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2019 (9) TMI 1271 - HC - Income TaxCapital gain u/s 45(4) in partnership firm on retirement of a partner - dissolution/reconstitution of partnership firm - valuation of the assets and liabilities of the firm and allottment of assets among the retiring and continuing partners took place - reconstitution of a Partnership Firm, the asset transferred to the outgoing partner or amount paid to him attracts capital gains tax liability in the hands of the assessee/Partnership Firm or not in terms of Section 45(4) - HELD THAT - As M/S. NATIONAL COMPANY VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX BUSINESS CIRCLE I I/C CHENNAI 2019 (5) TMI 354 - MADRAS HIGH COURT there was only a reconstitution of the partnership firm by retirement of two partners and admission of another partner. The partnership firm continued. It must also be further noted that the assets of the firm originally belonged to the father of the retiring / continuing partners and there was only a division of the assets on retirement in accordance with their entitlement on the shares in the partnership. As pointed out earlier, the National Company was originally a sole proprietorship concern started by N.Munuswamy Mudaliar. It was in the business of construction and assets had been acquired even at that particular point of time. The two daughters and two sons-in-laws of N.Munuswamy Mudaliar were subsequently admitted as partners and on division of the assets, it can also be arguably pointed out that one daughter and one son-in-law were allotted a share which they were otherwise legally entitled to out of the holdings N.Munuswamy Mudaliar. We hold that the provisions of Section 45(4) would not be attracted on the retirement of the two partners and consequential allotment of their share in the assets in the Assessee Firm. We therefore answer the substantial question of law in favour of the Assessee and against the Revenue.
Issues Involved:
1. Whether the transfer within the meaning of clause (4) of Section 45 of the Income Tax Act, 1961 occurred. 2. Whether the absence of an amendment to Section 2(47) affects the interpretation of the transfer under Section 45(4). 3. The correctness of the addition of interest under Section 234B of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Transfer within the meaning of clause (4) of Section 45 of the Income Tax Act, 1961 - The primary question was whether the reconstitution of a partnership firm, where assets were transferred to a retiring partner, constitutes a transfer under Section 45(4) of the Income Tax Act, 1961. - The court referenced a previous judgment in "M/s. National Company Vs. The Assistant Commissioner of Income Tax," where it was held that on the retirement of a partner, the partner's interest in the firm is determined and allotted, which does not amount to a transfer of interest in the partnership assets to the continuing partners. - The court reiterated that the transfer of a capital asset must involve consideration received by the assessee. When a partner retires, the amount received is their share in the partnership, not a consideration for the transfer of interest. Issue 2: Absence of Amendment to Section 2(47) - The court examined whether the lack of amendment to Section 2(47) impacts the interpretation of Section 45(4). - It was noted that Section 45(4) includes the term "otherwise," which should be read with "transfer of capital assets" by way of distribution of capital assets. This interpretation was supported by the judgment in "A.N.Naik Associates," which held that the term "otherwise" includes transfers during the existence of the firm, not just on dissolution. - The court acknowledged conflicting views, such as the Bombay High Court's decision in "Prashant S. Joshi," which held that retirement does not constitute a transfer under Section 45(4). However, the court favored the interpretation that includes transfers to retiring partners within the scope of Section 45(4). Issue 3: Addition of Interest under Section 234B - The court did not provide a detailed analysis of this issue, as the primary focus was on the interpretation of Section 45(4). - However, it was implied that the addition of interest under Section 234B would follow the outcome of the primary issues regarding the transfer and capital gains tax liability. Conclusion: - The court concluded that the provisions of Section 45(4) apply to the reconstitution of a partnership firm and the transfer of assets to a retiring partner. - The appeal was allowed in favor of the assessee, following the precedent set in the "National Company" case, and the questions of law were answered in favor of the assessee and against the Revenue. - The judgment emphasized that the transfer of assets to a retiring partner constitutes a transfer under Section 45(4), attracting capital gains tax liability.
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