INDIAN EXTRUSIONS, MUMBAI V. ACIT 24(3), MUMBAI

ITA 1994/MUM/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 1604 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-06-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 21-03-2017

Judgement Text

ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI M.BALAGANESH (ACCOUNTANT MEMBER) AND SHRI RAVISH SOOD (JUDICIAL MEMBER) ITA NO.1994/MUM/2017 (ASSESSMENT YEAR: 201 0 - 11 ) M/S INDIAN EXTRUSIONS B - 316/317, VIRWANI INDUSTRIAL ESTATE,WESTERN EXPRESS H IGHWAY, GOREGAON EAST, MUMBAI 400 063 VS. ACIT - 24(3) MUMBAI. (ASSESSEE) (REVENUE) PAN NO. AAAFI2366M ASSESSEE BY : SHRI VIJAY MEHTA , A.R REVENUE BY : MS. SHREEKALA PARDESHI , D.R DATE OF HEARING : 04/06 /2021 DATE OF PRONOUNCEMENT : 23 /06 /2021 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. ADDI TION OF RS 96,18,000 / - U/S 45(4) ON ACCOUNT O F REVALUATION OF ASSETS OF RS 1,28,46,250/ - : 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED C I T(A) ERRE D IN CONFIRMING ADDITIONS OF RS . 96,18,000/ - U/S 45(4) MADE BY THE ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 2 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 S ECTION 45(4). FURTHER THE LEARNED CTT(A) ERRED IN NOT APPRECIATING THAT THE PROVISIONS OF SECTION 45(4) DO NOT APPLY TO THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLANT SINCE THE ASSETS CONTINUED TO BE OWNED BY THE PARTNERSHIP FIRM. THUS ADDITION O F RS 96,18,000/ - MADE U/S 45(4) BEING BAD - IN - LAW NEEDS TO BE DELETED. 2. BRIEFLY STATED, THE ASSESSEE FIRM WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PVC CONTAINERS, CAPS ETC. HAD E - FILED ITS RETURN OF INCOME FOR A.Y. 2010 - 11 ON 28.09.2010, DECL ARING A TOTAL INCOME OF RS.94,20,146/ - . THE RETURN OF INCOME WAS INITIALLY PROCESSED AS SUCH U/S 143(1) OF THE ACT. SUBSEQUENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT U/S 143(2) OF THE ACT. 3. DURING THE COURSE OF THE ASSESSMENT PR OCEEDINGS , IT WAS OBSERVED BY THE A.O THAT THE ASSESSEE WAS CARRYING OUT ITS BUSINESS FROM FIVE DISTINCT PLACE S, VIZ. MUMBAI, DAMAN, DEHRADUN UNIT - 1 AND UNIT - 2 & P O NDICHERRY. ON A PERUSAL OF THE DETAILS, IT WAS NOTICED BY THE A.O THAT THE ASSESSEE FIRM WAS CARRYING OUT ITS BUSINESS SINCE 29.02.2004 WITH 4 PARTNERS VIZ. M/S AMARNATH H. SINGH (HUF) ; SHRI PANCHDEO H. SINGH ; SMT. MANJU R.SINGH; AND SMT.SHAIL V. SI N GH , WHEREIN ALL OF THEM HAD EQUAL SHARE S . SUBSEQUENTLY, AN AMENDMENT WAS MADE TO THE PARTNERS HIP DEED , DATED 01.01.2010 AND ONE MS . PRATIKS S A SINGH WAS ADMITTED AS A NEW PARTNER AND THE PROFIT SHARING RATIO OF THE BUSINESS WAS MODIFIED. SUBSEQUENTLY, M/S AMARNATH H SINGH (HUF) RETIRED FROM THE PARTNERS HIP AFTER THE END OF THE BUSINESS H OURS ON 31 ST JA NUARY, 2010, VIDE RETIREMENT DATED 17 TH FEBRUARY, 2010 AND THE PROFIT SHARING RATIO S WERE FURTHER MODIFIED. IT WAS OBSERVED BY THE A.O THAT THE ASSESSEE FIRM HAD RE - VALUED ITS SELF - OWNED LAND AND BUILDING SITUATED AT DAMAN UNIT AS PER THE PREVAILING MARKET VALUE ON 31 ST DECEMBER, 2009 , AND ALLOCATED THE REVALUATION GAIN OF RS.96,18,000/ - EQUALLY AMONGST THE ORIGINAL PARTNERS. OBSERVING THAT THE CREDIT OF THE REVALUATION SURPLUS TO THE CAPITAL ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 3 ACCOUNT S OF THE PARTNERS , INCLUDING THE RETIRING PARTNER , WHICH IN THE LATTER CASE WAS TRANSFERRED TO A LOAN ACCOUNT, PRIMA FACIE TANTAMOUNT TO DISTRIBUTION OF THE CAPITAL ASSET S OF THE FIRM OTHERWISE THAN BY DISSOLUTION OF THE FIRM, THE A.O , WAS OF THE VIEW THAT THE SAID SURPLUS OF RS.96,18,000/ - WAS IN THE NATURE OF CAPITAL GAIN THAT WAS LIABLE TO BE BROUGHT TO TAX U/S 45(4) R . W.S 50(2) OF THE ACT. BACKED BY HIS AFORESAID CONVICTION THE A.O TREATED THE AMOUNT OF RS.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 AS SESSEE 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) WHI LE CONCLUDING AS HEREINABOVE HAD ON THE BASIS OF HIS EXHAUSTIVE D ELIBERATIONS OBSERVED, AS UNDER: GROUND OF APPEAL NO.1 IN THIS GROUND OF APPEAL THE ASSESSEE HAD CHALLENGED THE ADDITION OF RS.96,18,000 / - U/S 45(4) OF THE ACT THE ASSESSEE HAS CLAIMED THAT THERE WAS NOT ACTUAL TRANSFER OF CAPITAL ASSETS AND THE D EVALUED ASSETS CONTINUE TO BE OWNED BY THE ASSESSEE. IT WAS ALSO CLAIMED THAT THE A.O HAS ERRED IN TAXING THE CAPITAL GAIN ON LAND AT DAMAN AS SH ORT TERM CA PITAL GAIN WITHOUT GRANTING THE BENEFIT OF INDEXATION AND ALSO IN NOT APPLYING THE SPECIAL RATE OF TAX AS PER SECTION 112 OF THE ACT. IN THE ADDITIONAL GROUND OF APPEAL THE ASSESSEE HAS CLAIMED THAT THE AO HAS ERRED IN TAXING THE REVALUATION GAI N ON THE DAMAN BUILDING AT 30% INSTEAD OF 20% SINCE THE BUILDING WAS ALSO HELD FOR MORE THAN 3 YEARS. ESSENTIALLY THE ASSESSEE SEEKS THAT THE ENTIRE GAIN ON REVALUATION SHOULD BE TREATED AS LONG TERM CAPITAL GAIN. ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 4 7.1 THE FACTS AND THE SUBMISSIONS' OF THE CASE ARE CAREFULLY CONSIDERED. IT IS NOTED THAT A LITTLE BACKGROUND OF THE CASE IS REQUIRED/O BE SPELT OUT. THE A SSESSEE CARRIES OUT ITS BUSINESS FROM FIVE DISTINCT PLACES I.E. FROM MUMBAI/DAMAN, DEHRADUN UNIT - I & UNIT - II AND PONDICHERRY. THE FIRM HAD BEEN CARRYING OUT ITS BUSINESS SINCE 29/02/2004 WITH FOUR PARTNERS VIZ. M/S AMARNATH H. SINGH HUF, SHRI PANCHDEO H.SINGH. SMT. MANJ U R. SINGH AND SMT. SHAIL V. SINGH. ALL HAVING EQUAL SHARE. 7.2 IT IS FURTHER TO BE NOTED THAT ALL THE PARTNERS ARE CLOS ELY RELATED TO EACH OTHER AND THE SAME FAMILIES WERE ALSO RUNNING OTHER BUSINESSES UNDER THE NAME AND STYLE OF M/S AMARDEO PLASTICS INDUSTRIES & M/S AMARDEO ENTERPRISES CARRYING OUT NEARLY THE SAME BUSINESSES. DURING THE PREVIOUS YEAR THE FACTS REVEAL THA T THE LARGER JAMIFA DECIDED TO SETTLE THEIR COMBINED BUSINESSES IN A MANNER SO THAT EACH BUSINESS UNIT IS CONTROLLED BY SPECIFIC FAMILY LINES TO THE VIRTUAL EXCLUSION OF THE OTHER FAMILY MEMBERS. THEREFORE IN ALL THE CONCERNS, THE PARTNERSHIP DEEDS WERE AME NDED TO GIVE MAXIMUM CONTROL OVER INDIVIDUAL UNITS OF A PARTICULAR BUSINESS TO A [PARTICULAR FAMILY LINEAGE AND SUBSEQUENTLY THE INSIGNIFICANT PARTNER WOULD EITHER RECUSE HIMSELF LEAVING THE UNIT TOTALLY IN THE CONTROL OF THE PARTICULAR FAMILY LINEAGE OR T HE UNIT IS TAKEN OVER BY THE DOMINANT PARTNER. IN THE CASE OF THE ASSESSEE THE ENTIRE BUSINESS WAS PLANNED TO BE HANDED OVER TO ONE FAMILY. THIS WAS A WELL - PLANNED AND CAREFULLY EXECUTED SCHEME OF DIVISION OF AND TRANSFER ON INTEREST IN THE BUSINESS ASSETS . 