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TMI Blog2019 (7) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... y the three partners and it was agreed that the Assessee would retire from the firm w.e.f. 1.4.2007 and a sum of Rs. 339.50 lakhs would be paid to the Assessee. On 9.6.2007 deed of retirement was signed. The Assessee gave up all her rights as partner of the firm and its assets nor was the Assessee liable to pay any of its liabilities. The capital account of the Assessee as on 1.4.2006 showed an opening balance of Rs. 1,64,14,044. Profit for the year of Rs. 46,20,591 was credited to his account. Similarly on revaluation of the land and building on 15.1.2007, a sum of Rs. 53,26,462 and Rs. 9,24,650 respectively was credited to her account. Another sum of Rs. 18,12,528 was also credited as interest on capital in her capital account. After reducing the Partner's drawing and other payments made the balance to the credit of Assessee's capital account was Rs. 2,77,88,200/-. The difference between the sum of Rs. 3,39,50,000 and the sum of Rs. 2,77,88,200 viz., a sum of Rs. 61,61,800 was taxed as capital gain by the AO. The Assessee had invested a sum of Rs. 50 lacs in specified bonds and therefore the AO allowed deduction upto Rs. 50 lacs and brought to tax Rs. 11,61,800/- as Long term cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest in assets of the partnership firm in terms of the definition of the term transfer u/s 2(47) of the Act. Therefore there was no capital gain that could be brought to tax in the hands of the assessee. Before CIT(A) assesee also gave a breakup of his payments made to the assesee which was as follows:- (i) Amount outstanding in her capital account as on 31.3.2007 Rs. 2,77,88,200/- (ii) Good will paid during AY 2008-09 Rs. 21,64,800/- Good will paid during AY 2009-10 Rs. 39,97,000/-- Rs. 61,61,800/- Rs. 3,39,50,000/- 5. It can be seen from the aforesaid submission of the Assessee that the difference between the sum payable to the Assessee on retirement and the sum shown as credit in the capital account of the Assessee viz. a sum of Rs. 61,61,800/- is being claimed by the Assessee to be Goodwill. Neither in the MOU or in the Deed of reconstitution there is a reference to Goodwill. Only a sum of Rs. 38,38,200/- has been shown as Goodwill in the books of the Assessee and also in the capital account of the Assessee. The assessee also placed reliance on the decision of the Hon'ble Karnataka High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty. Explanation.-For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA; 9. Capital asset has been defined in section 2(14) of the Act, as meaning "Property" of any kind held by the assessee, whether or not connected with his business or profession. The above exhaustive definition is subject to the following exclusions like stock-in-trade, consumable stores or raw material held for the purpose of business or profession, personal effects agricultural land in India, certain Gold bonds, special bearer bonds and Gold deposit bonds. 10. The share or interest of a partner in the partnership and its assets would be property and, therefore, a capital asset within the meaning of the aforesaid definition. To this extent, there can be no doubt. 11. The question is as to whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under section 45 of the Act. 12. A look at how formation and dissolution of partnership was used as a device to evade tax on capital gains to convert an asset held individuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of section 48 of the Act. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. Parliament with the avowed object of blocking this escape route for avoiding capital gains tax by the Finance Act, 1987, introduced sub-section (3) to section 45 with effect from 1-4-1988. The effect of this was that the profits and gains arising from the transfer of a capital asset by a partner to a firm are chargeable as the partner's income of the previous year in which the transfer took place and the amount recorded in the books of account of the firm, shall be deemed to be the full valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person." 16. To plug this loophole the Finance Act, 1987, brought on the statute book a new sub-section (4) in section 45 of the Act, with effect from 1-4-1988, which reads as follows: "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 the consideration received or accruing as a result of the transfer." 17. Before the introduction of sub-section (4) to section 45, there was clause (ii) of section 47 which read as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by retirement and admission of new partners was also set out. It also provided that such of those assets or liabilities belonging to or due from any of the firms allotted to parties thereto in the schedule, would 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. Pursuant to the said family settlement, there was a deed of reconstitution of various partnerships as set out under the family settlement. For the relevant assessment year 1997-98, the Assessing Officer taxed the partnerships for capital gains under section 45(4). On appeal, the appellate authority upheld the impugned order. On second appeal, the Tribunal held that there was no dissolution but only reconstitution. It also held that the expression 'otherwise' in section 45(4) has to be read ejusdem generis and would contemplate situations like a deemed dissolution. It, accordingly, held that the business continued to be run and there was no dissolution of the firm and, consequently, section 45(4) was not attracted. On further appeal by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anabai Pamabai (supra) would continue to apply. 22. As far as situation (b) & (c) are concerned, this situation has been subject matter of consideration in several cases and there is conflict of opinion amongst Courts on whether there would be incidence of tax or not. We also make it clear that the fact that there was revaluation of the assets of the firm and resultantly the capital account of the firm stood enhanced is also not relevant. What is the credit in the capital account of the partner alone has to be seen. So long as there is no prohibition on revaluation of assets of the firm and there are no tax incidence on revaluation of assets of the firm, the credit to the partners capital account on revaluation cannot be looked at adversely. 