2010 (9) TMI 746 - AT - Income Tax

Retirement from partnership firm - transfer u/s 2(47) - whether any part of the sum received by the assessee on retirement from the firm gave rise to capital gain chargeable to tax under the Act - Held that - the clauses in the retirement deed do convey interest in immovable property and further refers to the fact that the assessee will not have any interest over the assets of the firm. Thus it was a case of lump sum payment in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners. - There was a transfer of interest of the retiring partner over the assets of the partnership on retirement. Therefore there was liability to tax on account of capital gain.

Issues Involved:
1. Taxability of the amount received by the appellant on retirement from a partnership firm under the head 'capital gains'.
2. Interpretation of the term 'transfer' within the meaning of section 2(47) of the Income-tax Act.
3. Applicability of judicial precedents and relevant law on the subject.
4. Construction of the deed of retirement and its implications on capital gains tax liability.

Detailed Analysis:

1. Taxability of the Amount Received on Retirement:

The primary issue was whether the amount received by the appellant on retirement from the partnership firm M/s. D.S. Corporation is taxable under the head 'capital gains'. The appellant contended that the settlement of accounts on retirement does not involve any transfer of assets and thus does not attract capital gains tax. The Assessing Officer (AO) and the CIT(A) upheld the view that the amount received is taxable as short-term capital gain, arguing that the retirement amounts to a transfer of a capital asset under section 2(47) of the Income-tax Act.

2. Interpretation of 'Transfer' Under Section 2(47):

The term 'transfer' includes the sale, exchange, or relinquishment of the asset, or the extinguishment of any rights therein. The AO and CIT(A) interpreted the retirement of the partner and the subsequent receipt of the amount as a 'transfer' of the partner's interest in the partnership assets to the continuing partners. The CIT(A) relied on various judgments of the Bombay High Court, which held that retirement involving an assignment or relinquishment of interest in favor of continuing partners constitutes a transfer.

3. Applicability of Judicial Precedents:

The appellant cited several Supreme Court judgments, including Addl. CIT v. Mohanbhai Pamabhai and CIT v. Hind Construction Ltd., to argue that retirement from a partnership does not constitute a transfer and hence does not attract capital gains tax. The CIT(A) distinguished these cases on the grounds that they did not involve an assignment of interest in favor of continuing partners. The Tribunal referred to the Bombay High Court's decisions in CIT v. Tribhuvandas G. Patel, CIT v. H.R. Aslot, and N.A. Mody v. CIT, which supported the view that such transactions amount to a transfer.

4. Construction of the Deed of Retirement:

The Tribunal examined the sequence of events and the clauses in the deed of retirement. It noted that the revaluation of assets and the crediting of the revaluation surplus to the capital accounts of the partners indicated an artificial increase in the capital account. The deed explicitly stated that the retiring partner relinquished all rights, title, and interest in the partnership assets in favor of the continuing partners. This was seen as a lump sum payment in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets, thus constituting a transfer under section 2(47) of the Act.

Conclusion:

The Tribunal concluded that the amount received by the appellant on retirement from the partnership firm is taxable as short-term capital gain. The mode of retirement, involving the revaluation of assets and the subsequent payment to the retiring partner, constituted a transfer of interest in the partnership assets. The Tribunal upheld the CIT(A)'s order, dismissing the appellant's grounds and confirming the taxability of the amount under the head 'capital gains'.

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