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2016 (11) TMI 1064 - ITAT MUMBAI

2016 (11) TMI 1064 - ITAT MUMBAI - TMI - Taxability of capital gains in the hands of the assessee firm - retiring partner - valid transfer - Held that:- The partnership firm, that is, the assessee did not transfer any right in the capital asset or any of the asset of the partnership firm in favour of the retiring partner and neither it ceases its hold on the property of the firm. Its right in the property of the firm was still intact and has not been extinguished at all. Even the retiring partne .....

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ion 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. - There is no transfer of any capital asset of the assessee firm to its retiring partner and hence no capital gains chargeable to tax arises in hands of the assessee firm and section 45(4) has no application on the facts of the present case. - Decided in favour of assessee - ITA No. 5639/Mum/2012, ITA No. 6276/M .....

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06- 07. 2. In the assessee s appeal, following grounds have been raised:- That the learned CIT (A) under the facts and circumstances of the case and in law has:- Reopening of assessment under section 147 of the Act 1. erred in upholding the reopening of assessment under section 147 of the Act, without appreciating that reassessment order is bad in law and should have been quashed; Computation of capital gain under section 45(4) of the Act 2. erred in confirming the Long Term Capital Gain ( LTCG .....

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t satisfied and in the absence of any distribution of capital assets, the impugned transaction is not chargeable to tax in the hands of Appellant firm; 5. failed to appreciated that section 45(4) of the Act cannot be applied to retirement of partner, where amount due to retiring partner has been paid towards its share in the firm and hence the income cannot be charged to tax in the hands of the Appellant firm; Double taxation of the same income 6. erred in upholding the action of the AO in taxin .....

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Act, while computing the tax payable for the year; 9. erred in levying interest under section 234B of the Act while computing the tax payable for the year; 10 . Without prejudice the above, on the fact of the case, interest under section 234A and 234B cannot be levy simultaneously . 3. The revenue has taken following ground in its grounds of appeal:- 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the total consideration on account of transfer of r .....

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eived for the purpose of section 45(4) of the Act. 3. For these and other reasons it is submitted that the order of the CIT(A) may be set-aside and that of the AO restored. 4. The appellant craves leave to amend or later any ground or add a new ground which may be necessary . Besides aforesaid grounds, revenue has also taken following as additional grounds:- Without prejudice to the main ground already raised the addition of ₹ 55,52,02,720/- made on account of distribution of transfer of c .....

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onsideration should be taken as 55,52,02,720/-, as against ₹ 33,52,47,975/- taken by Hon'ble CIT(A), without appreciating that the difference in consideration was due to constructed area to be given in AY 2009-10 (i.e. area of 35,495 sq. ft.), was held to be chargeable to tax in AY 2009- to by Hon'ble CIT(A) and the AO has already assessed the impugned sum in that year on substantive basis, and thereby suggesting double taxation; Cost of acquisition 2. erred in objecting the order .....

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wherein core issue of chargeability of capital gains u/s 45(4) has been raised which will have the implication on the grounds raised in department s appeal as well as the cross objections. Brief background and facts qua the issue of chargeability of capital gains are that, the assessee is a Partnership firm engaged in the business of construction of housing and commercial projects in Mumbai. The said Partnership firm was constituted on 13th March, 1997; vide Partnership Deed , which was constit .....

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ted in the firm on 30th June, 1997. Even after the admission of the new partners, the profit ratio of M/s Bharat Barrel Drum Mfg. Co. Ltd remained the same, that is, at 50%. Since the construction of the project was ongoing during the FY 2005-06, therefore, no income accrued to the assessee from the construction business during the year ending 31st March, 2006. Later, on 30th April, 2005, vide Dissolution Deed , M/s Bharat Barrel Drum Mfg. Co. Ltd., one of the partners in the firm, retired from .....

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er for sum of ₹ 17,22,47,975/- during the year under consideration; and e) Balance area of 36,495 sq. feet was to be allotted to the retiring partner on the completion of the construction. As stated above, since the project was under construction and no taxable income had accrued to the assessee firm, therefore, it did not filed any return of income for the assessment year 2006-07. The return of income was filed for the first time for the assessment years 2007-08, 2008-09 and 2009-10, all .....

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t dated 30.05.2005 and as per the said Deed, the retiring partner was eligible for an amount of ₹ 33,57,22,975/- and constructed area of 35,495 Sq. ft. @ ₹ 5110/- per sq ft out of the building which was under construction in the plot. Since the return of income for the assessment year 2006-07 had not been filed by the assessee, he proposed to tax the assessee-firm under section 45(4) and accordingly, proceeded to reopen the case under section 147 by issuance of notice under section 1 .....

