Section 45(4) of the Income Tax Act
Income-tax Act, 2025: s.67
Section 45(4) falls under section 45 of the Income-tax Act, 1961, which corresponds to section 67 (Capital gains) of the Income-tax Act, 2025.
Read section 67 of the 2025 Act
Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.
The decision most relied on for Section 45(4) is Sunil Siddharthbhai v. CIT (156 ITR 509), cited in 82 of the 107 judgments on BharatTax that turn on this section.
Leading authorities on Section 45(4)
A partner's contribution of a personal asset to a partnership firm does not amount to a "transfer" for capital gains purposes under the Income-tax Act, as the consideration (the partner's interest in the firm) is indeterminate, and the computational machinery for capital gains fails.
In an assessment completed under section 153A, only undisclosed income and undisclosed assets detected during a search can be brought to tax.
Additions to income cannot be justified based on loose papers or rough notes found during a search if there is no other corroborative evidence to prove that the amounts represent undisclosed income or actual expenditures not recorded in books of account. The onus is on the revenue to discharge its burden of proof.
The distribution of capital assets to a partner upon the dissolution of a partnership firm does not constitute a 'transfer' and is therefore not taxable as capital gains.
When a partner retires from a partnership firm and receives consideration, including a proportionate share of goodwill, it is not considered a transfer for capital gains tax purposes.
Section 28(iv) of the Income-tax Act, 1961, which deals with benefits or perquisites in the course of business, is only applicable when such benefit or perquisite is received in a non-monetary form. Monetary amounts cannot be assessed under this section.
Capital gains arising from the distribution of capital assets on the dissolution of a firm or other association of persons, or otherwise, are taxable under section 45(4) based on the fair market value of the asset on the date of transfer. This applies even to reconstitutions of partnership businesses as part of a family settlement.
Distribution, division, or allotment of assets to partners upon dissolution of a firm is a mutual adjustment of rights and not a transfer of assets by the firm, as the firm does not hold separate rights in partnership assets.
Consideration paid to a retiring partner, even if it exceeds the balance in their capital account, is not chargeable to tax as it does not constitute a 'transfer'.
Section 28(iv) cannot be applied to tax a sum in the hands of partners if no benefit or perquisite arises to them in the course of business. An increase in a partner's capital due to revaluation of firm assets lacks nexus with the business and is not taxable under Section 28(iv).
