TaxTMI 
TaxTMI 
2019 (1) TMI 1551
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....eparing the draft questions and not to enlarge or modify the point of difference referred by the differing Members to the Third Member. Accordingly the learned Representatives of both the sides have proposed draft questions and after a detailed discussion and deliberation, it is agreed that question Nos. 2 & 3 as suggested by the Sr. DR correctly incorporate the exact controversy in the point of difference. It is accordingly settled and finalised that the said two questions are required to be considered and decided by the Third Member in this case to resolve the controversy in the point of difference between the differing Members. The said two questions are as under: - " 1. Whether on the facts and in the circumstances of case, where on revaluation of asset being land held by the partnership firm which resulted into enhancement of value of asset and this enhanced amount credited in capital account of partners and when a retiring partner takes amount in his capital account including enhanced value of asset, it gives rise to Capital Gain under section 45(4) r.w. Section 2(14) of the Income Tax Act. 2. Whether on the facts and in the circumstances of the case, is there any trans....
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.... the Government of India, Ministry of Tourism vide letter dated 18.01.2006 granted permission to the assessee firm to construct five star hotel on the property purchased by it at Juhu Tara Road. Meanwhile the assessee firm also arrived at a settlement with 77 of the 81 tenants who had occupied the said property. Thereafter the assessee firm decided to revalue the property and as per the valuation made by a Registered Valuer, Shri A.R.Nigam vide valuation report dated 25.03.2006, the property was revalued at 1,93,90,60,000/-. On the basis of the said valuation done by the Registered Valuer, revaluation surplus was created in the books of account of the assessee firm and the same was credited to the capital accounts of all the partners in their profit sharing ratio. On 27.03.2006, the partnership was again reconstituted whereby Smt. Hemlata Shetty retired from the partnership firm and her profit sharing ratio of 20% was given to four new partners at 5% each, who were admitted to the partnership firm. On retirement, Smt. Hemlata Shetty was paid the entire amount of 31,40,48,088/- standing to the credit of her capital account including the amount of 30,87,98,087/- credited on account o....
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....assets was chargeable to tax as capital gain in the hands of the assessee firm being distribution of capital assets by way of dissolution of the partnership firm or otherwise in terms of Section 45(4) of the Act. To arrive at this conclusion, the AO relied on the decisions of the Hon'ble Supreme Court in the case of CIT vs. Bankey Lal Vaidya (79 ITR 594) and Dewas Chic Corporation (68 ITR 240) and the decision of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra). 4. The action of the AO in bringing to tax the revaluation surplus of 1,54,39,90,435/ - as capital gain by applying provisions of Section 45(4) of the ALL was challenged by the assessees in the appeals filed before the learned CIT(A) and after considering the submissions made by the assessees as well as the material available on record, the learned CIT(A) held that there was no dissolution of partnership firm either at the time of retirement of Smt. Hemlata Shetty on 26.03.2006 or at the time of retirement of Shri Sudhakar Shetty on 25.05.2006. According to him, there was only reconstitution of the partnership firm with change of partners and there was nothing in the retirement deed to sug....
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....ntinuing partnership firm and hence there was no transfer of any kind within the meaning of Section 2(47) of the Act. The learned CIT(A) also considered the judicial pronouncements relied upon by the Assessing Officer to make out the case of application of Section 45(4) of the Act and found the same to be distinguishable on facts. The learned CIT(A) accordingly arrived at a conclusion that there was no distribution of capital assets by the assessee firm as a result of revaluation and retirement of partners as envisaged in Section 45(4) of the Act and directed the AO to delete the addition of 1,54,39,90,435/- made on account of capital gain by applying the said provision. 5. Aggrieved by the relief given by the learned CIT(A) to the assessee by deleting the addition made by the AO on account of capital gain by applying provisions of Section 45(4) of the Act, an appeal was preferred by the Revenue before the Tribunal. After considering the submissions of both the sides and the material available on record including the judicial pronouncements cited by both the sides, the learned Accountant Member proposed a lead order. In the said order, he initially referred to the provisions of S....
