TaxTMI 
TaxTMI 
2021 (7) TMI 136
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....f the provisions of section 45(4). Further the learned CTT(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.Sh....
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....e Act the assessee has claimed that there was not actual transfer of capital assets 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 s....
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....he readjustment cannot be done without getting shares properly. To give effect to the above reconstitution and also to ensure that the partners are not 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....
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....ere judgments relating to the period prior to the introduction of present section 45(4) of the Act and related to other statutes besides Income Tax). The assessee also submitted that even if the provisions of section 45(4) of the Act are sought to be applied, the same may be applied 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 ass....
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....ains tax unless it does not fall within the definition of transfer under section 2(47). The High Court held that Section 45 is a charging section and the purpose and object of the Act of 1987 was to charge tax arising on distribution of capital assets of firms which otherwise was not subject to taxation. The High Court noted that if the language 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 Ac....
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....ecategorized as unsecured loans. 8.2 It is also required to be noted that the Karnataka High Court in the case of Commissioner of Income-tax, Davangere Vs. Gurunath Talkies (2010) 328 ITR 59 (Karnataka) had taken similar stance. The facts of this case were as under: In this case the firm was carrying on the business of maintaining a qnema theatre, comprising of four partners 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 f....
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....firm. In the present case the court held the partners only had a share in the partnership asset. Thus when you 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 prpportionate 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." 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 th....
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....tinguishments of interest. The partners by surrendering their rights and interest in the firm have extinguished their rights and interest in the firm, which was a capital asset under the Act and the transfer of such asset is exigible for tax on capital gains. Surrender of rights and interests in a firm may result in the case of a retirement from the firm that too is relinquishment of his rights and interests in the firm that leads to extinguishments of interest. In our 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 receive....
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....mbit of the provisions of section 45(4) of the Act. Therefore the main ground of appeal No. 1 and its related sub-grounds are dismissed." 5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short "A.R") for the assessee took us through the issue in question. It was submitted by the ld. A.R that the solitary issue involved in the present appeal was as to whether or not the distribution of the revaluation surplus 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 In....
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....urt in the case of Dynamic Enterprises (supra), had observed, that the said judgment does not lay down the correct law. In order to buttress his aforesaid claim, the ld. A.R took us through Para 28 of the aforesaid order of the Tribunal in the case of M/s Amardeo Plastics Industries (supra). It was further submitted by the ld. A.R that the Hon"ble High Court of Bombay in the case of PCIT Vs. Electroplast Engineers (2019) 263 Taxman 120 (Bom), had while discussing the applicability of Sec. 45(4) of 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 as....
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....d allocated the revaluation surplus of Rs. 96,18,000/- equally amongst the original partners. Being of the view that the credit of the revaluation surplus to the capital accounts of the partners, including the retiring partner, whose amount was subsequently transferred to a loan account, did tantamount to distribution of the capital assets of the firm otherwise than by dissolution of the firm within the meaning of Sec. 45(4) of the Act, the A.O had brought the same to tax as "capital gain" in the hands 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 pa....
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....deration received or accruing as a result of the transfer" (Underlined for emphasis by us) It is evident from a perusal of the above that for invoking of section 45(4) of the Act, twin conditions need to be satisfied, namely, (i) there should be transfer of capital asset by way of distribution of capital asset; and, (ii) such distribution shall be on dissolution or otherwise. We shall now recapitulate the events that took place during the year under consideration, which led to invoking of section 45(4) of the Act by the Assessing 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 A....
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....d in proportion of profits. There is no provision, either under the Act or Indian Partnership Act, 1932 which prohibits change of profit sharing ratio of partnership firm only in a particular manner. Before us, the rationale behind keeping profit ratio in such manner has also been explained. It was explained that the said arrangement was only to attain maximum efficiency. It was further demonstrated before us that, in fact, the profits increased to more than twice after such reorganisation. Thus, change in profit sharing ratio has only resulted into increase 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 n....
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.... by the partners at the start of the year and the difference on account of revaluation of asset was credited to the partners account. The revaluation of partnership assets was anterior to the introduction of new partners. Revaluation of assets by partnership firm does not attract capital gains. The revaluation of assets of partnership and the credit of revalued amount to the capital account of partners in their respective share ratio does not entail any transfer as defined under section 2(47) of the Act The introduction of new partners to a partnership firm owning immovable assets and consequent reduction in the share ratio 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 sub....
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....e provisions of Sec. 45(4) of the Act. Secondly such a transfer should take place at the time of dissolution or other similar events such as retirement of the partners. Until such time, the shared right of the partners become the exclusive right of any retiring partner and no occasion arises for to tax the same under the head 'capital gains' as envisaged by sec. 45(4) of the Act." (Underlined for emphasis by us) The next decision relied upon was CIT v. Dynamic Enterprises (359 ITR 83 (Karn)(FB), whose relevant portion reads as under: "In order to attract sub-section (4) of section 45 the condition is (1) there should be a distribution of capita 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 acqui....
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....y happen when there is dissolution of the firm. Therefore according to us, it is not a case of distributing capital assets amongst the partners at the time of retirement and therefore provisions of section 45(4) are not applicable." (Underlined for emphasis by us) 22. With the above legal position in mind, now we may go back to the facts of the instant case. Admittedly, in the present case, the Assessing Officer has not pointed out any instance wherein the firm has extinguished its right in any of its asset available with it before such modification was carried out. It was also not the case of the Revenue that some assets which were hither to Reflected in books of account were not reflected in the account books post the 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 f....
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....sessment was made holding that the appellants are liable for tax on capital gains" 24. It is evident from the above discussion that in the case before the Hon'ble High Court, there was no dispute with respect to the fact that the assets were indeed distributed and transferred to the partners and were no longer in the books of the account firm. The rights in the assets were transferred to the partners. The dispute before the Hon'ble Bombay High Court was whether the word 'otherwise1 used in section 45(4) of the Act would take into cases which are akin to dissolution of firm or would also cover reconstitution of firm. The Hon'ble Bombay High Court held that section 45(4) of the Act would cover cases even where there is reconstitution of firm and not only 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 jud....
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....ontinued and the business was also carried on by the remaining partners. There was thus no dissolution of the firm and there was no distribution of capital asset. What is given to the retiring partners was money representing the value of their share in the partnership. No capital asset was transferred on the date of retirement. In absence of distribution of capital asset and in absence of transfer of capital asset in favour of retiring partners, no profit of gain arose in the hands of partnership firm. " (Underlined for emphasis by us) 26. The aforesaid discussion by the Hon'ble High Court clearly reveals that mere a revaluation of assets and subsequent withdrawal of the revalued amount cannot lead to the inference that there was distribution of assets by the firm. 27. Before 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 ....