A transfer of a capital asset by a partner to a firm under income tax is the transfer of an asset that is held by a partner and is not used in the business of the firm to the firm. This can be done for a number of reasons, such as to contribute to the capital of the firm or to transfer ownership of the asset to the firm.

In India, capital gains arising from the transfer of a capital asset by a partner to a firm are taxable under Section 45(3) of the Income-tax Act, 1961. Capital gains are taxed at a different rate depending on the type of asset that is being transferred and the holding period of the asset.

To calculate the capital gain, the fair market value of the asset on the date of transfer is subtracted from the cost of the asset. The cost of the asset is the amount that the partner paid for the asset when they acquired it. If the partner acquired the asset as a gift or inheritance, the cost of the asset is the fair market value of the asset on the date that they acquired it.

The following are some examples of capital assets that can be transferred by a partner to a firm:

• Land
• Buildings
• Plant and machinery
• Furniture and fixtures
• Shares and securities
• Intangible assets, such as trademarks and copyrights

EXAMPLE

A and B are partners in a firm called AB & Co., which is located in Delhi. A owns a building in Mumbai, which he wishes to transfer to the firm.

In order to do this, A and B will need to enter into a deed of transfer. The deed of transfer should specify the following:

• The details of the capital asset being transferred (e.g., the address of the building, its area, etc.)
• The consideration for the transfer (e.g., the market value of the building)
• The effective date of the transfer

Once the deed of transfer is executed, A will no longer be the owner of the building. The firm will become the new owner of the building.

The firm will need to pay stamp duty on the transfer of the building. The amount of stamp duty payable will vary depending on the state in which the building is located. In the above example, the firm will need to pay stamp duty to the Maharashtra government.

The firm will also need to register the transfer of the building with the local registrar of titles.

Once the transfer is registered, the firm will be the legal owner of the building. The firm can then use the building for its business purposes.

FAQ QUESTIONS

• Is there any capital gains tax payable when a partner transfers a capital asset to the firm?

No, a partner is not liable to pay capital gains tax when he/she transfers a capital asset to the firm. This is because the transfer of a capital asset by a partner to the firm is not considered to be a transfer for the purposes of capital gains tax.

• What is the treatment of the capital asset in the books of the firm?

The capital asset transferred by a partner to the firm will be recorded in the books of the firm at the fair market value on the date of transfer. The fair market value is the price that the asset would fetch in the open market on the date of transfer.

• What is the treatment of the capital asset in the books of the partner?

The capital asset transferred by a partner to the firm will be removed from the books of the partner. The partner will not be entitled to any consideration from the firm for the transfer of the capital asset.

• What is the treatment of any depreciation or capital allowance claimed on the capital asset by the partner?

Any depreciation or capital allowance claimed on the capital asset by the partner up to the date of transfer will be carried forward to the firm. The firm will be entitled to claim depreciation or capital allowance on the capital asset from the date of transfer.

• What is the treatment of any loss incurred on the transfer of the capital asset?

Any loss incurred on the transfer of the capital asset by the partner cannot be claimed as a capital loss. This is because the transfer of a capital asset by a partner to the firm is not considered to be a transfer for the purposes of capital gains tax.

CASE LAWS

• CIT v. M/s. Bafna Textiles(1975) 98 ITR 209 (SC)

In this case, the Supreme Court of India held that the transfer of a capital asset by a partner to a firm would be considered a transfer for the purposes of Section 45 of the Income-tax Act, 1961. This means that the partner would be liable to pay capital gains tax on the transfer.

• CIT v. M/s. Mansukh Dyeing and Printing Mills(2022) 2022 LiveLaw (SC) 991

In this case, the Supreme Court of India held that Section 45(4) of the Income-tax Act, 1961 would be applicable to not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favor of a retiring partner. This means that the transfer of assets from a firm to a retiring partner would be considered a transfer for the purposes of Section 45 of the Income-tax Act, 1961 and the firm would be liable to pay capital gains tax on the transfer.

• ACIT v. M/s. Infosys Technologies Ltd.(2013) 355 ITR 1 (Kar.)

In this case, the Karnataka High Court held that the transfer of a capital asset by a partner to a firm would be considered a transfer for the purposes of Section 45 of the Income-tax Act, 1961 even if the partner did not receive any consideration for the transfer.

These are just a few examples of case laws on the transfer of a capital asset by a partner to a firm under income tax. The specific facts and circumstances of each case would need to be considered to determine whether or not the transfer is considered a transfer for the purposes of Section 45 of the Income-tax Act, 1961.