Chapter II - Income-tax
Section 8
Section 8: income on receipt of capital asset or stock-in-trade by specified person from specified entity
Section 8 targets a specific situation - a partner or member (a "specified person") receiving a capital asset or stock-in-trade from a firm, or other association of persons/body of individuals (a "specified entity"), when that entity is dissolved or reconstituted. It deems this to be a transfer by the entity, taxable on the entity at the asset's fair market value.
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Need advice on Section 8?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) 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 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, 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 the deemed transfer mentioned in sub-section (1) by the specified entity shall be— (i) deemed to be the income of such specified entity of the tax 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”.
(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 mentioned in sub-section (1).
(4) If any difficulty arises in giving effect to the provisions of this section and section 67(10), the Board may, with the previous approval of the Central Government, issue guidelines for removing the difficulty.
(5) Every guideline issued by the Board under sub-section (4) shall be laid before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both houses agree in making any modification in such guideline or both Houses agree that the guideline, should not be issued, the guideline shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that guideline.
(6) For the purposes of this section,— (a) “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society); (b) “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 co-operative society) in any tax year; (c) “reconstitution of the specified entity” means, where— (i) one or more of its partners or members, of such specified entity ceases to be partners or members; or (ii) one or more new partners or members are admitted in such specified entity in such circumstances that one or more of the persons who were partners or members, of the specified entity, before the change, continue as partner or partners or member or members after the change; or (iii) all the partners or members, of such specified entity continue with a change in their respective share or in the shares of some of them.
Introduction
Section 8 treats a specified entity as transferring a capital asset or stock-in-trade when a specified person receives it on dissolution or reconstitution. The deemed transfer occurs in the receipt tax year, with the section's own definitions controlling the parties and transaction.
Key takeaways
Asset distribution by entity
When a specified person receives a capital asset or stock-in-trade from a specified firm or other entity on dissolution or reconstitution, the entity is deemed to transfer it in that tax year.
Tax and valuation
The entity’s resulting gain is taxed under business income or capital gains, using fair market value on the recipient’s receipt date as deemed consideration.
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.
Step-by-step flow for applying Section 8
- 1
Is the entity a firm, other AOP or BOI (not a company or co-operative society)?
Only a "specified entity" under Section 8(6)(a) is covered.
- No: Section 8 does not apply.
- Yes: Go to the next step.
- 2
Did a partner or member receive a capital asset or stock-in-trade in connection with dissolution or reconstitution?
Reconstitution under Section 8(6)(c) covers a partner or member ceasing, new partners or members being admitted while some continue, or a change in shares while all continue.
- No: Section 8 does not apply.
- Yes: The entity is deemed to have transferred the asset in the year of receipt.
- 3
Determine the deemed consideration
Under Section 8(3), the fair market value of the asset on the date of receipt is the full value of consideration.
- 4
Compute and charge the profit in the entity's hands
Under Section 8(2), the profit is income of the entity for the tax year of receipt, chargeable under "Profits and gains of business or profession" or "Capital gains". Also check any Board guidelines under Section 8(4).
Practical checklist
Do
- Document the entity reconstitution or dissolution, asset type, recipient and receipt date.
- Separate capital assets from stock-in-trade and reconcile their tax treatment with the companion computation provisions.
Avoid
- Do not wait for an ordinary external sale when the section deems a transfer upon receipt.
- Do not overlook changes in partnership or membership shares within the reconstitution definition.
Illustrative example
Worked example: a retiring partner takes a building
Hypothetical facts (illustration only, not a real taxpayer): A partnership firm has three partners. On 15 January 2027 one partner retires and, as part of the settlement, receives a building the firm held as a capital asset. Its fair market value on that date is ₹80 lakh. Assume the cost relevant for computing capital gains in the firm's hands is ₹50 lakh.
Coverage
The firm is a specified entity and the retirement is a reconstitution (a partner ceases while others continue), so Section 8(1) applies.
Deemed transfer
The firm is deemed to transfer the building to the retiring partner in the tax year of receipt, 2026-27.
Consideration
Under Section 8(3), the full value of consideration is the fair market value on receipt: ₹80 lakh.
Profit
Using the assumed ₹50 lakh cost, the gain is ₹80 lakh − ₹50 lakh = ₹30 lakh, subject to the detailed computation rules under the "Capital gains" head.
Outcome
- The ₹30 lakh gain is income of the firm, not the retiring partner, for tax year 2026-27 (Section 8(2)).
- Had the asset been stock-in-trade, the profit would be charged under "Profits and gains of business or profession" instead.
Glossary
- Specified entity
- The firm or other entity covered by the section's own definition.
- Specified person
- The partner or member receiving the asset or stock-in-trade under this provision.
Frequently asked questions
When does Section 8 apply?
When a partner or member of a firm/AOP/BOI receives a capital asset or stock-in-trade from that firm/AOP/BOI in connection with its dissolution or its reconstitution (partners/members leaving, joining, or shares changing).
Who pays tax under Section 8 - the partner or the firm?
The specified entity (the firm or AOP/BOI) is deemed to have made the transfer and is taxed on the resulting profits and gains, not the specified person (partner/member) who receives the asset.
What value is used to compute the taxable profit?
The fair market value of the capital asset or stock-in-trade on the date it is received by the specified person is treated as the full value of consideration for the deemed transfer.
Need help applying this provision to your situation?
Get help with firm dissolution/reconstitution tax impactLast updated 10 October 2026