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Hello friends, here we discussed Section 9B, Section 45(4), & Section 48 of the Income Tax Act


Finance Act 2021, introduced a new section, section 9B under income tax act which specifies the provision related to transfer of Capital Assets or stock in trade on Reconstitution or Dissolution of Firm / AOP, etc.


If the All of the following conditions are satisfied;

  • There should be a Specified entity
  • There should be a Specified Person
  • Transfer of Capital Assets / Stock in trade / both
  • In connection with the dissolution / reconstitution.

If the above conditions are fulfilled;

  • Such transfer is said to be Deemed Transfer
  • Profit & Gain on such deemed transfer shall be deemed to be an income of such Specified entity.
  • Deemed income shall be recognized in the previous year in which specified person received such capital assets or stock in trade or both. (i.e., Income in the year of receipt).
  • Nature of income shall be determined as per the nature of assets ( Taxed either as Capital Gain or as PGBP Income).
  • FULL VALUE OF CONSIDERATION = FMV OF CA / SIT on the date of receipt of such assets.


 What is Reconstitution Stands for:

 Reconstitution means:

1. One or more members ceases to be partners/members of such specified entities.

E.g.; – ABC is a partnership firm, in which A B & C is a partner if any of the partners let’s say B ceases to be a partner either through retirement or otherwise, then the said situation covered under reconstitution of the firm.

2. One or more person admitted as a partner in the already existing specified entity in which one or more partners of a specified entity before a change continue to be a partner of such specified entity.

E.g.; – ABC is a partnership firm, in which A B & C is a partner, if D is admitted as a partner while partner A, B, C continues to be a partner of such entity then such case shall be  fall under b. and the said case shall be a reconstitution of the firm.

3. All or either of the partners of the specified entity continues with the change of their respective share.

E.g.; – ABC is a partnership firm, in which A B & C is a partner having 1/3 profit sharing ratio if all the partner agrees to change the share of all/ either of the partner, let’s say c share shall be decreased to 30% and A B share shall increase to 35 % each than the said case fall under c, and it is said to be reconstitution.

E.g.: – ABC is a partnership firm, in which A B C partner, wants to retire and partner D E F want to admit as a partner, in the current scenario, It is not the case of reconstitution as existing partner before change shall not continue as partners after the change.

Section 9B is a deeming provision, which enables certain income will be taxable in the hand of a specified entity.

It is not a computation provision, for computation provision of PGBP or Capital gain will apply.


Here partners/members include all the partners/members example- companies, cooperative societies (resident or non-resident).

On the death of a partner, a legal heir is entitled to deceased partner’s share, it is not a case of reconstitution, as reconstitution exists only in case of admission, retirement, or change in psr.

What is Dissolution;

As per case law (CIT vs Pigot Chapman & Co), A dissolution brings partnership comes to an end.

Where there are only two partners, and on the death of one partner, the firm is deemed to have dissolved as per case law (Mohd laiquiddin vs kamla devi Mishra).

Where there are only two partners, and one of the partners is retire, and the existing partner continues their business as a proprietor then the firm is deemed to have been dissolved (ITO  vs Om Namah Shivay builders & Developers).

What is Capital Asset?

It is defined under section 2 (14) for the purpose of section 9B.

An asset which is not an asset as per section 2(14), then the said asset is not a capital asset for the purpose of section 9B. it includes either movable, immovable, or actionable claims but does not include Stock in trade, Personal effects other than jewelry, Agricultural land, Gold Bond, and special bearer bond. (That’s why Government Specifically put Stock in Trade specifically in Section 9B).

What is Deemed Transfer

Transfer of Capital asset or stock in trade by a specified entity to a specified person in the event of reconstitution or dissolution is treated as deemed transfer. It overruled various judgment which held that Distribution, division, or allotment of assets by partnership firm upon dissolution or reconstitution is nothing but mutual adjustment of rights between partners.

Remember In case of reconstitution or dissolution, for applying section 9B, there must be a transfer of a capital asset or stock in trade or both.

