9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2022 (11) TMI 1180 - SC - Income TaxCapital gain - transfer - revaluation of assets - partnership firm - retirement of one partner and reconstitution of firm with new partners - applicability of Section 45(4) of the Income Tax Act as introduced by the Finance Act, 1987 - HELD THAT - The assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores on 01.01.1993 (relevant to A.Y. 1993-1994) and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets valued at Rs. 17.34 crores to the partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital ranging between Rs. 2.5 to 4.5 lakhs and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can be said to be transfer and which fall in the category of OTHERWISE and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable. For the purpose of interpretation of newly inserted Section 45(4), the decision of this Court in the case of Hind Construction Ltd. 1971 (9) TMI 16 - SUPREME COURT shall not be applicable and/or the same shall not be of any assistance to the assessee. As such, we are in complete agreement with the view taken by the Bombay High Court in the case of A.N. Naik Associates and Ors. 2003 (7) TMI 46 - BOMBAY HIGH COURT - We affirm the view taken by the Bombay High Court in the above decision. The impugned judgment and order passed by the High Court and that of the ITAT are unsustainable and the same deserves to be quashed and set aside and are accordingly quashed and set aside. The order passed by the AO is hereby restored.
Issues Involved:
1. Applicability of Section 45(4) of the Income Tax Act. 2. Interpretation of the term "otherwise" in Section 45(4). 3. Validity of revaluation of assets and crediting to partners' accounts as a "transfer" under Section 45(4). 4. Relevance of prior judgments in the context of amended Section 45(4). Issue-wise Analysis: 1. Applicability of Section 45(4) of the Income Tax Act: The core issue was whether the revaluation of assets and subsequent credit to partners' capital accounts constituted a "transfer" under Section 45(4). The Supreme Court analyzed the amendments introduced by the Finance Act, 1987, which inserted Section 45(4) to address the loophole that allowed avoidance of capital gains tax through asset revaluation and distribution without dissolution. 2. Interpretation of the term "otherwise" in Section 45(4): The term "otherwise" in Section 45(4) was pivotal. The Court agreed with the Bombay High Court's interpretation in A.N. Naik Associates, which held that "otherwise" includes not just dissolution but also scenarios where assets are transferred to partners during the firm's existence. This interpretation aimed to prevent tax avoidance by revaluing and distributing assets without formal dissolution. 3. Validity of Revaluation of Assets and Crediting to Partners' Accounts as a "Transfer" under Section 45(4): The Court examined the revaluation of assets from Rs. 21,13,225 to Rs. 17,56,00,000 and the crediting of this increased value to partners' accounts. It was held that this revaluation and crediting constituted a transfer under Section 45(4), as it effectively distributed the revalued assets among partners, making them liable for capital gains tax. The Court emphasized that the revalued amounts credited to partners' accounts were available for withdrawal, indicating a tangible benefit and thus a transfer. 4. Relevance of Prior Judgments in the Context of Amended Section 45(4): The Court distinguished the case of Hind Construction Ltd., which was decided before the insertion of Section 45(4). The Court noted that the earlier regime did not include the term "otherwise," and thus, the principles from Hind Construction Ltd. were not applicable to the amended provisions. The Court affirmed the Bombay High Court's decision in A.N. Naik Associates, which was consistent with the amended Section 45(4). Conclusion: The Supreme Court quashed the High Court and ITAT's judgments, which had deleted the additions made by the Assessing Officer towards short-term capital gains. The Court restored the Assessing Officer's order, holding that the revaluation of assets and crediting to partners' accounts constituted a transfer under Section 45(4), making it liable for capital gains tax. The appeals were allowed, and the Court emphasized the importance of interpreting "otherwise" to include transfers during the firm's existence to prevent tax avoidance.
|
