Section 8 — Income on receipt of capital asset or stock-in-trade by specified person from specified entity. Successor to s.9B of the 1961 Act.
Section 8 is in Chapter II — Basis of Charge, which runs from section 4 to section 10.
Sub-section (1) deems a transfer: where a specified person receives during the tax year a capital asset or stock-in-trade, or both, from a specified entity in connection with the entity's dissolution or reconstitution, the entity is deemed to have transferred it to him in the year of receipt.
Sub-section (2) makes the resulting profits and gains the income of the specified entity for that tax year, chargeable under "Profits and gains of business or profession" or under "Capital gains". Sub-section (3) deems the fair market value on the date of receipt by the specified person to be the full value of the consideration.
Sub-sections (4) and (5) let the Board, with the previous approval of the Central Government, issue guidelines removing difficulties in this section and section 67(10), each laid before both Houses for a total of thirty days and subject to modification or annulment without prejudice to what was previously done.
Sub-section (6) defines the terms: a "specified entity" is a firm or other association of persons or body of individuals, not being a company or co-operative society; a "specified person" is a partner or member of such an entity in any tax year; and "reconstitution" covers a partner or member ceasing, new ones being admitted while some continue, and all continuing with a change in their respective shares.
When a partner leaves with an asset rather than money, the asset goes out without a sale and the accretion in its value would escape charge at the entity level. The section treats the handover as a transfer by the entity at fair market value. The wide definition of reconstitution stops the charge being avoided by rearranging shares instead of retiring a partner.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Period for which a guideline is laid before each House | Thirty days | A total period of thirty days, in one session or two or more successive sessions | Sub-section (5) |
| Full value of consideration on the deemed transfer | Fair market value of the asset | As on the date of its receipt by the specified person, not the date of the deed or dissolution | Sub-section (3) |
The tax lands on the entity, not on the partner who takes the asset away. The trigger is receipt, so a retirement agreed in one year but given effect later is taxed in the later year. Because sub-section (3) substitutes fair market value on the date of receipt, the amount credited to the partner's capital account and the asset's book value are both irrelevant. The head of charge follows what was handed over, so one reconstitution can produce income under both heads.
A firm is reconstituted and a retiring partner takes a plot of land carried in the books at Rs 1 crore, worth Rs 4 crore on the day he receives it. The firm is deemed to have transferred the land for Rs 4 crore, and the gain is the firm's income of that tax year under "Capital gains". What his capital account was credited with does not enter the computation.
In the firm's or association's own assessment for the year the partner received the asset — the charge appears in the entity's return, not the outgoing partner's. A partner meets it indirectly, when the retirement or reconstitution deed is examined in the entity's proceedings.
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
See the full 1961 to 2025 concordance.
See the circulars index.