Share of profit in revaluation of land
pooja dedhia
(Querist) 12 June 2013
This query is : Resolved
on the retirement of partner of my father, we have revalued the land and building and passed the following entry in the books of account as follows.
L&B A\c 4500000
To revaluation account
(being L& B is revalued on account of the valuation at the retirement)
Revaluation a/c dr.
To existing partners;s capital account
to retiring capital account
what is the tax treatment will applicable to retiring and existing partners to
the share in profit on revaluation of partnership firm's assets ?
R.V.RAO
(Expert) 28 January 2014
The Hon'bel Supreme Court again in the case of CIT vs R.Lingamallu Raghukumar (2001) 247 ITR 801 (SC) reiterated its earlier view as laid down in the case of Sunil Siddharthabhai (Supra) and held that where a partner retires from a firm and the amount of his share in the partnership assets after deduction of liabilities and prior charges is determined on taking account in the manner prescribed by the partnership law there is no element of transfer of the manner prescribed by the partnership law there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners and the amount received by the retiring partner is not 'capital gain' under section 45 of the Income-tax Act. Similar reiteration of the view of the Hon'ble Supreme Court is found in the case of Addl. CIT vs Mohanbhai Pamabhai (1987) 165 ITR 166 (SC).
3.10 Ignoring a series of judgments of highest court of the land directly on the subject, it is humbly submitted, would be in violation of Article 141 of the Constitution of India, which reads as under:
Article 141: Law declared by Supreme Court to be binding on all courts:
"The law declared by the Supreme Court shall be binding on all courts within the territory of India."
Hon'ble Supreme Court in successive decisions held that an amount paid to a retiring partner in a Partnership Firm does not amount to a transfer within meaning of section 2(47). Therefore, even after the deletion of section 47(ii) w.e.f 1.4.88 amount paid to a retiring partner in Partnership Firm will not be taxable as capital gain as the same does not amount to transfer as defined in section 2(47) of Income Tax Act in view of successive decisions of Hon'ble Apex Court.
In a partnership amongst partners, each and every partner of the firm has an interest in each and every property of the partnership firm. Till the accounts are settled and the residue/surplus is not distributed amongst the partners, no partner can claim any share in such assets of the partnership firm. Each partner is entitled to its share of profits in the partnership firm but the entitlement of right in the assets/property of the partnership firm arises only on dissolution.
courts repeated said that when a partnership is reconstituted by adding a new partner, there is no transfer of assets within the meaning of section 45(4) of the Income-tax Act. Therefore, the questions formulated have to be answered against the Revenue and in favour of the assessee.
to conclude when there is no dissolution of firm and there is no capital gain to partners ,and there is no regular business profit being a case of revaluation of assets only in books, taxability is not seen in any abve court ruling.
it will be a different tax scenario if a partner brought land as his capital contribution or if the firm converted its land into stock and sold the same.
