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TMI Blog2019 (1) TMI 1551X X X X Extracts X X X X X X X X Extracts X X X X ..... evalued] which was credited to their capital accounts. There was thus no transfer of capital asset by way of distribution of capital asset either on dissolution or otherwise within the meaning of section 45(4) read with section 2(14) of the Act. I also hold that the money equivalent to enhanced portion of the assets re-valued does not constitute capital asset within the meaning of section 2(14) and the payment of the said money by the assessee-firm to the retiring partners cannot give rise to capital gain under section 45(4) read with section 2(14) . I accordingly agree with the view taken by the Id. judicial Member and answer both the question referred under section 254(4) in the negative and in favour of the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... constituted vide Deed of Partnership entered into on 01.08.2005. The object of the partnership firm was to carry on the business of development and tonstruction in partnership and the said partnership was originally constituted by two partners, namely Shri Rakesh Kumar Wadhwan and Shri Sudhakar M. Shetty with profit sharing ratio of 60% and 40% respectively. On 16.09.2005, the partnership was reconstituted by admitting Smt. Hemlata S. Shetty as partner with a revised profit sharing ratio of Shri Rakesh Kumar Wadhwan, Shri Sudhakar M. Shetty and Smt. Hcmlata S. Shetty being 60%, 20% and 20% respectively. Thereafter on 23.09.2005, the assessee firm purchased from Shri Percival Joseph Pereira a property bearing Survey No. 28A and B 1, Plot No. 2 and CTS No. 956,956/1 to 956/83 of Village Juhu, Tagluka Andheri, Mumbai Suburb, Grater Mumbai for a consideration of 6.5 crores. The said property admeasuring 14022 sq. yards, formerly known as Perieria Estate and later known as Unit Compound, comprised of land and buildings and structures occupied by tenants. Immediately after purchase of the said property, the partnership was again reconstituted by admitting two new partners, namely Prithv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,59,84,050/- received by them from the assessee firm on retirement. Based on this information, the AO was of the prima facie view that there was transfer of capital asset by way of distribution by the assessee firm to the retiring partners in terms of section 45(4) of the Act and assessee firm was liable to tax on the capital gain arising from such transfer as held by the Hori'ble Bombay High Court in the case of CIT vs. A.N. Naik Associates (265 nil 346). Since such capital gain was not declared by the assessee in the returns of income filed for assessment years 2007-07 and 2007-08, he reopened the assessments for the said two years after recording the reasons. In pursuance of the assessments reopened by him, reassessments were completed by the AO under section 143(3)/147 of the Act. In the said assessments, he held that it was not only the retiring partners whose capital accounts had been credited by their share of revaluation surplus, but the capital accounts of all the partners were also credited. He held that if the retiring partners had got equivalent rights in the form of their money, the other partners also got their increased capital in the assessee firm as a result of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al accounts. He held that while the firm was succeeding, there could not be any transfer of rights in the assets of the firm amongst the retiring partners, subsisting partners and the new partners. He held that there could be no transfer to oneself and this can happen only when there is a dissolution of partnership firm, which had not happened in the case of the assessee. He observed that there was no change of ownership of the capital assets in assessee's case after revaluation in as much as partnership firm continued to be the absolute owner of the said assets. He held that it was thus not a case of dissolution of the partnership firm or transfer of assets of the partnership firm and provisions of Section 45(4) were not attracted. Reliance was placed by the learned CIT(A) on the decision of the Hon'ble Kerala High Court in the case of C1T vs. Kunnankulam Mill Board (257 1TR 544) to hold that unless and until there is a change in the ownership of the capital asset, there cannot be any distribution of capital assets as contemplated in Section 45(4) of the Act. He also held that revaluation or retirement alone does not trigger provisions of Section 45(4) of the Act unless an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession capital asset is very widely defined to include property of any kind. He also relied on the decision of the Hon'ble Delhi High Court in the case of PNB Finance Ltd. vs. CIT (252 ITR 491), wherein it was held that all inclusive definition of the term 'capital asset' brings within its ambit property of any kind held by the.assessee. It was also held that the term property is of widest import and subject to any limitations which the context may require, it signifies every possible interest which a person can acquire, hold or enjoy. 