7.3 IN CONNECTION WITH THE ABOVE REORGANISATION, IN THE CASE OF THE PRESENT ASSESSEE, AN AMENDMENT WAS MADE TO THE DEED OF PARTNERSHIP ON 01.01.20 10 AND ONE MS. PRATIKSSA SINGH WAS ADMITTED AS A NEW PARTNER AND THE PROFIT SHARING RATIO OF THE FIRM WAS M ODIFIED 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 17 TH FEBRUARY 2010 AND THE PROFIT SHARING RATIO OF THE REMAINING PARTNERS WAS DECIDED AS UNDER : NAME OF PARTNER PROFI T /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 AMONGST THE PARTNERS LED TO M/S AMARNATH H . SINGH HUF TO RELINQUISH ITS 25% SHARE IN THE ASSETS OF THE FIRM AND S HRI PAN CHDEO H . SINGH AND MS PRATIKSSA SINGH EACH BENEFITED WITH 10% & 15% OF THE EMBEDDED VALUE OF THE FIRM WITHOUT BRINGING ANY ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 5 ADDITIONAL CAPITAL OR ASSETS, IT WAS OBVIOUS TO THE EXISTING PARTNERS THAT THE READJUSTMENT CANNOT BE DONE WITHOUT GETTING SHA RES PROPERLY. TO GIVE EFFECT TO THE ABOVE RECONSTITUTION AND ALSO TO ENSURE THAT THE PARTNERS ARE NOT DEPRIVED OF THEIR RIGHT IN THE TRUE VALUE OF THEIR SHA RE IN THE PROPERTY OF THE FIRM ON 31ST OF DECEMBER 2009, THE ASSESSEE REVALUED ITS SELF OWNED LAND AND BUILDING SITUATED AT DAMAN UNIT AS PER THE PREVAILING MARKET VALUE AS ON 31 ST DECEMBER. 2009 AND ALLOCATED THE REVALUATION GAIN EQUALLY AMONGST THE EARLIER PARTNERS AS UNDER: INDIAN EXTRUSIONS, DAMAN UNIT PARTICULA RS OF ASSETS COST OF PURCHASE/CO NSTRUCTION DATE OF PURCHASE/CONSTRUCTION REVALUED AMOUNT (RS.) REVALUATION GAIN (RS.) RS. LAND 5,07,388 22.02.1993 28,46,250 23,38,862 BUILDING 27,20,862 F.Y. 1993 - 94 1,00,00,000 72,79,138 TOTAL 96,18,000 M/S AMARNATH H SINGH (HUF) 24,04,500 SHRI PANCHDEO H. SINGH 24,04,500 SMT. MANJU R. SINGH 24,04,500 SMT. SHAIL V. SINGH 24,04,500 TOTAL 96,18,000 7.6 THUS EFFECTIVELY AND PRIOR TO THE RETIREMENT OF M/S AMARNATH H. SINGH HUF AND AFTER ADMISSI ON OF MS. PRATIKSSA SINGH, THE LAN D AND BUILDING OF THE ASSESSEE AT DAMAN WAS R EVALUED AND THE REVALUATION GAIN OF RS.96,18,000/ - WAS CREDITED TO THE CAPI TAL ACCOUNT OF THE PARTNERS IN THE EQUAL RA TIO. THUS M/S AMARNATH THE EMBEDDED VALUE OF THE ASS ETS 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 TH E REVALUATION GOT CREDITED TO THE CAPITAL ACCOUNT OF THE PARTNER , VIZ., M/S. AMARNATH H. SINGH H UF RETIRED FROM THE FIRM D URING THE F.Y.2009 - 10 RELEVANT TO A.Y .2010 - 11. AS PER THE AQ THE CRED IT 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 DI STRIBUTION 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 THE 1 T/ACT, 1961 .THE AO HELD THAT AS A RESULT OF THE ABOVE THERE IS A DISTRIBUTION OF ASSETS OF FIRM AMONGST THE RETIRING PARTN ER, SUBSISTING PARTNERS AND NEW PARTNER AND THE AO HELD THAT THE AMOUNT OF REVALUATION SURPLUS AT RS.96,18,OOQA - IS NOTHING BUT THE GAIN ARISING ON DISTRIBUT ION OF CAPITAL ASSETS BY WAY OF DISSOLUTION OF FIRM OR OTHERW ISE'. THEREFORE, THE AMOUNT OF RS.96 ,18,000/ - WAS TREATED BY THE AP AS CAPITAL GAIN OF THE ASSESSEE FOR THE F.Y.2009 - 10 RELEVANT TO A.Y.2010 - 11 AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE . 7.8 IN THE APPELLATE PROCEEDINGS THE ASSESSEE HAS REITERATED THAT THERE IS NO DISTRIBUTION OF A SSETS AND AS A RESULT THE PROVISIONS OF SECTION 45(4) OF THE ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 6 ACT ARE NOT APPLICABLE. THE ASSESSEE HAS ALSO CITED CERTAIN EASE JAWS TO SUGGEST THAT DURING THE SU BSISTENCE OF PARTNERSHIP, THE P ARTNERS DO NOT HAVE ANY RIGHT OVER THE PROPERT Y OF THE FIRM AND T HE OWNERSHIP DOESN'T CHANGE WITH THE CHANGE IN CONSTITUTION OF THE FIRM. (THI S IS N O T APPLICABLE TO THE FACTS OF THE CASE AT PRESENT BECAUSE THESE WERE JUDGMENTS RELATING TO THE PERIOD PRIOR TO THE INTRODUCTION OF PRESENT SECTION 45(4) OF THE ACT AND RELAT ED TO OTHER STATUTES BESIDES INCOME TAX). THE ASSESSEE ALSO SUBMITTED THAT EVEN IF THE PROVISIONS OF SECTION 45(4) OF THE ACT ARE SOUGHT TO BE APPLIED, THE SAME MAY BE APPLIED ONLY TO THE EXTENT OF THE SHARE OF THE RETIRING PARTNER I.E. M/S AMARN ATH H. SIN GH (HUF) AS ON THE DATE OF THE RETIREMENT. 8. IN ORDER TO DECIDE THE GROUND OF APPEAL, IT IS NECESSARY TO NOTE THAT THE CONCERNED SECTION 45(4) OF THE ACT CAME ON THE STATUTE BOOK ONLY W.E.F . 01.04.1988 AND THE DECISIONS O F THE VARIOUS AUTHORITIES/COURTS PRIOR TO THE SAME ARE NOT PROPER PRECEDENTS. THIS FACT HAS BEEN NOTED IN THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX VS. A.N. NAIK ASSOCIATES [2004] 265 ITR 346 (BOMBAY). THE FACTS OF THI S CASE AND THE DECISION T HEREIN ARE BRIEFLY NOTED BELOW : THE RESPONDENTS IN A. N. NAIK ASSOCIATES WERE PARTIES TO A FAMILY SETTLEMENT DATED JANUARY 30, 1997. PURSUANT TO THE SAID FAMILY SETTLEMENT , THERE WAS A DEED OF RECONSTITUTION OF VARIOUS PARTNERSHIP BUSINESSES OF THE FAMILY AS SET OUT UNDER THE FAMILY SETTLEMENT. FOR THE ASSESSMENT YEAR 1997 - 98, THE PARTNERSHIPS WERE TAXED FOR CAPITAL GAINS UNDER SECTION 45(4) OF THE INCOME - TAX ACT, 1961. THE INCOME - TAX APPELLATE 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 TH AT 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 PARTI ES 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 HAVIN G 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 ASSETS OR LIABILITIES BELONGING TO OR DUE FROM ANY OF THE FIRMS ALLOTTED TO PARTIES THERETO IN THE SCHEDULE ANNEXED SHALL BE TRANSFERRED OR ASSIGNED IRREVOCABLY AND POSSESSION MADE OVER ETC. THE HIGH COURT NOTED THE HISTORY OF SUB - SECTION (4) OF SECTION 45 OF THE ACT AND OBSERVED THAT IN ORDER TO ATTRACT CAPITAL GAINS THE FOLLOWING EVENTS ARE REQUIRED TO OCCUR AS UNDER: '1. TRANSFER OF CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS: ( A) UN ACCOUNT OF DISSOLUTION OF A FIRM; (B) OR OTHER ASSOCIATION OF PERSONS; (C) OR BODY OF INDIVIDUALS; (D) OR OTHERWISE THE; SHALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCIATION OR BODY OF PERSONS.' ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 7 THE HIGH COURT NOTED THAT SECTION 45(4) SEEMS TO HAVE BEEN INTRODUCED WITH A VIEW TO OVERCOME THE JUDGMENTS OF THE COURTS 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. IT WAS NOTED THAT THE DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION IS SUBJECT TO CAPITAL GAINS TAX UNLESS IT DOES NOT FALL WITHIN THE DEFINITION OF TRANSFER UNDER SECTION 2(47 ). THE HIGH COURT HELD THAT SECTION 45 IS A CHARGING SECTION AND THE PURPOSE AND OBJECT OF THE ACT OF 1987 WAS TO CHARGE TAX ARISING ON DISTRIBUTION OF CAPITAL ASSETS OF FIRMS WHICH OTHERWISE WAS NOT SUBJECT TO TAXATION. THE HIGH COURT NOTED THAT IF THE LA NGUAGE OF SUB - SECTION (4) IS CONSTRUED TO MEAN THAT THE EXPRESSION OTHERWISE HAS T O PARTAKE OF THE NATURE OF D ISSOLUATION OR DEEMED DISSOLUTION, THEN THE VERY OBJECT OF THE AMENDMENT COULD BE DEFEATED BY THE PARTNERS, BY DISTRIBUTING THE ASSETS TO SOME PARTNERS WHO MAY RETIRE. THE FIRM TH EN WOULD NOT BE LIABLE TO BE TAXED THUS DEFEATING THE VERY PURPOSE OF THE AMENDMENT ACT. IT WAS ALSO HELD THAT THE EXPRESSION OTHERWISE H AS NOT TO BE READ EJUSDEM GENERIS WITH THE EXPRESSION DISSOLUTION OF A FIRM OR BODY OR ASSOCIATION OF PERSONS' BUT 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 THE EXPRESSION 'OTHERWISE 77 AS THE OBJECT OF THE AMENDING ACT WAS TO REMOVE THE LOOPHOLE WHICH E XISTED WHEREBY CAPITAL GAIN TAX , WAS NOT CHARGE ABLE. THE HIGH COURT ACCORDINGLY HELD THAT WHEN THE ASSET OF THE PARTNERSHIP IS TRANSFERRED 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 T O 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 T HE ACT REMAIN ENFORCEABLE. THIS IS ALSO THE CASE OF THE PRESENT ASSESSEE. THE VARIOUS PARTNERS REPRESENTING THEMSELVES OR THEIR FAMIL Y LINE HAVE ADJUSTED THEIR INTER - SE RIGHTS. THE ASSESSEE FIRM BY ITS RECONSTITUTION ON 01.01.2010 HAS ELIMINATED ONE PARTNE R 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 TO CR EDIT THE GAIN AMONGST ALL THE PARTNERS EQUALLY AS PER THEIR EARLIER PROFIT SHARING PATTERN. IN OTHER WORDS THE FIRM HAS PAID THE PARTNERS MONEY FOR THE DIFFERENCE IN THE BOOK VALUE OF THE ASS E TS AND THE MARKET VALUE OF THE ASSETS. THIS MONEY HAS NOT BEEN BROUGHT IN BY ANY OF THE PARTNERS AS THEIR CONTRIBUTION. IT IS THE EMBEDDED VALUE IN THE ASSETS WHICH HAS INCREASED OVER THE PERIOD OF THE EXISTENCE OF THE FIRM. THE PARTNERS HAVE BENEFITTED BY TAKING THEIR RESPECTIVE SHARES IN THIS UNEARNED P ROFITS. THE CLAIM OF THE ASSESSEE THAT NO DISTRIBUTION TOOK PLACE IS NAIVE BECAUSE THE REVALUTION GAIN WAS PLACED AT THE DISPOSAL OF THE PARTNERS IN THEIR CAPITAL ACCOUNTS. THE EXISTING PARTNER ALSO GAVE UP THEIR SPECIFIC INTEREST IN THE BUSINESS AND GOT PAID THE DIFFERENCE AND THE CONTINUING PARTNERS ALSO GOT THEIR SHARE IN THE TRUE VALUE OF THE ASSETS. THE CAPITAL ACCOUNT BALANCE OF THE PARTNERS WERE ADJUSTED ACCORDINGLY AND SUBSEQUENTLY THE APPROPRIATE CAPITAL BALANCE OF THE EXISTING PARTNER WAS RECATEG ORIZED AS UNSECURED LOANS. ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 8 8.2 IT IS ALSO REQUIRED TO BE NO TED THAT THE KAR NATAKA HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX, DAVANGERE VS. GURUNATH TALKIES (2010) 328 ITR 59 (KARNATAKA) HAD TAKEN SIMILAR STANCE. THE FACTS OF THIS CASE WER E AS UNDER: IN THIS CASE THE FIRM WAS CARRYING ON THE BUSINESS OF MAINTAINING A QNEMA THEATRE, COMPRISING OF FOUR PARTNERS WHO WERE ENTITLED TO SHARE THE PROFITS OF THE FIRM. A RECONSTITUTION OF THE PARTNERSHIP FIRM TOOK PLACE BY ADDITION OF TWO PARTNERS TO THE PARTNERSHIP FIRM AND THE FIRM WA S AGAIN RECONSTITUTED WITH THE ERSTWHILE FOUR PARTNERS GO ING OUT AND RETIRING FROM T HE PA RTNERSHIP, THE NEWLY ADDED PARTNERS REMAINING IN THE FIRM AND CONTINUING THE FIRM. THE AO HELD THAT THE EXERCISE OF TAK ING INTO NE W PARTNERS AND SUBSEQUENTLY THE ORIGINAL FOUR PARTNERS GOING OUT OF THE FIRM LEAVING THE ENTIR E ASSETS OF THE FIRM IN THE HANDS OF THE NEWLY ADDED PARTNERS, IS VIRTUALLY A TRANSACTION INVOLVING THE TRANSFER OF THE ASSETS OF THE FIRM TO THE NEW PARTNERS, AS FIRM CONTINUED IN THE HANDS OF THE NEW PARTNERS. THE AO INVOKED THE PROVISIONS OF SECTION 45( 4) OF THE ACT AND THE VALUE OF THE SALE CONSIDERATION FOR THE TRANSFER OF THE ASSETS WAS TAKEN TO BE THE AMOUNT BROUGHT IN BY THE PARTNERS AND SHARED AMONGST THE EARLIER PARTNERS. THE HIGH COURT UPHELD THE ACTION OF THE ASSESS ING OFFICER AFTER NOTING THE JUD GMENT 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 H ELD 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 AN D 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 TH E PROPE RTY UNDER A REGISTERED THE FIRM ONLY AND THE PR OPERTY DID NOT STAND IN THE NAM E OF ANY INDIVIDUAL PARTNERS. AFTER THE RETIREMENT OF THREE PARTNERS, THE PARTNERSHIP CONTINUED TO EXIST AND THE BUSINESS WAS CARRIED ON BY THE REMAINING FIVE PARTNERS. THE COUR T HELD THAT THERE WAS NO DISSOLUTION OF THE FIRM OR AT ANY RAT E THERE WAS NO DISTRIBUTION OF C APITAI 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 PARTNERS FLIP. NO CAPITA L 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 RETI RING 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. THE HIGH COUR T SOUGHT TO DISTINGUISH THE DECISION IN THE CASE OF GURUNATHS TALKIES (SUPRA) ON THE GROUND THAT IN THAT CASE THE PROPERTY BELONGED TO THE PARTNERS AND NOT TO THE PARTNERSHIP FIRM. IN THE PRESENT CASE THE C OURT HELD THE PARTNERS ONLY HAD A SHARE IN THE PAR TNERSHIP ASSET. THUS WHEN YOU THE FIVE PARTNERS CAME INTO THE PARTNERSHIP AND BROUGHT CASH BY WAY OF CAPITAL CONTRIBUTION TO THE EXTENT OF THEIR CONTRIBUTION, THE Y WERE ENTITLED TO THE PRPPORTIO NATE SHARE IN THE INTEREST IN THE PARTNERSHIP FIRM. WHEN THE R ETIRING ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 9 PARTNERS TOOK CASH AND RETIRED, THEY WERE NOT RELINQUISHING THEIR INTEREST IN THE IMMOVABLE PROPERTY. WHAT THEY RELINQUISHED IS THEIR SHARE IN THE PARTNERSHIP. THEREFORE, THERE IS NO TRANSFER OF A CAPITAL ASSET, AS SUCH, NO CAPITAL GAINS OR PROFIT ARISES IN THE FACTS OF THIS CASE. IN THAT VIEW OF THE MATTER, SECTION 45(4) HAS NO APPLIC ATION TO THE FACTS OF THIS CASE. 8.4 THE ABOVE DECISION OF THE KARNATAKA HIGH COURT, WITH DUE RESPECT, IS DIFFERENT FROM THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE A. N. NAIK ASSOCIATES CASE (SUPRA). THE KARNATAKA HIGH COURT LAID STRESS ON THE POINT THAT 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. THIS IS NOT THE VIEW TAKEN BY THE JURISDICTIONAL HI GH COURT IN A.N. NAIK ASSOCIATES CASE WHERE IT WAS SPECIFICALLY HELD THAT THE EXPRESSION 'OTHERWISE' HAS NOT TO BE READ EJUSDEM GENERIS WITH THE EXPRESSION, 'DISSOLUTION OF A FIRM OR BODY 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 SH ARE 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 EXCEPT