TaxTMI 
TaxTMI 
2016 (11) TMI 1064
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.... under section 45(4) of the Act 2. erred in confirming the Long Term Capital Gain ('LTCG') on retirement of partner from the Appellant firm to the extent of Rs. 2,56,41,418/- as against no liability towards capital gain as per the Appellant; Applicability of section 45(4) of the Act 3. erred in upholding the provisions of section 45(4) of the Act, in the hands of the Appellant firm, without appreciating the facts of the case; 4. should have appreciated that conditions of section 45(4) of the Act with regard to the distribution of capital assets on dissolution or otherwise' was not satisfied and in the absence of any distribution of capital assets, the impugned transaction is not chargeable to tax in the hands of Appellant firm; 5. failed to appreciated that section 45(4) of the Act cannot be applied to retirement of partner, where amount due to retiring partner has been paid towards its share in the firm and hence the income cannot be charged to tax in the hands of the Appellant firm; Double taxation of the same income 6. erred in upholding the action of the AO in taxing the capital gain in the hands of the Appellant fi....
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....stances of the case the learned AO has: Full Value of Consideration 1. erred in objecting the order of the CIT(A) on the ground that full value of consideration should be taken as 55,52,02,720/-, as against Rs. 33,52,47,975/- taken by Hon'ble CIT(A), without appreciating that the difference in consideration was due to constructed area to be given in AY 2009-10 (i.e. area of 35,495 sq. ft.), was held to be chargeable to tax in AY 2009- to by Hon'ble CIT(A) and the AO has already assessed the impugned sum in that year on substantive basis, and thereby suggesting double taxation; Cost of acquisition 2. erred in objecting the order of CIT(A) on the ground that entire cost of land should not be allowed during the year under appeal, without appreciating that, as per scheme of the Income Tax Act, while computing capital gain, entire cost has to be allowed in the year of transfer itself; Without prejudice to the ground no 2, 3. the corresponding proportionate cost of land, along with indexation should be allowed, in AY 2009-10, wherein the partial consideration is brought to tax". 5. We will first take up the assessee's appea....
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....ncome for the assessment year 2006-07. The return of income was filed for the first time for the assessment years 2007-08, 2008-09 and 2009-10, all on one date, that is, on 03.12.2009. So far as the returns for the assessment years 2007-08 and 2008-09 are concerned, the Assessing Officer observed that the same were filed beyond the time limit prescribed under section 139(1). However from the note appearing in the Balance Sheet as on 31st March, 2007, filed along with the return of income for AY 2007-08, the AO found out that, one of the partner, M/s Bharat Barrel Drum Mfg. Co. Ltd has retired from the partnership firm, vide Deed of Agreement dated 30.05.2005 and as per the said Deed, the retiring partner was eligible for an amount of Rs. 33,57,22,975/- and constructed area of 35,495 Sq. ft. @ Rs. 5110/- per sq ft out of the building which was under construction in the plot. Since the return of income for the assessment year 2006-07 had not been filed by the assessee, he proposed to tax the assessee-firm under section 45(4) and accordingly, proceeded to reopen the case under section 147 by issuance of notice under section 148, dated 21st January, 2011 on the following "reasons recor....
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....ove provision makes it clear that the firm is chargeable to tax on the consideration received or accruing to the retiring partner as a result of transfer of asset/relinquishing of right in the assets. As per sec. 2(47)(ii) of the I T Act, transfer in relation to capital assets include extinguishment of any right therein. In the instant case, the retiring partner' has relinquished its right in the land of the firm and has received consideration in relinquishing such right. So, for the purpose of I T Act, it is a transfer and provisions of capital gain is attracted and the firm is liable to pay tax on profit or gain arising from the transfer or right in the land by the retiring partner. On verification of the record, it is seen that no return of income has been filed by the assessee for F. Y. 2005-06 relevant to A. Y 2006- 07 even though there was net gain of Rs. 32,71,02,4251- [Rs. 51,71,02,425 - 19,00,00,000 (book value of land) in the partnership firm)]. In view of the above, / have reason to believe that income chargeable to tax on transfer of right in the said property by retiring partner to the extent of Rs. 32,71,02,4251- has escaped assessment for A. Y. ....
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....leased and relinquished its interest and share in the partnership and its assets, which in this case is the land, in favour of the continuing partners and this is to reckoned as 'property' constituting a capital asset within the meaning of section 2(14) of the Act; and secondly, in any case section 45(4) itself is a charging provision and is a complete code in itself and therefore, section 2(47) and 2(14) need not be looked into the decide whether the transactions amount to transfer or not. He further observed that as regards the assessee's claim that there was lump sum payment to retiring partner at the time of retirement is not factually correct, because the retiring partner got lump sum payment in form of money of Rs. 16.3 crores as well as rights of 76,752 sq. ft of constructed area in the coming projects to be developed by the assessee firm on the land, which was brought by the retiring partner at the time of formation of the firm as his share of capital contribution. Therefore, there is a distribution of capital asset in the instant case in as much as the retiring partner who had brought the land as his capital contribution has relinquished his right in the said firm as well ....
