AI Drafter 
TaxTMI 
TaxTMI 
2017 (11) TMI 1418
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....lowing ground No. 1: - "The commissioner of Income Tax (Appeals)-42, Mumbai [CIT(A)] has erred in law and in facts by holding that the piece of land at Mahul, Mumbai purchased from Bharat Containers Private Limited is a capita asset under section 2(14) of the I.T. Act, 1961." 3. The second inter-connected issues in regard to this land at Mahul is, whether the provision of section 45(4) of the Act is applicable to the firm on crediting revaluation surplus to partners account settling their accounts on their retirement or not? For this assessee has raised following ground No.2: - "2. The CIT(A) has further erred in law and in facts by holding that In case where an asset is revalued prior to reconstruction of a firm and retiring partners accounts are settled in cash, the provisions of sec. 45(4) of the I.T. Act 1961 shall be invoked to tax the entire amount of revaluation in the hands of the firm. In this connection, the Ld CIT(A) further erred by holding that payment of cash/ bank balance by the firm for settlement of retiring partner's revalued capital balances amounts to distribution of capital asset as contemplated in sec. 45(4) of the Act." 4. Briefly stat....
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....ners took their share of valuation gain and HDIL gain a larger share in the firm without paying any tax. According to AO, the entire scheme is colourable device meant to transfer the ownership of Mahul land to HDIL. The AO also noticed the work done by assessee in different years and work-in-progress and was of the view that the firm has not carried out any development work till 01-04-2008 and therefore land is a capital asset and not stock-in-trade. Accordingly, the AO by applying the provisions of section 45(4) of the act, assessed the entire revaluation surplus of Rs. 67,69,60,000/-, already distributed to the retiring partners, as taxable in the hands of the assessee firm. Aggrieved, assessee filed appeal before CIT(A). 7. The CIT(A) on both the issues confirm the action of the AO by holding that the Mahul land is a capital asset and not as Stock-in-trade and also taxable under section 45(4) of the Act by observing as under: -: - "7. In these grounds of appeal the assessee has challenged the view taken by the AO that the Mahul land is capital asset. The assessee has claimed that the sole object of the firm was to deaf in the building construction activity and it had....
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.... and there was no dissolution of the Firm. It was claimed that the retiring partners had been paid their capital including the capital credited due to revaluation. It was claimed that there was no transfer of capital assets and there was no distribution of assets. It was claimed that during the Previous Year there was only a revaluation of asset and there was no actual transfer of asset. It was also argued that the benefit, if any, went to the retiring partners and not to the assessee. The assessee also argued that the conclusion of the AO that the whole relevant is a colourable device to evade payment of tax is not correct. The assessee has also relied upon its various submissions noted in detail above. 8.2 In order to decide the ground of appeal, it is necessary to note that the concerned section 45(4) of the Act came on the statute book only w.e.f. 01.04.1988 and the decisions of the various authorities/Courts prior to the same are not proper precedents. This fact has been noted in the decision of the jurisdictional High Court in the case of Commissioner of Income-tax vs. A.N. Naik Associates (2014) 265 ITR 346 (Bombay). The facts of this case and the decision therein a....
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....een introduced with a view to overcome the judgments of the Courts which took a view that the Firm on its own has no right but it is the partners who own jointly or in common the asset. It was noted that the distribution of capital assets on dissolution is subject to capital gains tax unless it does not fall within the definition of transfer under section 2(47). The High Court held that Section 45 is a charging section and the purpose and object of the Act of 1987 was to charge tax arising on distribution of capital assets of firms which otherwise was not subject to taxation. The High Court noted that 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 Amendment Act. It was also held that the expression "otherwise" has not to be read ejusdem generis with the expression, "dissolution of a firm or body or association of persons' but the expression "otherwise" has t....
