Recent change in Finance Act 2021 in Section 45(4) and Section 9B will have far reaching impact on taxability of firm and other specified entities. We through, a series of articles, wish to discuss various issues.
Reconstitution of Specified Entity – Firm, AOP, BOI- Liable for tax u/s 45(4) and 9B of ITA -Will impact many entities undergoing reconstitution
The word “Reconstitution of the specified entity” has been defined in Explanation (i) to Section 9B that has been introduced in Finance Act 2021. This definition of “Reconstitution of the specified entity” applies to both Section 45(4) and Section 9B of the Income tax Act.
It is stated as under:-
(i) “Reconstitution of the specified entity” means, where—
(a) one or more of its partners or members, as the case may be, of such specified entity ceases to be partners or members; or
(b) one or more new partners or members, as the case may be, are admitted in such specified entity in such circumstances that one or more of the persons who were partners or members, as the case may be, of the specified entity, before the change, continue as partner or partners or member or members after the change; or
(c) all the partners or members, as the case may be, of such specified entity continue with a change in their respective share or in the shares of some of them;
From the above definition, it can be concluded that Section 45(4) and Section 9B will apply in the following cases:
1. Death
2. Admission
3. Retirement
4. Change in Profit Sharing Ratio
From above we will find that besides, the earlier law regarding taxability on dissolution, there are many situations in which new provisions of 45(4) and 9B will be applicable.
As per our understanding, there are large numbers of partnership firms, AOP/BOI etc. on which this provision will be applicable and there will be lot many entities that will be affected from any of the changes stated above.
Further since the 45(4)/9B are effective from TY 20-21 i.e. retrospective effect, we suggest all professionals / entities to take care whether they have considered above provisions while filing their ITRs.
Interest u/s 234C due to 45(4) and 9B
Section 45(4) and Section 9B were introduced in Finance Act 2021 having retrospective applicability from Financial Year 20-21.
It has been observed that in many cases, reconstitution has taken place in the year 2020-21 that was not taxable under the Income Tax Act till the introduction of Finance Act 2021, thus the assessees may not have paid advance tax on the same.
Since the Finance Act, 2021 was passed in Parliament on 24 March 2021; nobody could have paid advance tax on cases of reconstitution on which there was no tax earlier.
However, such assessees on whom the above sections are applicable would still be made liable to Interest u/s 234C for non- payment advance tax, and they would be liable to pay interest on such tax of which they had no knowledge.
Since the Act came into force w.e.f. 01/04/2021, so at earliest possible the tax would have been paid in the month of April, so liability for interest u/s 234B will also arise for April 2021.
It is suggested all the firms affected by the above provisions of 234B and 234C for payment of interest on account of 45(4) and 9B may submit a presentation to CBDT u/s 119 of ITA for Waiver of the same.
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Disclaimer : The information in this article is true and complete to the best of our knowledge. All suggestions/opinion are made without any guarantee on the part of author. The author disclaims any liability in connection with the use of these suggestions/opinions.
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