Guidelines under section 9B and sub section 4 of section 45 of the income tax act 1961
Circular No. 14/2021 was issued by the Central Board of Direct Taxes on 2 July 2021. Its subject is Guidelines under section 9B and sub section 4 of section 45 of the income tax act 1961.
These are guidelines issued under a power in the section itself. Where a section says the Board may issue guidelines and that they bind, the guidelines carry more weight than an ordinary circular — read the enabling words before deciding which kind this is.
Issues guidelines under section 9B(4) on the new charge on partners and members taking assets out of a firm or other specified entity. Section 9B, inserted by the Finance Act, 2021, deems a specified entity to have transferred a capital asset or stock in trade to a specified person who receives it on dissolution or reconstitution, in the year of receipt, with fair market value on the date of receipt as the full value of the consideration, and taxes the resulting profit in the entity's hands under profits and gains of business or profession or under capital gains as the case may be. The substituted section 45(4) separately charges the specified entity to capital gains where a specified person receives money or a capital asset on reconstitution, on a formula given in the sub-section, and the two provisions operate in addition to each other and are to be worked out independently; both apply from assessment year 2021-22. The difficulty the guidelines take up is attribution: the amount taxed under section 45(4) is to be attributed to the entity's remaining capital assets so that it is not taxed again when they are later sold, but the Act gives that attribution only for the purposes of section 48, which does not reach capital assets forming part of a block, whose written down value comes from section 43(6)(c) and whose gains are computed under section 50.
Section 9B(4) empowers the Board, with the approval of the Central Government, to issue guidelines to remove difficulties in giving effect to section 9B and section 45(4), and the gap in the attribution rule for block-of-asset cases was one such difficulty.
F. No.370142/22/2021-TPL
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes (TPL Division)
Circular No. 14 of 2021
Dated: 02"d July, 2021
Sub.: Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961
- reg.
Finance Act, 2021 inserted a new section 98 in the Income-tax Act 1961 (hereinafter referred
to as "the Act"). This section mandates that whenever a specified person receives any capital asset or
stock in trade or both from a specified entity, during the previous year, in connection with the
dissolution or reconstitution of such specified entity, then it shall be deemed that the specified entity
have transferred such capital asset or stock in trade or both, as the case may be, to the specified
person (hereinafter referred to as "deemed transfer"). This deemed transfer would be in the year in
which such capital asset or stock in trade or both are received by the specified person. Any profits
and gains arising from such deemed transfer is 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. Further, it is 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. It has also been provided that the 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. The definitions of
terms " reconstitution of the specified entity", "specified entity" and "specified person" are provided
in section 98 of the Act.
2. Similarly the Finance Act 2021 substituted sub-section (4) of section 45 of the Act. This
newly substituted sub-section (4) now provides that where a specified person receives any money or
capital asset or both from a specified entity, during the previous year, in connection with the
reconstitution of such specified entity, then any profits or gains arising from receipt of such receipt
by the specified person shall be chargeable to income-tax as income of the specified entity under the
head "Capital gains". It has been further deemed that this income shall be the income of the specified
entity of the previous year in which such money or capital asset or both were received by the
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specified person. A formula to calc ulate such profits and gains has also been prov ided in this subsection. The defin itions of terms " reconstitution of the spec ified entity", " specified entity" and
"specified person" shall be as provided in section 9B of the Act while the terms " se lf-generated
goodwill " and "self-generated asset" have been defined in this sub-section. It has been further
clarified that when a capital asset is recei ved by a spec ified person from a specified entity in
connection with the reconstitution of such specified entity, the provisions of sub-section (4) of
section 45 of the Act shall operate in addition to the provisions of section 9B of the Act and the
taxation under the said provisions thereof shall be worked out independently. Both, the new section
9B and substituted sub-section (4) of section 45 are applicable for the assessment year 2021-22 and
subsequent assessment years.
3. Sub-section (4) of section 9B of the Act provides that if any difficulty arises in giving effect
to the provisions of this section and sub-section (4) of section 45 of the Act, the Board may, with the
approval of the Central Government, issue guidelines for the purposes of removing the difficulty. For
this purpose, the Central Board of Direct Taxes, with the approval of the Centra l Government, hereby
issues the following guidelines.
