Section 8: Income on receipt of capital asset or stock in trade by specified person from specified entity

8(1)

Where a specified person receives during the tax year any capital asset or stock-in-trade or both from a specified entity in connection with the dissolution or reconstitution of such specified entity, then the specified entity shall be deemed to have transferred such capital asset or stock-in-trade, or both, to the specified person in the year in which such capital asset or stock-in-trade, or both, are received by the specified person.

8(2)

Any profits and gains arising from the deemed transfer mentioned in sub-section (1) by the specified entity shall be—

• (i) deemed to be the income of such specified entity of the tax year in which such capital asset or stock-in-trade or both were received by the specified person; and
• (ii) 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”, as per this Act.

8(3)

In this section, 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 mentioned in sub-section (1)

8(4)

If any difficulty arises in giving effect to the provisions of this section and section 67(10), the Board may, with the previous approval of the Central Government issue guidelines for removing the difficulty.

8(5)

No guideline under sub-section (4) shall be issued after the expiration of two years from the 1st April, 2026.

8(6)

Every guideline issued by the Board under sub-section (4) shall be laid before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive session aforesaid, both houses agree in making any modification in such guideline or both Houses agree that the guideline, should not be issued, the guideline shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that guideline

8(7)

In this section,—

• (a) “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society);

• (b) “specified person” means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any tax year;

• (c) “reconstitution of the specified entity” means, where—

  • (i) one or more of its partners or members of such specified entity ceases to be partners or members; or
  • (ii) one or more new partners or members are admitted in such specified entity in such circumstances that one or more of the persons who were partners or members of the specified entity, before the change, continue as partner or partners or member or members after the change; or
  • (iii) all the partners or members of such specified entity continue with a change in their respective share or in the shares of some of them.

Explanation

Section Summary:

Section 8 of the new income tax law deals with the tax implications when a specified person (such as a partner or member of a firm or association) receives capital assets or stock-in-trade from a specified entity (like a firm or association of persons) during its dissolution or reconstitution. The section deems such receipt as a transfer of assets, triggering tax consequences for the specified entity.

Key Changes:

1. Deemed Transfer: The section introduces the concept of a deemed transfer of assets (capital assets or stock-in-trade) from the specified entity to the specified person during dissolution or reconstitution. This was not explicitly addressed in the prior income tax law.
2. Fair Market Value (FMV): The FMV of the asset on the date of receipt is deemed as the consideration for the transfer, which is a new provision.
3. Taxability: The profits or gains from such deemed transfers are taxable under the heads "Profits and gains of business or profession" or "Capital gains", depending on the nature of the asset.
4. Guidelines for Implementation: The Central Board of Direct Taxes (CBDT) can issue guidelines to address difficulties in implementing this section, but only within two years from April 1, 2026.

Practical Implications:

1. For Specified Entities: Firms or associations must recognize the deemed transfer of assets during dissolution or reconstitution and calculate the tax liability based on the FMV of the assets.
2. For Specified Persons: Partners or members receiving assets must ensure proper documentation and reporting, as the FMV of the assets will determine the tax implications for the entity.
3. Tax Compliance: Entities must maintain records of asset valuations and ensure accurate reporting of deemed transfers in their tax filings.

Critical Concepts:

1. Specified Entity: Refers to a firm, association of persons, or body of individuals (excluding companies and co-operative societies).
2. Specified Person: Refers to a partner or member of the specified entity.
3. Reconstitution: Includes scenarios like changes in partners/members, admission of new partners/members, or alterations in profit-sharing ratios.
4. Fair Market Value (FMV): The value of the asset on the date of receipt, which is used to calculate the deemed consideration for the transfer.

Compliance Steps:

1. Valuation of Assets: Determine the FMV of the capital assets or stock-in-trade on the date of receipt by the specified person.
2. Tax Calculation: Compute the taxable income under the appropriate head (business income or capital gains) based on the FMV.
3. Reporting: Include the deemed transfer and related tax implications in the income tax return of the specified entity.
4. Documentation: Maintain records of the dissolution/reconstitution process, asset valuations, and tax computations.

Example:

• Scenario: A partnership firm (specified entity) is reconstituted, and Partner A (specified person) receives a piece of machinery (capital asset) with an FMV of ₹10 lakhs.
• Application: The firm is deemed to have transferred the machinery to Partner A, and the ₹10 lakhs FMV is treated as the consideration for the transfer. The firm must calculate and pay tax on the deemed capital gains or business income, depending on the nature of the machinery.

This section ensures that tax is levied on the transfer of assets during dissolution or reconstitution, even if no actual sale occurs.