2016 (11) TMI 1064 - AT - Income Tax

Taxability of capital gains in the hands of the assessee firm - retiring partner - valid transfer - Held that - The partnership firm, that is, the assessee did not transfer any right in the capital asset or any of the asset of the partnership firm in favour of the retiring partner and neither it ceases its hold on the property of the firm. Its right in the property of the firm was still intact and has not been extinguished at all. Even the retiring partner did not acquire any right in the property, albeit it has only surrendered its right and interest in the partnership firm. Here when the retiring partner took cash and also further cash in lieu of agreed constructed area from the stock in trade of the firm, it did not relinquishing its interest in the immovable property. What it relinquished was its share in the partnership firm. Therefore, there is no transfer of a capital asset within the scope of section 45(4), because to attract Section 45(4), there should be a transfer of a capital asset from the firm to the retiring partners, by which the firms ceases to have any right in the property which is so transferred. There is no transfer of any capital asset of the assessee firm to its retiring partner and hence no capital gains chargeable to tax arises in hands of the assessee firm and section 45(4) has no application on the facts of the present case. - Decided in favour of assessee

Summary

Issues Involved:
1. Reopening of assessment under section 147 of the Act.
2. Computation of capital gain under section 45(4) of the Act.
3. Applicability of section 45(4) of the Act.
4. Double taxation of the same income.
5. Levy of interest under Sections 234A and 234B of the Act.
6. Full value of consideration and cost of acquisition.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147 of the Act:
The assessee challenged the reopening of the assessment under section 147, arguing that the reassessment order was bad in law. The Assessing Officer (AO) initiated the reopening based on the non-filing of the return for the assessment year 2006-07 and the belief that income had escaped assessment due to the retirement of a partner and the corresponding transfer of rights in partnership assets.

2. Computation of Capital Gain under Section 45(4) of the Act:
The AO computed the Long Term Capital Gain (LTCG) on the retirement of a partner, M/s Bharat Barrel Drum Mfg. Co. Ltd., who relinquished its rights in the partnership firm in exchange for monetary compensation and constructed area. The AO calculated the full value of consideration as ?55,52,02,720 and determined the net capital gain after deducting the cost of acquisition.

3. Applicability of Section 45(4) of the Act:
The core issue was whether the transfer of rights upon the retirement of a partner constituted a "transfer of capital asset" under section 45(4). The assessee argued that there was no distribution of capital assets and no dissolution of the firm, thus section 45(4) should not apply. The AO and CIT(A) held that the transaction resulted in the transfer of a capital asset and was taxable under section 45(4).

4. Double Taxation of the Same Income:
The assessee contended that taxing the capital gain in the hands of the firm would result in double taxation since the same income was already taxed in the hands of the retiring partner. The AO dismissed this argument, maintaining that the firm was liable for the capital gains tax.

5. Levy of Interest under Sections 234A and 234B of the Act:
The assessee objected to the levy of interest under sections 234A and 234B, arguing that it was not justified. The AO, however, levied the interest while computing the tax payable for the year.

6. Full Value of Consideration and Cost of Acquisition:
The CIT(A) partially allowed the assessee's appeal by adjusting the full value of consideration and cost of acquisition. The CIT(A) directed that the balance amount should be taxed in the year of actual transfer of the constructed area (AY 2009-10) and computed the cost of acquisition with indexation benefits.

Judgment Analysis:

Reopening of Assessment:
The Tribunal did not adjudicate on the validity of the reopening under section 147 as it was rendered academic due to the main issue being decided in favor of the assessee.

Computation and Applicability of Section 45(4):
The Tribunal held that there was no transfer of a capital asset by the firm to the retiring partner. The firm continued to hold the property, and the retiring partner only relinquished its share in the partnership, not in the firm's assets. Thus, section 45(4) was not applicable, and no capital gains tax was chargeable in the hands of the firm.

Double Taxation:
The Tribunal acknowledged the assessee's argument and ruled that taxing the firm would result in double taxation, which is not permissible.

Interest under Sections 234A and 234B:
Given the main issue's resolution, the Tribunal did not specifically address the interest levied under sections 234A and 234B.

Full Value of Consideration and Cost of Acquisition:
The Tribunal agreed with the CIT(A) on the full value of consideration and cost of acquisition adjustments but ultimately ruled that no capital gains tax was applicable.

Additional Ground by Revenue:
The Tribunal dismissed the additional ground raised by the revenue, which sought to treat the transaction as sales turnover and tax it as business income. The Tribunal held that the Department could not introduce a new case at the Tribunal stage, which was not part of the original assessment.

Conclusion:
The Tribunal allowed the assessee's appeal, ruling that no capital gains tax was applicable under section 45(4) in the hands of the firm. The revenue's appeal and the assessee's cross-objection were dismissed. The additional ground raised by the revenue was also dismissed.