Question And Answer
Subject: Sec. 45(4)
Querist: Prakash Kulkarni
Answered by:
Tags: ,
Date: September 24, 2022
Query asked by Prakash Kulkarni

Assessee is LLP engaged in the business of jewellery. The assessee has kept the non-moving items or the items which are displayed separately and the said stock is valued at cost in the year in which those were purchased. Out of the 5 partners, 3 partners have expressed their desire to retire from the LLP and continuing partners decided to admit 3 new partners in the LLP.

The retiring partner will be paid an amount standing to their capital account as on the date of retirement i.e 30.09.2021. While working out the financials at the time of retirement, the non- moving items/ items for display are considered at cost only. The market value of the said stock was more by Rs. 10,00,000/- than the cost.

The incoming partners have been admitted on the ground that they will be ready to work as a working partners and also introduce the capital in the firm.


  1. Whether the assessee firm is correct by not considering the market value of the non-moving items / items for display at the time of working the balance standing to the capital account of the retiring partner ?
  2. Whether provisions of section 45(4) will be attracted in this situation ?
  3. If yes, is there any tax implication on the retiring partners of LLP ?
File Uploaded: Not Available

There is a formula provided under section 45(4) of the Income-tax Act, 1961 (Act) for computation of capital gains. It is as under:

A = B + C – D

A = income chargeable to income-tax under this sub¬section as income of the specified entity under the head “Capital gains”;
B = value of any money received by the specified person from the specified entity on the date of such receipt;
C = the amount of fair market value of the capital asset received by the specified person from the specified entity on the date of such receipt; and
D = the amount of balance in the capital account (represented in any manner) of the specified person in the books of account of the specified entity at the time of its reconstitution:

Provided that if the value of “A” in the above formula is negative, its value shall be deemed to be zero :
Provided further that the balance in the capital account of the specified person in the books of account of the specified entity is to be calculated without taking into account the increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset.

Section 45(4) of the Act will be attracted in the hands of the firm. However, as the amount paid to the retiring partners by the Firm is the same as their capital contribution, the Capital Gains will be nil.

17 -9 -2022
Q. 3 Implication of conversion of Charitable trust in to Sec. 8 Co under companies Act

Assessee is charitable Trust under Bombay Public trust Act, having charitable objects in operation since last 15 years. Trust has immovable property as asset and also investment in Fixed deposits out of Funds created for specific purpose . The trustees have decided to convert the same in to Sec. 8 of the Companies Act, with Guarantee.
a. whether there are any tax implication under Income tax Act 1961 on such conversion.
b. whether any stamp duty is required to be paid.

Ans : There is no specific provision under section 47 of the Income-tax Act, 1961 (Act) dealing with a conversion of a charitable trust into a company under section 8 of the Companies Act, 2013.

However, assuming the transaction is considered as a transfer under the scheme of the Act, as per the computation mechanism provided under section 11(1A) of the Act, the assets could be transferred at a value that the capital gains are nil.

Disclaimer: This article is only for general information and is not intended to provide legal advice. Readers desiring legal advice should consult with an experienced professional to understand the current law and how it may apply to the facts of their case. Neither the author nor and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this article nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of

Leave a Reply

Your email address will not be published. Required fields are marked *