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TMI Blog2020 (3) TMI 953X X X X Extracts X X X X X X X X Extracts X X X X ..... ishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of sec.2(47). There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution. In order to attract S.34(3)(b) it is necessary that the sale or transfer of asset must be by the assessee to a person. Dissolution of a firm must, in point of time, be anterior to the actual distribution, division or allotment of the assets that takes place after making accounts and discharging the debts and liabilities due by the Firm. Upon dissolution the firm ceases to exist; then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division, or allotment of assets of the erstwhile partners, it not done by the dissolved firm. During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. Durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by it on account of reduction in share in a partnership firm namely M/s Mahakosh Property Developers. 2.2 We have carefully heard the rival submissions and perused relevant material on record including documents placed in the paper-book. We have also deliberated on various judicial pronouncements as relied upon by both the representatives. The written submissions filed subsequent to the hearing of the case has also been considered. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. The Ld.AR submitted that the factual matrix is squarely covered in assessee s favor by certain binding judicial pronouncements. 2.3 Facts on record would reveal that the assessee being resident corporate assessee stated to be engaged in manufacturing processing of milk products and also in the business of wind power generation, mining and trading in commodities was assessed for year under consideration u/s 143(3) on 22/03/2013 wherein the income of the assessee was determined at ₹ 1419.55 Lacs after certain additions and disallowances as against returned income of ₹ 1019.10 Lacs e-filed by the assessee on 13/10/2010. The Capital Gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trades Agencies Pvt.Ltd. 80,00,000 (B) Suresh Chandra Shahra(HUF) 80,00,000 (C) Mrs. Mriduladevi Shahra 80,00,000 (D) Mr. Nitesh Shahra 80,00,000 (E) Mr. Manish Shahra 80,00,000 TOTAL 4,00,00,000 The assessee, relied upon the decision of Hon ble Madras High Court in A.K.Sharfuddin V/s CIT (1960 39 ITR 333) for the proposition that compensation received by a partner from another partner for relinquishing rights in the partnership firm would be capital receipt and there would be no transfer of asset within the meaning of Sec.45(4) of the Act. Reliance was placed on other decisions also to submit that the provision of S.28(iv) and S.41(2) shall have no application to such receipts. 2.5 However, Ld. AO opined that a business builds some reputation after it is continued for some time. It is valuable asset and its value depends on personal reputation of the owner / management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer brought to tax ₹ 4 crore as capital gain u/s 45(1) of the Act holding that the sum of ₹ 4 crore was received by the appellant company on account of relinquishment of its right in the shares to the extent of 5%.The appellant company during the course of appeal proceedings contended that such receipt is neither revenue receipt nor taxable under the head capital gains. The submissions of the appellant are not acceptable. Section 2(47) of the Act defines the term transfer . Relinquishment of the asset and the extinguishment of any rights therein are included as 'transfer' under the provisions of section 2(47) of the Act. Therefore, relinquishment or the extinguishment of the appellant's right over the share of profit in the firm from 30% to 25% and the consideration of a sum of ₹ 4 crore received on account of same have to be necessarily treated as consideration received for transfer of capital asset. Accordingly, the addition of ₹ 4 crore made by the AO u/s 45(1) of the Act is hereby confirmed. Aggrieved as aforesaid the assessee is in further appeal before us. Our adjudication to the issue would be as given in succeeding par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation received by an existing partner from other partners for reduction in profit sharing ratio would be chargeable to tax as Capital Gain u/s 45(1)? As per the provisions of S.45(1), any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to Capital Gains Tax. We find that the answer to aforesaid question lies in the decision of Hon ble Karnataka High Court in CIT V/s P.N.Panjawani (356 ITR 676) wherein this question was elaborately examined by the Hon ble High Court in the light of various judicial precedents. The relevant discussion was as under: - 5. These appeals were admitted to consider the following substantial question of law Whether the appellate authorities were right in holding that the admission of the new partners and assignment of right in the firm to the new partners out of the rights of the assessee for consideration does not amount to transfer in the hands of assessee under Sec. 2(47) of the Act and consequently not liable to tax under Sec.45 of the Act? 6. The Assessing Authority relying on the judgment of the Apex Court in the case of Malbar Fisheries Co., ( supra ) has proceeded o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of the firm is liable to capital gain tax to the extent of relinquishment of his rights in the assets of the erstwhile firm in favour of the four partners of the reconstituted firm. It is the correctness of this finding, which is before us. 7. The assessee are sought to be taxed under Section 45(1) of the Act on the ground that there is a transfer. The word 'transfer' has been defined in Section 2(47) of the Act as under- transfer , in relation to a capital asset, includes, - ( i ) the sale, exchange or relinquishment of the asset; or ( ii ) the extinguishment of any rights therein; or ( iii ) the compulsory acquisition thereof under any law; or ( iv ) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;][or] [(iva) the maturity or redemption of a zero-coupon bond; or] [( v ) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or ( vi ) any transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Malabar Fisheries Co. ( supra ) explaining the position of a partnership under the Partnership Act as well as Income Tax Act held as under: - A Partnership Firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the Firm as such has no separate rights of its own in the Partnership Assets and when one talks of firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of sec.2(47) of the IT Act, 1961 There is no transfer of assets involved e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner's retirement. What is the profit or gain which can be said to accrue or arise to the assessee when he makes over his personal asset to the partnership