TMI Blog2021 (7) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... y the A.O u/s 45(4) of the Act. - Appeal of assessee allowed. - ITA No.1994/MUM/2017 - - - Dated:- 23-6-2021 - Shri M.Balaganesh (Accountant Member) And Shri Ravish Sood (Judicial Member) For the Assessee : Shri Vijay Mehta, A.R For the Revenue : Ms. Shreekala Pardeshi, D.R ORDER PER RAVISH SOOD, J.M: The present appeal filed by the assessee is directed against the order passed by the CIT(A)-42, Mumbai, dated 18.11.2016, which in turn arises from the order passed by the A.O u/s 143(3) of the Income Tax Act, 1961 (for short Act ), dated 26.02.2013. The assessee has assailed the impugned order on the following grounds of appeal before us: 1. Addition of ₹ 96,18,000/- u/s 45(4) on account of revaluation of assets of ₹ 1,28,46,250/-: 1.1 On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming additions of ₹ 96,18,000/- u/s 45(4) made by the learned AO without appreciating that revaluation of the assets concerned in the ensuing AY 2010-11 does not tantamount to distribution of assets within the ambit of the provisions of section 45(4). Further the learned CTT(A) erred in not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.O treated the amount of ₹ 96,18,000/- (supra) as the capital gain of the assessee firm for the year under consideration i.e A.Y. 2010-11 and added the same to its returned income. 4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). After deliberating at length on the contentions advanced by the assessee, the CIT(A), being of the view that the A.O had rightly concluded that the distribution of the revaluation amount to the partners capital accounts during the continuation of the firm partook the character of capital gain u/s 45(4) r.w.s 2(14) of the Act, thus, confirmed the same. As regards the claim of the assessee that the distribution of the revaluation amount to the partners capital accounts did not fall within the scope and gamut of the provisions of Sec. 45(4) of the Act, the same did not find favour with the CIT(A) and was rejected by him. The CIT(A) while concluding as hereinabove had on the basis of his exhaustive deliberations observed, as under: Ground of appeal No.1 In this ground of appeal the assessee had challenged the addition of ₹ 96,18,000/- u/s 45(4) of the Act the assessee has claimed that there was not ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 and one Ms. Pratikssa Singh was admitted as a new partner and the profit sharing ratio of the Firm was modified to as under: Amarnath H. Singh HUF 1% Shri Panchdeo H. singh 37% Smt. Manju R. Singh 25% Smt. Shail V. Singh 25% Ms. Pratikssa Singh 12% 7.4 Still further in the process of the re-adjustiiient of inter-se rights and claims M/s Amarnath H. Singh (HUF) retired from the partnership after end of business hours as on 30 January 2010 vide retirement deed dated 17th February 2010 and the Profit sharing ratio of the remaining partners was decided as under: Name of Partner Profit/loss share Shri Panchdeo H. Singh 35% Smt. Manju R. Singh 25% Smt. Shail V. Singh 25% Ms. Pratikssa Singh 15% 7.5 Since the readjustment of shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of M/s Amarnath H. Singh HUF and after admission of Ms. Pratikssa Singh, the land and building of the assessee at Daman was revalued and the revaluation Gain of ₹ 96,18,000/- was credited to the capital account of the partners in the equal ratio. Thus M/s Amarnath the embedded value of the assets of the Firm got credited to its Capital Account with the Firm and after its retirement the amount so credited alongwith the earlier coital and the accrued profits as on date of retirement to the loan account was transferred to the loan of M/s Amarnath H. Singh HUF. 7.7 From the above facts, it is clear that the assets of the assessee firm has been revalued and the surplus of the revaluation got credited to the capital account of the partner, viz., M/s. Amarnath H. Singh HUF retired from the firm during the F.Y.2009-10 relevant to A.Y.2010-11. As per the AQ the credit of revaluation surplus to the capital account of partners including a retiring partner whose amount has; been subsequently transferred to the loan account, prima facie tantamount to distribution of capital assets of the firm otherwise than by Dissolution of the Firm which is taxable u/s. 45(4) R.W.S. 50(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal held that there was no dissolution but only reconstitution. The Income-tax Appellate Tribunal also held that the expression otherwise'' had to be read ejusdem generis and would contemplate situations like a deemed dissolution and consequently held that tax on capital gains was not chargeable. The High Court noted that in the memorandum of family settlement 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 arid assets thereto be divided separately and partitioned. The deed also recited that resorting to civil suits would damage the family since the entire business is a family business, the nucleus having been inherited. Under the terms and conditions of the settlement, it was set out that the assets which are proposed to be divided in partition under the settlement are 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 also provided that such of those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred 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 if so read, it will further the object and the purpose and intent of the amendment of section 45. 