Sec. 45(4)
This query is : Resolved
20 August 2011
hi expert
I want to know the scope of Sec. 45(4)in case of firm.
(1) what is the meaning of the term used in the above section- "distribution of capital assets on the dissolution or otherwise".
does it mean distribution to
(i)partner only or
(ii) anyone ( e.g. creditor for settlement of their debt.)
by the way, as per ICAI modules, it includes the case of business acquired by the company on dissolutin of firm, except the cases where condtions of sc.47(xiii) is satisfied.
(2) what does "on dissoltion or otherwise" mean?
does it mean that - sec. 45(4) attract even in case of transfering asset by a firm , while it is in operation (i.e. not in the process of dissolution)
I want to know the scope of Sec. 45(4)in case of firm.
(1) what is the meaning of the term used in the above section- "distribution of capital assets on the dissolution or otherwise".
does it mean distribution to
(i)partner only or
(ii) anyone ( e.g. creditor for settlement of their debt.)
by the way, as per ICAI modules, it includes the case of business acquired by the company on dissolutin of firm, except the cases where condtions of sc.47(xiii) is satisfied.
(2) what does "on dissoltion or otherwise" mean?
does it mean that - sec. 45(4) attract even in case of transfering asset by a firm , while it is in operation (i.e. not in the process of dissolution)
20 August 2011
1. It covers transfer to any one (e.g. Partners and creditors etc.)
2. Dissolution or otherwise mean- Bombay High Court held that: The Expression 'OTHERWISE" has to be read with the words transfer of capital assets and section 45 4 would get invocked even in the case of subsisting partners of a partnership firm, transferring assets in favour of a retiring partner in which case the Fair Market Value as on date of thasnfer should be taken as full value of consideration, The expression OTHERWISE" would cover any possible situation of tansfer of capital assets by the firm to partner[ CIT VS NAIK ASSOCIATES (2004) 265 ITR 346 (BOM)]
2. Dissolution or otherwise mean- Bombay High Court held that: The Expression 'OTHERWISE" has to be read with the words transfer of capital assets and section 45 4 would get invocked even in the case of subsisting partners of a partnership firm, transferring assets in favour of a retiring partner in which case the Fair Market Value as on date of thasnfer should be taken as full value of consideration, The expression OTHERWISE" would cover any possible situation of tansfer of capital assets by the firm to partner[ CIT VS NAIK ASSOCIATES (2004) 265 ITR 346 (BOM)]
21 August 2011
Thanks Sir,
but still i would ask that-
whether this sec. applies in the case " other than dissolution".
i.e. for simple understanding, i would be thankful for your comments on the following case:
a firm is operating throughout the year 2011. (i.e. it is not in the process of dissolution.) During this period it has transferred following capital assets:
(a) capital asset A (FMV 10 lacs) to creditor for settlement of its dues of Rs. 8Lacs
(b) capital Asset B (FMV2 lacs) to its working partner on mutual consent of patners.
but still i would ask that-
whether this sec. applies in the case " other than dissolution".
i.e. for simple understanding, i would be thankful for your comments on the following case:
a firm is operating throughout the year 2011. (i.e. it is not in the process of dissolution.) During this period it has transferred following capital assets:
(a) capital asset A (FMV 10 lacs) to creditor for settlement of its dues of Rs. 8Lacs
(b) capital Asset B (FMV2 lacs) to its working partner on mutual consent of patners.
23 July 2025
### **Explanation of Section 45(4) – Applicability and Scope**
Section **45(4)** of the Income Tax Act deals with **capital gains taxation** in the case of a **firm** when **capital assets** are transferred by the firm to its **partners**, or **creditors**, during the **dissolution** or **otherwise**.