STOCK IN TRADE. UNDER S. 2(14) OF THE IT ACT, 'CAPITAL ASSET' HAS BEEN DEFINED TO MEAN PROPERTY OF ANY KIND HELD BY AN ASSESSEE. THIS IS VERY WISE DEFINI TION AND A SHARE OF A PARTNER IN THENET PARTNERSHIP ASSETS HAS BEEN HELD TO AB CAPITAL ASSET UNDER SEC. 2(4A) OF THE I.T. ACT, 1922 BY THE MADRASS HIGH COURT IN V. RANGASWAMI NAIDU VS. CIT (1957) 31 ITR 711 (MAD). [SEC. 2(4A) OF THE 1922 ACT IS THE FORERUN NER OF S. 2(14) OF THE NEW ACT]. THE SHARE OR INTEREST IN THE NET PARTNERSHIP ASSETS HAS ALSO BEEN HELD TO BE 'PR OPERTY' FOR THE PURPOSE OF THE W . T ACT, BY THE ALLAHABAD HIGH COURT IN JUGGILAL KAMLAPAT BANKERS VS. WTO (1979) 116 ITR 646 (ALL) 8.7 IT WAS ALSO OBSERVED BY A SPECIAL BENCH OF THE TRIBUNAL IN THE CASE MRS. ARATHI SHENOY V. JOINT CIT [2000] 75 ITD 100 (BANG.) (SB), HAS HELD THAT: 'INTEREST IN A FIRM IS AN ASSET AS ANY OTHER ASSET AND THIS IS SO RECOGNIZED BY THE ACT THAT DEFINE D A CAPITAL ASSET TO INCLUDE EXTINGUISHME NTS OF INTEREST. THE PARTNERS BY SURRENDERING THEIR RIGHTS AND INTEREST IN THE FIRM HAVE EXTINGUISHED THEIR RIGHTS AND INTEREST IN THE FIRM, WHICH WAS A CAPITAL ASSET UNDER THE ACT AND THE TRANSFER OF SUCH ASSET IS EXIGIBLE FOR TAX ON CAPITAL GAINS. SURRENDER OF RIGHTS AND INTERESTS IN A FIRM MAY RESULT IN THE CASE OF A RETIREMENT FROM TH E FIRM THAT TOO IS RELINQUISHMEN T OF HIS RIGHTS AND INTERESTS IN THE FIRM THAT LEADS TO EXTINGUISHMENTS OF INTEREST. IN OUR VIEW IN SITUATIONS WHERE LIKE THE ONE BEFORE US A PARTNER RECEIVES FOR GIVING UP HIS RIGHTS AND ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 10 INTEREST IN THE FIRM AT A PRICE THAT IS EQUATED WITH REFERENCE TO THE MARKET VALUE OF THE ASSETS OF THE FIRM, HIS RIGHTS AND INTERESTS HAVE BEEN VALUED AT THE MARKET P RICE. WHEN THIS MARKET PRI CE EXCEEDS THE COST S. 45 OF TH E ACT COMES INTO OPERATION, THE DIFFERENCE BETWEEN THE MARKET PRICE AND THE COST BEING GAINS IS TREATED AS ON ACCOUNT OF TRANSFER OF CAPITAL ASSET LEADING TO LEVY OF TAX ON SUCH CAPITAL GAIN'. 8.8 IN THE CASE OF THE PRESENT ASSESSEE THE EXITING PARTNER HAS EXTINGUISHED ITS RIGHTS AND INTERESTS IN THE ASSETS OF THE INDIVIDUAL UNITS AS PER THE AMENDED DEED OF PARTNERSHIP AND HAVE RECEIVED A PRICE WHICH IS EQUATED WITH REFERENCE TO THE REVALUED/MAR KET VALUE OF THE ASSETS. THE CONTINUING PARTNERS HAVE ALSO BENEFITTED FROM THE TRANSFER OF ASSET TO THEIR CAPITAL ACCOUNTS AS CASH. THIS HAS BENEFITED ALL PARTNERS THAT THE CAPITAL BALANCES HAVE INCREASED WITHOUT THE INCREASE COMING FRO M EITHER FROM A FRES H INFUSION O F CAPITAL OR FROM ANY CREDIT OF SHARE OF ACTUAL PROFIT OF THE FIRM. 8.9 ANOTHER WAY OF LO OKING AT THE T HINGS 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 TH E 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 O F 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 CAP I TAL ACCOUNTS BY A SUM OF MONEY/CA S H BELONGING TO THE FIRM CLEARLY TANTAMOUNT TO A TRANSFER OF CAPITAL ASSETS BY THE ASSESSEE TO THE PARTNERS. IT IS, THEREFORE, A CASE WHER E INSTEAD OF QUANTIFYING THE PARTNERS SHARE ON DISSOLUTION OF THE FIRM BY TAKING ACCOUNTS ON THE FOOTING OF A NOTIONAL/ACTUAL SALE, THE ASSESSEE AGREED TO PAY A LUMP SUM IN CONSIDERATION TO THE CONTINUING/ WITHDRAWING PARTNER ON HIS ASSIGNING OR RELINQUIS HING HIS INTEREST OR RIGHT IN THE SPECIFIC ASSETS OF THE PARTNERSHIP IN FAVOUR OF T HE CONTIN UING PARTNERS. THEREF ORE ON THE PLAIN READING OF SEC. 45(4), IT IS HELD THAT THE ASSESSEE FIRM HAS DISTRIBUTED CAPITAL ASSETS TO THE PARTNERS. THE CONTENTION OF TH E ASSESSEE THAT SECTION 45(4) IS APPLICABLE ONLY TO THE DISSOLUTION IS NOT THE CORRECT VIEW IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF A.N. NAIK ASSOCIATES (SUPRA) 8.10 IN VIEW OF THE ABOVE, THE ACTION OF THE AO IN HOLDING THA T THE DISTRIBUTION OF THE REVALUATION AMOUNT TO THE PARTNERS' CAPITAL ACCOUNTS DURING TH E CONTINUATION OF THE FIRM PARTA KES THE CHARACTER OF CAPITAL GAIN U/S 45(4) R.W .S. 2(14) IS CONFIRMED. THERE IS NO MERIT IN THE SUBMISSION OF THE ASSESSEE THAT THE SAME IS OUTSIDE THE AMBIT OF THE PROVISIONS OF SECTION 45(4) OF THE ACT. THEREFORE THE MAIN GROUND OF APPEAL NO. 1 AND ITS RELATED SUB - GROUNDS ARE DISMISSED. 5. THE ASSESSEE BEING AGGRIEVED WITH THE ORDER OF THE CIT(A) HAS CARRIED THE MATTER IN APPEAL BEFORE US. THE LD. AUTHORIZED REPRESENTATIVE (FOR SHORT A.R) FOR THE ASSESSEE TOOK US THROUGH THE ISSUE IN QUESTION . I T WAS SUBMITTED BY THE LD. A.R THAT THE SOLITARY ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 11 ISSUE INVOLVED IN THE PRESENT APPEAL WAS AS TO WHETHER OR NOT THE DISTRIBUTION OF THE REVALUA TION SURPLUS TO THE PARTNERS CAPITAL ACCOUNTS DURING THE CONTINUATION OF THE FIRM WOULD PARTAKE THE CHARACTER OF CAPITAL GAIN U/S 45(4) R.W.S 2(14) . IT WAS SUBMITTED BY THE LD. A.R, THAT THE SAME CIT(A) WHILE DISPOSING OFF THE APPEAL IN THE CASE OF A SIST ER CONCERN OF THE ASSESSEE, VIZ. M/S AMARDEO PLASTIC INDUSTRIES, HAD VIDE HIS ORDER DATED 18.11.2016 FOR A.Y. 2010 - 11 TAKEN A SIMILAR VIEW , AND HAD CONCLUDED , THAT CREDITING OF THE PARTNERS CAPITAL ACCOUNTS BY MERE MONEY/CASH BELONGING TO THE FIRM WOULD CLEARLY TANTAMOUNT TO A TRANSFER OF CAPITAL ASSET BY THE ASSESSEE TO THE PARTNERS. IT WAS SUBMITTED BY THE LD. A.R THAT THE AFORESAID ORDER OF THE CIT(A) IN THE CASE OF M/S AMAR D EO PLASTICS INDUSTRIES (SUPRA) HAD THEREAFTER BEEN VACATED BY THE TRIBUNAL I.E ITAT, MUMBAI BENCHES A, MUMBAI IN THE CASE OF M/S AMAR D EO PLASTICS INDUSTRIES VS. ACIT - 24(3), MUMBAI, ITA NO. 1874 & 1875/MUM/2017 FOR A.Y 2010 - 11 , DATED 31.05.2019. OUR ATTENTION WAS DRAWN BY LD. A.R TO THE AFORESAID ORDER OF THE TRIBUNAL IN THE CASE O F M/S AMAR D EO 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 HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. A. N. NA I K ASSOCIATES (2004) 265 ITR 346 (BOM), IT WAS HELD THAT THE TRANSFER OF A CAPITAL ASSET WAS A PRE - CONDITION FOR INVOKING THE PROVISION S 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 ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 12 HAD FURTHER RELIED ON THE JUDGMENT OF THE FULL BENCH OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. DYNAMIC ENTERPRISE 359 ITR 83 (KAR) ( FB ) . IT WA S SUBMITTED BY THE LD. A.R THAT THE HONBLE HIGH COURT IN ITS AFORESAID ORDER , HAD OBSERVED , THAT IN ORDER TO A TTRACT SEC. 45( 4 ) OF THE ACT THE CAPITAL AS SET OF THE FIRM SHOULD BE TRANSFERRED IN FAVOUR OF A