2004 (10) TMI 290 - AT - Income Tax

ITAT Rules: Rs. 1.82 Crores from Partnership Dissolution Not Taxable Under Capital Gains.

Smt. Durdana Khatoon. Versus Deputy Commissioner Of Income-Tax.

Smt. Durdana Khatoon. Versus Deputy Commissioner Of Income-Tax. - ITD 093, 015, TTJ 093, 753, Issues Involved:1. Liability to be assessed to tax on Rs. 1.82 crores received by the assessee.2. Determination of whether the receipt was consequent to the dissolution of the firm or the retirement of a partner.3. Examination of whether the amount received was in excess of the share in the partnership assets.Summary:1. Liability to be assessed to tax on Rs. 1.82 crores received by the assessee:The primary issue for adjudication was whether the sum of Rs. 1.82 crores received by the assessee from M/s. Odeon Theatres was taxable. The Assessing Officer and the CIT(A) believed that this amount was liable to capital gains tax as the assessee had relinquished her right in the partnership firm. The assessee contended that the amount represented her share of the firm's assets received on its dissolution and thus was not liable to tax.2. Determination of whether the receipt was consequent to the dissolution of the firm or the retirement of a partner:The assessee argued that the firm was dissolved on 21-1-1989 when she issued a notice for dissolution under section 43(1) of the Indian Partnership Act, 1939. The Revenue, however, contended that the firm was not dissolved but that the assessee retired from the partnership as evidenced by the retirement deed dated 30-9-1999. The Tribunal found that the circumstances suggested the business was carried out by only two partners, and the assessee received her share in the assets through a compromise deed, indicating a dissolution rather than retirement.3. Examination of whether the amount received was in excess of the share in the partnership assets:The Tribunal held that the amount received by the assessee was her share in the value of the partnership assets and not in excess of her entitlement. The assets of the partnership were revalued, and the assessee received 1/3rd of this value as agreed upon by the partners. The Tribunal concluded that even if the receipt was considered as retirement, the amount received could not be taxed as capital gains since it did not constitute a transfer within the meaning of section 2(47) of the Income-tax Act. The Tribunal relied on the judgments of the Hon'ble Supreme Court in the cases of Tribhuvandas G. Patel v. CIT and CIT v. R. Lingmallu Raghukumar, which held that the amount received by a retiring partner from a partnership firm cannot be construed as capital gain.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the amount of Rs. 1.82 crores received could not be brought to tax as capital gains under section 45 read with section 2(47) of the Income-tax Act, as there was no transfer involved.