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?
Yes, on the excess. The substituted s.45(4) charges the FIRM to capital gains on money or a capital asset (or both) received by a partner in connection with a reconstitution, to the extent it exceeds the balance in his capital account — and that balance must be computed WITHOUT the increase caused by revaluation of any asset or by self-generated goodwill or any other self-generated asset. The formula is A = B + C − D, and if A is negative it is deemed to be zero, so a loss cannot be thrown up. Substituted by the Finance Act 2021 with effect from 1 April 2021, i.e. AY 2021-22.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2021-04-01, reported as Income-tax Act 1961, s.45(4) as substituted w.e.f. 1-4-2021 (AY 2021-22); Income-tax Rules 1962, rules 8AA(5) and 8AB, inserted by CBDT Notification No. 76/2021, G.S.R. 470(E), dated 2 July 2021. It bears on section 45(4), section 9B, section 48, section 48(iii), section 45(3), section 140, section 139(1) of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
The old s.45(4) charged the firm on the DISTRIBUTION of a capital asset on dissolution 'or otherwise', and a generation of litigation turned on whether a retirement was a distribution and whether a revaluation credit was a transfer. The substituted provision abandons that ground entirely. It charges receipt by the partner, it expressly includes MONEY, and the second proviso strips the revaluation credit out of the very figure the firm would otherwise use to say nothing was taken out in excess. That single proviso reverses the commonest planning structure — revalue, credit the partners, pay out against the credited balance. Two consequences practitioners get wrong. First, Explanation 2 says the sub-section operates IN ADDITION to s.9B and that the taxation under the two is to be worked out INDEPENDENTLY — where a retiring partner takes a capital asset, both charges can arise on the one event and neither is set off against the other. Second, the gain does not float free: rule 8AA(5) fixes whether it is short or long term by reference to the asset it is attributed to, and rule 8AB attributes it to the assets REMAINING with the firm so that it becomes a cost under s.48(iii) when the firm later sells them. Miss rule 8AB and the firm pays tax twice on the same appreciation.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
Read aloud by your device. Press again to stop.
Not a case. The sub-section applies 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 that entity. Both expressions, and 'reconstitution of the specified entity', carry the meanings given to them in s.9B: a firm, AOP or BOI other than a company or a co-operative society is the specified entity; its partner or member is the specified person; and reconstitution covers a partner ceasing, a new partner being admitted with continuity of at least one existing partner, or a change in the partners' respective shares. Note the difference in trigger from s.9B: s.9B covers dissolution AND reconstitution and catches capital assets and stock in trade; s.45(4) covers reconstitution only, and catches money and capital assets but not stock in trade.
Notwithstanding s.45(1), the profits or gains arising from such receipt by the specified person are chargeable to income-tax as income of the SPECIFIED ENTITY under the head 'Capital gains' and are deemed to be the income of the specified entity of the previous year in which the money or capital asset was received by the specified person. The amount is determined by the formula A = B + C − D, where B is the value of money received on the date of receipt, C is the fair market value of the capital asset received on the date of receipt, and D is the balance in the capital account (represented in any manner) of the specified person in the books of the specified entity at the time of reconstitution. Where A is negative it is deemed to be zero (first proviso). The capital account balance is to be calculated without taking into account any increase due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset (second proviso). Explanation 2 declares, for the removal of doubts, that where a capital asset is received in connection with a reconstitution, the sub-section operates in addition to s.9B and the taxation under the two provisions is to be worked out independently. Rule 8AA(5) then treats the amount as arising from the transfer of a SHORT-term capital asset so far as it is attributed to an asset that is short term at the time of taxation, to an asset forming part of a block of assets, or to a self-generated asset or self-generated goodwill, and as arising from a LONG-term asset only so far as it is attributed to a capital asset not so covered which is long term at that time. Rule 8AB attributes the taxed amount, for the purposes of s.48(iii), to the capital assets REMAINING with the specified entity in the proportion which the revaluation increase or recognition of value in each asset bears to the aggregate increase or recognition across all assets (sub-rule (2)); makes no attribution where the taxed amount does not relate to a revaluation or to a self-generated asset or goodwill (sub-rule (3)); and makes no attribution where the taxed amount relates only to the capital asset received by the specified person (sub-rule (4)). Explanation 1 to rule 8AB confines sub-rule (2) to revaluations based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U. Rule 8AB(5) to (7) require the specified entity to furnish the details of the amount attributed, in Form No. 5C, electronically and verified under s.140, on or before the due date under Explanation 2 below s.139(1) for the assessment year in which the amount is chargeable under s.45(4).
