TMI Blog2012 (5) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... settes. The partnership was constituted on 05.04.1961. The firm owned property in the form of land situated at 6/2 and 6/3, Doddanakundi Industrial Road, Tubbarahalli village, Marathahaili measuring 1,67,765 sq.ft. The firm filed its return of income for the assessment year 1992-93. Afterwards, no returns were filed on the ground that the firm had stopped its activities and there was no income. In the books of account, the value of the land shown is at Rs.25,747/-, the value at which it was purchased in the year 1967. The value of the borewell, dining room and factory building along with the value of the land were shown at Rs.1,93,510/-. The firm revalued the assets as on 01.04.1995 and the opening value was at Rs.7/- crores. As on 31.03.1995, the firm consisted three partners each having equal share. The said partnership was reconstituted by a partnership deed dated 12.10.1995 admitting four more new partners. The four new partners contributed Rs.3.50 crores towards their share of capital. As a result of reconstitution of the firm, the assets hitherto owned by the firm of three partners were made over to the reconstituted firm, of seven partners. The result was that the interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution of the firm by way of induction of new partners. Therefore, a reduction in the share in a partnership firm on account of reconstitution of the firm by way of induction of new partners cannot be said to have effected a transfer of any kind even by an act of extinguishment. In view of the judgment of the Apex Court in the case of Malbar Fisheries Co. v. CIT [1979] 120 ITR 49, where it has been held that there is no transfer of assets even when distribution takes place upon dissolution of the firm. Therefore how can it be justified that there is a transfer of asset merely on reconstitution of the firm through induction of new partners and therefore, the Appellate Authority set aside the order passed by the Assessing Authority taxing the assessee for the capital gain. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. The Tribunal after taking note of the relevant provisions of the Income Tax Act as well as the Indian Partnership Act, 1932 and the judgments of the Apex Court held that the judgments relied on by the revenue would apply to a case where the firm, the assessee is not genuine and the action taken by the firm should lead to a situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm and hot on individual partners. Admittedly, the partnership continues and the erstwhile partners continue to have interest in the partnership assets. Merely because, they have withdrawn money from the partnership firm, it does not constitute consideration for proportionate reduction in their share in the firm. Both the appellate authorities on a careful consideration of the facts and the law on the point have rightly upheld the contention of the assessee and it does not call for any interference and therefore, he submits that there is no merit in these appeals and are liable to be dismissed. 5. These appeals were admitted to consider the following substantial question of law "Whether the appellate authorities were right in holding that the admission of the new partners and assignment of right in the firm to the new partners out of the rights of the assessee for consideration does not amount to transfer in the hands of assessee under Sec. 2(47) of the Act and consequently not liable to tax under Sec.45 of the Act?" 6. The Assessing Authority relying on the judgment of the Apex Court in the case of Malbar Fisheries Co., ( supra ) has proceeded on the assumption t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax to the extent of relinquishment of his rights in the assets of the erstwhile firm in favour of the four partners of the reconstituted firm. It is the correctness of this finding, which is before us. 7. The assessees are sought to be taxed under Section 45(1) of the Act on the ground that there is a transfer. The word 'transfer' has been defined in Section 2(47) of the Act as under- "transfer", in relation to a capital asset, includes,- ( i ) the sale, exchange or relinquishment of the asset; or ( ii ) the extinguishment of any rights therein; or ( iii ) the compulsory acquisition thereof under any law; or ( iv ) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;][or] [(iva) the maturity or redemption of a zero coupon bond; or] [( v ) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or ( vi ) any transaction (whether by way of becoming a member of, or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explaining the position of a partnership under the Partnership Act as well as Income Tax Act held as under:- "A Partnership Firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the Firm as such has no separate rights of its own in the Partnership Assets and when one talks of firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of sec.2(47) of the IT Act, 1961 There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realisation or exercise should be postponed. Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner's retirement. What is the profit or gain which can be said to accrue or arise to the assessee when he makes over his personal asset to the partnership firm as his contribution to its capital? The consideration, as we have observed, is the right of a partner during the subsistence of the partnership to get his share of profits from time to time and after the dissolution of the partnership or with his retirement from the partnership to receive the value of the share in the net partnership assets as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains'' and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation,- For the purposes of this sub-section, the expression "insurer" shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938)] (2)** ** ** [(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital assets to a firm as a capital contribution and becomes a partner of a firm. The income so derived is liable to be taxed at the hands of such member or partner. Whereas sub-Section (4) of Section 45 deals with profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm chargeable to tax as the income of the firm. Therefore, a clear distinction has been made between the income of the firm and income of the partner and the person who is transferring the capital assets being liable to pay capital gains. 16. It is in this background if we look at the background of this case, the landed property was not owned by the erstwhile partners. It was owned by the partnership firm. May be the erstwhile partners had l/3rd share each in all the partnership assets including this assets. On reconstitution of the firm, four more partners were inducted, who contributed Rs.2.50 crores as their capital contribution. Thus, the inducted partners also became partners in the firm and the firm continue to assets own, including .this, landed property. The erstwhile partners withdrew the money brought in by the incoming partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held as follows: "Section 2(47) of the Income-tax Act, 1961, defines "transfer" in relation to a capital asset. It is an inclusive definition which, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. It is not necessary for a capital gain to arise, that there must be a sale of a capital asset, Sale is only one of the modes of transfer envisaged by Section 2(47) of the Act. Relinquishment of the asset or extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45 of the Act." 19. In the instant case, as the assessee was not the owner of this capital asset, the question of relinquishing their interest in that asset or extinguishment of their right in their asset would not arise. The assets belong to the firm. The incoming partners paid money to the firm by way of their capital contribution. The firm as such has not relinquished its interest in favour of the incoming partners. On the contrary, by inducting them, they are also entitled to intere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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