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2017 (11) TMI 1418 - ITAT MUMBAIDistribution of capital assets u/s 45(4)- partnership firm - whether the provision of section 45(4) is applicable to the firm on crediting revaluation surplus to partners account settling their accounts on their retirement or not? - Held that:- In this case, the transferor is the partners who on their retirement assign their rights in the assets of the firm and in lieu the firm pays the retiring partners the money lying in their capital a/c, meaning thereby that the firm becomes the transferee in this transaction. Hence, it is the firm and its continuing partners who have acquired the rights of the retiring partners in the assets of the firm by paying them lump sum amount on their retirement. So it cannot be said that the firm is transferring any right in capital asset to the retiring partner, rather it is the retiring partner who is transferring the rights ill capital assets in favour of continuing partners. The ITAT Mumbai in case of Sudhakar Shetty [2011 (3) TMI 1644 - ITAT MUMBAI] held that the transaction was taxable in hands of retiring partner for assignment of his rights in favour of firm and its continuing partners. Since the same event cannot result into transfer by retiring partners as well as by firm, the ITAT by holding the transaction to be transfer from retiring partner to firm impliedly held that the transactions not to be taxable in hands of firm. The purpose of 45(4) of the Act is to bring such transactions which have an effect of transfer of capital asset without the asset being actually transferred. The purpose is to tax the actual beneficiary of such transactions. In the present case, the firm or the continuing partners are not the beneficiaries as no new tangible income or asset has arisen to them, rather the firm and continuing partners have purchased the share of retiring partner by paying cash. It is the retiring partners who have been benefitted by receiving much more than actual capital contributed by them on account of revaluation. Thus there can be no case of tax avoidance by colorable device by the firm on the facts and circumstances of the assessee firm's case. Accordingly, we are of the view that the assessee firm is not liable to capital gains on the above transaction. This issue of assessee’s appeal is allowed.
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