Section 45(4) and Section 9B - Treatment on transfer of capital asset to partner/member on dissolution or reconstitution of specified entity. - Income Tax - Ready Reckoner - Income Tax

Section 45(4) Section 9B : Treatment on transfer of capital asset to partner/member on dissolution or reconstitution of specified entity. I. Section 45(4) : Profits or gains from receipt of money or capital asset or both by specified person from specified entity on reconstruction of specified entity shall be chargeable to income-tax as income of such specified entity under the head 'Capital Gains'. Deemed income in the hands of specified entity Notwithstanding anything contained in section 45(1) , where a specified person receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from such receipt by the specified person shall be chargeable to income-tax as income of such specified entity under the head Capital gains and Year of taxability such profit and gains shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person. Computation of such profit and gains from such receipt Notwithstanding anything to the contrary contained in this Act, such profits or gains shall be determined in accordance with the following formula, namely:- A = B+C-D Where, A = income chargeable to income-tax u/s 45(4) as income of the specified entity under the head Capital gains ; (if the value of A in the above formula is negative, its value shall be deemed to be zero) 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. Balance in the capital account 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 the increase in the capital account of the specified person due to the following revaluation of any asset or self-generated goodwill or any other self-generated asset. self-generated goodwill and self-generated asset mean goodwill or asset, as the case may be, which has been acquired without incurring any cost for purchase or which has been generated during the course of the business or profession. II. Type of capital gain chargeable to tax u/s 45(4) [ Section 242A) Rule 8AA(5) ] - Capital Gains shall be of the following type :- Short Term Capital Gain (STCG) Long Term Capital Gain (LTCG) The amount or a part of it shall be deemed to be from transfer of short term capital asset, hence STCG if it is attributed to :- Capital asset which is STCA at the time of taxation of amount u/s 45(4); or Capital asset forming part of block of asset; or Capital asset being self-generated asset and self-generated goodwill as defined in clause (ii) of Explanation 1 to sec 45(4). The amount or a part of it shall be deemed to be from transfer of long term capital asset or assets, hence LTCG if it is attributed to capital asset which is not covered in STCG and is LTCA at the time of taxation of amount u/s 45(4). III. Section 9B : Income on receipt of capital asset or stock in trade by specified person from specified entity in connection with the dissolution or reconstruction of such specified entity. [ Inserted w.e.f. AY 2021-22 ] Deemed transfer in the hands of specified entity 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. Year of taxability 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- deemed to be the income of such specified entity of the previous year in which such capital asset or stock in trade or both were received by the specified person; and Head of Income 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- chargeable to income-tax as income of such specified entity under the head Profits and gains of business or profession or under the head Capital gains , in accordance with the provisions of this Act. Full value of Consideration In order to compute capital Gains, 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. Power of CBDT to issue guidelines [ Section 9B(4) and Section 9B(5) ] If any difficulty arises in giving effect to the provisions of this section and section 45(4) , the Board may, with the approval of the Central Government, issue guidelines for the purposes of removing the difficulty. Every guideline issued by the Board under section 9B(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. Guidelines under section 9B and section 45(4) of the Income-tax Act, 1961 ( Circular no. 14/2021 dated 02.07.2021) Attribution of income taxable u/s 45(4) to the capital assets remaining with the specified entity, u/s 48 [ Rule 8AB Added vide Notification No. 76/2021 , dated 02.07.2021 ] (1) For the purposes of Section 48(iii) , where the amount is chargeable to income-tax as income of specified entity under Section 45(4) , the specified entity shall attribute such amount to capital asset remaining with the specified entity in a manner provided in this rule. (2) Where the aggregate of the value of money and the fair market value of the capital asset received by the specified person from the specified entity, in excess of the balance in his capital account, chargeable to tax under section 45(4) , relates to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill, of the specified entity, the amount attributable to the capital asset remaining with the specified entity for purpose of section 48(iii) shall be the amount which bears to the amount charged under section 45(4) the same proportion as the increase in, or recognition of, value of that asset because of revaluation or valuation bears to the aggregate of increase in, or recognition of, value of all assets because of the revaluation or valuation. (3) Where the aggregate of the value of money and the fair market value of the capital asset received by the specified person from the specified entity, in excess of the balance in his capital account, charged to tax under section 45(4) does not relate to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill, of the specified entity, the amount charged to tax under section 45(4) shall not be attributed to any capital asset for the purposes of section 48(iii) . (4) Notwithstanding anything contained in sub-rules (2) or (3), where the aggregate of the value of money and the fair market value of the capital asset received by the specified person from the specified entity, in excess of the balance in his capital account, charged to tax under section 45(4) relate only to the capital asset received by the specified person from the specified entity, the amount charged to tax under section 45(4) shall not be attributed to any capital asset for the purposes of section 48(iii) . (5) The specified entity shall furnish the details of amount attributed to capital asset remaining with the specified entity in Form No. 5C . (6) Form No. 5C shall be furnished electronically either under digital signature or through electronic verification code and shall be verified by the person who is authorised to verify the return of income of the specified entity under section 140 . (7) Form No. 5C shall be furnished on or before the due date referred to in the Explanation 2 below section 139(1) for the assessment year in which the amount is chargeable to tax under section 45(4). (8) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall - (i) specify the procedure for filing of Form No. 5C; (ii) specify the procedure, format, data structure, standards and manner of generation of electronic verification code, referred to in sub-rule (6), for verification of the person furnishing the said Form; and (iii) be responsible for formulating and implementing appropriate security, archival and retrieval policies in relation to the Form No 5C so furnished. Note The amount chargeable to tax under section 45(4) shall relate to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill, of the specified entity, if the revaluation is based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U . Revaluation of an asset or valuation of self-generated asset or self-generated goodwill does not entitle the specified entity for the depreciation on the increase in value of that asset on account of its revaluation or recognition of the value of self-generated asset or self-generated goodwill due to its valuation. self-generated asset and self-generated goodwill shall have the same meaning as assigned to them in clause (ii) of Explanation 1 to section 45(4) .