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Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 - Income Tax - 14/2021

Extract

..... fied 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 9B 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 &qu .....

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Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 - Income Tax

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..... block of asset and section 50 of the Act to determine the capital gains arising on transfer of such assets. However, the Act has not yet provided that amount taxed under sub-section (4) of section 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 (hereinafter referred to as "the Rules") notified vide notification no. 76 dated 02.07.2021 also applies to capital assets forming 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 gains 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 section 48 of the Act. such reference may be deemed to include reference for the purposes of sub-clause (c) of clause (6) of section 43 of the Act and section 50 of the Act. 5. For the removal of doubt it is further clarified that in case the capital asset remaining with the specified entity is forming part of a block of asset, the amount att .....

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Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 - Income Tax

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..... 35 lakh is charged to long term capital gains and let us assume that the tax is ₹ 7 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 ₹ 7 lakh) is to be credited in the capital account of each of the three partners, i.e. 1 lakh each. Thus partner "A" capital account would increase to ₹ 21 lakh. This exercise is required to be carried out since section 9B of the Act mandates that it is to be deemed that the firm "FR" has transferred the land "U" to partner "A" and the long term capital gains of ₹ 35 lakh is chargeable to tax in the hands of the firm "FR" As against capital balance of ₹ 21 lakh, partner "A" has received ₹ 61 lakh (₹ 11 lakh of money plus land "U" of fair market value of ₹ 50 lakh). Thus ₹ 40 lakh is required to be charged to tax under sub-section (4) of section 45 of the Act. This shall be in addition to an amount of ₹ 35 lakh charged to tax under section 9B of the Act. On account of c .....

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Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 - Income Tax

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..... ree partners, i.e. ₹ 11 lakh each. Thus partner "A" capital account would increase to ₹ 21 lakh. Partner "A" decides to exit the firm "FR". The firm revalue its lands "S" and "T" based on valuation report from a registered valuer, as defined in rule 11U of the Rules, and as per that valuation report fair market value of lands "S" and "T" is ₹ 70 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 firm "FR" on the basis of increase in their value due to revaluation based on the valuation report of registered valuer. In this case as per revaluation there are only t .....

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Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 - Income Tax

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..... that the firm "FR" has transferred land "S" to partner "A". However, since the sale consideration is equal to indexed cost of acquisition, there will not be any capital gains tax. For partner "A", the cost of acquisition of this land would be ₹ 45 lakh. The net book profit of ₹ 15 lakh (capital gains of ₹ 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" capital account would increase to ₹ 105 lakh. This exercise is required to be carried out since section 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 apportioned to partners’ capital accounts. As against capital balance of ₹ 105 lakh, partner "A" has received ₹ 120 lakh (money of ₹ 75 Lakh plus land "S" of fair market value of ₹ 45 lakh). Thus ₹ 15 Lakh is required to be charged to tax under sub-section (4) of section 45 of the Act. On account of clause (iii) of section 48 of the Act .....

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Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 - Income Tax

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..... ose of calculation of depreciation under section 32 of the Act, the written down value of the block of asset "intangible" of which Patent "T" is part, would remain ₹ 45 lakh and would not be increased to ₹ 60 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 which depreciation is allowable under the Act: Explanation 2 of sub-section (1) 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, inter-alia, provides that the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year is to be increased by the actual cost of any asset falling within that block, acquired during the previous year. This clause does not allow any increase on account of revaluation. Sub-section (1) of section 43 of the Act which defines ‘'Actual cost" as actual cost of the as .....

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Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 - Income Tax

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