Page 43 - Knowledge Network Transform

of partner is negative, whether this is the asset has been sold to a third
also to be taken at Nil or at the person at FMV).
negative value itself. E.g. if there is a
Thereafter the notional profit arising
debit balance of Rs. 50,000 in
from this transaction (net of tax
partner's capital account and at the liability u/s. 9B) is to be credited to
time of retirement Rs. 1,00,000 has
the Partner's Capital account and
been given to him, whether taxable amount u/s.
based on this revised capital account balance,
45(4) would be Rs. 1,00,000 only (treating capital taxable income u/s. 45(4) is to be worked out.
account balance as Nil) or it would be Rs. 1,50,000
(taking capital account balance at its mathematical y Since for both Sec. 9B and Sec. 45(4), FMV of the
negative value)? same asset is to be taken account, this whole
process may appear to be creating double
There is no clarity available as of now. It is taxation of the same amount but actually this is
interesting to note that if there is a debit balance of
not and this is what has been specifically
Rs. 50,000 in partner's capital account and at the
contemplated by Expl. 2 to Sec. 45(4).
time of retirement nothing is given to him,
nothing would be taxable u/s. 45(4) as there is no It may be worthwhile to note that both the
money or capital asset “received” by the partner. sections, while deeming FMV of the asset as the full
(It may also be interesting to note that formula value of consideration, do not contain a reference
given in Sec. 45(4) talks only about “the amount to either sections like 50/43CA nor Sec. 50CA and
of balance in the capital account”. Inadvertently Rule 11UAA have been given a connect therein.
or otherwise, it has failed to specify the nature of Nature of Capital Gains for Sec. 45(4)
balance i.e. Credit or Debit). U/s. 45(4) what is being taxed is the excess payment

Combining Both the Sections being made to a partner over and above his capital
While Sec. 9B is applicable at the time of both account balance. This is different from the normal
dissolution and reconstitution of the firm, Sec. concept of capital gains taxability where profits
45(4) is applicable only at the time of reconstitution from transfer of a capital asset are taxed. Since for
of the firm. the purposes of Sec. 45(4) there is no transfer as
such, whether actual of deemed, and the taxability
“Reconstitution” for the purposes of both sections is not for any capital asset but is for the balance in
covers following three situations:
capital account of the partner, the moot question is
y Retirement of one or more partners. how to find out long term/short term nature of

y Admission of one or more partners with at least capital gains?
one of the existing partner continuing
Rule 8AA(5) has been brought into statute to clarify
y Change in the share of partners this. The clause(i) of rule 8AA(5) conveys that if the
Though the basis of taxability here is dissolution/ amount being taxed u/s. 45(4) is attributed to a
reconstitution of the firm, the year of taxability in capital asset which is short term at the time of
both the sections is the year of “receipt” by the taxation u/s 45(4) or is attributed to a capital asset
partner. forming part of block of asset or a self-generated
In case of reconstitution of the firm, if what is being asset/ self-generated goodwill, the capital gain or
given to the partner is only money then only Sec. part of it shall be deemed to be from transfer of
45(4) is applicable. However, if a capital asset is short term capital asset. On the other hand, if the
being given (with or without money) to the partner amount being taxed u/s. 45(4) is attributed to
then Sec. 9B and Sec. 45(4) both shall be applicable. capital asset which is not covered by clause (i) and is
In such case, first the tax liability u/s. 9B on the long term capital asset at the time of taxation u/s
deemed transfer of asset to the partner is to be 45(4), the capital gain or part of it shall be deemed
worked out. (This calculation more or less same as if to be from transfer of long term capital asset.

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