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TMI Blog2012 (7) TMI 652X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is directed against the order of the CIT(A)-IV, Hyderabad dated 31.1.2012 for assessment year 2008-09. 2. The assessee raised the following grounds of appeal: 1. The order of the learned CIT(A) is not only erroneous both on facts and in law but is perverse. 2. The learned CIT(A) erred in holding that there is a transfer of capital asset when the assessee retired from partnership and thereby erred in holding that the amount received of ₹ 8,22,17,952 as capital gains. 3. The learned CIT(A) failed to appreciate the fact that the decisions relied upon by him in the case of Mrs. Arthi Shenoy reported in 75 ITD 100 of Special Bench ITAT and also that of 257 ITR 449 are in favour of assessee and thereby erred in holding that there is a transfer even on retirement and further that as per the decision in the case of Bishanlal reported in 257 ITR 449 the capital gains is assessable in the hands of the firm and not in the hands of partner and thereby erred in confirming the assessment of capital gains. 4. The learned CIT(A) erred in not referring to the decision of A.P. High Court in the case of Sudex reported in 290 ITR 511 and relying on the decision of Mumbai H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 8,22,17,952 as long term capital gain. Vide reply dated 16.12.2010, the assessee submitted before him that sec. 45 of the Act does not provide to treat the amount received on retirement from partnership as an amount taxable as 'capital gains'. However, the Assessing Officer felt that the above contention of the assessee was not correct, as sec. 45(1) of the Act provides that any profits or gains arising from the transfer of a capital asset effected in a previous year shall be chargeable to Income tax under the head 'capital gains' in the year in which the transfer takes place. He reiterated that the right in a firm is capital asset within the meaning of sec. 2(14) of the Act and extinguishment of such right therein is a transfer as per sec. 2(47) of the I T Act. He opined that goodwill in the instant case was a capital asset within the meaning of sec. 2(14), which had been relinquished to the firm or other partner amounting to transfer covered by both (i) and (ii) of sec. 2(47). 4. The Assessing Officer further opined that sec. 45(3) of the A also provides that gains arising from the transfer of a capital asset by person to a firm in which he is a partner, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in the case of Shevanti Bhai C. Mehta vs. ITO (83 TTJ 542) (Pune) wherein held that interest in the firm is an asset, as any other asset, as recognised by the Act and transfer thereof within the meaning of sec. 2(47) of the Act gives rise to capital gain exigible to tax. The Hon ble Tribunal observed that in a situation where a partner receives for giving up his right in the firm, a price that is equated with reference to the market value of the assets of the firm, his right and interest had been valued at the market price and when the price exceeds the cost, sec. 45 comes into operation to treat the difference between the market price and the cost, being gains on account of transfer of capital asset, leading to levy of tax on capital gains. They held that since in the said case the outgoing partners had surrendered their rights and interest in the firm in consideration of the amount paid to them by the other parties who took over the business in an auction in accordance with the terms of the partnership deed, there was a transfer of capital asset and the resultant capital gain was liable to tax as long term capital gains in the hands of such partner. 9. The Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the Assessing Officer did not examine whether the goodwill could have been held as belonging to the partner at all. Referring to sec. 14 of the Partnership Act, he submitted that the goodwill belongs to the partnership firm and not to the partners. He averred that what the assessee got was only her share in such goodwill at the time of retirement, which had been valued and her share was credited to her capital account as per the provisions of Partnership Act, which she withdrew at the time of retirement. 14. The AR further argued that if the amount is to be considered as receipt on transfer of goodwill, then all the other partners also had received goodwill, as their capital accounts had been credited with their shares therein. However, all of them did not retire. The representative contended that if the amount so credited is considered as received on transfer of goodwill and how the same would be taxed in the hands of the partners retiring in any subsequent year. He, therefore, claimed that. it would not be correct to tax the amounts as capital gains only in the hands of the retiring partners. 