This article is written by Vaibhav Sachde, pursuing an Introductory Course to Legal Writing from Lawsikho.

Background

In India, the Income Tax Act became applicable from 1st April 1962, and as a supplement to the Act is the Income Tax Rules 1962. Under this Act, the authority responsible to make rules for carrying out the purpose of the Act is CBDT (Central Board of Direct Taxes). The rules can’t overrule the provisions of the Act made and are within the ambit of the Act. CBDT has made numerous changes to these regulations and these amendments are made in response to the need for the new growing society. For filling of details regarding the amount attributed to capital assets remaining with the specified entity and proper implementation of newly substituted Section 45(4) of the Income Tax Act 1961, an amendment was brought in Income Tax Rules 1962 by the Central Board of Direct taxes on July 2, 2021, through a notification by the Ministry of Finance.

The amendment was made under the powers conferred by Section 48 and Section 295 of the Income Tax Act 1961 (43 of 1961), and the new set of rules will be called as e Income Tax Amendment (18th Amendment), Rules, 2021. For the official government notice click here The details of the amendment to the Act are as follows- 

Official notification of amendment            

Addition of sub-rule to Rule 8AA

In the Rule 8AA of Income-tax Rules,1962 which specifies, method of determination of the period of holding of capital assets in certain cases, after the Sub-rule (4) a Sub-rule (5) has been added, namely:

8AA(5)-

1. Under the head of “capital gains” as per Section 45(4) if the amount chargeable to income tax is as income of a specified entity (hereinafter referred only an “entity”) then the whole amount or its portion shall be considered to be from the transfer of short-term capital asset if it is attributed to the following categories of capital asset: 

a) Under Section 45(4) is a short-term capital asset at the time of taxation of amount; or 

b) If it is a component of a block of assets; or

c) As defined in clause (ii) of Explanation 1 to Section 45(4) asset being a self-generated asset and self-generated goodwill; and 

2. The whole amount or its portion shall be considered to be from the transfer of long-term capital asset if it is attributed to the capital asset which under Section 45(4) is a long-term capital asset at the time of taxation of the amount and capital asset which is not covered by the above clause (i).

• The “explanation 1” given above is as follows- “For the purpose of this rule, the amount chargeable to tax under Section 45(4) shall relate to the revaluation of any capital asset or valuation of a self-generated asset or self-generated goodwill, of the specified entity, if the revaluation is based on a valuation report obtained from a registered valuer as defined in clause (g) of rule 11U.”

Introduction of Rule 8AB

After the Rule 8AA of Income-tax Rules,1962, Rule 8AB has been added which stipulates, the attribution of income taxable under Section 45(4) to capital assets still held by the specified entity under Section 48. Namely:

1. “8AB. Attribution of income taxable under Section 45(4) to the capital assets remaining with the specified entity, under Section 48.”
2. 8AB(1)- Where an amount is chargeable to income-tax as income of an entity under Section 45(4), the entity shall attribute such amount to capital assets remaining with the entity in the manner provided in this rule for clause (iii) of Section 48.
3. 8AB(2)- The amount attributable to the capital asset remaining with the entity for purpose of Section 48(iii) shall be the amount that bears to the amount charged under Section 45(4) the same proportion as the increase in, or recognition of, the value of that asset because of revaluation or valuation bears to the aggregate of increase in, or recognition of, the value of all assets because of the evaluation or valuation. When the sum of the value of money and the fair market value of the capital asset received by the specified person from the entity is more than his capital account balance and charged to tax under Section 45(4) relates to the revaluation of any capital asset or valuation of a self-generated asset or self-generated goodwill, of the specified entity.

The amount charged to tax under Section 45(4) shall not be attributed to any capital asset for clause (iii) of Section 48 mentioned under the following [8AB(3) and 8AB(3)]-

1. 8AB(3)- When the sum of the value of money and the fair market value of the capital asset received by the specified person from the entity is more than his capital account balance and charged tax under Section 45(4) does not relate to the revaluation of any capital asset or valuation of a self-generated asset or self-generated goodwill, of the entity.
2. 8AB(4)- when the sum of the value of money and the fair market value of the capital asset received by the specified person from the entity is more than his capital account balance and charged to tax under Section 45(4) relate only to the capital asset received by the specified person from the specified entity. [This will be regardless of anything present in sub-rules (2) or (3)]
3. 8AB(5)- In Form No. 5C, the entity must provide the details of the amount attributed to the capital asset that is still with the entity.
4. 8AB(6)- The furnishing method of form no 5C must be electronic either under a digital signature or through an electronic verification code and the person who is authorised to verify the return of income of the entity under Section 140 shall verify it.
5. 8AB(7)- For the assessment year in which the amount is chargeable to tax under sub-section (4) of Section 45, Form No. 5C must be filed on or before the due date referred to in Explanation 2 below subsection (1) of Section 139.
6. 8AB(8)- As the case may be, The Principal Director General of Income-tax (Systems) or the Director-General of Income-tax (Systems) will be in charge for-
7. specifying the procedure for filing of Form No. 5C; 
8. specifying the procedure, format, data structure, standards, and manner of generation of electronic verification code, referred to in sub-rule (6), for verification of the person furnishing the said Form; and 
9. formulating and implementing appropriate security, archival, and retrieval policies concerning Form No 5C.

