M/s. Bhaggyam Builders, CHENNAI V. ACIT, CHENNAI

ITA 2614/CHNY/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4996 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 01-08-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 09-09-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Fair market value
• Section: 2(14); 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI . , , BEFORE SHRI DUVVURU RL REDDY , JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NO. 2614/MDS/2016 / ASSESSMENT YEAR : 2010-11 M/S. BHAGGYAM BUILDERS, NO. 20, RAMAN STREET, T. NAGAR, CHENNAI 600 017. [PAN: AABFB 1568F] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, NON CORPORATE CIRCLE -1, CHENNAI. ( / APPELLANT) ( / RESPONDENT) '( / APPELLANT BY : SHRI. S. SRIDHAR, ADVOCATE +,'( / RESPONDENT BY : SHRI. N. MADHAVAN, ADDL. CIT ( /DATE OF HEARING : 25.10.2017 ( /DATE OF PRONOUNCEMENT : 22.01.2018 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THIS IS AN APPEAL AGAINST THE ORDER OF THE COMMISSI ONER OF INCOME TAX (APPEALS)-2, CHENNAI IN ITA NO. 65/CIT(A )-2/2013-14 DATED 29.07.2016 FOR ASSESSMENT YEAR 2010-11. :-2-: ITA NO. 2614/MDS/2016 2. MRS. B. SAKUNTHALA RAN A PROPRIETARY BUSINESS IN THE NAME OF M/S. BHAGGYAM BUILDERS FROM 1993 ONWARDS. THIS PROPRIET ARY CONCERN WAS CONVERTED INTO A PARTNERSHIP FIRM W.E.F. 01.05.2003 IN THE SAME NAME OF M/S. BHAGGYAM BUILDERS ADMITTING HER SON AND DAUGHTER AS PARTNERS. AT THE TIME OF CONVERSION, THE PROPERTY MEASURING 1120 SQ.FT. A T NEW BOAG ROAD, PURCHASED ON 04.03.1996 BY MRS. B. SAKUNTHALA FOR A CONSIDERATION OF RS. 4,32,000/- VIDE DOC 40496/1996 STOOD IN HER NAME, WAS SHOWN AS A FIXED ASSETS IN THE SCHEDULE OF M/S. BHAGGYAM BUILDERS, A PARTNERSHIP FIRM. 3. DURING ASSESSMENT YEAR 2010-11, THIS ASSET WAS T RANSFERRED TO HER INDIVIDUAL ACCOUNT IN ORDER TO SETTLE THE PROPERTY AND THIS TRANSACTION WAS REFLECTED IN THE FIXED ASSET SCHEDULE APPENDED TO T HE BALANCE SHEET AS ON 31.03.2010 OF M/S. BHAGGYAM BUILDERS. BY SETTLEMEN T DEEDS DATED 14.07.2010 (DOC NOS. 1523& 1524/2010 & DATED 14.07. 2011. MRS.SAKUNTHALA SETTLED THAT PROPERTY IN FAVOUR OF HER DAUGHTER & S ON, RESPECTIVELY. SINCE, THE FIRM TRANSFERRED THE PROPERTY AS ON 31.03.2010 TO M RS. B. SAKUNTHALA, THE AO HELD THAT THE FIRM/PARTNERS RIGHT IN THE SAID PROP ERTY WAS RELINQUISHED OR EXTINGUISHED WHICH AMOUNTS TO TRANSFER U/S. 2(47) A ND HENCE ADOPTING THE GUIDELINE VALUE AS ON 31.03.2010 AS THE SALE CONSID ERATION, THE AO BROUGHT TO TAX THE LTCG. AGGRIEVED, THE ASSESSEE FILED AN APP EAL BEFORE THE CIT(A). THE CIT(A) HELD THAT THE CASE LAWS RELIED ON BY THE ASSESSEE ARE NOT APPLICABLE AS THE SUB SECTIONS (3) & (4) OF SECTION 45 WERE INSERTED BY THE :-3-: ITA NO. 2614/MDS/2016 FINANCE ACT, 1987 W.E.F. 01.04.1988 