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TMI Blog2019 (5) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... stitution of the partnership firm by retirement of two partners and admission of another partner. The partnership firm continued. It must also be further noted that the assets of the firm originally belonged to the father of the retiring / continuing partners and there was only a division of the assets on retirement in accordance with their entitlement on the shares in the partnership. As pointed out earlier, the National Company was originally a sole proprietorship concern started by N.Munuswamy Mudaliar. It was in the business of construction and assets had been acquired even at that particular point of time. The two daughters and two sons-in-laws of N.Munuswamy Mudaliar were subsequently admitted as partners and on division of the assets, it can also be arguably pointed out that one daughter and one son-in-law were allotted a share which they were otherwise legally entitled to out of the holdings N.Munuswamy Mudaliar. In view of the peculiar facts of the case in hand, we hold that the provisions of Section 45(4) would not be attracted on the retirement of the two partners and consequential allotment of their share in the assets in the Assessee Firm. We therefore answer the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms. N.Munuswamy Mudaliar originally started a sole proprietorship concern under the name of National Company in the year 1950. He then converted it as a partnership firm in the year 1974 and admitted his son, two daughters and one son-in-law, into the partnership. Since the son passed away in the year 1994, the partnership firm was reconstituted and the other son-in-law was also admitted as a partner. N.Munuswamy Mudaliar passed away on 08.06.2001. Thereafter the partnership firm was reconstituted and the partners were his two daughters, Dr.Chandra Ananthasayanam and Dr.Shanthi Shanmugasundaram and his two sons-in-laws, Dr.C.V.Ananthasayanam and Dr.V.Shanmugasundaram. 5. It is seen from the records that serious disputes arose among the partners. An Arbitrator Mr.M.S.Raghavan was appointed to settle the disputes. Dr.Shanthi Shanmugasundaram and Dr.V.Shanmugasundaram agreed to retire from the partnership business with effect from 30.11.2003 and a Deed of Retirement was also executed. The Firm continued with the remaining partners Dr.Chandra Ananthasayanam and Dr.C.V.Ananthasayanam, who also admitted their son Arjun A. Raja as another partner. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm. They had been allotted properties to the extent of the credit balance in the capital account. 12. The learned counsel for appellant - Assessee argued that this cannot be termed as transfer of assets and urged that Section 45(4) of the Income Tax Act would not apply to the facts of the present case. He also submitted that the Tribunal had relied on the Judgement of the Bombay High Court in CIT Vs. A.N.Naik Associates [2004] 265 ITR 346 (Bom) . However a later Bench of the Bombay High Court in Prashant S. Joshi Vs. The Income Tax Office and Ors., reported in 2 010 324 ITR 154 (Bom) had dealt with a similar fact situation and had held that on retirement of partners, when there is transfer of assets, it would not attract the provisions of Section 45(4) of the Act. The learned Senior Counsel also very fairly stated that the Judgement of A.N.Naik Associates was not cited in Prashant S. Joshi . He also relied on the observations made in B.T.Patil Sons Vs. Commissioner of Gift Tax reported in ( 2000) 163 CTR SC 363 wherein the Hon'ble Supreme Court had held that when a partners retires and obtains in lieu of his interest in the firm an asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. To examine this, it would be advantagous to refer to the definition of the word transfer as defined under Section 2(47)(vi) of the Act. Section 2 . In this Act, unless the context otherwise requires.- (47) transfer , in relation to a capital asset, includes:- (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or any arrangement or in any other manner whatsoever) which has the effect of transferring , or enabling the enjoyment of, any immovable property. 18. In the background of the above provisions it has to be determined whether there would be a transfer of capital asset on retirement of a partner. Section 4 of the Partnership Act is as follows:- Section 4. Nature of partnership ' partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 346 (Bom), the facts were that the respondents were parties to a family settlement dated 30.01.1997. Pursuant to the family settlement, there was a deed of reconstitution of various partnerships. One of the questions of law which had been formulated for consideration was whether the deed of reconstitution of partnership by the Assessee firm was a device to avoid tax. A further examination of the facts in that case reveal that it had been agreed between the parties that businesses of six firm would be distributed in