TaxTMI 
TaxTMI 
2011 (1) TMI 266
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....n each and every case of distribution of assets whether the partnership is subsisting or not, then there is no need for the words " on dissolution or otherwise" in section 45(4) and the expression would loose its usefulness. The whole relevance of section 45(4) is lost if the reasoning of the Bombay High Court is accepted. If the legislature wanted to include retirement under the expression otherwise, the same would have been expressly provided. (b) The first appellate authority failed to notice that each of the two retiring partners was allotted stock in trade and some other assets along with substantial liabilities. (c) The CIT(Appeal) ought to have been that stock in trade allotted to each of the two retiring partners, cannot be considered as "CAPITAL ASSET" within the meaning of section 2(14) of the Income-tax Act, 1961 and if the value of stock in trade allotted to each of the retiring partner is excluded from the assets allotted to each of them, the balance represents excess of liabilities over other assets as allotted to each of the retiring partner. (d) The first appellate authority should have held that after excluding, the stock in trade which is not a "Capital A....
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....0 To Profession Tax 2500 By Remuneration to Parnters 106250 To Closing Balance 8239202 By Share of Profit 785385 8357726 8357726 Details of Assets and Liabilities allotted to Kamlesh C. Minawala: Assets Takenover Amount Liabilities Taken over Amount Goodwill 3439642 Loan Kamlesh J. Minawala HUF 127332 Fixed Assets 1669721 Loan Poonam K.Minawala 2989147 Stock in Trade 14798497 Girish J. Minawala 4393501 Sundry Debtors 29150 Nayana Minawala 3824930 Deposits 141285 Sundry Creditors for expenses 102268 Loans & advances to staff 7200 Sundry Creditors for Labour Charges 60122 Prepaid Shop Rent 8000 TDS Payable 31993 Cash 59282 Provisions-Rajkot 165965 Central Bank-10526 2929 Advance from Customers 35850 CCBRajkot1022 100387 Receivable from CJM 1434037 Liabilities trfd on retirement 11731106 Net Assets Takenover 9959024 Gross Assets trfd on retirement 21690130 21690130 Chimanlal Minawala's Capit....
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.... partners) . The same was taxed as capital gain of the firm on retirement of two partners. 7. Before CIT(A), the Assessee submitted that section 45(4) of the Income-tax Act has no application to the facts of the assessees case. It was submitted that section 45(4) brings to tax capital gains arising on the transfer of capital asset by way of distribution of capital assets on the dissolution of a firm or otherwise and charges the said gain to tax as income of the firm. The assessee submitted that there was no dissolution in the case of our firm. The assessee pointed out that Clause 15 of the partnership deed dated 1-4-2001 specifically states that retirement, death, or insolvency of a partner does not result in the dissolution of the firm and that the remaining partners would continue to carry on the firm's business. It was submitted that the expression "or otherwise" appearing in section 45(4) of the Income-tax Act does not cover the case of retirement of partners from a firm. The assessee relied on the decision of the Jabalpur Bench of the ITAT in the case of ACIT v. Tehmoflies India, reported at 60 ITD 554(Jbr), wherein the ITAT had held that even after the insertion of section....
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....n of the firm. It was argued that there was allotment of assets in specie to the retiring partners. However, the major part of the assets distributed, forms part of stock-in-trade, net result of the assets and liabilities (excluding stock in trade) allotted would be a negative figure. Without prejudice to the above it was argued that even on the basis adopted by the ITO the short term capital gain u/s. 45(4) of the I.T. Act, would work out to only out to Rs. 34,39,642 only as mentioned below: A. Chimanlal J. Minawala: (i) Value of assets allotted to him on his retirement (including his share of good will credited to his A/c.) Rs. 71,60,758 (ii) Less: Amount payable by firm to RP as per his Capital account with the firm excluding Goodwill Rs. 54,40,937 (iii) Balance Rs. 17,19,821 B. Kamalesh C. Minawala: (i) Value of assets allotted to him on his retirement (including his share of goodwill credited to his A/c.) Rs. 99,59,024 (ii) Less: Amount payable by firm to RP as per his Capital account with the firm excluding goodwill Rs. 82,39,203 (iii) Balance Rs. 17,19,821 Total of A(iii) and B (iii) above representing short term capital gain work....
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....rgeability to capital gain tax in such circumstances was in issue before theHon'ble Court. The Court dealt with the issue as to what would be the effect of partners of a subsisting partnership distributing assets to partners who retire from the partnership. Does the asset of the partnership, on being allotted to the retired partner/partners fall within the expression "otherwise"? The Court held that the purpose and object of the Act of 1987 was to bring to charge of tax arising on distribution of capital assets of firms which otherwise was not subject to taxation. If the language of sub-section (4) is construed to mean that the expression "otherwise" has to partake of the nature of dissolution or deemed dissolution, then the very object of the amendment could be defeated by the partners, by distributing the assets to some partners who may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the Amending Act. The Court noticed that the position prior to the amendment by introduction of section 45(4) by the Finance Act, 1987, was that there was no transfer of assets by the firm to the partners on dissolution or transfer of assets to the retiring pa....
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.... a "capital asset" and in this regard drew our attention to the provisions of section 45(4) of the Act, which reads as follows : "The 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 and, for the purposes of section 48, the fair market value of the asset 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." It was submitted by him that the term "Capital Asset" has been defined in section 2(14) of the Act, as meaning "Property of any kind held by an Assessee, whether or not connected with his business or profession. The above exhaustive definition is subject to the following exclusions like stock in trade, consumable stores or raw material held for the purpose of business or profession, personal effects, agricultural land in India, Certain Gold bonds, special bearer....
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....s (page-1304): "The whole concept of partnership is to enter upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the, of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges." What is the subject-matter o....
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....ue of the assets of the firm in which the partner has a share. The full value of consideration received should be arrived at after excluding the accrual of interest on capital, remuneration payable to partner, share of profit of the firm. The cost of acquisition of the capital asset should be reckoned as initial capital contribution and further capital contribution of capital and the profit on revaluation of assets of the firm. If on retirement the full value of consideration (excluding interest on capital, remuneration payable to partner, share of profit of the firm) paid to a retiring partner exceeds initial capital contribution, further capital contribution of capital and the profit on revaluation of assets of the firm, only then it can be said that there is capital gain. In case there is no such excess then there can be no capital gain which can be brought to tax. If there is deficit then it can be said that the Assessee has incurred a capital loss. 18. The capital asset transferred on retirement of a partner from the firm is the right as a partner. The firm settles such right by giving away assets of the firm which includes its stock-in-trade. The stock-in-trade in that eve....
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.... bear any PAN, address of the payee. Under the circumstances, the AO was of the view that the assessee has inflated labour charges so as to reduce taxable profit and the assessee has failed to justify some proportion of labour charges to the production of ornaments and therefore a sum of Rs. 5,17,678 being 10% of labour charges was added back by way of bogus labour charges claimed. 21. Before CIT(A) it was submitted that the books of the assessee are audited and all expenses are fully vouched and verifiable. Labour charges are incurred and paid for making ornaments and other articles sold in the shop and sometimes for making them as per customer's order. Karigarwise book is maintained in respect of labour expenses giving full particulars of weight of ornaments and manufactured and labour charges payable for the same. It was also submitted that the assessee could obtain bills vouchers and receipts from the karigars as far as possible. Since some of the karigars have small set up are operating from their residence, they do not have printed bill books. It was also submitted that karigars are illiterate, hence are not able to prepare bills and vouchers on their own. Even in such ....