My firm paid capital gains tax under the substituted section 45(4) on the money we paid a partner on reconstitution. When the firm later sells the land that was revalued, can it deduct that already-taxed amount from the sale consideration?
Only if the section 45(4) charge arose out of a revaluation of a capital asset or the valuation of a self-generated asset or self-generated goodwill, and only through Rule 8AB. Section 48(iii) allows the firm to deduct so much of the section 45(4) amount as is attributable to the capital asset being transferred, 'calculated in the prescribed manner', and the prescribed manner is Rule 8AB: the amount is spread over the assets in the same proportion as the increase in the value of each asset on revaluation bears to the total increase, and the attribution must be reported in Form 5C by the section 139(1) due date.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2021-07-02, reported as Rule 8AB inserted by the Income-tax (Eighteenth Amendment) Rules, 2021, with effect from 2 July 2021 (footnote 66 on the Department's rule page); section 48(iii) inserted by Act No. 13 of 2021 (Finance Act 2021) with effect from 1 April 2021, that is from assessment year 2021-22. It bears on section 45(4), section 48, section 48(iii), section 9B, section Rule 8AB, section Rule 8AA(5), section 139(1), section 140 of the Income Tax Act 1961, in Capital Gains, Deductions & Disallowances and Assessment & Scrutiny matters.
This is the relief limb of the 2021 scheme and it is routinely lost. Rule 8AB(3) is the trap: where the section 45(4) charge does not relate to a revaluation or to the valuation of a self-generated asset or goodwill — for example where a partner is simply paid out cash exceeding his capital account without any revaluation — the amount is attributed to nothing, so no part of it is ever deductible under section 48(iii). Rule 8AB(4) does the same where the amount relates only to the capital asset the partner actually took away. And Explanation 1 makes the whole relief turn on whether the revaluation was based on a report from a registered valuer as defined in rule 11U(g); a revaluation done on the partners' own estimate does not qualify. Explanation 2 separately shuts down the obvious second claim: the revalued increase carries no depreciation. Note also that the attribution rule for the section 48(iii) deduction is Rule 8AB, not Rule 8AA(5) — Rule 8AA(5) does a different job, deciding whether the section 45(4) income is short-term or long-term.
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The substituted section 45(4), in force from assessment year 2021-22, charges the firm (the 'specified entity') where a partner (the 'specified person') receives money or a capital asset or both from it in connection with a reconstitution, on the amount A = B + C - D, where B is the money received, C is the fair market value of the capital asset received and D is the balance in his capital account at the time of the reconstitution, that balance being computed without the increase attributable to revaluation of any asset or to self-generated goodwill or any other self-generated asset. The firm therefore pays tax on an amount that is, in substance, unrealised appreciation on assets it still holds. Clause (iii) of section 48 was inserted at the same time to prevent that amount being taxed a second time when the firm eventually transfers the asset. Clause (iii) does not itself contain the arithmetic; it says the attributable amount is to be 'calculated in the prescribed manner'. Rule 8AB, inserted by the Income-tax (Eighteenth Amendment) Rules 2021 with effect from 2 July 2021 — the same day CBDT issued its guidelines under section 9B(4) — supplies that manner and prescribes Form 5C for reporting it.
Rule 8AB(1) requires the firm to attribute the section 45(4) amount to the capital assets remaining with it in the manner the rule lays down. Sub-rule (2) is the operative attribution: where the excess charged under section 45(4) relates to revaluation of any capital asset or to valuation of a self-generated asset or self-generated goodwill, the amount attributable to a remaining capital asset bears to the section 45(4) amount the same proportion as the increase in, or recognition of, the value of that asset because of the revaluation or valuation bears to the aggregate of the increase in, or recognition of, the value of all assets because of the revaluation or valuation. Sub-rules (3) and (4) are the two exclusions: where the charged amount does not relate to a revaluation or to the valuation of a self-generated asset or goodwill, and where it relates only to the capital asset actually received by the partner, the amount is not attributed to any capital asset for section 48(iii) at all. Sub-rules (5) to (7) require the attribution to be furnished in Form 5C, electronically, verified by the person authorised under section 140, on or before the due date under Explanation 2 to section 139(1) for the assessment year in which the amount is chargeable under section 45(4). Explanation 1 conditions the whole of sub-rule (2) on the revaluation being based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U. Explanation 2 denies depreciation on the increase in value arising from the revaluation or from recognition of self-generated goodwill or a self-generated asset.