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....tion of capital asset takes place on retirement, death etc, of partner and money equivalent is t in lieu of assets towards the share of the partner. To arrive at this conclusion, the learned Accountant Member relied on the decision of the Hon'ble Supreme Court in the case of CIT v. Bankey Lai Vaidya (1971) 79 ITR 594(SC) and the decision of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra). He accordingly held that even distribution of money equivalent to the retiring partners towards their share shall also fall within the ambit of transfer under section 2(47) of the Act and will fall within the sweep of chargeability to tax as per the provisions of section 45(4.) of the Act keeping in view the deletion of clause (ii) of Section 47 of the Act by Finance Act, 1987 w.e.f. 01.I)4.19RR and the definition of capital asset as contained in Section 2(24) of the Act which is of widest amplitude. He accordingly held that the addition made by the AO on account of capital gain to the total income of the assessee firm by application of Section 45(4) of the Act was sustainable but only to the extent of surplus arising out of revaluation of property which stood dis....
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....sfer of capital assets within the meaning of section 45(4) of the Act. It was held by the Hon'ble Bombay High Court that the word "otherwise" used in section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partners of a partnership transferring the assets in favour of retiring partner. He held that the facts involved in the present case, however, were different, inasmuch as, except payment of money standing to the credit of the partners' capital account in the partnership, there was no physical transfer of any asset by the partnership firm and the decision of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra) was not applicable. He held that what was paid to the retiring partner was only the money standing to the credit of his/her capital account and hence, there was no distribution of any capital assets by way of transfer so as to attract the provisions of section 45(4) of the Act. 9. The Id. Judicial Member referred to the decision of the Full Bench of Hon'ble Karnataka High Court in the case of CIT-vs.- Dynamic Enterprises [359 ITR 83] to note that while deciding the similar issue in the similar f....
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....y the Id. Accountant Member, the Id. Judicial Member noted that the facts involved in the said case were that there was a dissolution of firm and the two partners wanted to distribute the assets among themselves and one of the partners did not agree to sell/exchange or transfer his shares in assets of the firm and finally agreed to receive money equivalent to his share. The other partner accordingly agreed to pay the money on the basis of assets valued on dissolution and took over the assets of the firm on dissolution. He held that the Hon'ble Supreme Court in these facts and circumstances of the case held that the money value of the partner's share in assets of the firm received by partner amounted to distribution of assets of the firm on dissolution. He observed that the Hon'ble Apex Court, however, finally held that no capital gain arose on the value of money paid to the retiring partner as there was no sale or exchange or transfer of assets. He held that the decision of the Hon'ble Supreme Court in the case of Bankey Lal Vaidya (supra) thus had no application to the facts of the assessee's case. He further held that the decision of the Hon'ble Karnataka ....
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....ion of money equivalent to the retiring partner towards his share also falls within the ambit of transfer as defined under section 2(14) attracting the provisions of section 45(4) of the Act. He contended that the decision of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra) and the decision of the Hon'ble Supreme Court in the case of CIT -vs.- Bankey La! Vaidya (supra) relied upon by the Id. Accountant Member to decide the issue in favour of the revenue are very relevant and the same squarely cover the issue in favour of the revenue. He, therefore, strongly supported the order passed by the Id. Accountant Member and contended that the view taken by the id. Accountant Member deserves to be endorsed. 13. The Id. Counsel for the assessee, on the other hand, contended that the decision of the Hon'ble Supreme Court in the case of CIT -vs. Bankey Lal Vaidya [79 ITR 594] relied upon by the Assessing Officer as well as by the Id. Accountant Member is found to be distinguishable on facts by the Judicial Member. In this regard, he invited our attention to para nos. 18 & 19 of the order of the Id. Accountant Member to show the distinguishing features poi....
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....e case of A.N. Naik Associates (supra), which involved a different set of facts as pointed out by the Id. Judicial Member in his order as well as by the Full Bench of the Hon'ble Karnataka High Court in the case of Dynamic Enterprises (supra). He contended that similarly the decision of the Hon'ble Karnataka High Court in the case of KirlosIcar Asia Limited (supra) was not relevant to decide the issue and reliance of the lion'ble Accountant Member on the same is clearly misplaced. He contended that the decision of the Full Bench of Hon'ble Karnataka High Court in the case of Dynamic Enterprises (supra) as well as the decision of the Tribunal in the case of Keshav & Co. (supra) and Mahul Corporation (supra), on the other hand, are directly applicable to the facts of the present case and the view taken by the Id. Judicial Member while deciding the issue in favour of the assessee by following the said judicial pronouncements is correct in law as well as on facts. 16. I have heard the rival submissions and also perused the relevant material available on record including two separate orders passed by the Id. Differing Members. I have also carefully gone through the var....
