TMI Blog2019 (7) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... iewed as not applicable to cases after the amendment to the law w.e.f. 1-4-1989 whereby Sec.47(ii) of the Act was deleted and simultaneously Sec.45(3) 45(4) were introduced. Therefore the question whether there will be incidence of tax on capital gain on retirement of a partner from the partnership firm would depend on the upon mode in which retirement is effected as laid down by the Hon'ble Bombay High Court in the cases of Tribhuvandas G. Patel [ 1977 (9) TMI 13 - BOMBAY HIGH COURT] and N.A. Modi's case [ 1985 (10) TMI 52 - BOMBAY HIGH COURT] . Therefore the decision of the ITAT Mumbai in the case of Sudhakar M.Shetty Vs. ACIT [ 2010 (9) TMI 746 - ITAT, MUMBAI] following the decision of the Pune Bench of the ITAT in the case of Shevantibhai C. Mehta v. ITO [ 2003 (8) TMI 208 - ITAT PUNE] holding that question of taxability of an amount received by a partner on retirement from firm would depend upon mode in which retirement is effected, holds good. Therefore taxability in such situation would depend on several factors like the intention as is evidenced by the various clauses of the instrument evincing retirement or dissolution, the manner in which the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For The Respondent : Dr. Pradeep Kumar, Addl. CIT(DR) ORDER Per N.V. Vasudevan, Vice President This is an appeal by the by the assessee against order dated 4/8/2016 of CIT, Bengaluru-2, Bengaluru relating to asst. year 2008-09. 2. The only issue that arises for consideration in this appeal is as to whether the Revenue authorities were justified in treating sum of ₹ 11,61,800/- as capital gains chargeable to tax which sum was received by the assesee on his retirement from a partnership firm by name M/s PSI Hydraulics. 3. The facts and circumstances under which aforesaid issue arises for consideration are that the Assessee and one D.Venkatesh formed a Partnershi by a deed of partnership dated 1.4.2004. Miss.Suvidha Venkatesh, D/O.D.Venkatesh was inducted as partner in the firm w.e.f. 1.4.2007. On 8.6.2007 an MOU was signed by the three partners and it was agreed that the Assessee would retire from the firm w.e.f. 1.4.2007 and a sum of ₹ 339.50 lakhs would be paid to the Assessee. On 9.6.2007 deed of retirement was signed. The Assessee gave up all her rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e IT Act. The judicial pronouncements stated above would support the taxability of Goodwill under the provisions of Sec 45 of the IT Act. However, the assessee had also invested ₹ 50,00,000/- in Rural Electrification Corporation Ltd under the provisions of Sec 54 EC as an abundant caution for claiming exemption u/s 54EC. After considering the investment of ₹ 50,00,000/- the Capital Gains is worked out as under. (61,61,800/- (-) 5000000/- = 11,61,800/-) 4. Accordingly the AO brought to tax a sum of ₹ 11,61,800/- as chargeable capital gains. 5. Aggrieved by the aforesaid order of the AO, assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee relied on the decision of the Hon ble Supreme Court in the case of ACIT Vs. Mohanbhai Pamabhai 165 ITR 166 for the proposition that the amount received by a partner on his retirement from a firm is his share in the partnership firm and not for consideration in transfer of his inters in the partnership to the other partners. There was no transfer of interest in assets of the partnership firm in terms of the definition of the term transfer u/s 2(47) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard the rival submission. The learned DR as well as the learned Counsel for the Assessee primarily placed reliance on several decided cases. We shall deal with those cases at the appropriate juncture. 8. To appreciate the rival contentions we have to refer to certain provisions of the Income-tax Act, 1961. Section 45(1) of the Act brings to tax any capital gain that accrues or arises on transfer of a capital asset. The capital gain is charged to tax in the previous year in which the transfer takes place. Section 2(47) defines what is transfer and it reads as follows : ( 47) transfer , in relation to a capital asset, includes,- ( i) the sale, exchange or relinquishment of the asset; or ( ii) the extinguishment of any rights therein; or ( iii) the compulsory acquisition thereof under any law; or ( iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; ( v) any transaction involving the allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm in which the individual as a partner. A partner can bring asset owned by him as his capital contribution. The intention to treat own property as property of the firm can be inferred even by book entries in the firm. No document registered or otherwise is required for doing so. Such introduction of capital