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....ring partner remains with the firm at Rs. 12,65,83,588/-" only as on the date of retirement. So, the cost o sale consideration received on retirement from the firm by the retiring partner is Rs. 12,65,83,588/- only. It is seen from the notes below Balance Sheet as on 31.03.2007 filed along with the return of income for AY 2007-08 that the assessee has adopted the market value of the asset @ 5110/- per sq. ft. as per Ready Reckoner-2005. So, the total value of the consideration received by the retiring partner is calculated as under:- (Rs.) 75,752 sq.ft. @ Rs. 5110/-: 39,22,02,720 (being fair market value of consideration Of area allotted to Retiring partner) Consideration by way of money 16,30,00,000 55,52,02,720 The Long term capital gain chargeable to tax is computed as under:- Full value consideration received on account Of transfer of rights in Partnership assets as worked out above: 55,52,02,720/- Less: Cost of acquisition as computed above: 12,65,83,588/- NET CAPITAL GAIN : 42,86,19,132/- 8. In the first appeal, the details submissions were made by the assessee which has been dealt and incorporated by the....
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....er, the firm has paid the compensation in lieu of its rights in the firm. There is no distribution of any capital asset on the dissolution of the firm and hence, it cannot be taxed under section 45(4). In support of his contention, he strongly relied upon the decision of ITAT Mumbai Bench in the case of Electroplast Engineers vs. ACIT, reported in (2015) 45 CCH 189 which in turn is based on the principle laid down in the decision of the Full Bench of the Hon'ble Karnataka High Court in the case of CIT v Dynamic Enterprises, reported in 359 ITR 93. Besides this, he also relied upon following decisions, viz., * Delhi Industries & Enterprises (60 SOT 212) (Del Trib); * M/s. Karnataka Agro Chemicals (ITA no.594 of 2013, dated 23 June 2014) Karnataka High Court; * Arbuda Estate Corporation (ITA No.354/Ahd/2003) dated 20th November, 2009; * M/s Vaibhav Industries (ITA No.3052/Mum/2014) dated 16 March, 2016. Thus, he submitted that in view of the aforesaid decisions and also looking to the fact that there is absence of transfer of any capital asset as well as any distribution of asset on the dissolution of the firm or otherwise, therefore, section 45....
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....ng partner shall receive the amount as mentioned herein, in lieu of and in full satisfaction, that is, 50% share in the partnership firm and assets thereof". Section 2(14) defines that, 'capital asset' is property of any kind and it contains "bundle of rights" and, therefore, such a transfer of rights amounts to transfer of capital asset and hence chargeable to tax under the head "capital gains". Since the transfer has taken place in this year, therefore, the same has to be taxed in this year only. In support, he relied upon the following decisions:- Sr. No. Citation Case laws 1 Girish Textiles 10 SOT 474(Mum Trib) 2 Mangalore Ganesh Beedi Works 265 ITR 685 (Kar HC) 3 Dehi Industries & Enterprisess 60 SOT 212 (Del Trib) 4 Arbuda Estate Corporation ITA 3052/M/2014 dated 20.11.2009 5 M/s Vaibhav Industries ITA 3052 of 2014 dated 16.03.2016 Even otherwise also, he submitted that it is a case of amount distributed to the partner in lieu of capital asset and hence the same would be taxable under section 45(4). He also strongly emphasized on the word "otherwise" which will cover such cases where there is no dissolution. I....
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....nd relinquished its interest and share in the favour of the partnership firm along with its assets which in this case is the land in favour of the continuing partners and this transfer of the right is to reckoned and construed as "capital assets" within the meaning of section 2(14); and secondly, it is chargeable to capital gains in the hands of the assessee- firm under section 45(4). The Ld. CIT(A) has held that amount of money to the extent of Rs. 33.52 Crores is nothing but a capital asset going to the retiring partner and, therefore, the same is taxable under section 45(4). The said sum comprised of Rs. 16.3 Crores paid in cash and Rs. 17.22 Crores paid in lieu of 41,257 Sq. feet of the constructed area. He thus directed that, the actual transfer of constructed area of 32,495 sq. ft was transferred in AY 2009-10 and same should be taxed in that year and the balance was directed to be taxed in this year. He computed the cost of acquisition at Rs. 30.96 Crores (after indexation on cost of sum of Rs. 19 Crores) and had finally Long-term-capital-gains chargeable to tax in AY 2006-07 was arrived at Rs. 2.56 Crores (Rs.33.52 Crores - Rs. 30.96 Crores). 14. The main issue here is, ....
