TMI Blog2012 (10) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of the continuing partners. So, even if capital gain has to be taxed it has to be in the hands of the retiring partners not in the case of the assessee-firm. Thus there was no transfer of a capital asset by the assessee-firm by way of distribution or otherwise in the AY under consideration . From the very beginning of the partnership the plot of land in question was treated stock in trade by the assessee firm. Even on 31.03.2008 it was shown as current asset (i.e. W-I-P) in the balance sheet. AO has nowhere rebutted/ doubted this factual position, therefore, no reason to disagree with the logical findings given by the FAA - in favour of assessee. - IT APPEAL NO. 4630 (MUM.) OF 2011 - - - Dated:- 12-10-2012 - D. Manmohan And Rajendra, JJ. ORDER Rajendra, Accountant Member Challenging the order dtd. 28-03-2011 of the CIT(A)-35, Mumbai, Assessing Officer (AO) has raised following Grounds of Appeal : (i) On the facts and in the circumstances of the case, and in law, the ld CIT(A) erred in directing the A.O. to delete the entire addition of capital gain u/s. 45(4) of the Income Tax Act-1961 without appreciating the fact that HDIL was admitted as partner in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the opinion that 50% of the value of the plot of the land was transferred in favour of the HDIL on 06.07.2007 and thereby the assessee firm was liable to be taxed u/s. 45(4) of the Act. AO further found that on 15.10.2007 HDIL had entered into an agreement with Mumbai International Airport Ltd (MIAL). He held that agreement between MIAL HDIL was the proof that the new partner had become 100% owner of the plot. On 01.04.2008, the said plot of land was revalued at ₹ 2,68,37,42,000/-. He issued a show cause notice to the assessee firm for taxing the entire value of plot amounting to ₹ 268.37Crores u/s. 45(4) of the Act under the head 'Capital Gains'. After considering the submissions of the assessee, he held that HDIL had already dealt with the property of the firm as its own property when it had signed an MOU with MIAL for rehabilitation of the slums on the land of the firm, that it had claimed that all the ownership rights of the plot of land belonged to it, that a copy of the MOU was furnished by the assessee during the course of the assessment proceedings, that no document supporting the MOU was submitted by the assessee-firm, that capital gain arising out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the addition made by the AO and observed that the AO was free to consider the applicability of section 45(4) of the Act in the next assessment year. 4. Before us, Departmental Representative (DR) submitted that the provisions of section 2(47) r.w.s.45(4) were applicable in the case under consideration, that purpose of the transaction as a whole, was to transfer the all the rights to HDIL by the assessee-firm, that assessee had relinquished its rights in the relevant AY in favour of the HDIL, that relinquishment of the rights was 'otherwise transfer' of rights as per the provisions of section 2(47) r.w.s 45(4) of the Act. He referred to various terms of Deed of Admission in this regard and submitted that old partners had surrendered their rights in favour of the new partner i.e. HDIL, that there was extinguishment of the rights in favour of the new partner. He referred to cases of Kartikeya Sarabhai (228 ITR 163), Mrs. Grace Collis (248 ITR 323) and Gurunath Talkies (supra). Authorised Representative (AR) submitted that the provisions of section 45(4) were not applicable in the present case, that admission of partner was not covered by word 'otherwise transferred u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not based on sound legal footings. FAA, after considering the facts of the case and legal provisions, has held that there was no distribution of assets in the case under consideration. A bare perusal of Deed of Admission (dtd. 06.07.2007) and Retirement Deed (dtd. 27.05.2008) prove that on both the occasions there was no distribution of assets of the assessee-firm. On 06.07.2007 HDIL was admitted as a new partner In our humble opinion admission of a new partner to the existing partnership-firm does not result in distribution of assets. Similarly, on 27th May, 2008; when three partners retired and remaining two partners continued the business of the firm; there was no redistribution of assets of the firm. After going through the above retirement deed we are of the opinion that it is not a case where firm was taken over by the new partner and thus provisions of section 45(4) of the Act can be invoked. As per the settled principles of law of partnership, during the continuation of the partnership, partners do not have separate right over the assets of the firm in addition to interest in share of profits. The basis of the said proposition is that value of the interest of the each part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned as how he arrived at the said conclusion. We have perused the said MOU and we have not found any clause which proves that the new partner of the assessee-firm was treating the said asset as its own. We fully agree with the FAA that MOU was not analysed by the AO in correct perspective. 5.3 As per the settled principles of taxation revaluation of capital assets does not result in accrual or receipt of taxable income unless and until the capital asset is actually transferred. Secondly, revaluation of assets before conversion of a firm into company cannot be equated with dissolution of firm/transfer of assets of firm. If the above principle is applied to the basic facts of the case, it can be safely held that re-valuation of the plot of land did not result in any profit or gain to the firm and hence question of distribution of profit by the firm does not arise. Thus, the basic ingredient for invoking provisions of section 45(4) of the Act is missing in the case under consideration. The twin requirements of the section 45(4) contemplate not only the retirement of the partners from the partnership firm but also the transfer by way of distribution of capital assets. It is a fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset within the meaning of section 2(47) by the firm to the retiring/continuing partners. We would like to refer to the decision of the Hon'ble jurisdictional High Court, delivered in the case of A.N. Naik (supra): Section 45 of the Income-tax Act, 1961, is a charging section ..The Act of 1987 also brought on the statute book a new sub-section (4) in section 45 of the Act. The effect is that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm's income in the previous year in which the transfer took place. From a reading of sub-section (4) to attract capital gains tax what would be required would be as under : (1) transfer of capital asset by way of distribution of capital assets : (a) on account of dissolution of a firm ; (b) or other association of persons ; (c) or body of individuals ; (d) or other-wise ; the gains shall be chargeable to tax as the income of the firm, association or body of persons. The expression otherwise has to be read with the words transfer of capital assets . It is now clear that when the asset is tran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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