The scheme works in three steps and each is deliberately separate. Section 9B deems the firm to have transferred any capital asset or stock in trade that a partner receives on dissolution or reconstitution, at fair market value on the date of receipt. The substituted section 45(4) then charges the firm on money or a capital asset received by the partner in connection with a reconstitution to the extent it exceeds his capital account balance, that balance being stripped of any revaluation or self-generated-asset uplift — which is precisely why the charge falls on appreciation the firm has not realised. Explanation 2 to section 45(4) states that the sub-section operates in addition to section 9B and that taxation under the two provisions is worked out independently. Because the firm has been taxed on unrealised appreciation in assets it still owns, section 48(iii) gives it a corresponding deduction when it does sell, and Rule 8AB decides how much of the charge is carried into which asset. The logic of sub-rules (3) and (4) follows from that: if the charge did not arise from appreciation in retained assets, there is no double taxation to relieve, so nothing is carried forward.
the amount charged to tax under sub-section (4) of section 45 shall not be attributed to any capital asset for the purposes of clause (iii) of section 48
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Handle my notice → Ask a CA on WhatsAppOnly if the section 45(4) charge arose out of a revaluation of a capital asset or the valuation of a self-generated asset or self-generated goodwill, and only through Rule 8AB. Section 48(iii) allows the firm to deduct so much of the section 45(4) amount as is attributable to the capital asset being transferred, 'calculated in the prescribed manner', and the prescribed manner is Rule 8AB: the amount is spread over the assets in the same proportion as the increase in the value of each asset on revaluation bears to the total increase, and the attribution must be reported in Form 5C by the section 139(1) due date. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 45(4), section 48, section 48(iii), section 9B, section Rule 8AB, section Rule 8AA(5), section 139(1), section 140 of the Income Tax Act 1961. It is reported as Rule 8AB inserted by the Income-tax (Eighteenth Amendment) Rules, 2021, with effect from 2 July 2021 (footnote 66 on the Department's rule page); section 48(iii) inserted by Act No. 13 of 2021 (Finance Act 2021) with effect from 1 April 2021, that is from assessment year 2021-22. This is the relief limb of the 2021 scheme and it is routinely lost. Rule 8AB(3) is the trap: where the section 45(4) charge does not relate to a revaluation or to the valuation of a self-generated asset or goodwill — for example where a partner is simply paid out cash exceeding his capital account without any revaluation — the amount is attributed to nothing, so no part of it is ever deductible under section 48(iii). Rule 8AB(4) does the same where the amount relates only to the capital asset the partner actually took away. And Explanation 1 makes the whole relief turn on whether the revaluation was based on a report from a registered valuer as defined in rule 11U(g); a revaluation done on the partners' own estimate does not qualify. Explanation 2 separately shuts down the obvious second claim: the revalued increase carries no depreciation. Note also that the attribution rule for the section 48(iii) deduction is Rule 8AB, not Rule 8AA(5) — Rule 8AA(5) does a different job, deciding whether the section 45(4) income is short-term or long-term. If it applies to you, the first step is this: Establish first whether any part of the section 45(4) charge is traceable to a revaluation or to the valuation of a self-generated asset or self-generated goodwill; if none of it is, do not claim under section 48(iii) at all, because Rule 8AB(3) attributes nothing.
