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TMI Blog2012 (7) TMI 652X X X X Extracts X X X X X X X X Extracts X X X X ..... of Bishanlal reported in 257 ITR 449 the capital gains is assessable in the hands of the firm and not in the hands of partner and thereby erred in confirming the assessment of capital gains. 4. The learned CIT(A) erred in not referring to the decision of A.P. High Court in the case of Sudex reported in 290 ITR 511 and relying on the decision of Mumbai High Court to hold sec. 45(4) is applicable even on retirement. 5. The learned CIT(A) erred in not following the decision of Hyderabad ITAT in the case of Navnir Roller Flour Mills though the same is applicable on all fours to hold that there is no transfer. 6. The learned CIT(A) failed to appreciate the fact that as per sec. 6 of partnership act the Goodwill belong to the partnership firm and therefore, there cannot be any transfer by a partner of an asset that belong to firm to other partners and further erred in not appreciating the fact that a retiring partner is entitled to get share in value of all assets including goodwill and getting such share on retirement does not amount to transfer and thereby erred in holding that there is a transfer and confirming the order of the AO. 7. The learned CIT(A) erred in not entertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he meaning of sec. 2(14), which had been relinquished to the firm or other partner amounting to transfer covered by both (i) and (ii) of sec. 2(47). 4. The Assessing Officer further opined that sec. 45(3) of the A also provides that gains arising from the transfer of a capital asset by person to a firm in which he is a partner, by way of a capital contribution shall be chargeable to tax as his income of the previous year in which such transfer takes place, and for the purpose of sec. 48, the amount recorded in the books of accounts of the firm as the value of the capital asset shall be deemed to be the full value of the consideration received as a result of the transfer of the capital asset. He noted that in the present case, the assessee, being a partner, had relinquished goodwill to the firm, i.e., transferred a capital asset to the firm for a consideration of Rs. 7,95,88,639/-, as recorded in the books of accounts of the firm, as value of the share of goodwill of that partner. 5. The Assessing Officer noted that the above view is supported by the decision of the Hon'ble Bombay High Court in the case of CIT vs. A.N. Naik Associates and Anr. (265 ITR 346), wherein the Hon'ble Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration of the amount paid to them by the other parties who took over the business in an auction in accordance with the terms of the partnership deed, there was a transfer of capital asset and the resultant capital gain was liable to tax as long term capital gains in the hands of such partner. 9. The Assessing Officer noted that in the case of Mrs. Arthi Shenoy and Others vs. DCIT (75 ITD 100) (Bang.) (SB) wherein held that "retirement in the normal course also involves the same concept of relinquishment of capital asset i.e. the interest or rights in the firm's property and consequent extinguishment of rights therein and this involves transfer from one to other. Interest or rights in the firm's assets capable of being sold and purchase and such sale and purchase transaction involve transfer from one to other. 10. In the light of the above, the Assessing Officer concluded that the cases cited by the appellant pertained to the position prior to the amendment in the Act, i.e. omission of sec. 47(ii) by the Finance Act, 1987, which came into effect from 1.4.1988. He noted that after 1.4.1988, many High Courts and Tribunals have taken a view that relinquishment of capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and how the same would be taxed in the hands of the partners retiring in any subsequent year. He, therefore, claimed that. it would not be correct to tax the amounts as capital gains only in the hands of the retiring partners. 15. The counsel for the assessee further submitted that in fact the decision of the Hon'ble Delhi High Court in the case of Bishan Lal Kanodia Vs. CIT (257 ITR 449) is in favour of the assessee, as the amount received by the petitioner was held as not exigible to tax. He averred that what was held in the said decision is that when it relates to assets and only when the amount received on retirement is more than the share one is entitled to, then it is taxable. He also referred to the decisions of the Hon'ble Supreme Court in the case of Tribhuvandas G. Patel vs. CIT (236 ITR 512) and Addl. CIT vs. Mohanbhai Pamabhai (165 ITR 166) (SC) referred to therein. The representative averred that in the assessee's case it was not the case of the Assessing Officer that she had received more than her share and in fact she had received only her share in goodwill and nothing more. 16. The AR placed reliance on the judgement of Supreme Court in the case of CIT vs. R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax Appellate Tribunal that the deed of reconstitution by inducting a partners in the assessee firm was not a device to avoid tax had to be upheld. However, the transfer of assets of the partnership to the retiring partiers would amount to the transfer of the capital assets in the nature of capital gains and business profits which were chargeable to tax under section 45(4)." 