6. After referring to the relevant provisions and discussing the scope thereof, the learned Accountant Member relied upon the decision of the Hon'ble Supreme Court in the case of Tribhuvan G. Patel vs. CIT 236 ITR 515 wherein it was held that even where a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (ii) of Section 47 of the Act. By relying on the wording of clause (ii) of Section 47 at it stood prior to the deletion, the learned Accountant Member held that payment of amount to the retiring partner towards his share in the assets of the partnership firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61,75,97,614/-. 7. The learned Judicial Member did not agree with the view taken by the learned Accountant Member that there was a transfer of capital assets by way of distribution of capital asset on retirement of two partners from the assessee firm within the meaning of Section 45(4) of the Act in the facts and circumstances of the assessee's case. Accordingly he proceeded to pass a separate order expressing his dissenting view. 8. In his order passed separately, the Id. Judicial Member held that the decision of the Hon'ble Bombay High Court in the case of CIT -vs.- A.N. Naik Associates (supra), of Hon'ble Supreme Court in the case of CIT - vs.- Bankey Lai Vaidya (supra) and of the Hon'ble Karnataka High Court in the case of Kirolskar Asia Limited -vs.- CIT (supra) relied upon by the Id. Accountant Member to come to his conclusion were rendered in altogether different facts and the ratio of the same, therefore, was not applicable to the facts of the present case. He held that in the case of A.N. Naik Associates (supra), there was a Memorandum of family settlement in the family of the assessee, according to which, the assets were distributed among various partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, inasmuch as there was reconstitution of the firm without dissolution and the firm existed even on retirement of the partners, who were paid amounts standing to their credit in their capital account including their share in the re-valued assets. 10. The Id. Judicial Member referred to the decision of the Coordinate Bench of the Tribunal in the case of Keshav & Co. -Vs.- ITO [161 ITD 798], wherein it was held that what the partnership firm had paid to the retiring partner was the compensation for all his rights in the partnership firm and since there was no transfer of any assets or property of the partnership firm to its partner, section 45(4) had no application. He also relied on another decision of the Coordinate Bench of the ITAT in the case of Mahul Construction Corporation -vs. - ITO (ITA No. 2784/MUM/2017 dated 24.11.2017), wherein the retiring partner was paid money standing to the credit of his capital account without transfer of any capital asset of the firm to the partner on retirement and it was held by the Tribunal that the provisions of section 45(4) were not attracted. As noted by the Id. Judicial Member, the said decision was rendered by the Tribunal afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s found to be distinguishable on facts by the Hon'ble Karnataka High Court in the case of Dynamic Enterprises (supra) as well as by the Coordinate Bench of the ITAT in the case of Keshav & Co. (supra) and Mahul Corporation (supra). He accordingly held that the money standing to the credit of partner in his/her capital account paid on retirement could not be taxed as capital gains arising from the transfer of capital asset by way of distribution of capital asset on the dissolution of firm or otherwise as per the provisions of section 45(4) read with section 2(14) of the Act. 12. The Id. D.R., at the outset, cited the cases of CIT -vs. Bankey Lal Vaidya [79 ITR 595] and CIT, Madhya Pradesh -vs.- Dewas Cine Corporation [68 ITR 240] decided by the Hon'ble Supreme Court in support of the Revenue's case and contended that the ratio of the said decisions relied upon by the Assessing Officer is squarely applicable in the facts of the present case. He took us through the relevant portion of the judgments delivered by the Hon'ble Supreme Court in the said cases and relied on certain observations and findings recorded by the Hon'ble Supreme *Court, which according to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order and relied upon to decide the issue against the assessee are actually not recorded anywhere in the judgment of the Hon'ble Supreme Court. 