The substituted section 45(4), in force from assessment year 2021-22, charges the firm (the 'specified entity') where a partner (the 'specified person') receives money or a capital asset or both from it in connection with a reconstitution, on the amount A = B + C - D, where B is the money received, C is the fair market value of the capital asset received and D is the balance in his capital account at the time of the reconstitution, that balance being computed without the increase attributable to revaluation of any asset or to self-generated goodwill or any other self-generated asset. The firm therefore pays tax on an amount that is, in substance, unrealised appreciation on assets it still holds. Clause (iii) of section 48 was inserted at the same time to prevent that amount being taxed a second time when the firm eventually transfers the asset. Clause (iii) does not itself contain the arithmetic; it says the attributable amount is to be 'calculated in the prescribed manner'. Rule 8AB, inserted by the Income-tax (Eighteenth Amendment) Rules 2021 with effect from 2 July 2021 — the same day CBDT issued its guidelines under section 9B(4) — supplies that manner and prescribes Form 5C for reporting it. 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. Rule 8AB(1) requires the firm to attribute the section 45(4) amount to the capital assets remaining with it in the manner the rule lays down. Sub-rule (2) is the operative attribution: where the excess charged under section 45(4) relates to revaluation of any capital asset or to valuation of a self-generated asset or self-generated goodwill, the amount attributable to a remaining capital asset bears to the section 45(4) amount the same proportion as the increase in, or recognition of, the value of that asset because of the revaluation or valuation bears to the aggregate of the increase in, or recognition of, the value of all assets because of the revaluation or valuation. Sub-rules (3) and (4) are the two exclusions: where the charged amount does not relate to a revaluation or to the valuation of a self-generated asset or goodwill, and where it relates only to the capital asset actually received by the partner, the amount is not attributed to any capital asset for section 48(iii) at all. Sub-rules (5) to (7) require the attribution to be furnished in Form 5C, electronically, verified by the person authorised under section 140, on or before the due date under Explanation 2 to section 139(1) for the assessment year in which the amount is chargeable under section 45(4). Explanation 1 conditions the whole of sub-rule (2) on the revaluation being based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U. Explanation 2 denies depreciation on the increase in value arising from the revaluation or from recognition of self-generated goodwill or a self-generated asset.
The scheme works in three steps and each is deliberately separate. Section 9B deems the firm to have transferred any capital asset or stock in trade that a partner receives on dissolution or reconstitution, at fair market value on the date of receipt. The substituted section 45(4) then charges the firm on money or a capital asset received by the partner in connection with a reconstitution to the extent it exceeds his capital account balance, that balance being stripped of any revaluation or self-generated-asset uplift — which is precisely why the charge falls on appreciation the firm has not realised. Explanation 2 to section 45(4) states that the sub-section operates in addition to section 9B and that taxation under the two provisions is worked out independently. Because the firm has been taxed on unrealised appreciation in assets it still owns, section 48(iii) gives it a corresponding deduction when it does sell, and Rule 8AB decides how much of the charge is carried into which asset. The logic of sub-rules (3) and (4) follows from that: if the charge did not arise from appreciation in retained assets, there is no double taxation to relieve, so nothing is carried forward. In the words reproduced by the source cited on this page: "the amount charged to tax under sub-section (4) of section 45 shall not be attributed to any capital asset for the purposes of clause (iii) of section 48"
