What the courts have decided on section 48(iii), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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Statutory position — Rule 8AA(5): whether the section 45(4) charge on the firm is short-term or long-term
CBDT Circulars & InstructionsCuts both ways
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.
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Statutory position — Rule 8AB and section 48(iii): how the section 45(4) amount is set off when the firm later sells the asset
CBDT Circulars & InstructionsCuts both ways
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.
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Statutory position — section 9B: the firm is deemed to transfer, at fair market value, whatever a partner takes out
CBDT Circulars & InstructionsCuts both ways
My firm handed a flat and part of its stock to a retiring partner. Nothing was sold and no money changed hands. Is the FIRM taxable on that?
Yes. Section 9B, inserted by the Finance Act 2021 with effect from 1 April 2021 (AY 2021-22), deems the firm to have transferred the capital asset or stock in trade to the partner in the year he receives it, and deems the fair market value on the date of receipt to be the full value of consideration. The charge falls on the FIRM, not the partner, and it arises on both dissolution and mere reconstitution — a partner retiring or a new partner coming in is enough.
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Statutory position — the substituted section 45(4): the firm is taxed on what a partner takes out above his capital account
CBDT Circulars & InstructionsCuts both ways
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.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.