15. As regards the decision of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra) strongly relied upon by the Id. Accountant Member to decide the issue against the assessee and in favour of the revenue, the Id. Counsel for the assessee contended that the same was not only found to be distinguishable on facts by the Id. Judicial Member for the reasons given in paragraphs no. 8 to 10 of his order, but a reference was also made by him in this regard to the decision of Full Bench of Hon'ble Karnataka High Court in the case of Dynamic Enterprises (supra) as well as the decisions of Coordinate Benches of the Tribunal in the case Keshav & Co. (supra) and Mahul Corporation (supra), wherein the same was found to be distinguishable on facts. He contended that all these three cases relied upon by the Id. judicial Member in support of the view taken by him involved similar facts and the ratio of the same has been rightly applied by the Id. Accountant Member to decide the issue in favour of the assessee. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said property and obtaining permission of the concerned competent authority for construction of a five-star hotel, the said property was revalued at ₹ 193,90,60,000/- as per the valuation report dated 25.03.2006 prepared by Shri A.R. Nigam, a Registered Valuer. The resultant revaluation surplus was credited to the capital accounts of the partners in their profit sharing ratio and accordingly a sum n ₹ 30,87,98,087/- each came to be credited to the capital accounts of the two partners namely Smt. Hemlata Shetty and Shri Suclhakar Shetty having 20% profit share each. Thereafter Smt. Hemlata Shetty retired from the partnership firm on 27.03.2006 while Shri Sudhakar Shetty retired from the partnership firm on 22.05.2006. On their retirement, both these partners were paid the amounts standing to the credit of their capital accounts in the partnership firm including the amount of ₹ 30,87,98,087 credited on account of revaluation surplus. The question that has arisen and which is referred to the Third Member is whether, in these facts and circumstances of the case, the money equivalent to enhanced portion of the assets revalued constitutes capital asset and whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place....... Provided further that any transfer of capital assets........ on the dissolution of a firm or other association of persons...... shall not, for the purposes of this section, be treated as sale, exchange or transfer of the capital assets". 20. The case of Bankey Lal Vaidya (supra) relied upon in support of the revenue's case involving assessment year 1947-48 came to be considered by the Hon'ble Supreme Court in the context of section 12B(1) of 1922 Act. In the said case, the assessee, who was the Karta of a Hindu undivided family, entere.d on behalf of the HUF into a partnership firm with one Devi Sharan Garg to carry on the business of manufacturing and selling pharmaceutical products and literature relating thereto. On July 27, 1946, the partnership firm was dissolved and the assets of the firm including goodwill, machinery, furniture, medicines, library arid copyright in respect of certain publications were valued on the date of dissolution at ₹ 2,50,000/-. The assessee was paid a sum of ₹ 1,25,000/- in lieu of his share and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not in the case of a partnership firm as envisaged in section 45(4) of the Income Tax Act, 1961. 21. In the case of Dewas Cine Corporation (supra) relied upon in support of the revenue's case, Shri S.G. Sanghi and Shri Hari Prasad entered into an agreement to carry on the business in partnership as exhibitors of cinematograph films in the name and style of "Dewas Cine Corporation" with effect from March 1, 1947. Each partner, who was an owner of a cinematograph theatre, brought his theatre into the books of the partnership as an asset of the partnership. For the assessment years 1950-51 to 1952-53, the Income Tax Officer allowed depreciation aggregating to ₹ 44,380/- in respect of the two theatres. The partnership was dissolved on September 30, 1951 and on dissolution, it was agreed between the partners that the theatres should be returned to their original owners. In the books of account maintained by the partnership, the assets were shown as taken over on October 1, 1951, at the original price less the depreciation allowed. In the proceedings for assessment years 1952-53, the assessee-firm was treated as a registered firm and it was held that by restoring the two t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking the proportionate value of share in the net partnership assets after deduction of liabilities and prior charges. The amount so received also included in its break-up an amount representing proportionate share in the value of goodwill. The Assessing Officer took a view that the amount. received by the assessees to the extent it included their proportionate share in the value of the goodwill represented capital gain chargeable to tax under section 45 of the Income Tax Act, 1961. The assessees disputed this view taken by the Assessing Officer in the appeal filed before the first appellate authority and being unsuccessful, filed a further appeal to the Tribunal. Before the Tribunal, two contentions mainly were advanced on behalf of the assessees. The first contention was that the retirement of the assessees from the partnership