15. The counsel for the assessee further submitted that in fact the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of Mrs. Artee Shenoy vs. DCIT, 75 ITD 100. He also relied on the judgement of Bombay High Court in the case of CIT v. A.N. Naik Associates Anr (265 ITR 346) wherein it was held that Held, that the documents would clearly show that before the continuing partners retired there was an induction of a new partner in the morning of the said day and outgoing partners retired at the closing of business hours on that day. In other words, the partnership subsisted but with two partners and the business also continued. That would, therefore, not amount to dissolution of the firm. There was no denial that there were family disputes amongst the partners and the genesis of the family arrangement was not disputed. The arrangement by way of division of the assets and business interests was clearly defined and was not an isolated transaction in respect of the firms. The finding by the Income Tax Appellate Tribunal that the deed of reconstitution by inducting a partners in the assessee firm was not a device to avoid tax had to be upheld. However, the transfer of assets of the partnership to the retiring partiers would amount to the transfer of the capital assets in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation : For the purposes of sub-cls. (v) and (vi), immovable property shall have the same meaning as in cl. (d) of s. 269UA. 21. Capital asset has been defined in s. 2(14) of the Act, as meaning property of any kind held by the assessee, whether or not connected with his business or profession. The above exhaustive definition is subject to the following exclusions like stock-in-trade, consumable stores or raw material held for the purpose of business or profession, personal effects, agricultural land in India, certain gold bonds, special bearer bonds and gold deposit bonds. 22. The share or interest of a partner in the partnership and its assets would be property and, therefore, a capital asset within the meaning of the aforesaid definition. To this extent, there can be no doubt. The next question is as to whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under s. 45 of the Act. 23. A look at how formation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of s. 48 of the Act. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in s. 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. In coming to the above conclusion the Hon ble Court relied on the decision of the Hon ble Supreme Court in Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300. The Hon ble Supreme Court in the said decision explained the nature of partnership and the right of the partners over the assets of the partnership as follows (p. 1303 of AIR) : .....whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a capital asset by a partner to a firm are chargeable as the partner s income of the previous year in which the transfer took place and the amount recorded in the books of account of the firm, shall be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset. 27. In the case of dissolution where partners are allotted capital assets of the firm, it was held that there was no transfer. In Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC), the Hon ble Supreme Court has explained the nature of distribution of assets of a partnership on dissolution amongst its partners and as to whether such distribution of assets would constitute transfer within the meaning of s. 2(47) of the IT Act as follows : A 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 of its own in the partnership assets and when one talks of the firm s property or firm s assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , body of individuals or other association of persons. Sec. 47 of the Act lays down which are the transactions not regarded as transfer for the purpose of s. 45 of the Act. 30. The Finance Act, 1987, w.e.f. 1st April, 1988, omitted this clause, the effect of which was that distribution of capital assets on the dissolution of a firm would w.e.f. 1st April, 1988 be regarded as transfer . Therefore, instead of amending s. 2(47), the amendment was carried out by the Finance Act, 1987, by omitting s. 47(ii), the result of which was that distribution of capital assets on the dissolution of a firm was regarded as transfer . The effect was that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm s income in the previous year in which the transfer took place and for the purposes of computation of capital gains, the fair market value of the asset on the date of transfer was deemed to be the full value of the consideration received or accruing as a result of the transfer. 31. Thus Parliament brought into the tax net transactions whereby assets were brought into a firm or taken out of the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h otherwise was not subject to taxation. If the language of sub-s. (4) is construed to mean that the expression otherwise has to partake of the nature of dissolution or deemed dissolution, then the very object of the amendment could be defeated by the partners by distributing the assets to some partners who may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the amending Act. The Court noticed that the position prior to the amendment by introduction of s. 45(4) by the Finance Act, 1987, was that there was no transfer of assets by the firm to the partners on dissolution or transfer of assets to the retiring partner on retirement. The effect was that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm s income in the previous year in which the transfer took place and for the purposes of computation of capital gains, the fair market value of the asset on the date of transfer would be deemed to be the full value of the consideration received or accrued as a result of the transfer. Therefore, if the object of the Act is seen and the mischief it seek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tnership assets which remain after satisfying the debts and liabilities of the partnership. When therefore a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed in the relevant provisions of the partnership law and it is this, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partner. The transfer of a capital asset in order to attract capital gains tax must be one as a result of which consideration is received by the assessee or accrues to the assessee. When a partner retires from a partnership what he receives is his share in the partnership which is worked out and realized and does not repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest by a deed attracting stamp duty while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of s. 2(47) of the Act. 40. The above decision was followed by the Hon ble Bombay High Court in the other two cases of N.A. Modi (supra) and H.R. Aslot (supra). The Pune Bench of the Tribunal in the case of Shevantibhai C. Mehta vs. ITO (2004) 83 TTJ (Pune) 542 had considered the aforesaid decision of Hon ble Bombay High Court and other decisions relied upon by learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d dt. 19th Jan., 1962, the assessee retired from the firm w.e.f. 31st Aug., 1961, and the remaining partners continued to carry on the business of the firm. On the occasion of such retirement, the assessee was paid : (1) ₹ 1 lakh as his share of profits of the firm for the broken period ended 31st Aug., 1961, (2) ₹ 50,000 as his share of the value of the goodwill, and (3) ₹ 4,77,941 as his share in the remaining assets of the firm. 43. The issue relevant for our purpose is the liability of the sum of Rs. ,77,941 or any part thereof to capital gains tax. The Hon ble Court took up for consideration as to what is the real nature of the transaction when a partner retires from the partnership. Does the transaction amount to any relinquishment of his share or interest in the partnership in favour of the continuing partners, or does it stand on the same footing as an adjustment of his rights that results upon dissolution of the partnership. On behalf of the assessee it was contended that retirement of a partner and quantification of his share and payment thereof to him stands on the same footing as adjustment of rights that results upon dissolution of a firm and, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f them from all covenants, agreements, matters and things in the here before recited partnership dated, the 8th Jan., 1951, and the supplementary agreement dt. 24th Aug., 1957, contained and in further pursuance of the said agreement and in consideration of the premises aforesaid and without making any further payment of any amount to him the retiring partner as beneficial owner doth hereby assign and release upto the continuing partners and each of them all that his right, title, interest and undivided half share in the said partnership firm and all his share and interest on the said pieces of land-hereditaments and premises, structures and buildings standing thereon..... and machinery, plant, equipment, etc...To hold the same unto the continuing partners absolutely in equal shares as tenants-in-common..... And this indenture further witnesseth that in pursuance of the said agreement and in consideration of the premises aforesaid the retiring partner doth hereby release, grant, convey and transfer and assure all that his individual half share in all the several pieces or parcels of land-hereditaments ... to have and to hold the said undivided half share and the premises hereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of the continuing partners. Therefore, we are of the view that the assessee satisfies the parameters laid down by the Bombay High Court in the cases referred to above and, therefore, there was a transfer of interest of the retiring partner over the assets of the partnership firm on her retirement and, therefore, there was a liability to tax on account of capital gain. 50. The next ground for our consideration is with regard to nonconsidering the ground relating to set off of short term capital loss arising from investment made by the assessee in SBI Mutual Fund. 51. Brief facts of the issue are that during the scrutiny proceedings, the assessee had filed a letter before the Assessing Officer claiming that she had incurred short term capital loss of ₹ 97,07,329 from her investments in SBI Mutual Funds during the year. Letters from SBI Fund Management P. Ltd. in this regard were also filed. Though the Assessing Officer noted that the claim was in order as per section 74 of the Act, he noted that such loss had not been claimed in the return of income. Accordingly, he held that in view of the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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