Revaluation of fixed assets in running partnership firm
Nirmalya Srimani
(Querist) 26 August 2014
This query is : Resolved
A partnership firm constituted with nine partners. In accordance to clause of partnership deed partnership shall be continued after death of any partner. Now legal heir of the deceased partner is interested to be a partner, but the existing partners do not agree with him. Existing partners decided that the entire capital along with share of profit and interest on capital as on date of death of said partner will be paid out to heir of deceased partner as final and full settlement. But heir of deceased partner demanding revaluation of fixed assets so that share value will get higher and he will get the inflated capital as a share of his interest in partnership firm. Now the question is – can he claim like that – in a running partnership firm? Will it be lawful in the eye of Income Tax Act? What is saying Indian Standard Accounts?
Anirudh
(Expert) 26 August 2014
Dear Mr. Nirmalya Srimani,
Please note that in the absence of any provision in the Partnership Deed, whether or not the legal heir of the deceased partner has to be accepted as a partner is the prerogative of the continuing partners.
However, if the share of the deceased partner in the partnership is to be settled, it cannot be done without revaluing the assets of the firm.
But please also note that Revaluation of assets by partnership firm does not attract capital gains. The revaluation of assets of partnership and the credit of revalued amount to the capital account of partners in their respective share ratio do not entail any transfer as defined under s. 2(47) of the IT Act. Income Tax Act does not prohibit such revaluation.
Indian Accounting Standards do not come into play.
Nirmalya Srimani
(Querist) 26 August 2014
If fixed assets are revalued for the settlement with heir of deceased partner and effect of this revaluation, capital of each partner become inflated. As result of that interest on capital will be increased automatically. Shall this interest on fictitious capital be allowed by Income Tax Department? Can you provide me specific Act or Rule or Case Law by virtue of that revaluation of fixed assets is compulsory in case of final settlement with heir of deceased partner In a running partnership firm?
Anirudh
(Expert) 26 August 2014
When all of you know that the interest will go up because of revalued asset, can't you people be intelligent enough to bring the interest rate applicable on the new revised capital figure to such a level which will be equal to the interest amount that was being paid to the partners prior to revaluation of the asset?
If that is done, still do you expect any objection from the I.T. Department?
Anirudh
(Expert) 26 August 2014
I need not give you the specific case law. It is the normal logic. Put yourself in his position then you will argue/demand much more than what he is demanding.
If you do not give, then he will approach the Court of law, and you will realise then - what is the case law.
Anirudh
(Expert) 27 August 2014
One more thing. It just skipped my mind. As far as capital of the partners is concerned, no interest is payable. Even if it is paid, it will be treated as part of the profit. Therefore, where is the problem?
Nirmalya Srimani
(Querist) 28 August 2014
Now if more than one partner intends to withdraw inflated capital after the revaluation of fixed assets - how firm would provide fund. It will be automatically shut down. I think dissolution of firm is necessary, if we like to revalue the fixed assets. There is some clue in section 37 of Partnership Act. In the light of this section partners can satisfy the claimant – we think over in it. But, do you have any reference on it?
