The firm has been charged under section 45(4) on a payout to a partner on reconstitution. Is that gain short-term or long-term, and how do I work out the split?
You look through the charge to the assets the amount has been attributed to. Rule 8AA(5) deems the amount, or a part of it, to be from the transfer of a short-term capital asset where it is attributed to an asset that is short-term at the time of the section 45(4) taxation, to an asset forming part of a block of assets, or to a self-generated asset or self-generated goodwill; and to be from the transfer of a long-term capital asset where it is attributed to any other asset that is long-term at that time. One section 45(4) charge can therefore split into a short-term part and a long-term part.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2021-07-02, reported as Sub-rule (5) inserted in Rule 8AA by the Income-tax (Eighteenth Amendment) Rules, 2021, with effect from 2 July 2021. It bears on section Rule 8AA(5), section 45(4), section 9B, section 48(iii), section Rule 8AB, section 2(42A), section 50 of the Income Tax Act 1961, in Capital Gains and Assessment & Scrutiny matters.
Two of the three short-term limbs catch firms out. First, anything attributed to a capital asset forming part of a block of assets is short-term without more — the firm's long-held factory building, being depreciable and in a block, produces a short-term charge no matter how long it has been held, which is consistent with section 50 but is regularly missed when the return is prepared. Second, self-generated goodwill and other self-generated assets are always short-term, and those are the very items a reconstitution revaluation is usually built on. That matters for the rate, for indexation, and for what losses can be set off against the charge. The characterisation also has to be settled at the same time as the Rule 8AB attribution, because the two rules use the same attribution: Rule 8AA(5) asks what the amount was attributed to, and that answer comes from Rule 8AB.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Rule 8AA determines the period for which a capital asset is held in cases the rule specifies. Sub-rule (5), inserted with effect from 2 July 2021 together with Rule 8AB, deals with the amount chargeable to income-tax as income of a specified entity under section 45(4) under the head 'Capital gains'. It does not itself compute anything; it characterises an amount already computed under the section 45(4) formula and already attributed under Rule 8AB.
The amount, or a part of it, is deemed to be from the transfer of a short-term capital asset if it is attributed to (a) a capital asset which is a short-term capital asset at the time of taxation of the amount under section 45(4), or (b) a capital asset forming part of a block of assets, or (c) a capital asset being a self-generated asset or self-generated goodwill as defined in clause (ii) of Explanation 1 to section 45(4). The amount, or a part of it, is deemed to be from the transfer of a long-term capital asset or assets if it is attributed to a capital asset not covered by clause (i) which is a long-term capital asset at the time of taxation of the amount under section 45(4).
The section 45(4) charge is not a gain on the transfer of any identified asset — it is a charge on an arithmetical excess, A = B + C - D. Something therefore has to supply the character the charging provision cannot. The rule does it by borrowing the character of the assets to which Rule 8AB attributes the amount, and by fixing the point of testing as the time of taxation under section 45(4) rather than any later date. The block-of-assets limb and the self-generated-asset limb are absolute, which keeps the rule aligned with section 50 for depreciable assets and prevents a long-term character being claimed for goodwill that, by definition in clause (ii) of Explanation 1 to section 45(4), was acquired without any cost of purchase.
the amount or a part of it shall be deemed to be from transfer of long-term capital asset or assets, if it is attributed to capital asset which is not covered by clause (i) and is long-term capital asset at the time of taxation of amount under sub-section (4) of section 45
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Handle my notice → Ask a CA on WhatsAppYou look through the charge to the assets the amount has been attributed to. Rule 8AA(5) deems the amount, or a part of it, to be from the transfer of a short-term capital asset where it is attributed to an asset that is short-term at the time of the section 45(4) taxation, to an asset forming part of a block of assets, or to a self-generated asset or self-generated goodwill; and to be from the transfer of a long-term capital asset where it is attributed to any other asset that is long-term at that time. One section 45(4) charge can therefore split into a short-term part and a long-term part. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section Rule 8AA(5), section 45(4), section 9B, section 48(iii), section Rule 8AB, section 2(42A), section 50 of the Income Tax Act 1961. It is reported as Sub-rule (5) inserted in Rule 8AA by the Income-tax (Eighteenth Amendment) Rules, 2021, with effect from 2 July 2021. Two of the three short-term limbs catch firms out. First, anything attributed to a capital asset forming part of a block of assets is short-term without more — the firm's long-held factory building, being depreciable and in a block, produces a short-term charge no matter how long it has been held, which is consistent with section 50 but is regularly missed when the return is prepared. Second, self-generated goodwill and other self-generated assets are always short-term, and those are the very items a reconstitution revaluation is usually built on. That matters for the rate, for indexation, and for what losses can be set off against the charge. The characterisation also has to be settled at the same time as the Rule 8AB attribution, because the two rules use the same attribution: Rule 8AA(5) asks what the amount was attributed to, and that answer comes from Rule 8AB. If it applies to you, the first step is this: Do the Rule 8AB attribution first — Rule 8AA(5) has nothing to work on until you know which asset each part of the section 45(4) amount is attributed to.