PARTNER, AS A RESULT WHEREOF , THE FIRM CEAS E S TO HAVE ANY INTEREST IN THE CAPITAL ASSET TRANSFERRED WHILE FOR THE PARTNER GOT VESTED WITH AN EXCLUSIVE INTEREST IN THE SAME . IN OTHER WORDS, THE INTEREST T HE FIRM HA D IN THE CAPITAL ASSET SHOULD BE EXTINGUISHED AND IN TURN THE PARTNER IN WHOSE FAVOUR THE TRANSFER IS MADE ACQUIRE D THE SAME . IN THE BACKDROP OF THE AFORESAID FACTS, IT WAS SUBMITTED BY THE LD. A.R THAT SINCE NO DISTRIBUTION OF ASSETS HAD TAKEN P LACE IN THE CASE OF THE PRESENT ASSESSEE, THUS , ON THE SAID COUNT ALON E THE PROVISION S OF SEC. 45(4) COULD NOT HAVE BEEN INVOKED. AS REGARDS THE JUDGMENT OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. GURUNATH TALKIES (2010) 328 ITR 59 (KAR ) , IT WAS SUBMITTED BY THE LD. A.R THAT THE FULL BENCH OF THE HONBLE HIGH COURT IN THE CASE OF DYNAMIC ENTERPRISES (SUPRA), HAD OBSERVED, THAT THE SAID JUDGMENT DOES NOT LAY DOWN THE CORRECT LAW. IN ORDER TO BUTTRESS HIS AFORESAID CLAIM, THE LD. A.R TOO K US THROUGH P ARA 28 OF THE AFORESAID ORDER OF THE TRIBUNAL IN THE CASE OF M/S AMAR D EO PLASTICS INDUSTRIES (SUPRA). IT WAS FURTHER SUBMITTED BY THE LD. A.R THAT THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF PCIT VS. ELECTRO P LAST ENGINEER S (2019) 263 TAXM AN 120 (BOM) , HAD WHILE DISCUSSING THE APPLICABILITY OF SEC. 45(4) OF THE ACT IN THE BACKDROP OF THE ORDERS PASSED IN THE CASE OF, VIZ. IN A.N. NA I K ASSOCIATS (SUPRA) AND DYNAMIC ENTERPRISE S (SUPRA), HAD OBSERVED , THAT WHERE THE ASSETS WERE EVALUATED AND T HE RETIRING PARTNERS WERE PAID THEIR SHARE OF PARTNERSHIP ASSET, THEN, IN THE ABSENCE OF ANY TRANSFER OF CAPITAL ASSET THE PROVISIONS OF SEC. 45(4) WOULD NOT BE APPLICABLE. IT WAS FURTHER SUBMITTED BY THE LD. A.R THAT THE ITAT, MUMBAI D BENCH ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 13 IN THE CASE OF M/S D.S. CORPORATION VS. ITO - 21(4), MUMBAI, ITA NO. 3526 & 3527/MUM2012, DATED 15.11.2018, HAD OBSERVED , THAT AS IN THE CASE BEFORE THEM THERE WAS NO DISSOLUTION OF THE PARTNERSHIP FIRM , AND SINCE , PROPERTY IN QUESTION CONTINUED TO BE OWNED BY THE ASS ESSEE FIRM EVEN AFTER THE RETIREMENT OF THE PARTNERS, IT WAS , THUS, NOT A CASE OF TRANSFER OF THE SAID PROPERTY BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OR OTHERWISE. IN ORDER TO BUTTRESS HIS AFORESAID CLAIM THAT THE DISTRIBUTION OF THE REVALUATION 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 I TS WISDOM HAD VIDE THE FINANCE ACT, 2021 AMENDED SEC. 45(4), WHEREIN UNDER THE POST - AMENDED PROVISION, THE RECEIPT OF MONEY OR C APITAL 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 T HAT THE DISTRIBUT ION 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 T HE ORDERS OF THE LOWER AUTHORITIES. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES , PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD , AS WELL AS CONSIDERED THE JUDICIAL PRONOUNCEMENTS ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 14 THAT HAVE BEEN PRESSED INTO SERVICE BY THEM TO DRIVE HOME THEIR RESPECTIVE CONTENTIONS. AS OBSERVED BY US HEREINABOVE, THE SOLITARY ISSUE INVOLVED IN THE PRESENT APPEAL IS THAT AS TO WHETHER OR NOT THE CR EDIT OF THE REVALUATION SURPLUS TO THE CAPITAL ACCOUNTS OF THE PARTNERS, INCLUDING THE RETIRING PARTNER, WHEREIN IN THE LATTER CASE THE AMOUNT WAS TRANSFERRED TO A LOAN ACCOUNT, DID TANTAMOUNT TO DISTRIBUTION OF THE CAPITAL ASSETS OF THE FIRM OTHERWISE THA N BY DISSOLUTION OF THE FIRM WITHIN THE MEANING OF SEC. 45(4) OF THE ACT . AS OBSERVED BY US HEREINABOVE, THE ASSESSEE FIRM HAD RE - VALUED ITS SELF - OWNED LAND AND BUILDING SITUATED AT DAMAN UNIT AS PER THE PREVAILING MARKET VALUE ON 31 ST DECEMBER, 2009, AND ALLOCATED THE REVALUATION SURPLUS OF RS.96,18,000/ - EQUALLY AMONGST THE ORIGINAL PARTNERS. BEING OF THE VIEW THAT THE CREDIT OF THE REVALUATION SURPLUS TO THE CAPITAL ACCOUNTS OF THE PARTNERS, INCLUDING THE RETIRING PARTNER, WHOSE AMOUNT WAS SUBSEQUENTLY T RANSFERRED TO A LOAN ACCOUNT, DID TANTAMOUNT TO DISTRIBUTION OF THE CAPITAL ASSETS OF THE FIRM OTHERWISE THAN BY DISSOLUTION OF THE FIRM WITHIN THE MEANING OF SEC. 45(4) OF THE ACT, THE A.O HAD BROUGHT THE SAME TO TAX AS CAPITAL GAIN IN THE HANDS OF THE ASSESSEE FIRM. WE HAVE DELIBERATED AT LENGTH ON THE ISSUE IN QUESTION, AND ARE OF THE CONSIDERED VIEW, THAT A S SUBMITTED BY THE LD. A.R, AND RIGHTLY SO , THE AFORESAID ISSUE IS SQUARELY COVERED BY THE ORDER PASSED BY THE COORDINATE BENCH OF THE TRIBUNAL, V IZ. ITAT, MUMBAI BENCHES A IN THE CASE OF A SISTER CONCERN OF THE ASSESSEE, VIZ. M/S AMAR D EO PLASTICS INDUSTRIES VS. ACIT - 24(3), MUMBAI ITA NO S .1874 - 1875/MUM/2017 FOR A.Y 2010 - 11 ; DATED 31.05.2019. AS OBSERVED BY US HEREINABOVE, THE TRIBUNAL ON THE BAS IS OF ITS EXHAUSTIVE DELIBERATIONS AND CONSIDERING THE VARIOUS JUDICIAL PRONOUNCEMENTS THAT WERE PRESSED INTO SERVICE BY THE LD. AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES, HAD OBSERVED , THAT FOR INVOKING OF SEC. 45(4) OF THE ACT TWO CONDITION S WERE REQUIRED TO BE CUMULATIVELY ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 15 SATISFIED, VIZ. ( I ) THERE SHOULD BE TRANSFER OF CAPITAL ASSET BY WAY OF A DISTRIBUTION OF CAPITAL ASSET; AND (II) SUCH DISTRIBUTION SHALL BE ON DISSOLUTION OR OTHERWISE. IT WAS, THUS, IN THE BACKDROP OF THE AFORESAID OBSERV ATION, 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 NON E OF THE ASSETS OF THE FIRM WERE ACTU ALLY TRANSFERRED TO ANY PARTNER , EITHER IN ACCOUNT BOOKS OR OTHERWISE. IT WAS FURTHER OBSERVED, THAT AS HELD BY THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF PCIT VS. ELECTRO P LAST (2019) 263 TAXMAN 120 (BOM) , WHERE THE RETIRING P ARTNERS WERE PAID SUMS O N 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 OBSERVE D 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 REVOLV ES AROUND THE APPLICABILITY OF PROVISIONS OF SECTION 45(4) OF THE ACT. IN THE EARLIER PART OF THIS ORDER, WE HAVE ELABORATELY NOTED THE FACTS AND THE MANNER IN WHICH SECTION 45(4) OF THE ACT HAS BEEN INVOKED BY THE ASSESSING OFFICER AND THE SAME IS NOT BEI NG REPEATED FOR THE SAKE OF BREVITY. THE PROVISION OF SECTION 45(4) OF THE ACT READS AS UNDER: '45(1) .. .. (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 WHIC H 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 (UNDERLINED FO R EMPHASIS BY US ) IT IS EVIDENT FROM A PERUSAL OF THE ABOVE THAT FOR INVOKING OF SECTION 