TaxTMI 
TaxTMI 
2006 (12) TMI 168
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....venue and Shri Vijay Patil/Vishwas Mahindale, learned Counsel appeared for the assessee and put forward their rival submissions. 3. In both the appeals, the issue raised by the revenue is under: "On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition of Rs. 10,65,863 - (in the case of Shri Deviprasad L. Dave) Rs. 10,43,658 (in the case of Smt. Paru D. Dave) being the amount of short-term capital gains assessed in the hands of the assessee on account of assessee's assignment and relinquishment of rights in the firm's assets on the reconstitution of the firm." 4. The brief facts of the case are that both the assessees were partners in the firm M/s. Rakhal Corporation having equal shares in the profits of the business. The said firm owned a factory premises, book value of which was shown at Rs. 79,452 up to 31-3-1993. No depreciation was claimed on the said factory premises by the firm. On 15-4-1993, the said factory premises were revalued at Rs. 23 lakhs on the basis of a valuation report of a Registered Valuer. The difference in value was credited equally to the capital accounts of both the partners, i.e., Rs. 11,10,274....
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....in the property as the revaluation, reconstitution and withdrawal of capital do not constitute any transfer and therefore, there was no liability to any capital gains. The CIT(A) during the course of appellate proceedings observed that the firm had revalued the factory shed and had credited the difference in the partners capital account prior to the process of introducing new partners. Even after the introduction of new partners and reduction in the share of old partners, the asset concerned remained in the hands of the firm and the assessees could not have claimed any right or interest over the said property. The CIT(A) further observed that revaluation by itself does not generate any income. Reliance was placed on the decision of Hon'ble Supreme Court in CIT v. Hind Construction Ltd. [1972] 83 ITR 211 for the proposition that revaluation being a mere book entry, does not generate any income. Further it was also observed by the CIT(A) that it has been held in a number of cases that a partner has no interest in any assets of the partnership during the subsistence of the partnership as the partner does not have any interest or right in the partnership asset and therefore, the pa....
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.... a right in the profits of the firm and to get a share in the assets of the partnership on its dissolution. It was further submitted by the learned AR that the provisions of section 2(47) of the Income-tax Act are not applicable as there is no transfer of any asset. The Assessing Officer while completing the assessment had taxed the capital gains on revalued value of factory premises. It was further clarified by the learned AR that the provisions of section 45(4) of the Act are also not applicable as it talks of distribution of assets on dissolution of partnership firm and not on reduction of share of partners. For the proposition that the reduction in share ratio amounts to transfer or not, reliance was placed by the learned AR on the decision of Hon'ble Kerala High Court in CIT v. Kunnamkulam Mill Board [2002] 257 ITR 544. The learned AR for the assessee further clarified that the ratio laid down by the Hon'ble Supreme Court in Chhotalal Mohanlal's case was under the Gift-tax Act and the connotation of transfer under Gift-tax Act and under Income-tax Act are different. The learned AR relied on the decision of Hon'ble Supreme Court in Jagatram Ahuja v. CGT [2000] 2....
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....the formation of partnership or acquired in the course of business of partners nip, becomes the property of the firm. The partners of a partnership firm are entitled to a share in the profits of the business to the extent of their share ratio. During the subsistence of partnership no partner has any assigned right or share in the partnership property. During the continuance of the partnership the partners have only a right in the profits of the partnership and no partner can deal with any portion of the partnership property as his own during the continuance of the partnership firm. 10. Their Lordships of Hon'ble Supreme Court in S.V. Chandra Pandian v. S.V. Sivalinga Nadar [1995] 212 ITR 592 held that as under: "...The above provisions make it clear that regardless of the character of the property brought in by the partners on the constitution of the partnership, such property shall become the property of the firm and an individual partner shall only be entitled to his share of profits, if any, accruing to the partnership from the realization of this property and upon dissolution of the partnership to a share in the money representing the value of the property. It is well-se....
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....ship firm takes place and residue is distributed amongst the partners after settlement of amounts, there is no transfer or relinquishment of interest as envisaged under section 17 of the Registration Act. This view was held by the Hon'ble Supreme Court in S.V. Chandra Pandian's case. The Income-tax Act has brought in by way of an amendment to section 45 of the Income-tax Act that on dissolution of partnership firm provisions of section 45(4) of the Act shall be applicable which treats the dissolution of a partnership as deemed transfer of assets from the partnership firm to its partners. 13. In a partnership amongst partners, each and every partner of the firm has an interest in each and every property of the partnership firm. Till the accounts are settled and the residue/surplus is not distributed amongst the partners, no partner can claim any share in such assets of the partnership firm. Each partner is entitled to its share of profits in the partnership firm but the entitlement of right in the assets/property of the partnership firm arises only on dissolution. 14. The other issue to be considered is whether there is a relinquishment of a right in the property of the fi....