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QUERY: Mr. A retired from a partnership firm. Upon retirement, the assets of the firm are revalued and the excess amount is credited to each partner’s capital account. Mr. A is paid the amount standing to his capital account [which is inclusive of revaluation amount]. What would be tax implications in the hands of the firm and/or in the hands of the Mr. A?

Will the position be different if:

(i) Instead of revaluation being carried out in the books of account, a lump sum huge amount is paid to Mr. A by drawing up a memorandum of settlement.

(ii) The amount paid to Mr. A is debited to the rest of the partners’ account or is debited goodwill account of the firm.

(iii) There is admission of a new partner who brings the amount required to be paid to Mr. A and who is given the same share as of Mr. A

(iv) There is no new admission and the existing partners distribute the share of Mr. A equally /unequally.
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Section 45(4) of the Income-tax Act, 1961 provides that, profits or gains arising from transfer of capital assets by way of distribution of capital assets on dissolution of a firm, association, etc. “or otherwise” shall be chargeable to tax as income of the firm, association, etc. of the previous year in which the said transfer takes place and for purpose of section 48,