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New Section 9B added to Income Tax Act by the parliament while passing the Finance Bill 2021
A new section 9B which was not proposed while presenting the Finance Bill 2021 on 1st Feb 2021 has been added during the passage of the bill in the parliament. The aim is to plug the loophole on tax leakage arsing from reconstitution of the firm or AOP.
After section 9A of the Income-tax Act, the following section shall be inserted, namely:—
‘9B. (1) Where a specified person receives during the previous 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, as the case may be, to the specified person in the year in which such capital asset or stock in trade or both are received by the specified person.
(2) Any profits and gains, arising from such deemed transfer of capital asset or stock in trade or both, as the case may be, by the specified entity shall be—
(i) deemed to be the income of such specified entity of the previous 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”, in accordance with the provisions of this Act.
(3) For the purposes of 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 of the capital asset or stock in trade or both by the specified entity.
(4) If any difficulty arises in giving effect to the provisions of this section and sub-section
(4) of section 45, the Board may, with the approval of the Central Government, issue guidelines for the purposes of removing the difficulty.
(5) Every guideline issued by the Board under sub-section (4) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-; tax authorities and on the assessee.
Explanation.—For the purposes of this section,—
(i) “reconstitution of the specified entity” means, where—
(a) one or more of its partners or members, as the case may be, of such specified entity ceases to be partners or members; or
(b) one or more new partners or members, as the case may be, are admitted in such specified entity in such circumstances that one or more of the persons who were partners or members, as the case may be, of the specified entity, before the change, continue as partner or partners or member or members after the change; or
(c) all the partners or members, as the case may be, of such specified entity continue with a change in their respective share or in the shares of some of them;
(ii) “specified entity” means.a firm or other association of persons or body of individuals (not being a company or a cooperative society);
(iii) “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 cooperative society) in any previous year.’.’.
With this, the probable leakage in plugging the loophole arsing from reconstitution of the firm or AOP has been axed appropriately. Orignal proposal as was proposed in the Finance Bill 2021 was not so full proof. With addition of section 9B, the probable litigation or scope of tax avoidance has also been put to an end.