2012 (9) TMI 12 - HC - Income Tax

Non admission of capital gain on transfer of right and title - Settlement of accounts - dissolution of partnership firm - reopening of assessment - Held that - As decided in Additional C.I.T. Vs. Mohanbhai Pamabhai 1987 (2) TMI 59 - SUPREME COURT when a partner retires from a partnership firm taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved. As in the present case when the appellant was paid Rs.15.00 lakhs by Y.Kalyana Sundaram in full and final settlement towards his 50% share on the dissolution of the firm, there was no transfer as understood in law and consequently there cannot be tax on alleged capital gain - It is a recognized method of making up the accounts of the dissolved firm and the receipt of money by him is nothing but a receipt of his share in the distributed asset of the firm. The appellant received the money value of his share in the assets of the firm. He did not agree to sell, exchange or transfer his share in the assets of the firm. Payment of the amount agreed to be paid to the appellant under the compromise was not in consequence of any share, exchange or transfer of assets to Y.Kalyana Sundaram. As up to the assessment year 1987-1988, Section 47 (ii) excluded these transactions and from assessment year 1988-89, in the case of dissolution of a firm, only the firm is taxable on capital gains on dissolution under Section 45 (4) of the Income Tax Act, 1961 and not the partner - in favour of assessee.

Issues Involved:
1. Validity of the reassessment proceedings under Section 148 of the Income Tax Act, 1961.
2. Determination of whether the payment received by the appellant constituted a "transfer" liable to capital gains tax.
3. Applicability of Section 45(4) and Section 47(ii) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Validity of the Reassessment Proceedings under Section 148:
The appellant filed his return for the assessment year 1989-90 on 08-04-1991, declaring a total income of Rs.50,760/-. The respondent issued a notice under Section 148 on 27-12-1993, believing that the appellant had sold his 50% share in Theatre Radha for Rs.15.00 lakhs and had not admitted any capital gain from this transaction. The appellant responded, stating that the return filed earlier should be treated as the return in response to the notice. The reassessment order dated 29-03-1994 concluded that the appellant had indeed sold an asset and computed the capital gains accordingly.

2. Determination of Whether the Payment Received Constituted a "Transfer" Liable to Capital Gains Tax:
The appellant contended that the Rs.15.00 lakhs received was towards his share in the dissolved partnership and not a sale or transfer liable to capital gains tax. He cited several Supreme Court decisions, including C.I.T. Vs. Dewas Cine Corporation and C.I.T. Vs. Bankey Lal Vaidya, to argue that the distribution of assets upon dissolution does not constitute a "transfer" for tax purposes. The Tribunal, however, dismissed these contentions and upheld the reassessment order.

3. Applicability of Section 45(4) and Section 47(ii) of the Income Tax Act, 1961:
The appellant argued that up to the assessment year 1987-1988, Section 47(ii) excluded such transactions from capital gains tax. From the assessment year 1988-89, Section 45(4) made only the firm liable for capital gains tax upon dissolution, not the individual partners. The Tribunal did not address these contentions, leading to the appeal under Section 260-A.

Judgment Analysis:

Reassessment Proceedings:
The High Court noted that the Tribunal failed to consider the appellant's written submissions and the cited case law. The reassessment was based on the belief that the payment constituted a sale, which the appellant disputed.

Nature of Payment as "Transfer":
The High Court cited Supreme Court rulings, including C.I.T. Vs. Dewas Cine Corporation and C.I.T. Vs. Bankey Lal Vaidya, which held that the distribution of assets upon dissolution does not constitute a "transfer" liable to capital gains tax. The Court emphasized that the appellant received the payment as a settlement of his share in the dissolved firm, not as a sale or transfer of assets.

Applicability of Section 45(4) and Section 47(ii):
The High Court agreed with the appellant that Section 47(ii) excluded such transactions from capital gains tax up to the assessment year 1987-1988. From the assessment year 1988-89, Section 45(4) made only the firm liable for capital gains tax upon dissolution. The Court noted that the legislature did not amend the law to make partners liable, even after the introduction of Section 45(4).

Conclusion:
The High Court allowed the appeal, setting aside the order of the I.T.A.T. and confirming that the payment received by the appellant did not constitute a "transfer" liable to capital gains tax. The Court held that the amount received was towards the appellant's share in the dissolved firm and not a sale or transfer of assets. The appeal was allowed with no costs.

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