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.... 8.5 In the next round of Retirement & Reconstitution of the Firm dated 27/05/2008 the three corporate partners besides IIDIL exited from the partnership and ILDIL's share in the Firm rose to 85%. It is also relevant to note that HDIL's had been claiming before various authorities ownership control over Mahul land much in advance as mentioned in the order of assessment. Thus in a roundabout manner HDIL gained primacy in the Firm at the expense of the other partners. However, the Deed of Retirement & Reconstitution dated 27/0512008 not only seeks to note the terms of the new partnership but it also seeks to lay down the terms of retirement of the three corporate partners in extcnso. This is slightly unusual. 8.6 The deed dated 27/05/2008 makes it very clear that the retiring partners have retired w.e.f. closing hours of 27/0512008 and not prior to it. In its para-2 & 4 it is mentioned that the continuing partners shalt he entitled to the share, right, title and interest of the Retiring Partners including in the Mahul land. In para-3 it is mentioned that for the purposes of settling the accounts of the assets of the Firm have been revalued and the Balance Sheet and Prof....
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....of revaluation. 8.9 In a nutshell the Mahul land which was purchased for a total consideration of Its. 4,67,00,000/- as per the so-called 'development agreement' dated 23/11/2005 and whose opening investment value as on 01/04/2008 was just Its. 4.78,79,190/- was revalued at Rs. 67,92,60,000 as on 01-04-2008. After apparently considering the cost of land at a round figure or something, the partners have appropriated a sum of Rs. 63,12,50,000/- to themselves as at 27/05/2008. In other words the Firm has placed the revaluation gain at the disposal of the partners as at 27/05/2008. This money was only the difference in the hook value and the market value of Mahul land. This, money has not been brought in by any of the partners as their capita! contribution. It as the embedded value in the asset which has increased over the period of the existence of the Firm. All the partners have benefited by taking their respective shares in this unearned profits (the subsequent reversal by the remaining partners in a new avatar notwithstanding). The claim of the assessee that no distribution took place is naïve because the revaluation gain was placed at the disposal of the part....
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....8.18 In view of the above, the action of the AO in holding that the distribution of the revaluation amount to the partners' capital accounts during the continuation of the firm partakes the character of capital gain under section 45(4) read with section. 2(14) is confirmed. There is no merit in the submission of the assessee that the same is outside the ambit of the provisions of section 45(4) of the Act. Therefore, on principle the grounds of appeal no. 4,5 & 6. their related sub- grounds and all arguments connected with the revaluation gain in Principle are dismissed. Since the issue is decided against the assessee on the main ground itself there is no requirement to further adjudicate the same from the point of view of the colourable device route. 8.19 However it is seen that the actual distribution of capital asset was to tune of Its. 63,12,50,000/- and not Rs. 63,12,80,810/- as taken by the AO. The AO is directed to restrict the addition to Rs. 63,12,50,000/- and the assessee gets a relief of Rs. 30,810/-. As a result, the grounds of appeal no. 4, 5 & 6 are partly allow. Aggrieved, now assessee is in appeal before Tribunal on both inter-connected issues. 8. Befo....
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....o capital gains tax in the previous year in which the said transfer takes place; and iii. Irrespective of actual sale consideration, the "fair market value" of the asset on the date of such transfer will be taken as full value of consideration received for the purpose of computing capital gains. 9. In view of the above, the Ld Counsel stated that the revaluation of Mahul Land of the assessee as on 01-04-2008 and the credit of revalued amount to the capital account of 7 partners in their respective share ratio does not entail any transfer as defined u/s 2(47) of the Act. He argued that with the introduction of new partner HDIL on 06-07-2007 to firm, owning immovable assets and consequent reduction in the share ratio of present 6 partners does not entail any relinquishment of their rights in the partnership property. On introduction of new partner HDIL & retirement of 3 old partners, there is realignment of share ratio inter-se between the partners only to the extent of sharing the profits or losses, if any of the assessee firm's business. Thus, there is no transfer by the firm as contemplated by Section 45(4) of the Act. Since, the assessee is in the business of cons....
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....rstwhile partnership firm together with the benefits of all contracts, licenses, agreements, rights, sanctions, Permission, premises, stock-in-trade, monies, credits, and effects belonging thereto. (3) The accounts of the Retiring Partners have been amicably settled. For settling the accounts of Retiring Partners, the assets of the partnership have been revalued at a value as mutually agreed between the Retiring Partners and the Continuing Partners. After giving effect of the revaluation of the assets, the Balance sheet and Profit & Loss account as at 1st April 2008 have been prepared...... (4) The Retiring Partner doth, retire from the said partnership and shall cease to have any interest in any of the business and assets of the said Firm and the Continuing Partners shall forever, in the manner and in proportion to hereinafter provided to be entitled to the share, right, title and interest of tire Retiring Partner in the said business of the erstwhile partnership firm, together with the benefit of all premises and stock-in-trade, moneys, credits and effects belonging thereto including the property situate, lying and being in the Village Mahul, formerly in the dis....