Let’s break down the query into the two key questions posed:
---
### **1. What is the meaning of the term “distribution of capital assets on the dissolution or otherwise”?**
* **"Distribution of capital assets on dissolution or otherwise"** refers to the transfer or distribution of **capital assets** from the **firm** to either:
* **Partners** (on dissolution or otherwise), or
* **Creditors** (for the settlement of the firm’s liabilities).
This provision **applies to both** situations:
* **Transfer to Partners**: When the firm distributes assets (capital assets like property or machinery) to its partners in the course of **dissolution** or in **other situations** such as reconstitution, retirement, or **distribution of assets on a partner leaving the firm**.
* **Transfer to Creditors**: If the firm settles its liabilities with creditors by transferring capital assets instead of cash.
This means that the transfer does not need to happen only during the **dissolution** of the firm. It can also apply in cases where the firm is **operating normally** and not in the process of dissolution, like in your example where the firm transfers capital assets to its creditors to settle dues.
#### **Key Point**:
* **Section 45(4)** can apply when a firm **transfers assets to partners or creditors** irrespective of whether it is dissolving or continuing to operate. The term **“otherwise”** captures scenarios other than dissolution, like the transfer of assets to a partner due to a **retirement**, **reconstitution of the firm**, or the **settlement of creditors**.
---
### **2. What does “on dissolution or otherwise” mean?**
* The phrase **“on dissolution or otherwise”** has been interpreted to include situations **other than the dissolution of the firm**.
* **Dissolution** refers to the **formal winding-up** or termination of a firm’s operations.
* **Otherwise** refers to **other scenarios**, such as:
* **Retirement of a partner**,
* **Reconstitution of the firm**, or
* **Transfer of assets to settle debts with creditors**.
In your example, Section 45(4) **can apply even if the firm is not in the process of dissolution**. The firm can still trigger capital gains tax on the transfer of capital assets if:
* The firm transfers a capital asset to a **creditor** for the settlement of liabilities (even while the business is ongoing).
* The firm transfers an asset to a **partner** during a **reconstitution** or retirement of a partner.
---
### **Example Scenarios:**
**Scenario 1: Transfer to Creditor**
* **Transfer of Asset A** (FMV Rs. 10 Lacs) to settle dues of Rs. 8 Lacs:
* **Yes, this is covered by Section 45(4)**, as it is a **transfer of a capital asset to a creditor** for the settlement of the firm's liabilities.
* The capital gain will be **taxable** as if the firm has sold the asset. The capital gains will be computed based on the **Fair Market Value (FMV)** of the asset at the time of transfer (FMV = Rs. 10 Lacs).
* The firm will **record a capital gain** of Rs. 10 Lacs (FMV) – Rs. 8 Lacs (settlement), which will be taxable.
**Scenario 2: Transfer to a Partner**
* **Transfer of Asset B** (FMV Rs. 2 Lacs) to a partner:
* **Yes, this is covered by Section 45(4)**, as the **capital asset** is being transferred to a **partner**.
* Even though the firm is not dissolving, the transfer of the asset to the partner triggers a **capital gain**, and the FMV of the asset will be treated as the consideration for the transfer.
* The firm would need to **calculate capital gains** based on the FMV of the asset at the time of transfer (FMV = Rs. 2 Lacs).
---
### **Conclusion:**
* **Section 45(4)** applies **not just in the case of dissolution**, but also in situations where assets are transferred to **partners** or **creditors** while the firm is operating. The term **"otherwise"** ensures that capital gains are taxed in cases such as **partner retirement**, **reconstitution**, or **debt settlement** involving asset transfers.
* **Capital Gains Tax Implication**: When assets are transferred to a partner or creditor, the firm is deemed to have sold those assets at their **Fair Market Value** (FMV) and will be liable to pay capital gains tax.
If you need more detailed calculations or any further clarifications, feel free to ask!
Section **45(4)** of the Income Tax Act deals with **capital gains taxation** in the case of a **firm** when **capital assets** are transferred by the firm to its **partners**, or **creditors**, during the **dissolution** or **otherwise**.