45(4) OF THE ACT, TWIN CONDITIONS NEED TO BE SATISFIED, NAMELY, (I) THERE SHOULD BE TRANSFER OF CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSET; AND, (II) SUCH DISTRIBUTION SHALL BE ON DISSOLUTION OR OTHERWISE. WE SHALL NOW RECAPITULATE THE EVENTS THAT TOOK PLACE DURING THE YEAR UNDER CONSIDERATION, WHICH LED TO ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 16 INVOKING OF SECTION 45(4) OF THE ACT BY THE ASSESSING OFFICER. FIRSTLY, THERE WAS REVALUATION OF ASSET S AND THE CAPITAL ACCOUNT OF ALL THE PARTNERS WERE CREDITED BY THE REVALUATION AMOUNT. SECONDLY, THERE WAS CHANGE IN PROFIT SHARING RATIO OF PARTNERS IN SUCH A WAY THAT PROFIT SHARING RATIO OF THE PARTNERS WAS DECIDED BASED ON THE UNITS OWNED BY THE FIRM E XCEPT FOR ONE PARTNER WHO WAS ONLY GIVEN LUMP SUM CONSIDERATION AND NO PERCENTAGE SHARE IN PROFIT OF THE FIRM. THIRDLY, PARTNERS MADE AMENDMENTS IN A PARTNERSHIP DEED WHICH, INTER ALIA, INCLUDED A CLAUSE THAT SHRI PRABHAT SINGH WOULD BE SOLELY RESPONSIBLE FOR ANY LIABILITY ARISING IN MUMBAI UNIT AFTER 01.01.2010, SHRI RAHUL SINGH AND SHRI AMARNATH SINGH WOULD BE SOLELY RESPONSIBLE FOR ANY LIABILITY ARISING IN DAMAN, PONDICHERRY 1 AND PONDICHERRY 2 UNITS AND SHRI PANCHDEO SINGH WOULD NOT BE RESPONSIBLE FOR A NY LIABILITY ARISING OUT OF ANY UNITS. LASTLY, THERE WAS WITHDRAWAL OF AMOUNT BY THE PARTNERS AFTER REVALUATION SUBSEQUENTLY. IN THIS BACKGROUND, THE ASSESSING OFFICER HELD THAT THERE WAS IN EFFECT 'TRANSFER OF ASSETS' BY THE FIRM TO ITS PARTNERS AND THERE FORE, 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 WA S 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 TH E 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 'DISTRIBU TION' CAN BY NO STRETCH OF IMAGINATION BE SAID TO INCLUDE A MERE REVALUATION OF ASSETS. 18. THE NEXT EVENT THAT TOOK PLACE WAS THE WAS CHANGE IN PROFIT SHARING RATIO OF THE PARTNERS WHEREBY DIFFERENT PROFIT SHARING RATIO WAS DETERMINED, BASED ON DIFFERENT UNITS AND ONE OF THE PARTNER WAS TO BE GIVEN ONLY FIXED REMUNERATION INSTEAD OF SHARE IN PROFITS. IN THIS CONTEXT, THE LD. REPRESENTATIVE FOR THE ASSESSEE RELIED ON THE DECISION OF CIT V. J.K. DOSHI & CO (SUPRA), RAGHUNANDAN NANU KOTHARE V. HORMASJI BEZON JI BAMJI (SUPRA), CIT V. RAMA TRANSPORT CO. (SUPRA) FOR THE PROPORTION THAT PARTNERS CAN AGREE TO SHARE PROFITS IN THE WAY THEY LIKE. THE CONTENTION OF THE APPELLANT IS QUITE POTENT, AND IN VIEW THE CHANGE IN PROFIT SHARING RATIO IS ONLY AN INTER - SE ARRANG EMENT BETWEEN THE PARTNERS AND THEY ARE FREE TO DIVIDE THE PROFITS IN THE MANNER THEY LIKE. THE RATIO OF SHARE OF PROFIT DOES NOT HAVE TO BE DEFINED IN PROPORTION OF PROFITS. THERE IS NO PROVISION, EITHER UNDER THE ACT OR INDIAN PARTNERSHIP ACT, 1932 WHICH PROHIBITS CHANGE OF PROFIT SHARING RATIO OF PARTNERSHIP FIRM ONLY IN A PARTICULAR MANNER. BEFORE US, THE RATIONALE BEHIND KEEPING PROFIT RATIO IN SUCH MANNER HAS ALSO BEEN EXPLAINED. IT WAS EXPLAINED THAT THE SAID ARRANGEMENT WAS ONLY TO ATTAIN MAXIMUM EF FICIENCY. IT WAS FURTHER DEMONSTRATED BEFORE US THAT, IN FACT, THE PROFITS INCREASED TO MORE THAN TWICE AFTER SUCH REORGANISATION. THUS, CHANGE IN PROFIT SHARING RATIO HAS ONLY RESULTED INTO INCREASE IN OPERATIONAL EFFICIENCY; AND AS SUCH, THE CHANGE IN PR OFIT SHARING RATIO, IN ISOLATION, CANNOT BE THE BASIS TO HOLD THAT THERE IS ANY TRANSFER/ DISTRIBUTION OF ASSETS OF THE FIRM. ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 17 19. THE THIRD EVENT THAT TOOK PLACE WAS THAT THERE WAS AMENDMENT IN THE PARTNERSHIP DEED IN SUCH A WAY THAT LIABILITY OF THE PARTNERS WAS RESTRICTED TO SOME UNITS WHEREIN THEIR PROFIT SHARING RATIO WAS HIGH. THE ASSESSING OFFICER CONCLUDED THAT SINCE LIABILITY OF THE PARTNERS WAS RESTRICTED TO THE PARTICULAR UNIT, THIS IMPLIED TRANSFERRING OF ASSETS AND LIABILITY OF THAT UNIT T O THE RESPECTIVE PARTNERS. IN THIS REGARD, IT IS MAIN NOTEWORTHY THAT THOUGH THE PARTNERSHIP DEED STATES OF INTER - SE PROFIT SHARING ON THE BASIS OF UNITS AS WELL AS UNIT - WISE LIABILITY, BUT THE PARTNERS WERE VERY MUCH JOINTLY AND SEVERALLY LIABLE TO THE OU TSIDERS. PERTINENTLY, THE LIABILITY OF THE PARTNERS TO OUTSIDERS IS GOVERNED BY THE INDIAN PARTNERSHIP ACT, 1932, WHICH CANNOT BE CURTAILED BY ALTERATION IN THE PARTNERSHIP DEED DECIDED BY THE PARTNERS AMONGST THEMSELVES. THUS, THE AFORESAID AMENDMENT IN T HE 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 ASSESSIN G 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 THE APPLICABLE LEGAL POSITION. THE LEGAL POSITION CAN BE UNDERSTOOD BY REFERRING TO THE VARIOUS CASE LAWS RELIED DURING OF COURSE OF HEARING. THE FIRST DECISION REFERRED IS ITO V. PARU D. DAVE 110 ITD 410 (MUM), WHOSE, THE RELEVANT PORTION READS AS UNDER: '13. IN A PARTNERSHIP AMONGST PARTNERS, EACH AND EVERY PARTNER OF THE FIRM HAS AN INTEREST IN EACH AND EVERY PROPERTY OF THE PARTNERSHIP FIRM. TILL THE ACCOUNTS ARE SETTLED AND THE RESIDUE/SURPLUS IS NOT DISTRIBUTED AMONGST THE PARTNERS, NO PARTNER CAN CLAIM ANY SHARE IN SUCH ASSETS OF THE PARTNERSHIP FIRM. EACH PARTNER IS ENTITLED TO ITS SHARE OF PROFITS IN THE PARTNERSHIP FIRM BUT THE ENTITLEMENT OF RIGHT IN TH E ASSETS/PROPERTY OF THE PARTNERSHIP FIRM ARISES ONLY ON DISSOLUTION. 16. IN THE FACTS BEFORE US THE PARTNERSHIP ASSET WAS REVALUED BY THE PARTNERS AT THE START OF THE YEAR AND THE DIFFERENCE ON ACCOUNT OF REVALUATION OF ASSET WAS CREDITED TO THE PARTNERS ACCOUNT. THE REVALUATION OF PARTNERSHIP ASSETS WAS ANTERIOR TO THE INT RODUCTION OF NEW PARTNERS. REVALUATION OF ASSETS BY PARTNERSHIP FIRM DOES NOT ATTRACT CAPITAL GAINS. THE REVALUATION OF ASSETS OF PARTNERSHIP AND THE CREDIT OF REVALUED AMOUNT TO THE CAPITAL ACCOUNT OF PARTNERS IN THEIR RESPECTIVE SHARE RATIO DOES NOT ENTA IL ANY TRANSFER AS DEFINED UNDER SECTION 2(47) OF THE ACT THE INTRODUCTION OF NEW PARTNERS TO A ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 18 PARTNERSHIP FIRM OWNING IMMOVABLE ASSETS AND CONSEQUENT REDUCTION IN THE SHARE RATIO OF PRESENT PARTNERS DOES NOT ENTAIL ANY RELINQUISHMENT OF THEIR RIGHTS PART NERSHIP 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 RATIO 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 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 PE R 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 RE - VALUATION OF THE PLOT OF LAND DID NOT RESULT IN ANY PROFIT OR GAIN TO THE FIRM AND HENCE Q UESTION 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 IREMENT OF THE PARTNERS FROM THE PARTNERSHIP FIRM BUT ALSO THE TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS. IT IS A FACT THAT RETIRING PARTNERS HAD WITHDRAWN THE SUMS TO CREDIT IN THEIR ACCOUNTS, BUT SUCH WITHDRAWALS CANNOT BE TREATED AS 'DISTRIBUTIO N OF CAPITAL ASSETS EITHER ON DISSOLUTION OF FIRM OR OTHERWISE. 