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Date: January 5, 2023
Query asked by VENKATESH RAO

A firm has 3 partners  A,B and C.  Partner  B is retiring and his credit balance of capital/current account is taken over by partner A. Partner A is issuing “memorandum of debt” to retiring partner C. The debt instrument is proposed to be registered with registration department of immovable properties paying requisite stamp duty for registration of debt instrument. The firm has immovable property and machineries and is a manufacturing concern.What are the tax implication for the firm, partner A and retiring partner C ?.




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As we understand, there is no cash or stock or capital asset given to the retiring partner by the firm. Therefore, there will be no implication under section 9B and section 45(4) of the Income-tax Act, 1961 (Act). However, there is an extinguishment of Partner B’s rights in the firm and consideration for the same is in the form of a debt. Therefore, section 45(1) of the Act will be attracted.

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