The Central Board of Direct Taxes (CBDT) has issued guidelines for taxing partnership firms on its reconstitution in respect of the provisions of section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 vide Circular No. 14 of 2021 dated 2nd July 2021.
It is pertinent to mention here that Section 9B provides for taxation of income of the firm on the transfer of capital assets & stock in trade whereas Section 45(4) now provides for taxation of income in the hands of the firm which is actually the income in the hands of the partner.
The CBDT noticed that the amount taxed under sub-section (4) of section 45 of the Act is required to be attributed to the remaining capital assets of the specified entity so that when such capital get transferred in the future, the amount attributed to such capital assets gets reduced from the value of the consideration and to that extent the specified entity does not pay tax again on the amount.
It is further noticed that this attribution is given in the Act only for the purposes of 48 of the Act. It may be seen that section 48 of the Act only applies to capital assets that are not forming a block of assets. For capital assets forming a block of assets, there is sub-clause (c) of clause of section 43 of the Act to determine the 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 provided that the amount taxed under sub-section (4) of section 45 of the Act can also be attributed to capital assets forming part of a block of assets and which are covered by these two provisions. remove the difficulty, it is clarified that rule 8AB of the Income Tax Rules, 1962 notified vide notification no. 76 dated 02.07.2021 also applies to capital forming part of a block of assets.
Wherever the term capital asset is appearing in the rule of the Rules, it refers to a capital asset whose capital gains are computed under section 48 of the Act as well capital asset forming part of a block of assets. Further, wherever reference is made for the purposes 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.
The Circular states that for the removal of doubt it is further clarified that in case the capital asset remaining with the specified entity is forming part of a block of asset, the amount attributed to such capital asset under rule 8AB of the Rules shall be reduced from the full value of the consideration received or accruing as a result of subsequent transfer of such asset by the specified entity, and the net value of such consideration shall be considered for reduction from the written down value of such block under sub-clause (c) of clause (6) of section 43 of the Act or for calculation of capital gains, as the case may be, of: under section 50 of the Act.
The CBDT has for the purpose of understanding and for removing difficulties, if any , in the application of section 9B of the Act and sub-section (4) of section 45 has explained the practical application with help of three exhaustive examples which may be referred to in Circular given below.
Through the examples, CBDT has stressed that section 32 of the Act does not allow depreciation on goodwill. Even amounts of “self-generated asset”, then also the depreciation will not be admissible on the amounts recognized in valuation. CBDT highlighted that as in the case of “self-generated asset” there is no actual cost to the assessee, depreciation is not allowable under section 32 of the Act on an asset whose actual cost is nil.”
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