TaxTMI 
TaxTMI 
2009 (1) TMI 528
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....es of being heard. On the facts and in the circumstances of the case as well as in law, learned CIT(A) failed to appreciate that the partner's interest in the firm was transferred to the company at a higher value and hence, the benefit needs to be taxed in the hands of the partner as the definition of transfer as given in section 2(47) is an inclusive definition and, therefore, it does not restrict the scope of the definition to what is enumerated in the said section and there is no dissolution or reconstitution of the firm to warrant applicability of section 45(4)." 3. Grounds raised in cross objections in all these cross objections are also identical and they read as follows :- (1)The learned CIT(A) rightly held that section 47(xiii) is applicable to the facts of the case and hence, no addition can be sustained in the hands of the assessee. (2)The learned CIT(A) rightly held that section 45(4) cannot be applied to the facts of the case, as there is no gain on distribution of capital assets on dissolution. (3)Without prejudice to the above, there was no benefit or perquisite, whether convertible into money or not arising from business or exercise of profession, rece....
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....re & Fixtures 575871.00 671097.80 1246968.80 1246968.39 - TOTAL 48017529.00 56255149.39 104272678.39 175016904.39 70744226.00 1.1 Thus, as a result of this revaluation in the fixed assets of the partnership firm, there has been an accretion of Rs. 7.07 crores in the value of fixed assets in the hands of the firm as on 1-4-1998 and the same has also been admitted to be capital gain, in its hands by partnership firm. However, the firm claimed that as per provisions of section 47(xiii) of the Income-tax Act, which are operative from 1-4-1999, this transaction does not amount to a transfer for the purpose of capital gains. The partnership firm wherein all the appellants are partners has, therefore, not offered any capital gains in its hands on this accretion of Rs. 7.07 crores in the value of fixed assets. The partnership firm instead has credited this amount of Rs. 7.07 crores directly to the capital accounts of the partners as under :- Particulars Amount Particulars Amount To amount transferred to partner's capital account By capital gain on assignment of business of Princ....
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.... Multiplast Closing capital on 31-3-1998 Closing capital on 1-4-1998 (after crediting capital gain on sale of assets claimed exempt u/s. 47(xiii) Value of shares allotted on 1-4-1998 by a newly formed company Manish M. Chheda 4678849.76 13521878.01 13521878.01 Payal M. Chheda 1680330.67 5217541.97 5217541.97 Nehal A. Chheda 8350672.20 18962306.10 1896230610 53996066.95 124740292.95 124740292.95 1.4 All the appellants filed their return of income for this assessment year which were accepted under section 143(1) of the Income-tax Act except in the case of Shri Manish Chheda where the case was selected for scrutiny. In the case of Shri Manish Chheda, the Assessing Officer brought to tax the amount received by Shri Manish Chheda as income under section 28(iv) of the Income-tax Act. The action of the Assessing Officer was upheld by learned CIT(A) also vide order dated 29-11-2002. On these facts, the Assessing Officer reopened the cases of all other appellants under section 148 of the Income-tax Act and reassessment orders were passed in the month of March, 2004. In these reassessment orders, the Assessing Officer has mad....
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....ion 47(xiii), restricting or prohibiting the taxing of benefit under section 28(iv), the same could not be presumed. Similarly, it is immaterial if the two provisions namely, section 28(iv) and section 47(xiii) are related to two different heads of income envisaged in the Act namely, the former to 'Income from business' and the latter to 'Capital gains' . That in case of other partners such addition has not been made, could also not be a ground to exempt the assessee. Thus, by crediting the partner's capital account with the amount of Rs. 88.43 lakhs on account of revaluation of assets of the firm and increasing his stake as a shareholder to that extent, a monetary benefit resulted to the appellant and the amount of Rs. 88.43 lakhs was rightly taxed by the Assessing Officer by adding back the same to the total income of the appellant." 6. However, in other cases, the action of the Assessing Officer was not upheld. The learned CIT(A) has held in the case of other partners that if the conditions of section 47(xiii) are not satisfied, then profit resulting from transfer of assets from firm to company is taxable in the hands of the company as per provisions of section 47A of the Inc....