Rule 8AA determines the period for which a capital asset is held in cases the rule specifies. Sub-rule (5), inserted with effect from 2 July 2021 together with Rule 8AB, deals with the amount chargeable to income-tax as income of a specified entity under section 45(4) under the head 'Capital gains'. It does not itself compute anything; it characterises an amount already computed under the section 45(4) formula and already attributed under Rule 8AB. The matter was decided on 2021-07-02 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. The amount, or a part of it, is deemed to be from the transfer of a short-term capital asset if it is attributed to (a) a capital asset which is a short-term capital asset at the time of taxation of the amount under section 45(4), or (b) a capital asset forming part of a block of assets, or (c) a capital asset being a self-generated asset or self-generated goodwill as defined in clause (ii) of Explanation 1 to section 45(4). The amount, or a part of it, is deemed to be from the transfer of a long-term capital asset or assets if it is attributed to a capital asset not covered by clause (i) which is a long-term capital asset at the time of taxation of the amount under section 45(4).
The section 45(4) charge is not a gain on the transfer of any identified asset — it is a charge on an arithmetical excess, A = B + C - D. Something therefore has to supply the character the charging provision cannot. The rule does it by borrowing the character of the assets to which Rule 8AB attributes the amount, and by fixing the point of testing as the time of taxation under section 45(4) rather than any later date. The block-of-assets limb and the self-generated-asset limb are absolute, which keeps the rule aligned with section 50 for depreciable assets and prevents a long-term character being claimed for goodwill that, by definition in clause (ii) of Explanation 1 to section 45(4), was acquired without any cost of purchase. In the words reproduced by the source cited on this page: "the amount or a part of it shall be deemed to be from transfer of long-term capital asset or assets, if it is attributed to capital asset which is not covered by clause (i) and is long-term capital asset at the time of taxation of amount under sub-section (4) of section 45"
It was decided by the CBDT Circulars & Instructions on 2021-07-02 and is reported as Sub-rule (5) inserted in Rule 8AA by the Income-tax (Eighteenth Amendment) Rules, 2021, with effect from 2 July 2021. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section Rule 8AA(5), section 45(4), section 9B, section 48(iii), section Rule 8AB, section 2(42A), section 50, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The amount, or a part of it, is deemed to be from the transfer of a short-term capital asset if it is attributed to (a) a capital asset which is a short-term capital asset at the time of taxation of the amount under section 45(4), or (b) a capital asset forming part of a block of assets, or (c) a capital asset being a self-generated asset or self-generated goodwill as defined in clause (ii) of Explanation 1 to section 45(4). The amount, or a part of it, is deemed to be from the transfer of a long-term capital asset or assets if it is attributed to a capital asset not covered by clause (i) which is a long-term capital asset at the time of taxation of the amount under section 45(4). It arises in Capital Gains and Assessment & Scrutiny matters, on section Rule 8AA(5), section 45(4), section 9B, section 48(iii), section Rule 8AB, section 2(42A), section 50 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Tag each attributed part: short-term if the asset was short-term at the time of the section 45(4) taxation, short-term if the asset is in a block of assets, short-term if it is self-generated goodwill or another self-generated asset within clause (ii) of Explanation 1 to section 45(4). Treat the balance — assets outside those three limbs that were long-term at the time of the section 45(4) taxation — as long-term. Test holding period as at the time of taxation under section 45(4), not as at the date the firm later sells the asset. Carry the split into the return so that the short-term and long-term components of one section 45(4) charge are separately disclosed, and keep the Form 5C attribution as the working for it.