8.1 In this case law above it is made very clear that even if there is a family settlement, the provisions of section 45(4) of the Act remain enforceable. This is also the case of the present assessee. The various partners representing themselves or their family line have adjusted their inter-se rights. The assessee Firm by its reconstitution on 01.01.2010 has eliminated one partner and the business is now with one group. It is too obvious that the assessee could not have handed over 100% of the Unit immediately to its partners in their partnership ratios because the revaluation benefits had to be claimed equally and because such a step would have negated the concept of Finn and the exiting Partner would not have got the due share in the intrinsic value of the assets of the entire business. Therefore a scheme was thought of by the assessee to first revalue the entire assets and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of the Bombay High Court in A.N. Naik Associates case (supra) and also the judgments of the Karnataka High Court in the case of Suvardhan Vs. CIT (2006) 287 ITR 404 (Kar) held it to be a device adopted to transfer the immovable property and he held the capital gains tax is liable to be paid by the firm. The High Court held that in order to attract 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. In other words, the interest the firm has in the capital asset should be extinguished and the part-tiers in whose favour the transfer is made should acquire that interest and only then the profits or gains arising from such transfer is liable to tax under Section 45(4) of the Act. The High Court also held that the Firm had purchased the property under a registered the firm only and the property did not stand in the name of any individual partners. After the retirement of three partners, the partnership continued to exist and the business was carried on by the remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or association of persons but the expression otherwise has to be read with the words transfer of capital assets as by way of distribution of capital assets or 'otherwise'. As per the jurisdictional High Court, the capital gains can be charged even if there is transfer otherwise than by distribution of capital assets. The jurisdictional High Court has itself noted that if such a view is not taken, then the purpose of the amendment would be lost. 8.5 After carefully considering the oral and written submissions of the learned ARs of the assessee vis-a-vis the Assessment Order and upon a careful consideration of the facts and the legal submissions applicable to the case of the Appellant, it is clear that the assessee Finn has revalued its assets during the year under appeal and correspondingly credited the proportionate share of the same to the respective partners to be used by them as needed. Thereafter, the assessee has distributed amounts (read money) and this has been withdrawn as required by the partners from time to time or redesignated as loans as the case may be. 8.6 It is further to be noted that definition of capital asset u/s 2(14) includes all assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave increased without the increase coming from either from a fresh infusion of capital or from any credit of share of actual profit of the Firm. 8.9 Another way of looking at the things is by holding that the Firm has permitted the partners to taken the cash standing to their credit. The cash was not the property of the partners. The cash/bank balance of the firm was also an asset of the firm. It is displayed on the asset side of the balance sheet also for this reason. Therefore, even a right in the asset or in cash or in bank balance etc all are capital asset u/s 2(14). When the firm distributed the same by way of payment to the respective partners, it amounts to capital gain in the hands of the firm u/ 45(4) r.w.s 2(14). This is squarely covered within the ambit of definition of transfer u/s 2(47) also. Therefore, on a conjoint reading of all these sections, it is held that crediting the partners capital accounts by a sum of money/cash belonging to the Firm clearly tantamount to a transfer of capital assets by the assessee to the partners. It is, therefore, a case where instead of quantifying the partner s share on dissolution of the Firm by taking accounts on the footing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by ld. A.R to the aforesaid order of the Tribunal in the case of M/s Amardeo Plastic Industries (supra). It was submitted by the ld. A.R that the Tribunal in its aforesaid order, had observed, that a mere revaluation of assets and subsequent withdrawal of the revaluation amounts by the partners cannot be construed as distribution of assets by the firm. It was pointed out by the ld. A.R that the Tribunal while concluding as hereinabove had referred to the order of a co-ordinate bench of the Tribunal in ITO Vs. Fine Developers, 55 SOT 122 (Mum), wherein after considering the judgment of the Hon ble High Court of Bombay in the case of CIT vs. A. N. Naik Associates (2004) 265 ITR 346 (Bom), it was held that the transfer of a capital asset was a pre-condition for invoking the provisions of Sec. 45(4) of the Act. It was also