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tial contribution and the second partner agreed to bear all cost/expenses for developing the land from its source of fund. The assessee M/s. Keshav & Co. filed its return of income for A. Y. 2003-04 with ITO18 (2)-3, Mumbai on 28.3.2005 declaring Nil income and showing work-in-progress at ₹ 7,69,4021-. The record shows that no substantial development of the land was started before the date of retirement of first partner. The first partner i.e. M/s. Bharat Barrel and Drum Manufacturing .....

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t, an amount of ₹ 33,57,22,9751- and 35495 sq. ft. area valued at ₹ 18,13,79,450/- has been determined as consideration for the retiring partner. It means the retiring partner was eligible for a total consideration of ₹ 51,71,02,425/- as its share in the assets of the firm. Provision of sec. 45(4) reads as under:- "The profits or gain arising from the transfer of a capital asset by way of distribution of capital asset on the dissolution of a firm or other association of pe .....

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r that the firm is chargeable to tax on the consideration received or accruing to the retiring partner as a result of transfer of asset/relinquishing of right in the assets. As per sec. 2(47)(ii) of the I T Act, transfer in relation to capital assets include extinguishment of any right therein. In the instant case, the retiring partner' has relinquished its right in the land of the firm and has received consideration in relinquishing such right. So, for the purpose of I T Act, it is a transf .....

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at income chargeable to tax on transfer of right in the said property by retiring partner to the extent of ₹ 32,71,02,4251- has escaped assessment for A. Y. 2006-07 within the meaning of Section 147 of the Act. Issued notice u/s 148 of the Act. 6. The assessee objected to the initiation of reopening the case under section 147 r.w.s. 148 mainly on the ground that, firstly, any taxability of capital gains if at all would arise in the hands of the partner; and secondly, section 45(4) cannot b .....

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erest in the firm by retiring partner and the same cannot be charged tax in the hands of the firm; (iii) The following conditions should be satisfied to invoke section 45(4):- • Transfer of capital asset; • Transfer should be by way of distribution of capital asset; • Transfer by way of distribution should be on dissolution of the firm or otherwise; (iv) In support of its contention, the assessee relied upon various judicial decision of the ITAT and also relied upon the following .....

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e decision of Hon. Mumbai ITAT in the case of Sudhakar Shetty 130 ITD 197. 7. The Ld. Assessing Officer after analyzing the provision of section 45(4) and the decision of the Hon ble jurisdictional High Court in the case of CIT vs. A. N. Naik Associates, reported in [2004] 187 CTR 162, held that, firstly, the transaction carried out by the assessee firm has resulted into transfer within the meaning and scope of section 2(47), in the sense that the retiring partner has assigned, released and reli .....

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hat as regards the assessee s claim that there was lump sum payment to retiring partner at the time of retirement is not factually correct, because the retiring partner got lump sum payment in form of money of ₹ 16.3 crores as well as rights of 76,752 sq. ft of constructed area in the coming projects to be developed by the assessee firm on the land, which was brought by the retiring partner at the time of formation of the firm as his share of capital contribution. Therefore, there is a dis .....

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ssee firm exercised this option in consideration of ₹ 33,57,22,975/-. Further, the right of the retiring partner in remaining areas, i.e. 35,395 sq. ft. was exchanged with fully constructed area of 22500 sq.ft of Apsara Cinema Pvt. Ltd and the assessee replaced its liability towards retiring partner to Apsara Cinema Pvt. Ltd in the books of account for F.Y. 2008-09. The above act on the part of the assessee also proves beyond doubt that there was a distribution of capital assets at the tim .....

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of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of the retiring partner. Accordingly, he calculated the value of consideration received by the retiring partner and also the taxable capital gain in the following manner:- As per the Deed of Retirement dated 30.04.2005 attached with the return of income filed in response to notice under section 148 of the Act, the retiring partner i.e. M/s. Bharat Barrel & Drum Mfg. Co. Pvt. Ltd. was entitle .....

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the outstanding capital balance till 30.04.2005. Thereafter, the capital contribution of the retiring partner remains with the firm at ₹ 12,65,83,588/- only as on the date of retirement. So, the cost o sale consideration received on retirement from the firm by the retiring partner is ₹ 12,65,83,588/- only. It is seen from the notes below Balance Sheet as on 31.03.2007 filed along with the return of income for AY 2007-08 that the assessee has adopted the market value of the asset @ 51 .....