• The “explanation 2” given above is as follows- “For the removal of doubt it is clarified that revaluation of an asset or valuation of a self-generated asset or self-generated goodwill does not entitle the specified entity for the depreciation on the increase in value of that asset on account of its revaluation or recognition of the value of a self-generated asset or self-generated goodwill due to its valuation.”
• The “explanation 3” given above is as follows- “For this rule, the expressions self-generated asset and self-generated goodwill shall have the same meaning as assigned to them in clause (ii) of Explanation 1 to Section 45(4).”
• The above-used terms specified entity and specified person are defined under Section 9B and the terms “self-generated goodwill” and “self-generated asset” are defined under sub-section (4) of Section 45 of the Income Tax Act 1961.
• Also, subsection (4) of Section 45 of the activities mentioned above has been substituted with a new one as per notification on July 2, 2021. The new subsection (4) now provides that any profits or gains arising from the receipt by the specified person shall be chargeable to income-tax as income of the specified entity under the head “Capital gains’ ‘. When a specified person receives any money or capital asset or both from a specified entity, during the previous year, in connection with the reconstitution of such specified entity, further this income must necessarily be the income of the specified entity of the previous year in which such money or capital asset or both were received by the specified person. To calculate the above-mentioned profits and gains a formula is provided under the new subsection. For the official circular click here

Form no 5C to be included

Form no 5C is added to Income Tax Rules 1962, in Appendix II, after Form No. 5B. the form will be as follows:                              

                                                     Form No. 5C

Details of the amount attributed to capital asset remaining with the specified entity

1. Name of the specified entity
2. Permanent Account number
3. Assessment Year
4. Amount taxable under sub-section (4) of section 45
5. Attribution of amount taxable under sub-section (4) of section 45 to capital assets remaining

 

Sr.No.	Capital Asset		Book Value	Revalued amount/valued amount for self-generated asset	Amount attributed	Short term/ long term
	name	Whether self-generated yes/no
	Total

 

1. Name and registration number of the valuer based on whose valuation report information at serial no 5 is provided.

VERIFICATION

I, son/ daughter of

  solemnly declare that to the best of my knowledge and belief, the information given in the form is correct and complete and is in accordance with the provisions of the Income-tax Act, 1961. I further declare that I am furnishing the form in my capacity as (drop down to be provided in e-filing utility) and I am also competent to furnish this form and verify it. I am holding a permanent account number.

Place:

Date : Signature:

Analysis 

In India, the Partnership Act 1932 specifies that there is no difference between partners and partnerships which does not let the firm be a separate legal entity. Also, thus, income tax is levied on the firm but this would form an issue and confusion for taxation of gains earned by partner when he retires from the firm or while the dissolution when the firm allots share in capital assets to the partners. In the case of Commissioner Of Income-Tax vs Mohanbhai Pamabhai on 24 September 1971 under Gujarat High Court, it was said that when a partner retires from a partnership, what he receives is his share in the partnership which is worked out and realized and does not represent consideration received by him as a result of the extinguishment of his interest in the partnership asset. So, to go against this and broaden the taxation in such cases the legislature introduced Section 45(4) in the Income Tax Act 1961 through amendment in 1987. Still, the act was ambiguous and the supreme court and other courts backed their previous decision. But still for a partner or former partner when they receive any amount or property as a result of the firm’s dissolution or reconstitution, the income-tax implications in the hands of the partner or the firm had always been a contentious issue. So, The Finance Act, 2021 had addressed the aforesaid Issues by inserting Section 9B, substituting Section 45(4), and inserting Section 48(iii). And as we know the income tax rules are there for efficient implementation of the Income Tax Act. Therefore, for proper implementation of Section 45(4) of the Act, the amendment in rules was brought.

The amendment was in form of sub-rule (5) to Rule 8AA and a new Rule-8AB to prescribe the method for calculating income taxable as “capital gains” under Section 45(4) of the Act, as well as the method for attributing such income to remaining assets with the specified entity under clause (iii) of Section 48 of the Act. The amendment has successfully created a necessary structure for the amount attributed to capital assets remaining with the specified entity. The amendment has clarified and divided the issue of whether the amount chargeable to income-tax as income of a specified entity under the category of capital gains is derived from the transfer of a short-term or long-term capital asset.

Further, it has helped the specified entity to follow the manner and identify the income for attribution to remaining assets with the specified entity under clause (iii) of Section 48 of the Act. The most necessary and important part is the provision of new Form No. 5C. The Form No. 5C is very inclusive and beneficial as it is necessary for the specified entity to furnish the details of the amount attributed to the capital asset remaining with the specified entity in the form. And this form is to be compulsorily furnished electronically either under a digital signature or through an electronic verification code. This makes the data safe from being misplaced or forged. A further benefit is that this needs to be verified by the person who is authorized to verify the return of income of the specified entity under Section 140. Hence, the amendment has successfully created a necessary structure for the amount attributed to capital assets remaining with the specified entity.

Conclusion

The amendment to the rules was made by CBDT after announcing the changes in Section 45(4) and Section 48 of the act through the Finance Bill 2021. The amendments were in form of new Rule 8AA(5) which dealt with the method for determining the period of holding capital assets in cases where the amount is chargeable to income-tax as income of a specified entity under Section 45(4) of the Income-tax Act, 1961 (“the IT Act”) under the heading “Capital gains and under Section 48 of the IT Act, a new Rule 8AB was introduced that deals with the attribution of income taxable under Section 45(4) of the IT Act to capital assets remaining with the specified entity. The new form 5C has also been added in which under Rule 8AB.

References

• https://www.incometaxindia.gov.in/communications/notification/notification_77_2021.pdf
• https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx
• https://indiankanoon.org/doc/1526873/
• https://www.incometaxindia.gov.in/pages/rules/income-tax-rules-1962.aspx
• https://www.incometaxindia.gov.in/communications/circular/circular_14_2021.pdf

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