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....ing a company or a cooperative 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". 18. The purpose of inserting sub-section (4) in section 45 of the Income Tax Act, 1961 by the Finance Act, 1987 w.e.f. 1st April, 1988 is explained in the explanatory notes on the provisions of the Finance Act 1987 vide the CBDT Circular No. 495 dated 22.09.1987. As explained by the CBDT, the conversion of partnership assets into individual assets on dissolution or otherwise was being used as the scheme of tax avoidance and accordingly new sub-section (4) was inserted in section 45 so as to make the profit or gains arising from the transfer of capital asset by a firm to a partner on dissolution or otherwise chargeable as the firm's income in the previous year in which the transfer took place. Prior to insertion of sub-section (4) in section 45 w.e.f. April 1st, 1988, the position wa....
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....n Garg nor did he transfer his share in the capital assets. It was held that the assets of the firm included the goodwill, machinery, furniture, medicines, library and the copyright in respect of certain publications and since a large majority of the said assets were incapable of physical division, the partners agreed that the assets be taken over by Shri Devi Sharan Garg at a valuation and the assessee be paid his share of the value in money. It was held that such an arrangement amounted to a distribution of the assets of the firm on dissolution and the payment of the agreed amount to the assessee under the arrangement of his share was, therefore, not in consequence of any sale, exchange or transfer of assets. In the present case, the facts involved however, are different, inasmuch as, there is no dissolution of the partnership firm and since the property in question was continued to be owned by the assessee-firm even after the retirement of two partners namely Smt. Hemlata Shetty and Shri Sudhakar Shetty, it is not a case of transfer of the said property by way of distribution of capital assets on dissolution or otherwise. In the case of Bankey Lal Vaidya (supra), the partnership....
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....al income of the assessee in the year 1952-53 under the second proviso to section 10(2)(vii) of the Income Tax Act, 1922 and while answering the same in the negative and in favour of the assessee, Hon'ble Supreme Court relied on the provisions of the Partnership Act, 1932 to hold that wheii the two partners had brought in the theatres of their respective ownership into the partnership, the theatres must be deemed to have become the property of the partnership. It was held that under section 46 of the Partnership Act, 1932, on the dissolution of the firm, every partner or his representative was entitled to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights. It was held that the distribution surplus was for the purpose of adjustment of the rights of the partners in the assets of the partnership and it did not amount to transfer of assets. The issue involved in the case of Dewas Cine Corporation (supra) thus was entirely different and the decision rendered by the Hon'ble Supreme Court in the said case was in a different context than ....
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....re, not within the ambit of the charging provision contained in section 45 and the proportionate share in the value of the goodwill received by each assessee for transfer of his interest in the goodwill was not taxable as capital gain. 23. Dissatisfied with the decision of the Tribunal in so far as it went against it in the case of CIT -vs.- Mohanbhai Pamabhai (supra), the Revenue carried. the matter before the Hon'ble Gujarat High Court. The following two questions were referred to the Hon'ble Gujarat High Court:- (i) Whether the Tribunal was right in holding that the goodwill of the firm is a self-acquired asset of the firm? (ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount received by the assessee by way of his share in the goodwill of the first is not liable to be assessed to tax? The following third question was also referred to the Hon'ble Gujarat High Court at the instance of the assessee: (iii) Whether on the facts and in the circumstances of the case, the retirement of the assessee as partner from the firm amounted to dissolution of the firm, and, therefore, the capital gain, if any, ....
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....al allowed the said appeal by holding that there was no dissolution of the partnership firm but only reconstitution. The Tribunal also held that the expression "otherwise" used in section 45(4) had to be read ejusdem generis and would contemplate situations like a deemed dissolution. It was also held by the Tribunal that the business of the partnership firm continued to be run and there being no dissolution of the firm, section 45(4) of the Act was not attracted. Against the orders of the Tribunal, the Revenue went in appeal before the Hon'ble Bombay High Court raising inter alia the following questions of law:- "(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 'otherwise', in sect....
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.... adjustment of rights between the partners, which cannot be regarded as a transfer of assets within the meaning of section 2(47) of the Act. Hon'ble Bombay High Court then proceeded to examine the position in the context of the law as amended after 1988 and held that on retirement of a partner or partners of an existing firm, who receives assets of the firm, the law before 1988 would really of no support as by section 45(4), what was otherwise not taxable has been made taxable. It was held that if the object of insertion of sub-section 4 of section 45 is seen and the mischief it seeks to avoid, it would be clear that the intention of Parliament was to bring into the tax net transactions whereby assets were brought into a firm or taken out of the firm. It was 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" and the same has to be read with the words "transfer of capital assets" by way of distribution of capital assets. Consequently it was held that even when a firm is in existence and there is a transfer of capital asset, it comes within the expression "otherwise" as the ....
