Section 9B
A new section 9B which was not proposed while presenting the Finance
Bill 2021 on 1st Feb 2021 has been added during the passage of the bill in the
parliament. The aim is to plug the loophole on tax leakage arising from the
reconstitution of the firm or AOP.
1. Following event (Specified event) took place
in the Partnership firm/AOP/BOI (FIRM)
a)
Dissolution
b)
Change in Profit Sharing ratio
c)
Retirement
of Partner
d) New Person is admitted as a partner in FIRM
2. Partner/Member
(specified person) of Firm, AOP or BOI received
Capital asset or stock in trade from FIRM in connection with specified Event.
3.
If the above conditions are satisfied, then FIRM is
deemed to have transferred such capital Asset or stock in trade to specified Person
4. There
arise Profit or gains on such transfer to be computed based on Sales consideration
(Stock in trade or Capital Asset) to be taken at FMV of the asset on the date of transfer.
5. Such
Profit or gains shall be chargeable to tax in the hands of FIRM under the hands of PGBP
or Capital gains, following
the provision of Act,
6. If
any difficulty arises in giving effect to the provision of section 9B, CBDT is
empowered to issue guidelines for removing the difficulty.
Section 45(4)
1. Section override
Section 45(1)
2.
There is either change in profit sharing ratio, retirement, or admission (Reconstitution)
of Partner
in FIRM (Dissolution not Covered)
3. Partner receives
Capital asset or Money from FIRM in connection with re-constitution.
4. On receipt
of capital Asset
or money, Profit &
gains arises to such
partner.
5. Such Profit
& gain
a)
Shall be chargeable to Income Tax under the head “ Capital gains”
and
b) Shall be deemed to be the income of the FIRM in the previous year in which money or capital asset is
received by the partner.
6.
Profit & Gains will be computed
as under:
a) Money
received + FMV of Capital Asset Received less
Balance in capital Account of such
partner at the time of reconstitution (without taking into account the increase in the capital account of the specified
person due to revaluation of any asset or due
to self-generated goodwill
or any other self-generated asset.)
b) If the
above working results in a negative amount, then gain shall be considered as ZERO
Amendment in section 48
1.
In calculating capital gain u/s 45(1)
according to section
9B, the Capital gain will be computed as under;-
a)
FMV of Capital
Asset transferred to Partner
b)
Less: Cost/Indexed cost of Acquisition/Improvement
c) Less: Capital gain chargeable to tax u/s 45(4) on the
transfer of Capital Asset to Partner
Taxability – Summary
|
Group |
Transaction |
Section 45(4) |
Section 9B |
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|
|
Receipt |
of |
Money |
by |
Taxability |
will |
be |
No Taxability |
|
|
Partner |
|
|
|
computed |
|
|
|
|
|
Receipt
of Capital Asset |
Taxability
will be first |
Then, taxability will |
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|
Reconstitution of the firm (Change in PSR, Admission or Retirement of Partner) |
(from the firm’s perspective) by Partner |
computed |
be computed in pursuance of section 9B under section 45(1) &
48 |
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|
Receipt of Stock
in Trade |
No Taxability |
Taxability will be computed in |
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|
|
|
|
pursuance of section |
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|
|
|
|
9B, as per provisions |
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|
applicable for PGBP |
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|
|
Receipt of Money |
|
Not taxable |
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|
|
Receipt of Capital Asset |
|
Taxability will be |
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|
|
|
|
computed in |
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|
Dissolution
of FIRM |
|
NOT Applicable |
pursuance of section 9B under section |
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|
|
|
|
45(1). |
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|
Receipt of Stock
in Trade |
|
Taxability will be |
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|
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|
computed in |
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|
|
|
|
pursuance of section |
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|
9B, as per provisions |
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applicable for PGBP |
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The above provision can be illustrated with Example
A.
Transfer of Capital Asset on the retirement of Partner
1.
There are 3 partners (A, B & C) each having
a Capital of Rs. 3 lacs on 31-03-2021
2.
There are 3 capital assets
X- Rs. 4 lacs, Y-Rs. 4 lacs, and Z – Rs. 1 lacs. All Assets acquired on 01-04-2017
3. A retires
and he was given Asset Z,
having FMV of Rs. 10 lacs
Tax Implications
i)
Taxability
U/s 45(4) – {FMV of Asset- Capital
Balance) – Rs. 7 lacs ( 10-3).
ii)
Taxability according to section 9B and will be taxable u/s 45(1) FMV of Capital
Asset Rs.
