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Issues involved: Interpretation of provisions u/s 45(3) and 45(4) of the Income Tax Act in a case involving reconstitution of a partnership firm and distribution of assets to retiring partners.
Summary: The appeal was filed by the Revenue against the order of the Ld. CIT(A)-XXV Mumbai for the A.Y.2006-07 concerning a partnership firm engaged in supplying well water. The firm reconstituted with new partners, and retiring partners carried away their capital, including revaluation amount of a plot. The Assessing Officer applied provisions of section 45(3) and 45(4) of the Income Tax Act, citing a judgment of the Bombay High Court. The appellant contended that the plot was not transferred to partners, relying on decisions of ITAT Mumbai and Kerala High Court. The Ld. CIT(A) analyzed the case law and held that as the retiring partners did not take away the plot but only the revalued amount, the capital gain taxed by the AO was not applicable. The plot remained the property of the firm even after reconstitution. The Ld. Departmental Representative insisted on following the A.N. Naik & Associates judgment, while the Ld. Counsel for the assessee supported the Ld. CIT(A)'s order. In the hearing, the case of Smt. Paru D. Dave was discussed, where revaluation did not result in capital gain due to no transfer of assets. The Kerala High Court's decision emphasized that reconstitution of a partnership does not constitute a transfer of assets. Following these precedents, the appeal of the assessee was allowed, and the Revenue's appeal was dismissed. Conclusion: The Ld. CIT(A) ruled in favor of the assessee, emphasizing that no transfer of assets occurred during the reconstitution of the firm, in line with the decisions of Smt. Paru D. Dave and CIT Vs Kunnamkulam Mill Board. The judgment highlighted that revaluation alone does not lead to capital gain without an actual transfer of property.
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