Identify the event, receipt and governing Act
The Finance Act, 2021 introduced section 9B and replaced section 45(4) of the Income-tax Act, 1961, applicable from AY 2021–22. Earlier decisions on the former law do not settle liability under these provisions. These examples use the 1961 Act. For a tax year under the Income-tax Act, 2025, check sections 8, 67(10) and 536; the 2026 Rules prescribe Rule 50 and Form 27 for the corresponding attribution procedure.
| Test | Section 9B | Section 45(4) |
|---|---|---|
| Event | Receipt in connection with dissolution or reconstitution. | Receipt in connection with reconstitution. |
| Receipt | Capital asset or stock-in-trade. Money alone does not trigger this section. | Money or a capital asset; compute any excess under the formula. |
| Measure | FMV at receipt is deemed consideration. Apply the correct cost and profit rules. | Money plus FMV at receipt less adjusted partner capital at reconstitution, floored at nil. |
| Income head | Capital gains or business profits, as applicable. | Capital gains; determine short-term or long-term character under Rule 8AA(5). |
| Taxpayer | The specified entity, which can include a firm or LLP. | The specified entity; the recipient’s own tax position is a separate question. |
Reconstitution includes a partner ceasing to be a partner, admission while at least one existing partner continues, or a change in shares where all continue. Identify what was actually received in connection with that event, when it was received and how it was recorded. Section 9B and section 45(4) can both apply to the same reconstitution and operate independently.
Calculate the adjusted capital and later attribution
For section 45(4), calculate A = B + C − D, with B the money received, C the FMV of the capital asset received and D the partner’s capital-account balance at reconstitution. Disregard increases from asset revaluation and from self-generated goodwill or any other self-generated asset. Treat a negative A as nil. Where section 9B also applies, the CBDT illustrations account for the deemed transfer and allocate the applicable post-tax net book profit to partners before computing the adjusted D. Do not confuse a deemed transfer’s realised book gain with a revaluation credit, or use the gross taxable capital gain as an automatic increase in capital.
Under Rule 8AB, attribute the eligible section 45(4) gain to remaining assets where the excess relates to the relevant revaluation or valuation and the rule’s requirements are met. Use the proportionate increases or recognised values from the qualifying registered valuer’s report. Do not use tax WDV as an automatic weighting or spread an unrelated amount across all assets. There is no attribution where the rule excludes it, including when the excess relates only to the asset the partner receives. Preserve the asset schedule and file Form 5C under Rule 8AB by the applicable return due date. On a later transfer, apply section 48(iii) or the specific depreciable-block mechanism explained in the circular. The attributed amount does not increase the block’s depreciation base.
Seven worked illustrations
1. Cash above adjusted capital
On retirement on 31 December 2024, a partner receives ₹100 lakh from the firm and has ₹40 lakh adjusted capital. Section 9B does not apply to cash alone. Section 45(4) gain is ₹60 lakh. If validly attributed to qualifying long-term factory land as in example 4, and assuming no other income, no surcharge and the applicable 12.5% rate plus 4% cess, the tax on that gain is ₹7.80 lakh. If attribution or classification differs, recompute the rate. The partner’s own receipt is not automatically exempt under section 10(2A), which concerns a partner’s share of the assessed firm’s total income.
2. Transfer of a long-held industrial plot
Assume a December 2024 distribution of land acquired in 2012, with supported FMV of ₹250 lakh and both book and tax cost of ₹50 lakh. No transfer costs apply. Section 9B gain is ₹200 lakh before tax, assuming the stated non-indexed basis. Illustrate a section 9B tax provision of ₹29.12 lakh (12.5% × ₹200 lakh × 1.12 surcharge factor × 1.04 cess factor), assuming the stated surcharge and no marginal relief. The remaining book profit is ₹170.88 lakh and the retiring partner’s equal one-third share is ₹56.96 lakh. With prior adjusted capital ₹80 lakh, D becomes ₹136.96 lakh. Section 45(4) gives ₹113.04 lakh (₹250 lakh − ₹136.96 lakh). Compute the final tax separately after classifying the second gain and checking the actual surcharge and relief.