firm as his contribution to its capital? The consideration, as we have observed, is the right of a partner during the subsistence of the partnership to get his share of profits from time to time and after the dissolution of the partnership or with his re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv ) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head Capital gains'' and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation,- For the purposes of this sub-section, the expression insurer shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938)] [(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h came into effect from 01.04.1988, deals with a person who transfers a capital assets to a firm as a capital contribution and becomes a partner of a firm. The income so derived is liable to be taxed at the hands of such member or partner. Whereas sub-Section (4) of Section 45 deals with profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm chargeable to tax as the income of the firm. Therefore, a clear distinction has been made between the income of the firm and income of the partner and the person who is transferring the capital assets being liable to pay capital gains. 16. It is in this background if we look at the background of this case, the landed property was not owned by the erstwhile partners. It was owned by the partnership firm. May be the erstwhile partners had l/3rd share each in all the partnership assets including this assets. On reconstitution of the firm, four more partners were inducted, who contributed ₹ 2.50 crores as their capital contribution. Thus, the inducted partners also became partners in the firm and the firm continue to assets own, including this, landed property. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a V. Sarsbhai v. CIT [1997] 228 ITR 163 / 94 Taxman 164 where it was held as follows: Section 2(47) of the Income-tax Act, 1961, defines transfer in relation to a capital asset. It is an inclusive definition which, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. It is not necessary for a capital gain to arise, that there must be a sale of a capital asset, Sale is only one of the modes of transfer envisaged by Section 2(47) of the Act. Relinquishment of the asset or extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45 of the Act. 19. In the instant case, as the assessee was not the owner of this capital asset, the question of relinquishing their interest in that asset or extinguishment of their right in their asset would not arise. The assets belong to the firm. The incoming partners paid money to the firm by way of their capital contribution. The firm as such has not relinquished its interest in favour of the incoming part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any merit in these appeals. The substantial question of law is answered in favour of the assessees and against the revenue. Consequently, the appeals are dismissed. The aforesaid decision considers catena of judicial pronouncements on the given issue. The Hon ble Apex Court in Malabar Fisheries Co. ( supra ) explaining the position of a partnership under the Partnership Act as well as Income Tax Act held that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the Partnership Assets and when one talks of firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relinquishing his share or right in the partnership and its assets in favor of the continuing partners. The coordinate bench chose to follow the decision of Hon ble Bombay High Court in CIT V/s A.N.Naik Associates (2004 265 ITR 346) and distinguished the case law of Prashant B.Joshi V/s ITO (324 ITR 154). However, factual matrix is not the same here since the reconstitution deed do not envisages relinquishment of assessee s right in the assets of the firm. Therefore, the said case law as well as the case law of CIT V/s A.N.Naik Associates (supra) is not applicable. 6.3 The Hon ble Bombay High in Prashant B.Joshi V/s ITO (supra) observed as under: - 13. During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On a dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabiliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 retiring partner for extinguishment of his interest in a particular asset. 14. The appeal against the judgment of the Gujarat High Court was dismissed by a Bench of three learned Judges of the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166. The Supreme Court relied upon its judgment in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The Supreme Court reiterated the same principle by relying upon the judgment in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. The Supreme Court held that what is envisaged on the retirement of a partner is merely his right to realise his int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) which held the field at the material time provided that nothing contained in section 45 was applicable to certain transactions specified therein and one of the transactions specified in clause ( ii ) was distribution of the capital assets on a dissolution of a firm. Section 47( ii ) was subsequently omitted by the Finance Act of 1987 with effect from 1-4-1988. Simultaneously, sub-section (4) of section 45 came to be inserted by the same Finance Act. Sub-section (4) of section 45 provides that 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. The fair market value of the assets 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 for the purpose of section 48. Ex facie sub-section (4) of section 45 deals with a situation where there is a transfer of a capital asset b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of asset by one partner in favor of other partners. The decision of Hyderabad Tribunal in Smt. Girija Reddy V/s ITO (ITA No.297/Hyd/2012 23/05/2012) 129 ITR 244 16/02/1979) deal with a situation wherein one partner received share of goodwill which is not the case here. The case law of Hon ble Delhi High Court in J.K.Kashyap V/s ACIT (302 ITR 255 2008) is a case of joint owners of certain property. Therefore, the case laws being relied upon by Ld. DR are not applicable to given factual matrix. 7. Finally, on the facts and circumstances, we hold that the compensation received by the assessee from existing partners for reduction in profit sharing ratio would not tantamount to Capital Gains chargeable to tax u/s 45(1). Therefore, by deleting the impugned addition, we allow the appeal. ITA No. 5234/Mum/2016, AY 2012-13 8. Facts are pari-materia the same in this year. An assessment u/s 143(3) was framed on 30/03/2015 and further compensation of ₹ 800 Lacs was received by the assessee on account of reduction of share in the firm from 25% to 21% in favor of an existing partner. The same was brought to tax by Ld. AO in similar manner. The Ld. CIT(A), inter-alia, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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