Overview of Section 9B
Section 9B of the Income Tax Act, 1961 has been inserted vide Finance Act, 2021. It provides for taxation of Income on receipt of capital asset or stock in trade by the specified person from the specified entity. The section creates a deeming fiction that whenever there is a transfer by a specified entity to specified person any capital asset or stock in trade then profits and gains on such transfer shall be chargeable in hands of specified entity as Capital gains or Profits and Gains of Business or Profession (PGBP).
Provisions of Section 9B
Subsection (1) of section 9B
Where a specified person receives during the previous year any capital asset or stock in trade or both from a specified entity in connection with the dissolution or reconstitution of such specified entity, then the specified entity shall be deemed to have transferred such capital asset or stock in trade or both, as the case may be, to the specified person in the year in which such capital asset or stock in trade or both are received by the specified person.
Subsection (2) of section 9B
Any profits and gains arising from such deemed transfer of capital asset or stock in trade or both, as the case may be, by the specified entity shall be—
Subsection (3) of section 9B
For the purposes of this section, fair market value of the capital asset or stock in trade or both on the date of its receipt by the specified person shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer of the capital asset or stock in trade or both by the specified entity.
Subsection (4) of section 9B
If any difficulty arises in giving effect to the provisions of this section and sub-section (4) of section 45, the Board may, with the approval of the Central Government, issue guidelines for the purposes of removing the difficulty.
Subsection (5) of section 9B
Every guideline issued by the Board under sub-section (4) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the assessee.
Analysis of provisions of Section 9B
Section 9B provides that whenever there is a dissolution or reconstitution of the specified entity and as a result of such dissolution or reconstitution specified entity transfers to specified person any capital asset or stock in trade or both then such transfer shall be deemed to be taken place by the specified entity to specified person in the year in which such transfer took place. Income arising on such transfer shall be chargeable in the hands of specified entity as Capital Gains or PGBP.
Consideration for such transfer shall be the Fair market value (FMV) of capital asset or stock in trade on the date when such stock in trade or capital asset is received by the specified person from the specified entity.
How Income Tax will be calculated
Going by the provisions of sub-section (2) of section 9B it is clearly mentioned that tax will be calculated in accordance with the provisions of this act. Accordingly一
Important Note: All the above calculations shall be made in the hands of specified entity and there will be no tax consequence in the hands of specified person on such transfer.
Example relating to Section 9B
Let’s suppose there are three partners in firm “FR” namely “A”, “B” and “C”. Capital balance of each partner is Rs.10 lakhs. There are three pieces of land ‘S’, ‘T’ and ‘U’ at a book value of Rs.10 lakhs each.
Partner ”A” decides to exit the firm for which he will be paid Rs.11 lakhs and shall also be given land ‘U’. FMV of land ‘U’ on such date is Rs.50 lakhs. Let’s assume Indexed cost of acquisition of land ‘U’ is Rs.15 lakhs.
Assuming land ‘U’ is a long term capital asset the long term capital gain arising on such transfer shall be Rs.35 lakhs [FMV of Rs.50 lakhs (-) Indexed cost of acquisition of Rs.15 lakhs]. Firm “FR” needs to pay long term capital gain tax of Rs.7 lakhs [ Rs.35 lakhs X 20% tax rate] ignoring surcharge and cess.