10,00,000
Less: Indexed Cost of Acquisition Rs. 1,10,661 (1,00,000 x 301/272) Less:
Capital u/s 45(4) Rs. 7,00,000
Long Term Capital Gain Rs. 1,89,339
B.
Transfer of Stock in trade on the
retirement of Partner
1.
There are 3 partners (A,B & C) each having
a Capital of Rs. 3 lacs as on 31-03-2021.
2.
A retires and he was given stock in trade (Book value – Rs. 2 lacs), having FMV of Rs. 10 lacs
Tax Implications
i) Taxability according to section
9B and will be taxable
u/s 28 FMV of Stock in Trade Rs.
10,00,000
Less: Book value Rs. 2,00,000
PGBP Rs. 8,00,000
Unresolved Issues
1. Nature of Capital gain (Long term and Short
term) u/s 45(4)
a) Section
45(4) is a departure from Normal Capital Gain taxation rules. A capital gain arises on transfer of
Capital Asset
b) U/s
45(4), receipt of money or Capital Asset (FMV) by the partner above balance in his capital Account,
is chargeable to tax under the capital
gains and such capital gains though accrue to partner, but same
is taxable in the hands of FIRM. Law does not deem any transfer
of Capital Asset u/s 45(4) and gain arising in pursuant thereto.
c) In the absence of transfer of capital
assets, there cannot be Short term or long-term
capital gain, as the same is dependent upon the holding period of a capital
asset before its transfer.
d)
Thus Section envisage special
capital gain and following implication draw from thereupon
i)
The setting of bough forward
loss - If Partner has bought forward Long term
Loss under the head Capital gain, whether it can be set-off against the special capital gains. Long-term capital
loss can be set-off against Long term capital
gain only. In the absence of the essence of special capital gain, this point needs clarification.
ii)
Place of Accrual of Capital
Gains- Capital gain on transfer of Capital Asset situated in India is deemed as accruing or arising in India u/s
9. In the case of special capital gain, there is no transfer of
Capital gain. In the absence of specific provision,
as regard place of accrual of special capital gain, the taxability of same in the hands of Non-resident is questionable
2. The
implication of Double taxation in the hands of FIRM
a) Under Section 45(4), money paid to a
retiring partner above balance in his account is deemed as Capital gain. The excess amount, generally, represents unrealized appreciation in the value of the Firm's asset as on the date of retirement.
b)
Though unrealized gain is made taxable in the hands
of FIRM, there is no corresponding provision for the increase in the value of
the asset in the hands
of FIRM
c)
Explained as under:-
i)
Suppose there are 3 partners
(A, B, C), each having the capital balance of Rs. 2 lacs and C retires.
ii)
One capital Asset (X) (book
value – Rs. 3 lacs) is having a market value of Rs. 12 lacs. C will be credited
with his share
of appreciation – Rs. 3 lacs ( 9 lacs x 1/3)
iii)
C capital account stands at
Rs. 5 lacs ( 2+3) and Rs. 3 lacs is profit accruing to C and will be
made taxable in the hands of FIRM
as a capital gain.
iv)
Suppose immediately after
C’s retirement, FIRM sold capital asset (X) at Rs. 12 lacs and made capital gain (STCG) of Rs 9 lacs ( 12-3). But
out of Rs. 9 lacs, Rs. 3 lacs has already been taxable in the hands of FIRM on C’s retirement and the
same is again made taxable on the actual capital gain.
v)
There needs to be provision for enhancement in the
COST OF ACQUISITION of capital
assets, whose unrealized gain is being made taxable in the hands of retiring partners earlier.
3. The implication of Double Taxation
in the hands of retiring
partner
a) Under
Section 9B, on receipt of capital asset by retiring partner, taxability is cast on the FIRM based on FMV of Capital Asset.
But there is no corresponding provision
for the Cost of Acquisition (COA) to be taken as FMV, in the hands of the
retiring partner
b)
Explained
as under
a) Suppose
C, having the Capital balance of Rs. 2 lacs, was given Capital Asset (book value- Rs.
3 lacs) having FMV at Rs. 9
lacs
b) The
FIRM will be made taxable on an aggregate of capital gain (9B+45(4)) of Rs. 7 lacs ( 1+6).
c) The
partner has been given Capital Asset at Rs. 3 lacs, but firm is being made taxable
based on FMV of capital
Asset i.e Rs. 9 lacs
d) As
per the existing provision of section 48, COA in the hands of the partner will
be taken at Rs. 5 lacs, which should have been Rs. 9 lacs.
e) Thus in the absence of explicit
provision u/s 55 for FMV being COA in the hands of retiring partner, there will be double taxation, when he
will sell such asset in the future.
