2012 (10) TMI 579 - AT - Income Tax

Addition of capital gain u/s. 45(4) - CIT(A) directed to delete the addition - Held that - Allocation of assets of the firm to the retiring partners is the basis for invocation of provisions of Section 45(4). In the case under consideration, neither there was any dissolution nor other event took place that had an effect of allocation of exclusive interest in any capital asset to the retiring partners. In these circumstances, FAA was justified in holding that conditions of Section 45(4) were not fulfilled as during the relevant AY there was only admission of HDIL as new partner in the firm, that there was neither retirement nor distribution of assets, nor revaluation of plot of land during the assessment year under consideration. Retiring partners had relinquished their rights in the assets of the firm and in lieu of that firm had paid the retiring partners money lying in their capital account. Obviously, assessee-firm had not transferred any right in capital asset to the retiring partners rather it is the retiring partners who have transferred the rights in capital assets in favour of the continuing partners. So, even if capital gain has to be taxed it has to be in the hands of the retiring partners not in the case of the assessee-firm. Thus there was no transfer of a capital asset by the assessee-firm by way of distribution or otherwise in the AY under consideration . From the very beginning of the partnership the plot of land in question was treated stock in trade by the assessee firm. Even on 31.03.2008 it was shown as current asset (i.e. W-I-P) in the balance sheet. AO has nowhere rebutted/ doubted this factual position, therefore, no reason to disagree with the logical findings given by the FAA - in favour of assessee.

Issues Involved:
1. Applicability of Section 45(4) of the Income Tax Act, 1961.
2. Transfer of assets within the meaning of Section 45(5) read with Section 2(47) of the Income Tax Act, 1961.
3. Revaluation of assets and its tax implications.
4. Distribution of capital assets on admission and retirement of partners.

Detailed Analysis:

1. Applicability of Section 45(4) of the Income Tax Act, 1961:
The primary issue was whether the admission of Housing Development and Infrastructure Limited (HDIL) as a new partner with a 50% profit-sharing ratio constituted a "transfer" under Section 45(4) of the Income Tax Act, 1961. The Assessing Officer (AO) argued that the admission of HDIL resulted in a transfer of 50% of the existing partners' interest, thereby triggering capital gains tax under Section 45(4). The First Appellate Authority (FAA) disagreed, stating that mere admission of a partner does not amount to a transfer of assets and thus does not attract Section 45(4). The Tribunal upheld the FAA's view, emphasizing that there was no distribution of assets or revaluation during the assessment year in question.

2. Transfer of Assets within the Meaning of Section 45(5) read with Section 2(47) of the Income Tax Act, 1961:
The AO contended that the firm had transferred 50% of the plot's value to HDIL, making it liable for capital gains tax. The FAA countered that there was no retirement or distribution of assets during the assessment year, and the plot remained the firm's stock-in-trade. The Tribunal agreed, noting that the plot was consistently shown as stock-in-trade and not as a capital asset. The Tribunal concluded that no capital asset was transferred, and thus, the provisions of Section 45(4) were not applicable.

3. Revaluation of Assets and Its Tax Implications:
The AO argued that the revaluation of the plot of land on 01.04.2008 and the subsequent retirement of three partners indicated a transfer of assets. However, the FAA and the Tribunal noted that the revaluation occurred in the next assessment year (2009-10) and not in the year under consideration (2008-09). The Tribunal reiterated that revaluation alone does not result in taxable income unless the asset is actually transferred. Therefore, the revaluation did not trigger capital gains tax under Section 45(4).

4. Distribution of Capital Assets on Admission and Retirement of Partners:
The AO's position was that the admission of HDIL and the retirement of three partners constituted a redistribution of assets, invoking Section 45(4). The FAA and the Tribunal disagreed, stating that the partnership deed and retirement deed did not indicate any distribution of assets. The Tribunal emphasized that during the continuation of the partnership, partners do not have separate rights over the firm's assets. The Tribunal cited the case of Paru D Dave, which held that mere admission of new partners does not amount to a transfer of assets under Section 45(4).

Conclusion:
The Tribunal dismissed the appeal filed by the AO, upholding the FAA's order. The Tribunal concluded that there was no transfer of capital assets by the firm during the assessment year in question, and thus, the provisions of Section 45(4) were not applicable. The Tribunal emphasized that the revaluation of assets and the admission or retirement of partners did not constitute a transfer of assets within the meaning of Section 45(4) read with Section 2(47) of the Income Tax Act, 1961.

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