TaxTMI 
TaxTMI 
2021 (7) TMI 136
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....T(A) erred in not appreciating that the provisions of section 45(4) do not apply to the facts and circumstances of the case of the appellant since the assets continued to be owned by the partnership firm. Thus addition of Rs. 96,18,000/- made u/s 45(4) being bad-in-law needs to be deleted. 2. Briefly stated, the assessee firm which is engaged in the business of manufacturing of PVC containers, CAPS etc. had e-filed its return of income for A.Y. 2010-11 on 28.09.2010, declaring a total income of Rs. 94,20,146/-. The return of income was initially processed as such u/s 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment u/s 143(2) of the Act. 3. During the course of the assessment proceedings, it was observed by the A.O that the assessee was carrying out its business from five distinct places, viz. Mumbai, Daman, Dehradun Unit-1 and Unit-2 & Pondicherry. On a perusal of the details, it was noticed by the A.O that the assessee firm was carrying out its business since 29.02.2004 with 4 partners viz. M/s Amarnath H. Singh (HUF); Shri Panchdeo H. Singh; Smt. Manju R.Singh; and Smt.Shail V. Singh, wherein all of them had equal shares. Subsequen....
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....sets and the devalued assets continue to be owned by the assessee. It was also claimed that the A.O has erred in taxing the capital gain on land at Daman as short term capital gain without granting the benefit of indexation and also in not applying the special rate of tax as per section 112 of the Act. In the additional ground of appeal the assessee has claimed that the AO has erred in taxing the revaluation gain on the Daman building at 30% instead of 20% since the building was also held for more than 3 years. Essentially the assessee seeks that the entire gain on revaluation should be treated as long term capital gain. 7.1 The facts and the submissions' of the case are carefully considered. It is noted that a little background of the case is required/o be spelt out. The assessee carries out its business from five distinct places i.e. from Mumbai/Daman, Dehradun Unit-I & Unit-II and Pondicherry. The Firm had been carrying out its business since 29/02/2004 with four partners viz. M/s Amarnath H. Singh HUF, Shri Panchdeo H.Singh. Smt. Manju R. Singh and Smt. Shail V. Singh. all having equal share. 7.2 It is further to be noted that all the partners are closely related to eac....
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.... deprived of their right in the true value of their share in the property of the Firm on 31st of December 2009, the assessee revalued its self owned land and building situated at Daman Unit as per the prevailing Market Value as on 31st December. 2009 and allocated the revaluation gain equally amongst the earlier partners as under: Indian Extrusions, Daman Unit Particulars of Assets Cost of Purchase/Construction Date of purchase/construction Revalued Amount (Rs.) Revaluation Gain (Rs.) Rs. Land 5,07,388 22.02.1993 28,46,250 23,38,862 Building 27,20,862 F.Y. 1993-94 1,00,00,000 72,79,138 Total 96,18,000 M/s Amarnath H Singh (HUF) 24,04,500 Shri Panchdeo H. Singh 24,04,500 Smt. Manju R. Singh 24,04,500 Smt. Shail V. Singh 24,04,500 Total 96,18,000 7.6 Thus effectively and prior to the retirement of M/s Amarnath H. Singh HUF and after admission of Ms. Pratikssa Singh, the land and building of the assessee at D....
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....pplied only to the extent of the share of the retiring partner i.e. M/s Amarnath H. Singh (HUF) as on the date of the retirement. 8. In order to decide the ground of appeal, it is necessary to note that the concerned section 45(4) of the Act came on the statute book only w.e.f. 01.04.1988 and the decisions of the various authorities/Courts prior to the same are not proper precedents. This fact has been noted in the decision of the jurisdictional High Court in the case of Commissioner of Income-tax vs. A.N. Naik Associates [2004] 265 ITR 346 (Bombay). The facts of this case and the decision therein are briefly noted below: The respondents in A. N. Naik Associates were parties to a family settlement dated January 30, 1997. Pursuant to the said family settlement, there was a deed of reconstitution of various partnership businesses of the family as set out under the family settlement. For the assessment year 1997-98, the partnerships were taxed for capital gains under section 45(4) of the Income-tax Act, 1961. The Income-tax Appellate Tribunal held that there was no dissolution but only reconstitution. The Income-tax Appellate Tribunal also held that the expression "otherwise'&....