Let’s break down the query into the two key questions posed:
---
### **1. What is the meaning of the term “distribution of capital assets on the dissolution or otherwise”?**
* **"Distribution of capital assets on dissolution or otherwise"** refers to the transfer or distribution of **capital assets** from the **firm** to either:
* **Partners** (on dissolution or otherwise), or
* **Creditors** (for the settlement of the firm’s liabilities).
This provision **applies to both** situations:
* **Transfer to Partners**: When the firm distributes assets (capital assets like property or machinery) to its partners in the course of **dissolution** or in **other situations** such as reconstitution, retirement, or **distribution of assets on a partner leaving the firm**.
* **Transfer to Creditors**: If the firm settles its liabilities with creditors by transferring capital assets instead of cash.
This means that the transfer does not need to happen only during the **dissolution** of the firm. It can also apply in cases where the firm is **operating normally** and not in the process of dissolution, like in your example where the firm transfers capital assets to its creditors to settle dues.
#### **Key Point**:
* **Section 45(4)** can apply when a firm **transfers assets to partners or creditors** irrespective of whether it is dissolving or continuing to operate. The term **“otherwise”** captures scenarios other than dissolution, like the transfer of assets to a partner due to a **retirement**, **reconstitution of the firm**, or the **settlement of creditors**.
---
### **2. What does “on dissolution or otherwise” mean?**
* The phrase **“on dissolution or otherwise”** has been interpreted to include situations **other than the dissolution of the firm**.
* **Dissolution** refers to the **formal winding-up** or termination of a firm’s operations.
* **Otherwise** refers to **other scenarios**, such as:
* **Retirement of a partner**,
* **Reconstitution of the firm**, or
* **Transfer of assets to settle debts with creditors**.
In your example, Section 45(4) **can apply even if the firm is not in the process of dissolution**. The firm can still trigger capital gains tax on the transfer of capital assets if:
* The firm transfers a capital asset to a **creditor** for the settlement of liabilities (even while the business is ongoing).
* The firm transfers an asset to a **partner** during a **reconstitution** or retirement of a partner.
---
### **Example Scenarios:**
**Scenario 1: Transfer to Creditor**
* **Transfer of Asset A** (FMV Rs. 10 Lacs) to settle dues of Rs. 8 Lacs:
* **Yes, this is covered by Section 45(4)**, as it is a **transfer of a capital asset to a creditor** for the settlement of the firm's liabilities.
* The capital gain will be **taxable** as if the firm has sold the asset. The capital gains will be computed based on the **Fair Market Value (FMV)** of the asset at the time of transfer (FMV = Rs. 10 Lacs).
* The firm will **record a capital gain** of Rs. 10 Lacs (FMV) – Rs. 8 Lacs (settlement), which will be taxable.
**Scenario 2: Transfer to a Partner**
* **Transfer of Asset B** (FMV Rs. 2 Lacs) to a partner:
* **Yes, this is covered by Section 45(4)**, as the **capital asset** is being transferred to a **partner**.
* Even though the firm is not dissolving, the transfer of the asset to the partner triggers a **capital gain**, and the FMV of the asset will be treated as the consideration for the transfer.
* The firm would need to **calculate capital gains** based on the FMV of the asset at the time of transfer (FMV = Rs. 2 Lacs).
---
### **Conclusion:**
* **Section 45(4)** applies **not just in the case of dissolution**, but also in situations where assets are transferred to **partners** or **creditors** while the firm is operating. The term **"otherwise"** ensures that capital gains are taxed in cases such as **partner retirement**, **reconstitution**, or **debt settlement** involving asset transfers.
* **Capital Gains Tax Implication**: When assets are transferred to a partner or creditor, the firm is deemed to have sold those assets at their **Fair Market Value** (FMV) and will be liable to pay capital gains tax.
If you need more detailed calculations or any further clarifications, feel free to ask!
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