TMI Blog2019 (1) TMI 1551X X X X Extracts X X X X X X X X Extracts X X X X ..... er on dissolution or otherwise within the meaning of section 45(4) read with section 2(14) of the Act. I also hold that the money equivalent to enhanced portion of the assets re-valued does not constitute capital asset within the meaning of section 2(14) and the payment of the said money by the assessee-firm to the retiring partners cannot give rise to capital gain under section 45(4) read with section 2(14) . I accordingly agree with the view taken by the Id. judicial Member and answer both the question referred under section 254(4) in the negative and in favour of the assessee. - I.T.A. Nos. 3526 & 3527/MUM/2012, I.T.A. Nos. 3882 And 3883/MUM/2012 - - - Dated:- 10-1-2019 - Shri P. M. jagtap, Vice.-President (KZ) (Third Member) For The Assessee : Dr. K. Shivaram Shri Rahul Hakani For The Department : Shri Ajay Kumar ORDER On account of difference of opinion between the learned Accountant Member and learned Judicial Member, Mumbai Benches, this matter has been referred to me by the Hon'ble President, ITAT for consideration and decision under section 254(4) of the Income Tax Act, 1961 (hereina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence. The assessee in the present case is a partnership firm which was originally constituted vide Deed of Partnership entered into on 01.08.2005. The object of the partnership firm was to carry on the business of development and tonstruction in partnership and the said partnership was originally constituted by two partners, namely Shri Rakesh Kumar Wadhwan and Shri Sudhakar M. Shetty with profit sharing ratio of 60% and 40% respectively. On 16.09.2005, the partnership was reconstituted by admitting Smt. Hemlata S. Shetty as partner with a revised profit sharing ratio of Shri Rakesh Kumar Wadhwan, Shri Sudhakar M. Shetty and Smt. Hcmlata S. Shetty being 60%, 20% and 20% respectively. Thereafter on 23.09.2005, the assessee firm purchased from Shri Percival Joseph Pereira a property bearing Survey No. 28A and B 1, Plot No. 2 and CTS No. 956,956/1 to 956/83 of Village Juhu, Tagluka Andheri, Mumbai Suburb, Grater Mumbai for a consideration of 6.5 crores. The said property admeasuring 14022 sq. yards, formerly known as Perieria Estate and later known as Unit Compound, comprised of land and buildings and structures occupied by tenants. Immediately after purchase of the said property, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05.2006 respectively. He also received information about the amounts of 31,40,48,088/- Fts.35,59,84,050/- received by them from the assessee firm on retirement. Based on this information, the AO was of the prima facie view that there was transfer of capital asset by way of distribution by the assessee firm to the retiring partners in terms of section 45(4) of the Act and assessee firm was liable to tax on the capital gain arising from such transfer as held by the Hori'ble Bombay High Court in the case of CIT vs. A.N. Naik Associates (265 nil 346). Since such capital gain was not declared by the assessee in the returns of income filed for assessment years 2007-07 and 2007-08, he reopened the assessments for the said two years after recording the reasons. In pursuance of the assessments reopened by him, reassessments were completed by the AO under section 143(3)/147 of the Act. In the said assessments, he held that it was not only the retiring partners whose capital accounts had been credited by their share of revaluation surplus, but the capital accounts of all the partners were also credited. He held that if the retiring partners had got equivalent rights in the form of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment of rights of partners and the retiring partners were paid only the sum standing to the credit of their capital accounts. He held that while the firm was succeeding, there could not be any transfer of rights in the assets of the firm amongst the retiring partners, subsisting partners and the new partners. He held that there could be no transfer to oneself and this can happen only when there is a dissolution of partnership firm, which had not happened in the case of the assessee. He observed that there was no change of ownership of the capital assets in assessee's case after revaluation in as much as partnership firm continued to be the absolute owner of the said assets. He held that it was thus not a case of dissolution of the partnership firm or transfer of assets of the partnership firm and provisions of Section 45(4) were not attracted. Reliance was placed by the learned CIT(A) on the decision of the Hon'ble Kerala High Court in the case of C1T vs. Kunnankulam Mill Board (257 1TR 544) to hold that unless and until there is a change in the ownership of the capital asset, there cannot be any distribution of capital assets as contemplated in Section 45(4) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of firm or otherwise. He then referred to the definition of capital assets given in Section 2 (1 4) of the Act to note that the expression capital asset is very widely defined to include property of any kind. He also relied on the decision of the Hon'ble Delhi High Court in the case of PNB Finance Ltd. vs. CIT (252 ITR 491), wherein it was held that all inclusive definition of the term 'capital asset' brings within its ambit property of any kind held by the.assessee. It was also held that the term property is of widest import and subject to any limitations which the context may require, it signifies every possible interest which a person can acquire, hold or enjoy. 