Taxability of asset distributions made to partners by a partnership business

With regards to the taxability of distributions of capital assets, stock-in-trade, or money by a partnership business to its partners on its dissolution or reconstitution, the Finance Act of 2021 introduced several substantial adjustments, which have been explored here. One should know about 80g.

Pre-amendment era:-

The market rate value of the asset on the date of such transport was deemed to be the sale consideration of the Income Tax Act of 1961, which provided for the chargeability of the capital gain on the distribution of capital assets upon the dissolution of a firm or is in the year when the said transfer takes place. Since several courts have ruled that section 45(4) only applies in cases of firm dissolution and not in other situations involving firm reconstitution, there has been some debate regarding the applicability of the provision in cases of distribution of capital assets other than those involving firm dissolution.

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Amendment by Finance Act, 2021:-

(a) The addition of a new Section 9B that charges income tax on distributions of capital assets or stock-in-trade made to a partner by a company upon dissolution or reconstitution.

(b) The creation of a new section 45 in place of the current section 45(4) of the Income Tax Act of 1961.

(c) The aforementioned changes will take effect on April 1, 2021, and will consequently apply to AY 2021–2022, which corresponds to FF 2020–21.

Income from the sale of a particular person's stock or capital asset

(1) The partner's receipt of the capital asset or stock:- Any capital asset or stock in trade that a partner of a firm gets from that firm upon the dissolution or reconstitution of that firm—or both—will be regarded to be a transfer in the firm's eyes.

(2) Chargeable to Income Tax:- As a result, any profits and gains from the presumed transfer of capital assets or stock in trade will be considered part of the company's income for the transfer year and will be subject to income tax under the headings "Capital Gain" or "Profits and Gains of Business or Profession," as applicable.

(3) The Sale's Determination when determining whether to charge income tax, take into account:- The whole amount of the evaluation received or accruing as a result of such a considered transfer will be regarded to be the current market value of the capital asset or equity in trade on the date of such presumed transfer.

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