1985 (12) TMI 116 - AT - Income Tax

Assessee-HUF's Firm Share Reduction Not Taxable: Tribunal Decision

The Tribunal held that the reduction of the assessee-HUF's share in the firm did not constitute a transfer under section 2(47) of the Income-tax Act, ... Capital Gains, Chargeability Of Issues Involved:1. Whether the reduction of the assessee-HUF's share in the firm Brundavan Talkies constitutes a transfer within the meaning of section 2(47) of the Income-tax Act, 1961.2. Whether the withdrawal of Rs. 1,05,000 by the assessee-HUF from its capital account results in long-term capital gains subject to tax.Issue-wise Detailed Analysis:1. Reduction of Assessee-HUF's Share in the Firm:The assessee-HUF reduced its share in Brundavan Talkies from 50 paise to 30 paise as part of a reconstitution of the firm on 26-7-1978. The Income Tax Officer (ITO) considered this reduction as a relinquishment of rights, thus constituting a transfer under section 2(47) of the Income-tax Act, 1961. The Tribunal initially upheld this view, relying on the Gujarat High Court's decision in CIT v. Kartikey V. Sarabhai, which stated that the extinguishment of rights in a partnership amounts to a transfer. However, the Tribunal in the present appeal concluded that merely restricting the shareholding without selling it to a new partner does not amount to a transfer. The Tribunal emphasized that the reconstituted firm was a new entity, and the old partners had the discretion to revise their shareholdings. Therefore, the reduction of the shareholding did not constitute a transfer within the meaning of section 2(47).2. Withdrawal of Rs. 1,05,000 by Assessee-HUF:Following another reconstitution of the firm on 1-4-1979, the assessee-HUF's share was further reduced from 30 paise to 15 paise. The ITO treated the withdrawal of Rs. 1,05,000 from the assessee-HUF's capital account as a realization of long-term capital gains. The Tribunal, however, disagreed, citing the Andhra Pradesh High Court's decision in CIT v. L. Raghu Kumar and the Madras High Court's decision in CIT v. N. Palaniappa Gounder. Both courts held that the withdrawal of capital by a partner upon reduction of shareholding does not amount to a transfer and hence does not attract capital gains tax. The Tribunal further noted that the Supreme Court in Sunil Siddharthbhai v. CIT had reversed the Gujarat High Court's decision in Kartikey V. Sarabhai, clarifying that no transfer is involved in such cases. The Tribunal concluded that since the assessee-HUF did not receive any consideration from the new partners for relinquishing its share, and the withdrawn amount was not excess over the capital, no capital gains tax was exigible.Conclusion:The Tribunal allowed the appeal, setting aside the ITO's order and directing the deletion of the long-term capital gains from the assessee-HUF's income computation for the assessment year 1980-81. The Tribunal's decision was based on the interpretation that no transfer occurred under section 2(47) and the binding judicial precedents from the Andhra Pradesh and Madras High Courts, as well as the Supreme Court's ruling in Sunil Siddharthbhai v. CIT.