2019 (1) TMI 1282 - HC - Income Tax

Income from the transfer of property by way of distribution of assets on retirement of the two partners - long term capital gains OR short term capital gain - assessee is a partnership firm - period of holding - Held that - In view of the development agreement, the assessee retained remaining 50% of the land with use of FSI available on such land. Under the development agreement, therefore, the assessee can be seen to have divested itself of a portion of the land with the rights attached to such land and having retained the remaining portion. This development agreement under no circumstances, can be seen to have given rise to acquisition of the land or rights therein by the assessee on the date of agreement. Consequently, therefore, when two partners representing 50% share in the profit as well as the assets of the firm retired, the assessee distributed 50% of the rights in land which remained with the assessee upon execution of the development agreement and offered the notional value to long term capital gain, which the Tribunal correctly approved. No question of law, therefore.

Summary

Issues:
1. Determination of capital gains tax treatment on the distribution of assets upon retirement of partners.

Analysis:
The case involved a partnership firm that had acquired a plot of land and entered into a development agreement for the same. Upon retirement of two partners, the firm distributed 50% of the land, FSI, and development rights to the retiring partners. The key question was whether the income from this distribution should be treated as long-term capital gains or short-term capital gains.

The Assessing Officer initially considered the gain to be short-term capital gain, but the firm argued that it should be treated as long-term capital gain under Section 45(4) of the Income Tax Act. The firm had offered capital gain tax based on the valuation of the land after the development agreement, claiming indexed cost of 50% of the land.

The Commissioner of Income Tax (CIT) allowed the firm's appeal, stating that the distribution on retirement of partners constituted a transfer of long-term capital assets. The Tribunal upheld this view, noting that the firm had offered the full value of consideration to long-term capital gain and retained 50% of the land with FSI.

The High Court agreed with the CIT and Tribunal, emphasizing that the development agreement did not result in the acquisition of the land by the firm. The firm had divested a portion of the land while retaining the rest, leading to the distribution of rights in the land upon retirement of partners. As such, the distribution was rightly treated as long-term capital gain. The court dismissed the appeal, affirming the treatment of the distribution as long-term capital gain.