6. After referring to the relevant provisions and discussing the scope thereof, the learned Accountant Member relied upon the decision of the Hon'ble Supreme Court in the case of Tribhuvan G. Patel vs. CIT 236 ITR 515 wherein it was held that even where a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (ii) of Section 47 of the Act. By relying on the wording of clause (ii) of Section 47 at it stood prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made by the AO on account of capital gains amounting to 1,54,39,90,435/- by applying Section 54(4) of the Act was sustainable to the extent of ₹ 61,75,97,614/-. 7. The learned Judicial Member did not agree with the view taken by the learned Accountant Member that there was a transfer of capital assets by way of distribution of capital asset on retirement of two partners from the assessee firm within the meaning of Section 45(4) of the Act in the facts and circumstances of the assessee's case. Accordingly he proceeded to pass a separate order expressing his dissenting view. 8. In his order passed separately, the Id. Judicial Member held that the decision of the Hon'ble Bombay High Court in the case of CIT -vs.- A.N. Naik Associates (supra), of Hon'ble Supreme Court in the case of CIT - vs.- Bankey Lai Vaidya (supra) and of the Hon'ble Karnataka High Court in the case of Kirolskar Asia Limited -vs.- CIT (supra) relied upon by the Id. Accountant Member to come to his conclusion were rendered in altogether different facts and the ratio of the same, therefore, was not applicable to the facts of the present case. He held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution of capital assets among partners and there was no transfer of capital assets rendering section 45(4) inapplicable. He noted that the facts involved in the said case were identical to that of the case of the assessee, inasmuch as there was reconstitution of the firm without dissolution and the firm existed even on retirement of the partners, who were paid amounts standing to their credit in their capital account including their share in the re-valued assets. 10. The Id. Judicial Member referred to the decision of the Coordinate Bench of the Tribunal in the case of Keshav Co. -Vs.- ITO [161 ITD 798], wherein it was held that what the partnership firm had paid to the retiring partner was the compensation for all his rights in the partnership firm and since there was no transfer of any assets or property of the partnership firm to its partner, section 45(4) had no application. He also relied on another decision of the Coordinate Bench of the ITAT in the case of Mahul Construction Corporation -vs. - ITO (ITA No. 2784/MUM/2017 dated 24.11.2017), wherein the retiring partner was paid money standing to the credit of his capital account without transfer of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) was squarely applicable to the facts of the assessee's case and the Id. Accountant Member was not correct in overlooking the same and applying the decision of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra), which was found to be distinguishable on facts by the Hon'ble Karnataka High Court in the case of Dynamic Enterprises (supra) as well as by the Coordinate Bench of the ITAT in the case of Keshav Co. (supra) and Mahul Corporation (supra). He accordingly held that the money standing to the credit of partner in his/her capital account paid on retirement could not be taxed as capital gains arising from the transfer of capital asset by way of distribution of capital asset on the dissolution of firm or otherwise as per the provisions of section 45(4) read with section 2(14) of the Act. 12. The Id. D.R., at the outset, cited the cases of CIT -vs. Bankey Lal Vaidya [79 ITR 595] and CIT, Madhya Pradesh -vs.- Dewas Cine Corporation [68 ITR 240] decided by the Hon'ble Supreme Court in support of the Revenue's case and contended that the ratio of the said decisions relied upon by the Assessing Officer is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that the same has not been cited by the Id. Accountant Member in his order. He took us through the judgment of the Hon'ble Supreme Court delivered in the said case to point out that the so-called observations of the Hon'ble Supreme Court as quoted by the Assessing Officer in paragraph no. 13.4.2 of the assessment order and relied upon to decide the issue against the assessee are actually not recorded anywhere in the judgment of the Hon'ble Supreme Court. 