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TMI Blog2017 (3) TMI 1313X X X X Extracts X X X X X X X X Extracts X X X X ..... 45(4) of the Act. It held that the expression “otherwise” used in section 45(4) has to be read with the words transfer of capital assets by a distribution of capital assets, if so read, it becomes clear even when a firm is in existence and there is a transfer of capital assets, it comes within the expression “otherwise” as the object of the amending Act was to remove the loophole which existed whereby capital gain tax was not chargeable. In the instant case, the firm continue to exist and the subject land has been transferred by the firm (as we have held above) in favour of one of the partners of the firm, Shri Ratan Singh. Therefore, it is for the Revenue to decide whether such transfer in favour of Ratan Singh is taxable in hands of the firm under section 45(4) of the Act or not. To that extent, the above findings of ld CIT(A) stand modified. In light of above discussion taking into consideration the entirety of facts and circumstances of the case, it is the firm in whose name the asset stood prior to the date of the transfer which has transferred the asset (and not the assessee) vide the sale deed dated 12.05.2009. Therefore, it is clear that the assessee cannot be brought t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause land was the property of the firm. (vi) The firm was reconstituted on 19.12.2007 wherein Smt. Sharda Rani Agrawal w/o Shri Naresh Kumar Agrawal was introduced as partner. As per clause 15 of this deed, it was specified that all the lands and lease acquired at Naurangabad are the asset of the firm and the assessee has no individual right in the same. (vii) The firm sold agriculture land at khasra no.228 (0.12 hectare) and khasra no.231 (0.27 hectare) for ₹ 180000/- at village Naurangabad, Tehsil Alwar to the assessee through agreement to sell dated 02.01.2008. The firm has declared this transaction in the balance sheet by deducting 180000/- from land a/c in the fixed asset chart debited Kundan Lal Badshah partner s capital a/c. Simultaneously assessee reflected these two lands at ₹ 180000/- in his balance sheet. (viii) The constitution of the firm was again changed on 11-06-2008 whereby Smt. Indu bai and Smt. Sharda Devi Agrawal retired and Sh. Ramesh Chand and Sh. Ratan Singh were introduced as partner. The share of the assessee was reduced to 6% and the other two partners have share of 47% each. Alongwith this partnership deed, assessee executed a Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to presume that it is not possible to ascertain that the land under consideration was the property which was introduced as capital contribution by the assessee in the firm. (ii) The land at Kh. no.288 Kh. no.231 were purchased by the firm on 24.07.2006 in the name of the assessee. The cost of these land including expenses was ₹ 168100/- which were recorded in the books of the firm. Therefore these land are different than the land which was contributed by the assessee as his capital contribution in the firm. (iii) In respect of land at Kh. No.230, the firm got it converted into industrial land on 14.02.2007. Conversion charges of ₹ 6200/- was debited by the firm in the land account. Therefore only because the conversion order is in the name of the assessee and the Challan of ₹ 6200/- was deposited in the name of the assessee would not make this land as individual property of the assessee when it has been contributed by him to the firm and recorded in the books of the firm as its own property. (iv) In the reconstituted deed dated 19.12.2007, in clause 15 it has been stated that the land and lease acquired at Naurangabad in the name of first partner is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06/2008. Thus the fourth fifth party has released and relinquished all their rights and claims in the assets of the firm and also free of liabilities. d) Retirement deed dated 01/04/2009- clause No.5- That the rest of the parties have taken over all the rights over industrial converted Land at Khasra No.230 area 6200 Sq. mtr at gram Naurangabad, Alwar and Buildings, Plant machinery, Security, Deposits. They will be liable to repay loans and other liabilities from 01/04/2009. This the third party has released and relinquished all their rights and claims in the assets of the firm and also free of liabilities. e) Retirement deed dated 01.04.2009 by which assessee retired from the firm, in clause 5 it is specifically mentioned that the continuing partners have taken over all the rights over the industrial converted land at Kh. No.230 and the retiring partner have released and relinquished all this right and claim in the asset of the firm. The same fact is also mentioned in the retirement deed dated 11.06.2008 specifically. This makes it abundantly clear that the land under consideration is not the property of the assessee but is the property of the firm. Accordingly obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the firm, it constructed a factory building by incurring expenditure of 11.95 lacs upto 31.03.2008 (P.B.78-81) and also installed plant and machinery to carry on the business of manufacturing of grit. All these assets were the property of the firm. Therefore the sale deed dated 12.05.2009 executed by Sh. Ratan Singh as power of attorney holder of the assessee in his favour comprising of the land and construction thereon is only to avoid any probable dispute in future. This cannot be construed as sale by the assessee to Sh. Ratan Singh when the property continues with the firm. No consideration as mentioned in the sale deed has passed from Sh. Ratan Singh to the assessee. In fact the assessee was paid his capital balance in the firm of ₹ 24,59,001/- before 31.03.2009 itself. Therefore when assessee is neither the actual owner nor the beneficial owner of the said property, the question of assessing the capital gain in his hand does not arise for consideration. 