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TMI Blog2015 (12) TMI 1281X X X X Extracts X X X X X X X X Extracts X X X X ..... Ramratan Sohanlal Saraf and Shri Niraj Ramratan Saraf having share ratio of 75% and 25% respectively. During the year under appeal, i.e., on 15.01.2010, the constitution of the firm underwent a change in terms of "Deed of Reconstituted Partnership Deed" of the same date (15.01.2010) by which, 3 partners were admitted, wherein the profit sharing ratio underwent a change in the following manner :- Ramratan Sohanlal Saraf 67.5% Niraj Ramratan Saraf 17.5% Pravin Kumar Agarwal 5% Alok Kumar Agarwal 5% Sudhir Kumar Agarwal 5% Immediately thereafter, on 16.01.2010 a "Deed of Retirement-cum- Reconstitution of Partnership Deed" was made by which the earlier two partners, Ramratan Sohanlal Saraf and Shri Niraj Ramratan Saraf retired from the partnership firm and in the same deed, the continuing 3 partners have changed their sharing ratio in the following manner :- Pravin Kumar Agarwal 40% Alok Kumar Agarwal 30% Sudhir Kumar Agarwal 30% 3. There was no dissolution or discontinuity of the firm or business. At the time of the retirement of the partners, the firm created an intangible asset in the books in the form of "Goodwill" for an amount of Rs. 3, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set to the retiring partners. It was further brought to the notice of the Ld. CIT(A) that, Hon'ble Karnataka High Court in Full Bench decision in the case of CIT vs Dynamic Enterprises has distinguished the decision of Bombay High Court in A.N. Naik Associates (supra) and disapproved its earlier decision in CIT vs Gurunath, Talkies, reported in [2010] 328 ITR 59. However ld. CIT(A), rejected the assessee's contention and held that payment of goodwill is nothing but payment on account of transfer of capital asset of the firm. He further held that creation of goodwill was a colourable device to camouflage the transaction. He also applied the principle of Mc Dowell & Co. Ltd [154 ITR 148] to confirm the addition made by the AO. The relevant observation and finding of the CIT(A) can be summarized in the following manner:- firstly, the Ld. CIT(A), agreed with the contention of the assessee that neither there was any dissolution of the firm nor the firm was discontinued. The firm continued by its remaining partners with all its assets and there was no transfer of assets by way of distribution of capital asset, because no asset have gone out of the books of the firm whether tangible or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nues and there is only reconstitution of the partners in the present assessment year; secondly, there is no dissolution of the firm as the firm is continuing by the remaining partners with the same business, hence there is no dissolution of the firm; thirdly, there is no transfer of asset by way of distribution of capital asset, because no asset has gone out of the books of account of the assessee firm; and lastly, all the assets, tangible or intangible still continues with the assessee firm. All these facts have been noted and accepted by the CIT(A) in para 7 of the impugned order. What the assessee firm has done, it has created a "goodwill" account and distributed the amount among the retiring partners. It is not the case of the revenue that "goodwill" of the firm has been transferred, rather they have disputed the manner in which the goodwill has been created solely for the purpose of making the payment to the retiring partners. What the retiring partners have taken is, only money towards the value of their shares. Now in such a situation, whether it can be held that the assessee firm is liable to pay capital gain without there being any distribution of capital assets on dissolu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed from the firm. Thus, it cannot be held that there is any transfer of asset chargeable to tax under the head "capital gain" within the ambit and scope of section 45(4). 8. Coming to the decision of Hon'ble Bombay High Court and decision of Karnataka High Court in the case of Gurunath (supra) as relied upon by the CIT(A), it is seen that Full Bench of the Karnataka High Court in the case of CIT vs Dynamic Enterprises, reported in [2013] 359 ITR 83 (Kar)(FB), has distinguished the case of the Bombay High Court on facts and dissented from the decision of its own Court in case of Gurunath Talkies (supra). In this case, the question of law referred for consideration of Full Bench was as under:- "When a retiring partner takes only the money towards the value of his share, whether the firm should be made liable to pay capital gains even when there is no distribution of capital asset/assets among the partners under Section 45(4) of the I.T. Act? Or Whether the retiring partner would be liable to pay for the capital gains?" Relevant facts and case of the revenue were as under :- "4. M/s Dynamic Enterprises-the respondent herein is a partnership firm which came into existence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to be paid by the firm. In appeal, the appellate authority has affirmed the said order. The appellate authority held that the reconstitution of firm has taken place on 01.04.1994 i.e., nearly one year after the members of the Khemka family were introduced as partners. Therefore, it accepted the genuineness of the old firm as well as the new firm but it held it is a colourable device to evade payment of tax". 9. Hon'ble Court after taking into consideration various decisions and analyzing the provisions of section 45 and subsection (4) thereto; meaning of transfer as given in section 2(47); section 14 of Indian Partnership Act; and also the various decisions of the Hon'ble Supreme Court, observed and held as under :- "24. Therefore, in order to attract Section 45(4) of the Act, the capital asset of the firm should be transferred in favour of a partner, resulting in firm ceasing to have any interest in the capital asset transferred and the partners should acquire exclusive interest in the capital asset. In other words, the interest the firm has in the capital asst should be extinguished and the partners in whose favour the transfer is made should acquire that interest. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution, they were entitled to the proportionate share in the interest in the partnership firm. When the retiring partners took cash and retired, they were not relinquishing their interest in the immovable property. What they relinquished is their share in the partnership. Therefore, there is no transfer of a capital asset, as such; no capital gains or profit arises in the facts of this case. In that view of the matter, Section 45(4) has no application to the facts of this case. 27. In Gurunath's case (supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case of Commissioner of Income Tax vs A N Naik Associates - (2004) 265 ITR 346 (BOMBAy0. In Naik's case, the asset of the partnership firm was transferred to a retiring partner by way of a deed of retirement. A memorandum of family settlement was entered into and the business of those firms as set out therein was distributed in terms of the family settlement as the party desired that various matters consisting the business and assets thereto be divided separately and portioned. The term has also provided that such of those assets or liabilities belonging to or due from any of the firms all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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