2024 (11) TMI 162 - AT - Income Tax

Transfer of capital assets owned by the appellant firm to its partners resulting into Capital Gains - transfer of immovable property by book entries - As per AO assessee firm had purchased the lands for business purpose and due to no business activity carried on in these lands, the same were transferred to the partners - as argued appellant firm has transferred only the amounts pertaining to the immovable properties sitting in the Balance Sheet of the assessee firm to its partners capital accounts without execution of any instruments in writing and hence there was no legal transfer of the impugned properties to the partners giving rise to the Capital gains HELD THAT - Perusal of the Balance Sheet of the assessee firm shows that the opening value of such land as on 01.04.2016 was shown as Rs. 2,28,29,180/- which was transferred to the two partners on the ground that the lands were registered in their name originally. It is an admitted fact that there was no revaluation of such lands and no excess amount other than the cost of the lands has been credited to the capital accounts of the partners which is otherwise eligible for withdrawal by the partners. It is also an admitted fact that the lands were transferred to the capital accounts of the partners at book value only and therefore, no capital gain has arisen. Since there was no revaluation of any asset and the assets were transferred at cost price to the partners, therefore, the decision of Mansukh Dyeing and Printing Mills 2022 (11) TMI 1180 - SUPREME COURT is not applicable to the facts of the present case. As assets in question were transferred to the two partners by passing a journal entry only. The Hon ble Bombay High Court in the case of CIT vs. M.J. Mehta and Bros. 1992 (9) TMI 11 - BOMBAY HIGH COURT has held that the transfer of immovable property belonging to the firm to its partners by means of book entry was not valid. Once the transfer is treated as not valid because of mere passing of book entry, therefore, in our opinion, there cannot be any capital gain. While the AO has brought the amount being transfer of land to Sameer A Pimple, however, the amount transferred to Shirish K Sankhe towards the land has not been brought to tax and no action either u/s 263 or 147 of the Act has been initiated. In other words, the Assessing Officer has partly accepted a transaction and partly rejected the same. Therefore, the CIT(A)/NFAC in our opinion is not justified in sustaining the addition made by the AO - Grounds raised by the assessee are accordingly allowed.

Summary

Issues Involved:

1. Validity of taxing the transfer of capital assets from the assessee firm to its partners as capital gains.
2. Applicability of Section 45(4) of the Income Tax Act, 1961.
3. Legality of transfer of immovable property by book entries without a formal instrument.
4. Consistency in the Assessing Officer's treatment of similar transactions.

Issue-wise Detailed Analysis:

1. Validity of Taxing the Transfer as Capital Gains:

The central issue in this case was whether the transfer of land from the assessee firm to its partners should be taxed as capital gains. The firm had transferred land valued at Rs. 62,70,540/- to its partners by making journal entries in the capital accounts, without executing any formal sale deed or agreement. The assessee argued that this did not constitute a legal transfer and hence should not attract capital gains tax. The CIT(A)/NFAC upheld the Assessing Officer's decision to tax this transfer, reasoning that the transfer of assets to partners, even through journal entries, amounted to a transfer under Section 2(47) of the Act, thus attracting capital gains tax.

2. Applicability of Section 45(4) of the Income Tax Act:

Section 45(4) was pivotal in this case, as it deals with the taxation of profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or otherwise. The CIT(A)/NFAC relied on this provision, interpreting the term "or otherwise" to include transfers made by a firm to its partners during its subsistence. The assessee contended that since the lands were transferred at book value without revaluation, no capital gains should arise. The Tribunal found merit in the assessee's argument, noting that the assets were transferred at cost price and not revalued, distinguishing the case from the Supreme Court's decision in CIT vs. Mansukh Dyeing and Printing Mills, where revaluation of assets was a key factor.

3. Legality of Transfer by Book Entries:

The legality of transferring immovable property through mere book entries was another critical issue. The assessee cited the Bombay High Court's decision in CIT vs. M.J. Mehta and Bros., which held that such transfers were not valid. The Tribunal agreed with this precedent, concluding that a mere journal entry without a formal instrument does not constitute a valid transfer of immovable property, and therefore, no capital gain should arise from such a transaction.

4. Consistency in the Assessing Officer's Treatment:

The Tribunal also noted an inconsistency in the Assessing Officer's approach. While the transfer of land to one partner was taxed, a similar transfer to another partner was not. No action was taken under Sections 263 or 147 of the Act to address this discrepancy. The Tribunal found this selective treatment unjustified and directed the deletion of the addition of Rs. 62,70,540/-.

Conclusion:

The Tribunal concluded that the CIT(A)/NFAC's decision to uphold the addition was not justified. It set aside the order, directing the Assessing Officer to delete the addition, thus allowing the appeal filed by the assessee. The judgment emphasized the importance of consistent application of tax laws and the necessity of formal instruments in the transfer of immovable property.