18. The learned DR also relied on the judgement in the case of Bishan Lal Kanodia vs. CIT (257 ITR 449) (Delhi) wherein it was held as under: "Held, that whether it was held to be a case of dissolution of the partnership or of retirement, having regard to the provisions contained in section 47(ii) of the Act, as it stood prior to 1988, the assessee was entitled to the benefit thereof only with respect to the assets, he derived from the partnership firm and not to the excess amount. The excess amount was liable to tax as capital gain." 19. The learned DR relied on the order of the Tribunal Pune Bench in the case of Shevantibhai C. Mehta vs. Income tax Officer (Pune) (83 TTJ 542) wherein held that when the retiring partner assigning his interest in the partnership firm specifically by a deed of retirement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there can be no doubt. The next question is as to whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under s. 45 of the Act. 23. A look at how formation and dissolution of partnership was used as a device to evade tax on capital gains to convert an asset held individually into an asset of the firm in which the individual is a partner and conversion of capital assets into individual assets on dissolution or otherwise, is necessary. 24. Partnership as a form of carrying on business evolved so that two or more persons can to join together by pooling resources in the form of capital and expertise. One of the devices used by assessee to evade tax on capital gain was to convert in asset held individually into asset of the firm in which the individual is a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise. 25. Such introduction of capital asset as capital contribution by a partner up to 1st April, 1988 did not result in incidence of capital gain. It was so held by the Hon'ble Supreme Court in the case of Sunil Siddhart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows (p. 1303 of AIR) : ".....whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in, all the partners, and in that sense every partner was an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to L share in the assets of the firm which remain after satisfying the liabilities set out in cl. (a) and sub cls. (i), (ii) and (iii) of cl. (b) of s. 48." The position was later explained i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly by 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 the 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 s. 2(47) of the Act. Further, it is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and disch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of transfer was deemed to be the full value of the consideration received or accruing as a result of the transfer. 31. Thus Parliament brought into the tax net transactions whereby assets were brought into a firm or taken out of the firm. Thus s. 45(4) covers cases where there is dissolution of the firm and distribution of assets of the firm by the firm to its partners. 32. Dissolution and retirement are two different concepts. In the case of retirement, the retiring partner goes out of the firm but the remaining partners continue to carry on the business of the partnership as a firm. In the case of dissolution, the firm no longer exists and the dissolution is between all the partners of the firm. 33. In the case of retirement of a partner there could be two situations. In the first situation there can be a retirement of a partner from the firm and the firm might continue its existence and the retiring partner might be given assets in lieu of amounts payable to him on retirement. This could be done either on the basis of settling amounts standing to the credit of his capital account or on a lump sum basis. There could be a second situation where the retiring partner is paid c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fair market value of the asset on the date of transfer would be deemed to be the full value of the consideration received or accrued as a result of the transfer. Therefore, if the object of the Act is seen and the mischief it seeks to avoid, it would be clear that the intention of Parliament was to bring into the tax net transactions whereby assets were brought into a firm or taken out of the firm. 35. Prior to the aforesaid decision, cases where on retirement, property was allotted to a partner by the firm in lieu of amounts payable to him were subjected to capital gains tax. In that scenario the assessees took a stand that retirement is also one form of dissolution of the firm because distribution of assets on retirement was not regarded as a transfer under s. 47(ii) of the Act. This was not accepted by Hon'ble Bombay High Court and they held in the case of N.A. Mody (supra)] that a clear distinction exists between retirement of a partner from a firm and dissolution of the firm. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which consideration is received by the assessee or accrues to the assessee. When a partner retires from a partnership what he receives is his share in the partnership which is worked out and realized and does not represent consideration received by him as a result of the extinguishment of his interest in partnership assets. Hence, when an assessee retires from a firm and receives an amount in respect of his share in the partnership there is no transfer of interest of the assessee in the goodwill of the firm and no part of the amount received by him would be assessable to capital gains tax under s. 45." 