TaxTMI 
TaxTMI 
2019 (9) TMI 1271
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....rder of the learned Tribunal:- i. Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal is right in holding that there was a transfer within the meaning of clause (4) of Section 45 of the Income Tax Act, 1961? ii. Whether in the facts and circumstances of the case, the Tribunal is right in holding that in the absence of an amendment of Section 2(47) of the Act, there is a transfer within the provisions of clause 4 of Sections 45 of the Income Tax Act, 1961? iii. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in law in sustaining the addition of interest under Section 234B of the Income Tax Act, 1961 since a charge was not created by the Assessing Officer as part of the order? 4. Both the learned counsels fairly agreed that the controversy involved in the present case is covered by a decision of a co-ordinate Bench of this Court, in which, one of us (Dr.Vineet Kothari,J.) was a party, decided on 08.04.2019 in T.C.A.Nos.365 and 366 of 2009 in "M/s. National Company Vs. The Assistant Commissioner of Income Tax". The Cognate Bench of this Court, in that matter of M/s. Nation....
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....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 for effecting such transfer would be executed. The Assessment was based on the family settlement and the subsequent deeds of retirement of partnership. It is thus seen that there was a conscious decision taken prior to reconstitution of the firms to transfer assets and the liabilities by way of a family settlement. It was also consciously decided to execute all necessary deeds and documents to effect such transfer. A transfer of assets in such circumstances, though held was not a device to avoid tax was still held to be 'transfer' within the meaning of Section 2(47....
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....re 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 the same was not a transfer and taxable under Section 45(4) of the Act. The reasoning of the Bombay High Court, is given below for better appreciation:- "13. During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On a dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which ....
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.... 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 share in a particular partnership asset or that a particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular asset. 14. The appeal against the judgement of the Gujarat High Court was dismissed by a Bench of three learned Judges of the Supreme Court in Addl. Commissioner of Income Tax, Gujarat v. Mohanbhai Pamabhai : 165 ITR 166. The Supreme Court relied upon its judgement in Sunil Siddharthbhai v. Commissioner of Income Tax MANU/SC/0164/1....
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...."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. It may also be appropriate to refer to Commissioner of Income Tax Vs. R.Lingmallu Raghukumar reported in 2001 247 ITR 801 SC. The entire Judgement is quoted below:- "1. This appeal by the Revenue is directed against the Judgement of the Andhra Pradesh High Court dated July 21, 1982, (see (1983) 141 ITR 674), in Referred Case No. 28 of 1977, whereby the following question of law referred to the High Court was answered against the Revenue a....
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....d there was only a division of the assets on retirement in accordance with their entitlement on the shares in the partnership. As pointed out earlier, the National Company was originally a sole proprietorship concern started by N.Munuswamy Mudaliar. It was in the business of construction and assets had been acquired even at that particular point of time. The two daughters and two sons-in-laws of N.Munuswamy Mudaliar were subsequently admitted as partners and on division of the assets, it can also be arguably pointed out that one daughter and one son-in-law were allotted a share which they were otherwise legally entitled to out of the holdings N.Munuswamy Mudaliar. 34. In view of the peculiar facts of the case in hand, we hold that the provisions of Section 45(4) would not be attracted on the retirement of the two partners and consequential allotment of their share in the assets in the Assessee Firm. We therefore answer the substantial question of law in favour of the Assessee and against the Revenue. 35. In the result, the Appeals of the Assessee are allowed. No costs. 5. The facts found by the learned Tribunal in the present case, are also quoted below for ref....
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....eep not only cases of dissolution but also cases of subsisting partners of a partnership transferring assets to retiring partners. (ii) New Gujarat Tin Printing Works V. ITO [2010] 8 taxmann.com 24/[2011] 128 ITD 182(Ahd.) The word 'otherwise' as occurring in Section 45(4) covers a situation, where the capital asset of the firm is distributed to its partners otherwise than on dissolution of the firm. (iii) CIT Vs. A.N.Naik Associates [2004] 136 Taxman 107/265 ITR 346(Bom.) The expression 'otherwise' has not to be read ejusdem generis with the expression' dissolution of a firm or body of individuals or association of persons. The expression 'otherwise' has to be read with the words 'transfer of capital assets' by way of distribution of capital assets. If so read, it becomes clear that even when a firm is in existence and there is a transfer of capital assets, it comes within expression 'otherwise' as the object of the amending Act was to remove the loophole which existed whereby capital gain tax was not chargeable. Therefore, when the asset of the partnership is transferred to a retirin....