Hello friends, here we discussed Section 9B, Section 45(4), & Section 48 of the Income Tax Act
SECTION 9B OF 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;
If the above conditions are fulfilled;
What is Reconstitution Stands for:
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.`
METHOD OF COMPUTATION
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.
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|
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).
We Calculate capital account of a specified person without taking effect of an increase in capital account
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)