1992 (9) TMI 13 - HC - Income Tax

Summary

Issues involved:
1. Interpretation of section 263 of the Income-tax Act regarding annulment of Commissioner's order.
2. Determination of whether there was a transfer of interest by the assessee to other partners within the meaning of section 2(47) of the Income-tax Act, 1961.

Interpretation of section 263 - Commissioner's Order:
The case involved a partnership named White Field Industrial Corporation, where land was purchased before the assessee became a partner. The assessee received Rs. 2 lakhs upon retirement, which the Commissioner deemed as a transfer liable to tax under section 263. The Tribunal, citing precedent, held that no transfer occurred as the land was acquired before the assessee joined the partnership. The Tribunal's decision was based on the judgment in CIT v. L. Raghu Kumar [1983] 141 ITR 674, which established that no transfer of interest in partnership assets occurs when a retiring partner withdraws an amount exceeding his capital and profits share. Consequently, the Tribunal ruled in favor of the assessee, concluding that no transfer took place under section 2(47) of the Act.

Transfer of Interest - Section 2(47) Interpretation:
The Tribunal's decision was supported by the legal principle that the withdrawal of an amount by a retiring partner at the time of retirement does not constitute a transfer of a capital asset to existing partners. This interpretation was based on the ruling in CIT v. L. Raghu Kumar [1983] 141 ITR 674 (AP), where it was established that such withdrawals do not attract capital gains tax as there is no transfer within the meaning of section 2(47) of the Act. Therefore, the second question regarding the transfer of interest was answered in favor of the assessee, leading to a consequential affirmation of the first question in favor of the assessee as well.

This judgment clarifies the application of section 263 of the Income-tax Act and the definition of transfer of interest under section 2(47) in the context of partnership withdrawals and retirement benefits.