15. As regards the decision of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra) strongly relied upon by the Id. Accountant Member to decide the issue against the assessee and in favour of the revenue, the Id. Counsel for the assessee contended that the same was not only found to be distinguishable on facts by the Id. Judicial Member for the reasons given in paragraphs no. 8 to 10 of his order, but a reference was also made by him in this regard to the decision of Full Bench of Hon'ble Karnataka High Court in the case of Dynamic Enterprises (supra) as well as the decisions of Coordinate Benches of the Tribunal in the case Keshav Co. (supra) and Mahul Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction. As already discussed in detail while narrating the facts, the said partnership firm was reconstituted from time to time. Meanwhile on 23.09.2005, the assessee-firm purchased a property at Village Juhu, Taluka Andhri, Greater Mumbai, admeasuring 14,022 sq.yd. for a consideration of ₹ 6.5 crores. After arriving at a settlement with most of the tenants occupying the said property and obtaining permission of the concerned competent authority for construction of a five-star hotel, the said property was revalued at ₹ 193,90,60,000/- as per the valuation report dated 25.03.2006 prepared by Shri A.R. Nigam, a Registered Valuer. The resultant revaluation surplus was credited to the capital accounts of the partners in their profit sharing ratio and accordingly a sum n ₹ 30,87,98,087/- each came to be credited to the capital accounts of the two partners namely Smt. Hemlata Shetty and Shri Suclhakar Shetty having 20% profit share each. Thereafter Smt. Hemlata Shetty retired from the partnership firm on 27.03.2006 while Shri Sudhakar Shetty retired from the partnership firm on 22.05.2006. On their retirement, both these partners were paid the amounts standing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of Section 47 was omitted by the Finance Act, 1987 w.e.f. April 1, 1988. 19. In the 1922 Act, the provisions dealing with capital gains were contained in section 12B(1) and the same read as under:- The tax shall be payable by an assessee under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946..... and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place....... Provided further that any transfer of capital assets........ on the dissolution of a firm or other association of persons...... shall not, for the purposes of this section, be treated as sale, exchange or transfer of the capital assets . 20. The case of Bankey Lal Vaidya (supra) relied upon in support of the revenue's case involving assessment year 1947-48 came to be considered by the Hon'ble Supreme Court in the context of section 12B(1) of 1922 Act. In the said case, the assessee, who was the Karta of a Hindu undivided family, entere.d on behalf of the HUF in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessee was paid a fixed sum in lieu of his share in the business together with the goodwill that was taken over by Shri Devi Sharan Garg. It is pertinent to note here that the money equivalent paid to the partner in lieu of his share in the assets of the firm taken over by other partner on dissolution was never treated as constituting a capital asset. Moreover, the question of taxability of capital gain was involved in the case of a partner under section 12B(1) of the 1922 Act and not in the case of a partnership firm as envisaged in section 45(4) of the Income Tax Act, 1961. 21. In the case of Dewas Cine Corporation (supra) relied upon in support of the revenue's case, Shri S.G. Sanghi and Shri Hari Prasad entered into an agreement to carry on the business in partnership as exhibitors of cinematograph films in the name and style of Dewas Cine Corporation with effect from March 1, 1947. Each partner, who was an owner of a cinematograph theatre, brought his theatre into the books of the partnership as an asset of the partnership. For the assessment years 1950-51 to 1952-53, the Income Tax Officer allowed depreciation aggregating to ₹ 44,380/- in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of manufacturing Mangalore tiles in partnership in the name of Prajapati Tiles Company. The said business was being carried on by the firm ever since its inception on 13th January, 1953. There were disputes between the partners of the firm as a result of which the assessees retired from the firm w.e.f. 18.02.1962, leaving the other seven as continuing partners of the firm. On retirement, each retiring partner received a certain amount in respect of his share in the partnership and this amount was worked out by taking the proportionate value of share in the net partnership assets after deduction of liabilities and prior charges. The