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TMI Blog2012 (10) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm, engaged in the business of builders and developers, filed its return of income on 22.07.2008 admitting total income at Rs. Nil. Initially the return was processed u/s. 143(1) of the Income-tax Act, 1961 (Act). Later on the case was selected for scrutiny. AO completed the assessment u/s. 143(3) of the Act determining the total income at Rs. 86,72,80,450/-. 2. During the assessment proceedings, AO noted that the original partnership deed was signed on 25.11.2005 and following were the partners :- SN. Name of the Partner % of profit/loss ratio 1. Sapphire Land Developers 60 2. Vision Finstock Pvt. Ltd. 20 3. Nisha Capital Services Pvt. Ltd. 10 4. Suraksha Developers Pvt. Ltd. 10 2.1. On 06.07.2007, Housing Development and Infrastructure Limited (HDIL) was introduced as a new partner and the profit sharing ratios of the partners was as under: SN. Name of the Partner % of profit/loss ratio 1. Sapphire Land Developers 10 2. Vision Finstock Pvt. Ltd. 20 3. Nisha Capital Services Pvt. Ltd. 10 4. Suraksha Developers Pvt. Ltd. 10 5. HDIL 50 2.2. AO further noticed that the assessee firm had purchased a piece of plot of land from Bhandary Metall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of land in question continued to be the stock-in-trade of the appellant-firm as on 31.03.2008 as per the balance sheet which was not disputed by the AO. With reference to the case of Gurunath Talkies (supra), FAA held that in that case new partners were admitted when old partners retired whereas in the case of the assessee-firm there was no retirement of any of the partners during the year under consideration, that above decision was not applicable to the case of the assessee-firm. He held that the case of Paru D Dave (110 ITD 410) was squarely applicable to the facts of the case under consideration, that mere admission of partners did not attract provisions of section 45(4) of the Act, that during the continuance of the partnership-firm rights of the partners were confined to obtaining the share of the profit and no partner could claim exclusive claim to any assets. He further held that even if there was liability u/s. 45(4) of the Act, same had to be considered in the next assessment year because the plot of land was revalued in the next year and retirement of three partners from the partnership firm also took place in the next year. He finally held that the assessee was not lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; Bench of Mumbai Tribunal. He also referred to the cases of Texspin Engg. And Manufacturing works Girish Textiles Industries (10 SOT 474), Prashant S Joshi (189 Taxman 1), J. Keemat Roy & Co (11 SOT 462), P N Panjawani. 5. We have heard the rival submissions and perused the matter placed before us by the representatives of both sides. Before deciding the issue, it will be useful to summarise the basic facts and chronology of the case: (i) Original Partnership (dt. 25-11-2005) consisted of 4 partners. (ii) On 06-07-2007, HDIL became a new partner with 50% profit sharing ratio. (iii) Assessee-firm and MIAL entered in to MOU on 15.10.2007. (iv) On 0-04-2008 plot of land was revalued. (v) Deed of retirement was signed on 27.05.2008 and on that date out of the five, three partners retired. 5.1 AO has made addition to the total income of the assessee-firm on the basis that on admission of the new partner i.e. HDIL, existing partners had transferred 50% to their interest to it and thus there was re-distribution of the assets of the firm. As per the AO on 27-05-2008, when interest of three partners were transferred to HDIL, there was again re-distribution of assets of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners do not entail any relinquishment of their rights in the partnership property. On introduction of new partners, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses, if any, of the partnership business. When any new partner is introduced into an existing partnership firm, the profit sharing ratios undergo a change, which does not amount to transfer as defined under s. 2(47) of the Act, as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership and thus on realignment of profit sharing ratio, on introduction of new partners, there is no relinquishment of any nonexistent share in the partnership assets as the assets remained with the firm. Such an arrangement is not covered by the provisions of s. 45(4) of the Act, which covers the case of dissolution of partnership firm. Accordingly, no capital gains arise on such relinquishment of share ratio in the partnership firm." 5.2 Though the AO has held that HDIL had treated the plot of land, owned by the firm, as its own while it had sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assess-firm and hence provisions of section 45(4) should not have been invoked. 5.3.2 Hon'ble Bombay High Court in the case of A.N. Naik (265 ITR 346) has explained the expression 'otherwise' used in Section 45 of the Act. It was held by Hon'ble Court that the expression otherwise has to be read with word 'transfer by way of distribution of capital asset' and not with the word 'dissolution'. Thus, from the above judgment also, it is clear that transfer of a capital asset is the pre-condition for invoking the provisions of Sec. 45(4) of the Act. Secondly, such a transfer should take place at the time of dissolution or other similar events such as retirement of the partners. Until such time, the shared rights of the partners become the exclusive right of any retiring partner and no occasion arises for to tax the same under the head 'capital gains' as envisaged by sec. 45(4) of the Act. As stated earlier, in the present case, there was no extinguishment of rights of any of the assets owned by the firm. In other words, continuing partners had not transferred any rights of the plot of the land in question in favour of the retiring partner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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