observed that such a transfer should take place at the time of dissolution or other similar events such as retirement of the partners. The ld. A.R had further relied on the judgment of the Full bench of the Hon ble High Court of Karnataka in the case of CIT Vs. Dynamic Enterprise 359 ITR 83 (Kar) (FB). It was submitted by the ld. A.R that the Hon ble High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation surplus to the partners capital accounts during the continuation of the firm would not partake the character of capital gain within the meaning of Sec. 45(4) r.w.s 2(14), it was submitted by the ld. A.R that what the A.O had sought to do was something that had became taxable as per the Finance Act, 2021. Elaborating on his said contention, it was submitted by the ld. A.R that the legislature in all its wisdom had vide the Finance Act, 2021 amended Sec. 45(4), wherein under the post-amended provision, the receipt of money or capital asset by a partner on a reconstitution of a firm, to the extent the value of such money [+] F.M.V of the capital asset is in excess of the balance in his capital account is to be deemed to be the capital gain of the firm. In the backdrop of his aforesaid contentions, it was submitted by the ld. A.R that as the lower authorities had erroneously observed that the distribution of the revaluation surplus to the partners capital accounts would tantamount to capital gain under Sec. 45(4) of the Act, therefore, te view so taken by them be vacated. 5. Per contra, the ld. Departmental Representative (for short D.R ) relied on the orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be on dissolution or otherwise. It was, thus, in the backdrop of the aforesaid observation, therein observed by the Tribunal that a revaluation of the capital assets of the firm and crediting of the capital accounts of the partners by the amount of the revaluation surplus was merely a book entry and none of the assets of the firm were actually transferred to any partner, either in account books or otherwise. It was further observed, that as held by the Hon ble High Court of Bombay in the case of PCIT Vs. Electroplast (2019) 263 Taxman 120 (Bom), where the retiring partners were paid sums on reconstitution of the partnership firm in proportion of their share in partnership business/asset, no transfer of assets can be said to have taken place, and therefore, no capital gains would arise. The Tribunal while concluding as hereinabove had observed as under: 16. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around the applicability of provisions of section 45(4) of the Act. In the earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer held that there was in effect 'transfer of assets' by the firm to its Partners and therefore, the conditions of section 45(4) of the Act were satisfied. The CIT(A) also upheld the order of Assessing Officer by placing reliance on the decision of the Hon'ble Bombay High Court in case of CIT v. A.N. Naik Associates (supra) to hold that there was distribution of assets, within the meaning of Section 45(4) of the Act. 17. The moot point is as to whether the above transactions, in isolation or clubbed together, can be construed as 'distribution of assets' within the meaning of Section 45(4) of the Act. So far as revaluation of assets of the firm, and crediting of capital account of the Partner is concerned, notably the excessive of revaluation of assets is merely a book entry and none of the assets of the firm were actually transferred to any of the Partners either in account books or otherwise. It is well understood that revaluation is generally carried out to record the true value of assets in the books of account in place of historical cost of the assets. The expressions transfer and distribution can by no stretch of imagination be said to include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alteration in the Partnership Deed decided by the partners amongst themselves. Thus, the aforesaid amendment in the partnership revising the profit sharing based on units and making partners liable for the liabilities of their respective units cannot constitute a transfer of assets to the partners. 20. Now, we may proceed to analyse the cumulative impact of the transactions noted by the Assessing Officer. In sum and substance, the entire exercise carried out by the assessee entailed to giving of unit wise control to the partners, which has been explained to be done with the intention of attaining to maximum efficiency by making partners liable to the firm for liabilities arising in the units controlled by them. In other words, the exercise ensured that the partners were made liable for the conduct of the respective units. The Assessing Officer was of the view that giving partners unit-wise control resulted into transfer of assets of those units in favour of the respective partners. 