TaxTMI 
TaxTMI 
2003 (7) TMI 46
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.... there was no dissolution but only reconstitution. The Income-tax Appellate Tribunal also held that the expression "otherwise" had to be read ejusdem generis and would contemplate situations like a deemed dissolution and consequently held that tax on capital gains was not chargebale. On the facts, it was held that the business continued to be run and there was no dissolution of the firm and consequently section 45(4) of the Act was not attracted. The present appeals are preferred by the Revenue and various questions were framed. At the time of hearing, however, the following questions of law have been formulated for consideration which are as under: "1. Whether the deed of family settlement dated January 30, 1997, amounts to dissolution of partnership formed by agreement as contemplated under section 40 of the Indian Partnership Act? 2. Whether the distribution of assets of the firm amongst the retiring partners dated January 30, 1997, and the deed of reconstitution dated January 30, 1997, would amount to transfer of the capital assets which is in the nature of capital gains and business profits chargeable to tax under section 45(4) of the Income-tax Act? 3. Whether the word 'o....
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....t 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." Sub-section (4) along with sub-section (3) were introduced by the Finance Act, 1987, with effect from April I, 1988. From a reading of the above subsection to attract capital gains what would be required would be as under: "1. Transfer of capital asset by way of distribution of capital assets: (a) On account of dissolution of a firm; (b) Or other association of persons; (c) Or body of individuals; (d) Or otherwise; shall be chargeable to tax as the income of the firm, association or body of persons." On behalf of the Revenue, it is contended that the deed of family settlement dated January 30, 1997, amounts to dissolution of the partnership and the distribution of assets amongst the partners, even if it may be, by entries in the books, would amount to transfer of capital assets, to which the provisions of section 45(4) would be attracted. Independently, it is contended that even if there be no dissolution the expression "otherwise" would have to be read to mean any transfer of assets of the firms in favour of any of th....
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....rights therein. We first propose to answer the issue whether the deed of family settlement dated January 30, 1997, amounts to dissolution of the partnership firm by agreement under section 40 of the Indian Partnership Act. The Revenue has firstly placed reliance in the case of Erach F.D. Mehta v. Minoo F.D. Mehta, AIR 1971 SC 1653. There the apex court held on the facts therein that the agreement that one of the partners will retire amounts to dissolution of the partnership. In that case there were only two partners. The facts in our case are different. In Mir Abdul Khaliq v. Abdul Gaffar Sheriff, AIR 1985 SC 608, the apex court held on the facts that the documents clearly showed that not only the named partner had retired from the partnership but, the firm consisting of three partners was dissolved on the date on which the partner was intimated. In that case, one of the persons had sent a letter to the bank intimating retirement of named partner and requesting for closing the account of the firm, and opening a new account. It was on those facts that it was held that there was both retirement and dissolution of the partners. In the instant case, the documents would clearly show th....
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....sting legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction." This issue was an issue before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal has held that the firm was in existence right from 1985 and it was not a device to avoid tax. It was noted that there was no denial that there were family disputes amongst the partners and the genesis of family arrangement was not disputed. The arrangement by way of division of the assets and business interest was clearly defined and were not an isolated transaction in respect of the appellant firms. The Tribunal noted that from the memorandum of family arrangement, there was no contemplation of dissolution of the firm but reconstitution of the firm. The saving of tax was only a consequence of a normal event. We are in agreement with the view taken that the family settlement only provides the manner in which the assets of the family would be separated. The settlement itself contemplated various steps to be taken for giving effect to the family settlement. In our opinion, ther....
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.... Partnership Act is not a distinct entity. If that be the position, the apex court noted it would be difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership. 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 the 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 section 2(47) of the Act. Proceeding further, the court observed that every dissolution must be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm and thereupon distribution, division or allotment of assets takes place. The distribution to the partners is not done by the dissolved firm and in that sense there is no transfer ....
