2005 (6) TMI 250 - AT - Income Tax

Summary

Issues Involved:
1. Whether the write-off of debit balances of retired partners can be considered a capital loss assessable under the head 'Capital gains'.
2. Whether there was a transfer of capital assets and consideration received for such transfer.
3. The timing of the retirement of partners and the relevance to the assessment year.
4. Applicability of the Andhra Pradesh High Court decision in CIT v. G. Seshagiri Rao.

Issue-wise Detailed Analysis:

1. Write-off of Debit Balances as Capital Loss:
The Revenue contended that the CIT(A) erred in allowing the assessee's claim of write-off of debit balances of retired partners as a capital loss assessable under the head 'Capital gains'. The assessee argued that the write-off of debit balances constituted a capital loss, as supported by the decisions in Girdhari Lal Gian Chand v. CIT and CIT v. Tribhuvandas G. Patel. However, the Tribunal emphasized that for a capital loss to be recognized under section 45, there must be a transfer of assets, which did not occur in this case.

2. Transfer of Capital Assets and Consideration:
The Tribunal noted that for any capital receipt to be brought under section 45, there must be a disposal of an asset by any of the modes referred to in the definition of transfer under section 2(47). The Tribunal cited the Supreme Court's decision in Vania Silk Mills (P.) Ltd. v. CIT, which clarified that profits or gains must arise from the transfer of a capital asset. In this case, the debit balances of the retired partners were written off without any transfer of assets or consideration, thus failing to meet the primary condition for capital loss under section 45.

3. Timing of Retirement and Assessment Year:
The Tribunal observed that the partners retired on 31st March 1991 and 31st March 1993, but the write-off and claimed capital loss were for the accounting period relevant to the assessment year 1995-96. The Tribunal concluded that any transfer of assets would have taken place in the years of retirement, not in the relevant assessment year. Therefore, the write-off of debit balances in the current year could not be considered a transfer of assets.

4. Applicability of Andhra Pradesh High Court Decision:
The Revenue argued that the CIT(A) should have applied the ratio of the Andhra Pradesh High Court's decision in CIT v. G. Seshagiri Rao, which would have sustained the disallowance of the assessee's claim of capital loss. The Tribunal, however, focused on the requirement of a transfer of assets for recognizing capital loss under section 45, which was not satisfied in this case.

Conclusion:
The Tribunal concluded that the write-off of debit balances of retired partners did not involve a transfer of capital assets and, therefore, could not be considered a capital loss under section 45. The Tribunal set aside the order of the CIT(A) and restored the order of the Assessing Officer, disallowing the claimed capital loss. The appeal was allowed in favor of the Revenue.