Guidelines
4. It is noti ced that the amount taxed under sub-section (4) of section 45 of the Act is required to
be attributed to the remaining capital assets of the specified entity, so that when such capital assets
get transferred in the future, the amount attributed to such capital assets gets reduced from the full
value of the consideration and to that extent the spec ified entity does not pay tax agai n on the same
amount. It is further noticed that this attribution is given in the Act only for the purposes of section
48 of the Act. It may be seen that section 48 of the Act onl y applies to capita l assets wh ich are not
forming block of assets. For capital assets forming block of assets there is sub-c lause (c) of clause (6)
of section 43 of the Act to determ ine written down value of the block of asset and section 50 of the
Act to determine the capital ga ins arising on transfer of such assets. However, the Act has not yet
provided that amount taxed under sub-section (4) of secti on 45 of the Act can also be attributed to
capital assets forming part of block of assets and which are covered by these two provisions. To
remove difficulty, it is clarified that rule 8AB of the Income Tax Rules, 1962 (here inafter referred to
as " the Rules") notified vide notification no. 76 dated 02.07.2021 also applies to capital assets
form ing part of block of assets. Wherever the terms capital asset is appearing in the rule 8AB of the
Rules, it refers to capital asset whose capital ga in s is computed under section 48 of the Act as well as
capital asset forming part of block of assets. Further, wherever reference is made for the purposes of
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section 48 of the Act, such reference may be deemed to inc lude reference for the purposes of subclause (c) of c lause (6) of section 43 of the Act and secti on 50 of the Act.Example 2: There are three partners "A", "B" and "C" in a firm " FR", hav in g one third share each. Each partner has a capital balance of {I 0 lakh in the firm. There are three pieces of lands "S", "T" and " U" in that firm and there is no other capital asset in that finn . All these three lands were acquired by the finn more than two years ago.
Book value of each of the land is ~10 lakh. Partner "A" wishes to exit. The firm sells land "U" for its fair market value of~ 50 lakh. Let us assume that the indexed cost of acquisition ofland "U" is ~15 lakh. Thus, an amount of ~50 lakh less ~15 lakh would be charged to tax in the hands of firm " FR" under the head "Capital gains" . Hence, the amount of ~ 35 lakh is charged to long term capital gains and let us assume that the tax is n lakh(assume no surcharge or cess just for ease of calculation and illustration purposes).
This, net book profit after tax of ~33 lakh (capital gains of ~40 lakh without indexation less tax of n lakh) is to be credited in the capital account of each of the three partners, i.e. ~ II lakh each. Thus paliner "A" capital account would increase to ~21 lakh.
Partner "A" decides to exit the finn " FR" . The firm revalue its lands " S" and "T" based on valuation repOlt from a registered va luer, as defined in rule II U of the Rules, and as per that valuation report fair market value of lands "S" and "T" is no lakh each On the exit of partner "A", the firm decides to give him ~ 61 lakh of money to settle his capital balance. Thus, as against capital balance of ~21 lakh, partner "A" has received ~61 lakh of money. Thus ~40 lakh is required to be charged to tax under sub-section (4) of section 45 of the Act. This will be in addition to ~35 lakh already charged to capital gains.
On account of clause (iii) of section 48 of the Act, read with rule 8AB of the Rules, this ~40 lakh is to be attributed to the remaining assets of the finn "FR" on the basis of increase in their va lue due to revaluation based on the va luation report of registered valuer. In this case as per revaluation there are only two capital assets remaining; lands "S" and "T". In both cases the value has increased by ~60 lakh each. Thus, out of ~40 lakh, ~20 lakh shall be attributed to land "S" and ~20 Lakh to land ''T''. When either of these lands gets sold, this amount attributed to them would be reduced from sales consideration under clause (iii) of section 48 of the Act.
The amount of~40 lakh which is charged to tax under sub-section (4) of section 45 of the Act shall be charged as long term capital gains in view of sub-rule (5) of rule 8AA of the Rules, since the amount of ~40 lakh is attributed to land "S" and land "T" which are both long term capital assets at the time of taxation oP40 lakh under sub-section (4) of section 45 of the Act.
Note: The final result in both example I and 2 is same due to the operation of section 9B of the Act.
Example 3:
There are three partne rs "A", "B" and "C" in a finn "FR", having one th ird share each. Each partner has a capital balance onlOO lakh in the finn. There is a piece of land "S" of book value of 'OO lakh . There is patent "T" of written down va lue of ~4 5 lakh . And there is cash of ~225 lakh. The land was acquired by the finn more th an two years ago. The patent was acquired/deve loped/registered one yea r back.
Partner "A" wishes to exit. The finn reval ue its land and patent based on va luation report from a registered valuer, as defined in rule II U of the Rules, and as per that va luati on report fair market value of land "s" is 5 lakh and fa ir market value of patent "T" is ~6 0 lakh. As per the va luation report there is also se lf-generated goodwill of ~3 0 lakh. On the exit of partner "A", the fi rm dec ides to give him ~7 5 lakh in money and land "s" to settl e his capital ba lance.
In accordance with the provisions of section 9B of the Act, it would be deemed that the finn " FR" has transferred land "S" to the partner "A" at its fair market va lue of ~45 lakh. Let us assume that the indexed cost of acqu isition of land "S" is ~45 lakh .
Now on account of the deeming provisions of secti on 9B of the Act, it is deemed that the firm " FR" has transferred land "S" to partne r "A" . However, sin ce the sale consideration is equal to indexed cost of acquisition, there will not be any capital ga in s tax. For pa rtner "A", the cost of acquisition of this land would be 5 lakh .