AIMING TO BRING TO TAX NET, THE TRANSACTIONS WHERE BY THE ASSETS, WHICH WERE BROUGH T INTO OR TAKEN OUT OF THE FIRM. RELYING ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ITO VS INTERNATIONAL RUBBER & PLASTICS (2010) 127 ITR 347 (CHENNAI), SHE HELD THAT, WHEN A FIRM IS IN EXISTENCE AND THERE IS A TRANSFER OF CAPITAL ASSETS, THE EXPRESSION AFTER WISE APPEARING IN SECTION 45(4) I S APPLICABLE & THE OBJECT OF THE AMENDMENT WAS TO REMOVE THE LOOPHOLE WHICH HAS EXISTED WHEREBY CAPITAL GAINS TAX WAS NOT CHANGEABLE. AGGRIEVED AG AINST THE ORDER OF THE CIT(A), THE ASSESSEE FILED THIS APPEAL CHALLENGING THE DECISION OF THE CIT(A). 4. THE AR TAKING US THROUGH THE PAPER BOOK SUBMITTE D THE ABOVE FACTS AND THE RELEVANT BOOK ENTRIES. IT IS SEEN THAT THE IMPUGNED ASSET VALUE AT RS. 5,02,000/- IS DEDUCTED FROM MRS. B. SAKUNTHALA, PAR TNERS CAPITAL ACCOUNT AS ON 31.03.2010 AND THUS, THE FACT RECORDED BY AO & S USTAINED BY THE CIT(A) STOOD CONFIRMED. THE AR RELYING ON VARIOUS DECISIO NS REPORTED IN 142 ITR 792 (MAD), 211 ITR 781 (MAD), 234 ITR 635 (MAD), 241 IT R 668(MAD) SUBMITTED THAT DURING THE SUBSISTENCE OF PARTNERSHIP, NO IMMO VABLE PROPERTY OF THE FIRM CAN BE TRANSFERRED TO PARTNERS BY MERE BOOK ENTRIES AND SUCH TRANSFER REQUIRED REGISTRATION ETC. FURTHER, THE AR RELYING ON THE DECISION REPORTED IN 383 ITR 258 (MAD) WHEREIN IT IS HELD THAT WHEN PART NERSHIP FIRM IS TRANSFERRED INTO A COMPANY , THERE IS NO TRANSFER OF CAPITAL AS SET AS CONTEMPLATED BY SECTION 45(1) AND HENCE SUBMITTED THAT THE IMPUGNED TRANSACTION IS NOT A :-4-: ITA NO. 2614/MDS/2016 TRANSFER. FURTHER, THE AR RELYING ON THIS TRIBUNAL DECISION IN THE CASE OF ACIT VSGOYAL DRESSES IN ITA NO. 1478/MDS/2007 FOR ASSESS MENT YEAR 2004-05 DATED 22.08.2008, REPORTED IN 126 ITD 131 CONTENDED THAT CAPITAL GAIN IS NOT CHARGEABLE TO TAX ALSO FOR THE REASON THAT THE TRAN SFER OF PROPERTY TO THE RETIRING PARTNER WAS NECESSITATED ON ACCOUNT OF FAM ILY ARRANGEMENT TO AVOID A POSSIBLE DISPUTE. PER CONTRA, THE DR SUPPORTED THE ORDERS OF LOWER AUTHORITIES AND THEIR RELIANCE ON THIS TRIBUNAL DECISION IN THE CASE OF ITO VS INTERNATIONAL RUBBER & PLASTICS, SUPRA. FURTHER, THE DR SUBMITTE D THAT THE ASSESSEE HAS NOT LAID ANY MATERIAL TO SAY WHAT WAS THE ACCOUNTIN G TREATMENT IN ASSESSMENT YEAR 2004-05 WHEN THE PROPRIETARY BUSINESS WAS CONV ERTED INTO PARTNERSHIP BUSINESS. WHEN THE ASSETS BROUGHT INTO THE FIRM IS TRANSFERRED TO ONLY ONE OF THE PARTNERS, EXTINGUISHMENT HAPPENS, WHICH IS A TR ANSFER, AND HENCE THE ASSESSEE IS LIABLE FOR CAPITAL GAIN. 5. WE HEARD THE RIVAL SUBMISSIONS, GONE THROUGH REL EVANT ORDERS AND MATERIAL. THE FACT REMAINS THAT MRS.SAKUNTHALA BRO UGHT HER PROPRIETARY CONCERN INTO A PARTNERSHIP FIRM WITH HER SON AND DA UGHTER DURING ASSESSMENT YEAR 