2008 (8) TMI 907 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 45(4) of the Income-tax Act in the case of retirement of a partner.
2. Consideration of family arrangement as a 'transfer' for the purpose of capital gains.

Summary:

Issue 1: Applicability of Section 45(4) of the Income-tax Act in the case of retirement of a partner

The revenue appealed against the Commissioner of Income-tax (Appeals) for deleting the addition made on account of long-term capital gains, arguing that section 45(4) should be invoked. The assessee, a partnership firm, did not compute capital gain upon the retirement of a partner, Smt. Parama Devi, who was allotted a property as part of a family arrangement. The Assessing Officer disagreed, citing the judgment of the Hon'ble Bombay High Court in CIT v. A.N. Naik Associates, which brought such cases under the purview of section 45(4). However, the Commissioner of Income-tax (Appeals) relied on ITAT's decision in G.K. Enterprises and other judicial precedents, concluding that section 45(4) does not apply to the retirement of a partner and that a family arrangement is not a 'transfer' for capital gains purposes.

Issue 2: Consideration of family arrangement as a 'transfer' for the purpose of capital gains

The learned counsel for the assessee argued that the 'transfer' occurred due to a family arrangement, which should not attract capital gains tax. The Commissioner of Income-tax (Appeals) accepted this argument, noting that the family arrangement was bona fide and aimed at maintaining family harmony. The Tribunal in Kay Arr Enterprises had previously held that transfers under family arrangements do not fall under section 2(47) and are not subject to capital gains tax. The Hon'ble Madras High Court affirmed this view, stating that family arrangements to avoid litigation among family members do not constitute a 'transfer' for capital gains purposes.

Conclusion:

The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals), holding that section 45(4) is not attracted in the case of the retirement of a single partner and that the family arrangement does not amount to a 'transfer' for capital gains purposes. The appeal by the revenue was dismissed.