Income Tax--Current Issues

Practice Update

V.K. Subramani

TAX IMPLICATIONS OF RECEIPT OF CAPITAL ASSET OR STOCK IN TRADE BY A PARTNER ON CERTAIN OCCASIONS

Finance Act, 2021 has inserted section 9B which would cover transactions between partnership firm and partners when there is a change in constitution of the firm by way of admission or retirement of partners or change in profit sharing ratios. The section gets triggered only if the incoming or outgoing or continuing partner receives any capital asset or stock in trade from the firm. The key aspect is receipt from the firm. If any consideration is received from incoming or continuing partner(s) then that act is not covered by section 9B. However, it may be covered by section 56(2)(x) subject to monetary limit of Rs. 50,000 and whether the relationship between the payer and payee falls within the term 'relative' specified in that section or otherwise.

The fair market value of the capital asset and/or stock in trade on the date of receipt by the partner shall be deemed to be the full value of consideration received or accruing as a result of deemed transfer. In respect of stock in trade, it is taxable under the head 'Profits and gains of business or profession' and in respect of capital asset, it is taxable under the head 'Capital gains'. The most important aspect is that the tax is charged on the (specified) entity and not on the recipient partner.

Similarly, section 45(4) got substituted in the Finance Act, 2021. It covers cases where the partner receives money or capital asset from the firm and the amount of consideration exceeds the amount standing to his credit in the capital account. Though it is the partner who benefits from such excess payment the tax liability is fastened to the firm. It is deemed as 'capital gain' in the hands of the firm.

When the transaction is covered by section 9B, it may fall either in the category of 'short term capital gain' or 'long term capital gain'. No possibility for availing exemption since the consideration is 'deemed'. However, indexation benefit could be availed for computation.

On the other hand, when a transaction is covered by section 45(4) there is no possibility of obtaining the indexation benefit since the computation is very clearly given in the section itself. As regards, nature of capital gain whether short-term or long-term, it is somewhat ambiguous from the provisions. But based on the association of the partner with the firm, it could be interpreted as long-term in which case concessional rate of tax would befall on the firm.