2004-05 WHICH COMPRISED ALL THE ASSETS AND LI ABILITIES INCLUDING THE IMPUGNED ASSET, AND THEN ONWARDS IT WAS COMMON PRO PERTY OF ALL THE PARTNERS. DURING ASSESSMENT YEAR 2010-11, THE IMPU GNED ASSET IS TRANSFERRED TO HER AND SUBSEQUENTLY IN ASSESSMENT YEAR 2011-12 THAT PROPERTY WAS ALSO REGISTERED IN THE NAME OF HER SON & DAUGHTER. THE ASSESSEE COULD NOT LAY :-5-: ITA NO. 2614/MDS/2016 ANY MATERIAL FOR DISPUTE ETC., AND HENCE THE CASE L AW RELIED ON BY THE ASSESSEEIS NOT APPLICABLE TO THE FACTS OF THIS CASE . THE OTHER DECISIONS WERE RENDERED BEFORE THE INSERTION OF SUB SECTIONS (3) & (4) OF 345 BY THE FINANCE ACT, 1987 AND HENCE THEY ARE NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THIS CASE. THIS TRIBUNAL IN THE CASE OF SHARADHATE NNY PRODUCTS LTD VS ACIT FOR ASSESSMENT YEAR 2009-10 DATED 18.03.2016 REPOR TED IN 180 TTJ 284 RECORDED THE SCOPE OF THE ABOVE AMENDMENT, THE RELE VANT PORTION IS EXTRACTED AS UNDER: 6.2 AT THIS POINT OF TIME, IT IS APPROPRIATE TO R EFER TO CERTAIN PROVISIONS OF THE ACT RELEVANT TO THE FACTS OF THE PRESENT CASE. 6.2.1 SECTION 2(47) DEFINES WHAT IS TRANSFER AND IT READS AS FOLLOWS : '(47) 'TRANSFER', IN RELATION TO A CAPITAL ASSET, I NCLUDES, (I) THE SALE, EXCHANGE OR RELINQUISHMENT OF THE ASS ET; OR (II) THE EXTINGUISHMENT OF ANY RIGHTS THEREIN; OR (III) THE COMPULSORY ACQUISITION THEREOF UNDER ANY LAW; OR (IV) IN A CASE WHERE THE ASSET IS CONVERTED BY THE OWNER THEREOF INTO, OR IS TREATED BY HIM AS, STOCK-IN-TRADE OF A BUSINESS CAR RIED ON BY HIM, SUCH CONVERSION OR TREATMENT; (V) ANY TRANSACTION INVOLVING THE ALLOWING OF THE P OSSESSION OF ANY IMMOVABLE PROPERTY TO BE TAKEN OR RETAINED IN PART PERFORMANCE OF A CONTRACT OF THE NATURE REFERRED TO IN SECTION 53A O F THE TRANSFER OF PROPERTY ACT, 1882 (4 OF 1882); OR (VI) ANY TRANSACTION (WHETHER BY WAY OF BECOMING A MEMBER OF OR ACQUIRING SHARES IN, A COOPERATIVE SOCIETY, COMPANY OR OTHER AOP OR BY WAY OF ANY AGREEMENT OR ANY ARRANGEMENT OR IN ANY OTHER MANNER WHATSOEVER) WHICH HAS THE EFFECT OF TRANSFERRING, OR ENABLING THE ENJ OYMENT OF, ANY IMMOVABLE PROPERTY.' EXPLANATION : FOR THE PURPOSES OF SUB-CLS. (V) AND (VI), 'IMMOVABLE PROPERTY' SHALL HAVE THE SAME MEANING AS IN CLAUSE (D) OF SECTION 269UA.' 6.2.2 SECTION 2(14) DEFINES CAPITAL ASSET, AS MEANI NG 'PROPERTY' OF ANY KIND HELD BY THE ASSESSEE, WHETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION. THE ABOVE EXHAUSTIVE DEFINITION IS SUBJ ECT TO THE FOLLOWING EXCLUSIONS LIKE STOCK-IN-TRADE, CONSUMABLE STORES O R RAW MATERIAL HELD FOR :-6-: ITA NO. 2614/MDS/2016 THE PURPOSE OF BUSINESS OR PROFESSION, PERSONAL EFF ECTS, AGRICULTURAL LAND IN INDIA, CERTAIN GOLD BONDS, SPECIAL BEARER BONDS AND GOLD DEPOSIT BONDS. THE SHARE OR INTEREST OF A PARTNER IN THE