Year of Transfer and Taxation.

It is deemed to be transferred in the year, in which such capital asset or stock in trade is received by a specified person. And shall be taxed on the hand of specified entity in the year in which it is received by specified person.`


Profit & gain on transfer of capital assets is chargeable to capital Gain, & all the provisions from section 45 to section 55A shall apply accordingly, except to the extent provision is in conflict with section 9B, as 9B is a special provision.

  • Compute the gain as per section 48.
  • Cost of acquisition shall be taken FMV as of 1. 04. 2001 if it is purchased before said date.
  • The benefit of indexation shall be taken.

Profit & gain on transfer of stock in trade shall be computed in the manner provided in sections 28 to 44DB.


Section 48 provides for the mode of computation of capital gain, which is as follows.

Computation of capital gain under section 9B read with rule 48(iii) shall be as follows

Manner of computation
The full value of the consideration received or accrued (fair market value of capital assets) (Section 9B does not deal with money Section 45(4) does XXX
Less: – Expenditure incurred wholly and exclusively in connection with the transfer; XXX
Less: – Cost of acquisition/indexed cost of acquisition; XXX
Less: – Cost of improvement/indexed cost of improvement; and XXX
Less: – The amount chargeable to tax as income of specified entity under section 45(4) which is attributable to the capital asset being transferred by the said entity [section 48(iii)] XXX
Capital Gain XXX

Clause (iii) of section 48 has been inserted by finance act 2021, which provide that if any money or capital asset is received by a specified person from a specified entity, then the amount chargeable to income-tax as income of such specified entity under section 45(4), which is attributable to the capital asset being transferred by the specified entity, shall be calculated in the prescribed manner and shall be allowed as a deduction in computing capital gains.

The amount which is chargeable to tax under section 45(4) shall be reduced for calculating capital gain under section 9B to avoid double taxation, that’s why 48(iii) has been introduced in finance Act 2021

Section 9B(3) provides that  FMV of capital assets or stock in trade shall be deemed to be full consideration for the purpose of computing capital gain or PGBP, hence Section 50C, 50 CA, and 43CA shall not be applied.

Rate of Tax

The rate of tax will be determined on the basis of the nature of capital assets transferred & their period of holding. Hence it may be liable to charge tax at a concessional rate as provided in section 111A or section 112A subject to the fulfillment of a condition

Section 45 (4).

  • There should be a specified person
  • There should be a specified entity
  • Transfer of capital assets or money or both
  • From specified entity to specified person.
  • During the previous year
  • In connection with the reconstitution of a specified entity.


  • Not applicable in case of dissolution
  • Not applicable for transfer of stock in trade.
  • Implication; –
    • Any profit or gain on transfer of such assets to the specified person shall be chargeable to income tax as the income of specified entity.
    • Deemed to be the income in the year of receipt of such assets by the specified assets.
    • Such profits shall be treated as CAPITAL GAIN.

    A= B+C-D

    • A = Income of specified entity which is to be calculated for charging capital gain.
    • B = Vale of money on the date of receipt.
    • C = FMV of capital assets on the date of receipt.
    • D = Amount of capital balance of the specified person which is appeared in their capital account on the date of reconstitution.

    We Calculate capital account of a specified person without taking effect of an increase in capital account

    • Due to the revaluation of assets.
    • Due to self-generation of goodwill.
    • Due to other self-generated assets. (Proviso to section 45(4))

    It comes with Notwithstanding effect whatever mentioned in Section 45(1).


    Specified shall pay tax under section 45(4) is in addition to tax which is to be paid under section 9(B).

    The government has issued a Guideline which we will discuss to the next article.


    Capital Withdrawal from their respective capita accounts during the   course of business shall not attract 45(4)

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One Comment

  1. dhaval says:

    What is to be done in case of a firm where all the existing partners retire and new partner join the fir. Further the LAND is already considered as stock in trade and the same is not being transferred but Money is being paid to the existing/retiring partners? Will the provisions of PGBP apply or CG as per 45(4)

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May 2024