AI Drafter 
TaxTMI 
TaxTMI 
2022 (11) TMI 1180
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....dismissed the said appeals and has confirmed the respective orders passed by the Income Tax Appellate Tribunal (hereinafter referred to as "ITAT") deleting the short term capital gains addition made by the Assessing Officer (AO), the Revenue has preferred the present appeals. 2. The facts leading to the present appeals in nutshell are as under :- 2.1 The respondent assessee, a partnership firm originally consisted of four partners (all brothers) engaged in the business of Dyeing and Printing, Processing, Manufacturing and Trading in Clothing. Under the Family Settlement dated 02.05.1991, the share of one of the existing partners - Shri M.H. Doshi having 25% profit share in the firm was reduced to 12% and, for his balance 13% share, three new partners were admitted namely, viz., Smt. Ranjan Doshi (11%), Shri Prakash Doshi (1%) and Shri Rajeev Doshi (1%). It appears that thereafter, Shri M.H. Doshi, Shri Manohar Doshi and Shri V.H. Doshi retired from the partnership and reconstituted the partnership firm consisted of the partners namely, viz., Shri Hasmukhlal H. Doshi, Smt. Rajan H. Doshi, Shri Prakash H. Doshi & Shri Rajiv H. Doshi. 2.2 That on 01.11.1992, the firm was agai....
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....nsfer, which was liable to capital gains tax under Section 45(4) of the Income Tax Act. As land and building was involved, the assessee had claimed the depreciation on building, and the Assessing Officer assessed the amount of short-term capital gain under Section 50. 2.6 The Commissioner of Income Tax (Appeals) [CIT(A)] by order dated 30.07.2004 confirmed the addition on account of Short-Term Capital Gains and held that there is a clear distribution of assets as partners have also withdrawn amounts from the capital account. CIT(A) also observed that value of the assets of the firm which commonly belonged to all the partners of the partnership have been irrevocably transferred in their profit-sharing ratio to each partner. To the extent that the value has been assigned to each partner, the partnership has effectively relinquished its interest in the assets and such relinquishment can only be termed as transfer by relinquishment. Therefore, according to the CIT(A), conditions of Section 45(4) are satisfied and therefore, the assets to the extent of their value distributed would be deemed as income by capital gains in the hands of the assessee firm. The CIT (A) also observed that ....
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....res to the partners and that during the years, some new partners were inducted by introduction of small amounts of capital ranging between 2.5 to 4.5 lakhs and these partners have huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal, the amount so revalued and credited in the capital accounts of the respective partners can be said to be "transfer" and therefore, the provisions of Section 45(4) inserted into the Income Tax Act w.e.f. 01.04.1988 shall be applicable. 3.1 It is submitted that the Hon'ble High Court has not properly appreciated the object and purpose of introduction of Section 45(4). It is submitted that the introduction of Section 45(4) was accompanied by the omission of clause (ii) of Section 2(47). Section 47(ii) omitted, exempted transform by way of distribution of capital assets from the ambit of the definition of 'transfer'. It is submitted that this helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same on dissolution. This loophole was sought to be plugged by insertion of Section 45(4) and omissi....
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.... partners' capital account. It is submitted that the surplus on account of such revaluation credited to the partners' capital account cannot be said to be transfer as per the provisions of Section 45(4) of the Income Tax Act. 4.2 It is submitted that as per the provisions of Section 45(4) of the Income Tax Act, two conditions were required to be fulfilled. Firstly, there must be a transfer by way of distribution of capital assets, secondly, that, such transfer should be either on account of dissolution of partnership firm or otherwise. 4.3 It is submitted that in the present case, during the year there was neither any distribution of assets of the partnership firm nor dissolution or otherwise of the partnership firm has taken place. The surplus on revaluation of assets was notionally credited to the partners' capital account of all the partners. It is submitted that therefore as rightly observed and held by the ITAT confirmed by the Hon'ble High Court, it was not a case of transfer/deemed transfer under Section 45(4) of the Income Tax Act and therefore, both, the ITAT as well as the High Court have rightly deleted the addition made towards the short-term capital gains. 4.4....
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....t is submitted that in this context, the Bombay High Court held that Section 45(4) shall be attracted. 4.7 Making above submissions, it is prayed to dismiss the present appeals. 5. We have heard the learned counsel appearing for the respective parties at length. 6. The short question, which is posed for the consideration of this Court is the applicability of Section 45(4) of the Income Tax Act as introduced by the Finance Act, 1987. 7. The relevant portion of Section 45, with which we are concerned, is sub-section (4), which reads as under:- "(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a cooperative society) or otherwise, shall 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." 7.1 Sub-section (4) of Sect....
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....5(4) of the Income Tax Act inserted vide Finance Act, 1987, by which, "OR OTHERWISE" is specifically added, the aforesaid submission on behalf of the assessee has no substance. The Bombay High Court in the case of A.N. Naik Associates and Ors., (supra) had an occasion to elaborately consider the word "OTHERWISE" used in Section 45(4). After detailed analysis of Section 45(4), it is observed and held that the word "OTHERWISE" used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partners of a partnership, transferring the assets in favour of a retiring partner. While holding so, it is observed in paragraphs 14, 21, 22 and 24 as under:- "14. Pursuant to the inclusion of sub-section (4) in section 45, on the dissolution of a partnership the profits or gains arising from the transfer of capital asset are chargeable to tax as income of the firm. It is contended on behalf of the assessee that even after introduction of section 45(4), the position will be the same as the definition clause i.e. namely section 2(47) has not been amended. Secondly it is contended that the expression "otherwise" must be read edjusdem generis with th....
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....section (4) is construed to mean that the expression "otherwise" has to partake in the nature of dissolution 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 Amending Acts. Prior to the Finance Act, 1987 in case of a partnership it was held that the assets are of the partners and not of the partnership. Therefore if on retirement a partner receive his share of the assets, may be in the form of a single asset, it was held that there was no transfer and similarly on dissolution of the partnership. Another device resorted to by an assessee was to convert an asset held independently as an asset of the firm in which the individual was a partner. The decision of the Supreme Court in (Kartikeya v. Sarabhai v. C.I.T.), 1985 (156) I.T.R. 509 took a view that this would not amount to transfer and, therefore, fell outside the scope of capital gain. The rationale being that the consideration for the transfer of the personal asset was indeterminate, being the right which arose or accrued to the partner dur....
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....purpose and intent of amendment of section 45. Once, that be the case, we will have to hold that the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature of capital gains and business profits which is chargeable to tax under section 45(4) of the I.T. Act. We will, therefore, have to answer question No. 3 by holding that the word "otherwise" takes into its sweep not only the cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. XXXXXXXXXXXXXX 24. Considering this clause as earlier contained in section 47, it meant that the distribution of capital assets on dissolution of a firm etc. were not regarded as transfer. The Finance Act, 1987 w.e.f. 1-4-1988, omitted this clause, the effect of which is that distribution of capital assets on the dissolution of a firm would henceforth be regarded as 'transfer'. Therefore, instead of amending section 2(47), amendment was carried out by the Finance Act, 1987, by omitting section 47(11), the result of which is that distribution of capital assets on the dissolution of a firm would....