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.... tangible or intangible and whether movable or immovable, belonging to partnership firm and/or against the Continuing Partners and same shall belong to the Continuing Partners subject to payment of all outgoings in respect of the said several premises. (9) The Retiring Partners do and each of them doth and also the Continuing Partners do and each of them doth hereby declare that none of them have at any time borrowed money or incurred any debt or guaranteed any liabilities or on account of or on behalf of the partnership which is not disclosed in writing to the other partners and if any time hereafter any liability, not so disclosed or come to light or he revalued, the partner/s who may have incurred such liability shall on his/her own pay and discharge the same and they have to keep indemnified the other or others of them against all actions, suits, proceedings and costs, charges and expenses in respect of any liabilities, not so disclosed to the other." 12. From the above clauses, of retirement deed, it is clear that the retiring partners merely retired from the partnership firm without any distribution of assets of the firm amongst the original and new incoming partn....
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....firm is subsisting, there cannot be any transfer of rights in the assets of the firm by any or all partners amongst themselves because during subsistence of partnership, the firm and partners do not exist separately. There can be no transfer to oneself. This could only happen when there is dissolution of the firm. Therefore, according to us, it is not a case of distributing capital assets amongst the partners at the time of retirement and therefore provisions of section 45(4) are not applicable. 13. For this proposition, the learned counsel for the assessee relied on the decision of Hon'ble Karnataka High Court full Bench in the case of CIT vs. Dynamic Enterprises (2013) 359 ITR 83 (Kar), wherein Hon'ble High Court held that section 45(4) of the Act is not applicable as there is no transfer of asset by the firm to the partners and the facts were that the P. Firm had purchased land and 5 persons became new partners and after a year three old partners retired after revaluation by taking cash towards value of their share. Even Hon'ble High court has considered the argument of Colourable device and held the same against Revenue. For this Hon'ble High Court observed as under: - ....
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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 Talkies' case (supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case CIT v. A.N. Naik Associates [2004] 265 ITR 346/136 Taxman 107 (Bom.). In A.N. Naik Associates' case (supra), 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 annex....
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....he assessee also distinguished on decision of the Hon'ble Bombay High Court -Panaji Bench in the case of CIT vs. AN Naik Associates and Anothers (2004) 265 ITR 346 (Bom), by stating that in this case, there was transfer by way of distribution of capital asset and not with the dissolution of firm. The learned Counsel for this proposition relied on co-ordinate Bench decision of ITAT in the case of ITO vs. Fine Developers in ITA No.4630/Mum/2011 for AY 2008-09 vide order dated 12-10-2012, wherein it is held as under: - "5.3.2. Hon'ble Bombay High Court in the case of A.N.Naik (265 ITR 346) has explained the expression 'otherwise' used in Section 45 of the Act. It was held by Hon'ble Court that the expression otherwise has to be read with word 'transfer by way of distribution of capital asset' and not with the word 'dissolution'. Thus, from the above judgment also, it is clear that transfer of a capital asset is the pre-condition for invoking the provisions of Sec.45(4) of the Act. Secondly, such a transfer should take place at the time of dissolution or other similar events such as retirement of the partners. Until such time, the shared rights of the partners become the exclu....
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....their rights in the assets of the firm and in lieu of that firm had paid the retiring partners money lying in their capital account. Obviously, assessee-firm had not transferred any right in capital asset to the retiring partners rather it is the retiring partners who have transferred the rights in capital assets in favour of the continuing partners. So, even if capital gain has to be taxed it has to be in the hands of the retiring partners not in the case of the assessee-firm." 15. Further, the learned Counsel for the assessee also relied on Hon'ble Bombay High Court in the case of CIT vs. Ravishankar R. singh in Income Tax Appeal No. 207 of 2015 dated 31-07-2017, wherein Hon'ble High Court exactly on identical facts stated that mere revaluation of the satellite rights would not give rise to capital gains. Hon'ble High Court held as under: - "4 We have considered the submissions. It has been observed by the Tribunal that there is neither distribution of assets nor any realization of assets. There is no dissolution of the firm nor distribution of assets of the firm amongst the partners. No transfer of assets has taken place. It is further observed that the partnership f....
