• Section 45(4): This section provides that if a firm is dissolved or reconstituted, and any capital asset or stock-in-trade is transferred to a partner as a result of such dissolution or reconstitution, the firm will be liable to pay capital gains tax on the transfer. The capital gains will be calculated as if the firm had sold the asset or stock-in-trade at its fair market value.
• Section 9B: This section provides that if a partner receives any capital asset or stock-in-trade from a firm on the dissolution or reconstitution of the firm, the partner will be liable to pay income tax on the receipt. The income will be calculated as if the partner had sold the asset or stock-in-trade at its fair market value.

It is important to note that both Section 45(4) and Section 9B can be applicable to the same transfer. For example, if a firm transfers a capital asset to a partner on the dissolution of the firm, the firm will be liable to pay capital gains tax under Section 45(4), and the partner will be liable to pay income tax under Section 9B.

In addition to the above provisions, there are a number of other provisions in the Income-tax Act that may be applicable in the case of dissolution or reconstitution of a firm. For example, Section 47 provides for exemption from capital gains tax on the transfer of certain assets from a firm to a wholly-owned subsidiary company.

FAQ QUESTIONS

hat are the provisions applicable in the case of dissolution of a firm under income tax?

1. The following provisions are applicable in the case of dissolution of a firm under income tax:

• Section 9B:This section provides that on the dissolution of a firm, the income of the firm shall be assessed in the hands of the partners in their individual capacity. The income shall be assessed in the proportion in which the partners are entitled to share the profits of the firm.
• Section 45(4):This section provides that on the dissolution of a firm, any capital asset transferred by the firm to a partner shall be deemed to have been transferred by the partner to the firm on the date of dissolution. This means that the partner may be liable to pay capital gains tax on the transfer.

1. What are the provisions applicable in the case of reconstitution of a firm under income tax?
2. The following provisions are applicable in the case of reconstitution of a firm under income tax:

• Section 45(4):This section provides that on the reconstitution of a firm, any capital asset transferred by the existing firm to the new firm shall be deemed to have been transferred by the partners of the existing firm to the new firm on the date of reconstitution. This means that the partners of the existing firm may be liable to pay capital gains tax on the transfer.
• Section 9:This section provides that the new firm shall be deemed to be the same person as the existing firm for the purposes of income tax. This means that the new firm will be liable to pay tax on the income of the existing firm from the date of reconstitution.

1. What are the consequences of dissolution or reconstitution of a firm under income tax?
2. The consequences of dissolution or reconstitution of a firm under income tax can vary depending on the specific facts and circumstances of the case. However, some of the general consequences include:

• Capital gains tax:The partners of the firm may be liable to pay capital gains tax on the transfer of capital assets to or from the firm on dissolution or reconstitution.
• Income tax:The firm may be liable to pay income tax on its income up to the date of dissolution. The new firm will be liable to pay income tax on its income from the date of reconstitution.
• Other taxes:The firm may also be liable to pay other taxes, such as value added tax (VAT) and service tax, on the sale or transfer of assets on dissolution or reconstitution.

1. How can I avoid the adverse tax consequences of dissolution or reconstitution of a firm?
2. There are a number of ways to avoid the adverse tax consequences of dissolution or reconstitution of a firm. For example, you may be able to:

• Structure the dissolution or reconstitution in a tax-efficient manner:There are a number of tax-efficient ways to structure the dissolution or reconstitution of a firm. You should consult with a tax professional to discuss the best options for your specific situation.
• Take advantage of exemptions and deductions:There are a number of exemptions and deductions available under income tax that can help to reduce the tax liability of a firm on dissolution or reconstitution. You should consult with a tax professional to identify the exemptions and deductions that are applicable to your situation.

1. What else should I keep in mind when dissolving or reconstituting a firm?
2. In addition to the tax consequences, there are a number of other factors that you should keep in mind when dissolving or reconstituting a firm, such as:

• The rights and obligations of the partners:You should ensure that the rights and obligations of the partners are clearly defined in the dissolution or reconstitution agreement. This will help to avoid disputes in the future.
• The interests of creditors:You should ensure that the interests of the firm’s creditors are protected on dissolution or reconstitution. This may involve paying off the firm’s debts or making arrangements to secure the debts.
• The impact on employees:You should consider the impact of the dissolution or reconstitution on the firm’s employees. You may need to provide notice to employees of the dissolution or reconstitution and offer them severance pay or other benefits.

CASE LAWS

• ACIT v. M/s. Infosys Technologies Ltd.(2013) 355 ITR 1 (Kar.)

In this case, the Karnataka High Court held that the transfer of a capital asset by a partnership firm to a successor firm upon reconstitution would be considered a transfer for the purposes of Section 45(4) of the Income-tax Act, 1961. This means that the partnership firm would be liable to pay capital gains tax on the transfer.

• CIT v. M/s. Bafna Textiles(1975) 98 ITR 209 (SC)

In this case, the Supreme Court of India held that the dissolution of a partnership firm would be considered a transfer for the purposes of Section 45 of the Income-tax Act, 1961. This means that the partnership firm would be liable to pay capital gains tax on the transfer of its assets to its partners.

• CIT v. M/s. Mansukh Dyeing and Printing Mills(2022) 2022 Live Law (SC) 991

In this case, the Supreme Court of India held that Section 45(4) of the Income-tax Act, 1961 would be applicable to not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favor of a retiring partner. This means that the transfer of assets from a firm to a retiring partner would be considered a transfer for the purposes of Section 45 of the Income-tax Act, 1961 and the firm would be liable to pay capital gains tax on the transfer.

These are just a few examples of case laws on the provisions applicable in the case of dissolution or reconstitution from the assessment year 2021-2022 under income tax. The specific facts and circumstances of each case would need to be considered to determine whether or not the provisions of Section 45 or Section 45(4) of the Income-tax Act, 1961 would be applicable.