The Income tax Department is likely to reopen old cases related to land deals and redevelopment where entities tried to escape paying taxes amounting to crores by using the ambit of partnership firms.
The Supreme Court (SC) last week plugged this loophole which allowed entities to evade tax by saying that “capital gain tax” would be imposed on revaluation of such firms.
How did the entities evade tax?
The entities would evade tax through revaluation – by holding the real estate assets through a partnership, then revaluing the properties at the prevailing market price. New partners were then brought in who would infuse cash into the firm. The old partners would then withdraw the money after crediting their capital accounts of their share of the profits – which is allowed for partnership firms.
By using such a method, all stamp duty, capital gains and income tax accruing in a plain property sale or transfer were evaded. The new partners were then allowed to control the firm in which money was transferred.
Last week, the SC said that the surplus through revaluation would be taxable in such firms as transfer and a “capital gains tax” would be imposed.
Hence, post revaluation, the firm would face a tax liability and the old partners – who were the ultimate owners of the property and as the `sellers' – can no longer escape paying tax while taking out funds put in by new partners or the 'buyers' joining the firm.
Now, since the SC has ruled in favour of the tax department, the department is likely to start looking into past transactions and past assessments are likely to be reopened.
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