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t above: 55,52,02,720/- Less: Cost of acquisition as computed above: 12,65,83,588/- NET CAPITAL GAIN : 42,86,19,132/- 8. In the first appeal, the details submissions were made by the assessee which has been dealt and incorporated by the Ld. CIT(A) from pages 10 to 17 of the Appellate order. On the said written submissions, remand report was also called for which has been incorporated from pages 17 to 18 of the appellate order. 9. After considering the finding of the Assessing Officer, as well as .....

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es as cash payment and balance ₹ 17.22 Crores paid in cash in lieu of 41,257 sq. ft of the constructed area; • He further observed that, since, section 45(4) speaks about the distribution of the capital assets, therefore, he gave direction to the AO that balance amount should be taxed in the year of actual transfer of constructed area of 35,495 sq.ft. which was in the AY 2009-10; • The ld. CIT(A) also computed the cost of acquisition at ₹ 30.96 Crores and after giving benef .....

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retiring partner was entitled for ₹ 16.30 crores in money and 76,751 sq.ft of the constructed area in the property to be developed by the assessee firm in lieu of all the rights, title, and interest in the assessee-firm. There was no transfer of any capital asset of the assessee firm but consideration to be paid to the retiring partner and, therefore, the provision of section 45(4) cannot be invoked in the hands of the assessee firm. Here, the retirement of the partner has not lead to any .....

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5) 45 CCH 189 which in turn is based on the principle laid down in the decision of the Full Bench of the Hon ble Karnataka High Court in the case of CIT v Dynamic Enterprises, reported in 359 ITR 93. Besides this, he also relied upon following decisions, viz., • Delhi Industries & Enterprises (60 SOT 212) (Del Trib); • M/s. Karnataka Agro Chemicals (ITA no.594 of 2013, dated 23 June 2014) Karnataka High Court; • Arbuda Estate Corporation (ITA No.354/Ahd/2003) dated 20th Novemb .....

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artner was nothing but cash and certain portion of stock-in-trade and that too was finalized in terms of cash. Giving of stock-in-trade cannot be reckoned as capital asset under section 2(14). Thus, there is no transfer of capital asset albeit it is a transfer of stock-in-trade. Lastly, he submitted that the assessee had transferred 35,495 sq. feet of fully constructed area to Bharat Barrel & Drum Mfg. Pvt. Ltd in lieu of the outstanding liability as per the retirement deed entered in AY 200 .....

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d (as per the agreement to the retiring partner) has made the addition of ₹ 18.13 Crores to the total income of the assessee in the AY 2009-10 under section 45(4) and taxed the same by reopening the assessment u/s 147. Aggrieved by the said assessment order of the Assessing Officer, the assessee is in appeal before the CIT(A) on the ground that:- a) There is no distribution of capital asset on retirement of partner from the firm in the AY 2009-10; b) In any case, firm was only to give stoc .....

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t . This is evident from copy of retirement Deed, (the copy of which is appearing at page 47 to 81 of the PB) and our specific attention was drawn to para 4 clause b wherein, it has been stated that the retiring partner shall receive the amount as mentioned herein, in lieu of and in full satisfaction, that is, 50% share in the partnership firm and assets thereof . Section 2(14) defines that, capital asset is property of any kind and it contains bundle of rights and, therefore, such a transfer of .....

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M/s Vaibhav Industries ITA 3052 of 2014 dated 16.03.2016 Even otherwise also, he submitted that it is a case of amount distributed to the partner in lieu of capital asset and hence the same would be taxable under section 45(4). He also strongly emphasized on the word otherwise which will cover such cases where there is no dissolution. In support of his contention, he strongly relied upon the order of the Assessing Officer as well as CIT (A). As an alternative plea, he submitted that it should b .....

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wo partners namely, M/s Bharat Barrel Drum Mfg. Co. Ltd. and M/s Urmi Real Estate Pvt. Ltd. The former had contributed to the Partnership, land admeasuring 15,663 sq. yards which was then valued at ₹ 19 crores and the later had decided to contribute funds and its expertise in the field of construction towards development of the land. Immediately, thereafter, on 30th June, 1997, two new partners were admitted, viz., Shri Vinod Tejraj Gowani and Shri Hitesh Tejraj Gowani. All the four partne .....

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sq. ft. to be allotted out of stock-in-trade of the firm; c) The firm had the right to purchase the 41,257 sq. feet of the above mentioned area on or before 30th January, 2006; d) The firm exercised its right and purchased the area from the retiring partner for sum of ₹ 17,22,47,975/- during the year under consideration; and e) Balance area of 36,495 sq. feet was to be allotted on the completion of the construction. After the retirement, the firm continued its business on as is where is b .....

