Capital Gains Retiring Partner Taking Money Towards His Share Where Distribution of Capital Asset Not InvolvedApplicability of Section 45(4)

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The Tax Publishers Retiring Partner Taking Money Towards His Share Where Distribution of Capital Asset Not Involved--Applicability of Section 45(4) CA Manoj Gupta Section 45(4) provides that any distribution of assets on dissolution of a firm/AOP/BOI is subject to capital gains. For computing capital gains, the fair market value of the capital assets on the date of distribution is taken as the full value of consideration. Capital gains is to be charged in the hands of the firm. If the partners of a firm retire by taking their share in assets of the firm, however, without dissolution of firm, then whether Section 45(4) will apply is the question which has arisen in several cases. The learned author analyses such cases in this write-up and presents a sort of planning aimed at to avoiding rigour of Section 45(4) on the basis of some court decisions. 1. Applicability of Section 45(4) Sub-section (4) of Section 45 provides that any distribution of assets on dissolution of a firm/AOP/BOI is subject to capital gains. For the purposes of computing capital gains, the fair market value of the capital assets on the date of distribution is taken as full value of consideration. Capital gains is to be charged in the hands of the firm. Sub-section (4) of Section 45 deals with a distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals or otherwise. If in the course of such distribution of capital asset there is a transfer of a capital asset by the firm in favour of a person and it results in profits or gains to the firm, then the said profits or gains shall be chargeable to tax as income of the firm and again for computing such income, Section 48 is attracted. In other words, in the process of a dissolution of a firm, if a capital asset is transferred to a partner which results in profits or gains, then that income is chargeable at the hands of the firm under this provision. In order to attract sub-section (4) of Section 45, the conditions precedent are : SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Retiring Partner Taking Money Towards His Share Where Distribution of Capital Asset Not Involved--Applicability of Section 45(4)

CA Manoj Gupta

Section 45(4) provides that any distribution of assets on dissolution of a firm/AOP/BOI is subject to capital gains. For computing capital gains, the fair market value of the capital assets on the date of distribution is taken as the full value of consideration. Capital gains is to be charged in the hands of the firm. If the partners of a firm retire by taking their share in assets of the firm, however, without dissolution of firm, then whether Section 45(4) will apply is the question which has arisen in several cases. The learned author analyses such cases in this write-up and presents a sort of planning aimed at to avoiding rigour of Section 45(4) on the basis of some court decisions.

1. Applicability of Section 45(4)

Sub-section (4) of Section 45 provides that any distribution of assets on dissolution of a firm/AOP/BOI is subject to capital gains. For the purposes of computing capital gains, the fair market value of the capital assets on the date of distribution is taken as full value of consideration. Capital gains is to be charged in the hands of the firm.

Sub-section (4) of Section 45 deals with a distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals or otherwise. If in the course of such distribution of capital asset there is a transfer of a capital asset by the firm in favour of a person and it results in profits or gains to the firm, then the said profits or gains shall be chargeable to tax as income of the firm and again for computing such income, Section 48 is attracted. In other words, in the process of a dissolution of a firm, if a capital asset is transferred to a partner which results in profits or gains, then that income is chargeable at the hands of the firm under this provision. In order to attract sub-section (4) of Section 45, the conditions precedent are :