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CBDT issues guidelines on capital gains

Guidelines deal with deemed transfer of a capital asset or stock in trade to an exiting partner of a firm and receipt of capital asset or funds by a partner from a firm. (Graphics: Mint)Premium
Guidelines deal with deemed transfer of a capital asset or stock in trade to an exiting partner of a firm and receipt of capital asset or funds by a partner from a firm. (Graphics: Mint)

  • The guidelines clarify the methodology for attribution of income of an entity on its reconstitution and gives examples of situations where a partner exits a firm and the organisation settles the capital balance

NEW DELHI: The Central Board of Direct Taxes (CBDT) on Friday issued a set of guidelines to be applied in determining tax liability in cases where partnership firms are restructured or dissolved.

The guidelines seek to bring clarity on the methods to be followed while computing tax liability after the Finance Act, 2021, introduced a new section 9B in the Income Tax Act and substituted another provision - 4 of section 45.

The changes are applicable from assessment year 2021-22. These sections deal with deemed transfer of a capital asset or stock in trade to an exiting partner of a firm and receipt of capital asset or funds by a partner from a firm. The Finance Act specifies that any profits and gains arising from such deemed transfer is treated as the income of the partnership.

The guidelines explain the methodology to be followed in these cases.

The CBDT, in a circular, said guidelines were issued under provisions meant to remove difficulty in implementation.

The guidelines clarify the methodology for attribution of income of an entity on its reconstitution and gives examples of situations where a partner exits a firm and the organisation settles the capital balance.

It also helps determine capital gains as short term or long term at the time of taxability of such income in the hands of the reconstituted entity, explained Sandeep Bhalla, partner, Dhruva Advisors LLP.

“Its characterisation as short term or long term capital gains depends upon the period of holding of remaining capital assets to which such income is attributed. Any excess received on revaluation/ valuation of assets will be deemed as short term capital gains if it relates to self generated goodwill or assets forming part of block of assets," said Bhalla

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