TMI BlogGuidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital assets forming block of assets there is sub-clause (c) of clause (6) of section 43 of the Act to determine written down value of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clause (iii) of section 48 of the Act, read with rule 8AB of the Rules, this ₹ 40 lakh is to be at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise 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, 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 firm FR on the basis of increase in the value due to revaluation of existing capital assets, or due to recognition of the value of self-generated goodwill, based on the valuation report of registered valuer. In this case as per this report the value of patent T has increased by ₹ 15 lakh and the self-generated goodwill value has been recognised at ₹ 30 lakh. Thus one third of ₹ 15 lakh (i.e. ₹ 5 lakh) would be attributed to patent T , while two third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 assets to the assessee. In revaluation, there is no actual cost to the assessee Further, section 32 of the Act does not allow depreciation on goodwill. If in the given example self-generated goodwill is replaced by self-generated asset , even then the depreciation will not be admissible on the amount of ₹ 30 lakh recognised in valuation. In this regard it may be highlighted that the above mentioned provisions, in the immediate preceding paragraph, are also applicable to self-generated asset and since there is no actual cost to assessee in case of self-generated asset , depreciation is not allowable under section 32 of the Act on an asset whose actual cost is nil. (Ank ..... X X X X Extracts X X X X X X X X Extracts X X X X
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