amount so received also included in its break-up an amount representing proportionate share in the value of goodwill. The Assessing Officer took a view that the amount. received by the assessees to the extent it included their proportionate share in the value of the goodwill represented capital gain chargeable to tax under section 45 of the Income Tax Act, 1961. The assessees disputed this view taken by the Assessing Officer in the appeal filed before the first appellate authority and being unsuccessful, filed a further appeal to the Tribunal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) of the Act? It is pertinent to note that the Hon'ble Gujarat High Court decided the questions no. 1 2 referred to it in the affirmative and in favour of the assessee and consequently did not consider it necessary to answer question no. 3. The decision of the Hon'ble Gujarat High Court rendered while deciding the questions no. 1 2 as involved in the case of Mohanbhai Pamabhai was upheld by the Hon'ble Supreme Court in 165 ITR 166. It is thus clear that the issue in the context of section 47(ii) relating to the transfer of capital asset by way of distribution of capital assets on dissolution or otherwise was not decided in the case of Mohanbhai Pamabhai and the reliance on the same in support of the revenue's case on the issue under consideration is clearly misplaced. The Hon'ble Supreme Court in the case of Tribhuvandas G. Patel (supra) followed the decision of Mohanbhai Pamabhai (supra). It is relevant to mention here that all these judgments cited on the issue were previous to the amendment brought about by the Finance Act, 1987 by inserting sub-section (4) in section 45 w.e.f. 01.04.1988 and it is therefore necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ? ( 3) Whether the word 'otherwise', in section 45(4) takes into its sweep not only cases akin to dissolution of the firm but also cases of reconstitution of firm? 2. While deciding the questions referred to it, the Hon'ble Bombay High Court first took note of the fact that by the memorandum of family settlement dated January 30, 1997, it was agreed between the parties thereto, that business of six firms as set out therein would be distributed in terms of the family settlement as the parties desired that various matters concerning the business and assets thereto be divided separately and partitioned. Under the terms and conditions of the settlement, it was set out that the assets which were proposed to be divided in partition under the settlement were held by the aforesaid firms and individual partners. With reference to the firms, the manner in which the firms were to be reconstituted by retirement and admission of new partners was also set out. It was also noted that such of those assets or liabilities belonging to or due from any of the firms allotted to parties thereto in the schedule annexed shall be transferred or assigned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and there is a transfer of capital asset, it comes within the expression otherwise as the object of the amending Act was to remove the loophole which existed whereby capital gain tax was not chargeable. It was accordingly held that when the asset 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 and the provisions of section 45(4) would be applicable. 27. A careful study of the judgment of the Hon'ble Bombay High Court in the case of A.N. Naik Associates (supra) shows that the facts involved in the said case were materially different from the facts involved in the present case, inasmuch as, the assets of the partnership firm in the said case were transferred to the retiring partners and the partnership firm, which was assessable to tax, had ceased to have a right or its right in the property stood extinguished in favour of the partner to whom it was transferred. Keeping in view this factual position that existed in the case of A.N. Naik Associates (supra) , Hon'ble Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deed dated 13.05.1987 for a consideration of ₹ 2,50,000/-. Another reconstitution took place on 1.7.1991 by which Shri L.P. Jain retired from the firm and Smt. Pushpa Jain and Smt. Shree Jain were inducted as partners. The partnership firm again was reconstituted and five partners belonging to Khemka Group were inducted into the firm by a deed dated 28.04.1993. Before the said reconstitution, the assets of the firm were revalued as per the report of the registered valuer on 28.03.1993. Thereafter the three old partners retired through deed of retirement dated 01.04.1994 and received the enhanced value of property in financial year 1994-95. This reconstitution whereby the new partners were introduced and the old partners were retired was treated by the Assessing Officer as a device adopted by the assessee to evade capital gains tax as well as stamp duty. He held that there was a transfer of property from old firm to new firm on 01.04.1994 on