TMI Blog2022 (11) TMI 1180X X X X Extracts X X X X X X X X Extracts X X X X ..... he partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can be said to be transfer and which fall in the category of OTHERWISE and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable. For the purpose of interpretation of newly inserted Section 45(4), the decision of this Court in the case of Hind Construction Ltd.[ 1971 (9) TMI 16 - SUPREME COURT] shall not be applicable and/or the same shall not be of any assistance to the assessee. As such, we are in complete agreement with the view taken by the Bombay High Court in the case of A.N. Naik Associates and Ors.[ 2003 (7) TMI 46 - BOMBAY HIGH COURT ] - We affirm the view taken by the Bombay High Court in the above decision. The impugned judgment and order passed by the High Court and that of the ITAT are unsustainable and the same deserves to be quashed and set aside and are accordingly quashed and set aside. The order passed by the AO is hereby restored. - CIVIL APPEAL NO. 8258 OF 2022 CIVIL APPEAL NO. 8259 OF 2022 - - - Dated:- 24-11-2022 - M. R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. Rs. 2.50 lakhs Smt. Bhavna Doshi Rs. 2.25 lakhs Smt. Rupal Doshi Rs. 2.25 lakhs It was mentioned in the reconstituted partnership deed that two partners, namely, viz., Shri Hasmukh H. Doshi and Smt. Ranjan Doshi had decided to withdraw part of their capital. 2.3 On 01.01.1993, the assets of the firm were revalued and an amount of Rs. 17.34 crores were credited to the accounts of the partners in their profit-sharing ratio. Two of the existing partners, viz., namely Shri Hasmukhlal H. Doshi Smt. Ranjan Doshi withdrew part of their capital which was roughly Rs. 20 to Rs. 25 lakhs. Thus, according to the Revenue, the new partners were immediately benefited by the credit to their capital accounts of the revaluation amount, as Rs. 3.12 crores was credited to Smt. Vaishali Shah (who contributed Rs. 4.50 lakhs); Rs. 1.56 crores to Smt. Bhavna Doshi (who contributed Rs. 2.25 lakhs); Rs. 1.56 crores to Smt. Rupal Doshi (who contributed Rs. 2.25 lakhs); and Rs. 1.73 crores to M/s. Ranjana Textiles (who contributed Rs. 2.50 lakhs only). 2.4 The respondent filed its Return of Income for the relevant assessment years. The Return of Income was filed for A.Y. 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uished the decision of the Bombay High Court in the case of Commissioner of Income-Tax Mumbai Vs. Texspin Engg. and Mfg. Works, Mumbai, (2003) 263 ITR 345 (Bom.). 2.7 In an appeal preferred by the assessee, the ITAT by judgment and order dated 26.10.2006 and relying upon the decision of this Court in the case of Commissioner of Income Tax, West Bengal Vs. Hind Construction Ltd., (1972) 4 SCC 460 allowed the appeal and has set aside the addition made by the A.O. towards Short Term Capital Gains by observing that as observed and held by this Court in the aforesaid decision, revaluation of the assets and crediting to partners account did not involve any transfer. The ITAT observed and held that the decision of the Bombay High Court in the case of A.N. Naik Associates and Ors. (supra) shall not be applicable and held that the decision of the Bombay High Court in the case of Texspin Engg. and Mfg. Works, Mumbai (supra) shall be appliable. 2.8 Relying upon the decision of this Court in the case of Hind Construction Ltd. (supra), by the impugned judgment and order the High Court has dismissed the appeals preferred by the Revenue. Hence the present appeals being Civil Appeal No. 825 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 45(4), distribution of capital assets to the partners account is deemed transfer of capital assets and therefore assessable as capital gains in the hands of the firm. 3.4 Now, so far as reliance placed upon the decision of this Hon ble Court in the case of Hind Construction Ltd. (supra) relied upon by the assessee, it is vehemently submitted that the said decision shall not be applicable as the said decision was considering the provisions prior to insertion of Section 45(4) of the Income Tax Act. It is submitted that thereafter Section 45(4) of the Income Tax Act has been inserted with specific object and purpose. It is submitted that therefore the said decision shall not be applicable while considering the effect of Section 45(4) of the Income Tax Act. 3.5 It is submitted that on the contrary, the decision of the Bombay High Court in the case of A.N. Naik Associates and Ors., (supra) shall be applicable with full force as the same was dealing with Section 45(4). It is submitted that in the case of A.N. Naik Associates and Ors., (supra), the Bombay High Court has interpreted the words otherwise used in Section 45(4) of the Income Tax Act and has observed and held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of this Court in the case of Hind Construction Ltd. (supra) as well as decision of the Bombay High Court in the case of Texspin Engg. and Mfg. Works, Mumbai (supra). 