4. Complexity
in Computation Mechanism.
a) Under
new taxability provision, Capital gain on transfer of Capita Asset to retiring partner
is first computed u/s 45(4) and then same is allowed as deduction while computing
Capital gain envisage in section
9B
b) If retiring
Partner is given both money and Capital asset on retirement, then there is no provision
to determine the capital gain accruing on the
transfer of Capital
Asset.
c)
Explained
as under
i)
Suppose Partner C (having
Capital Balance – Rs. 2 lacs) retires. He is given money of Rs. 3 lacs and Capital Asset (book value- Rs. 4 lacs) –
Rs. 10 lacs (FMV)
ii)
The Taxable Capital
under section 45(4)
and 9B will be work out as under:-
|
Particulars |
Section 45(4) |
Section 9B |
|
Money Paid to Partner |
3,00,000 |
|
|
FMV of Capital Assets |
10,00,000 |
|
|
Less: Balance in Capital Account |
2,00,000 |
|
|
Capital Gain
u/s 45(4) |
11,00,000 |
|
|
FMV of Capital
Asset |
|
10,00,000 |
|
Less; Book Value
of Capital Asset |
|
4,00,000 |
|
Less: Capital Gain on transfer of Capital
Asset made taxable
u/s 45(4). It Cannot be worked out, since capital gains u/s 45(4) have been worked out based on aggregate Consideration comprising payment
of money and FMV of Asset. There is no provision to work out
capital gain u/s 45(4) proportionate to receipt of capital asset
by Partner |
|
???????? |
5. Deemed transfer u/s 9B- Weakness
in Strengthening taxability
a)
Section
9B provides that if there is the dissolution of firm or reconstitution in the
firm, receipt of a capital asset or
stock in trade is DEEMED as transfer and gain arising in pursuant thereto will be taxable
under the head Capital gains or PGBP. Same hold
u/s 45(4).
b)
It implies that if the partner receives capital
asset or stock in trade during tenue of partnership
or without there being reconstitution in FIRM, then
such transaction will not be considered as transfer, as u/s 9B deeming transfer
arising on dissolution or reconstitution of FIRM
only.
c)
This
aspect could render entire taxability u/s 9B & 45(4) ineffectual, explained
as under
i)
Suppose
there are 3 partners, each having a Capital balance of Rs. 2 lacs. Asset (Book value- Rs. 6 lacs)
of the firm has a
market value of Rs. 27 lacs.
ii)
The
firm carried out revaluation of Assets and credited the revaluation gain of Rs. 21 lacs, in equal proportion (7 lacs each). Now the capital balance of each partner stands at Rs. 9 lacs ( 2+7).
iii)
Suppose
C receives an asset of Rs 9 lacs (FMV) again his capital balance. There will not be any taxability either u/s 9B or Section
45(4), as C has not retired
iv)
Suppose after 1 year of this
transaction, C retires. Now on this retirement,
there is no taxability, as no capital asset is being transferred on
retirement, which has already been done earlier during C tenure as Partner
d)
This
loophole needs to be curbed to strengthen the revised taxability u/s 9B and 45(4).
6. Whether deemed Transfer
u/s 9B is specific or General
a)
Section 9B provides receipt
of Capital Asset or stock in trade by Partner
on reconstitution or dissolution of the firm as Transfer
b)
The
point of consideration is whether such transaction is transferred for computing taxable income as envisaged in section 9B ONLY or it is transferred for all other intent under Act, enunciated as under
i)
If
there is a transfer of Immovable property above Rs. 50 lacs to partner on retirement, whether
the partner will be required to deduct TDS u/s 194IB?
ii)
If
the FMV of Capital Asset transfer on retirement is less than FMV envisage u/s 56(2)(x), whether the partner will
also be taxable u/s 56(2)(x) for excess of FMV u/s 56(2)(x) and section
9B.
7. FMV of Stock in Trade u/s 9B- Whether treated
as Turnover ??
a)
Under
Section 9B, receipt of stock in trade on the retirement of a partner is treated
as Transfer of stock in trade, and
the firm is being taxable based on FMV of stock in trade.
b)
Question
for consideration is, whether such transfer of stock in trade at FMV, is treated as TURNOVER, as many provision
under the Act is contingent upon the level of
turnover, explained as under:-
i)
Tax Audit is dependent
upon Turnover
ii)
TDS u/s 194Q is dependent upon Turnover
iii)
TCS u/s 206C is also partly dependent upon Turnover
I hope that government will suitably consider the above points and will issue guidelines in the due course to resolve the unsettled aspects
in the implementation of Section 9B and section
45(4)
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