Section 45(4) - Capital Gain on transfer of asset by a firm/AOP/BOI to partner/member

• Section 45(4) of the Income Tax Act 1961 prescribes provisions regarding taxation of capital gains on transfer of asset being money or capital asset or both by a firm/AOP/BOI to partner/member on the reconstitution of such firm/AOP/BOI.

• In such a case, the profits or gains arising from such receipt by the partner/member shall be chargeable to tax as income of such firm/AOP/BOI under the head Capital Gains for the year in which such money or capital asset or both were received by the partner/member.

• Such profits/gains shall be calculated using the following formula: 

A= B+C-D

where A = income chargeable to tax under the head Capital Gains

B = value of money received by the partner/member

C = amount of FMV of capital asset received by the partner/member

D = amount of balance in the capital account of the partner/member in the books of the firm/AOP/BOI at the time of reconstitution.

• If the value of A above is negative, it will be considered as zero.

• While calculating the balance of capital account of the partner/member, any increase in the capital account on account of revaluation of asset or self generated goodwill or asset shall be ignored.

• Reconstitution of firm/AOP/BOI shall have the same meaning as given in section 9B of the Act.

• Self generated goodwill or self generated asset means any asset which has been acquired without incurring any cost or which has been generated during the course of business or profession.