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TMI Blog2012 (5) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets as on 01.04.1995 and the opening value was at Rs.7/- crores. As on 31.03.1995, the firm consisted three partners each having equal share. The said partnership was reconstituted by a partnership deed dated 12.10.1995 admitting four more new partners. The four new partners contributed Rs.3.50 crores towards their share of capital. As a result of reconstitution of the firm, the assets hitherto owned by the firm of three partners were made over to the reconstituted firm, of seven partners. The result was that the interest of the three partners of the erstwhile firm which in the immovable property was reduced from 1/3rd to 1/6th or 16.67%. Therefore, the Assessing Authority held that there was a relinquishment of right and interest insofar as 50% of the interest of each of the partners in the erstwhile firm by means of assets made over to the reconstituted firm which amounted to transfer within the terms of Section 2(47) of the Income Tax Act, 1961 (for short hereinafter referred to as 'the Act'). The erstwhile three partners after reconstitution of the firm have withdrawn a sum of Rs. 1,16,66,666/- each on 14.10.1995. According to the Assessing Authority, this amount represented ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellate Authority set aside the order passed by the Assessing Authority taxing the assessee for the capital gain. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. The Tribunal after taking note of the relevant provisions of the Income Tax Act as well as the Indian Partnership Act, 1932 and the judgments of the Apex Court held that the judgments relied on by the revenue would apply to a case where the firm, the assessee is not genuine and the action taken by the firm should lead to a situation of tax evasion. In the instant case, it is nobody's case that the firm is not genuine. The firm even after the induction of new partners, continues to exist. Merely because, they did not carry on any business after induction of new partners is no ground to hold that it is not a genuine firm. Further held that the admission of a partner to the firm results in the reduction of the share of interest from the profit of the firm by virtue of reduction in the share of profit, but it is not the same as in transfer of property for valuable consideration in favour of the newly admitted partners. Therefore, in the instant case, it is not a case of transfer of property by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion of law "Whether the appellate authorities were right in holding that the admission of the new partners and assignment of right in the firm to the new partners out of the rights of the assessee for consideration does not amount to transfer in the hands of assessee under Sec. 2(47) of the Act and consequently not liable to tax under Sec.45 of the Act?" 6. The Assessing Authority relying on the judgment of the Apex Court in the case of Malbar Fisheries Co., (supra) has proceeded on the assumption that the partnership firm has no legal existence. The partnership property will vest in all the partners and in that sense, every partner has an interest in the property of the partnership. The partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law, the firm as such has no separate rights on its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is properties or assets in which all the partners have a joint or common interest. Therefore, he was of the view that the ownership of the properties vest in all the partners of the firm and no pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;][or] [(iva) the maturity or redemption of a zero coupon bond; or] [(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, or co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.- For the purpose of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA;]" 8. Section 14 of the Indian Partnership Act, 1932 deals with the property of the firm, which reads as under:- "14. The property of the firm - Subject to contract between the partners, the property of the firm includes all property and rights and interests in propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of sec.2(47) of the IT Act, 1961 There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution. In order to attract S.34(3)(b) it is necessary that the sale or transfer of asset must be by the assessee to a person. Dissolution of a firm must, in point of time, be anterior to the actual distribution, division or allotment of the assets that takes place after making accounts and discharging the debts and liabilities due by the Firm. Upon dissolution the firm ceases to exist; then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... What is the profit or gain which can be said to accrue or arise to the assessee when he makes over his personal asset to the partnership firm as his contribution to its capital? The consideration, as we have observed, is the right of a partner during the subsistence of the partnership to get his share of profits from time to time and after the dissolution of the partnership or with his retirement from the partnership to receive the value of the share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. When his personal asset merges into the capital of the partnership firm a corresponding credit entry is made in the partner's capital account in the books of the partnership firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or the partner retires. It evidences no debt due by the firm to the partner. Indeed, the capital represented by the notional entry to the credit of the partner's account may be completely wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1938)] (2)** ** ** [(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (4) The 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 other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was owned by the partnership firm. May be the erstwhile partners had l/3rd share each in all the partnership assets including this assets. On reconstitution of the firm, four more partners were inducted, who contributed Rs.2.50 crores as their capital contribution. Thus, the inducted partners also became partners in the firm and the firm continue to assets own, including .this, landed property. The erstwhile partners withdrew the money brought in by the incoming partners as drawings, They did not retire from the partnership firm. They continued to be the partners of the firm. However, their share got reduced. In other words, 50% of their share held before reconstitution became the share of the incoming partners. As the property was not owned by this erstwhile partners, it cannot be said they transferred 50% in favour of incoming partners and any amount represents the consideration received for such transfer and as such it is liable for payment of capital gains under Section 45 (1) of the Act. It is because they did not transfer the capital assets. Insofar as arguments with regard to the reconstitution, their share got reduced and the amount which was withdrawn and partnership rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case, as the assessee was not the owner of this capital asset, the question of relinquishing their interest in that asset or extinguishment of their right in their asset would not arise. The assets belong to the firm. The incoming partners paid money to the firm by way of their capital contribution. The firm as such has not relinquished its interest in favour of the incoming partners. On the contrary, by inducting them, they are also entitled to interest in the said assets and therefore, the said judgment has no application to the facts of this case. 20. Further, reliance was placed on the judgment of this Court in the case of Commissioner of Income-tax v. Gurunath Talkies [2010] 328 ITR 59, where it was held as follows: - "Section 47 of the Income-tax Act, 1961, was introduced to take out certain transactions which otherwise are transfers of capital assets and otherwise taxable under section 45, from being taxed. On the reintroduction of sub-sections (3) and (4) by the Finance Act, 1987 in section 45 clause (ii) of section 47 has been expressly omitted removing the protective umbrella. The legislative intent is quite clear and this takes care of any situation where in effect t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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