2015 (9) TMI 321 - AT - Income Tax

Validity of the re-assessment proceedings u/s.147 - Commissioner of Income Tax (Appeals) sustaining the order of the Assessing Officer who had made addition by invoking the provisions of section 45(4) and treating the settlement of an asset in favour of the retiring partner as capital gain - CIT(A) confirmed re-assessment order and additions thereon - Held that - It is pertinent to mention here that the transfer of the asset is by the firm which is a legal entity to the retiring partner another distinct legal entity being an individual . Therefore, it is crystal clear that capital gain will arise in the hands of the transferor viz. the assessee firm and not the transferee viz. the retiring partner Mrs. Aruna Visvewar. Section-45(4) of the Act mandates the assessee firm to be liable for capital gain tax arising out of the transfer of its asset to the retiring partner even in the circumstance when the partnership is reconstituted on retirement of a partner. Further, the loan taken by the assessee firm for purchase of the asset which is transferred cannot be factored because the loan does not alter the cost of the assets purchased or the value of the asset transferred to the transferee. Therefore we do not have any hesitation to confirm the order of the Ld. CIT (A) as well as the order of the Ld. Assessing Officer. - Decided against assessee.

Summary

Issues Involved:
1. Validity of the re-assessment proceedings under Section 147 of the Income Tax Act.
2. Addition made by invoking the provisions of Section 45(4) of the Income Tax Act and treating the settlement of an asset in favor of the retiring partner as capital gain.
3. Levy of interest under Sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Validity of the Re-assessment Proceedings under Section 147:
The Assessee did not advance any argument to substantiate the claim that the reopening of the assessment was invalid. Consequently, this issue was dismissed as not pressed.

2. Addition Made by Invoking Provisions of Section 45(4):
The primary issue was whether the transfer of immovable property to the retiring partner should be treated as capital gain under Section 45(4) of the Income Tax Act. The Assessing Officer (AO) determined a capital gain of Rs. 6,16,67,531 by computing the difference between the value of the asset transferred (Rs. 9,04,10,000) and its indexed cost of acquisition (Rs. 2,87,42,469).

The Assessee argued that:
- The term "or otherwise" in Section 45(4) should not apply unless there is a transfer of a capital asset by way of distribution upon the dissolution of a firm.
- There was no dissolution or cessation of business; the remaining partners continued the business.
- Cited various case laws to support that the transfer did not amount to a capital gain.

The AO rejected these arguments, stating that:
- The cited case laws were irrelevant or misquoted.
- The transfer of assets to the retiring partner constituted a distribution of capital assets, thus falling under Section 45(4).
- The deemed value of the asset was based on the partition deed, and any discrepancies in the fair market value would be addressed upon receiving further information.

The CIT(A) upheld the AO's decision, referencing the Bombay High Court's ruling in CIT Vs. A. N. Naik Associates, which clarified that the term "otherwise" includes the transfer of assets to a retiring partner. The CIT(A) also rejected the Assessee's argument about the outstanding loan from Federal Bank, stating that liabilities do not alter the cost of the asset for capital gain computation.

3. Levy of Interest under Sections 234B and 234C:
The Assessee did not argue against the levy of interest under Sections 234B and 234C. Therefore, this issue was also dismissed as consequential.

Conclusion:
The Tribunal concluded that the transfer of the asset to the retiring partner was liable to be taxed under Section 45(4) of the Income Tax Act. The presence of a loan did not affect the computation of capital gains. The appeal by the Assessee was dismissed, and the orders of the CIT(A) and AO were upheld. The judgment emphasized that the provisions of Section 45(4) apply even when a firm is reconstituted and assets are transferred to a retiring partner, ensuring the intent of the amendment to remove loopholes in capital gains taxation.