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....ets amounting to a transfer of assets within the meaning of section 2(47) of the Act. Pursuant to the inclusion of sub-section (4) in section 45, on the dissolution of a partnership the profits or gains arising from the transfer of capital asset are chargeable to tax as income of the firm. It is contended on behalf of the assessee that even after introduction of section 45(4), the position will be the same as the definition clause, i.e., namely, section 2(47), has not been amended. Secondly, it is contended that the expression "otherwise" must be read ejusdem generis with the expression dissolution of firm. So considered, there is no dissolution on the facts of the case. On behalf of the Revenue, it was, however, argued that the amendment was brought about to remove the mischief occasioned by parties avoiding to pay tax, considering the law as declared and to plug the loopholes. The expression otherwise must be read to include transfer of capital assets of the assessee-firm to a partner. As the section is a self-contained code, there was no need to amend the definition of transfer under section 2(47) of the Act. The position therefore, will have to be examined in the context of th....
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....o tax. The learned judge held that until such time such capital asset is transferred by way of distribution of the assets on the dissolution of the firm no occasion arises for bringing to tax any capital gain on a transfer which has not taken place. The section itself gives no room for doubt as the year in which the capital gain is to be brought to tax is the previous year in which the said transfer takes place. This judgment would again be of no assistance. In CIT v. Kunnamkulam Mill Board [2002] 257 ITR 544 (Ker) the assessment was for the year 1989-90. In that case, the real controversy was whether by retirement of a partner of the firm there is a transfer of the assets of the firm in favour of the surviving partners within the meaning of section 45(4) of the Act. The Division Bench of the Kerala High Court answered the same in the negative by holding that there was no transfer of assets, by holding that as long as there is no change in ownership of the firm and its properties, there is no transfer of ownership on reconstitution of the firm. This is therefore, not a case, where the assets were allotted to a retiring partner. Reliance has been placed in a judgment of the apex co....
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....same to gift-tax. The issue was whether distribution of machinery was a transfer in the nature of sale, for a consideration. The Division Bench of the Karnataka High Court considered the expression of "transfer" under section 2(xxiv) of the Gift-tax Act, which defines "transfer of property" as any disposition, conveyance, assignment, settlement, delivery or other alienation of property. The Division Bench noted that the Act was self-contained and the definition of "property" is to rope in artificial devices which may include mere agreements or arrangements, intended to confer gifts, which may not however, fall under the normal meaning of "transfer" as gifts and the definition of "gift" in section 2(xii) to include many transactions which could not ordinarily be described as transfers of property and has a wider import than the meaning given to "gift" in section 122 of the Transfer of Property Act. The court after considering various judgments, held that the decisions which hold that there is no transfer of property when there is a distribution of assets on dissolution or when an asset is allotted to a partner on his retirement from the firm, will be inapplicable where an asset is b....
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....7 ITR 588 upholding the judgment of the Karnataka High Court. The apex court observed as under: "In our view, when there is a dissolution of a partnership or a partner retires and obtains in lieu of his interest in the firm, an asset of the firm, no transfer is involved...But the position is different when, during the subsistence of a partnership, an asset of the partnership becomes the asset of only one of the partners thereof; there is, in such a case, a transfer of that asset by the partnership to the individual partners." The ratio of the judgment as can be culled out is that when a subsisting partner receives from the firm an asset then there is a transfer of that asset from the partnership to the individual partner. In other words under the Wealth-tax Act when an asset of the partnership becomes the asset of one of the partners it amounts to a transfer. Before proceeding to further examine the matter, we may consider the judgment in N. Bagavathy Ammal v. CIT [2003] 259 ITR 678 (SC). The apex court therein took the view that in construing the provisions of section 46(2) of the Income-tax Act, 1961, the definition of "capital asset" in section 2(14) had no relevance. In that....
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.... the assets are of the partners and not of the partnership. Therefore, if on retirement a partner received his share of the assets, may be in the form of a single asset, it was held that there was no transfer and similarly on dissolution of the partnership. Another device resorted to by an assessee was to convert an asset held independently as an asset of the firm in which the individual was a partner. The decision of the Supreme Court in Kartikeya V. Sarabhai v. CIT [1985] 156 ITR 509 took a view that this would not amount to transfer and, therefore, fell outside the scope of the capital gain. The rationale being that the consideration for the transfer of the personal asset was indeterminate, being the right which arose or accrued to the partner during the subsistence of the partnership to get his share of profit from time to time and on dissolution of the partnership to get the value of his share from the net partnership asset. Parliament with the avowed object of blocking this escape route for avoiding capital gains tax by the Finance Act, 1987, has introduced sub-section (3) to section 45. The effect of this was that the profits and gains arising from the transfer of a capital ....