Rationalisation of provision of transfer of capital asset to partner on dissolution or reconstitution

Section 45(4) of Income Tax act, 1961 – Newly Substitute provide an another exception of capital gain in the year in which Capital asset received by specified person

The existing provisions of section 45 (1) of the Act inter alia, provides that any Capital gains arising from the transfer of a capital asset shall be chargeable to tax in the previous year in which such transfer takes place.

Further said section 45(4), provides that the Capital gains arising from the transfer of a capital asset by way of distribution on the dissolution of a Firm or AOP or BOI (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of such Firm or AOP or BOI in the previous year in which the said transfer takes place.

Full value of the consideration = FMV of the asset on the date of such transfer

In this regard, it has been noticed that there is uncertainty regarding applicability of provisions of aforesaid sub-section to a situation where assets are revalued or self-generated assets are recorded in the books of accounts and payment is made to partner or member which is in excess of his capital contribution.

Hence, it is proposed to substitute the existing section 45 (4) of the Act with a new sub-section (4).

New proposed section 45 (4) of the Act applies in a case where

  • a specified person
  • who receives during the previous year any capital asset
  • at the time of dissolution or reconstitution of the specified entity.

Calculation of Capital gain

Particular INR (Amount)
FMV of the capital asset received by partners or members or money received by them XXXX
Less:- Capital balance of the partner or member in the book of A/c of Firm or AOP or BOI as the case may be (XXXX)
Capital Gain XXX

NOTE: -1. Capital gain will be taxable in the hand of Firm or AOP or BOI in the year in which such specified entity transfer the capital to their partner or member as the case may be.

NOTE: – 2. FMV of the capital asset on the date of receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

The balance in the capital account of the specified person in the books of account of the specified entity is to be calculated without taking into account increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset.

This amendment will be effective from the 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

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Qualification: Student - CA/CS/CMA
Company: Soni Chatrath & Co.
Location: New Delhi, Delhi, India
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