2004 (8) TMI 92 - HC - Income Tax

Capital gain transfer of assets dissolution of firm - Revenue submitted that as one of the partners had paid a sum of Rs. 5 lakhs to the other partner it was a case of transfer of asset and therefore assessable to the capital gain tax. From the finding recorded by the Tribunal it is seen that on account of mutual distrust between the partners a situation arose when the business of the firm could not be carried on smoothly and therefore both the partners had decided to dissolve the firm. Offer was given on dissolution by the assessee to take over the assets of the firm from the other partner for Rs. 2, 50, 000. However the other partner offered a sum of Rs. 5 lakhs with certain conditions which was accepted by the assessee - Thus it is a case of dissolution of partnership firm and it did not result in any transfer of the assets - Tribunal was justified in holding that the transaction was not a transfer and no capital gains accrued

Summary

Issues:
1. Whether the transaction was a 'transfer' for the purpose of capital gains tax?
2. Whether the Income-tax Appellate Tribunal was correct in deleting the income from capital gains added by the Income-tax Officer?

Analysis:
1. The case involved a partnership where one partner offered to purchase the other partner's share in the cinema building and assets due to differences arising between them. The Tribunal held that it was a case of dissolution where one partner takes over the assets of the other, and no transfer of assets occurred, thus no liability to capital gains tax arose. The Tribunal also referred to section 47 of the Income-tax Act, which excludes such transactions from capital gains taxation. The Revenue argued that the payment of Rs. 5 lakhs by one partner to the other constituted a transfer of assets, but the court disagreed. The court found that the dissolution of the partnership did not result in a transfer of assets as commonly understood, and the deeds executed were to safeguard rights and interests, not indicative of a transfer. Therefore, the court upheld the Tribunal's decision that no capital gains accrued from the transaction.

2. The Tribunal's decision to delete the income from capital gains added by the Income-tax Officer was based on the finding that the transaction was a dissolution of partnership where one partner took over the assets of the other without a transfer occurring. The court agreed with the Tribunal's reasoning, emphasizing that the dissolution did not result in a transfer of assets as per common law understanding. The court concluded that no capital gains arose from the transaction, affirming the Tribunal's decision in favor of the assessee against the Revenue. The court held that the transaction was not a transfer, and therefore, no capital gains were applicable. Consequently, both questions of law were answered in the affirmative, in favor of the assessee and against the Revenue, with no order as to costs.