2019 (4) TMI 960 - AT - Income Tax

Taxability of capital gain in firm - revaluation of asset being land held by the partnership firm - Transfer of capital asset on dissolution of firm or otherwise u/s 45(4) r.w.s. 2(14) - money equivalent as paid by the partnership firm to the retiring partner - difference of opinion by members of tribunal - reference to Third Member by the Hon'ble President u/s.255(4) - HELD THAT - In agreement with the view of the Ld.CIT(A) that money equivalent to enhanced portion of the asset revalued and credited in capital account of the partner is not a capital asset and distribution of such money equivalent to the partners on retirement did not constitute transfer of capital asset on dissolution of the firm or otherwise within the meaning of section 45(4) r.w.s. 2(14), there was difference of opinion between my Learned Brother and myself and the point of difference was referred to Third Member by the Hon'ble President u/s.255(4) of the Act. Hon'ble Third Member 2019 (1) TMI 1551 - ITAT MUMBAI answered both the questions in the negative and in favour of the assessee agreeing with the view of the Judicial Member. Since the Majority view of the Members is against the Revenue, the grounds raised by the Revenue in both the appeals are decided against the Revenue in conformity with the order passed by the Third Member.

Summary

Issues:
1. Whether the money equivalent to the enhanced portion of the asset revalued constitutes a capital asset for the purpose of section 45(4) r.w.s. 2(14) of the Income Tax Act.
2. Whether there is a transfer of capital asset on dissolution of a firm or "otherwise" within the meaning of section 45(4) r.w.s. 2(14) when the money equivalent is paid by the partnership firm to the retiring partner.

Detailed Analysis:
Issue 1: The first issue revolves around determining if the money equivalent to the enhanced portion of the asset revalued constitutes a capital asset for tax purposes. The Judicial Member and the Accountant Member had differing views on this matter, leading to a reference to the Third Member. The Hon'ble Third Member, in a detailed order dated 10.01.2019, answered this question in the negative and in favor of the assessee. The Third Member's decision aligned with the view of the Judicial Member, concluding that the money equivalent did not give rise to Capital Gain under section 45(4) r.w.s. Section 2(14) of the Income Tax Act.

Issue 2: The second issue pertains to whether there is a transfer of capital asset on dissolution of a firm or "otherwise" when the money equivalent is paid by the partnership firm to the retiring partner. The disagreement between the Judicial Member and the Accountant Member led to the reference to the Third Member. The Third Member's decision, as mentioned earlier, was against the Revenue, deciding that there was no transfer of capital asset in this scenario. Consequently, the grounds raised by the Revenue were decided against them, and both the appeals of the Revenue and the Assessee were dismissed.

Additional Points: The judgment also addressed other grounds raised by the parties. The challenge to the jurisdiction of the Assessing Officer in passing the Assessment Order was withdrawn by the assessee and dismissed as withdrawn. Furthermore, the ground raised on the reopening of the assessment proceedings under section 147 of the Act was rejected by concurrent orders for the reasons explained therein. Therefore, the grounds raised by the assessee in its appeals were also rejected. The final decision was pronounced in the open court on 3rd April 2019, with both the Revenue's and the Assessee's appeals being dismissed.