Brief Background- A, B and C are three partners in the firm. A is willing to gift (via irrevocable transfer) his share of Interest (Profit/Loss sharing ratio) along with his capital balance in partnership firm to his son (who is major). There are many sections which are invoked in these transaction, which need to analyze for the proposed transfer. I have mentioned below transaction briefly for education purpose.
Viability as per Partnership Act, 1932 – As per Section 32 along with section 72 of Indian Partnership Act 1932.If the partnership is at will, a partner can retire from the firm by giving public notice. Further, he is liable for any act done only for on or before date of retirement (if public notice is duly served) unless and until there is a specific provision with the counter party.
Further, there is no specific provision under Partnership Act for transfer of interest for no consideration.
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Viability as per Income-tax Act, 1961 (“the Act”) |
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| Applicability of section 9B of the Act, | It is applicable when a partner receives any capital asset or stock in trade or both from a partnership firm in connection with the reconstitution.
In current case, partnership firm is not transferring any capital asset or stock in trade. Thus, this provision is not applicable. |
| Applicability of Section 45(4) | Where a partner receives any money or capital asset or both from a firm in connection with the reconstitution of such firm, then any profits or gains arising from such receipt shall be chargeable under the head “Capital gains” in accordance with the following formula, namely: —
A = B + C – D Where, A = income chargeable to income-tax under this subsection as income of the specified entity under the head “Capital gains”; B = value of any money received by the specified person from the specified entity on the date of such receipt; C = the amount of fair market value of the capital asset received by the specified person from the specified entity on the date of such receipt; and D = the amount of balance in the capital account (represented in any manner) of the specified person in the books of account of the specified entity at the time of its reconstitution: Since, in our case only Capital Account balance is payable. Therefore, A and D shall be the same. Hence, Capital Gain amount shall come out to be Nil. |
| Applicability of 56(2)(x) | This section might get attracted in the hand of Mr. A’s son. However, there is specific exemption for gift which is received by son from his father under 56(2)(x) of the Act. |
| Applicability of clubbing provisions |
Since, gift is an irrevocable transfer of Asset, provisions of clubbing shall not apply in current case. |
Compliances need to take care
1. Gift agreement for transfer of interest from Mr. A to his son;
2. Retirement deed mentioning retirement, liability and rights of Mr. A; and
3. Amended Partnership deed admitting son of Mr. X and mentioning retirement of Mr. A along with updated terms and conditions
Author Bio
What shall be the GST implication on transfer of partnership interest to relative?