3. Remove a self-generated goodwill credit
A negotiated ₹300 lakh goodwill valuation gives an illustrative ₹150 lakh credit to each of two equal partners. An outgoing partner with ₹20 lakh adjusted capital therefore shows ₹170 lakh on that settlement working and receives ₹170 lakh cash. Disregard the ₹150 lakh goodwill increase in D. The section 45(4) gain is ₹150 lakh. If the gain is short-term at the ordinary 30% firm rate and this is the firm’s only taxable income, 12% surcharge and 4% cess give ₹52.416 lakh before statutory rounding, with no marginal relief on these assumptions. This calculation does not authorise recognising internally generated goodwill in the financial statements.
4. Later transfer of remaining factory land
Assume example 1’s ₹60 lakh is gain, not tax paid, and relates wholly to qualifying long-term land retained by the firm. A registered valuation supports an increase of ₹200 lakh, from ₹100 lakh to ₹300 lakh, with no other qualifying asset. Assume the required attribution is made and documented. The firm sells the land for ₹350 lakh in December 2025, with tax cost ₹100 lakh and no other adjustments. Section 48(iii) permits a ₹60 lakh deduction, leaving gain of ₹190 lakh instead of ₹250 lakh. If the sale is in a tax year under the 2025 Act, verify the transition and the corresponding deduction before using the old-law working.
5. Capital paid in by a new partner
A new partner contributes ₹50 lakh cash and no partner receives money, capital assets or stock from the firm. Admission is a reconstitution on these facts but those receipts provisions are not triggered. Verify the identity and source of the contribution and consider other relevant provisions separately.
6. A ratio changes without a receipt
Three continuing partners change from equal shares to 2:2:1, or 40%, 40% and 20%. Assuming no actual or constructive receipt of money, capital assets or stock connected with the change, the ratio change alone does not trigger these two charges.
7. Accounts and tax workpapers
A firm with ₹18 crore turnover reconstitutes on 31 March 2025. Do not describe FY 2024–25 as the later ICAI Phase I mandate. The ICAI announcement sets Phase I for periods beginning on or after 1 April 2025 for turnover exceeding ₹5 crore and Phase II from 1 April 2026 for all covered entities. Keep the deed, payout records, capital movement, tax computation and asset attribution together. A future tax deduction does not itself increase the carrying value of the asset.
Frequently asked questions
Is a retiring partner’s settlement exempt?
Sections 9B and 45(4) charge the entity. Determine the nature and tax treatment of the partner’s own receipt separately; section 10(2A) is not a general exemption for settlement proceeds.
Does a book revaluation increase D?
No, the statutory calculation excludes that increase, even if it appears in a settlement statement.
What if A is negative?
Use nil in the entity’s section 45(4) computation. That does not determine other possible claims or the recipient’s tax treatment.
What happens on dissolution?
Section 9B expressly covers qualifying asset or stock distributions on dissolution. Section 45(4) uses reconstitution; analyse the legal facts and any other applicable provisions.
Does attribution create extra depreciation?
No. Preserve the amount and asset linkage for the later transfer and apply the prescribed computation.
What should the capital grid show?
Separate actual contributions, drawings, allocated book profits and tax, excluded valuation increases, receipts and the Form 5C or corresponding later-year attribution.
Sources
- Income-tax Act, 1961: sections 9B, 10(2A), 45(4), 48(iii), 50 and 112
- Finance (No. 2) Act, 2024: capital gains amendments effective 23 July 2024
- CBDT Circular 14/2021: interaction of sections 9B and 45(4) and treatment of depreciable blocks
- CBDT Notification 76/2021: Rules 8AA and 8AB and Form 5C
- Income-tax Act, 2025: sections 8, 67(10) and 536
- Income-tax Rules, 2026: Rule 50 and Form 27
- ICAI: phased applicability of non-corporate and LLP reporting guidance