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....erest in share of profits because of the fact that the value of the interest of each partner qua an asset cannot be isolated or carved out front value of partner's interest in the totality of the partnership assets. When an asset of the firm is allotted to a partner on dissolution or retirement of the firm, the shared interest of all the partners in the said asset, is replaced by the exclusive interest of the partner for a consideration. Thus, there is an extinguishment of the "common interest" of all the partners of the firm in that particular asset and a resultant creation of "absolute ownership" of partner to whom it is allotted. Such a transaction would qualify as a "transfer" of capital asset within the meaning of Sec. 2(47) of the Act. In fact, after revaluation of asset, there is no change of ownership as no interest of partners in the alleged capital asset is transferred to the Retiring Partners on the date of retirement, but remained in the books of the firm as oil which was subsequently transferred to a third party being SRA (Slum Rehabilitation Authority) vide Deed of Conveyance dated 27.06.2010. On the contrary, it is not the appellant firm which has transferred its....
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....acts. In that case, the issue before the Division Bench of the Karnataka High Court was, charging of gift-tax. fit case, there was a firm wit): five partners which owned several assets in the form of machinery, certain debits were made to the respective accounts in July, 1977, stated to be the value of certain machinery distributed by the firm to tire partners. Some machinery was given to the partners individually and one machine was given to all the five partners to beheld by them jointly as co-owners. As a result, the firm ceased to be the owner of the said machinery and the five partners became the owners of the machinery so distributed either individually or as co-owners. The five partners shortly thereafter formed another partnership and contributed the machinery which was distributed to them by the assessee firm to the new firm by doing valuation. The new firm thereafter sold the machinery for a price. The GTO treated the difference at the price at which tire machinery was distributed by the assessee-firm to its partners as deemed gift and subjected the same to gift-lax. The issue was whether distribution of machinery was a transfer in the nature of sale, for a consideration.....
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.... claim or exercise any specific share or right over such asset to the extent of his share in the business of the partnership (as a co-owner can do in respect of a co-ownership property), as his right during the subsistence of the partnership is only to get his share of profits. But, on allotment of the asset by the fir.,: to the partner, such partner becomes entitled to exercise over the asset, all rights of an absolute owner. 17w Court then proceeded to observe what was a mere interest on allotment by the firm, enlarges into an absolute right, title and interest. The extinguishment of the common interest of the partners of the firm and creation of absolute ownership of the partner to whom it is allotted. Such a transaction is therefore a transfer of property as defined in the GT Act. We may note that the partnership was subsisting and an asset of the partnership was made the absolute ownership of one of the subsisting partners." 18. We find that this judgment came up for consideration before the apex Court in B. T. Patil & Sons vs. CGT [2001] 247 ITR 588 (SC), upholding the judgment of the Karnataka High Court. The apex court observed as under: " In our view, when ther....
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...., it is the firm and its continuing partners who have acquired the rights of the retiring partners in the assets of the firm by paying them lump sum amount on their retirement. So it cannot be said that the firm is transferring any right in capital asset to the retiring partner, rather it is the retiring partner who is transferring the rights ill capital assets in favour of continuing partners. The ITAT Mumbai in case of Sudhakar Shetty (2011) 130 lTD 197 (Mum) has held that such transaction amounted to transfer within the meaning of section 2(47) of the Act, inasmuch as the partner i.e. Sudhakar Shetty could be said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of the continuing partners to assignment and accordingly confirmed the capital gains assessed in hands of the retiring partner Shri Sudhakar Shetty in respect of the amount received by him from the firm over and above his capital contribution. The ITAT held that the transaction was taxable in hands of retiring partner for assignment of his rights in favour of firm and its continuing partners. Since the same event cannot result into transfer by retiring partners as....