amounted to dissolution of the firm within the meaning of section 47, clause(ii), and, therefore, no transfer of capital asset chargeable to tax under section 45 was involved in the process by which the goodwill of the firm was taken over by the remaining seven partners and the proportionate share in the value of the goodwill was paid to each of the retiri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise was not decided in the case of Mohanbhai Pamabhai and the reliance on the same in support of the revenue's case on the issue under consideration is clearly misplaced. The Hon'ble Supreme Court in the case of Tribhuvandas G. Patel (supra) followed the decision of Mohanbhai Pamabhai (supra). It is relevant to mention here that all these judgments cited on the issue were previous to the amendment brought about by the Finance Act, 1987 by inserting sub-section (4) in section 45 w.e.f. 01.04.1988 and it is therefore necessary to examine the issue in the light of amended provisions which has brought about a change in the position of law on the point for income tax purpose. 24. In the case of N. Naik Associates (supra) which is heavily relied upon by the Assessing Officer as well as by the Id. Accountant Member in support of the revenue's case, the decision was rendered in the context of section 45(5) of the Act, 1961. It is interesting to note that even the Id. CIT(Appeals) in his impugned order has relied on the said decision of the Hon'ble Bombay High Court to decide the matter in favour of the assessee while the Id. Judicial Member has found the said case to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n partition under the settlement were held by the aforesaid firms and individual partners. With reference to the firms, the manner in which the firms were to be reconstituted by retirement and admission of new partners was also set out. It was also noted that such of those assets or liabilities belonging to or due from any of the firms allotted to 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 were reasonably required by the party entitled to such transfer would be effected. After taking note of this factual position, the Hon'ble Bombay High Court referred to section 45(4) and proceeded initially to answer the question no. 1. It was held in this context by the Hon'ble Bombay High Court that the partnership firm having subsisted and the business also continued, there was no dissolution of the partnership firm and the decision of the Tribunal to that effect could not he faulted. Hon'ble Bombay High Court then proceeded to answer questions no. 2 & 3 together with question no. 5 and noted that the various judgments cited on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets of the partnership firm in the said case were transferred to the retiring partners and the partnership firm, which was assessable to tax, had ceased to have a right or its right in the property stood extinguished in favour of the partner to whom it was transferred. Keeping in view this factual position that existed in the case of A.N. Naik Associates (supra), Hon'ble Bombay High Court held that there was a transfer of capital assets by way of distribution of assets even though the partnership firm continued to exist and there was no dissolution as the case was covered within the expression "otherwise" used in section 45(4). In the present case, the facts involved are materially different, inasmuch as, the partnership firm not only continued to exist after reconstitution without there being any dissolution, but the property also continued to be owned by the said firm without any extinguishment of rights in favour of the retiring partners. There was thus no transfer of the said property even within the meaning of expression "otherwise" used in section 45(4). It is thus clear that the facts involved in the case of A.N. Naik Associates (supra) were materially different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to evade capital gains tax as well as stamp duty. He held that there was a transfer of property from old firm to new firm on 01.04.1994 on which capital gains tax was payable. The first appellate authority upheld the view taken by the Assessing Officer. On further appeal by the assessee, the Tribunal held that as per section 45 of the Income Tax Act, profit and gains arising from the transfer of a capital asset is chargeable under the head "capital gains" and hence to levy capital gains tax, there should be an asset and there should be transfer in respect of that asset. The Tribunal referred to the definition of "transfer" given in section 2(47), which includes sale, exchange or relinquishment of the asset as well as extinguishment of any rights in the asset. The Tribunal held that the assesee-firm had not relinquished any right in the land and the said land being continued to be owned by the firm, the reconstituted firm could not be termed as a transferor even for the arguments sake. It was held that there was thus no transfer of land and the firm