Question And Answer
Subject: Capital Gain-Sec 56(2)(x)-GAAR
Querist: Arun Kumar Arora
Answered by:
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Date: August 27, 2022
Query asked by Arun Kumar Arora

There is a Partnership Firm having three partners.The Net  worth of the Firm is Rs. 100 Crores (considering Market value of Goodwill and Immovable Properties-whereas Net worth as per Books of Accounts is Rs. 50 Crores) as on 31-03-2022. A new Partner is admitted in the Firm  on 1-4-2022 and he is given 25% Share of Profit in the Firm whereas existing partners Share is reduced. New Partner contributes Rs 25 Lacs in Firm as his Capital Contribution.Existing Partners are not given any Stock nor any Immovable Property nor any money over and above the balances appearing in their capital accounts.


1-Such Transaction involves any Capital Gain Tax Liability on continuing Partners.

2-The incoming Partner is Liable to tax u/s 56(2)(x) of Act 1961.

3-The abovesaid arrangement is covered under GAAR Provisions

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No, such transfer does not attract any Capital Gains on the continuing Partners as neither section 9B nor section 45(4) of the Income-tax Act, 1961 (Act) is attracted.

Property” for the purpose of section 56(2)(x) of the Act is specifically defined under clause (d) of the Explanation to clause (vii) of section 56 (2) of the Act, and the same does not include interest in LLP. Therefore, section 56(2)(x) of the Act is not applicable in transfer of interest in LLP.

Yes, as the Partner gets interest in the partnership firm worth around 25 crores for Rs. 25 lakhs, the Department may take a view that the transfer lacks substance and as the tax avoidance according to the Department could be more than 3 Crores, the same could attract GAAR.

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