TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 731
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....re, whether the firm should be made liable to pay capital gains even when there is no distribution of capital asset/assets among the partners under Section 45(4) of the I.T. Act? or Whether the retiring partner would be liable to pay for the capital gains?" FACTUAL MATRIX 3. Before we proceed to answer the said substantial questions of law, it is necessary to have a look at the factual background. 4. M/s.Dynamic Enterprises-the respondent herein is a partnership firm which came into existence on 09.01.1985 with Sri Anurag Jain and Sri Nirmal Kumar Dugar as its partners. The firm was engaged in the business of buying landed properties, constructions of buildings thereon, construction of industrial sheds, commercial complexes etc. On 13.04.1987, the firm was reconstituted by which Sri Nirmal Kumar Dugar retired from the partnership and L.P. Jain (father of Anurag Jain) entered the partnership as he showed his willingness to contribute capital for purchase of land to construct housing complex. The firm purchased land bearing Sy.No.13/1, Jakkasandra Village, Begur Hobli, Bangalore South Taluk under a registered sale deed dated 13.5.1987 for a consideratio....
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....uced as partners. The difference between the value determined on account of the revaluation and the book value was credited in the capital account of the partners in the profit share ratio on reconstitution of the firm as on 01.04.1994. The retiring partners have withdrawn their capital as standing in the books of accounts of the firm. As per Section 45 of the Income Tax Act, profit and gains arising from the transfer of a capital asset is chargeable under the head "capital gains". Hence to levy capital gains tax there should be an asset and there should be transfer in respect of that asset. The word 'transfer' is defined in Section 2(47) of the I.T. Act. As per this definition, transfer includes sale, exchange or relinquishment of the asset. It also includes extinguishment of any rights in the asset. Hence to complete the process of transfer there should be a person who is having a right in an asset and then such right is either sold, exchanged or relinquished to another person. In the instant case, the firm was reconstituted as on 01.04.1994 to continue the same business. The firm has not relinquished any right in the land. The land is being owned by the firm. The return filed by....
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....p; 25. The second question is answered in the negative in favour of the Revenue and against the assessee holding that the judgments which were noticed by the Tribunal were in the context of the law as it existed prior to its amendment in the year 1987. Finance Act of 1987 having expressly and with definite purpose brought about the amendment to IT Act reintroducing sub-ss. (3) and (4) to s. 45 of the Act, the Tribunal should have examined the appeal before it merely by applying the statutory provisions as it prevailed during the accounting period relevant to the assessment year 1994-95 and not merely by following the principles, the ratio of the judgment of the Supreme Court which had been rendered slightly in a different context. Though Mr.Shankaranarayana Rao, learned counsel for the assessee would submit that the assessee had not indulged in any suppression or misrepresentation and that the transactions were genuine and has been clearly disclosed in the return and therefore in the situation never warranted a levy of penalty as it was proposed in the assessment order and also does not warrant levy of interest, as a consequence of this appeal being allowed, it automatically restor....
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....ets of the firm in the sense that the assets of the firm as had been held by the erstwhile partners is transferred to the newly added two partners though all along the assets of the firm continued in the hands of the firm. Therefore, it was held that there is transfer of capital assets within the meaning of Section 2(47). 14. In Mangalore Ganesh Beedi Works's case (supra), after the dissolution of the firm, its business was continued by association of persons comprised of all the erstwhile 13 partners by using the assets as well as the name of the dissolved firm. Therefore, till the date of dissolution, the name "Mangalore Ganesh Beedi Works" was of the partnership firm. Whereas, after the dissolution, it became the name of the association of persons comprised of all the erstwhile partners of the dissolved firm. In that context it was held though the firm stood dissolved on December 5th 1987, for a limited purpose of winding up of the affairs of the firm, it continued till its assets and business were sold as a going concern on November 20th 1994. Therefore, the firm continued to hold the properties as owner till November 20th 1994. In those circumstances, there was no distributio....
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....apital 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 transaction (whether by way of becoming a member of, or acquiring shares in, or co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.- For the purpose of sub-clauses (v) and (vi), "immovable property" sha....
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.... 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 can not, 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 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,....
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....nto 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 retirement from the partnership to receive the value of the share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. When his personal asset merges into the capital of the partnership firm a corresponding credit entry is made in the partner's c....
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....ersonal asset merges into the capital of the partnership firm a corresponding credit entry is made in the partner's capital account in the books of the partnership firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter-se when the partnership is dissolved or the partner retires. 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 the partnership, of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and other prior charges. 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. The distribution, division, or allotment of assets of the erstwhile partners, is not done by the dissolved firm. 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 o....
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....ocess of a dissolution of a firm, if a capital asset is transferred to a partner which results in profits or gains, then that income is chargeable at the hands of the firm under this provision. In order to attract sub-section (4) of Section 45, the condition precedent is, (1) There should be a distribution of capital assets of a firm; (2) Such distribution should result in transfer of a capital asset by firm in favour of the partner; and (3) On account of the transfer there should be a profit or gain derived by the firm. (4) Such distribution should be on dissolution of the firm or otherwise. 24. Therefore, in order to attract Section 45(4) of the Act, the capital asset of the firm should be transferred in favour of a partner, resulting in firm ceasing to have any interest in the capital asset transferred and the partners should acquire exclusive interest in the capital asset. In other words, the interest the firm has in the capital asset should be extinguished and the partners in whose favour the transfer is made should acquire that interest. Then only the profits or gains arising from such transfer is liable to tax under Se....
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....nership firm. When the retiring partners took cash and retired, they were not relinquishing their interest in the immovable property. What they relinquished is their share in the partnership. Therefore, there is no transfer of a capital asset, as such, no capital gains or profit arises in the facts of this case. In that view of the matter, Section 45(4) has no application to the facts of this case. 27. In Gurunath's case (supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case Commissioner of Income Tax Vs. A.N.Naik Associate - (2004) 265 ITR 346 (BOMBAY). In Naik's case, the asset of the partnership firm was transferred to a retiring partner by way of a deed of retirement. A memorandum of family settlement was entered into and the business of those firms as set out therein was distributed in terms of the family settlement as the party desired that various matters consisting the business and assets thereto be divided separately and partitioned. The term has also provided that such of those assets or liabilities belonging to or due from any of the firms allotted, the parties thereto in the schedule annexed shall be transferred or assigned....