CBDT Issues Rules for Taxing Partnerships in India

CA Sapna Ghelani | Last updated: 07 July 2021

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Quick Summary

The Central Board of Direct Taxes (CBDT) has introduced new guidelines for calculating tax liability when Indian partnership firms are restructured or dissolved. These rules, effective from assessment year 2021-22, clarify the taxation of 'deemed transfers' of capital assets or stock-in-trade to partners, or receipt of assets/funds by partners from the firm. The aim is to provide transparency and simplify the process of attributing income during such changes.

For a case, when partnership firms are restructured or dissolved, The Central Board of Direct Taxes (CBDT) has issued a certain guideline to be applied in computation of their tax liability, last Friday.

The guidelines were issued to give transparency on the methods to be followed while determiningthe tax liability. These guidelines are issued after the introduction of a new Section - 9B in the Income Tax Act in Finance Act, 2021 and substituted another provision - 4 of section 45. These changes are applicable from assessment year 2021-22.

India Partnership Tax Rules: CBDT Issues New Guidelines

What does the Guideline Deal with?

The guideline deals with the deemed transfer of a capital asset or stock-in-trade to an existing 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 firm.

Further clarifying, the CBDT has said that capital assets, money or stock in trade which received by a partner in a partnership firm during its dissolution or reconstruction will be called as a deemed transfer and any profits or gains arising from such transfer would be liable to income tax.

The purpose behind such guideline issue?

The CBDTsaid that the guidelines were issued under provisions with the aim to remove difficulty in implementation. The guidelines,also aim to clear the methodology for attribution of income of an entity on its reconstitution.It gives examples of certain situations where a partner is leavingthe firm and the firm settles the capital balance.

What does the Section say?

Section 9B provides for taxation of income of the firm on the transfer of capital assets & stock in trade.

Section 45(4) now taxes income in the hands of the firm, which is actually the income in the hands of the partner.

The CBDT had observed 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 is transferred in the future, the amount attributed to such capital assets gets subtracted from the value of the consideration and the specified entity does not have to pay tax again on the amount.

Also, it should be noted that this attribution is only made in the Act for the purposes of section 48 of the Act. The adaptation will take effect in the assessment year 2021-22.

The Act does not, however, state that the amount charged under section 45(4) of the Act can also be ascribed to capital assets that are part of a block of assets and are covered by these two sections.

FAQ :

The CBDT has issued guidelines for computing the tax liability of partnership firms when they are restructured or dissolved, introducing clarity on 'deemed transfers' of assets.

These changes are applicable from the assessment year 2021-22.

A 'deemed transfer' occurs when a partner receives a capital asset, money, or stock-in-trade from a partnership firm during its dissolution or reconstruction.

Any profits and gains arising from such a 'deemed transfer' are treated as the income of the partnership firm and are liable to income tax.

The guidelines aim to remove difficulties in implementation, clarify the methodology for attributing income during reconstitution, and provide transparency in tax computation for partnership firms.