It was decided by the CBDT Circulars & Instructions on 2021-07-02 and is reported as Rule 8AB inserted by the Income-tax (Eighteenth Amendment) Rules, 2021, with effect from 2 July 2021 (footnote 66 on the Department's rule page); section 48(iii) inserted by Act No. 13 of 2021 (Finance Act 2021) with effect from 1 April 2021, that is from assessment year 2021-22. 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 45(4), section 48, section 48(iii), section 9B, section Rule 8AB, section Rule 8AA(5), section 139(1), section 140, 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. Rule 8AB(1) requires the firm to attribute the section 45(4) amount to the capital assets remaining with it in the manner the rule lays down. Sub-rule (2) is the operative attribution: where the excess charged under section 45(4) relates to revaluation of any capital asset or to valuation of a self-generated asset or self-generated goodwill, the amount attributable to a remaining capital asset bears to the section 45(4) amount the same proportion as the increase in, or recognition of, the value of that asset because of the revaluation or valuation bears to the aggregate of the increase in, or recognition of, the value of all assets because of the revaluation or valuation. Sub-rules (3) and (4) are the two exclusions: where the charged amount does not relate to a revaluation or to the valuation of a self-generated asset or goodwill, and where it relates only to the capital asset actually received by the partner, the amount is not attributed to any capital asset for section 48(iii) at all. Sub-rules (5) to (7) require the attribution to be furnished in Form 5C, electronically, verified by the person authorised under section 140, on or before the due date under Explanation 2 to section 139(1) for the assessment year in which the amount is chargeable under section 45(4). Explanation 1 conditions the whole of sub-rule (2) on the revaluation being based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U. Explanation 2 denies depreciation on the increase in value arising from the revaluation or from recognition of self-generated goodwill or a self-generated asset. It arises in Capital Gains, Deductions & Disallowances and Assessment & Scrutiny matters, on section 45(4), section 48, section 48(iii), section 9B, section Rule 8AB, section Rule 8AA(5), section 139(1), section 140 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. If it is, obtain and keep the valuation report of a registered valuer within rule 11U(g) — Explanation 1 to Rule 8AB makes that report the condition of the attribution. Work the proportion asset by asset: the amount attributed to an asset is the section 45(4) amount multiplied by the increase in that asset's value on revaluation divided by the aggregate increase in the value of all assets revalued. File Form 5C electronically, verified by the person authorised under section 140, on or before the section 139(1) due date for the assessment year in which the section 45(4) amount is charged — the attribution is reported for the year of the charge, not for the later year of sale. Do not claim depreciation on the revalued increase; Explanation 2 to Rule 8AB expressly denies it. When the asset is finally sold, claim the attributed amount as a clause (iii) deduction in the section 48 computation, alongside clauses (i) and (ii), and tie it back to the Form 5C already filed.
Still good law. This is statutory and rule text, not a decision about it, so the status records that the provisions are in force as stated and not that any court has construed them. The dating is established and can be relied on: clause (iii) of section 48 was inserted by Act No. 13 of 2021, the Finance Act 2021, with effect from 1 April 2021, that is from assessment year 2021-22; Rule 8AB was inserted by the Income-tax (Eighteenth Amendment) Rules, 2021 with effect from 2 July 2021. No amendment to Rule 8AB after that date has been found, and the rule is stated as it currently stands. NO JUDICIAL DECISION CONSIDERING RULE 8AB HAS BEEN FOUND. A search of Tribunal decisions for the statutory phrase 'reconstitution of the specified entity' returns ten orders, and none of them turns on the attribution rule. That is not surprising: the charge under the substituted section 45(4) first bit in assessment year 2021-22, and the section 48(iii) deduction only falls to be claimed when the firm later transfers the asset, so the disputes are still ahead. Three consequences follow for anyone using the entry. Every proposition here is textual and stands or falls on the words of the rule, which is why the sub-rules are set out. The exclusions in sub- rules (3) and (4) are where the relief is most often lost, and there is no authority softening them: where the section 45(4) charge does not relate to a revaluation or to the valuation of a self-generated asset or goodwill, or relates only to the capital asset the partner actually took away, nothing is attributed to any remaining asset and no part of the charge is ever deductible. And the reporting condition in sub-rules (5) to (7) has not been tested, so whether a late or omitted Form 5C is fatal to the deduction is an open question; file it on time rather than argue about it later. 