5.3.2 HON'BLE BOMBAY HIGH COURT IN THE CASE OF CITV. A.N. NAIK ASSOCIATES (2004] 265 ITR 346/136 TAXMAN 107 HAS EXPLAINED THE EXPRESSION OTHERWISE USED IN SECTION 45 OF THE ACT. IT WAS HELD B Y HON'BLE COURT THAT THE EXPRESSION OTHERWISE HAS TO BE READ WITH WORD 'TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSET' AND NOT WITH THE WORD 'DISSOLUTION'. THUS, FROM THE ABOVE JUDGMENT ALSO IT IS CLEAR THAT TRANSFER OF A CAPITAL ASSET IS THE PRE - CONDIT ION FOR INVOKING THE PROVISIONS OF SEC. 45(4) OF THE ACT. SECONDLY SUCH A TRANSFER SHOULD TAKE PLACE AT THE TIME OF DISSOLUTION OR OTHER SIMILAR EVENTS SUCH AS RETIREMENT OF THE PARTNERS. UNTIL SUCH TIME, THE SHARED RIGHT OF THE PARTNERS BECOME THE EXCLUSI VE RIGHT OF ANY RETIRING PARTNER AND NO OCCASION ARISES FOR TO TAX THE SAME UNDER THE HEAD 'CAPITAL GAINS' AS ENVISAGED BY SEC. 45(4) OF THE ACT.' ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 19 (UNDERLINED FOR EMPHASIS BY US) THE NEXT DECISION RELIED UPON WAS CIT V. DYNAMIC ENTERPRISES (359 ITR 83 (KARN)(FB), WHOSE RELEVANT PORTION READS AS UNDER: 'IN ORDER TO ATTRACT SUB - SECTION (4) OF SECTION 45 THE CONDITION IS (1) THERE SHOULD BE A DISTRIBUTION OF CAPITA ASSETS OF A FIRM; (2) SUCH DISTRIBUTION SHOULD RESULT IN TRANSFER OF A CAPITAL ASSET BY FI RM IN FAVOUR OF THE PARTNER; (3) ON ACCOUNT OF THE TRANSFER THERE SHOULD BE A PROFIT OR GAIN DERIVED BY THE FIRM AND (4) SUCH DISTRIBUTION SHOULD BE ON DISSOLUTION OF THE FIRM OR OTHERWISE. IN ORDER TO ATTRACT SECTION 45(4) THE CAPITAL ASSET OF THE FIRM SH OULD BE TRANSFERRED IN FAVOUR OF A PARTNER, RESULTING IN THE 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 CAPITA L ASSET SHOULD BE EXTINGUISHED AND THE PARTNERS IN WHOSE FAVOUR THE TRANSFER IS MADE SHOULD ACQUIRE THAT INTEREST. THEN ALONE ARE THE PROFITS OR GAINS ARISING FROM SUCH TRANSFER LIABLE TO TAX UNDER SECTION 45(4). .. (I) THAT THE PROPERTY BELONGED TO THE FIRM. IT DID 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: 12DURING THE SUBSISTENCE OF PARTNERSHIP, NO PARTNER HAS ANY ASSIGNED RIGHT OR SHARES IN THE PARTNERSHIP PROPERTY. DURING THE CONTINUANCE OF THE PARTNE RSHIP 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 THE PARTNERSHIP FIRM. IN A PARTNERSHIP AMONGST PARTNERS, EACH AND EVERY PARTNER OF THE FIRM HAS AN INTEREST IN EACH AND EVERY PROPERTY OF THE PARTNERSHIP FIRM. TILL THE ACCOUNTS ARE SETTLED AND THE RESIDUE/SURPLUS IS NOT DISTRIBUTED AMONGST THE PARTNERS, NO PARTNER CAN CLAIM A NY SHARE IN SUCH ASSETS OF THE PARTNERSHIP FIRM. EACH PARTNER IS ENTITLED TO ITS SHARE OF PROFITS IN THE PARTNERSHIP FIRM BUT THE ENTITLEMENT OF RIGHT IN THE ASSETS/ PROPERTY OF THE PARTNERSHIP FIRM ARISES ONLY ON DISSOLUTION. WHILE THE FIRM IS SUBSISTING, THERE CANNOT BE ANY TRANSFER OF RIGHTS IN THE ASSETS OF THE FIRM BY ANY OR ALL PARTNERS AMONGST THEMSELVES BECAUSE DURING SUBSISTENCE OF PARTNERSHIP, THE FIRM AND PARTNERS DO NOT EXIST SEPARATELY. THERE CAN BE NO TRANSFER TO ONESELF. THIS COULD ONLY HAPPE N ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 20 WHEN THERE IS DISSOLUTION OF THE FIRM. THEREFORE ACCORDING TO US, IT IS NOT A CASE OF DISTRIBUTING CAPITAL ASSETS AMONGST THE PARTNERS AT THE TIME OF RETIREMENT AND THEREFORE PROVISIONS OF SECTION 45(4) ARE NOT APPLICABLE. (UNDERLINED FOR EMP HASIS BY US) 22. WITH THE ABOVE LEGAL POSITION IN MIND, NOW WE MAY GO BACK TO THE FACTS OF THE INSTANT CASE. ADMITTEDLY, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT POINTED OUT ANY INSTANCE WHEREIN THE FIRM HAS EXTINGUISHED ITS RIGHT IN ANY OF ITS ASSET AVAILABLE WITH IT BEFORE SUCH MODIFICATION WAS CARRIED OUT. IT WAS ALSO NOT THE CASE OF THE REVENUE THAT SOME ASSETS WHICH WERE HITHER TO REFLECTED IN BOOKS OF ACCOUNT WERE NOT REFLECTED IN THE ACCOUNT BOOKS POST THE ABOVE EVENTS. NOTABLY, THERE HAS BEEN NO ADMISSION, RETIREMENT OF PARTNER OR DISSOLUTION OF PARTNERSHIP FIRM. MOREOVER, THE ASSESSING OFFICER HAS NOT POINTED OUT ANY INSTANCE OF TRANSFER OF INTEREST IN CAPITAL ASSETS OF THE FIRM IN FAVOUR OF ANY PARTNER. ALSO, AS EXPLAINED BY THE ID AR, T HE PARTNERS HAVE NOT WITHDRAWN THE REVALUATION GAINS CREDITED TO THEIR ACCOUNT. INSTEAD, IT HAS BEEN POINTED OUT THAT PART OF THE ASSETS OF THE FIRM WERE SOLD IN SUBSEQUENT YEAR AND THE RESULTANT GAIN WAS OFFERED TO TAX. ALSO, TWO GALAS OF MUMBAI UNIT AND BUILDING AT DAMAN UNIT WERE TRANSFERRED TO PANCHDEO SINGH AND MUMBAI UNIT WAS TRANSFERRED ON SLUMP SALE BASIS TO PRABHAT SINGH IN ASSESSMENT YEAR2013 - 14 AND THE RESULTANT CAPITAL GAIN WAS OFFERED TO TAX BY THE FIRM. THIS FACT FURTHER SUBSTANTIATES THE FACT THAT THERE WAS NO TRANSFER OF UNIT OR ASSETS OF THE UNITS 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 NO TED 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 T HE 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 A LSO 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 A SSETS WHICH ARE PROPOSED TO BE D IVIDED 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 PROVI DED THAT SUCH OF THOSE ASSETS OR LIABILITIES BELONGING TO OR DUE FROM ANY OF THE FIRMS ALLOTTED TO PARTIES THERETO IN THE SCHEDULE ANNEXED SHALL BE TRANSFERRED OR ASSIGNED IRREVOCABLY AND POSSESSION MADE OVER AND ALL SUCH DOCUMENTS, DEEDS, DECLARATIONS, AF FIDAVITS, PETITIONS, LETTERS AND ALIKE AS ARE REASONABLY REQUIRED BY THE PARTY ENTITLED TO SUCH TRANSFER WOULD BE EFFECTED. IT IS BASED ON THIS DOCUMENT AND THE SUBSEQUENT DEEDS OF RETIREMENT OF PARTNERSHIP ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 21 THAT THE ORDER OF ASSESSMENT WAS MADE HOLDING THA T THE APPELLANTS ARE LIABLE FOR TAX ON CAPITAL GAINS 24. IT IS EVIDENT FROM THE ABOVE DISCUSSION THAT IN THE CASE BEFORE THE HON'BLE HIGH COURT, THERE WAS NO DISPUTE WITH RESPECT TO THE FACT THAT THE ASSETS WERE INDEED DISTRIBUTED AND TRANSFERRED TO THE PARTNERS AND WERE NO LONGER IN THE BOOKS OF THE ACCOUNT FIRM. THE RIGHTS IN THE ASSETS WERE TRANSFERRED TO THE PARTNERS. THE DISPUTE BEFORE THE HON'BLE BOMBAY HIGH COURT WAS WHETHER THE WORD 'OTHERWISE 1 USED IN SECTION 45(4) OF THE ACT WOULD TAKE INTO CASE S WHICH ARE AKIN TO DISSOLUTION OF FIRM OR WOULD ALSO COVER RECONSTITUTION OF FIRM. THE HON'BLE BOMBAY HIGH COURT HELD THAT SECTION 45(4) OF THE ACT WOULD COVER CASES EVEN WHERE THERE IS RECONSTITUTION OF FIRM AND NOT ONLY CASES AKIN TO DISSOLUTION. NOTABL Y, WHETHER THE PROVISIONS OF SECTION 45(4) OF THE ACT WOULD APPLY EVEN WHERE THE ASSETS HAVE NOT BEEN DISTRIBUTED, WAS NEVER THE ISSUE BEFORE THE HON'BLE BOMBAY HIGH COURT. THE POSITION BEFORE US IS THAT THE ASSETS HAVE NEITHER BEEN DISTRIBUTED AND NOR THE INTEREST IN THE ASSETS BEEN TRANSFERRED TO THE PARTNERS IN THE INSTANT YEAR. HENCE, RELIANCE BY THE REVENUE ON THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT TO CONTEND THAT SECTION 45(4) OF THE ACT WOULD APPLY EVEN IN ABSENCE OF TRANSFER OF ASSETS IS NOT CORRECT SINCE THAT WAS NOT THE ISSUE BEFORE THE HON'BLE BOMBAY HIGH COURT. 