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2015 (12) TMI 1281 - ITAT MUMBAI

2015 (12) TMI 1281 - ITAT MUMBAI - TMI - Treatment to payment made to retiring partners as transfer of capital assets by way of distribution & brining the same to tax as short-term-capital gains in the hands of assessee firm - Held that:- We hold that there is no transfer of capital asset by way of distribution of capital asset at the time of making the payments to the retiring partners and therefore, no capital gain is chargeable to tax in hands of the assessee firm. Accordingly, order of the C .....

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impugned order dated 31.07.2014, passed by CIT(A)-34, Mumbai for the quantum 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 manufactu .....

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ich, 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 contin .....

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amratan Sohanlal Saraf and Shri Niraj Ramratan Saraf, respectively. The AO observed that such a payment to the retiring partners amounts to distribution of capital asset on the dissolution of the firm which is taxable under section 45(4). Further, the firm, without revaluing the assets has created goodwill and paid the amount to the retiring partners, this also tantamount to revaluation of the asset of the assessee firm at the time of the retirement of the partners. In response to the show cause .....

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so, he has referred and relied upon the decision of Hon ble Jurisdictional High Court in case of CIT vs. A.N. Naik Associates, reported in 265 ITR 346, wherein their Lordships have interpreted the expression otherwise as provided in section 45(4), which is to be read with the word transfer of capital assets by way of distribution, 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 partner .....

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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 H .....

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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 intangible. However, he h .....

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he firm and form firm to its partners in certain situations. Here, in this case, the action of the firm by creating goodwill and by making payment in lieu thereof to the partners is nothing but distribution of assets to its retiring partners which has been done in an indirect manner by retaining the assets in the firm. Thus, he confirmed the order of the AO after detailed reasoning as given from pages 6 to 13 of the appellate order; and Lastly, he strongly referred and relied upon the decision o .....

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ues 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 En .....

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e 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 .....

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gain without there being any distribution of capital assets on dissolution of a firm, within the scope and meaning of section 45(4). Sub-section (4) of section 45 reads as under :- 4. The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, associat .....

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f capital assets of a firm; (2) Such distribution should result in transfer of a capital asset by firm in favour of the partner; and (3) On account of the transfer there should be a profit or gain derived by the firm. (4) Such distribution should be on dissolution of the firm or otherwise . Thus, the gain from transfer of a capital asset should be by way of a distribution of capital asset on a dissolution of a firm which shall be chargeable to tax as an income of the firm, in other words, if the .....

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rest 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 the .....

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sion 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 ca .....

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Anrag Jain) entered the partnership as he showed his willingness to contribute capital for purchase of land to construct housing complex. The firm purchased land bearing Sy.No. 13/1, Jakkasandra Village, Begur Hobii, Bangalore South Taluk under a registered sale deed dated 13.5.1987 for a consideration of ₹ 2,50,000/-. Another reconstitution took place on 1.7.1991 by which Sri L.P. Jain retired from the firm and Smt. Pushpa Jain and Smt. Shree Jain were inducted as partners. The firm was .....

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4. Hence, it is a transfer within the 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 .....

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e 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., 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 .....

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hould 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. Then only the profits or a gain arising from such transfer is liable to tax under Section 45(4) of the Act. 25. In the instant case, the partnership firm had purchased the property under a registered sale deed in the name of the firm. The property did not stand in the name of .....

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e partners. There was no dissolution of the firm or at any rate there was no distribution of capital asset on 01.04.1994 when three partners retired from the partnership firm. What was given to the retiring partners is cash representing the value of their share in the partnership. No capital asset was transferred on the date of retirement under the deed of retirement deed dated 01.04.1994. In the absence of distribution of capital asset and in the absence of transfer of capital asset in favour o .....

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pted 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 th .....

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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 .....

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ions, letters and alike as are reasonably required by the party entitled to such transfer would be effected. It is based on this document and subsequent deeds of retirement of partnership that the order of assessment was made holding that the assessee are liable for tax on capital gains. 28. In that context, the Bombay High Court held that when the assets of the partnership is transferred to a retiring partner, the partnership which is assessable to tax ceases to have a right or its right in the .....

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