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TMI Blog2019 (9) TMI 1271X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and circumstances of the case, the Income Tax Appellate Tribunal is right in holding that there was a transfer within the meaning of clause (4) of Section 45 of the Income Tax Act, 1961? ii. Whether in the facts and circumstances of the case, the Tribunal is right in holding that in the absence of an amendment of Section 2(47) of the Act, there is a transfer within the provisions of clause 4 of Sections 45 of the Income Tax Act, 1961? iii. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in law in sustaining the addition of interest under Section 234B of the Income Tax Act, 1961 since a charge was not created by the Assessing Officer as part of the order? 4. Both the learned counsels fairly agreed that the controversy involved in the present case is covered by a decision of a co-ordinate Bench of this Court, in which, one of us (Dr.Vineet Kothari,J.) was a party, decided on 08.04.2019 in T.C.A.Nos.365 and 366 of 2009 in "M/s. National Company Vs. The Assistant Commissioner of Income Tax". The Cognate Bench of this Court, in that matter of M/s. National Company, on the issue whether on a reconstitution of a Partnership F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther examination of the facts in that case reveal that it had been agreed between the parties that businesses of six firm would be distributed in terms of the family settlement, as the parties desired that various matters concerning the business and the assets thereto be divided separately and partitioned. In the settlement, the manner in which the assets were proposed to be divided were set out. It was also provided that all such documents, deeds, declarations, affidavits as are reasonably required for effecting such transfer would be executed. The Assessment was based on the family settlement and the subsequent deeds of retirement of partnership. It is thus seen that there was a conscious decision taken prior to reconstitution of the firms to transfer assets and the liabilities by way of a family settlement. It was also consciously decided to execute all necessary deeds and documents to effect such transfer. A transfer of assets in such circumstances, though held was not a device to avoid tax was still held to be 'transfer' within the meaning of Section 2(47) of the Act. 23. In the light of the above facts, it was held in A.N.Naik Associates as follows:- "21. The e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have been expressed in Prashant S. Joshi Vs. The Income Tax Officer and Others reported in 2010 324 ITR 154 (Bom) wherein a Division Bench of the Bombay High Court, again dealing with a fact situation in respect of a partnership firm dealing with development of real estate, when a partner retired and agreed to receive sum of Rs. 50 lakhs, in addition to the balance lying to his credit in the capital as reflected in the books of accounts as final settlement of his dues on account of retirement, held that the same was not a transfer and taxable under Section 45(4) of the Act. The reasoning of the Bombay High Court, is given below for better appreciation:- "13. During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On a dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only in the surplus that the retiring partner is entitled to claim a share. It is, therefore, not possible to predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular asset. 14. The appeal against the judgement of the Gujarat High Court was dismissed by a Bench of three learned Judges of the Supreme Court in Addl. Commissioner of Income Tax, Gujarat v. Mohanbhai Pamabhai : 165 ITR 166. The Supreme Court relied upon its judgement in Sunil Siddharthbhai v. Commissioner of Income Tax MANU/SC/0164/1985 : (1985) 156 ITR 509 (S.C.). The Supreme Court reiterated the same principle by relying upon the judgement in Addanki Narayanappa and Anr. Vs. Bhaskara Krishnappa and Ors. MANU/SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45(3) can refer to formations and dissolutions. Since change in constitution is a concept recognised in Chapter XVI-C of the Act, there is no reason why the law should not have referred to change in constitution along with dissolution, if that were the intent instead of the expression "or otherwise". 28. It is seen that even the learned author has expressed the view with that Section 45(4) of the Act would not apply on retirement of a partner from a partnership firm and when there is transfer of assets. 29. It may also be appropriate to refer to Commissioner of Income Tax Vs. R.Lingmallu Raghukumar reported in 2001 247 ITR 801 SC. The entire Judgement is quoted below:- "1. This appeal by the Revenue is directed against the Judgement of the Andhra Pradesh High Court dated July 21, 1982, (see (1983) 141 ITR 674), in Referred Case No. 28 of 1977, whereby the following question of law referred to the High Court was answered against the Revenue and in favour of the assessee (page 676): "Whether, on the facts and in the circumstances of the case, the excess amount of Rs. 46,500 received by the assessee on retirement from the two partnership firms is assessable to capital gains?" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction and assets had been acquired even at that particular point of time. The two daughters and two sons-in-laws of N.Munuswamy Mudaliar were subsequently admitted as partners and on division of the assets, it can also be arguably pointed out that one daughter and one son-in-law were allotted a share which they were otherwise legally entitled to out of the holdings N.Munuswamy Mudaliar. 34. In view of the peculiar facts of the case in hand, we hold that the provisions of Section 45(4) would not be attracted on the retirement of the two partners and consequential allotment of their share in the assets in the Assessee Firm. We therefore answer the substantial question of law in favour of the Assessee and against the Revenue. 35. In the result, the Appeals of the Assessee are allowed. No costs. 5. The facts found by the learned Tribunal in the present case, are also quoted below for reference :- "9. We have heard both the parties and carefully perused the materials available on record. The case of the assessee is very simple. During the year under consideration the assessee firm was reconstituted wherein one of the partners Mrs.Arunan Visvewar had retired and therefore recons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istributed to its partners otherwise than on dissolution of the firm. (iii) CIT Vs. A.N.Naik Associates [2004] 136 Taxman 107/265 ITR 346(Bom.) The expression 'otherwise' has not to be read ejusdem generis with the expression' dissolution of a firm or body of individuals or association 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 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 cases 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 transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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