21. Before we address the aforesaid any further, we may briefly touch upon the legal position which has been brought out before us, since in our view; the Assessing officer has not appreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act which covers the case of dissolution of partnership firm. Accordingly no capital gain arises on such relinquishment of share ratio in the partnership firm. We confirm the order of CIT(A) and dismiss the grounds of appeal raised by the revenue. (Underlined for emphasis by us) The second decision relied upon is ITO v. Fine Developers 55 SOT 122 (Mum), whose relevant portion reads as under: 5.3 As per the settled principles of taxation revaluation of capital assets does not result in accrual or receipt of taxable income unless and until the capital asset is actually transferred. Secondly, revaluation of assets before conversion of a firm into company cannot be equated with dissolution of firm/transfer of assets of firm. If the above principle is applied to the basic facts of the case it can be safely held that revaluation of the plot of land did not result in any profit or gain to the firm and hence question of distribution of profit by the firm does not arise. Thus, the basic ingredient for invoking provisions of section 45(4) of the Act is missing in the case under consideration. The twin requirements of the section 45(4) contemplate not only the ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a proportionate share in the interest in the firm. When the retiring partners took cash and retired, they were not relinquishing their interest in the immovable property. What they relinquished was their share in the partnership. Therefore the transfer of a capital asset as such, and no capital gains or profit arose in the hands of the firm. Therefore, section 45(4) had no application to the facts of this case. (Underlined for emphasis by us) The next decision relied upon was Mahul Construction Corporation v. ITO in ITA No. 2784/Mum/2017 dated 24.11.2017, whose relevant portion reads as under: 12 During the subsistence of partnership, no partner has any assigned right or shares in the partnership property. During the continuance of the partnership the partners have only a right in the profits of the partnership and no partner can deal with any portion of the partnership property as his own during the continuance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any of the individual partner during the year under consideration. Thus, in the above factual background, and the legal position noted by us earlier, the cumulative effect of the transactions noted by the Assessing officer do not constitute transfer of assets to any partner by the firm. 23. Before us, Ld. Departmental Representative D.R. as well as the CIT(A) has heavily relied upon the decision of Hon'ble Bombay High Court in the case of CIT v. A.N. Naik Associates (supra) to support the case of Revenue. In this regard, we may refer to the following discussion so as to appreciate the facts of the case. 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. The deed also recited that resorting to civil suits would damage the family since the entire business is a family business, the nucleus having been inherited. Under the terms and conditions of the settlement, it was set out that the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, the Id. AR pointed out that what the Partners have withdrawn in assessment years 2011-12 and 2012-13 is much less than what was there in the opening balance of Partner's Capital Account before revaluation. This factual assertion has not been negated at all. It is pertinent here to refer to the recent decision of the Hon'ble Bombay High Court in the case of PCIT vs. Electroplast Engineers in ITA No. 137 of 2017 wherein while discussing the applicability of 45(4) of the Act, the judgement in A.N. Naik Associates (supra) and in the case of Dynamic Enterprises (supra) was considered and it was held that where retiring Partners were paid sums on reconstitution of assessee-partnership firm in proportion of their share in partnership business/asset, no transfer of assets can be seized to have taken place and therefore, no capital gains would arise. The relevant discussion in the aforesaid judgement reads as under: 7. This decision of the Court in the case of A.N. Naik Associates (supra) was considered by the Karnataka High Court in the Full Bench Judgment in the case of Dynamic Enterprises (supra). The question considered by the court was when retiring pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rement or admission of any partner. Moreover, we find that the said decision has been overruled by the subsequent Full Bench judgement of the Hon'ble Karnataka High Court in case of CIT v. Dynamic Enterprises (supra). Of course, the CIT(A) notes that reference to the Full Bench was made by the Division Bench since there was a conflict between the decisions in case of Gurunath Talkies (supra) and CIT v. Mango lore Ganesh Beedi Works (265ITR 658 (Kar). As per the CIT(A), the Hon'ble Supreme Court in case of M Janardhana Rao v. Jt CIT (273 ITR 50) had already set aside the judgment in the case of CIT v. Mangalore Ganesh Beedi Works (supra) even before the Full Bench was constituted. In our considered view, the approach of the CIT(A) is quite wrong. It is evident from the decision of the Hon'ble Supreme Court in case of M. Janardhana Rao v. Jt. CIT (supra) that the decision of the Hon'ble High Court has been set aside since no substantial question of law was formulated at time of admission of appeal by the Hon'ble Court. The Hon'ble Supreme Court has specifically noted that no opinion is expressed on the merits of the case. Hence, the CIT(A) is wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X
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