which capital gains tax was payable. The first appellate authority upheld the view taken by the Assessing Officer. On further appeal by the assessee, the Tribunal held that as per section 45 of the Income Tax Act, profit and gains arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. It was held that the interest the firm has in the capital asset should be extinguished and the partners in whose favour the transfer was made should acquire that interest so as to attract the provisions of section 45(4). It was observed by the Hon'ble Karnataka High Court that in the case before it the partnership being continued to exist even after the retirement of three partners, there was neither dissolution of the firm nor even the distribution of capital asset on 01.04.1994 when the three partners retired from the partnership firm. As noted by the Hon'ble Karnataka High Court what was given to the retiring partners was cash representing their value in the partnership and there was no transfer of any capital asset on the date of retirement under the deed of retirement dated 01.04.1994. It was held that in the absence of distribution of capital asset and in the absence of transfer of capital asset in favour of the ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dynamic Enterprises did not transfer any right in the capital asset in favour of the retiring partners and since its right to the property was not extinguished and the retiring partner did not acquire any right in the property, held that the facts involved were materially different from the facts involved in the case of A.N. Naik Associates (supra). It was held by the Full Bench of the Hon'ble Karnataka High Court that its Division Bench while deciding the Gurunath Talkies case did not appreciate this distinguishing factors and the judgment passed in the case of Gurunath Talkies by wrongly applying the law laid down by the Hon'ble Bombay High Court in the case of A.N. Nails Associates (supra) did not lay down the correct law. Accordingly it was held by the Full Bench of the Hon'ble Karnataka High Court in the case of Dynamic Enterprises (supra) that when a retiring partner takes only money towards the value of his share and when there is no distribution of capital asset/assets among the partners, there is no transfer of a capital asset and consequently no profits or gains is chargeable to tax under section 45(4) of the Income Tax Act, 1961. 31. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court held that there was no change in the status of the assessee-firm even on the retirement of the five partners and there was no change in the ownership of the property even with the change in the constitution of the firm. It was held that as long as there was no change in ownership of the firm and its properties, there was no transfer of capital assets. It was held that there was thus no transfer of assets within the meaning of section 45(4) of the Act on the reconstitution of the partnership firm and the addition made by applying section 45(4) was not sustainable. 32. It is no doubt true that the term capital asset is very widely defined in section 2(14) to include property of any kind and as held by Hon'ble Delhi High Court in the case of PNB Finance Ltd. (supra), the said all inclusive definition of the 'capital asset' brings within its ambit property of any kind held by the assessee. In this regard, reliance is placed in support of the revenue's case on the decision of Hon'ble Karnataka High Court in the case of Kirloskar Asea Limited (117 ITR 82) . In the said case, the assessee was a Public Limited Company registered under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d portion of the assets revalued and paid by the assessee-firm to the retiring partners cannot be equated with the foreign exchange acquired and realised at a higher value in terms of rupee as involved in the case of Kirloskar Asea Limited (supra) so as to say that it constitutes capital assets for the purpose of section 45(4) read with section 2(14] of the Act. Moreover, the money equivalent to enhanced portion of the assets revalued and paid by the assessee firm to the retiring partners cannot be treated by any stretch of imagination, as the capital asset held by the assessee firm. 33. To summaries, I am of the view that the partnership firm in the present case continued to exist even after the retirement of Smt. Hemlata Shetty and Shri Sudhakar Shetty from the partnership on 26.03.2006 and 25.05.2006 respectively. There was only a reconstitution of partnership firm on their retirement without there being any dissolution and the land properly acquired by the partnership firm continued to be owned by the said firm even after reconstitution without any extinguishment of rights in favour of the retiring partners. The retiring partners did not acquire any right in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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