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argeable to capital gains in the hands of the assessee- firm under section 45(4). The Ld. CIT(A) has held that amount of money to the extent of ₹ 33.52 Crores is nothing but a capital asset going to the retiring partner and, therefore, the same is taxable under section 45(4). The said sum comprised of ₹ 16.3 Crores paid in cash and ₹ 17.22 Crores paid in lieu of 41,257 Sq. feet of the constructed area. He thus directed that, the actual transfer of constructed area of 32,495 sq. .....

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sub-section (4) of section 45, which reads as under:- 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, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value .....

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should be on dissolution of the firm or otherwise. Hence the basic condition for invoking the provision of section 45(4) is that, gain should be on transfer of a capital asset by way of distribution of capital asset on the dissolution of firm. Here, in this case, admittedly there is no dissolution of the firm as the assessee-firm is continuing its business on as is where is basis with the remaining three partners. What the firm has paid is the compensation to the retiring partner for all its rig .....

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of the character of property brought, such property becomes the property of the firm which inter-alia implies that the partnership property would vest in all the partners of the firm and the individual partner ceases with his individual rights in the property and he is only entitled to his share of profits, if any, accruing to the partnership firm from the exploitation or realization of such property and in case of dissolution of the partnership firm, to a share in the money representing the va .....

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re is distribution of the assets the capital gain can only be charged under the deeming provision of section 45(4) for which the basic condition precedent is that the distribution of the capital asset should be on the dissolution of the firm and otherwise. If in the course of such distribution of capital asset there is transfer of a capital asset by the firm in favour of the partner and it results in profits or gains to the firm, then such profits or gains are chargeable to tax as capital gain o .....

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r. 15. The department has immensely harped upon the words or otherwise appearing in the section 45(4) to canvass that it will cover the case where there is no dissolution and in support strong reliance has been placed on the decision of the Hon ble Bombay High Court in A.N. Naik Associates (2004) 265 ITR 346. This entire controversy in hand before us and also the implication of the ratio laid down by Hon ble Bombay High Court while dealing with the words otherwise used in section 45(4) has been .....

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oney 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 on 09.01.1985 with Sri Anurag Jain and Sri Nirmal Kumar Du .....

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andra 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 reconstituted and five partners belonging to Khemka Group were inducted into the firm by a deed dated 28.04.1993. Before the reconstitution, the assets of the firm were revalued as per the r .....

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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. T .....

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s 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 . The Hon ble Court after noting down the above facts and taking into consideration various decisions; analyzing the provisions of section 45 and sub-section (4) thereto; meaning of transfer as given in section 2(47); section 14 of Indian Pa .....

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n 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 any individual partners. No individual partners brought that capital asset as capital contribution into the firm. Five partners brought in cash by way of cap .....

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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 of the retiring partners, no profit or gain arose in the hands of the partnership firm. Therefore, the question of the firm being assessed under Section 45(4) .....

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oceeds 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 prop .....

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his 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 (BOMBAY). 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 asset .....

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s 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 property stands extinguished in favour of the partner to whom it is transferred. If so read, it will further the object and purpose and intent of amendment .....

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ontext the Bombay High Court held that 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 i .....

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l gains tax under Section 45(4). Therefore, the said judgment does not lay down correct law . (Emphasis added is ours) 16. Thus, if we apply the above ratio laid down by the Full bench decision of the Hon ble Karnataka High Court, on the facts of the present case, then it is ostensibly clear that the partnership firm, that is, the assessee did not transfer any right in the capital asset or any of the asset of the partnership firm in favour of the retiring partner and neither it ceases its hold o .....

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are in the partnership firm. Therefore, there is no transfer of a capital asset within the scope of section 45(4), because 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. So far as allotting of some area in the constructe .....

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e by us) and therefore, this premise of the revenue for taxing the capital gains in the hands of the assessee firm has also no legs to stand. Thus, respectfully relying upon the ratio and decision of the aforesaid Hon ble Karnataka High Court, Full Bench, we hold that there is no transfer of any capital asset of the assessee firm to its retiring partner and hence no capital gains chargeable to tax arises in hands of the assessee firm and section 45(4) has no application on the facts of the prese .....

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treated as allowed. 18. Similarly the ground taken in the revenue s appeal and assessee s Cross Objection have been rendered in-fructuous, in view of our finding and observations given in the assessee s appeal. Hence they are treated as dismissed. 19. Coming to the additional ground raised by the revenue, the Ld. Counsel, at the outset objected that the said ground is outside the scope of assessment order and a new angle or case cannot be roped in the proceedings before the Tribunal. In support .....

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