TMI Blog2006 (12) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... y relinquishment of their rights in the partnership property. On introduction of new partners, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses, if any of the partnership business. When any new partner is introduced into an existing partnership firm, the profit sharing ratios undergo a change, which does not amount to transfer as defined under section 2(47) of the Act, as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership and thus on realignment of profit sharing ratio, on introduction of new partners, there is no relinquishment of any non-existent share in the partnership assets as the asset remained with the firm. Such an arrangement is not covered by the provisions of section 45(4) of the Act, which covers the case of dissolution of partnership firm. Accordingly, no capital gains 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. In the result, the appeals file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring ratio of the old partners were reduced to 5 per cent i.e., 3 per cent of Shri D.L. Dave (HUF) and 2 per cent of Smt. Paru Dave. As per the terms of the partnership, the capital of the firm was fixed at Rs. 1 lakh, which was required to be contributed by the partners in their profit sharing ratio. Subsequently, the old partners withdrew a total sum of Rs. 18,53,700 from their respective capital accounts. In the case of both the assessees, the return of income was accepted by way of intimation under section 143(1)(a) of the Income-tax Act. During the course of assessment in the case of the firm M/s. Rakhal Corporation, the difference in revaluation of factory premises of Rs. 22,20,548 was treated as short-term capital gains. On appeal the CIT(A) deleted the addition in the hands of the firm by observing that 'there is no doubt a case for bringing this amount to tax in the hands of the partners since they have divested themselves of valuable rights and an asset handed over the same to the new partners. But looking to the firm itself, it cannot be said that the firm has earned any income out of this transaction'. Based on the abovesaid observation of CIT(A) the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution of the asset on dissolution of a firm does not apply to the present case. On the question of revaluation, the CIT(A) observed that as the revaluation was done in the preceding year and capital was withdrawn in the subsequent year i.e., the year under consideration, there is mere withdrawal of capital and it was held that the said amount is not assessable as capital gains in the hands of the partners. The revenue is aggrieved and hence this appeal. 6. The learned DR for the revenue stated that the transaction in question was a sham and colourable transaction to evade tax and even if take it at a face value income from capital gains will arise as there is relinquishment of rights in terms of section 2(47) of the Income-tax Act. Reliance was placed on the decision of Hon'ble Madras High Court in S.V. Kumaragurupasamy v. CIT [2003] 260 ITR 127. The learned DR further stated that in case of readjustment of share ratio, there is transfer as held by the Hon'ble Supreme Court in Sree Narayana Chandrika Trust v. CGT [2003] 261 ITR 279 and CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 (SC). The learned DR further submited that in case of transfer, consideration has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n reconstitution or retirement of a partner there is relinquishment of any right in the property of the firm. 8. We have heard the rival submissions and perused the records. Both the assessees before us were partners in the partnership firm M/s. Rakhal Corporation with 50 per cent share of each. The partnership firm owned a factory building which was shown at cost in the balance sheet from year to year and no depreciation was being claimed on the said factory building. On 1-4-1993 i.e., the start of accounting year, the WDV of the said factory building was reflected at Rs. 79,452. During the year under consideration, the said factory building was revalued at Rs. 23 lakhs and the difference on account of revaluation of asset amounting to Rs. 22,20,548 was credited to the respective partners account on the date of revaluation i.e., 15-4-1993. On 29-4-1993 the firm was reconstituted by the admission of five new partners who inducted a sum of Rs. 34 lakhs by way of capital contribution and loan and advances in the partnership firm. The shares of the old partners from 100 per cent was reduced to 5 per cent. Subsequently, both the partners had withdrawn a sum of Rs. 9,65,100 by Shri D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he firm. Accordingly, each and every partner of the firm would have an interest in the property or asset of the firm but during its subsistence no partner can deal with any portion of the property as belonging to him, nor can he assign his interest in any specific item thereof to anyone. On a true reading of the award as a whole, there was no doubt that it essentially dealt with the distribution of the surplus properties bringing to the dissolved firms. The award, therefore, did not require consideration under section 17(1) of the Registration Act. 11. Their Lordships of Hon'ble Supreme Court in Addanki Narayanappa v. Bhaskara Krishtappa AIR 1966 SC 1300 had held as under: ...During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest, in a specific item of the partnership property to anyone. His right is to obtain such profits, if any as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities.... 12. As the partners have no right in the assets of the partnership firm, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is no relinquishment of any right in the partnership property on reconstitution/retirement of a partner. 15. Their Lordship of Kerala High Court in Kunnamkulam Mill Board's case had held that- ownership of property does not change on change in the constitution of firm. As long as there is no distribution for the simple reason the firms total reconstitution, there is no transfer of capital assets. In the facts of the case before Kerala High Court, there was reconstitution of assets of the firm wherein the assets were revalued on mutual agreement of the partners. The difference in the revalued amounts was credited to the respective capital accounts of the partners. There was reconstitution of partnership firm with introduction of two partners for a short time and thereafter the original five partners retired and the business was carried on in partnership by the surviving two partners. It was held that in such cases of reconstitution, the ownership of the property does not change with the change in the constitution of the firm and accordingly there is no transfer of capital asset. It was further held that- if a partner retires, he does not transfer any right i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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