The net book profit 15 lakh (capital ga in s 15 lakh without indexation) is to be credited in the capital account of each of the three partners, i.e. ~5 lakh each. Thus partner "A" capita l account would increase to ~ I 05 lakh. This exercise is required to be carried out since secti on 9B of the Act mandates that it is to be deemed that the firm " FR" has transferred the land "S" to partner "A" . Thus, any gain in the books is to be apporti oned to partners' capital accounts.
As against capita l ba lance of ~ I 05 lakh, partner "A" has rece ived ~ 120 lakh (money of n 5 Lakh plus land "S" of fair ma rket va lue of ~45 lakh). Thus ~ 15 Lakh is requ ired to be charged to tax under subsection (4) of secti on 45 of the Act.
On acco unt of clause (iii) of section 48 of the Act, read with rule 8AB of the Rules and this guidance note, this ~ 15 lakh is to be attributed to the remaining capital assets of the fi nn " FR" on the basis of increase in the value due to revaluation of existing capital assets, or due to recognition of the value of se lf-generated goodwill, based on the valuation report of registered valuer. In this case as per this repOlt the value of patent 'T " has increased by 't IS lakh and the self-generated goodwill value has been recognised at 't30 lakh. Thus one third on IS lakh (i.e. 'tS lakh) wou ld be attributed to patent "T", wh il e two third of 'tIS lakh (i.e. 't10 lakh) wou ld be attributed to self-generated goodwi ll. 'tS lakh attributed to patent "T" shall not be added to the block of the assets and no depreciation sha ll be ava ilable on the same. When patent "T" gets transferred subsequently, this 'tS Lakh attributed shall be reduced from the fu ll va lue of the consideration received or accruing as a result of transfer of patent "T" by the firm " FR", and the net value shall be considered for reduction from the written down va lue of the intangible block under sub-clause ( c) of clause (6) of section 43 of the Act or for calculation of capita l gains, as the case may be, under section SO of the Act.(Refer guidance in paragraph S of this circular). Let us say that Patent T is sold for 't25 lakh. 'tS lakh shall be reduced from 't25 lakh and only net amount of no lakh shall be considered for reduction trom the written down va lue of the intangible block under sub-clause (c) of clause (6) of section 43 of the Act or for calculation of capital gains, as the case may be, under section 50 of the Act. Similarly when goodwill gets sold subsequently, 't10 lakh would be reduced from its sales consideration under clause (iii) of section 48.
The amount oP I5 lakh which is charged to tax under sub-section (4) of section 4S of the Act shall be charged as short term capital gains, as 'tS lakh is attributed to the Patent "T" wh ich is part of block of assets and 't 10 lakh is attributed to self-generated goodwill. In accordance with sub-rule (5) of Rule 8AA of the Rules, both of these are to be characterised as short term capital gains.
Note: For the purpose of calculation of depreciation under section 32 of the Act, the written down value of the block of asset " intangible" of wh ich Patent "T" is pM, would remain i!'45 lakh and wou ld not be increased to 't60 lakh due to revaluation during the year. In this regard it may be highlighted that the following provisions are relevant in determining the amount on wh ich depreciation is allowable under the Act:
• Explanation 2 of sub-section (I) of section 32 of the Act provides that the term "written down value of the block of assets" shall have the same meaning as in clause (c) of sub-section (6) of section 43 of the Act.
• Clause (c) of sub-section (6) of section 43 of the Act, with respect to block of assets, interalia, provides that the aggregate of the written down va lues of all the assets falling within that block of assets at the begi nning of the previous year is to be increased by the actua l cost of any asset falling within that block, acq uired during the previous year. This clause does not allow any increase on accou nt of reva luation .
• Sub-section (I) of section 43 of the Act wh ich defines "Actual cost" as actual cost of the assets to the assessee. In reva luation, there is no actual cost to the assessee
Further, section 32 of the Act does not a llow depreciation on goodwill. If in the given example "selfgenerated goodwi ll" is replaced by "se lf-generated asset", even then the depreciation will not be adm issible on the amount of ~30 lakh recognised in va luati on. In this regard it may be highlighted that the above mentioned provisions, in the immediate preceding paragrap h, are also appl icable to "self-generated asset" and since there is no actual cost to assessee in case of " se lf-generated asset", depreciation is not allowable under section 32 of the Act on an asset whose actual cost is nil.
Under Secretary to the Gov!. of India
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In the assessment of a firm for the year of a partner's retirement or a change in the profit-sharing ratio, and later, when the firm sells an asset and the department disputes the cost or written down value attributed to it.
Rules it names. Rule 8AA, 8AB of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
It mentions. Circular No. 14/2021
Source: the Income Tax Department’s own published text — its page for this instrument.