Not a judicial route. The scheme replaces a charge on 'distribution' with a charge on 'receipt', and replaces the search for a transfer with an arithmetical excess over the partner's own stake. The second proviso is the operative device: by excluding revaluation credits and self-generated goodwill from the capital account balance, it prevents the firm from manufacturing a larger 'D' and so a smaller charge out of a book entry, which is exactly what the pre-2021 revaluation-and-payout structure did. Explanation 2 forecloses the argument that a single receipt cannot be taxed twice over, and s.9B(4) and (5) give the Board power to issue binding guidelines because the two charges plus the attribution rules are, in combination, difficult to apply. Rules 8AA(5) and 8AB complete the scheme by fixing the character of the gain and by converting the tax paid into a cost under s.48(iii) for the assets that stay with the firm, so that the same appreciation is not taxed a second time when those assets are eventually sold.
Explanation 2.—For the removal of doubts, it is clarified that when a capital asset is received by a specified person from a specified entity in connection with the reconstitution of such specified entity, the provisions of this sub-section shall operate in addition to the provisions of section 9B and the taxation under the said provisions thereof shall be worked out independently.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppYes, on the excess. The substituted s.45(4) charges the FIRM to capital gains on money or a capital asset (or both) received by a partner in connection with a reconstitution, to the extent it exceeds the balance in his capital account — and that balance must be computed WITHOUT the increase caused by revaluation of any asset or by self-generated goodwill or any other self-generated asset. The formula is A = B + C − D, and if A is negative it is deemed to be zero, so a loss cannot be thrown up. Substituted by the Finance Act 2021 with effect from 1 April 2021, i.e. AY 2021-22. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 45(4), section 9B, section 48, section 48(iii), section 45(3), section 140, section 139(1) of the Income Tax Act 1961. It is reported as Income-tax Act 1961, s.45(4) as substituted w.e.f. 1-4-2021 (AY 2021-22); Income-tax Rules 1962, rules 8AA(5) and 8AB, inserted by CBDT Notification No. 76/2021, G.S.R. 470(E), dated 2 July 2021. The old s.45(4) charged the firm on the DISTRIBUTION of a capital asset on dissolution 'or otherwise', and a generation of litigation turned on whether a retirement was a distribution and whether a revaluation credit was a transfer. The substituted provision abandons that ground entirely. It charges receipt by the partner, it expressly includes MONEY, and the second proviso strips the revaluation credit out of the very figure the firm would otherwise use to say nothing was taken out in excess. That single proviso reverses the commonest planning structure — revalue, credit the partners, pay out against the credited balance. Two consequences practitioners get wrong. First, Explanation 2 says the sub-section operates IN ADDITION to s.9B and that the taxation under the two is to be worked out INDEPENDENTLY — where a retiring partner takes a capital asset, both charges can arise on the one event and neither is set off against the other. Second, the gain does not float free: rule 8AA(5) fixes whether it is short or long term by reference to the asset it is attributed to, and rule 8AB attributes it to the assets REMAINING with the firm so that it becomes a cost under s.48(iii) when the firm later sells them. Miss rule 8AB and the firm pays tax twice on the same appreciation. If it applies to you, the first step is this: Build the capital account balance ('D') from the books as at the time of reconstitution, then strip out every rupee of credit arising from revaluation of any asset and from self-generated goodwill or any other self-generated asset — the second proviso requires it, and this is where the assessment will be made or lost.
