TMI Blog2019 (4) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... ney representing the value of their share in the partnership. No capital asset was transferred on the date of retirement. In absence of distribution of capital asset and in absence of transfer of capital asset in favour of retiring partners, no profit of gain arose in the hands of partnership firm. In the present case, admittedly there was no transfer of capital asset upon reconstitution of the firm. All that happened was the firm's assets were evaluated and the retiring partners were paid their share of the partnership asset. There was clearly no transfer of capital asset. Revenue has not argued that the reconstitution of the firm was a colourable device to avail tax liability. - Decided against revenue - Income Tax Appeal No. 137 of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retiring parters were paid sums of ₹ 2.97 Crores (rounded of) and 77.27 Lakhs (rounded of) respectively in proportion of their shares in the partnership business. (II) The Assessing Officer was of the opinion that in terms of section 45(4) of the Income Tax Act, 1961, ( the Act for short) the firm had to pay short term capital gain tax on such amounts. The Assessing Officer was of the opinion that the goodwill credited by the firm of ₹ 3.75 Crores was nothing but the capital gain arising on distribution of the capital asset by way of dissolution of the firm or otherwise . (III) The assessee carried the matter in appeal in which heavy reliance was placed on Full Bench Judgment of Karnataka High Court in the case of Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the assessee opposed the appeal contending that decision of this Court in the case of A. N. Naik Associates (Supra) concerned a question whether Section 45(4) of the Act would apply only in a case of dissolution of the firm and not in case of retirement of a partner. The Court was not concerned with the question of applicability of Section 45(4) of the Act without there being any transfer of capital asset. The Karnataka High Court in the case of Dynamic Enterprises (Supra) has noticed the decision of this Court in the case of A. N. Naik Associates (Supra) and held that when there is no transfer of capital asset, Section 45(4) will not apply. 5. Having thus heard the learned counsel for the parties, we may summarise the und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or otherwise shall be chargeable to tax as income of the firm. For application of this provision, thus, transfer of capital asset is necessary. Provisions of Section 45(4) of the Act came up for consideration before this Court in the case of A. N. Naik Associates (Supra). It was a case in which there was reorganization of the partnership in quick succession. The Court held that such reorganization would not amount to dissolution of the firm. The question in such background was whether Section 45(4) of the Act would apply in case there has been transfer of capital asset. The Court referred to legislative changes and observed that when the asset is transferred to the partner, that falls within the expression otherwise and the rights of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred on the date of retirement. In absence of distribution of capital asset and in absence of transfer of capital asset in favour of retiring partners, no profit of gain arose in the hands of partnership firm. Following observations of the court may be noted: 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 capital when the firm was reconstituted on April 28,1993. Nearly a year thereafter on April 1,1994, by way of retirement, the erstwhile three partners took their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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