The finance act 2021, has inserted a new section 9B and subsection 4 of section 45 for taxability on transfer of a capital assets by a firm/ APO/BOI to a partner.
Taxability under capital gains under section 45(4)
The provision of this section shall apply where during the previous year the partner receives any money or capital asset or both from a firm in connection with the reconstitution, then any profits or gains arising from such receipt shall be chargeable to tax as income of Firm under the head Capital gains in the previous year in which assets are received by the partner.
Reconstitution shall cover the following events:
- Retirement/death of one or more partners; or
- Admission of new partners, provided at least one existing partner continues; or
- Change in respective profits shares of all or some of the partners.
Computation of Capital gains in the hands of Firm
A = B + C – D
Where,
A = income chargeable to income-tax under this subsection as income of the specified entity under the head “Capital gains”;
B = value of any money received by the specified person from the specified entity on the date of such receipt;
C = the amount of fair market value of the capital asset received by the specified person from the specified entity on the date of such receipt; and
D = the amount of balance in the capital account (represented in any manner) of the specified person in the books of account of the specified entity at the time of its reconstitution
| Particulars | Amount |
| Value of money on the date of receipts | Xxx |
| Less: Partner Capital account balance at the time of reconstitution | Xxx |
| Capital Gain | Xxx |
Notes:
- If the resultant figure is negative, gains are deemed to be nil and should not be treated as capital loss.
- Balance in capital account of the partner in the books of account of the firm is to be calculated without taking considering the increase in the capital account due to revaluation of any asset or due to self-generated good will.
- The above gains will be taxed in the hands of the partnership firm.
Distribution of gains to the remaining assets of the firm if the gain pertains to revaluation or self-generated goodwill/asset as per Rule 8AB
The above computed capital gains will be distributed to the remaining assets of the firm as below:
| Capital gains charged u/s 45(4) X Increase in value of such capital asset because of revalution Aggregate of increase in value of all capital assets because of revalution |
| Capital gains charged u/s 45(4) X Recognition of value of such self-generated goodwill / asset because of valution Aggregate of increase in value of all capital assets because of revalution |
Note: No depreciation shall be availed on the additions.
How to calculate capital gains on subsequent transfer of remaining assets?
Where the capital gain charged u/s 45(4) is attributed to remaining assets, then at the time of transfer of such assets it shall be reduced from the sale consideration.
Section 9B – Income on receipt of capital asset or stock in trade by specified person from specified entity
- Section 9B is a deeming provision to bring distribution of capital asset or stock in trade or both, on dissolution or reconstitution within the ambit of Income.
- Specified entity means a firm or other association of persons or body of individuals
- Specified person means a person, who is a partner of a firm or member of other association of persons or body of individuals.
- It provides for taxation of Income on receipt of capital asset or stock in trade by the specified person from the specified entity where there is a transfer by a specified entity to specified person any capital asset or stock in trade then profits and gains on such transfer shall be chargeable in hands of specified entity as Capital gains or Profits and Gains of Business or Profession (PGBP) accordingly.
- Consideration for such transfer shall be the Fair market value (FMV) of capital asset or stock in trade on the date when such stock in trade or capital asset is received by the specified person from the specified entity.
- If specified entity transfers any capital asset to specified person, FMV of capital asset will be considered as sales consideration and cost of acquisition & cost of improvement shall be taken as per the books of the specified entity. Indexation shall also be available.
- If specified entity transfers any stock in trade to specified person, FMV of stock in trade will be taken as sale value and cost of stock shall be taken as per the books of the specified entity.
Section 45(4) vs Section 9B
Section 9B will operate in addition to the provisions of section 45(4) and the taxation under the said provisions thereof shall be worked out independently.
| Particulars | Section 9B | Section 45(4) |
| Assets covered | Capital asset & Stock in trade | Any asset (incl. Money) |
| Scope | Transfers made during dissolution & reconstitution | Transfer made during reconstitution in specified entity |
| Taxation | Capital gain or PGBP (SIT) in the hands of specified entity | Capital gain in the hands of specified entity |
Author
Nandhini
