Computation of Capital Gain on Dissolution or Reconstitution of Firm, AOP, or BOI
Introduction
When a firm, AOP, or BOI is dissolved or reconstituted, and a partner/member receives capital assets, stock-in-trade, or money, the entity is deemed to have transferred such assets. The resulting income is taxable in the year of receipt by the partner/member.
Applicability
- Section 9B: Applies where capital assets or stock-in-trade are distributed to partners/members on dissolution or reconstitution; FMV on receipt date is deemed full consideration.
- Stock-in-trade: Taxable as business income.
- Capital assets: Taxable under capital gains.
- Section 45(4): Applies where money or capital assets are received by a partner/member on reconstitution; tax liability falls on the firm.
- Both sections apply simultaneously and are computed independently.
Capital Gains Computation (under section 9B)
| Particulars | Amount (₹) |
| Full value of consideration (FMV of capital assets) | xxx |
| Less: Transfer expenses | (xxx) |
| Less: Cost of acquisition/improvement | (xxx) |
| Less: The amount chargeable to tax as income of firm under Section 45(4) which is attributable to capital asset being transferred by the firm | (xxx) |
| Net Capital Gain | xxx |
Capital Gains Computation (under section 45(4))
| Particulars | Amount (₹) |
| Money received by partner | xxx |
| Add: FMV of asset received | xxx |
| Less: Balance in partner’s capital account | (xxx) |
| Net Capital Gain (if positive; otherwise nil) | xxx |
- Adjustments ensure revaluation/self-generated assets are not taxed twice.
- Gains are short-term if arising from depreciable/short-term/self-generated assets; otherwise long-term.