TMI Blog2020 (2) TMI 1433X X X X Extracts X X X X X X X X Extracts X X X X ..... he assets of the firm continued to be owned by the same firm and the outgoing partners are not taken away any asset in its physical form. Being so, in our opinion, Section 45(4) of the Act could not be applied. Accordingly, we dismiss the ground of the appeal taken by the revenue. - ITA No.365/Bang/2017, C.O. No.70/Bang/2017 (In ITA No.365/Bang/2017) - - - Dated:- 4-2-2020 - Shri N.V. Vasudevan, Vice President And Shri Chandra Poojari, Accountant Member For the Assessee : Shri H. Guruswamy, I.T.P. For the Revenue : Shri Pradeep Kumar, CIT (D.R) ORDER PER SHRI CHANDRA POOJARI, AM : This appeal filed by the Revenue and C.O. by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-7, Bangalore dt.28.11.2016 for the Assessment Year 2011-12. 2. The Revenue has raised the following grounds : 1. The order of the learned CIT (Appeals) is opposed to law and facts of the case. 2. The learned CIT (Appeals) has erred in law in ignoring the fact that the rearrangement of partnership deed was anterior to revaluation of assets. 3. Whether on the facts and circumstances of the case the CIT (Appeals) is justified in law in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .R Asha and the said partnership deed was reconstituted on 12-08-2010 to admit two more new partners namely T.K. Nagaraj Shetty and Sri. T.K. Ramesh Babu. The assets of the Firm were revalued on 01-04-2010. Again the firm was reconstituted second time on 17-01-2011 admitting two more partners Sri. G.N Vivek and Sri. G.N. Vinod and the existing three partners namely Sri. M.N Narasimhamurthy Naik, Smt. Mamatha Naik and Smt. S.R Asha were retired by taking their respective share of capital amount. The AO has held that the WDV of the assets of the Firm as on 01-04-2010 was of ₹ 2,04,49,437/- and after revaluation, the WDV as on 31-03-2011 was of ₹ 8,02,21,617/-. The AO further held that the outgoing three partners have drawn the amounts from the Capital and retired from the firm. The AO was of the view that the whole process constitutes a deemed dissolution of the firm u/s. 45(4) of the Act and accordingly he has brought the difference of WDV as on 01-04-2010 and 31-03-2011 amounting to ₹ 5,97,72,180/- (WDV as on 31-03-2011 ₹ 8,02,21,607 minus WDV as on 01-04-2010 of ₹ 2,04,49,437 = ₹ 5,97,72,180/-) as income of the Respondent Firm from Long Term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite of such clear and unambiguous verdict of the jurisdictional High Court, the AO has relied upon an over ruled decision of M/s. Gurunath Talkies. The Assessment Order passed by the AO placing reliance on an over ruled Judgment sets out a bad precedent which in turn amounts to disobedience of the law laid down by the Hon ble Jurisdictional High Court of Karnataka. The ld. AR submits that the Hon be Supreme Court in the case of Hansraj Gordhandas AIR (1970) SC 755 held that it is well established fact that in a taxing statute there is no room for any intendment and if the tax payer is within the plain terms of the exemption it cannot be denied its benefit by calling in AID any supposed intention of the Authority. In this view of the matter, the ld. AR submits that the AO has presumed himself that the provisions of Sec. 45(4) of the Act are applicable ignoring the Larger Bench Decision of the Hon ble High Court of Karnataka in the case of M/s. Dynamic Enterprises wherein the decision in the case of M/s. Gurunath Talkies was over ruled. The Hon ble Supreme Court time and again has held that citing of over ruled decisions is a matter of serious concern which leads to hazardous results ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the previous year in which the transfer took place. (4) 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 of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.] He also relied on the judgement of Bombay High Court in the case of CIT Vs. A N Naik Associates and Another 265 ITR 346 (Bom). 6. On the other hand, the learned Authorised Representative submitted that the judgement relied on by the ld. DR in the case of CIT Vs. Gurunath Talkies (supra) was over ruled by the judgment of Hon'ble Karnataka High Court in the case of CIT Vs. Dynomic Enterprises(supra) by the Larger Bench of Hon'ble High Court of Karnataka. However, as on the date of the assessment order, the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. Thus as per Section 45(4) of the Act, distribution of capital asset or dissolution of firm or otherwise was a Transfer and the profit and gains arising therefrom would be chargeable to tax. Now the question before us is whether the word Otherwise appearing in the phrase Distribution of capital asset on dissolution of the firm or otherwise would include retirement of partner also. This was considered by Kerala High Court in the case of CIT Vs. Kunnamkulam Mill Board 257 ITR 544 wherein it was held as under : As per sub-section (4) of Section 45 that distribution of capital assets on dissolution of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or otherwise. Then the said capital contribution shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. When a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which was originally exclusively belonging to him, becomes the trading asset of the firm, in which all partners acquire interest in proportion to their respective share in the firm. His right during the subsistence of the partnership is to get his share of profits from time to time as agreed upon among the partners. On dissolution of the firm or on retirement from the firm to get the value of his share in the net partnership asset as on the date of dissolution or retirement. Therefore, this is a case of a partner bringing capital asset to a partnership firm as his capital contribution. 23. Sub-section (4) of Section 45 deals with a distribution of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital asset on 01.04.1994 when three partners retired from the 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) and charging them tax for the profits or gains which did not accrue to them would not arise. 26. It was contended on behalf of the revenue that five incoming partners brought money into the firm. Three erstwhile partners who retired from the partners on 01.04.1994 took money and left the property to the incoming partners. It is a device adopted by these partners in order to evade payment of profits or gains. As rightly held by this Court in Gurunath's case (supra) it is taxable. This argument proceeds on the premise that the immovable property belongs to the erstwhile partners and that after the retirement the erstwhile pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would amount to the transfer of capital assets in the nature of capital gains and business profits which is chargeable to tax under Section 45(4) of the Income Tax Act. In that context, it was held 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. It is in this context 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 other words, its right to the property should stand extinguished and the retiring partners acquires absolute title to the property. 29. In the instant case, the partnership firm did not transfer any right in the capital asset in favour of the retiring partner. The partnership firm did not cease to hold the property and consequently, its right to the property is not extinguished. Conversely, the retiring partner did not acq ..... X X X X Extracts X X X X X X X X Extracts X X X X
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