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.... he is only entitled to his share of profits, if any, accruing to the partnership firm from the exploitation or realization of such property and in case of dissolution of the partnership firm, to a share in the money representing the value of the property. If the payment has been made to the partner for relinquishing of all his rights in the assessee-firm and not in the property of the partnership firm, then capital gains cannot be taxed in the hands of the assessee-firm, because, when a partner retires, he does not transfer any right in the immovable property or asset in favour of the surviving partner as he himself has no right with respect to the properties of the partnership firm. In the cases of partnership firm where there is distribution of the assets the capital gain can only be charged under the deeming provision of section 45(4) for which the basic condition precedent is that the distribution of the capital asset should be on the dissolution of the firm and otherwise. If in the course of such distribution of capital asset there is transfer of a capital asset by the firm in favour of the partner and it results in profits or gains to the firm, then such profits or gains are....
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....Anrag 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 Hobii, Bangalore South Taluk under a registered sale deed dated 13.5.1987 for a consideration of Rs. 2,50,000/-. Another reconstitution took place on 1.7.1991 by which Sri L.P. Jain retired from the firm and Smt. Pushpa Jain and Smt. Shree Jain were inducted as partners. The firm was reconstituted and five partners belonging to Khemka Group were inducted into the firm by a deed dated 28.04.1993. Before the reconstitution, the assets of the firm were revalued as per the report of the registered valuer on 28.03.1994. The three old partners retired through deed of retirement dated 01.04.1994. The old partners received the enhanced value of property in financial year 1994-95. 5. As per the Assessing Officer there is transfer of property from old firm to the new firm on 01.04.1994. Hence, it is a transfer within the meaning of Section 2(47) of the I.T. Act. Accordingly, notice under Section 148 was issued on 27.03.2002. In reply to the said notice, the assessee-firm....
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....o individual partners brought that capital asset as capital contribution into the firm. Five partners brought in cash by way of capital when the firm was reconstituted on 28.04.1993. Nearly a year thereafter on 01.04.1994 by way of retirement, the erstwhile three partners took their share in the partnership asset and went out of the partnership. After the retirement of three partners, the partnership continued to exist and the business was carried on by the reaming five partners. There was no dissolution of the firm or at any rate there was no distribution of capital asset on 01.04.1994 when three partners retired from the partnership firm. What was given to the retiring partners is cash representing the value of their share in the partnership. No capital asset was transferred on the date of retirement under the deed of retirement deed dated 01.04.1994. In the absence of distribution of capital asset and in the absence of transfer of capital asset in favour of the retiring partners, no profit or gain arose in the hands of the partnership firm. Therefore, the question of the firm being assessed under Section 45(4) and charging them tax for the profits or gains which did not accrue t....
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.... It is based on this document and subsequent deeds of retirement of partnership that the order of assessment was made holding that the assessee are liable for tax on capital gains. 28. In that context, the Bombay High Court held that when the assets of the partnership is transferred to a retiring partner, the partnership which is assessable to tax ceases to have a right or its right in the property stands extinguished in favour of the partner to whom it is transferred. If so read, it will further the object and purpose and intent of amendment of Section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would be amount to the transfer of capital assets in the nature of capital gains and business profits which is chargeable to tax under Section 45(4) of the Income Tax Act. In that context, it was held the word "otherwise" takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. It is in this context the Bombay High Court held that Section 45(4) was attracted. Therefore, to attract Section 45(4) there should be a transfer of a capi....
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....reed to be given to the retiring partner, it is undisputed that in lieu thereof cash has been paid to the retiring partner. No property or the asset of the partnership firm has been handed over or given to the retiring partner. The emphatic contention of the revenue that the word "otherwise" will cover such situation where there is no dissolution and strong reliance on Hon'ble Bombay High Court Judgment has been explained and well clarified by the Full Bench (as highlighted above by us) and therefore, this premise of the revenue for taxing the capital gains in the hands of the assessee firm has also no legs to stand. Thus, respectfully relying upon the ratio and decision of the aforesaid Hon'ble Karnataka High Court, Full Bench, we hold that there is no transfer of any capital asset of the assessee firm to its retiring partner and hence no capital gains chargeable to tax arises in hands of the assessee firm and section 45(4) has no application on the facts of the present case. Accordingly, the capital gain tax levied on the assessee firm is directed to be deleted and consequently the grounds raised by the assessee on this score are allowed. 17. In view of our above finding, the ....