Still good law. The sub-rule has been read from the Department's own rule page. The footnote there dates sub-rule (5) to the Income-tax (Eighteenth Amendment) Rules, 2021, with effect from 2 July 2021, and no later amendment to the sub-rule appears. No judicial decision considering Rule 8AA(5) has been located, and later treatment has not been checked. Two things qualify that. A rule has no life of its own: it stands or falls with the section under which it is made, and sub-rule (5) is made for the substituted section 45(4). If that section is amended, or if the charge it creates is read down, the characterisation the sub-rule performs goes with it, and this entry should not be relied on for a later year without checking the section first. And the absence of judicial consideration is a real absence rather than a sign of settled acceptance. The sub-rule allocates the amount charged under section 45(4) between short-term and long-term by reference to the assets to which it is attributed under Rule 8AB, and the questions that arise on that allocation — how it works where a reconstitution involves assets of both kinds, and what happens where the amount attributed exceeds the gain on the asset in question — have not been tested anywhere. A practitioner working a reconstitution should expect to argue the mechanics from the words of the rule and of section 48(iii), and should keep the attribution working papers, because there is no decision to cite. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Statutory entry, not a decision. 'tier' is set to 'cbdt' because the library's fixed tier vocabulary has no value for a statutory entry; the source is the Income-tax Department's own rule page. 'decided_on' is the date sub-rule (5) takes effect, 2 July 2021, and not a date of decision. The sub-rule has no application to any assessment year before AY 2021-22. It characterises an amount chargeable under the substituted section 45(4), and that substitution was made by Act No. 13 of 2021 with effect from 1 April 2021, that is from AY 2021-22. The footnote against sub-rule (5) records its insertion by the Income-tax (Eighteenth Amdt.) Rules, 2021, with effect from 2 July 2021. The sub-rule is set out as a table; the text reproduced here follows the wording but the tabular layout has not been preserved, and anyone quoting it in a proceeding should reproduce the table itself. Rule 8AA(5) characterises only; it performs no attribution. The attribution is done by Rule 8AB, headed 'Attribution of income taxable under sub-section (4) of section 45 to the capital assets remaining with the specified entity, under section 48'. Three things are worth keeping separate when the rule is used. The charge under section 45(4) falls on the specified entity and arises where a specified person receives money or a capital asset in connection with a reconstitution; section 9B deals with a different event, the receipt of a capital asset or stock in trade on dissolution or reconstitution, and deems a transfer by the entity. Both can be engaged by one reconstitution and they are computed separately. The character fixed by Rule 8AA(5) is the character of the amount charged under section 45(4), and not of any asset. It leaves the ordinary rule in section 2(42A) to govern the entity's own assets, and it does not turn a later transfer of a retained asset into a short-term transaction. And where the retained assets include depreciable assets, section 50 continues to govern the computation on their eventual transfer, the amount attributed under Rule 8AB entering that computation through section 48(iii). How the two work together where the block ceases to exist is not addressed by the rule, and nothing is stated about it here. Nor does the rule say anything about the treatment in the hands of the specified person who received the money or the asset; that is governed by the provisions applying to him, and the charge under section 45(4) on the entity does not by itself decide it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The amount, or a part of it, is deemed to be from the transfer of a short-term capital asset if it is attributed to (a) a capital asset which is a short-term capital asset at the time of taxation of the amount under section 45(4), or (b) a capital asset forming part of a block of assets, or (c) a capital asset being a self-generated asset or self-generated goodwill as defined in clause (ii) of Explanation 1 to section 45(4). The amount, or a part of it, is deemed to be from the transfer of a long-term capital asset or assets if it is attributed to a capital asset not covered by clause (i) which is a long-term capital asset at the time of taxation of the amount under section 45(4).
TaxSphere, “Statutory position — Rule 8AA(5): whether the section 45(4) charge on the firm is short-term or long-term”, https://taxnotice.vittsphere.com/caselaw/case/rule-8aa-5-short-term-or-long-term-character-of-the-section-45-4-charge/ (validity last checked 2026-09-08)
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