38. The Hon'ble Court held that the extended definition of the term 'transfer' under s. 2(47) of the Act, by which relinquishment and extinguishment of any right in a capital asset is considered as transfer would also not apply when a partner retires from the partnership and there would be no transfer of interest in the partnership assets. The Hon'ble Supreme Court confirmed the decision of the Hon'ble Gujarat High Court in Mohanbhai Pamabhai's case (supra). Similar view was also expressed by the Hon'ble Supreme Court in the case of CIT vs. R. Lingmallu Raghukumar (2001) 166 CT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of the Tribunal in the case of Shevantibhai C. Mehta vs. ITO (2004) 83 TTJ (Pune) 542 had considered the aforesaid decision of Hon'ble Bombay High Court and other decisions relied upon by learned counsel for the assessee before us and has reiterated that the question of taxability of an amount received by a partner on retirement from firm would depend upon mode in which retirement is effected as laid down by the Hon'ble Bombay High Court in the cases of Tribhuvandas G. Patel (supra) and N.A. Modi's case (supra). Before the Pune Bench, the assessee had argued that the decision of the Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) has since been reversed by the Hon'ble Supreme Court in Tribhuvandas G. Patel's case (supra). The Pune Bench after analyzing all aspects and the various decisions on the issue held that neither the Hon'ble Supreme Court nor other High Courts have disapproved the proposition laid down by the Hon'ble Bombay High Court having regard to the particular mode of retirement. The Pune Bench further found that on the contrary, the Hon'ble Delhi High Court in the case of Bishan Lal Kanodia vs. CIT (2002) 173 CTR (Del) 496 : (2002) 257 ITR 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at retirement of a partner and quantification of his share and payment thereof to him stands on the same footing as adjustment of rights that results upon dissolution of a firm and, therefore, since there was no transfer of any capital asset in the instant case, the sum of Rs. 4,77,941 or any part thereof was not liable to be charged under the head "Capital gains". This was not accepted by Hon'ble Bombay High Court and they held that a clear distinction exists between retirement of a partner from a firm and dissolution of the firm. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while in the case of dissolution of the firm as such no more exists and the dissolution is between all the partners of the firm. 44. Thereafter the Hon'ble Court held that where accounts are taken and the partner is paid the amount standing to the credit of his capital account there would be no transfer. If, on the other hand, the partner is paid a lump sum consideration for transferring or releasing his interest in the partnership assets to the continuing partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual half share in all the several pieces or parcels of land-hereditaments ... to have and to hold the said undivided half share and the premises hereby granted as expressed so as to be unto and to the use of the continuing partners absolutely as tenants-incommon in equal shares forever....." 46. Having regard to the particular mode employed by the assessee and the continuing partners to effect and bring about retirement of the assessee from the partnership, the Court held that the transaction will have to be regarded as amounting to "transfer" within the meaning of s. 2(47) of the IT Act, in as much as the assessee could be said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of the continuing partners and the transaction cannot be regarded as amounting to any distribution of capital assets upon dissolution of a firm. 47. In the case of N.A. Modi (supra) and H.R. Aslot's case (supra) the facts and manner of retirement and payment of consideration were identical. 48. In the case of the assessee the clauses in the retirement deed do convey interest in assets and further refer to the fact that the assessee will not h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (284 ITR 323), the assessee's claim was not allowable. During the appellate proceedings, the representative of the assessee submitted that set off for the short term capital loss arising from investments in SBI Mutual Funds should have also been given. He averred that the decision of the Hon'ble Supreme Court in the case of Goetz India Ltd. (supra) was in a different context and not on the similar facts. In instant case, the Assessing Officer had proposed to tax the amount as capital gains, as against the assessee's claim that the same is not taxable. Accordingly, having recorded the fact that the assessee otherwise qualified for such set off, the set off should not have been disallowed on the ground that the same was not claimed in the return of income. He maintained that the assessee was well within her right to make claims during the assessment proceedings and it does not amount to filing revised computation. In this regard he referred to the decision of the Hon'ble Ahmedabad ITAT in the case of Kisan Discretionary Family Trust (2 DTR 363), which was rendered after the decision of the Hon'ble Apex court in the case of Goetz India Ltd. He further claimed that even ..... X X X X Extracts X X X X X X X X Extracts X X X X
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