Partnership Firm Reconstitution on Death of partner

Partnership Firm Reconstitution on Death of partner

My father ( I am his daughter )was partner in partnership firm along with his two sons and his younger brother. This was partnership firm with partnership at wiil. After his death ( August 2016) ,remaining surviving partners entered in new partnership deed wherein they stated All Assets and liabilities of Old firm are taken over by new firm at book value. They never settled accounts of deceased partner. They continued firm with same PAN. They submitted assesment for FY 2016-17 with income tax authorities with same PAN.
I had raised complaint with income tax office who have replied they have noted my complaint and action against firm if needed shall be taken up as per Law in due course.
i have also filed partition suit in which I have asked for my share in these firms as applicable from date of his death. To regularize their unlawful acts, they have registered new partnership deed with Registrar of Firm giving Notice of Reconstitution of firm by stating Deceased partner was retired by other partners from firm after his death. Strangely, Registrar of Firm has accepted and registered this change in Register of Firm.
This firm is showing Land at Rs 1 lac and building at 10 lac in its last abstract balance sheet which I got from my RTI application.. This must be acquired around 20 years back. Market value today of Land may be 100 times higher and building may be 20 times higher.
I need answers to following questions Assuming they say that Accounts of deceased partner was settled and assuming forgetting other legal aspects of cheating , criminal conspiracy etc.

1. Whether this transfer of property ( Land and Building ) at book value from old firm to new reconstituted firm Attracts any Capital Gains Tax as on Date of Transfer. That is on date of formation of reconstituted firm. As it can be safely assumed Share of deceased in firm's property was paid on book value. But purchaser has purchased that share at much lower than fair market value or Circle Rate.
I think sec 45(3) and 45(4) of income tax provisions deal with such situations.

2. whether other depreciated assets like Office furniture, vehicles , Air conditioners etc. will attract capital gains tax.

3. I have asked Income tax office to take action against firm under sec 277 , 278 etc stating Firm has Falsified Book of Accounts. I have further asked Income tax office these falsified returns are Result of Culpable Mind and Prosecution action against firm shall be taken. I am sure they are not maintaining any separate account for Legal heir of deceased. Whether Income tax office has right under Income tax act to proceed against firms under these sections.

4. Under what rules/acts as given by income tax office, action against these firms can be taken.

Asked 6 years ago in Capital Gains Tax

There shall be no capital gains in point 1 and 2 above. Such case is not covered under section 45(3) or 45(4). In this case, there is neither a transfer of asset nor a distribution of assets has taken place. Merely retirement of a partner and reconstitution of the firm does not make such transaction liable to capital gain tax.

Lakshita Bhandari

CA, Mumbai

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Talk to Lakshita Bhandari

Hi,

- In respect to income tax matters, I don't think there is too much scope. Firstly it is a reconstitution of firm which is acceptable in law if there is change in partnership i.e. admission or death of partner. Secondly it is a reconstitution with same PAN and same partners so there is no transfer of capital assets. Assets are usually carried at historical cost. Concept of market value comes in force at the time of sale of assets.

- I think you should ask for your father's share at the time of his death because you are one of the legal heirs of your father. Also ask for compensation for not settling the amount till date.

- Please go through the clauses of old partnetship deed which your father had signed.

Thanks