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CBDT issues rules for taxing partnership firms

The Central Board of Direct Taxes( CBDT) has said that capital assets, fund or stock in trade received by a partner in a partnership firm while its dissolution or reconstruction would be considered as a saw send and profits of amplifications arising from the transfer would be subject to income tax.In two separate slice inserted in the Finance Act, 2021 earlier this year, the government had brought in provisions of taxing capital increases on transmit of capital assets by development partners or member in a partnership firm, so as to prevent evasion of taxes on asset gains.In a circular issued Friday, the Board said that deemed movement of capital assets or stock in trade or both when received by the partner or member from the firm would be subject to income tax under asset additions or profits and gains of business or profession. The carnival market value of the capital asset or stock in trade or both will be deemed as the full value of consideration.The Board also said that any fund or asset asset or both received by the partner or representative from the house during dissolving or reconstruction will be chargeable under uppercase incomes. The above requirements also includes capital asset forming a part of a block of resources. It notified the new rules, specifying short term and long term capital assets which will be chargeable under uppercase gains.Capital resource which is short term capital asset at the time of taxation, wording one of the purposes of a block of resources or being self-generated asset and self-generated goodwill will be considered as short term capital asset.Capital asset which is long term capital asset at the time of taxation and does not fall under the three categories above, will be considered as long term capital asset.The Board clarified that revaluation of an asset or valuation of self-generated asset or self-generated goodwill does not entitle depreciation on the increase in value of that asset.Experts said that the new rules will provide much needed clarity for blame of income and determination of long term and short term capital gains at the entrusts of the reconstituted entity. "It’s characterization as short term or long term capital additions depends upon the period of holding of remaining capital assets to which such income is attributed. Any excess received on revaluation/ valuation of assets will be deemed as short term capital gains if it relates to self-generated goodwill or assets wording part of block of resources, ” said Sandeep Bhalla, partner at Dhruva Advisors LLP.Further no depreciation would be allowed on self-generated due to valuation or revaluation, he added.“All self-generated assets including goodwill - if revalued or quality in notebooks resulting in increase in capital base of a partner- would be regarded as short term capital asset for taxability in case of transfer to a partner pursuant to its reconstitution. This will cause real hardship to tax payers, ” Amrish Shah, partner at Deloitte India noted.The Board clarified that when transport of capital assets makes lieu both provisions will be applicable and taxation will be worked out separately. This to be applied from AY 2021 -2 2 and subsequent years. Formula for calculating such gains and amplifications has been given in a separate notification.“When such capital assets get transmitted in the future, the amount attributed to such capital assets goes reduced from the full value of the consideration and to that extent the specified entity does not pay tax again on the same amount, ” the Board said in the circular. It was also pointed out that in case the capital asset remaining with the specified entity is forming part of a block of resource, the amount attributed to such asset resource shall be reduced from the full value of the consideration received or accruing as a result of precede movement of such asset by the specified entity, and the net value of such consideration shall be considered for reduction from the written down value of such block or for calculation of capital gains.

Read more: economictimes.indiatimes.com

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