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2009 (7) TMI 738 - HC - Income TaxCapital Gain - The assessee-firm was carrying on the business of maintaining a cinema theatre. It had partners who were entitled to share the profits of the firm. The firm filed its return of income for the year 1995-96 and declared a loss of Rs. 2,60,104. However, the Assessing Officer issued notice under section 143(3) read with section 147 of the Act calling upon the assessee to file its revised return on the premise that the assessee had not declared the income attributable to the transfer of capital assets resulting in capital gain. He held that firm was liable to be assessed on the gains attributable to the transaction which was the amount brought in by the partners and shared amongst the earlier partners. The Tribunal took the view that there was no dissolution of the firm, whereupon the assets had been transferred to the partners of the firm, and as there was no dissolution, section 45(4) of the Act was not attracted. Held that - the Assessing Officer had rightly indicated that the series of transaction such as reconstitution of firm twice, once in July, 1994, and again in December, 1994 and entire assets retained in the hands of newly added two partners though all along the assets of the firm continued in the hands of the firm. Therefore, there was transfer of capital assets within the meaning of section 2(47) attracting capital gain tax in terms of section 45(4) of the Act.
Issues Involved:
1. Whether the admission of new partners and the retirement of old partners with a consideration amount constitutes a transfer attracting capital gains under the Income-tax Act. 2. Whether the Tribunal correctly relied on previous judgments without applying the amended provisions of section 45 of the Act. Issue-wise Detailed Analysis: 1. Whether the admission of new partners and the retirement of old partners with a consideration amount constitutes a transfer attracting capital gains under the Income-tax Act: The case revolves around the reconstitution of a partnership firm during the assessment year 1995-96, where two new partners were admitted, and the existing four partners retired, receiving a consideration amount. The Assessing Officer (AO) issued a notice under section 143(3) read with section 147 of the Income-tax Act, calling for a revised return, asserting that the transaction amounted to a transfer of capital assets, attracting capital gains tax under section 45(4) of the Act. The AO concluded that the transaction involved the transfer of assets from the old partners to the new partners, as the firm continued with the new partners holding the assets. The AO determined the assessable income based on the amount brought in by the new partners, shared among the outgoing partners, and applied section 45(4) of the Act, demanding tax along with interest. The Commissioner of Income-tax (Appeals) upheld the AO's view, noting that the legislative intent behind sub-sections (3) and (4) of section 45 was to prevent revenue leakage through camouflaged transactions. The appellate authority emphasized that the reconstitution of the firm, resulting in the old partners retiring and new partners taking over, amounted to a transfer of assets, thereby attracting capital gains tax. However, the Income-tax Appellate Tribunal (ITAT) reversed this decision, stating that there was no dissolution of the firm, and hence, section 45(4) was not applicable. The ITAT relied on the Kerala High Court's judgment in CIT v. Kunnamkulam Mill Board, concluding that the facts were similar and the reasoning applied in that case was applicable here. Upon appeal, the High Court disagreed with the ITAT's reliance on the Kerala High Court's judgment, emphasizing the legislative intent behind the amendments to section 45. The High Court noted that the reconstitution of the firm, with the old partners retiring and new partners taking over the assets, constituted a transfer of capital assets, attracting capital gains tax under section 45(4). The court held that the transaction resulted in the transfer of assets from the old partners to the new partners, thereby confirming the AO's and the appellate authority's view. 2. Whether the Tribunal correctly relied on previous judgments without applying the amended provisions of section 45 of the Act: The High Court criticized the ITAT for relying on judgments that predated the 1987 amendments to section 45, which reintroduced sub-sections (3) and (4). The court highlighted the legislative intent to tax transactions that effectively transfer capital assets, even without dissolution. The court emphasized that the ITAT should have applied the amended provisions of section 45, which were designed to prevent revenue leakage through reconstitutions and transfers within firms. The High Court underscored the importance of understanding the legislative history and intent behind the amendments, agreeing with the Bombay High Court's judgment in CIT v. A. N. Naik Associates, which elaborated on the legislative changes and their implications. The court noted that the deletion of clause (ii) of section 47, which previously exempted certain transactions from capital gains tax, further supported the view that the reconstitution of the firm and the retirement of old partners constituted a transfer attracting capital gains tax. In conclusion, the High Court answered the first question in the affirmative, holding that the transaction amounted to a transfer attracting capital gains tax under section 45(4). The second question was answered in the negative, criticizing the ITAT for not applying the amended provisions of section 45 and relying on outdated judgments. The court upheld the AO's and the appellate authority's decisions, confirming the tax liability on the firm for the capital gains arising from the reconstitution and transfer of assets.
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