2004 (10) TMI 290 - AT - Income Tax

Capital Gains - Sum received at the time of the partner's retirement from his share in the partnership assets thereof liable for capital gain tax? - Applicability of section 45(4) of the Income-tax Act in the case of dissolution of the firm - Whether it is a case of dissolution or a case of retirement - HELD THAT - The view of the learned CIT(A) that the entire amount is received in excess of the share due to the assessee, is incorrect. The Assessing Officer should have prepared a balance sheet taking into account the re-valued assets at the market value and then arrived at the share of the assessee in the net assets of the partnership firm, after taking into account liabilities, current assets, goodwill, if any, etc., for the purpose of arriving at the excess receipt. The entire amount can, by no stretch of imagination, be considered as received in excess to her share in capital of the firm. In any event, such an exercise would be a futile one, in view of the judgment of the jurisdictional High Court in the case of R. Lingmallu Raghukumar 1997 (1) TMI 74 - SUPREME COURT and G. Seshagiri Rao 1992 (9) TMI 13 - ANDHRA PRADESH HIGH COURT as the excess receipt is not liable to tax. Even otherwise, when all the partners agree that this is her share in assets of the firm, it is not for us to artificially arrive at what is her share in partnership assets and what is the excess amount. Nowhere in the compromise deed, it is stated that something in excess to her entitlement and share in assets was paid to her. Thus, we hold that what was received by mutual consent was only money's worth of her share in the assets of the partnership assets only. Even if it is held that the assessee had received something more than what is actually due to her on the rendition of accounts, the same cannot be brought to tax as already stated by us and also in view of the judgment of the Hon'ble Supreme Court in the case of s G. Patel v. CIT 1996 (2) TMI 16 - SUPREME COURT , as well as the judgment reported in CIT v. R. Lingmallu Raghukumar. These judgments declare that when the assessee received her share in the value of asTribhuvandasets of the partnership firm, or in excess of the same, it cannot be brought to tax as there is no transfer. Thus, when a partner receives her share in the assets of the partnership firm or when she receives something in excess of her share in the assets of the partnership firm, and even in a case where the partner receives a share of profit, either in the case of retirement or in a case of dissolution the same cannot be brought to tax in view of the decision of the Hon'ble Supreme Court in the case of Tribhuvandas G. Patel as well as the decision of the Hon'ble Supreme Court in the case of R. Lingmallu Raghukumar, irrespective of the existence or deletion of section 47(ii) from the Act. Thus, we respectfully follow the judgments and hold that the amount in question cannot be brought to tax as capital gain u/s 45 read with section 2(47) of the Income-tax Act as there is no transfer. In the result, the addition in question is hereby deleted. The appeal of the assessee is allowed.

Summary

Issues Involved:
1. Liability to be assessed to tax on Rs. 1.82 crores received by the assessee.
2. Determination of whether the receipt was consequent to the dissolution of the firm or the retirement of a partner.
3. Examination of whether the amount received was in excess of the share in the partnership assets.

Summary:

1. Liability to be assessed to tax on Rs. 1.82 crores received by the assessee:
The primary issue for adjudication was whether the sum of Rs. 1.82 crores received by the assessee from M/s. Odeon Theatres was taxable. The Assessing Officer and the CIT(A) believed that this amount was liable to capital gains tax as the assessee had relinquished her right in the partnership firm. The assessee contended that the amount represented her share of the firm's assets received on its dissolution and thus was not liable to tax.

2. Determination of whether the receipt was consequent to the dissolution of the firm or the retirement of a partner:
The assessee argued that the firm was dissolved on 21-1-1989 when she issued a notice for dissolution under section 43(1) of the Indian Partnership Act, 1939. The Revenue, however, contended that the firm was not dissolved but that the assessee retired from the partnership as evidenced by the retirement deed dated 30-9-1999. The Tribunal found that the circumstances suggested the business was carried out by only two partners, and the assessee received her share in the assets through a compromise deed, indicating a dissolution rather than retirement.

3. Examination of whether the amount received was in excess of the share in the partnership assets:
The Tribunal held that the amount received by the assessee was her share in the value of the partnership assets and not in excess of her entitlement. The assets of the partnership were revalued, and the assessee received 1/3rd of this value as agreed upon by the partners. The Tribunal concluded that even if the receipt was considered as retirement, the amount received could not be taxed as capital gains since it did not constitute a transfer within the meaning of section 2(47) of the Income-tax Act. The Tribunal relied on the judgments of the Hon'ble Supreme Court in the cases of Tribhuvandas G. Patel v. CIT and CIT v. R. Lingmallu Raghukumar, which held that the amount received by a retiring partner from a partnership firm cannot be construed as capital gain.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the amount of Rs. 1.82 crores received could not be brought to tax as capital gains under section 45 read with section 2(47) of the Income-tax Act, as there was no transfer involved.