2003 (6) TMI 433 - AT - Income Tax

Summary

Issues:
1. Taxability of amount credited in the capital account of a retired partner upon revaluation of assets of the firm as capital gain.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai pertained to the assessment year 1994-95. The only issue raised by the Revenue was the taxability of the amount credited in the capital account of a retired partner upon revaluation of assets of the firm as capital gain. The Assessing Officer had taxed the amount of Rs. 12,50,000 credited to the assessee's capital account as short-term capital gains, considering it as a transfer within the meaning of section 2(47) of the Income-tax Act, 1961. The CIT(A) disagreed with this approach and deleted the addition after considering various legal precedents and submissions made by the assessee.

During the assessment proceedings, it was argued that the revaluation of assets was merely by book entries and did not involve any actual sale or transfer of assets. Reference was made to legal decisions such as Addl. CIT v. Mohanbhai Pamabhai and Sunil Siddarthbhai v. CIT to support the contention that such revaluation should not be taxed as capital gains. The CIT(A) also considered decisions from various High Courts and Tribunals which supported the position that mere revaluation of assets does not give rise to taxable profits or gains. Ultimately, the CIT(A) concluded that there was no basis for the Assessing Officer to tax the amount as capital gains upon the retirement of the partner.

The Appellate Tribunal, after hearing the arguments of both parties, referred to the decision of the Apex Court in Tribuvandas G. Patel v. CIT and other relevant legal precedents. The Tribunal noted that when a partner retires from a firm and receives an amount towards his share in the assets, it should not be assessed as capital gains. Citing the decision in CIT v. R. Lingmallu Raghukumar, the Tribunal emphasized that there is no transfer of interest in the partnership assets by the retired partner to the continuing partners in such cases. Consequently, the Tribunal rejected the appeal of the Revenue and upheld the decision of the CIT(A) to delete the addition of the amount as capital gains.

In conclusion, the Appellate Tribunal dismissed the appeal, ruling in favor of the assessee and holding that the amount credited in the capital account of the retired partner upon revaluation of assets of the firm was not taxable as capital gain.