Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax act, 1961

F. No.370142/22/2021-TPL
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes (TPL Division)
Circular No. 14 of 2021
Dated: 02nd July, 2021

Sub.: Guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961 - reg.

Finance Act, 2021 inserted a new section 98 in the Income-tax Act 1961 (hereinafter referredto as "the Act"). This section mandates that whenever a specified person receives any capital asset or stock in trade or both from a specified entity, during the previous year, in connection with the dissolution or reconstitution of such specified entity, then it shall be deemed that the specified entity have transferred such capital asset or stock in trade or both, as the case may be, to the specified person (hereinafter referred to as "deemed transfer"). This deemed transfer would be in the year in which such capital asset or stock in trade or both are received by the specified person. Any profits and gains arising from such deemed transfer is deemed to be the income of such specified entity of the previous year in which such capital asset or stock in trade or both were received by the specified person. Further, it is chargeable to income-tax as income of such specified entity under the head " Profits and gains of business or profession" or under the head "Capital gains", in accordance with the provisions of this Act. It has also been provided that the fair market value of the capital asset or stock in trade or both, on the date of its receipt by the specified person, shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer. The definitions of terms " reconstitution of the specified entity", "specified entity" and "specified person" are provided in section 98 of the Act.

2. Similarly the Finance Act 2021 substituted sub-section (4) of section 45 of the Act. This newly substituted sub-section (4) now provides that where a specified person receives any money or capital asset or both from a specified entity, during the previous year, in connection with thereconstitution of such specified entity, then any profits or gains arising from receipt of such receipt by the specified person shall be chargeable to income-tax as income of the specified entity under the head "Capital gains". It has been further deemed that this income shall be the income of the specified entity of the previous year in which such money or capital asset or both were received by the specified person. A formula to calc ulate such profits and gains has also been prov ided in this subsection. The defin itions of terms " reconstitution of the spec ified entity", " specified entity" and "specified person" shall be as provided in section 9B of the Act while the terms " se lf-generated goodwill " and "self-generated asset" have been defined in this sub-section. It has been further clarified that when a capital asset is recei ved by a spec ified person from a specified entity in connection with the reconstitution of such specified entity, the provisions of sub-section (4) of section 45 of the Act shall operate in addition to the provisions of section 9B of the Act and the taxation under the said provisions thereof shall be worked out independently. Both, the new section 9B and substituted sub-section (4) of section 45 are applicable for the assessment year 2021-22 and subsequent assessment years.

3. Sub-section (4) of section 9B of the Act provides that if any difficulty arises in giving effect to the provisions of this section and sub-section (4) of section 45 of the Act, the Board may, with the approval of the Central Government, issue guidelines for the purposes of removing the difficulty. For this purpose, the Central Board of Direct Taxes, with the approval of the Centra l Government, hereby issues the following guidelines. 

Guidelines

4. It is noti ced 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 assets get transferred in the future, the amount attributed to such capital assets gets reduced from the full value of the consideration and to that extent the spec ified entity does not pay tax agai n on the same amount. It is further noticed that this attribution is given in the Act only for the purposes of section 48 of the Act. It may be seen that section 48 of the Act onl y applies to capita l assets wh ich are not forming block of assets. For capital assets forming block of assets there is sub-c lause (c) of clause (6) of section 43 of the Act to determ ine written down value of the block of asset and section 50 of the Act to determine the capital ga ins arising on transfer of such assets. However, the Act has not yet provided that amount taxed under sub-section (4) of secti on 45 of the Act can also be attributed to capital assets forming part of block of assets and which are covered by these two provisions. To remove difficulty, it is clarified that rule 8AB of the Income Tax Rules, 1962 (here inafter referred to as " the Rules") notified vide notification no. 76 dated 02.07.2021 also applies to capital assets form ing part of block of assets.

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