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.... of sub-section (4) is construed to mean that the expression "otherwise" has to partake of the nature of dissoluation or deemed dissolution, then the very object of the amendment could be defeated by the partners, by distributing the assets to some partners who may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the Amendment Act. It was also 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" but 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 the expression "otherwise77 as the object of the Amending Act was to remove the loophole which existed whereby capital gain tax, was not chargeable. The High Court accordingly held that when the asset of the partnership is transferred to a retiring partner the partnership which is assessable to tax ceases to have a right or its right in the property stands extinguished in favour of the partner to whom ....
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....rtners who were entitled to share the profits of the firm. A reconstitution of the partnership firm took place by addition of two partners to the partnership firm and the firm was again reconstituted with the erstwhile four partners going out and retiring from the partnership, the newly added partners remaining in the firm and continuing the firm. The AO held that the exercise of taking into new partners and subsequently the original four partners going out of the firm leaving the entire assets of the firm in the hands of the newly added partners, is virtually a transaction involving the transfer of the assets of the firm to the new partners, as firm continued in the hands of the new partners. The AO invoked the provisions of section 45(4) of the Act and the value of the sale consideration for the transfer of the assets was taken to be the amount brought in by the partners and shared amongst the earlier partners. The High Court upheld the action of the assessing officer after noting the judgment of the Bombay High Court in A.N. Naik Associates case (supra) and also the judgments of the Karnataka High Court in the case of Suvardhan Vs. CIT (2006) 287 ITR 404 (Kar) held it to be ....
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....vable 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." 8.4 The above decision of the Karnataka High Court, with due respect, is different from the decision of the jurisdictional High Court in the A. N. Naik Associates case (supra). The Karnataka High Court laid stress on the point that 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 exclusive interest in the capital asset. This is not the view taken by the jurisdictional High Court in A.N. Naik Associates case where it was specifically 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" but the expression "otherwise" has to be read with the words "transfer of capital assets" as by way of distribution of capital assets or 'otherwise'. As per the jurisdictional Hi....
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....ur view in situations where like the one before us a partner receives for giving up his rights and interest in the firm at a price that is equated with reference to the market value of the assets of the firm, his rights and interests have been valued at the market price. When this market price exceeds the cost s. 45 of the Act comes into operation, the difference between the market price and the cost being gains is treated as on account of transfer of capital asset leading to levy of tax on such capital gain". 8.8 In the case of the present assessee the exiting partner has extinguished its rights and interests in the assets of the individual units as per the amended deed of Partnership and have received a price which is equated with reference to the revalued/market value of the assets. The continuing partners have also benefitted from the transfer of asset to their capital accounts as cash. This has benefited all partners that the capital balances have increased without the increase coming from either from a fresh infusion of capital or from any credit of share of actual profit of the Firm. 8.9 Another way of looking at the things is by holding that the Firm has permitted the p....
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....urplus to the partners capital accounts during the continuation of the firm would partake the character of capital gain u/s 45(4) r.w.s 2(14). It was submitted by the ld. A.R, that the same CIT(A) while disposing off the appeal in the case of a "sister concern" of the assessee, viz. M/s Amardeo Plastic Industries, had vide his order dated 18.11.2016 for A.Y. 2010-11 taken a similar view, and had concluded, that crediting of the partners capital accounts by mere money/cash belonging to the firm would clearly tantamount to a transfer of capital asset by the assessee to the partners. It was submitted by the ld. A.R that the aforesaid order of the CIT(A) in the case of M/s Amardeo Plastics Industries (supra) had thereafter been vacated by the Tribunal i.e ITAT, Mumbai benches "A", Mumbai in the case of M/s Amardeo Plastics Industries Vs. ACIT- 24(3), Mumbai, ITA No. 1874 & 1875/Mum/2017 for A.Y 2010-11, dated 31.05.2019. Our attention was drawn by ld. A.R to the aforesaid order of the Tribunal in the case of M/s Amardeo Plastic Industries (supra). It was submitted by the ld. A.R that the Tribunal in its aforesaid order, had observed, that a mere revaluation of assets and subsequent wit....