4.5 It is submitted that there can be no income just due to revaluation of capital asset unless the capital asset is also transferred. It is submitted that whenever an asset is revalued, even as per the accounting norms the corresponding notional surplus due to revaluation is required to be credited to revaluation reserve account in case of companies or credited to capital account of partners in case of partnership firm. This is only notional or book entry which is not represented by any additional tangible asset or income. It is submitted that once it is established that there is no profit or gain accrued to firm on revaluation resulting in real income, there can also be no distribution of such profits and gains and therefore, the same cannot be added in the income of the partnership firm as capital gains. 4.6 It is submitted that the decision of the Bombay High Court in the case of A.N. Naik Associates and Ors., (supra) shall not be applicable as in that case before the Bombay High court, the assets of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons; c. Or body of individuals; d. Or otherwise; shall be chargeable to tax as the income of the firm, association or body of persons. 7.2 The object and purpose of introduction of Section 45(4) was to pluck the loophole by insertion of Section 45(4) and omission of Section 2(47)(ii). While introduction to Section 45(4), clause (ii) of Section 2(47) came to be omitted. Earlier, omission of Clause (ii) of Section 2(47) and Section 47(ii) exempted the transform by way of distribution of capital assets from the ambit of the definition of transfer . The same helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same at the time of dissolution. The said loophole came to be plucked by insertion of Section 45(4) and omission of Section 2(47)(ii). At this stage, it is required to be noted that the word used OR OTHERWISE in Section 45(4) is very important. 7.3 In the present case, it was the case on behalf of the assessee relying upon the decision of this Court in the case of Hind Construction Ltd. (supra) that unless there is a dissolution of partnership firm and thereby the transfer of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loopholes. The expression otherwise must be read to mear transfer of capital assets of the assessee firm include to a partner. As the section is a self contained code, there was no need to amend the definition of transfer under section 2(47) of the Act. The Position therefore, will have to be examined in the context of the law as amended after 1988 .. XXXXXXXXXXXXXX 21. With the above, we may now proceed to answer the issue. On retirement of a partner or partners from an existing firm, and who receives assets from the firm, the law before 1998 would really be of no support, as by section 45(4) what was otherwise not taxable has been made taxable. Section 45(4) seems to have been introduced with a view to overcome the judgment of the Apex Court in Malabar Fisheries Co. v. Commissioner of Income-Tax, Kerala (supra) and other judgments which took a view that the firm on its own has no right but it is the partners who own jointly or in common the asset and thereby remedy the mischief occasioned. Distribution of capital assets on dissolution now is subject to capital gains tax unless it does not fall within the definition of transfer under section 2(47) What would be th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as that the profits and gains arising from the transfer of a capital asset by a partner to a firm is chargeable as the partner's income of the previous year in which the transfer took place. On a conversion of the partnership assets into individual assets on dissolution or otherwise also formed part of the same scheme of tax avoidance. To plug these loophole the Finance Act, 1987 brought on the statute book a new sub-section (4) in section 45 of the Act. The effect is that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm's income in the previous year in which the transfer took place and for the purposes of computation of capital gains, the fair market value of the asset on the date of transfer would be deemed to be the full value of the consideration received or accrued as a result of transfer. Therefore, if the object of the Act is seen and the mischief it seeks to avoid, it would be clear that intention of Parliament was to bring into the tax not transactions whereby assets were brought into a firm or taken out of the firm. 22. The expression otherwise in our opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he partners only got his share, it was held that there was no extinguishment of right. Considering the amendment, there is clearly a transfer and if, there be a transfer, it would be subject to capital gains tax. 7.5 In the present case, the assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores on 01.01.1993 (relevant to A.Y. 1993-1994) and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets valued at Rs. 17.34 crores to the partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital ranging between Rs. 2.5 to 4.5 lakhs and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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