TMI Blog2015 (12) TMI 1281X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment passed u/s 143(3) for the assessment year 2010-11. In various grounds of appeal, the assessee has challenged the treatment of payment made to retiring partners of ₹ 3,75,08,859/- as transfer of capital assets by way of distribution brining the same to tax as short-term-capitalgains in the hands of assessee firm. 2. Brief facts of the case are that, the assessee firm is engaged in the manufacturing of tube light fittings and other lighting accessories for over a period of 13 years. The assessee firm came into existence vide partnership deed dated 16.11.1996, then consisting of two partners namely, Shri 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, which not only includes cases of dissolution but also the case of subsisting partners of the partnership firm transferring the assets in favour of the retiring partners. Thus, he held that amount of goodwill created by firm at ₹ 3,75,08,859/- is nothing but capital gain arising on distribution of capital asset of the firm by way of dissolution of firm or otherwise. 4. Before the first appellate authority, the assessee submitted that the decision of Hon ble Bombay High Court in the case of CIT vs A N Naik Associates (supra) is not relevant to the present case, because in that case by way of Memorandum of family settlement, it was agreed that the business of those firms as set out therein would be distributed in terms of the family settlement and it was set out that all those assets or liabilities belonging to or due from any of the firm would be treated as transfer , which here in this case, there is no transfer of any asset 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of asset within the meaning of section 45(4). Even the goodwill continues with the assessee firm and it was created only for making the payment to the retiring partners on their respective share capital and there is no cost of acquisition of rights. The Ld. CIT(A) has failed to appreciate the correct position of law and also a decision of Full Bench of Karnataka High Court, wherein the decision relied upon by the CIT(A) have been distinguished or not accepted. In support, he filed a copy of the decision of the Karnataka High Court in the case of CIT vs. Dynamic Enterprises, judgment and order dated 16th February, 2013. 6. On the other hand, Ld. DR strongly relied upon the order of the CIT(A). 7. We have heard the rival contention, perused the relevant finding given in the impugned orders and also material placed on record. Here in this case, the basic facts which are undisputed are that, firstly, the original partnership firm continues 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm, in other words, if there is no dissolution of the firm and resultant no distribution of capital asset, then there is no transfer of such asset by the firm in favour of a partner resulting into profits or gains to the firm, which can be said chargeable to tax as income in the hands of the firm. Here in this case, none of the conditions as given in sub-section (4) are applicable, because no capital asset of the firm has been extinguished or any transfer has been made in favour of the partner for acquiring any such interest on asset. Here in this case, the creation of a goodwill is merely a mode of making the payment to the retiring partners without having any impact of the capital asset tangible or intangible . There is no actual transfer of any asset from the firm to the retiring partners by which the firm ceases to have any right in the property tangible or intangible. There is no absolute title of any property acquired by the partners after being extinguished 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he meaning of Section 2(47) of the I.T. Act. Accordingly, notice under Section 148 was issued on 27.03.2002. In reply to the said notice, the assessee-firm contended that it has paid the amount to the retiring partners standing on credit side in respect of capital accounts. There is no transfer of asset and therefore, they are not liable to pay any capital gains tax. 6. The Assessing Officer held that the land was purchased when the firm was having two partners, namely, Shri Anurag Jain and Shri L.P. Jain. The firm had done no business all through its existence. The receipt of rents and commission for assessment year 1994-95 were found as bogus. The immovable property was not utilized to earn paltry sums during the existence of the firm. The new partners were introduced and the old partners retired. This is a device adopted to transfer the immovable property. The incoming partners tried to evade capital gains tax as well as stamp duty and therefore, he held the capital gains tax is 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., nearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm being assessed under Section 45(4) and charging them tax for the profits or gains which did not accrue to them would not arise. 26. It was contended on behalf of the revenue that five incoming partners brought money into the firm. Three erstwhile partners who retired from the partners on 01.04.1994 took money and left the property to the incoming partners. It is a device adopted by these partners in order to evade payment of profits or gains. As rightly held by this Court in Gurunath s case (supra) it is taxable. This argument proceeds on the premise that the immovable property belongs to the erstwhile partners and that after retirement the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs to the partnership firm. It did not belong to the partners. The partners only had a share in the partnership asset. When the five partners came into the partnership and brought cash by way of capital contribution to the extent of their contribution, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Section 45(4) was attracted. Therefore, to attract Section 45(4) there should be a transfer of a capital asset from the firm to the retiring partners, by which the firms ceases to have any right in the property which is so transferred. In order words, its right to property should stand extinguished and the retiring partners acquire absolute title to the property. 29. In the instant case, the partnership firm did not transfer any right in the capital asset in favour of the retiring partner. The partnership firm did not cease to hold the property and consequently, its right to the property is not extinguished. Conversely, the retiring partner did not acquire any right in the property as no property was transferred in their favour. The Division Bench in Gurunath s case (supra) did not appreciate this distinguishing factor and by wrong application of the law laid down by the Bombay High Court held the assessee in that case is also liable to pay capital gains tax under Section 45(4). Therefore, the said judgment does not lay down correct law . 10. Thus, in view of our discussion above and respectfully following the ratio, as discussed by the Full Bench of Hon ble Karnataka ..... X X X X Extracts X X X X X X X X Extracts X X X X
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