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: no holding is asserted and 'decided_on' is the date Rule 8AB takes effect, 2 July 2021, not a date of decision. The rule's heading reads 'Attribution of income taxable under sub-section (4) of section 45 to the capital assets remaining with the specified entity, under section 48', and its footnote records 'Inserted by the IT (Eighteenth Amdt.) Rules, 2021, w.e.f. 2-7-2021'. The rule has eight sub-rules. Sub-rule (8), which empowers the Principal Director General or Director General of Income-tax (Systems) to lay down the procedure and format for Form 5C, is not set out in this entry; the other seven are. A FOOTNOTE TRAP ON SECTION 48, and it has misled readers into dating clause (iii) wrongly. The current printing of section 48 carries a footnote 'Ins. by Act No. 08 of 2023, w.e.f. 1-4-2024' whose marker sits on the PROVISO TO CLAUSE (ii) — the proviso excluding interest under section 24(b) and Chapter VI-A from the cost of acquisition — and not on clause (iii). Clause (iii) carries no footnote marker at all on the current printing, which is why the 2023 date gets attached to it. Its true commencement is recorded on the 2021 printing of section 48, where clause (iii) carries the footnote 'Ins. by the Act No. 13 of 2021, w.e.f. 1-4-2021'; older printings of the section, from before the 2021 amendments, carry no clause (iii) at all. So clause (iii) operates from assessment year 2021-22 and Rule 8AB from 2 July 2021 — the same day the Board issued its guidelines under section 9B(4). TWO THINGS TO CHECK BEFORE THE DEDUCTION IS CLAIMED. Explanation 1 conditions the whole of sub-rule (2) on the revaluation being based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U, so a revaluation on the partners' own estimate takes the firm outside the attribution rule altogether. And sub-rules (5) to (7) require the attribution to be furnished in Form 5C, electronically, verified by the person authorised under section 140, on or before the due date under Explanation 2 to section 139(1) for the assessment year in which the amount is chargeable under section 45(4) — a filing that is easy to miss in the year of the reconstitution and whose absence is what the Assessing Officer will point to years later when the asset is sold. 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.
Rule 8AB(1) requires the firm to attribute the section 45(4) amount to the capital assets remaining with it in the manner the rule lays down. Sub-rule (2) is the operative attribution: where the excess charged under section 45(4) relates to revaluation of any capital asset or to valuation of a self-generated asset or self-generated goodwill, the amount attributable to a remaining capital asset bears to the section 45(4) amount the same proportion as the increase in, or recognition of, the value of that asset because of the revaluation or valuation bears to the aggregate of the increase in, or recognition of, the value of all assets because of the revaluation or valuation. Sub-rules (3) and (4) are the two exclusions: where the charged amount does not relate to a revaluation or to the valuation of a self-generated asset or goodwill, and where it relates only to the capital asset actually received by the partner, the amount is not attributed to any capital asset for section 48(iii) at all. Sub-rules (5) to (7) require the attribution to be furnished in Form 5C, electronically, verified by the person authorised under section 140, on or before the due date under Explanation 2 to section 139(1) for the assessment year in which the amount is chargeable under section 45(4). Explanation 1 conditions the whole of sub-rule (2) on the revaluation being based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U. Explanation 2 denies depreciation on the increase in value arising from the revaluation or from recognition of self-generated goodwill or a self-generated asset.
TaxSphere, “Statutory position — Rule 8AB and section 48(iii): how the section 45(4) amount is set off when the firm later sells the asset”, https://taxnotice.vittsphere.com/caselaw/case/rule-8ab-attribution-of-the-45-4-charge-to-the-firms-remaining-capital-assets/ (validity last checked 2026-09-08)
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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?
A partner retired and we paid him Rs 2 crore, most of it out of a revaluation of the firm's land. He says it is his own capital. Is the FIRM taxable?
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A partner retired and took assets out of the firm. How do s.9B and s.45(4) work together?
