ICAI has released the publication titled ‘Technical Guide on Income Tax on Reconstitution of Firms’ for Members, in view of the amendments made by the Finance Act, 2021 in relation to taxation incidence on dissolution/ reconstitution of partnership firms, AOP and BOI, i.e. certain new provisions have been inserted in the Income-tax Act, 1961 which substitute the earlier provisions for taxation in such cases. This Guide from ICAI covers the law and procedures relating to taxation of reconstitution of partnership firms, application of latest provisions pertaining to transfer of capital assets, payment of money and/ or stock in trade to partners etc.
The income-tax law has separate set of provisions for dealing with issues arising from taxation of partnership firms’ affairs, inter-se. Transfer of capital asset and stock in trade from/ to firm, AOP or BOI to/ by partners or member on reconstitution or dissolution of firm is quite common. Among others, one of the popular forms of conducting business affairs by MSMEs is partnership firm. Even a lot of our practicing members operate by way of partnership form of business. LLP form of partnership has provided better vehicle for doing partnership business.
The Finance Act 2021 has made certain amendments, like insertion of new IT Section 9B, amendment of Section 45(4), insertion of a clause in Section 48, insertion of new IT Rule 8AB, to deal with taxation of transfer of stock, capital asset and payment of money to partner on dissolution or reconstitution of partnership, Association of Persons (AOP) or Body of Individuals (BOI). These amendments are aimed at providing clarity on incidence of taxation such transactions.
ICAI’s Technical Guide: Income Tax on Reconstitution of Firm/ AOP/ BOI (August 2021: First Edition)