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TMI Blog2017 (11) TMI 1418X X X X Extracts X X X X X X X X Extracts X X X X ..... xable in hands of retiring partner for assignment of his rights in favour of firm and its continuing partners. Since the same event cannot result into transfer by retiring partners as well as by firm, the ITAT by holding the transaction to be transfer from retiring partner to firm impliedly held that the transactions not to be taxable in hands of firm. The purpose of 45(4) of the Act is to bring such transactions which have an effect of transfer of capital asset without the asset being actually transferred. The purpose is to tax the actual beneficiary of such transactions. In the present case, the firm or the continuing partners are not the beneficiaries as no new tangible income or asset has arisen to them, rather the firm and continuing partners have purchased the share of retiring partner by paying cash. It is the retiring partners who have been benefitted by receiving much more than actual capital contributed by them on account of revaluation. Thus there can be no case of tax avoidance by colorable device by the firm on the facts and circumstances of the assessee firm's case. Accordingly, we are of the view that the assessee firm is not liable to capital gains on the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09-11-2005, having following profit and loss share ratio: - Sr. No. Name of Partners % holding 1 Waryam Singh 34 2. Sarang Wadhawan 33 3. Sunpreet Singh 33 5. This firm vide agreement dated 23-11-2005 acquired development rights over a piece of land admeasuring 9300 sq.yd at Mahul, Kurla, Mumbai from Bharat Containers Private Limited for a total consideration of ₹ 4.67 crores. Subsequently, this partnership deed was modified on 03-01-2006 and the following new partners were inducted:- (a) Manmaya Developers Pvt. Ltd. (b) Vision Finstock Pvt. Ltd. (c) Nisha Capital Services Pvt. Ltd. Further, the partnership deed was modified and vide partnership deed dated 06-07-2007 and another partner namely Housing Development and Infrastructure Limited (HDIL) was introduced and the flowing was the profit and loss sharing ratio of the partners: - Sl No. Name of the Partner Share (%) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding that the Mahul land is a capital asset and not as Stock-in-trade and also taxable under section 45(4) of the Act by observing as under: -: - 7. In these grounds of appeal the assessee has challenged the view taken by the AO that the Mahul land is capital asset. The assessee has claimed that the sole object of the firm was to deaf in the building construction activity and it had purchased the aforesaid land comprising of various factory buildings thereon. It was claimed that the seller company was required to discharge its various obligations such as outstanding compensation to workers, statutory and non-statutory dues and the assessee was required to discharge all these obligations to enjoy a clear title to the aforesaid property and thereafter to convert the land used from Industrial usage to Residential purpose. It was claimed that pending the fulfillment of all these obligations, the said land together with the incremental expenses were classified as Work-in-progress under the head Current Assets in all the Balance Sheets from the year ending 31.03.2006 to 31.03.2008. (not produced though). 7.1 The submissions of the assessee are considered and are not accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 45(4) of the Act came on the statute book only w.e.f. 01.04.1988 and the decisions of the various authorities/Courts prior to the same are not proper precedents. This fact has been noted in the decision of the jurisdictional High Court in the case of Commissioner of Income-tax vs. A.N. Naik Associates (2014) 265 ITR 346 (Bombay). The facts of this case and the decision therein as briefly noted below: The response A.N. Naik Associates were parties to a family settlement dated January 30, 1997. Pursuant to the said family settlement, there was a deed of reconstitution of various partnership business of family as set out under the family settlement. For the assessment year 1997-98, the partnerships were taxed for capital gains under section 45(4) of the Income-tax Act, 1961. The Income-tax Appellate Triounal held that there was no dissolution but only reconstitution. The Income-tax Appellate Tribunal also held that the expression otherwise had to be read ejusdem generis and would contemplate situations like a deemed dissolution and consequently held that tax on capital gains was not chargeable The High Court noted that in the memorandum of family settlement it was agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributing 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 Amendment Act. It was also held that the expression otherwise has not to be read ejusdem generis with the expression, dissolution of a firm or body or association of persons' but the expression otherwise has to be read with the words transfer of capital assets by way of distribution of capital assets. If so read, it becomes clear that 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. The High Court accordingly held that when the asset of the partnership is transferred to a retiring partner the partnership which is assessable to tax ceases to have a right or its right in the property stands extinguished in favour of the partner to whom it is transferred and if so read, it will further the object and the purpose and intent of the amendment of section 45. 