2.1 Query
Issues on retirement of a partner.
1.A partnership firm consisting of four partners is a S.S.I. unit. One of the partners holding 50% share, retires from the firm on 30.6.1988. The accounting year of the firm hither-to was Diwali. The entire assets and liabilities of the firm are taken over by rest of the three partners and the firm is continued to be carried on by those three partners. The balance standing to the credit of retiring partner’s capital account just before retirement is say Rs. 3.00 lacs and he is paid Rs. 5.00 lacs in full and final settlement of his account including his share in profits/losses of the firm upto the date of retirement.
2. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:
(i) Whether the provisions of section 45 (4) of the Income-tax Act, 1961 are applicable in the above case.
(ii) Whether the investment allowance already granted to the firm can be withdrawn.
(iii) Whether books of account are required to be closed on 30.6.1988, i.e., on the date of retirement of one partner. If such be the case, will there be requirement of issue of two separate audit reports, i.e., one for the period from Diwali, 1987 to 30.6.1988 and another from 1.7.88 to 31.3.1989.
(iv) Can the excess payment made to the retiring partner over and above his capital balance be taxed as income.
(v) Should excess payment made to the partner over and above his balance arrived at after adjustment of profit/loss upto the date of retirement be debited to goodwill account or to some other fixed assets like plant and machinery, building, etc.
Opinion November 23, 1990
1.The Committee notes that the issues raised by the querist in sub-paragraphs (i), (ii), (iv) and (v) of para 2 of the query involve interpretation of the relevant provisions of the Income-tax Act, 1961, and, therefore, are not answered in view of Rule 2 of the ‘Advisory Service Rules’ of the Expert Advisory Committee.
2.With regard to the matter raised in para 2 (iii) of the query, the Committee is of the view that the books of account are required to be closed on 30-6-1988 only if it is required by the ‘Deed of Partnership’ or the ‘Deed of Retirement’, as the case may be.
3.The Committee notes paragraph 10.14 of the ‘Guidance Note on Tax Audit under Section 44 AB of the Income-tax Act’ (2nd edition, 1989), issued by the Institute of Chartered Accountants of India, which recommends, inter alia:
“10.14 Where for assessment year 1989-90, the accounting year of the company is different from the previous year under the Income-tax Act, say calendar year, the question arises whether the tax auditor can audit and certify the accounts for the period of three months from 1st January to 31st March, and enclose them along with the statutory accounts for the calendar year under the Companies Act alongwith his report in Form 3CA/3CB, or whether the tax auditor will have to certify the accounts for the entire period of 15 months and submit his report on the accounts for the entire period for the purposes of Section 44AB(1). It appears that the tax auditor will have to submit the report on the accounts for the entire period of 15 months for purposes of Section 44AB, for which accounts will have to be prepared by the company. For this purpose, he will have to audit the accounts for the period from 1.1.89 to 31.3.1989 and has to certify the accounts for 15 months by placing reliance on the statutory audited accounts for the calendar year. Likewise for the subsequent assessment years also, he will have to certify and submit his report on the accounts for the financial year being the previous year for purposes of section 44AB, though he may place reliance on the statutory auditor’s report on accounts audited for the calendar year.
The tax auditor should give his report for that period in order to comply with the provisions of section 44AB in Form 3CB. It may be noted that Form 3CA is not appropriate in such cases since there is no statutory audit report covering the entire period forming part of the relevant previous year for income-tax purposes.”
4.In view of the above, the Committee is of the opinion that only one tax audit report under section 44AB of the Income-tax Act is required for the period Diwali 1987 to 31.3.1989 even if the accounts are closed on 30.6.1988. ________________________
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