GIFT OF CAPITAL OF PROPRIETARY CONCERN TO DAUGHTER

[RAKESH SHARMA]

'A' is running a proprietorship concern in the name of 'AM Ents' and the business data includes debtors,creditors,inventory ,capital etc.

'A ' sold the inventory of 1 Cr to a partnership firm 'QR Ents' in which her daughter is a partner so that her daughter can show her capital in the firm received from his father as an inventory sold to its firm.

What are the remedies available in such a case so that his daughter can show her capital in the firm

Please advise.

[ANURAG SHARMA]

Dear Mr. Rakesh,

I understand from the query that "A" wants to transfer amount to his daughter who is a partner in "QR Ents" so that she can show it as her share of capital in the firm. A can either transfer ₹ 1 cr. to her or transfer inventory worth ₹ 1 cr to her which she can introduce in the firm as her capital in kind i.e. in form of inventory. Firstly, Gift to daughter is exempt from tax. So no tax liability either to A or his daughter.

Secondly, A has sold inventory either at cost or at profit to "QR Ent." In that case, inventory belongs to the firm jointly by all the partners and cannot be shown as capital of A's daughter as liability to pay for purchase of inventory is on the firm. So "A" will be a creditor in the books of "QR Ents." If A has sold at cost, there would be no profit to his sole proprietorship. If A has sold inventory at profit, he will have to pay tax on profit. A simple way would be to reverse the sale transaction, if possible and gift the inventory to daughter by registered gift deed. The daughter can introduce the inventory in her firm as her share of Capital. In "A" case, since his business books will be separate, "A" has to show withdrawal of inventory from firm as drawings and "A"'s capital in sole proprietorship will reduce to that extent.

In case, transaction cannot be reversed,in A's books "QR Ents" would be debtor. He can assign this debt to his daughter through gift deed. Her daughter will take over the debt of A in the books of QR Ents, thereby the amount of creditor ("A") in QR Ents will get transferred to her daughter's capital account.

Regards,

CA Anurag Sharma (9831581824)

AI Summary

Gift exemption permits transfer of business capital to a daughter, via asset transfer or assignment of receivables as capital. A proprietor wishing to transfer business capital to his daughter may transfer cash or gift inventory; gifts to a daughter are exempt from tax. A sale of inventory to the partnership makes the proprietor a creditor and does not convert the item into the daughter's capital; sale at profit yields taxable profit to the proprietor. To make the inventory capital of the daughter, reverse the sale and execute a registered gift deed enabling the daughter to introduce the inventory as capital in kind, with the proprietor recording drawings. Alternatively assign the receivable arising from the sale to the daughter by gift deed.