TaxTMI 
TaxTMI 
2020 (2) TMI 1433
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....the amount of revaluation of assets as it is not a relinquishment of rights over the assets but credit balance of capital and current accounts ? 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above." 3. The C.O. filed by the assessee is in support of the order of CIT (Appeals) wherein the assessee has raised the following grounds : " 1. The Appellate order dated 28-11-2016 passed by the Learned Commissioner of Income-tax (Appeals) - 7, Bangalore was in accordance with the law and facts of the case. 2. The Learned Commissioner of Income-tax (Appeals) - 7, Bangalore was justified in deleting the addition made by the Ld. AO u/s. 45(4) with due appreciation of the evidence relied upon by the Respondent in the course of the Appellate proceedings. 3. The Ground No. 3 of the Departmental Appeal is not maintainable in law in view of the clear finding of the Ld. CIT(A....
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....as neither a dissolution of the firm nor distribution of the assets and as such the provisions of Section 45(4) of the Act were not applicable. The AR of the relied upon the decision of the Hon'ble High Court of Karnataka in the case CIT V/s. Dynamic Enterprises, wherein it was held that Section 45(4) of the Act was not applicable in the case of reconstitution or retirement of partners. However, the AO has rejected the submissions of the AR and held that the same facts were involved in the case of M/s. Gurunath Talkies in which the Hon'ble High Court of Karnataka has held that the re-arrangements were not akin to dissolution of the firm and Section 45(4) of the Act was not applicable. The AR submitted that the Hon'ble High Court of Karnataka in the case of M/s. Dynamic Enterprises has held that in view of the conflicting decisions in the cases of M/s. Gurunath Talkies and M/s. Mangalore Ganesh Beedi Works, the case of M/s. Dynamic Enterprises was referred to a Larger Bench for adjudication. In this regard, the AO has held that the matter before the Larger Bench was pending and therefore he relied upon the decision in case of M/s. Gurunath Talkies and accordingly a sum of Rs. 5,97,7....
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....ruled decision of M/s. Gurunath Talkies dis-regarding the Larger Bench decision of the Hon'ble High Court of Karnataka in the case of M/s. Dynamic Enterprises. The ld.AR submits that the AO was not justified in bringing to tax a sum of Rs. 5,97,72,180/- assessable as Long Term Capital Gains u/s. 45(4) of the Act. The ld.AR further submits that the order so passed by the AO was not justifiable as it was opposed to law and facts of the case and especially in the light of the decision of the Hon'ble High Court of Karnataka in the case of M/s. Dynamic Enterprises which is squarely applicable to the facts of the present case and therefore, the assessee has filed an Appeal before the CIT(A) who in turn has allowed the assessee's Appeal and deleted the addition made by the AO u/s. 45(4) of the Act. Under these facts and circumstances the Appeal filed by the Department against the order of CIT (Appeals). The C.O. filed by the Assessing Officer is in support of the order of CIT (Appeals). 5. The ld. DR submitted that in this case the firm was having 3 partners namely Shri M.N. Narasimhamurthy Naik, Smt. Mamtha Naik and Smt. S.R. Asha which was reconstituted on 12.08.2010 by admitting....
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....e Larger Bench of Karnataka High Court. The assessment order was passed on 13.03.2014 though the judgment in the case of CIT Vs. Dynomic Enterprises (supra) was passed on 16.09.2013, the Assessing Officer failed to follow the binding direction of the jurisdictional High Court. He supported the order of learned CIT (Appeals) which is squarely covered by the judgment of Larger Bench of Karnataka High Court in the case of CIT Vs. Dynomic Enterprises (supra). Further he relied on the Hon'ble Supreme Court judgment in the case of Sunil Siddharthbhay Vs. CIT (1985) 156 ITR 509 (SC) wherein it was held that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership asset including goodwill of the firm. There was no transfer of interest of the partner in the goodwill and not part of the amount received by the partner could be assessed as capital gain u/s. 45 of Income Tax Act wherein the Hon'ble Supreme Court followed the earlier decision in the case of Sunil Siddharthbhay Vs CIT (supra). The learned Authorised Representative also relied on the judgment of Hon'ble Supreme Court in the case of CIT Vs. R Lingmallu Raghu....
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....s that profit and gains arising therefrom would be chargeable to tax. It is also whether the word 'otherwise' appearing in the phrase "distribution of capital assets on dissolution of the firm or otherwise" would include retirement of partner also. Even if retirement is assumed to be covered within he ambit of expression 'otherwise' section 45(4) will not apply to retirement where only money value of the partner's interest in the firm is paid to the outgoing partner and no specific asset is distributed or transferred to the outgoing partner, because the firm continues to own the asset and for section 45(4) to attract, the firm should cease to be the owner of the asset. In CIT Vs. Kunnamkulam Mill Board (2002) 257 ITR 544 (Ker) the firm which originally consisted of five partners was reconstituted when two more partners joined the firm and at the time of reconstitution, the assets of the firm were revalued and difference was credited to the accounts of the five original partners. After two weeks these five partners retired and amounts standing to their credit were paid to them and the firm continued the business. The Assessing Officer held that s. 45(4) was attract....
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.... of a firm or other association of persons or body of individuals or otherwise. If in the course of such distribution of capital asset there is a transfer of a capital asset by the firm in favour of a person and it results in profits or gains to the firm, then the said profits or gains shall be chargeable to tax as income of the firm and again for computing such income, Section 48 is attracted. In other words, in the process of a dissolution of a firm, if a capital asset is transferred to a partner which results in profits or gains, then that income is chargeable at the hands of the firm under this provision. In order to attract sub-section (4) of Section 45, the condition precedent is, (1) There should be a distribution of capital assets of a firm; (2) Such distribution should result in transfer of a capital asset by firm in favour of the partner; and (3) On account of the transfer there should be a profit or gain derived by the firm. (4) Such distribution should be on dissolution of the firm or otherwise. 24. Therefore, 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 ....
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....ers have taken cash and given the property to the incoming partners. The property belongs to the partnership firm. It did not belong to the partners. The partners only had a share in the partnership asset. When the five partners came into the partnership and brought cash by way of capital contribution to the extent of their contribution, they were entitled to the proportionate share in the interest in the partnership 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's case (supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case Commissioner of Income Tax Vs. A.N.Naik Associate - (2004) 265 ITR 346 (BOMBAY). In Naik's case, 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 enter....