Not a case. The sub-section applies 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 that entity. Both expressions, and 'reconstitution of the specified entity', carry the meanings given to them in s.9B: a firm, AOP or BOI other than a company or a co-operative society is the specified entity; its partner or member is the specified person; and reconstitution covers a partner ceasing, a new partner being admitted with continuity of at least one existing partner, or a change in the partners' respective shares. Note the difference in trigger from s.9B: s.9B covers dissolution AND reconstitution and catches capital assets and stock in trade; s.45(4) covers reconstitution only, and catches money and capital assets but not stock in trade. The matter was decided on 2021-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Notwithstanding s.45(1), the profits or gains arising from such receipt by the specified person are chargeable to income-tax as income of the SPECIFIED ENTITY under the head 'Capital gains' and are deemed to be the income of the specified entity of the previous year in which the money or capital asset was received by the specified person. The amount is determined by the formula A = B + C − D, where B is the value of money received on the date of receipt, C is the fair market value of the capital asset received on the date of receipt, and D is the balance in the capital account (represented in any manner) of the specified person in the books of the specified entity at the time of reconstitution. Where A is negative it is deemed to be zero (first proviso). The capital account balance is to be calculated without taking into account any increase due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset (second proviso). Explanation 2 declares, for the removal of doubts, that where a capital asset is received in connection with a reconstitution, the sub-section operates in addition to s.9B and the taxation under the two provisions is to be worked out independently. Rule 8AA(5) then treats the amount as arising from the transfer of a SHORT-term capital asset so far as it is attributed to an asset that is short term at the time of taxation, to an asset forming part of a block of assets, or to a self-generated asset or self-generated goodwill, and as arising from a LONG-term asset only so far as it is attributed to a capital asset not so covered which is long term at that time. Rule 8AB attributes the taxed amount, for the purposes of s.48(iii), to the capital assets REMAINING with the specified entity in the proportion which the revaluation increase or recognition of value in each asset bears to the aggregate increase or recognition across all assets (sub-rule (2)); makes no attribution where the taxed amount does not relate to a revaluation or to a self-generated asset or goodwill (sub-rule (3)); and makes no attribution where the taxed amount relates only to the capital asset received by the specified person (sub-rule (4)). Explanation 1 to rule 8AB confines sub-rule (2) to revaluations based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U. Rule 8AB(5) to (7) require the specified entity to furnish the details of the amount attributed, in Form No. 5C, electronically and verified under s.140, on or before the due date under Explanation 2 below s.139(1) for the assessment year in which the amount is chargeable under s.45(4).
Not a judicial route. The scheme replaces a charge on 'distribution' with a charge on 'receipt', and replaces the search for a transfer with an arithmetical excess over the partner's own stake. The second proviso is the operative device: by excluding revaluation credits and self-generated goodwill from the capital account balance, it prevents the firm from manufacturing a larger 'D' and so a smaller charge out of a book entry, which is exactly what the pre-2021 revaluation-and-payout structure did. Explanation 2 forecloses the argument that a single receipt cannot be taxed twice over, and s.9B(4) and (5) give the Board power to issue binding guidelines because the two charges plus the attribution rules are, in combination, difficult to apply. Rules 8AA(5) and 8AB complete the scheme by fixing the character of the gain and by converting the tax paid into a cost under s.48(iii) for the assets that stay with the firm, so that the same appreciation is not taxed a second time when those assets are eventually sold. In the words reproduced by the source cited on this page: "Explanation 2.—For the removal of doubts, it is clarified that when a capital asset is received by a specified person from a specified entity in connection with the reconstitution of such specified entity, the provisions of this sub-section shall operate in addition to the provisions of section 9B and the taxation under the said provisions thereof shall be worked out independently."