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....ons of section 28(iv) are applicable, it could have upheld the action of the Assessing Officer. 9. The next issue that arose for consideration before learned CIT(A) was as to whether the excess amount received by the partners can be taxed as income under the head 'Short-term capital gains'. On this issue, learned CIT(A) held as follows :- "I have carefully pursued this line of argument advanced by the Assessing Officer. As already stated, the firm transferred all assets and liabilities to a company on 1-4-1998 as a going business concern. At the time of transfer, the firm has revalued its assets and as a result of succession of firm by a new company i.e., Prince Multiplast Pvt. Ltd., the assets were transferred to the new company as per revalued amount. The appellants are claiming that in the case of the firm though there is transfer of assets; but no capital gain is taxable in the hands of the firm as provisions of section 47(xiii) are applicable. It appears that the Assessing Officer has also accepted this stand of the appellant that provisions of section 47(xiii) are applicable to the firm, as no action has been taken by Assessing Officer in the case of the firm, Prince Mu....
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....from the date of the succession. As per provisions of section 47A of the Income-tax Act, in case any of these conditions are violated, the amounts can be taxed as capital gains in the hands of the company in the year in which the violation takes place. These provisions show that in no case, tax liability will be shifted to individual partners. In the present case, all the partners got the shares equivalent to the amount outstanding to their capital account and hence there are no gains to the partners. The view taken by the Assessing Officer that provisions of section 45(4) are not applicable to the case of the appellant is not correct. As per provisions of section 45(4) of the Income-tax Act, the profit and gain arising from the transfer of the capital asset from the distribution of capital assets on the dissolution of firm or otherwise shall be chargeable to tax in the hands of the firm. The Hon'ble Bombay High Court in the case of CIT v. A.N. Naik & Co. 265 ITR 346 has held that the word "otherwise' appearing in section 45(4) has not to be read ejusdem generis with the expression, 'dissolution of a firm or body or association of person'. The expression 'otherwise' has to be....
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.... considered the rival submissions. As far as issue with regard to whether taxability of income in question was under section 28(iv) of the Act was still open before the learned CIT(A) in the remand proceedings, we are of the view that the directions of the Tribunal have to be read as whole. This is contained in para No. 11 of the order of the Tribunal, which reads as follows :- "We have heard the rival submissions. Admittedly, the capital of the partners was increased to 7.07 crores by way of revaluation of the assets of the firm and shares of the new company have been allotted to them in lieu of their respective capital. The balance amount, if any, was to be treated as unsecured loans in the hands of the company as per clause 4 of the agreement of transfer dated 1-4-1998. The case of the assessee-firm is that the firm had fulfilled all the conditions of section 47(xiii ) and as such the assets of the firm being taken over by the new company cannot be regarded as transfer. Whereas, the case of the revenue is that the said increase in the capital of the partners is taxable under section. 28(iv) or alternatively it should be taxed as short-term capital gain in view of the provisio....
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....at any time during the previous year; (2)That there should be a benefit arising to the appellant-companies; (3)That the benefit must be one arising from the business carried on by the appellant-companies. (4)That the benefit, if any, must be revenue in character; must be of income in nature; (5)That the benefit has arisen to the appellant-companies in a business transaction they had. 17. As can be seen from the above, one of the condition necessary for applicability of section 28(iv) is the benefit or perquisite sought to be taxed must be arising in the course of business carried on. In the case of Chetanaben B. Sheth ( supra), Hon'ble Gujarat High Court has held that amount received by an assessee-partner of a firm towards valuation of goodwill and assets of a firm at the time of retirement from the firm does not attract provisions of section 28(iv) of the Act, since, the same cannot be said to be a perquisite arising from the business and that even otherwise it would not partake the character of income. Besides the above, we are of the view that the increase in capital of partner as a result of revaluation of assets of the firm has no nexus with the business of the....