terms of the family settlement, as the parties desired that various matters concerning the business and the assets thereto be divided separately and partitioned. In the settlement, the manner in which the assets were proposed to be divided were set out. It was also provided that all such documents, deeds, declarations, affidavits as are reasonably required for effecting such transfer would be executed. The Assessment was based on the family settlement and the subsequent deeds of retirement of partnership. It is thus seen that there was a conscious decision taken prior to reconstitution of the firms to transfer assets and the liabilities by way of a family settlement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... four partners were permitted to carry on the business at Trichy in the same name. It is seen that in that case, there was definitely an element of transfer of assets since two of the partners gave up their interests in the business at Trichy and four of the partners gave up their interest in the business at Chennai. The facts are certainly distinguishable to the facts of the present case. 25. However a directly contrary view to the view taken in A.N.NaiK Associates have been expressed in Prashant S. Joshi Vs. The Income Tax Officer and Others reported in 2010 324 ITR 154 (Bom) wherein a Division Bench of the Bombay High Court, again dealing with a fact situation in respect of a partnership firm dealing with development of real estate, when a partner retired and agreed to receive sum of ₹ 50 lakhs, in addition to the balance lying to his credit in the capital as reflected in the books of accounts as final settlement of his dues on account of retirement, held that the same was not a transfer and taxable under Section 45(4) of the Act. The reasoning of the Bombay High Court, is given below for better appreciation:- 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court held that there is, in such a situation, no transfer of interest in the assets of the partnership within the meaning of Section 2(47). When a partner retires from a partnership, what the partner receives is his share in the partnership which is working out by taking accounts and this does not amount to a consideration for the transfer of his interest to the continuing partners. The rationale for this is explained as follows in the judgement of the Gujarat High Court: .... what the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only in the surplus that the retiring partner is entitled to claim a share. It is, therefore, not possible to predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of capital asset. 27. In Sampath Iyengar's Law of Income Tax revised by S.Rajaratnam, 12th edition , it had been observed as follows:- 134. Or otherwise .- There should ordinarily be no presumption of transfer in dissolution except to the extent directed under Section 45(4). Retirement is prima facie not covered by the sub-section. But the Departmental view is that the words or otherwise immediately succeeding dissolution under Section 45(4) would cover even retirement. Or Otherwise can only mean before or after dissolution in contradistinction to on . Further Section 45(4) when understood in conjunction with Section 45(3) can refer to formations and dissolutions. Since change in constitution is a concept recognised in Chapter XVI-C of the Act, there is no reason why the law should not have referred to change in constitution along with dissolution, if that were the intent instead of the expression or otherwise . 28. It is seen that even the learned author has expressed the view with that Section 45(4) of the Act would not apply on retirement of a partner from a partnership firm and when there is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In CIT Vs. Kunnamkulam Mill Board reported in [2002] 257 ITR 544 (Ker), it was held that on retirement of the partner of the firm, there is no transfer of the assets of the firm in favour of the continuing partners within the meaning of Section 45(4) of the Act. 33. In the present case, very significantly, there was only a reconstitution of the partnership firm by retirement of two partners and admission of another partner. The partnership firm continued. It must also be further noted that the assets of the firm originally belonged to the father of the retiring / continuing partners and there was only a division of the assets on retirement in accordance with their entitlement on the shares in the partnership. As pointed out earlier, the National Company was originally a sole proprietorship concern started by N.Munuswamy Mudaliar. It was in the business of construction and assets had been acquired even at that particular point of time. The two daughters and two sons-in-laws of N.Munuswamy Mudaliar were subsequently admitted as partners and on division of the assets, it can also be arguably pointed out that one daughter and one son-in-law were allott ..... X X X X Extracts X X X X X X X X Extracts X X X X
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