23. Capital asset has been defined in section 2(14) of the Act, as meaning "Property" of any kind held by the assessee, whether or not connected with his business or profession. The above exhaustive definition is subject to the following exclusions like stock-in-trade, consumable stores or raw material held for the purpose of business or profession, personal effects agricultural land in India, certain Gold bonds, special bearer bonds and Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not liable to be charged under the head "Capital gains". This was not accepted by Hon'ble Bombay High Court and they held that a clear distinction exists between retirement of a partner from a firm and dissolution of the firm. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while in the case of dissolution of the firm as such no more exists and the dissolution is between all the partners of the firm. Thereafter the Hon'ble Court held that where accounts are taken and the partner is paid the amount standing to the credit of his capital account there would be not transfer. If, on the other hand, the partner is paid a lump sum consideration for transferring or releasing his interest in the partnership assets to the continuing partners then there would be an element of transfer. The Hon'ble Court held that what one has to see is whether the terms of the deed of retirement constitutes release of any assets of the firm in favour of the continuing partners. Having regard to the particular mode employed by the assessee and the continuing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g this decision, this question has to be and is answered in favour of the assessee and against the Revenue." 26. The decision in the case of Tribhuvandas G.Patel (supra) is a case where the deed of reconstitution specifically referred to release of rights of the outgoing partners in the assets of the partnership and further the fact that a specified sum over and above the sum standing to the credit of the partner's capital account was paid to the retiring partner, which excess sum was attributed to the retiring partner giving up his rights over the properties of the firm. It is only because of the provisions of Sec.47(ii) of the Act that the Hon'ble Court held that there was no incidence of tax on capital gain on the transaction. 27. The decision will therefore have to be viewed as not applicable to cases after the amendment to the law w.e.f. 1-4-1989 whereby Sec.47(ii) of the Act was deleted and simultaneously Sec.45(3) & 45(4) were introduced. 28. Therefore the question whether there will be incidence of tax on capital gain on retirement of a partner from the partnership firm would depend on the upon mode in which retirement is effected as laid down by the Hon'ble Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Assessee was paid the sum standing to the credit of his capital account and he gave up all his rights as partners and also over the property that the firm had purchased. All these factors were cumulatively considered as nothing but an act by which the Assessee gave up his rights over the property of the firm and therefore the sum of Rs. 30,87,98,087/- (gain on valuation of the property of the firm) was construed as a capital gain for giving up rights over the property of the firm liable to tax on capital gain. In such a scenario one has to construe the act of giving up or relinquishing rights as partner as transfer of capital asset and the capital gain will be the sum paid over and above the sum standing to the credit in the capital account. 30. It can be seen from the facts of the case of Sudhakar M.Shetty (supra), the revaluation of the assets took place in AY 2006-07. The Assessee Sudhakar M.Shetty retired in AY 2007-08 and what was taxed was virtually the sum credit to his capital account consequent to revaluation of assets that took place in AY 2006- 07. As we have already observed it should not be taken that the revenue has taxed the gain on revaluation of assets. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore would be Rs. 339.50 lacs minus Rs. 2,77,88,200 + 38,38,200 = Rs. 23,23,600/-. The Assessee had invested a sum of Rs. 50 lacs in specified bonds and therefore the AO allowed deduction upto Rs. 50 lacs. Therefore there would no capital gain which is chargeable to tax. 32. With regard to case laws cited on behalf of the Assessee, they are as follows: 1 Malabar Fisheries Co. Vs. CIT [1979] 120 ITR 49 (SC) 93-101 2 ACIT Vs. Mohanbhai Pamabhai [1987] 165 ITR 166 (SC) 102 3 ACIT Vs. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj) 103-111 4 CIT V Legal Representatives of N Paliniappa Gounder [1983] 143 ITR 343 (Madras) 112-115 5 CIT Vs. P.H Patel [1988] 171 ITR 128 (Andhra Pradesh) 116-121 6 CIT V Madan Lal Bhargava [1980] 122 ITR 545 (Allahabad) 122-125 7 ACIT Vs. Sri Mahinderpal Bhasin [1979] 117 ITR 26 (Allahabad) 126-129 8 CIT Vs. Krishnamoorthy [1998] 229 ITR 559 (Madras) 130-132 9 CIT Vs. L Raghu Kumar [1982] 141 ITR 674 (Andhra Pradesh) 133-136 10 CIT Vs. Lingmallu Raghukumar [2001] 247 ITR 801 (SC) 137-138 11 Tribhuvandas G Patel Vs. CIT [1999] 236 ITR 515 (SC) 139-141 12 CIT Vs. P.N Panjawani [2012] 356 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s.148 of the Act and it was held that there was no reason to believe to initiate proceedings u/s.147 of the Act. Incidentally the belief of chargeable capital gain escaping assessment was held to be unsustainable. Decision at S.No.19 in the case of Riyaz A.Sheikh (supra) follows the decision in the case of Tribbhuvandas G.Patel (supra) which relates to the law prior to Amendment w.e.f 1.4.1989. The decision at Sl.No.20 in the case of Sharadh Terry Products Ltd. (supra) is a case of settlement of accounts as per the credit balance in the capital account and hence there was no gain. The decision at Sl.No.22 in the case of Smt.Girija Reddy (supra) is a case of lump sum consideration paid on retirement and it was held that there was an incidence of capital gain liable to tax. As far as Sl.No.17 in the case of P.Sivakumar (supra) is concerned, the finding of fact is the payment which was sought to be taxed u/s.28(va) was amount paid to retiring partner as his share in the worth and value of the business akin to goodwill. Therefore this case is also distinguishable. The decision in the case of M/S.D.S.Corporation is again a case where the tax incidence was examined from the angle of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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