2016 (3) TMI 1128 - AT - Income Tax

Capital gain computation - transfer of property as per the provisions of section 2(47) - transfer of leasehold rights by the firm to its retiring partners - Held that - The provisions of section 45(4) of the Act are not applicable for the year under consideration, i.e. A.Y. 2010-11 as there is no retirement of any partner during this period. There is no transfer of leasehold rights in the said property by the assessee firm to the retiring partners; which continue to stay vested in the assessee firm even after the change in the constitution of the assessee firm. As per the provisions of section 45(4) of the Act the income is not to be taxable under the head business income but rather the income should be exigible to tax under the head Income from Capital Gains and the indexed cost of acquisition of the capital asset should be deducted from the full value of consideration computed under section 48 of the Act. - Decided against revenue

Summary

Issues:
1. Applicability of section 45(4) of the Income Tax Act for A.Y. 2010-11.
2. Treatment of transfer of leasehold rights by the assessee firm to retiring partners.

Analysis:

Issue 1: Applicability of section 45(4) of the Income Tax Act for A.Y. 2010-11:
The case involved a change in the constitution of the assessee firm, where two partners retired and two new partners were admitted. The Assessing Officer (AO) invoked section 45(4) of the Act, contending that there was a transfer of capital assets due to the change in constitution. However, the CIT(A) held that section 45(4) was not applicable for the year under consideration as there was no retirement of any partner during that period. The CIT(A) emphasized that the leasehold rights remained with the firm even after the change in constitution, and no consideration was given to the retiring partners. The CIT(A) further ruled that the income should be taxed under the head 'Income from Capital Gains,' deducting the indexed cost of acquisition from the full value of consideration. The Tribunal concurred with the CIT(A)'s findings, dismissing the Revenue's appeal.

Issue 2: Treatment of transfer of leasehold rights by the assessee firm to retiring partners:
The AO made an addition under section 45(4) of the Act, alleging a transfer of leasehold rights by the firm to its retiring partners. However, the CIT(A) disagreed, stating that no transfer of capital asset occurred as the leasehold rights remained with the firm post-constitution change. The CIT(A) referenced legal precedents supporting the assessee's position that no transfer took place without consideration to the retiring partners. The Tribunal upheld the CIT(A)'s decision, emphasizing that the income should be taxable as 'Income from Capital Gains' and not as 'business income,' directing the deletion of the addition made by the AO. The Tribunal found no reason to interfere with the CIT(A)'s order, ultimately dismissing the Revenue's appeal for A.Y. 2010-11.

In conclusion, the Tribunal upheld the CIT(A)'s decision, emphasizing the non-applicability of section 45(4) of the Act due to the absence of partner retirement and the retention of leasehold rights by the firm. The judgment highlights the importance of considering legal provisions and factual circumstances in determining the tax treatment of transactions involving capital assets and partnership changes.