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TMI Blog2019 (9) TMI 1271X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. 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 substantial question of law in favour of the Assessee and against the Revenue. - Tax Case (Appeal) No.716 of 2015 And M.P.No.1 of 2015 - - - Dated:- 16-9-2019 - Dr. Justice Vineet Kothari And Mr.Justice C.Saravanan For the Appellant : Mr.R.Sivaraman, Mr.P.Ramesh Kumar For the Respondent : Mr.M.Swaminathan (Senior Standing Counsel) Ms.V.Pushpa (Junior Standing Counsel) JUDGEMENT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that on the retirement of a partner from the firm, there will be allotment of his interests in the firm. The interest of a partner in a partnership firm is a right to obtain share of profits from time to time during the subsistence of the partnership and further, on dissolution of the partnership, or on his retirement from the partnership, to get the value of his share in the net partnership assets which remain after deducting the debts and liabilities of the partnership. This could be in the form of immovable assets or in the form of cash in lieu of the immovable assets. Therefore, when a partner retires from a partnership and his share in the net partnership assets is determined and allotted to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this, namely, his share in the partnership which he receives in terms of money or as an asset. There is in this transaction no element of transfer of interest in the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or association of persons . 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. In our opinion, therefore, 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. If so read it will further the object and the purpose and intent of the amendment of Section 45. Once, that be the case, we will have to hold that the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature of capital gains and business profits which is chargeable to tax under Section 45(4) of the Income Tax Act. We will, therefore, have to answer question No.3, by holding that the word otherwise takes into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... element of transfer within the meaning of Section 2(47). Chief Justice P.N.Bhagwati (as the learned Judge then was) speaking for a Division Bench of the Gujarat High Court in Commissioner of Income Tax, Gujarat V. Mohanbhai Pamabhai MANU/GJ/0015/1971 : (1973) 91 ITR 393 dealt with the issue in the following observations: ... when, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners: vide also the recent decision of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anki Narayanappa and Anr. Vs. Bhaskara Krishnappa and Ors. MANU/SC/0281/1966: (1966) SC 1300 . The Supreme Court held that what is envisaged on the retirement of a partner is merely his right to realise his interest and to receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership by virtue of his status as a partner and in terms of the partnership agreement. Consequently, what the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. The Supreme Court held that there was nothing strange in existing right or interest. The Supreme Court held that there was nothing strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. The Supreme Court inter alia cited with approval the judgement of the Gujaraj High Court in Mohanbhai Pamabhai (supra) and held that there is no transfer upon the retirement of a partner upon the distribution of his share in the net assets of the firm. In Commissioner of Income Tax V. R.Lingmallu Raghukumar MANU/SC/0810/2001: (2001) 247 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... swered against the Revenue and in favour of the assessee (page 676): Whether, on the facts and in the circumstances of the case, the excess amount of ₹ 46,500 received by the assessee on retirement from the two partnership firms is assessable to capital gains? 2. The High Court has held that there was no transfer of any assets as contemplated by the expression transfer as defined in Section 2(47) of the Income-tax Act. The High Court had placed reliance on the Judgement of the Gujarat High Court in CIT vs. Mohanbhai Pamabhai [1973] 91 ITR 393 , wherein it has been held that where a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts in the manner prescribed by the relevant provisions of the partnership law there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners . The said Judgement of the Gujarat High Court has been affirmed by this Court in Addl. CIT V. Mohanbhai Pamabhai [1987] 165 ITR 166. In view of the said Judgement we find no meri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue. 35 . In the result, the Appeals of the Assessee are allowed. No costs. 5. The facts found by the learned Tribunal in the present case, are also quoted below for reference :- 9. We have heard both the parties and carefully perused the materials available on record. The case of the assessee is very simple. During the year under consideration the assessee firm was reconstituted wherein one of the partners Mrs.Arunan Visvewar had retired and therefore reconstituted partnership deed was drawn on 30.05.2008 whereby the assessee firm has transferred one of its immovable asset being land to the retiring partner Mrs.Aruna Visvewar valued at ₹ 9,04,10,000/- as mentioned in the partition deed entered between the firm and the outgoing partner. The question that arises before us is whether the transfer of land belonging to the firm to the retiring partner is liable to be taxed under the head capital gains and if so in whose hands. It is pertinent to mention here that the transfer of the asset is by the firm which is a legal entity to the retiring partner another distinct legal en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets. 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 expression 'otherwise' as the object of the amending Act was to remove the loophole which existed whereby capital gain tax was not chargeable. Therefore, when the asset of the partnership is transferred to a retiring partner, the partnership which is assessable to tax cases to have a right or its right in the property stands extinguished in favour of the partner to whom it is transferred. If so read, it will further the object and purpose and intent of the amendment of Section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature of capital gains and business profits which are chargeable to tax u/s. 45(4). Therefore, the word 'otherwise' takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. (iv) Burlingtons Exports V. ACIT [1993] 45 ITD 424(Bom. Trib.) The words 'or o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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