It was decided by the CBDT Circulars & Instructions on 2021-04-01 and is reported as Income-tax Act 1961, s.45(4) as substituted w.e.f. 1-4-2021 (AY 2021-22); Income-tax Rules 1962, rules 8AA(5) and 8AB, inserted by CBDT Notification No. 76/2021, G.S.R. 470(E), dated 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 45(4), section 9B, section 48, section 48(iii), section 45(3), section 140, section 139(1), 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. Notwithstanding s.45(1), the profits or gains arising from such receipt by the specified person are chargeable to income-tax as income of the SPECIFIED ENTITY under the head 'Capital gains' and are deemed to be the income of the specified entity of the previous year in which the money or capital asset was received by the specified person. The amount is determined by the formula A = B + C − D, where B is the value of money received on the date of receipt, C is the fair market value of the capital asset received on the date of receipt, and D is the balance in the capital account (represented in any manner) of the specified person in the books of the specified entity at the time of reconstitution. Where A is negative it is deemed to be zero (first proviso). The capital account balance is to be calculated without taking into account any increase due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset (second proviso). Explanation 2 declares, for the removal of doubts, that where a capital asset is received in connection with a reconstitution, the sub-section operates in addition to s.9B and the taxation under the two provisions is to be worked out independently. Rule 8AA(5) then treats the amount as arising from the transfer of a SHORT-term capital asset so far as it is attributed to an asset that is short term at the time of taxation, to an asset forming part of a block of assets, or to a self-generated asset or self-generated goodwill, and as arising from a LONG-term asset only so far as it is attributed to a capital asset not so covered which is long term at that time. Rule 8AB attributes the taxed amount, for the purposes of s.48(iii), to the capital assets REMAINING with the specified entity in the proportion which the revaluation increase or recognition of value in each asset bears to the aggregate increase or recognition across all assets (sub-rule (2)); makes no attribution where the taxed amount does not relate to a revaluation or to a self-generated asset or goodwill (sub-rule (3)); and makes no attribution where the taxed amount relates only to the capital asset received by the specified person (sub-rule (4)). Explanation 1 to rule 8AB confines sub-rule (2) to revaluations based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U. Rule 8AB(5) to (7) require the specified entity to furnish the details of the amount attributed, in Form No. 5C, electronically and verified under s.140, on or before the due date under Explanation 2 below s.139(1) for the assessment year in which the amount is chargeable under s.45(4). It arises in Capital Gains and How Tax Law Is Read matters, on section 45(4), section 9B, section 48, section 48(iii), section 45(3), section 140, section 139(1) 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. Value 'B' (money) and 'C' (fair market value of any capital asset) as at the DATE OF RECEIPT by the partner, not the date of the deed. Compute A = B + C − D and treat a negative A as nil; there is no loss to carry. Ask separately whether s.9B is also triggered, and if it is, compute it independently — Explanation 2 forbids netting. Apply rule 8AA(5) to characterise the gain: short term to the extent attributed to a short-term asset, to an asset forming part of a block, or to a self-generated asset or self-generated goodwill; long term only for the remainder attributed to a long-term asset. Apply rule 8AB and file the attribution: under rule 8AB(2) the amount attaches to the assets remaining with the firm in the proportion of the revaluation increase, but only where the revaluation rests on a report from a registered valuer as defined in rule 11U (Explanation 1). Without that report the attribution — and the later s.48(iii) deduction — is not available. Then file Form No. 5C electronically by the s.139(1) due date for that assessment year; rule 8AB(5) to (7) make it mandatory, and the attribution recorded only in the firm's own books is not compliance. Note that under rule 8AB(3) and (4) there is NO attribution at all where the taxed excess does not relate to a revaluation or self-generated asset, or where it relates only to the capital asset the partner himself received; in those cases the firm gets no s.48(iii) cost step-up. If the year is AY 2020-21 or earlier, the substituted sub-section does not apply; the old s.45(4) governs and the pre-2021 case law is still the law for that year.
