|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.
|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, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.
Further, section 45(4) refers to "transfer” by way of distribution. The expression ‘distribution’ means an apportionment amongst several persons. It connotes something actual and not something notional. It implies a distribution in specie and not distribution of sale proceeds. [See James Anderson vs. CIT 39 ITR 123 (SC)]. It could be physical, it could also be constructive [See Punjab Distilling Industries Ltd. vs. CIT – 56 ITR (SC)].
Since the assets are not distributed to partners, no liability in the hands of firm, on retirement of ‘A’,
Now, in this case, the assets of the firm are revalued and excess amount is credited to each partner’s capital account. Thereafter, ‘A’ retired from a firm and on his retirement, the amount standing to his capital account has been paid. So, as per the Bombay High Court in CIT vs. A. N. Naik Associates, no liability as there is no transfer of any asset and account is settled in cash.
The position would remain the same, even if there is no revaluation of assets and huge amount is paid to ‘A’ by drawing up a memorandum of settlement, or amount paid to ‘A’ by debiting the rest of partners or new partner brings the amount and pays to ‘A’.
However, if a retiring partner assigns, releases and relinquishes his interest and share in the partnership in favour of continuing or new partner, it amounts to “transfer “ and liable to tax as per Tribuvandas G. Patel vs. CIT [236 ITR 515 (SC)] and CIT vs. H. R. Aslot [115 ITR 255 (Bom) (HC)
|CA. H. N. Motiwalla
|capital gains, partnership firm, retirement
Opinion Of Eminent Legal Luminaries On Controversial Issues
Whether On Retirement Of Partner From The Firm Is Liable To Tax On Excess Amount Received?
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