was not liable to pay capital gains tax. The order of the Tribunal was challenged by the revenue in the appeal filed before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ash representing their value in the partnership and there was no transfer of any capital asset on the date of retirement under the deed of retirement dated 01.04.1994. It was held that in the absence of distribution of capital asset and in the absence of transfer of capital asset in favour of the retiring partners, the question of the payment being assessed under section 45(4) would not arise. It was held that when the retiring partners took cash and retired, what they relinquished was their share in the partnership and there being no transfer of capital asset, section 45(4) had no application to the facts of the case. 30. In the case of Gurunath Talkies (supra) decided earlier, the Division Bench of the Hon'ble Karnataka High Court had taken a contrary view in favour of the revenue and against the assessee on the similar issue by following the judgnient of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra) and while dealing with the same in its judgment passed in the case of Dynamic Enterprises (supra), the Full Bench of the Hon'ble Karnataka High Court found that the facts involved in the case of A.N. Naik Associates (supra) decided by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards 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 chargeable to tax under section 45(4) of the Income Tax Act, 1961. 31. It is observed that a similar issue was also decided in favour of the assessee by Hon'ble Kerala High Court in the case of CIT -vs.-Kunnamkulal Mill Board (257 ITR 544) involving identical facts. In the said case, the assessee was a partnership firm. It had originally five partners and it was constituted under a Deed executed on 14.09.1983. Subsequently there was a change in the constitution of the partnership as evidenced by a new Partnership Deed executed on January 13, 1989. Two more partners were admitted at that time. At the time of admission of the new partners, there was a revaluation made in respect of the assets of the firm. As per clause 6 of the partnership deed, it was agreed that the difference representing enhancement by revaluation of the assets would be credited to the accounts of the original partners and the two new partners would have no share in it. The partnership firm continued with seven partners for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , reliance is placed in support of the revenue's case on the decision of Hon'ble Karnataka High Court in the case of Kirloskar Asea Limited (117 ITR 82). In the said case, the assessee was a Public Limited Company registered under the Indian Companies Act and carrying on business at Bangalore. It had entered into a collaboration agreement on August 21, 1964, with Alimanna Svenska Elektriska Aktiebolaget (in short 'ASEA'). The said foreign collaborator contributed towards the share capital of the assessee-company a sum of ₹ 12,00,000/-. This sum was paid in terms of dollars and credited to the accounts of the assessee maintained in Swedish Bank for the purpose of acquiring machinery. The assessee, however, could use only a part of the said amount for purchase of imported machinery and the balance amount lying in the Swedish Bank in foreign exchange was repatriated by the assessee to India with the permission of the Reserve Bank of India during the relevant year. When the dollars in question were acquired in or about the year 1964, a dollar was worth ₹ 4.76 but on account of devaluation of the Indian rupee which took place on June 6, 1966, the value of dol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y acquired by the partnership firm continued to be owned by the said firm even after reconstitution without any extinguishment of rights in favour of the retiring partners. The retiring partners did not acquire any right in the said property and what they got on retirement was only the money equivalent to their share of revaluation surplus (enhanced portion of the asset revalued] which was credited to their capital accounts. There was thus no transfer of capital asset by way of distribution of capital asset either on dissolution or otherwise within the meaning of section 45(4) read with section 2(14) of the Act. I also hold that the money equivalent to enhanced portion of the assets re-valued does not constitute capital asset within the meaning of section 2(14) and the payment of the said money by the assessee-firm to the retiring partners cannot give rise to capital gain under section 45(4) read with section 2(14) of the Income Tax Act, 1961. I accordingly agree with the view taken by the Id. judicial Member and answer both the question referred under section 254(4) of the Act in the negative and in favour of the assessee. 34. In the light of the above discussion, the matter may ..... X X X X Extracts X X X X X X X X Extracts X X X X
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