asset as capital contribution by a partner up to 1-4- 1988 did not result in incidence of capital gain. It was so held by the Hon'ble Supreme Court in the case of Sunil Sidharthbhai v. CIT [1985] 156 ITR 509 . The Hon'ble Supreme Court held that under the Income-tax Act, 1961, where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of section 45 of the Act, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest. On such introduction of capital the partner's capital account is credited with the market value of the property. Such entry does not represent the true value of consideration. It is a notional value only, intended to be taken into account at the time of det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eries v. CIT [1979] 120 ITR 49 (SC), the Hon'ble Supreme Court has explained the nature of distribution of assets of a partnership on dissolution amongst its partners and as to whether such distribution of assets would constitute transfer within the meaning of section 2(47) of the Income-tax Act as follows : A partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly by or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted by the Finance Act, 1987, w.e.f. 1-4-1988. Prior to omission of Sec.47(ii) of the Act, distribution of capital assets on dissolution of a firm, body of individuals or other Association of persons, would be regarded as transfer of a capital asset but by virtue of provisions of Sec.47(ii) of the Act, there was no charge to tax of the capital gain on such transfer. 19. It is important to note that here the incidence of tax is on the Partnership firm because it is the firms asset which is getting converted into asset of the transferee. 3. The firm continues and there is reconstitution whereby a partner retires and the retiring partner is allotted capital asset of the firm for relinquishing all his rights, interest in the partnership firm as partner. 20. The above two circumstances cover only bringing in individual assets as asset of the firm and the firm distributing its capital assets on distribution. The third case would be where the firm continues and there is reconstitution whereby a partner retires and the retiring partner is allotted capital asset of the firm for relinquishing all his rights, interest in the partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of persons . The expression otherwise has to be read with the words transfer of capital assets by way of distribution of capital assets. If so read, it becomes clear that even when a firm is in existence and there is a transfer of capital assets, 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. Therefore, 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. If so read, it will further the object and purpose and intent of the amendment of section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature of capital gains and business profits which are chargeable to tax under section 45(4). Therefore, the word otherwise takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner . Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest of a partner in the partnership and its assets would be property and, therefore, a capital asset within the meaning of the aforesaid definition. The next question is as to whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under section 45 of the Act. 24. The Hon'ble Bombay High Court had an occasion to deal with identical case as that of the Assessee in the present case which was a case of situation (b) referred to earlier in Tribhuvandas G.Patel Vs. CIT 115 ITR 95(Bom). In the case of Tribhuvandas G. Patel (supra), the assessee was a partner in the firm of KEW. The assessee had served on the other two partners a notice of dissolution of the firm with effect from 31-12-1960, which was not accepted by the other partners. The assessee, therefore, filed a suit for dissolution and accounts, but, ultimately, the disputes between the parties were amicably settled out of court and under a deed dated January 19, 1962, the assessee retired from the firm with effect from 31-8- 1961, and the remaining partners continued to carry on the business of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners to effect and bring about retirement of the assessee from the partnership, the Court held that the transaction will have to be regarded as amounting to transfer within the meaning of section 2(47) of the Income-tax Act, inasmuch as the assessee could be said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of the continuing partners and the transaction cannot be regarded as amounting to any distribution of capital assets upon dissolution of a firm. The above decision was followed by the Hon'ble Bombay High Court in the other two cases of N.A. Modi Vs. CIT 162 ITR 420(Bom) and CIT Vs. H.R. Aslot 115 ITR 255(Bom) . 