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.... the partnership firm continued to remain the owner of the property. 28. In support of the view taken in favour of the assessee on the issue under consideration, the Id. Judicial Member has placed a heavy reliance on the judgment of Full Bench of the Hon'ble Karnataka High Court in the case of CIT -vs.- Dynamic Enterprises (supra). As rightly observed by him, the facts involved in the said case are identical to the facts involved in the present case. The assessee in the said case was a partnership firm, which had come into existence on 09.01.1985 with Shri Anurag Jain and Sri Nirmal Kumar Dugar as its partners. The said 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 Shri Nirmal Kumar Dugar retired from the partnership firm and Shri L.P. Jain, father of Anurag Jain, entered as a partner. The firm purchased land at Jakkasandra Village, Begur Hobli, Bangalore South Taluk under a registered sale deed dated 13.05.1987 for a consideration of Rs. 2,50,000/-. Another reconstitution took place on 1.7.1991 by which Shri L.P. J....
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....tners and there is no question of any extinguishment of the firm's rights in the partnership assets. Hon'ble Karnataka High Court noted that the Indian Income Tax Act, however recognizes the firm as a distinct assessable legal entity apart from its partners and proceeded to examine the position with reference to sub-section (4) of section 45 introduced by the Finance Act, 1987 with effect from 01.04.1988. 29. After analysing the provision of section 45(4) of the Act, Hon'ble Karnataka High Court held that the following conditions are precedent in order to attract sub-section (4) of section 45:- (i) There should be a distribution of capital assets of the firm; (ii) Such distribution should result in transfer of capital asset by firm in favour of the partner; and (iii) Such distribution should be on dissolution of the firm or otherwise. On the basis of the above analysis, it was held by the Hon'ble Karnataka High Court that 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 e....
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....ood extinguished in favour of the partner to whom it was transferred. As observed by the Hon'ble Karnataka High Court, it was in this context the Hon'ble Bombay High Court held that 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. The Hon'ble Karnataka High Court laid emphasis on the observations recorded by the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra) to the effect that to attract section 45(4), there should be a transfer of a capital asset from the firm to the retiring partners, by which the firm ceases to have any right in the property, which was so transferred and its right to the property stands extinguished and the retiring partners acquire absolute title of the property. The Hon'ble Karnataka High Court took note of the fact that the partnership firm in the case of Dynamic Enterprises did not transfer any right in the capital asset in favour of the retiring partners and since its right to the property was not extinguished and the retiring partner did not acquire any right in the property, held tha....
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....he profit arising from the transfer was liable to tax as the income of the assessee-firm. In the appeal filed by the assessee, the first appellate authority held that the provisions of section 45(4) were not applicable in the case as there was neither a dissolution of the firm nor distribution of capital assets when the partners retired from the firm. The Tribunal confirmed the order of the first appellate authority and the question that arose for the consideration of Hon'ble Kerala High Court in the appeal filed by the revenue under section 260A of the Act was "whether, on the facts and in the circumstances of the case, the Tribunal was right in law and facts in holding that the provisions of section 45(4) had no application to the facts of the case and that the addition could not be sustained under that section", After considering the relevant provisions of the law as well as the case laws on the point, Hon'ble Kerala High Court held that there was no change in the status of the assessee-firm even on the retirement of the five partners and there was no change in the ownership of the property even with the change in the constitution of the firm. It was held that as long as....
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....ose before the Hon'ble Karnataka High Court was "whether, on the facts and in the circumstances of the case, a sum of Rs. 2,98,657/- was rightly assessed as long-term capital gain'. While answering the said question in the affirmative and in favour of the revenue, llon'ble Karnataka High Court held that the dollars in question, which were repatriated to India, being the property of the assessee, constituted capital asset of the assessee within the meaning of section 2(14) of the Act and any profit derived on account of its transfer was liable to be treated as capital gain as the assessee was able to acquire Indian currency only by transferring the capital asset as defined in section 2(47) of the Act. The facts involved in the present case, however, are entirely different from the facts involved in the case of Kirloskar Asea Limited (supra) and the money equivalent to enhanced portion of the assets revalued and paid by the assessee-firm to the retiring partners cannot be equated with the foreign exchange acquired and realised at a higher value in terms of rupee as involved in the case of Kirloskar Asea Limited (supra) so as to say that it constitutes capital assets for t....