25. COMING TO THE OBSERVATION OF THE ASSESSING OFFICER THAT THERE WAS WITHDRAWAL OF THE REVALUATION AMOUNT BY THE PARTNERS IN SUBSEQUENT YEAR AND THEREFORE THERE WAS TRANSFER WITHIN THE MEANING OF SECTION 45(4) OF 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 T O 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 DY NAMIC 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 TAKE N 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 PARTNER TAKES ONLY MONEY TOWARDS VALUE OF HIS SHARE, WHETHER THE FIRM SHOULD BE MADE LIABLE TO PAY CAPITAL GAINS EVEN WHEN THERE IS NO DISTRIBUTION OF CAPITAL ASSET AMONG THE PARTNERS UNDER SECTION 45(4) OF THE ACT. IN THE SAID CASE OF DYNAMIC ENTERPRISES (SUPRA), THE PARTNERSHIP FIRM WAS ENGAGED IN THE BUSINESS OF BUYING LAND AND PROPERTIES AND CONSTRUCTION OF BUILDINGS THEREON. THE FIRM UNDERWENT R ECONSTITUTION. BEFORE SUCH RECONSTITUTION THE ASSETS OF THE FIRM WERE REVALUED AS PER THE REPORT OF THE REGISTERED VALUER. THREE ERSTWHILE PARTNERS RETIRED. RETIRING PARTNERS RECEIVED ENHANCED VALUE OF THE PROPERTY UPON RETIREMENT. IN THIS CONTEXT THE COUR T CONSIDERED THE ABOVE NOTED QUESTION. THE COURT HELD THAT AFTER RETIREMENT OF PARTNERS, THE PARTNERSHIP CONTINUED AND THE BUSINESS WAS ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 22 ALSO CARRIED ON BY THE REMAINING PARTNERS. THERE WAS THUS NO DISSOLUTION OF THE FIRM AND THERE WAS NO DISTRIBUTION OF CA PITAL ASSET. WHAT IS GIVEN TO THE RETIRING PARTNERS WAS MONEY REPRESENTING THE VALUE OF THEIR SHARE IN THE PARTNERSHIP. NO CAPITAL ASSET WAS TRANSFERRED ON THE DATE OF RETIREMENT. IN ABSENCE OF DISTRIBUTION OF CAPITAL ASSET AND IN ABSENCE OF TRANSFER OF CAPITAL ASSET IN FAVOUR OF RETIRING PARTNERS, NO PROFIT OF GAIN AROSE IN THE HANDS OF PARTNERSHIP FIRM. ' (UNDERLINED FOR EMPHASIS BY US) 26. THE AFORESAID DISCUSSION BY THE HON'BLE HIGH COURT CLEARLY REVEALS THAT MERE A REVALUATION OF ASSETS AND SUBSEQUENT WI THDRAWAL OF THE REVALUED AMOUNT CANNOT LEAD TO THE INFERENCE THAT THERE WAS DISTRIBUTION OF ASSETS BY THE FIRM. 27. BEFORE PARTING, WE MAY ALSO REFER TO THE RELIANCE PLACED BY THE ASSESSING ON THE DECISION OF THE HON'BLE SUPREME COURT IN CASE OF CIT V. DEWAS CINE CORPORATION (SUPRA). IN OUR VIEW, THE SAID DECISION IS DISTINGUISHABLE ON FACTS AS THE SAID DECISION WAS PERTAINING TO DEPRECIATION OF ASSETS AND NOT ON REVALUATION OF ASSETS OR DISTRIBUTION OF ASSET AND HENCE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 28. SIMILARLY, THE CIT(A) HAS ALSO RELIED UPON THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN CASE OF CIT V. GURUNATH TALKIES (SUPRA) WHEREIN, SUBSEQUENT TO REVALUATION OF ASSETS THERE WAS RETIREMENT OF OLD PARTNERS AND ADMISSION OF NE W PARTNERS. THE HON'BLE HIGH COURT HELD THAT RECONSTITUTION OF THE FIRM WOULD INVOLVE TRANSFER OF ASSETS. NOTABLY, IN THE PRESENT CASE THERE IS NO EVENT OF RETIREMENT 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 DEC ISIONS 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 ME RITS OF THE CASE. HENCE, THE CIT(A) IS WRONG IN SAYING THAT THE JUDGEMENT IN CASE OF CIT V. MANGALORE GANESH BEEDI WORKS (SUPRA) HAS BEEN SET ASIDE BY THE HON'BLE SUPREME COURT ON MERITS. 29. THE CIT(A) ALSO RELIED ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF MRS. ARATHI SHENOY V. JT. CIT (SUPRA). IN THIS REGARD, IT IS NOTED THAT THE ISSUE BEFORE THE SPECIAL BENCH WAS OF TAXABILITY IN THE HANDS OF PARTNER WHO WAS SURRENDERING HER RIGHTS AND INTEREST IN THE FIRM ON RETIREMENT. IN THE INST ANT CASE, THE ISSUE IS INVOKING OF SECTION 45(4) OF THE ACT IN THE HANDS OF FIRM AND, HENCE THE FACT SITUATION IS COMPLETELY DIFFERENT FROM THE CASE BEFORE THE SPECIAL BENCH. ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 23 30. IN VIEW OF OUR ABOVE DISCUSSION, ON THE FACTS BEFORE US AND THE LEGAL POSITI ON NOTED BY US, WE DO NOT AGREE WITH THE CONCLUSION ARRIVED AT BY BOTH, THE ASSESSING OFFICER AS WELL AS THE CIT(A) THAT IN THE PRESENT CASE THERE WAS TRANSFER OF ASSETS AND THUS, PROVISIONS OF SECTION 45(4) OF THE ACT WERE APPLICABLE. WE THUS SET - ASIDE TH E ORDER OF CIT(A) AND DELETE THE ADDITION MADE BY THE ASSESSING OFFICER U/S 45(4) OF THE ACT. WE HAVE DELIBERATED AT LENGTH ON THE ISSUE UNDER CONSIDERATION, AND FIND , THAT THE ISSUE INVOLVED IN THE CASE BEFORE US IS SQUARELY COVERED BY THE AFORESAID ORDER PASSED BY THE TRIBUNAL IN THE CASE OF THE SISTER CONCERN OF THE ASSESSEE, VIZ. M/S AMAR D EO PLASTIC INDUSTRIES (SUPRA). ACCORDINGLY, RESPECTFULLY FOLLOWING THE VIEW THEREIN TAKEN BY THE TRIBUNAL, WE , HEREIN CONCLUDE , THAT THE REVALUATION OF THE ASSE TS OF THE FIRM AND CREDITING OF THE CAPITAL ACCOUNTS OF THE PARTNERS BY AN AMOUNT OF RS.96,18,000/ - (SUPRA) COULD NOT HAVE BEEN BROUGHT WITHIN THE MEANING OF SEC. 45(4) OF THE ACT. WE, THUS, IN TERMS OF OUR AFORESAID OBSERVATIONS SET - ASIDE THE ORDER OF THE CIT(A) AND VACATE THE ADDITION OF RS.96,18,000/ - MADE BY THE A.O U/S 45(4) OF THE ACT. 7. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS ALLOWED IN TERMS OF OUR AFORESAID OBSERVATIONS . ORDER PRO NOUNCED IN THE OPEN COURT ON 23 .06.2021 SD/ - SD/ - M. BALAGANESH RAVISH SOOD (ACCOUNTANT MEMBER) ( JUDICIAL MEMBER) MUMBAI, DATE: 23 .0 6 .2021 PS: ROHIT ITA NO.1994/MUM/2017 A.Y. 2010 - 11 M/S INDIAN EXTRUSIONS VS. ACIT - 24(3) 24 COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. DR C BENCH, ITAT, MUMBAI 6. GUARD FILE BY ORDER, DY./ASST. REGISTRAR ITAT, MUMBAI