2012 (6) TMI 716 - HC - Income Tax

Distribution of assets on dissolution of partnership - taxability of sum received by a partner - Revenue contending accrual of capital gains - AY 78-79 - Held that - Any amount paid to a partner as his share on dissolution of the partnership firm cannot be regarded as transfer not only in view of the clear mandate of Section 47(ii) but also because such receipt of amounts and/or property does not involve an element of transfer within the meaning of the definition of the word transfer in Section 2(47). See Prashant Joshi Vs. Income Tax Officer and anr (2010 (2) TMI 271 (HC)) - Decided in favor of assessee.

Summary

Issues:
Interpretation of Section 47(ii) of the Income Tax Act, 1961 regarding taxability of amounts received on dissolution of a partnership firm.

Analysis:
The High Court of Bombay addressed a reference under Section 256(1) of the Income Tax Act, 1961, concerning the Assessment Year 1978-79. The main issue revolved around whether the Tribunal was correct in confirming the order of the Appellate Assistant Commissioner (AAC), which held that no capital gains accrued to the assessee-partners on the distribution of assets upon the dissolution of a partnership firm, citing Section 47(ii) of the Income Tax Act, 1961.

The facts leading to the case involved a partnership firm dissolution where the respondent received an amount, leading to a dispute on its taxability. The Income Tax Officer initially held the amount as chargeable to tax under capital gains, but the AAC disagreed, citing Section 47(ii) which exempts distribution of assets on dissolution from capital gains tax. The Income Tax Appellate Tribunal upheld the AAC's decision, leading to the Revenue's appeal.

The Court examined Section 47(ii) of the Income Tax Act, 1961, which excludes the taxation of capital gains on the distribution of assets upon the dissolution of a firm. The amicus curiae argued that such distribution does not constitute a transfer under the Act's definition. Reference was made to a prior Bombay High Court judgment, later reversed by the Supreme Court, emphasizing that amounts received on retirement or dissolution are not taxable as capital gains under Section 47(ii).

The Supreme Court's stance on the issue was highlighted, where it was clarified that the realization of a partner's interest on dissolution is not a transfer but a realization of a pre-existing right. The Court emphasized that a partner's interest in specific assets only arises upon dissolution, not during the partnership's existence.

Considering the Supreme Court's decisions and the specific provision of Section 47(ii) applicable during the relevant assessment year, the Court ruled in favor of the assessee, holding that the amount received on the dissolution of the partnership firm was not taxable as capital gains. The Court appreciated the assistance of the amicus curiae and disposed of the reference accordingly, with no order as to costs.