TaxTMI 
TaxTMI 
2019 (5) TMI 354
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....sioner of Income Tax (Appeals) - VI, Chennai dated 16.03.2007 relevant to the Assessment Year 2004- 2005. 3. Both the appeals have been admitted on the following substantial questions of law:- "1. Whether the Appellate Tribunal was right in holding that Section 45(4) of the Income Tax Act, 1961 applies to retirement of partner from partnership business?; 2. Whether the Appellate Tribunal was right in the manner and application of the rule of ejusdem generis to Section 45(4) of the Income Tax Act, 1961?; 3. Whether the word 'otherwise' in Section 45(4) of the Income Tax Act, 1961 takes into its sweep not only cases akin to dissolution of the firm but also cases of reconstitution of firm?; and 4. Whether the Appellate Tribunal erred in not appreciating that unless there is a 'transfer' within the meaning of Section 2(47), capital gains under Section 45(4) is not attracted?". 4. The Assessee, M/s. National Company, Chennai, is engaged in the business of construction. It also owns, manages and maintains a commercial complex, two theatres and two kalyana mandapams. N.Munuswamy Mudaliar originally started a sole proprietorship concern under the name of "National....
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....bunal held that Section 45(4) of the Act applied to the Assessee and further held that there was "transfer" of assets within the meaning of Section 2(47)(vi) of the Act. 10. The Assessee is in appeal before us against the said order. Heard arguments advanced by Mr.P.H.Arvind Pandian, learned Additional Advocate General, instructed by Ms.R.Maheswari, for the appellant and Mr.T.R.Ravikumar, learned Senior Standing Counsel for the Revenue. 11. Mr.P.H.Arvind Pandian, learned Senior Advocate pointed out that Section 45(4) of the Income Tax Act would apply only in a case where there is "dissolution" of the partnership firm. In the present case, there was retirement of two partners and the firm had not been dissolved. On the other hand, it continued its business operations by inducting another partner. The retiring partners did not receive any consideration for the transfer of their interests in the firm. They had been allotted properties to the extent of the credit balance in the capital account. 12. The learned counsel for appellant - Assessee argued that this cannot be termed as "transfer" of assets and urged that Section 45(4) of the Income Tax Act would not apply to the facts of ....
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.... 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. ........ ........ " 16. It is clear that two primary requirements are essential for the application of Section 45(4) of the Act, namely, (i) there should be a transfer of a capital assets; and (ii) there should be distribution of capital assets on the dissolution of a firm or otherwise. 17. To examine this, it would be advantagous to refer to the definition of the word "transfer" as defined under Section 2(47)(vi) of the Act. "Section 2. In this Act, unless the context otherwise requires.- (47) "transfer", in relation to a capital asset, includes:- (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or ....
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....o the assessee. When a partner retires from a partnership he receives his share in the partnership and this does not represent consideration received by him in lieu of relinquishment of his interest in the partnership asset. 22. In Commissioner of Income Tax Vs. A.N.Naik Associates and Others reported in 2004 265 ITR 346 (Bom), the facts were that the respondents were parties to a family settlement dated 30.01.1997. Pursuant to the family settlement, there was a deed of reconstitution of various partnerships. One of the questions of law which had been formulated for consideration was whether the deed of reconstitution of partnership by the Assessee firm was a device to avoid tax. A further examination of the facts in that case reveal that it had been agreed between the parties that businesses of six firm would be distributed in terms of the family settlement, as the parties desired that various matters concerning the business and the assets thereto be divided separately and partitioned. In the settlement, the manner in which the assets were proposed to be divided were set out. It was also provided that all such documents, deeds, declarations, affidavits as are reasonably required ....
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....by six partners and running a printing press at Trichy and another at Chennai. They entered into an agreement on 28.04.1989 whereby two partners, were permitted to carry on the business under the same name at Chennai and four partners were permitted to carry on the business at Trichy in the same name. It is seen that in that case, there was definitely an element of transfer of assets since two of the partners gave up their interests in the business at Trichy and four of the partners gave up their interest in the business at Chennai. The facts are certainly distinguishable to the facts of the present case. 25. However a directly contrary view to the view taken in A.N.NaiK Associates have been expressed in Prashant S. Joshi Vs. The Income Tax Officer and Others reported in 2010 324 ITR 154 (Bom) wherein a Division Bench of the Bombay High Court, again dealing with a fact situation in respect of a partnership firm dealing with development of real estate, when a partner retired and agreed to receive sum of Rs. 50 lakhs, in addition to the balance lying to his credit in the capital as reflected in the books of accounts as final settlement of his dues on account of retirement, held that....
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....o transfer of interest in the partnership assets involved when a partner retires from the partnership. The Gujarat High Court held that there is, in such a situation, no transfer of interest in the assets of the partnership within the meaning of Section 2(47). When a partner retires from a partnership, what the partner receives is his share in the partnership which is working out by taking accounts and this does not amount to a consideration for the transfer of his interest to the continuing partners. The rationale for this is explained as follows in the judgement of the Gujarat High Court: .... what the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only in the surplus that the retiring partner is entitled to claim a share. It is, therefore, not possible to predicate that a particular amount is received by the retiring partner in respect of his shar....
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.... brought to tax as capital gain by transfer of capital asset. 27. In Sampath Iyengar's "Law of Income Tax" revised by S.Rajaratnam, 12th edition, it had been observed as follows:- "134. Or otherwise.- There should ordinarily be no presumption of transfer in dissolution except to the extent directed under Section 45(4). Retirement is prima facie not covered by the sub-section. But the Departmental view is that the words "or otherwise" immediately succeeding "dissolution" under Section 45(4) would cover even retirement. "Or Otherwise" can only mean "before or after dissolution" in contradistinction to "on". Further Section 45(4) when understood in conjunction with Section 45(3) can refer to formations and dissolutions. Since change in constitution is a concept recognised in Chapter XVI-C of the Act, there is no reason why the law should not have referred to change in constitution along with dissolution, if that were the intent instead of the expression "or otherwise". 28. It is seen that even the learned author has expressed the view with that Section 45(4) of the Act would not apply on retirement of a partner from a partnership firm and when there is transfer of assets. 29.....