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Tax Treatment of Dissolution/ CA. Manish Dafria
Reconstitution of Partnership Firm
Taxation of Partnerships at the time of dissolution or asset is to be done in normal manner based on
reconstitution of the firm has undergone a sea holding period of the asset being handed over by
change with the introduction of new Sec.9B and the firm. In case of long term capital asset u/s. 9B,
amended provisions of Sec. 45(4) by F.A. 2021 w.e.f. benefit of indexation would also be available in
01.04.21. Both these sections, along with related normal manner. (We shall be contrasting this
legislation contained in Sec. 48(iii), Rule 8AA(5), Rule situation subsequently with situation in Sec.
8AB and guidelines issued vide circular no. 14/2021, 45(4)).
create a complex mechanism of taxation. Here is an y For Sec. 9B to apply, the asset to be handed over
attempt to analyze the basic flow of this new by the firm must be capital asset or stock in trade.
mechanism along with some of the important, If it is neither (e.g. Rural Agriculture land in India),
unanswered issues arising therefrom. 9B shall not have any applicability.
Applicability of Sec. 9B and 45(4) Sec. 45(4) applies when in connection with the
Sec. 9B applies when in connection with the reconstitution of the firm, any money or capital asset
dissolution or reconstitution of the firm, any capital is handed over by the firm to a partner/erstwhile
asset or stock in trade is handed over by the firm to partner. In such case, excess of FMV of such capital
apartner/erstwhile partner. As mandated by the asset plus money being given to the partner over the
section, this transaction would be deemed to be a balance in capital account of the partner shall be
transfer, the FMV of the capital asset/ stock in trade treated as taxable capital gains in the hands of the
on the date of its receipt by the partner shall be firm.
deemed to be the full value of the consideration and
y The balance in the capital account of the partner is
profit arising from this deemed transfer would be to be calculated without taking into account the
chargeable to tax as income of the firm under the increase in capital account due to revaluation of
head "Profits and gains of business or profession" or
any asset or due to self-generated goodwill or any
under the head "Capital gains", in accordance with other self-generated asset.
the provisions of this Act.
y If the net result of computation under this section
y Since taxable income is to be calculated “in is a negative figure then it has been clarified that
accordance with the provisions of the act”, the
this will be taken as Nil. However, no clarity is
long term/short term categorization of capital available as to when the capital account balance
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