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....the Act in the backdrop of the orders passed in the case of, viz. in A.N. Naik Associats (supra) and Dynamic Enterprises (supra), had observed, that where the assets were evaluated and the retiring partners were paid their share of partnership asset, then, in the absence of any transfer of capital asset the provisions of Sec. 45(4) would not be applicable. It was further submitted by the ld. A.R that the ITAT, Mumbai "D" bench in the case of M/s D.S. Corporation Vs. ITO -21(4), Mumbai, ITA No. 3526 & 3527/Mum2012, dated 15.11.2018, had observed, that as in the case before them there was no dissolution of the partnership firm, and since, property in question continued to be owned by the assessee firm even after the retirement of the partners, it was, thus, not a case of transfer of the said property by way of distribution of capital assets on dissolution or otherwise. In order to buttress his aforesaid claim that the distribution of the revaluation surplus to the partners capital accounts during the continuation of the firm would not partake the character of capital gain within the meaning of Sec. 45(4) r.w.s 2(14), it was submitted by the ld. A.R that what the A.O had sought to do ....
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....of the assessee firm. We have deliberated at length on the issue in question, and are of the considered view, that as submitted by the ld. A.R, and rightly so, the aforesaid issue is squarely covered by the order passed by the coordinate bench of the Tribunal, viz. ITAT, Mumbai benches "A" in the case of a "sister concern" of the assessee, viz. M/s Amardeo Plastics Industries Vs. ACIT-24(3), Mumbai ITA Nos.1874-1875/Mum/2017 for A.Y 2010-11; dated 31.05.2019. As observed by us hereinabove, the Tribunal on the basis of its exhaustive deliberations and considering the various judicial pronouncements that were pressed into service by the ld. authorized representatives for both the parties, had observed, that for invoking of Sec. 45(4) of the Act two conditions were required to be cumulatively satisfied, viz. (i) there should be transfer of capital asset by way of a distribution of capital asset; and (ii) such distribution shall be on dissolution or otherwise. It was, thus, in the backdrop of the aforesaid observation, therein observed by the Tribunal that a revaluation of the capital assets of the firm and crediting of the capital accounts of the partners by the amount of the revaluat....
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.... Officer. Firstly, there was revaluation of assets and the Capital Account of all the Partners were credited by the revaluation amount. Secondly, there was change in profit sharing ratio of Partners in such a way that profit sharing ratio of the Partners was decided based on the units owned by the firm except for one Partner who was only given lump sum consideration and no percentage share in profit of the firm. Thirdly, Partners made amendments in a Partnership Deed which, inter alia, included a clause that Shri Prabhat Singh would be solely responsible for any liability arising in Mumbai unit after 01.01.2010, Shri Rahul Singh and Shri Amarnath Singh would be solely responsible for any liability arising in Daman, Pondicherry 1 and Pondicherry 2 units and Shri Panchdeo Singh would not be responsible for any liability arising out of any units. Lastly, there was withdrawal of amount by the Partners after revaluation subsequently. In this background, the Assessing Officer held that there was in effect 'transfer of assets' by the firm to its Partners and therefore, the conditions of section 45(4) of the Act were satisfied. The CIT(A) also upheld the order of Assessing Officer ....
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....in operational efficiency; and as such, the change in profit sharing ratio, in isolation, cannot be the basis to hold that there is any transfer/ distribution of assets of the firm. 19. The third event that took place was that there was amendment in the Partnership Deed in such a way that liability of the Partners was restricted to some units wherein their profit sharing ratio was high. The Assessing Officer concluded that since liability of the Partners was restricted to the particular unit, this implied transferring of assets and liability of that unit to the respective Partners. In this regard, it is main noteworthy that though the Partnership Deed states of inter-se profit sharing on the basis of units as well as unit-wise liability, but the Partners were very much jointly and severally liable to the outsiders. Pertinently, the liability of the Partners to outsiders is governed by the Indian Partnership Act, 1932, which cannot be curtailed by alteration in the Partnership Deed decided by the partners amongst themselves. Thus, the aforesaid amendment in the partnership revising the profit sharing based on units and making partners liable for the liabilities of their respective....