25. As against the decision of the Hon ble Bombay High Court in the case of Tribhuvandas (supra) the Assessee preferred appeal before the Hon ble Supreme Court and the Hon ble Supreme Court in the case of Thirubhuvandas G.Patel Vs. CIT 236 ITR 515 (SC) framed three questions of law for consideration and the following two questions (Question No.2 3) which are relevant for the present case were decided as follows: 2. Whether, on the facts and in the circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on retirement of a partner from the partnership firm would depend on the upon mode in which retirement is effected as laid down by the Hon'ble Bombay High Court in the cases of Tribhuvandas G. Patel (supra) and N.A. Modi's case (supra). Therefore the decision of the ITAT Mumbai in the case of Sudhakar M.Shetty Vs. ACIT 130 ITD 197 (Mumbai) following the decision of the Pune Bench of the ITAT in the case of Shevantibhai C. Mehta v. ITO (2004) 83 TTJ 542(Pune) holding that question of taxability of an amount received by a partner on retirement from firm would depend upon mode in which retirement is effected, holds good. Therefore taxability in such situation would depend on several factors like the intention as is evidenced by the various clauses of the instrument evincing retirement or dissolution, the manner in which the accounts have been settled and whether the same includes any amount in excess of the share of the partner on the revaluation of assets and other relevant factors which will throw light on the entire scheme of retirement/reconstitution. 29. In the case of Sudhakar M.Shetty (supra), the ITAT came to the conclusion after taking into cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um credit to his capital account consequent to revaluation of assets that took place in AY 2006- 07. As we have already observed it should not be taken that the revenue has taxed the gain on revaluation of assets. All cumulative factors will have to be seen to come to a conclusion regarding the real nature of gain before concluding that there was in fact capital gain on relinquishment of right as partner in the firm. 31. Keeping in mind the legal position as set out in the earlier paragraphs, let us examine the facts of the present case. The facts of the case are almost identical to the facts in the case of Sudhakar M.Shetty (supra). The Assessee and D.Venkatesh formed a Partnershi by a deed of partnership dated 1.4.2004. Miss.Suvidha Venkatesh, D/O.D.Venkatesh was inducted as partner in the firm w.e.f. 1.4.2007. On 8.6.2007 an MOU was signed by the three partners and it was agreed that the Assessee would retire from the firm w.e.f. 1.4.2007 and a sum of ₹ 339.50 lakhs would be paid to the Assessee. On 9.6.2007 deed of retirement was signed. The Assessee gave up all her rights as partner of the firm and its assets nor was the Assessee liable to pay any of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT V Legal Representatives of N Paliniappa Gounder [1983] 143 ITR 343 (Madras) 112-115 5 CIT Vs. P.H Patel [1988] 171 ITR 128 (Andhra Pradesh) 116-121 6 CIT V Madan Lal Bhargava [1980] 122 ITR 545 (Allahabad) 122-125 7 ACIT Vs. Sri Mahinderpal Bhasin [1979] 117 ITR 26 (Allahabad) 126-129 8 CIT Vs. Krishnamoorthy [1998] 229 ITR 559 (Madras) 130-132 9 CIT Vs. L Raghu Kumar [1982] 141 ITR 674 (Andhra Pradesh) 133-136 10 CIT Vs. Lingmallu Raghukumar [2001] 247 ITR 801 (SC) 137-138 11 Tribhuvandas G Patel Vs. CIT [1999 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and some of these cases have already been discussed and we have held that cases after 1.4.1989 have to be decided on different parameters. As far as case law at Sl.No.12 in the case of P.N.Panjawani (supra) is concerned it was a case of induction of partners and therefore not relevant to the present case. Case at Sl.No.14 in the case of Unity Care Health Services (supra) is a case of conversion of firm into a company which are governed by specific provisions and therefore not relevant to the present case. Case at Sl.No.15 in the case of Prabhuraj B.Appa (supra) is a case of receipt of consideration on account of goodwill and therefore to that extent this aspect has been discussed and held in favour of the Assessee in the earlier paragraphs. Case law at Sl.No.16 21 in the case of Dhinaic Enterprises (supra) and A.N.Naik Associates (supra) are cases in which the firm was the Assessee. The present appeal is from the perspective of the retiring partner. Hence, these decisions do not held the plea of the Assessee. Decision at Sl.No.18 in the case of Prashant S.Joshi (supra) is a case of notice u/s.148 of the Act and it was held that there was no reason to believe to initiate proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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