Section 9B has been inserted vide Finance Act, 2021 which shall have greater tax implications on the transfer of capital asset or stock-in-trade to the partners on reconstitution of the firm or AOP or BOI. Further, section 45(4) of the Income-tax Act has been amended to bring into tax bracket the gains of partner on his receipt of amount or capital asset or both on his retirement.
As, there lies a huge interplay between both these sections, it is pertinent to understand some critical questions that we all may come across while applying the provisions of the said as well as related sections.
Provisions of section 9B
Section 9B deals with taxation of asset or stock-in-trade transferred by the firm to the partner on reconstitution of the firm.
What is a specified entity?
Specified entity means a firm or other association of persons or body of individuals (not being a company or a co-operative society)
Who is a specified person?
Specified person means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year.
When can an entity be said to be reconstituted?
(a) when one or more of the partners of the firm or members of AOP or BOI ceases to be such partners or members; or
(b) when 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 of the specified entity, before the change, continue as partner or partners or member or members after the change; or
(c) when all the partners or members of such specified entity continue with a change in their respective share or in the shares of some of them
When does the transfer if capital assert or stock-in-trade takes place?
When any specified person receives any capital asset or stock in trade or both from a specified entity in connection with either dissolution or reconstitution of the said entity, then it shall be deemed that the specified entity has transferred such capital asset or stock in trade to the specified person in the year in which such capital asset or stock-in-trade is received by such person.
Who will be liable to pay tax and in which year the liability shall arise?
Under section 9(B), the chargeability of tax and liability to pay the tax lies on the specified entity and the liability falls in the previous year in which such capital asset or stock-in-trade were received by the specified person.
What shall be the value of consideration?
The fair market value of the asset or stock-in-trade as on the date of its receipt by the specified person shall be the full value of consideration.
Provisions of Section 45(4)
Section 45(4) deals with gains accrued to the partner on his retirement vis-à-vis receipt of amount or capital asset on retirement
What is the ambit of this section?
This section brings into the scope of tax any profits or gains arising by the person with he receiving amount or capital assets.
How the gains are calculated?
Section 45(4) provides a mechanism for determining the gains arising out of such transactions. The gains (A) shall be determined by a formula:
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:
Who has to bear tax on such gains?
The gains as computed under section 45(4) shall be deemed to be the gains of the specified entity in the year in which such money or capital asset is received by the specified partner.
What is the value of A is negative?
If the value of A is negative it will be deemed as Nil.
What shall be not be considered to compute the balance of capital account?
Balance of capital account shall be calculated without considering the increase in capital account of the specified person due to i) revaluation of the assets ii) self-generated goodwill iii) any other self-generated asset.
Whether the capital gains shall be long term or short term?
As per rule 8AA (5), the gains attributable to the specified entity shall be short term if the same is attributed to:
1. Short term capital asset as at the time of taxation under section 45(4)
2. Capital asset forming part of block of assets i.e. depreciable assets
3. Capital asset being self-generated asset and self-generated goodwill
The gains shall be long term if they are not covered under any of the three criteria mentioned above or they are long-term capital asset at the time of taxation under section 45(4)
Provisions of Section 48 (iii)
What is the purpose of amendment in section 48?
Interplay of section 45A (4) & 9B results in double taxation which made it necessary to eliminate such already taxed amount from getting taxed again. Let’s understand the potential double taxation from the example below:
| Sr. | Particulars | Amount |
| A | FMV of capital asset transferred to Partner A | Rs. 10,000/- |
| B | Partner A’s capital balance before revaluation | Rs. 6,000/- |
| C | Cost of capital asset transferred | Rs. 2,000/- |
| D | Capital Gain arising out of section 45(4) (A – B) | Rs. 4,000/- |
| E | Capital Gain arising out of section 9B (A – C) | Rs. 8,000/- |
There is clear double taxation of Rs. 4,000/-. To eliminate the same, section 48 (iii) read with newly inserted rule 8AB was inserted.
Rule 8AB states that when amount charged to tax under section 45(4) shall be excluded from full value of consideration for the purpose of section 9B.
Thus, in the aforementioned case, capital gain arising out of section 9B shall be computed as under:
| Sr. | Particulars | Amount |
| A | FMV of capital asset transferred to Partner A | Rs. 10,000/- |
| B | Less: Amount chargeable to tax under section 45(4) | Rs. 4,000/- |
| C | FMV for the purpose of section 9B r.w.s. 48(iii) (A – B) | Rs. 6,000/- |
| D | Cost of capital asset transferred | Rs. 2,000/- |
| E | Capital Gain arising under section 9B | Rs. 4,000/- |
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