8.3 In the present case the assessee had purchased the Mahul land but for some reason t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 512008 and not prior to it. In its para-2 4 it is mentioned that the continuing partners shalt he entitled to the share, right, title and interest of the Retiring Partners including in the Mahul land. In para-3 it is mentioned that for the purposes of settling the accounts of the assets of the Firm have been revalued and the Balance Sheet and Profit Loss Account as at 01/04/2008 have been prepared. A further Balance Sheet and Profit Loss Account as at 27/05/2008 was also prepared. is mentioned in the para-3 of the Deed but a copy of the same has not been made available by the assessee. It can however be deduced that the following amounts were credited to the Capital Accounts of the Partners as on 27/05/2008 (source: Schedule A to Balance Sheet as at 31.03.2009): Name of the Partner Opening Capital balance Revaluation amount credited (₹) Amounts paid as on 27.05.2008 (₹) Mr. Waryam Singh 10,000 3,15,62,500 Mr Sarang Wadhwan 50,000 3,15,62,500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 78,79,190/- was revalued at ₹ 67,92,60,000 as on 01-04-2008. After apparently considering the cost of land at a round figure or something, the partners have appropriated a sum of ₹ 63,12,50,000/- to themselves as at 27/05/2008. In other words the Firm has placed the revaluation gain at the disposal of the partners as at 27/05/2008. This money was only the difference in the hook value and the market value of Mahul land. This, money has not been brought in by any of the partners as their capita! contribution. It as the embedded value in the asset which has increased over the period of the existence of the Firm. All the partners have benefited by taking their respective shares in this unearned profits (the subsequent reversal by the remaining partners in a new avatar notwithstanding). The claim of the assessee that no distribution took place is na ve because the revaluation gain was placed at the disposal of the partners in their capital accounts. The retiring Partners gave up their specific interests in the asset and even received the revaluation gain. .. 8.16 In the case of the present assessee the partners have virtually extinguished their pre-exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the submission of the assessee that the same is outside the ambit of the provisions of section 45(4) of the Act. Therefore, on principle the grounds of appeal no. 4,5 6. their related sub- grounds and all arguments connected with the revaluation gain in Principle are dismissed. Since the issue is decided against the assessee on the main ground itself there is no requirement to further adjudicate the same from the point of view of the colourable device route. 8.19 However it is seen that the actual distribution of capital asset was to tune of Its. 63,12,50,000/- and not ₹ 63,12,80,810/- as taken by the AO. The AO is directed to restrict the addition to ₹ 63,12,50,000/- and the assessee gets a relief of ₹ 30,810/-. As a result, the grounds of appeal no. 4, 5 6 are partly allow. Aggrieved, now assessee is in appeal before Tribunal on both inter-connected issues. 8. Before us Ld. Counsel Sh K Shivram narrated arguments that Manamaya Developers Private Limited, Vision Finstock Private Limited and Nisha Capital Services Private Limited retired voluntarily from the firm. On retirement they were paid their capital including capital credited due to rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. In view of the above, the Ld Counsel stated that the revaluation of Mahul Land of the assessee as on 01-04-2008 and the credit of revalued amount to the capital account of 7 partners in their respective share ratio does not entail any transfer as defined u/s 2(47) of the Act. He argued that with the introduction of new partner HDIL on 06-07-2007 to firm, owning immovable assets and consequent reduction in the share ratio of present 6 partners does not entail any relinquishment of their rights in the partnership property. On introduction of new partner HDIL retirement of 3 old 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 assessee firm's business. Thus, there is no transfer by the firm as contemplated by Section 45(4) of the Act. Since, the assessee is in the business of construction activities, plot of land admeasuring area 7492.90 sq mtrs being Mahul land, is always being treated and reflected in the books of account of the assessee firm as a revenue asset being Work-In-Progress shown under the head Current Asset and shown as such in the annual accounts of the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Partners, the assets of the partnership have been revalued at a value as mutually agreed between the Retiring Partners and the Continuing Partners. After giving effect of the revaluation of the assets, the Balance sheet and Profit Loss account as at 1st April 2008 have been prepared...... (4) The Retiring Partner doth, retire from the said partnership and shall cease to have any interest in any of the business and assets of the said Firm and the Continuing Partners shall forever, in the manner