Partner transfers his assets to the firm - tax liability on rent, capital gains etc.

[ravichandran ramakrishnan]

An assessee who has been claiming depreciation on the building, his business premises owned by him subsequently entering into partnership lets out the building for rent to the firm. Queries -------- A) The rental income can the partner start showing as his Income from House Property in his individual return? B)In the event of sale of the property may be after three years will the partner the owner can take benefit of indexation and offer the same as long term in his Return.Will it get affected by the section 50A and treated as short term.

[DEV KUMAR KOTHARI]

Letting out of property to the firm in which the owner is partner will amount to use for business purppose, and owner / partner will be entitled to claim depreciation. Even if by chance/ mistake rent from firm is assessed as income from House property, S. 50 and 50A will apply. If he has plan to purchase other building falling in same block, he can avoid fully or partly tax depending on result of calculations of amount of WDV of bld + cost of new asset in same block - sale value of old bld in sameblock. if the owner of any asset has been allowed deprecation at any time, then section 50 apply. Suppsoe income returned as income from HP is accepted, the assessee will continue with contingency of rectification, revision or reassessment for treating the rent as incoe from business. Best course is to treat rent as business income , calim deprecation, and plan new acquisition in the year of sale. land being not depreciable asset,will not be subject to S. 50 and you can plan LTCG on sale of land and reinvestment in specified bonds etc. Even for bld. investment in specified bonds can be a tax saving device as bld is held for more than 36 months and it is a Long term capital asset, for which benefits are availabe even if gains are considered as STCG u/s 50.

AI Summary

Characterisation of rental income as business income allows depreciation claims and affects capital gains treatment on sale. Rent from letting a partner's building to the partnership is treated as business income, allowing the owner to claim depreciation. If depreciation has been claimed on the asset, Section 50 and related provisions apply on sale, potentially altering capital gain computation; assessments treating rent as income from house property can be rectified. Land, not being depreciable, is excluded from the depreciation-linked rules and may be eligible for long-term capital gains treatment with reinvestment reliefs. Tax planning should therefore treat rent as business income, claim depreciation where appropriate, and consider reinvestment/acquisition within the same block of assets to mitigate tax consequences under the depreciation provisions.