Still good law. In force from AY 2021-22. No decision applying the substituted sub-section on its own facts was located: indiankanoon searches on 7 September 2026 for 'rule 8AB', for 'money or capital asset or both' with 'specified person', and for 'self-generated goodwill' with 'specified entity' and 'reconstitution' produced only bare-act pages and orders for years before AY 2021-22. Any decision on the PRE-2021 s.45(4) — including the leading authorities on distribution on retirement and on revaluation — construes a provision that no longer exists in that form and is now of historical interest only, save for assessment years up to AY 2020-21. I did not check for any writ challenge to the substituted provision or to the rules. 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, and the source is the Income-tax Department's own section and rule pages, not a Board circular. 'decided_on' is the date the substitution takes effect. The Department's s.45 page as fetched carried NO amendment footnote against sub-section (4), so the substituting Act is taken from the Department's footnote to s.9B ('Act No. 13 of 2021, w.e.f. 1-4-2021') and from the ITAT Chennai order in DCIT v. Sathyabama Ramachandran (23 September 2025), which records that s.45(4) was amended 'vide Finance Act, 2021' and comes into force on 1 April 2021. I could not open the Finance Act 2021 clause itself: qc.incometaxindia.gov.in failed DNS resolution and the same path on the main domain returned 404. The library already holds a separate entry for CBDT Circular No. 14 of 2021, which carries the Board's guidelines and worked examples under rule 8AB; I attempted to retrieve that circular's own PDF and could not (the Department's landing page carries only a download link, and incometaxindia.gov.in/communications/circular/circular_no_14_2021.pdf returned 404), so nothing here is stated from the circular. Rule 8AA(5) and rule 8AB are quoted from CBDT Notification No. 76/2021 (G.S.R. 470(E)) dated 2 July 2021; the notification as fetched did not state a separate commencement date for the rules. Sub-rules (5) to (8) of rule 8AB, which require the attribution to be furnished in Form No. 5C electronically, verified under s.140, by the due date under Explanation 2 below s.139(1), were read from that same notification; an earlier draft of this entry omitted Form No. 5C altogether and advised that the attribution be kept in the firm's own records, which would have left a firm in breach of the rule and the s.48(iii) step-up resting on an attribution never furnished. 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.
Notwithstanding s.45(1), the profits or gains arising from such receipt by the specified person are chargeable to income-tax as income of the SPECIFIED ENTITY under the head 'Capital gains' and are deemed to be the income of the specified entity of the previous year in which the money or capital asset was received by the specified person. The amount is determined by the formula A = B + C − D, where B is the value of money received on the date of receipt, C is the fair market value of the capital asset received on the date of receipt, and D is the balance in the capital account (represented in any manner) of the specified person in the books of the specified entity at the time of reconstitution. Where A is negative it is deemed to be zero (first proviso). The capital account balance is to be calculated without taking into account any increase due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset (second proviso). Explanation 2 declares, for the removal of doubts, that where a capital asset is received in connection with a reconstitution, the sub-section operates in addition to s.9B and the taxation under the two provisions is to be worked out independently. Rule 8AA(5) then treats the amount as arising from the transfer of a SHORT-term capital asset so far as it is attributed to an asset that is short term at the time of taxation, to an asset forming part of a block of assets, or to a self-generated asset or self-generated goodwill, and as arising from a LONG-term asset only so far as it is attributed to a capital asset not so covered which is long term at that time. Rule 8AB attributes the taxed amount, for the purposes of s.48(iii), to the capital assets REMAINING with the specified entity in the proportion which the revaluation increase or recognition of value in each asset bears to the aggregate increase or recognition across all assets (sub-rule (2)); makes no attribution where the taxed amount does not relate to a revaluation or to a self-generated asset or goodwill (sub-rule (3)); and makes no attribution where the taxed amount relates only to the capital asset received by the specified person (sub-rule (4)). Explanation 1 to rule 8AB confines sub-rule (2) to revaluations based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U. Rule 8AB(5) to (7) require the specified entity to furnish the details of the amount attributed, in Form No. 5C, electronically and verified under s.140, on or before the due date under Explanation 2 below s.139(1) for the assessment year in which the amount is chargeable under s.45(4).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
Our JDA was never registered and the project collapsed. Am I still taxed on capital gains?
The firm revalued its land and credited the surplus to the partners' capital accounts. Is that taxable?
I sold a depreciable asset held for over three years. Can I still claim the capital gains exemption?
The AO says I sold below market value and wants to tax the difference. Can he do that?