Section 8: income on receipt of capital asset or stock-in-trade by specified person from specified entity

The deeming rule

Where a specified person receives, during the tax year, any capital asset or stock-in-trade (or both) from a specified entity in connection with the entity's dissolution or reconstitution, the specified entity is deemed to have transferred that capital asset or stock-in-trade to the specified person in the year of receipt (section 8(1)).

The profits and gains arising from this deemed transfer are deemed to be income of the specified entity for that tax year, chargeable under the head "Profits and gains of business or profession" or "Capital gains" (section 8(2)).

The fair market value of the capital asset or stock-in-trade, as on the date of receipt by the specified person, is deemed to be the full value of consideration for this deemed transfer (section 8(3)).

Key definitions used in this section

• "Specified entity" means a firm or other association of persons or body of individuals (not being a company or a co-operative society).
• "Specified person" means a partner of a firm, or member of an association of persons/body of individuals (not a company or co-operative society), in any tax year.
• "Reconstitution of the specified entity" covers three situations: one or more partners/members cease to be partners/members while others continue; one or more new partners/members are admitted while some of the earlier ones continue; or all partners/members continue but with a change in their respective shares.

Difficulty-removal power

Section 8(4) and 8(5) allow the Central Board of Direct Taxes, with the Central Government's prior approval, to issue guidelines to remove any difficulty in giving effect to this section (and the related capital gains provision, section 67(10)). Such guidelines must be laid before Parliament and can be modified or annulled by both Houses.

Frequently asked questions