and in proportion to hereinafter provided to be entitled to the share, right, title and interest of tire Retiring Partner in the said business of the erstwhile partnership firm, together with the benefit of all premises and stock-in-trade, moneys, credits and effects belonging thereto including the property situate, lying and being in the Village Mahul, formerly in the district of Thana, but now included in Greater Mumbai and in the Registration Sub-District of Bandra Mumbai Suburban being plot No. 2 of Survey No.15, Hissa No.1, corresponding to CTS No.611 of village Mahul containing by admeasurements 9300 Sq.yds. i.e. 7775.73 sq.mtr or thereabouts acquired under Agreement dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Continuing Partners do and each of them doth hereby declare that none of them have at any time borrowed money or incurred any debt or guaranteed any liabilities or on account of or on behalf of the partnership which is not disclosed in writing to the other partners and if any time hereafter any liability, not so disclosed or come to light or he revalued, the partner/s who may have incurred such liability shall on his/her own pay and discharge the same and they have to keep indemnified the other or others of them against all actions, suits, proceedings and costs, charges and expenses in respect of any liabilities, not so disclosed to the other. 12. From the above clauses, of retirement deed, it is clear that the retiring partners merely retired from the partnership firm without any distribution of assets of the firm amongst the original and new incoming partner. Since the reconstituted firm consists of 3 old partners and 1 new partner, it is not a case where firm with erstwhile partners was taken over by new partners only. That means the assessee firm has acquired its right in the assets of the firm by paying lump sum consideration which is nothing but the cost of improvement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, according to us, it is not a case of distributing capital assets amongst the partners at the time of retirement and therefore provisions of section 45(4) are not applicable. 13. For this proposition, the learned counsel for the assessee relied on the decision of Hon ble Karnataka High Court full Bench in the case of CIT vs. Dynamic Enterprises (2013) 359 ITR 83 (Kar), wherein Hon ble High Court held that section 45(4) of the Act is not applicable as there is no transfer of asset by the firm to the partners and the facts were that the P. Firm had purchased land and 5 persons became new partners and after a year three old partners retired after revaluation by taking cash towards value of their share. Even Hon ble High court has considered the argument of Colourable device and held the same against Revenue. For this Hon ble High Court observed as under: - 25. In the instant case, the partnership firm had purchased the property under a registered sale deed in the name of the firm. The property did not stand in the name of any individual partners. No individual partners brought that capital asset as capital contribution into the firm. Five partners brought in cash by way of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter, Section 45(4) has no application to the facts of this case. 27. In Gurunath Talkies' case (supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case CIT v. A.N. Naik Associates [2004] 265 ITR 346/136 Taxman 107 (Bom.). In A.N. Naik Associates' case (supra), the asset of the partnership firm was transferred to a retiring partner by way of a deed of retirement. A memorandum of family settlement was entered into and the business of those firms as set out therein was distributed in terms of the family settlement as the party desired that various matters consisting the business and assets thereto be divided separately and partitioned. The term has also provided that such of those assets or liabilities belonging to or due from any of the firms allotted, the parties thereto in the schedule annexed shall be transferred or assigned irrevocably and possession made over and all such documents, deeds, declarations, affidavits, petitions, letters and alike as are reasonably required by the party entitled to such transfer would be effected. It is based on this document and subsequent deeds of retirement of partnership that the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on co-ordinate Bench decision of ITAT in the case of ITO vs. Fine Developers in ITA No.4630/Mum/2011 for AY 2008-09 vide order dated 12-10-2012, wherein it is held as under: - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, even if capital gain has to be taxed it has to be in the hands of the retiring partners not in the case of the assessee-firm. 15. Further, the learned Counsel for the assessee also relied on Hon ble Bombay High Court in the case of CIT vs. Ravishankar R. singh in Income Tax Appeal No. 207 of 2015 dated 31-07-2017, wherein Hon ble High Court exactly on identical facts stated that mere revaluation of the satellite rights would not give rise to capital gains. Hon ble High Court held as under: - 4 We have considered the submissions. It has been observed by the Tribunal that there is neither distribution of assets nor any realization of assets. There is no dissolution of the firm nor distribution of assets of the firm amongst the partners. No transfer of assets has