Quiz for the week (15 Jan 2024):
Cheetah & Co is a partnership firm consisting of 5 equal partners. One of the partners died on 31st May, 2023. The partnership deed provided that the death of any partner shall not dissolve the firm and the surviving partners may continue the business as per the terms agreed upon by them at that time. Thus, the remaining partners continued the business of the firm by agreeing to share profits and losses @25% each. The following assets and inventory were held by the firm as on 31st May, 2023:
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S.No
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Particulars
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(i)
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Vacant land acquired by the firm on 23rd
January,2020 for Rs.7,50,000. The fair market value as on 31st
May,2023 was Rs.15 lakhs.
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(ii)
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Factory building WDV Rs.12,60,000 as on 1st
April,2023. Fair market value as on 31st May,2023 was Rs.31 lakhs.
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(iii)
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Plant & Machinery WDV Rs.8,50,000 as on 1st
April,2023. Fair market value as on 31st May,2023 was Rs.12 lakhs
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(iv)
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Stock in trade (cost) Rs.5,50,000. Market price as
on 31st May, 2023 was Rs.6,60,000
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It was decided to give stock at cost to the legal heirs of deceased partner as part of the settlement of his dues. Balance of capital was paid by the firm as per capital balance as appearing in deceased partner’s capital account. No revaluation or effect was given in the books of account. Discuss the tax consequence for the facts narrated above.
Answer :
Section 9B says that where a specified person receives during the previous year any capital asset or stock in trade or both from a specified entity in connection with the dissolution or reconstitution of such specified entity, then the specified entity shall be deemed to have transferred such capital asset or stock in trade or both, as the case may be, to the specified person in the year in which such capital asset or stock in trade or both are received by the specified person.
The expression 'specified person' means a person who is a partner of a firm or member of other AOP or BOI (not being a company or a co-operative society) in any previous year.
In this case, the firm has continued to exist with the surviving 4 partners in consonance with the deed of partnership and therefore it will not amount to dissolution of firm but it is covered by the expression 'reconstitution of the specified entity'. Therefore, it is covered by section 9B of the Act.
As regards inventory given to the legal heirs of the deceased partner the excess is chargeable to tax in the hands of the firm. The firm has to add Rs.1,10,000 to its total income in view of section 9B and pay tax thereon. The amount of tax liability being Rs.34,320 @ 31.2%.
If the term 'specified person' if interpreted literally, it would cover only a person who is a partner of the firm. However, the term 'assessee' defined in section 2(7) includes others also and not necessarily the very person who was a partner of the firm. Therefore, upon distribution of stock in trade to the legal heirs of the deceased partner, the firm is covered by section 9B of the Act. If such interpretation is not accepted then it would become a loophole for the firms to settle the dues of the deceased partner to the legal heirs. This interpretation may not stand the test of judicial scrutiny.
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