Merger of two partnership firms

[ketanvyas1975]

I am having two partnership firms wherein all the partners are common and their profit sharing ratio is also same. I want to merge both the firm into one or that i want one firm to take over all the assets and liabilities of another firm so that the another firm may be closed down. My query is whether any tax effect will arise in such a case? If yes, what should be best model for such an arrangement so that tax liability is reduced to minimum. If possible, kindly guide me about stamp duty implications also.

[ketanvyas1975]

learned friends, i once again urge to give me some guidnace in the matter as i am confused regarding the taxability. Thanks.

[ashutosh majumdar]

The problem is that the two firms, though constituting the same partners, are two different entities. The only exception given in the Act is to the conversion of a firm into a LLP. So, when one firm transfers its assets to the other firm, there is a "transfer". If consideration is received, there will be a tax liability. Why don't you detail the procedure that you propose to follow (who gets what etc) so it can be looked up.

[ketanvyas1975]

Thanks for your valuable views. Since there are two firms and we want to convert them into one, i think that slump sale of ongoing business by one firm to another firm can be done. This will perhaps reduce the tax burden. The firm has many immovable properties and hence itemwise sales may not be beneficial due to application of section 50C. However, i have two concerns in this regard (1) can we fix the sale consideration as per the net worth? Whether the A.O. can raise isues of valuation of the undertaking ? (2) what will be stamp duty implications?

If you have any better alternative, kindly suggest. Thanks again

[ashutosh majumdar]

If you have a lot of immovable property then a slump sale may not be practicable because of the stamp duty exposure. Have you considered keeping the title to the properties in the old firm but giving a perpetual & irrevocable tenancy to the new firm? If the stamp duty law in your State is benign, then this may be workable.

What are the other assets in the business? If the other assets are nominal in value, then the department may argue that s. 50C should apply on the basis that the major value is taken up by the immovable property.

If 50C does not apply (on the basis that what is transferred is not "land or building") then one can fix the consideration at the net worth. There is no provision by which the consideration can be taken at the market value.

[ketanvyas1975]

The idea of perpetual tenancy is really fine. i am checking the stamp duty provisions in this regard.

In case of slump sale in my case, i feel section 50C will not apply becasue the firm has many other assets like stock, debtors, loans and advances etc. the value of which is significant and at par with the value of immovabale properties. The fact is that both the firm are having its running business with registration with government authorities. The reason behind the merger is to reduce the administrative burden of maintaining two firms and government procedures of returns and assessment etc.

I agree that there is no provision for replacing fair market value. However, i have a doubt regarding applicability of section 55A in the situation as the slump sale will tak place betweeen two related parties.

[ashutosh majumdar]

If 50C does not apply, then how can the department change the agreed consideration? S. 55A does not authorise the substitution of the consideration by the FMV as held in Hiaben Jayantilal Shah v. Income-tax officer 310 ITR 31 (Guj). It was held "There is no provision in the Act which permits the Assessing Officer to disturb the sale consideration and at least section 55A cannot be invoked for the said purpose. [Para 14]"

55A is meant for the cost of acquisition as of 1.4.1981.

[ketanvyas1975]

It means that the partners of the firm can fix the consideration equal to the networth or near about that. What are the chances that this slump sale get taxed? is there any other provision or methodology y which the AO can otherwise levy tax?

[ketanvyas1975]

I have confusion regrding drafting of slump sale agreement. If partners in both the firms are same, should all of them sign twice i.e. one as purchaser and one as seller? Kindly advise.