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....o of present partners does not entail any relinquishment of their rights partnership property. On introduction of new partners, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses if any of the partnership business. When any new partner is introduced into an existing partnership firm, the profit sharing ratio undergo a change which does not amount to transfer as defined under section 2(47) of the Act as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership and thus on realignment of profit sharing ratio, on introduction of new partners, there is no relinquishment of any non-existent share in the partnership assets as the asset remained with the firm. Such an arrangement is not covered by the provisions of section 45(4) of the Act which covers the case of dissolution of partnership firm. Accordingly no capital gain arises on such relinquishment of share ratio in the partnership firm. We confirm the order of CIT(A) and dismiss the grounds of appeal raised by the revenue." (Underlin....
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....ita assets of a firm; (2) such distribution should result in transfer of a capital asset by firm in favour of the partner; (3) on account of the transfer there should be a profit or gain derived by the firm and (4) such distribution should be on dissolution of the firm or otherwise. In order to attract section 45(4) the capital asset of the firm should be transferred in favour of a partner, resulting in the firm ceasing to have any interest in the capital asset transferred and the partners should acquire exclusive interest in the capital asset. In other words, the interest the firm has in the capital asset should be extinguished and the partners in whose favour the transfer is made should acquire that interest. Then alone are the profits or gains arising from such transfer liable to tax under section 45(4). ....................... (i) That the property belonged to the 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 a proportionate share in the interest in the firm. When the ret....
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.... above events. Notably, there has been no admission, retirement of Partner or dissolution of partnership firm. Moreover, the Assessing Officer has not pointed out any instance of transfer of interest in capital assets of the firm in favour of any partner. Also, as explained by the Id AR, the Partners have not withdrawn the revaluation gains credited to their account. Instead, it has been pointed out that part of the assets of the firm were sold in subsequent year and the resultant gain was offered to tax. Also, two galas of Mumbai unit and building at Daman unit were transferred to Panchdeo Singh and Mumbai unit was transferred on slump sale basis to Prabhat Singh in Assessment Year2013-14 and the resultant Capital Gain was offered to tax by the firm. This fact further substantiates the fact that there was no transfer of unit or assets of the units to any of the individual partner during the year under consideration. Thus, in the above factual background, and the legal position noted by us earlier, the cumulative effect of the transactions noted by the Assessing officer do not constitute transfer of assets to any partner by the firm. 23. Before us, Ld. Departmental Representati....
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....nly cases akin to dissolution. Notably, whether the provisions of section 45(4) of the Act would apply even where the assets have not been distributed, was never the issue before the Hon'ble Bombay High Court. The position before us is that the assets have neither been distributed and nor the interest in the assets been transferred to the partners in the instant year. Hence, reliance by the Revenue on the judgement of the Hon'ble Bombay High Court to contend that section 45(4) of the Act would apply even in absence of transfer of assets is not correct since that was not the issue before the Hon'ble Bombay High Court. 25. Coming to the observation of the Assessing Officer that there was withdrawal of the revaluation amount by the Partners in subsequent year and therefore there was transfer within the meaning of section 45(4) of the Act, the Id. AR pointed out that what the Partners have withdrawn in assessment years 2011-12 and 2012-13 is much less than what was there in the opening balance of Partner's Capital Account before revaluation. This factual assertion has not been negated at all. It is pertinent here to refer to the recent decision of the Hon'ble Bomb....
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.... parting, we may also refer to the reliance placed by the Assessing on the decision of the Hon'ble Supreme Court in case of CIT v. Dewas Cine Corporation (supra). In our view, the said decision is distinguishable on facts as the said decision was pertaining to depreciation of assets and not on revaluation of assets or distribution of asset and hence not applicable to the facts of the present case. 28. Similarly, the CIT(A) has also relied upon the decision of the Hon'ble Karnataka High Court in case of CIT v. Gurunath Talkies (supra) wherein, subsequent to revaluation of assets there was retirement of old Partners and admission of new Partners. The Hon'ble High Court held that reconstitution of the firm would involve transfer of assets. Notably, in the present case there is no event of retirement or admission of any partner. Moreover, we find that the said decision has been overruled by the subsequent Full Bench judgement of the Hon'ble Karnataka High Court in case of CIT v. Dynamic Enterprises (supra). Of course, the CIT(A) notes that reference to the Full Bench was made by the Division Bench since there was a conflict between the decisions in case of Gurunath Ta....