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2025 (4) TMI 984 - AT - Income TaxShort-term capital gains tax u/s 45(4) - HELD THAT - A perusal of section 45(4) clearly shows that distribution of capital asset as a result of dissolution of a firm or otherwise the fair market value of the asset on the date of such transfer shall be deemed to be the full value of consideration received. In this case there is no dispute about the amount of fair market value of consideration i.e. Rs. 7.4 crores. AO shall compute the capital gain u/s. 45(4). Hence we remit the matter back to the file of the AO to compute the amount of capital gain u/s. 45(4) of the Act by adopting the sale consideration received from Shri Poonghat Srinivas of Rs. 7.4 crores as sale consideration by reducing the WDV of the asset as per the provisions of the Income Tax Act. Applicability of section 48 and section 50 - The provisions of section 48 provides for the method of computation of income chargeable under the head capital gains. Provisions of section 48 stipulates that the income chargeable under the head capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts viz. expenditure incurred wholly and exclusively in such transfer and the cost of acquisition of asset and cost of any improvement thereto whereas the provisions of section 45 are charging provision and section 48 provided for basis of computation. It is also settled law that the provisions of section 45 must be read with section 48 of the Act. If the computation cannot be effected for any reason the charging provision u/s. 45 fails. In the present case by virtue of the dictum laid down by the Hon ble High Court that provisions of section 45(4) are applicable and capital gains u/s. 48 r.w.s. 45(4) are computed. As applicability of section 50 on mere perusal of section 50 it is clear that the object behind enacting the provisions of section 50 is to compute the short term capital loss or the gains on sale of depreciable assets sale of an asset when the asset is sold on which depreciation has been allowed in the earlier years as per the Income Tax Act and Rules. The actual amount of depreciation in fact becomes known which would call for an adjustment to be made to the depreciation which had been earlier allowed as per the provisions of Income Tax Act and Rules made thereunder. This adjustment is called for in the year of sale by way of short term capital gains or loss. If the realisation of sale proceeds is more than the opening WD value of the asset as increased by the value of addition made in the asset during the year it would result in short term capital gains under the provisions of section 50 of the Act. Of course the amount of value of addition should be adjusted in terms of the provisions of section 50 of the Act. However these provisions of section 50 have no application to the facts of the present case as the same amount was assessed to capital gain u/s. 45(4) of the Act. Provisions of both section 45(4) and section 50 cannot be applied to the same amount. In this regard reliance is placed on the decision of Urmila Ramesh 1998 (1) TMI 2 - SUPREME COURT rendered in the context of provisions of section 41(2) read with provisions of section 2(22)(c) of the Act. Appeal filed by Revenue stands partly allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal and the Hon'ble High Court in this appeal include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Section 45(4) to the transfer during reconstitution of the firm Relevant legal framework and precedents: Section 45(4) of the Income Tax Act mandates that on distribution of capital assets by a firm to its partners on dissolution or otherwise, the fair market value of such assets shall be deemed as the full value of consideration for computing capital gains. The issue was whether "distribution or otherwise" includes transfers during reconstitution. Court's interpretation and reasoning: The Tribunal interpreted the phrase "or otherwise" in Section 45(4) broadly to include constructive distribution of capital assets even during the subsistence of the firm, not just on dissolution. It rejected the narrow view that the provision applies only to dissolution or physical distribution. The Tribunal reasoned that the legislative intent behind Finance Act, 1987 amendments was to tax capital gains arising from distribution of capital assets to partners, closing loopholes where such gains escaped tax. Key evidence and findings: The building was sold by the original partners to a new partner who was subsequently inducted into the firm, and the asset was brought into the firm books at the same value. The Tribunal found this transaction to constitute a transfer within the meaning of Section 45(4). Application of law to facts: The Tribunal held that the sale deed transferring the building to the incoming partner was a transfer of capital asset by the firm, attracting capital gains tax under Section 45(4). Treatment of competing arguments: The appellant contended that reconstitution does not amount to distribution and thus Section 45(4) should not apply. The Tribunal disagreed, emphasizing that "distribution" includes constructive distribution and the legislative purpose was to tax such transfers. Conclusions: Section 45(4) applies to transfers of capital assets during reconstitution, not only on dissolution. Issue 2: Computation of capital gains and applicability of Sections 48 and 50 Relevant legal framework and precedents: Section 48 prescribes the method of computing capital gains by deducting cost of acquisition and improvement from the full value of consideration. Section 50 deals specifically with short-term capital gains arising from transfer of depreciable assets, adjusting for written down value and additions to the block of assets. The Apex Court ruling in Commissioner of Income Tax v. Urmila Ramesh was cited to emphasize that charging provisions and computation provisions must be read together, and mutually exclusive provisions cannot be applied to the same amount. Court's interpretation and reasoning: The Tribunal, following the High Court's direction, held that while Section 45(4) is the charging provision applicable to the transfer, the computation of capital gains must be done as per Section 48. However, Section 50, which deals with depreciable assets, cannot be applied simultaneously to the same transaction as Section 45(4) has already been held applicable. The Tribunal explained that Section 50 is intended to compute gains or losses on sale of depreciable assets where depreciation has been claimed, but once the transaction is brought under Section 45(4), Section 50 does not apply. Key evidence and findings: The fair market value of the building was Rs. 7.4 crores, which was undisputed. The WDV of the asset was also considered. The AO was directed to compute capital gains by taking the sale consideration as Rs. 7.4 crores and deducting the WDV as per the Act. Application of law to facts: The Tribunal remanded the matter to the AO for computation of short-term capital gains under Section 45(4) read with Section 48, using the sale consideration and WDV. The contention that the asset's value brought in by the incoming partner should be considered as addition to the block of assets under Section 50 was rejected. Treatment of competing arguments: The appellant argued that no capital gains arise as the WDV at the end of the year was not less than at the beginning, and that Section 50 should apply to avoid capital gains tax. The Tribunal rejected this, relying on precedent that Section 45(4) applies to distribution of assets and the valuation must be done accordingly. Conclusions: The charging provision under Section 45(4) applies, and the gain must be computed under Section 48. Section 50 does not apply once Section 45(4) is invoked for the same transaction. Issue 3: Legality of raising additional grounds by the Revenue before the Tribunal Relevant legal framework: The appellant questioned the Tribunal's acceptance of additional grounds raised by Revenue which were not considered by AO or CIT(A). Court's interpretation and reasoning: This issue was framed before the High Court but was not specifically answered in the remand order. The Tribunal's order does not elaborate on this point further, focusing instead on the substantive tax issues. Conclusions: No explicit ruling on this procedural issue was recorded in the remand order. 3. SIGNIFICANT HOLDINGS "The language of section 45(4) should be construed to mean that the expression 'or otherwise' is not to be read ejusdem generis with the expression 'dissolution of the firm or Body or AOP'. The expression 'or otherwise' is to be read with the words 'transfer of the capital assets' by way of distribution of capital assets. The distribution of capital asset does not mean only physical distribution. It also covers constructive distribution or distribution of sales consideration among partners, by passing necessary entries in the firm's books of accounts." "The provisions of section 50 have no application to the facts of the present case as the same amount was assessed to capital gain u/s. 45(4) of the Act. In other words, provisions of both section 45(4) and section 50 cannot be applied to the same amount." "Section 48 provides for the method of computation of income chargeable under the head capital gains and must be read with the charging provision under section 45. If the computation cannot be effected for any reason, the charging provision under section 45 fails." Final determinations:
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