4. Under the Income tax Act, 1961 no tax can be imposed on a person unless the transaction falls in the four corners of taxability. In present case AO has considered the sale deed executed by Sh. Ratan Singh as charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longing 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 regard upon among the partners. 5.19 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 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 48 is attracted. In other words, in the process of dissolution of a firm, if a capital asset is transferred to a partner which results in profits or gains, then that income is chargeable at the hands of the firm under this provision. In order to attract sub-section (4) of Section 45, the condition precedent is, (1) There should be a distribution of capital assets of firm; (2) Such distribution should result in transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t denied that land and building continues to exist in the books of the firm. The appellant has also been examined by the AO in the course of remand proceedings and the same factual position has been reiterated by the appellant. The appellant has taken back his share in the firm amounting to ₹ 24.95 lacs and this fact has been duly recorded in the books of accounts of the firm and in the returns of income filed by the firm. 5.22 After considering the facts as stated above, it is found that AO has invoked the provisions of section 50C of the IT Act for the purposes of levy of capital gains tax in the hands of the appellant, whereas the fact that the asset was shown by the firm since inception in the returns filed has remained uncontroverted and is not denied. This is the substance of the transaction which emerges out of the examination carried out during the remand proceedings even though on the face of it a transfer deed has been executed by the new partner (as GPA holder of the retiring partner) in favour of himself. Further, no consideration is stated to have been passed as he could not have paid the same to himself. It would be relevant at this stage to refer to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that ld. CIT(A) has verified the fact that the capital asset remained in the books of account of the firm. It is also a fact that the capital asset was introduced into the firm by the partners. The ld. CIT(A) has relied upon the judgment of the Hon ble Supreme Court rendered in the case of Sunil Siddharthbhai Vs. CIT, 156 ITR 509 (SC). The revenue has not submitted any contrary binding precedent. Therefore, we do not find any infirmity in the order of ld. CIT(A), which is hereby affirmed. The ground raised by the revenue is rejected . 6. The ld DR is heard who has relied on the provisions of section 50C and has stated that the AO was correct in invoking the provisions of section 50C as there is a transfer through a registered deed by the assessee (through its power of attorney holder) in favour of Shri Ratan Singh. 7. We have heard the rival contentions and perused the material available on record. The land under consideration is an agricultural land at village Naurangabad (Khasra No.230) which was purchased by the assessee in his individual capacity and thereafter contributed by the assessee to the firm as his capital contribution. The same is evident from Clause-11 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituted partnership deed dated 11.06.2008 and power of attorney dated 11.6.2008 have to be read together and not on stand alone basis and also taking into consideration the treatment of the said property and acceptance thereof by the assessee, the firm, the incoming and the retiring partners. There is one common thread which is emerging and which is that, the subject land has been contributed as capital contribution by the assessee to the Firm and the said land continues to remain as property of the firm all along over the years and been shown and reflected in the books of accounts of the firm. 8. Proceeding further, it is noted that the constitution of the firm was again changed on 01.04.2009 where the assessee retired from the firm and the other two partners namely, Shri Ratan Singh and Shri Ramesh Chand continued the firm with the equal share and the property continued in the name of the firm and the retiring partner not having any rights and claims in the assets of the firm. All these facts clearly demonstrate that before the execution of sale deed dated 12.05.2009 (which is a subject matter of dispute before us), the land at village Naurangabad, Khasra No.230 was a property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the stock of the firm by a partner and no deed whatsoever registered or otherwise is required to be executed by the partner for doing so. In the present case, the facts are on a stronger footing as the capital contribution is evidenced by a deed of partnership and the same would be considered as a transfer in relation to capital asset in terms of Section 2(47) read with section 45(3) of the Act. Therefore, we agree with the finding of the ld CIT(A) that the liability to pay tax on capital gains, if any, arises in the hands of the appellant, when the property (purchased by the appellant) was transferred to the books of the partnership firm. Thus, the capital gains, if any, in the hands of the appellant would arise in FY 2006-07 under the provisions of section 45(3) of the IT Act i.e. in the year when such property is transferred to the books of the firm as capital contribution. 11. As per the Ld. CIT(A), as per the provisions of Section 45(4) of the Act, the taxability will arise on such transfer in terms of sale deed dt. 12.05.2009 in case of dissolution of the firm and the issue has to be examined by the concerned A.O having jurisdiction over the firm. It is here that we do n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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