Income Tax on Transfer by a partner of his share in a Partnership Firm

Although Partnership Firms do not have a separate legal entity, for Income Tax, they are treated as separate from their partners. These firms whether they are registered or unregistered are therefore required to register with the Income Tax Department and obtain a PAN Card Number. This article provides an insight into the income tax on transfer by a partner of his share in a partnership firm.

Partnership Act, 1932- related provision 

In terms of Section 32 and section 72 of the Indian Partnership Act 1932, if the partner exists at his discretion, the partner may leave the company by giving public notice. In addition, you are liable for any action taken only on or before the date of retirement (if public notice is properly issued) unless and until further notice has been provided to the opposing party. In addition, there is no specific provision under the Partnership Act of 1932 for the transfer of interest without consideration.

CBDT on income tax on transfer by a partner of his share in a partnership firm

The Central Board of Direct Taxes stated that transfers of capital goods or trading stocks or both on receipt of a partner or member from the company will be subject to income tax under capital gains or profits and business or professional profits. The fair market value of a large asset or a trading stock or both will be taken as the total consideration.

The Board also stated that any capital or money assets or both acquired by a partner or member from the company at the time of liquidation or reconstruction will be charged as capital gains. This also includes a capital asset that forms part of the block of the assets.

It introduces new rules, specifying short-term and long-term assets charged under capital gains.

• A capital asset that is short-term at the time of taxation, which forms part of the block of the assets that it produces for itself, and the interest it generates itself will be considered a short-term asset.
• An asset that is a long-term asset at the time of taxation and does not fall below the three categories above, shall be treated as long-term capital asset.

When these capital assets are transferred in the future, the amount specified in those capital assets is reduced from the total consideration, and at that rate the said entity does not pay tax again at the same rate.

Applicability as per Partnership Act, 1932

• Section 9B of the Act applies if the partner acquires any large asset or trading stock or both from a joint venture in respect of the re-establishment.
• Section 45 (4)- Where a partner acquires any capital or capital assets in respect of the restructuring of that company, any profits or benefits arising from such acquisition shall be charged under the heading “Capital gains” by the following formula, namely: –

A = B + C – D 

Where, 

A = A taxable income under this clause as the income of a business specified under the heading “Capital gains”;

B = the amount of any money received by the person named in the business specified on the date of receipt of that receipt; 

C = the fair market value of the principal asset acquired by the person named in the said business at the date of receipt of that receipt; and 

D = the balance in the main account (represented by any means) of the person named in the books of account of the said business at the time of its reconstitution.

• Section 56 (2) (x) – under this provision there is a specific exemption for the gifts received.
• Clubbing Provisions- Since, the gift is an irrevocable transfer of Property, the clubbing provisions will not apply.

Final words

If the principal asset remaining with the said business is part of the asset block, the amount specified in that capital asset shall be deducted from the total value acquired or accumulated as a result of the transfer of that asset by the said entity, and the total amount of that consideration will be considered to reduce the written value of that block or to calculate capital profits. Hope you got the required information on the income tax on transfer by a partner of his share in a partnership firm.