2009 (11) TMI 968 - AT - Income Tax

Summary

Issues Involved: The judgment deals with the issue of whether the distribution of revaluation reserve to partners by a partnership firm constitutes a transfer attracting capital gains u/s 45(4) of the Income-tax Act.

Issue 1: Interpretation of Section 45(4) of the IT Act

The Assessing Officer noted the distribution of revaluation reserve to partners and treated it as long-term capital gain u/s 45 of the IT Act. The CIT(A) deleted the addition, stating that section 45(4) was not attracted. The Tribunal analyzed the provisions of section 45(4) which deem the distribution of capital assets by a firm as a transfer. It was observed that for this provision to apply, there must be a distribution of "capital assets" in specie. In the present case, although the revaluation reserve was distributed, the land and building remained with the firm, indicating no distribution of capital assets. The Tribunal emphasized that the revaluation reserve account is not a capital asset under the Act and that the partners are the real owners of the assets. The Tribunal relied on precedents to support its conclusion that crediting partners' accounts with revaluation reserves, without physical distribution of assets, does not give rise to capital gains u/s 45(4).

Conclusion:

The Tribunal upheld the decision of the CIT(A) that section 45(4) was not attracted in the case as there was no distribution of any capital asset in specie to the partners. The appeal filed by the revenue was dismissed, and no costs were awarded.