taken place. It is further observed that the partnership firm was converted into a private limited company and the satellite rights thereafter vests with the company. The revaluation of the assets by the partnership firm would not attract any capital gain. There was no transfer as defined under Section 47 of the Act. The Tribunal relied on the judgment of this court in the case of Commissioner of Income Tax vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said asset, is replaced by the exclusive interest of the partner for a consideration. Thus, there is an extinguishment of the common interest of all the partners of the firm in that particular asset and a resultant creation of absolute ownership of partner to whom it is allotted. Such a transaction would qualify as a transfer of capital asset within the meaning of Sec. 2(47) of the Act. In fact, after revaluation of asset, there is no change of ownership as no interest of partners in the alleged capital asset is transferred to the Retiring Partners on the date of retirement, but remained in the books of the firm as oil which was subsequently transferred to a third party being SRA (Slum Rehabilitation Authority) vide Deed of Conveyance dated 27.06.2010. On the contrary, it is not the appellant firm which has transferred its rights, but the Retiring Partners, who vide extinguishment of their shared rights in favor of the Continuing Partners, are liable to capital gains tax. 17. Now let us take a hypothetical example that in a case where surplus due to revaluation is credited to partner's capital a/c. but none of the partners retire during that year, then it cannot be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Some machinery was given to the partners individually and one machine was given to all the five partners to beheld by them jointly as co-owners. As a result, the firm ceased to be the owner of the said machinery and the five partners became the owners of the machinery so distributed either individually or as co-owners. The five partners shortly thereafter formed another partnership and contributed the machinery which was distributed to them by the assessee firm to the new firm by doing valuation. The new firm thereafter sold the machinery for a price. The GTO treated the difference at the price at which tire machinery was distributed by the assessee-firm to its partners as deemed gift and subjected the same to gift-lax. The issue was whether distribution of machinery was a transfer in the nature of sale, for a consideration. The Division Bench qi the Karnataka High Court considered the expression of transfer under s. 2(xiv) of the CT Act, which defines transfer of property as any disposition, conveyance, assignment, settlement, delivery or other alienation of property. The Division Bench noted that the Act was self-contained and the definition of property is to rope in artifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to exercise over the asset, all rights of an absolute owner. 17w Court then proceeded to observe what was a mere interest on allotment by the firm, enlarges into an absolute right, title and interest. The extinguishment of the common interest of the partners of the firm and creation of absolute ownership of the partner to whom it is allotted. Such a transaction is therefore a transfer of property as defined in the GT Act. We may note that the partnership was subsisting and an asset of the partnership was made the absolute ownership of one of the subsisting partners. 18. We find that this judgment came up for consideration before the apex Court in B. T. Patil Sons vs. CGT [2001] 247 ITR 588 (SC), upholding the judgment of the Karnataka High Court. The apex court observed as under: In our view, when there is dissolution of a partnership or a partner retires and obtains in lieu of his interest in the firm, an asset of the firm, no transfer is involved... But the position is different when, during I/ic subsistence of a partnership, an asset of the partnership becomes of only one of the partners thereof there is, in such case, a transfer of that asset by the partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of continuing partners. The ITAT Mumbai in case of Sudhakar Shetty (2011) 130 lTD 197 (Mum) has held that such transaction amounted to transfer within the meaning of section 2(47) of the Act, inasmuch as the partner i.e. Sudhakar Shetty could be said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of the continuing partners to assignment and accordingly confirmed the capital gains assessed in hands of the retiring partner Shri Sudhakar Shetty in respect of the amount received by him from the firm over and above his capital contribution. The ITAT held that the transaction was taxable in hands of retiring partner for assignment of his rights in favour of firm and its continuing partners. Since the same event cannot result into transfer by retiring partners as well as by firm, the ITAT by holding the transaction to be transfer from retiring partner to firm impliedly held that the transactions not to be taxable in hands of firm. The purpose of 45(4) of the Act is to bring such transactions which have an effect of transfer of capital asset without the asset being actually transferred. The purpose is to tax the actual b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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