2018 (11) TMI 1858 - AT - Income Tax

Capital gain computation on revaluation of asset on partners retirement - Transfer of capital asset on dissolution of firm or otherwise within the meaning of section 45(4) r.w.s. 2(14) when the money equivalent is paid by the partnership firm to the retiring partner - matter refereed to Third Member - whether where on revaluation of asset being land held by the partnership firm which resulted into enhancement of value of asset and this enhanced amount credited in capital account of partners and when a retiring partner takes amount in his capital account including enhanced value of asset, it gives rise to Capital Gain under section 45(4) r.w. Section 2(14) ? - HELD THAT - Hon'ble Third Member answered both the questions in the negative and in favour of the assessee agreeing with the view of the Judicial Member. Since the Majority view of the Members is against the Revenue, the grounds raised by the Revenue in both the appeals are decided against the Revenue in confirmity with the order passed by the Third Member.

Summary

Issues:
1. Interpretation of whether the money equivalent to the enhanced portion of an asset revalued constitutes a capital asset for the purpose of section 45(4) r.w.s. 2(14) of the Income Tax Act.
2. Determination of whether the distribution of money equivalent to partners on retirement constitutes a transfer of capital asset on dissolution of the firm or "otherwise" within the meaning of section 45(4) r.w.s. 2(14) of the Act.

Analysis:

Issue 1:
The disagreement between the Judicial Member and the Accountant Member centered around the classification of the money equivalent to the enhanced portion of the revalued asset. The Judicial Member agreed with the view of the CIT(A) that this money equivalent, when credited in the capital account of a partner, does not qualify as a capital asset. Consequently, the distribution of this money to retiring partners does not trigger a transfer of a capital asset upon the dissolution of the firm or "otherwise" within the purview of section 45(4) r.w.s. 2(14) of the Income Tax Act. This interpretation was upheld by the Third Member, who answered the question in the negative, favoring the assessee.

Issue 2:
The Second issue revolved around whether the payment of the money equivalent to the retiring partner by the partnership firm, which includes the enhanced portion of the revalued asset, constitutes a transfer of a capital asset upon the firm's dissolution or "otherwise." The Third Member, concurring with the Judicial Member, answered this question in the negative, ruling in favor of the assessee. Consequently, the majority view against the Revenue led to the dismissal of the grounds raised by the Revenue in both appeals.

The judgment also addressed the jurisdiction of the Assessing Officer in passing the assessment order, which was challenged by the assessee but later withdrawn. The challenge to the reopening of assessment proceedings under section 147 of the Act was rejected. As a result, both the appeals of the Revenue and the Assessee were dismissed, with the order pronounced on April 3, 2019.