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TMI Blog2013 (11) TMI 731X X X X Extracts X X X X X X X X Extracts X X X X ..... is no distribution of assets and hence, one of the condition precedent for invoking Section 45(4) does not exist and hence Section 45(4) is not attracted to the facts of this case - When a retiring partner takes only money towards the value of his share and when there is no distribution of capital asset/assets among the partners there is no transfer of a capital asset and consequently no profits or gains is payable under Section 45(4) of the Income Tax Act – Decided against the Revenue. - I.T.A.No.1414/2006 - - - Dated:- 16-9-2013 - N Kumar, S Abdul Nazeer And V Suri Appa Rao, JJ. For the Appellant : Sri K V Aravind, Adv For the Respondent : Sri G Sarangan, Sr Counsel for Sri K S Ramabadran, Adv JUDGEMENT:- PER : N Kumar A Division Bench of this Court felt that there is a conflict between the proposition of law laid down in the case of Commissioner of Income Tax Vs. Mangalore Ganesh Beedi Works reported in (2004) 265 ITR 658 and in the case of Commissioner of Income Tax And Another Vs. Gurunath Talkies reported in (2010) 328 ITR 59. In order to resolve the said conflict, this matter was referred to the Full Bench by order dated 31.07.2012. On such reference, H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount to the retiring partners standing on credit side in respect of capital accounts. There is no transfer of asset and therefore, they are not liable to pay any capital gains tax. 6. The Assessing Officer held that the land was purchased when the firm was having two partners, namely, Shri Anurag Jan and Shri L.P.Jain. The firm had done no business all through its existence. The receipt of rents and commission for assessment year 1994-95 were found as bogus. The immovable property was not utilized to earn paltry sums during the existence of the firm. The new partners were introduced and the old partners retired. This is a device adopted to transfer the immovable property. The incoming partners tried to evade capital gains tax as well as stamp duty and therefore, he held the capital gains tax is liable to be paid by the firm. In appeal, the appellate authority has affirmed the said order. The appellate authority held that the reconstitution of firm has taken place on 01.04.1994 i.e., nearly one year after the members of the Khemka family were introduced as partners. Therefore, it accepted the genuineness of the old firm as well as the new firm but it held it is a colourable devic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which results in capital gain as such they are liable to tax under Section 45(4) of the Act. The transaction falls within the ambit of the word otherwise in Section 45(4) of the Act. Even otherwise it is a devise adopted by the partners to evade payment of profits or gains and taxable. 9. Per contra, the learned counsel for the assessee contended that in order to attract Section 45(4), the condition precedent is that there should be a dissolution of the firm and distribution of capital asset in which the outgoing partners should acquire interest in the capital asset and consequently the firm should cease to have any interest in the capital asset so transferred. The profit or gain arising from such transfer of a capital asset is taxable, under Section 45(4) of the Act, which is not the case on hand. 10. It is in this background we have to notice the conflicting judgments of this Court, which resulted in this reference and resolve the conflict. CONFLICTING JUDGMENTS 11. Before the Division Bench reliance was placed on the judgment of this Court in the case of Commissioner of Income Tax and Another Vs. Gurunath Talkies reported in (2010) 328 ITR 59. This Court in paras 24 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that premise we do not think we should keep this appeal pending without answering the questions raised in this appeal as the law which governs the field has been applied and questions are answered herein. There is no question of postponing the decision in this appeal any further. 12. Then the Division Bench noticed the judgment of this Court in the case of Commissioner of Income Tax Vs. Mangalore Ganesh Beedi Works reported in (2004) 265 ITR 658 held at para-20 as under: 20. In view of the above statutory provisions and the law laid down by the Supreme Court it appears reasonable to hold that though the firm stood dissolved on 5th December 1987, for a limited purpose of winding up of the affairs of the firm, it continued till its assets and business were sold as a going concern on 20th November 1994. Therefore, the firm continued to hold the properties as owner till 20th November 1994. For the foregoing reasons, we hold that there was no distribution of capital assets of the firm despite its dissolution and, therefore, the firm could not have been made liable for paying capital gains tax in terms of s.45(4) of the Act. 13. In Gurunath s case (supra), this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [(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 deemed to be the full value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the partnership. His right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from the partnership, of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and other prior charges. 19. The Supreme Court in the case of Malbar Fisheries Co. vs. CIT reported in (1979) 120 ITR 49 explaining the position of a partnership under the Partnership Act as well as Income Tax Act held as under:- A Partnership Firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner's interest takes place only when there is a dissolution of the firm or upon his retirement from it. It has some times been said, and we think erroneously, that the right of a partner to a share in the assets of the partnership firm arises upon dissolution of the firm or upon the partner retiring from the firm. We think it necessary to state that what is envisaged here is merely the right to realise the interest and receive its value. What is realised is the interest, which the partner enjoys in the assets during the subsistence of the partnership firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement. What the partner gets upon dissolution or upon retirement is the realisation of a preexisting right or interest. It is nothing strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n one talks of firm s property or the firm s assets all that is meant is property or assets in which all partners have a joint or common interest. The Whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done, whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share. The property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm. When a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset. When a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which was originally exclusively belonging to him, becomes the trading asset of the firm, in which all partners acquire interest in proportion to their respective share in the firm. His right during the subsistence of the partnership is to get his share of profits from time to time as agreed upon among the partners. On dissolution of the firm or on retirement from the firm to get the value of his share in the net partnership asset as on the date of dissolution or retirement. Therefore, this is a case of a partner bringing capital asset to a partnership firm as his capital contribution. 23. Sub-section (4) of Section 45 deals with a distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals or otherwise. If in the course of such distribution of capital asset there is a transfer of a capital asset by the firm in favour of a person and it results in profits or gains to the firm, then the said profits or gains shall be chargeable to tax as income of the firm and again for computing such income, Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of the retiring partners, no profit or gain arose in the hands of the partnership firm. Therefore, the question of the firm being assessed under Section 45(4) and charging them tax for the profits or gains which did not accrue to them would not arise. 26. It was contended on behalf of the revenue that five incoming partners brought money into the firm. Three erstwhile partners who retired from the partners on 01.04.1994 took money and left the property to the incoming partners. It is a device adopted by these partners in order to evade payment of profits or gains. As rightly held by this Court in Gurunath s case (supra) it is taxable. This argument proceeds on the premise that the immovable property belongs to the erstwhile partners and that after the retirement the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs to the partnership firm. It did not belong to the partners. The partners only had a share in the partnership asset. When the five partners came into the partnership and brought cash by way of capital contribution to the extent of their contribution, they were entitled to the proportionate share in the interest i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership, transferring assets in favour of a retiring partner. It is in this context the Bombay High Court held that Section 45(4) was attracted. Therefore, to attract Section 45(4) there should be a transfer of a capital asset from the firm to the retiring partners, by which the firms ceases to have any right in the property which is so transferred. In other words, its right to the property should stand extinguished and the retiring partners acquires absolute title to the property. 29. In the instant case, the partnership firm did not transfer any right in the capital asset in favour of the retiring partner. The partnership firm did not cease to hold the property and consequently, its right to the property is not extinguished. Conversely, the retiring partner did not acquire any right in the property as no property was transferred in their favour. The Division Bench in Gurunath s case (supra) did not appreciate this distinguishing factor and by wrong application of the law laid down by the Bombay High Court held the assessee in that case is also liable to pay capital gains tax under Section 45(4). Therefore, the said judgment does not lay down the correct law. 30. We would like ..... X X X X Extracts X X X X X X X X Extracts X X X X
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