Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether On Distribution Of Assets By The Firm Would Be Liable TO Tax On Dissolution Or On Distribution?

QUERY: A firm having three partners and doing construction work.

In the said firm, there are tippers and JCB machines standing in balance sheet for business purpose.

Out of three partners, one partner wants tipper and another partner wants JCB machinery for his individual business purpose.

Can it be the transferred by debiting their capital account and crediting machinery account during the continuation of partnership business with-out attracting capital gain tax.

What will be position, if the said transaction is effected on dissolution of firm?

Further, if the firm is decided to be dissolved on April 01, 2016 and the said transaction is made then as to whether the entry is to be passed on March 31, 2016 or April 01, 2016 and in that circumstances as to which date will be treated for taxation purpose i.e. March 31, 2016 or April 01, 2016 and in which year liability to pay income tax, if any, will arise?
ANSWER: If plant and machinery are withdrawn by the partners at book value during the continuance of partnership firm, then, the same can be debited to partners ac-count and credited to plant and machinery account in such case there is no question of any liability of capital gains. [See Malabar Fisheries Co. [120 ITR 49 (SC)]

However, if partners withdraw at the time of dissolution of firm then as per section 45(4) of the Act, the liability in the hands of firm would arise on the basis of fair market value of the assets withdrawn on the ground that it amounts to distribution.

The dictionary meaning of the expression “distribution” is “to give each a share, to give several persons”. The expression ‘distribution’ connotes something actual and not notional. It can be physical, it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts due to him. [see Punjab Distilling Industries Ltd. vs. CIT [57 ITR (SC)].

The Madras High Court in CIT Vs. Vijayalakshmi Metal Industries [256 ITR 540] has held that the relevant date for ascertaining the year in which the tax is to be levied is the year in which the transfer takes place. That year may or may not be the year in which the dissolution of the firm takes place. Until such time such capital asset is transferred by way of distribution of the assets on the dissolution of the firm no occasion arises for brining to tax any capital gain on a transfer which has not taken place. The section itself give no room for doubt as the year in which the capital gain to be brought to tax is “the previous year in which the said transfer takes place”

Thus the year in which transfer takes place would create liability for taxation.

Posted in Income-tax

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