PARTNERSHIP A ND ITS ASSETS WOULD BE PROPERTY AND, THEREFORE, A CAPITAL ASSET WITHIN THE MEANING OF THE AFORESAID DEFINITION. TO THIS EXTENT, THERE CAN BE NO DOUBT. THE NEXT QUESTION IS AS TO WHETHER IT CAN BE SAID THAT THERE WAS A TRANSFER OF CAPITAL ASSET BY THE RETIRING PARTNER IN FAVOUR OF THE FIRM AND ITS CONT INUING PARTNERS SO AS TO ATTRACT A CHARGE UNDER SECTION 45 OF THE ACT. A LOO K AT HOW FORMATION AND DISSOLUTION OF PARTNERSHIP WAS USED AS A DEVICE TO EVADE TAX ON CAPITAL GAINS TO CONVERT AN ASSET HELD INDIVIDUALLY INTO AN ASSET OF THE FIRM IN WHICH THE INDIVIDUAL IS A PARTNER AND CONVERSION OF CAPITAL A SSETS INTO INDIVIDUAL ASSETS ON DISSOLUTION OR OTHERWISE, IS NECESSARY. 6.2.2.1 PARTNERSHIP IS A FORM OF CARRYING ON BUSINE SS EVOLVED SO THAT TWO OR MORE PERSONS CAN TO JOIN TOGETHER BY POOLING RESOUR CES IN THE FORM OF CAPITAL AND EXPERTISE. ONE OF THE DEVICES USED BY ASSESSEE TO EVADE TAX ON CAPITAL GAIN WAS TO CONVERT IN ASSET HELD INDIVIDUALLY INTO ASSET OF THE FIRM IN WHICH THE INDIVIDUAL IS A PARTNER. SIMILARLY, PARTNERSHIP ASSETS WERE CONVERTED INTO INDIVIDUAL ASSETS ON DISSOLUTION OR OTHERWISE. 6.2.2.2 SUCH INTRODUCTION OF CAPITAL ASSET AS CAPIT AL CONTRIBUTION BY A PARTNER UP TO 1ST APRIL, 1988 DID NOT RESULT IN INCIDENCE O F CAPITAL GAIN. IT WAS SO HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF SU NIL SIDDHARTHBHAI V. CIT [1985] 156 ITR 509. THE HON'BLE SUPREME COURT HELD THAT UNDER THE IT ACT, 1961, WHERE A PARTNER OF A FIRM MAKES OVER CAPITAL ASSETS WHICH ARE HELD BY HIM TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPITAL, THERE IS A TRANSFER OF A CAPITAL ASSET WITHIN THE TERMS OF SECTION 45 OF THE ACT, BECAUSE AN EXCLUSIVE INTEREST OF THE PARTNER IN PERSONAL ASSETS IS REDUC ED, ON THEIR ENTRY INTO THE FIRM, INTO A SHARE INTEREST. ON SUCH INTRODUCTION O F CAPITAL THE PARTNER'S CAPITAL ACCOUNT IS CREDITED WITH THE MARKET VALUE O F THE PROPERTY. SUCH ENTRY DOES NOT REPRESENT THE TRUE VALUE OF CONSIDERATION. IT IS A NOTIONAL VALUE ONLY, INTENDED TO BE TAKEN INTO ACCOUNT AT THE TIME OF DETERMINING THE VALUE OF THE PARTNER'S SHARE IN THE NET PARTNERSHIP ASSET S ON THE DATE OF DISSOLUTION OR ON HIS RETIREMENT, A SHARE WHICH WILL DEPEND UPO N DEDUCTION OF THE LIABILITIES AND PRIOR CHARGES EXISTING ON THE DATE OF DISSOLUTION OR RETIREMENT. IT IS NOT POSSIBLE TO PREDICATE BEFORE HAND WHAT WI LL BE THE POSITION IN TERMS OF MONETARY VALUE OF A PARTNER'S SHARE ON THAT DATE . AT THAT TIME WHEN THE PARTNER TRANSFERS HIS PERSONAL ASSET TO THE PARTNER SHIP FIRM, THERE CAN BE NO RECKONING OF THE LIABILITIES AND LOSSES WHICH THE F IRM MAY SUFFER IN THE YEARS TO COME. ALL THAT LIES WITHIN THE WOMB OF THE FUTUR E. IT IS IMPOSSIBLE TO CONCEIVE OF EVALUATING THE CONSIDERATION ACQUIRED B Y THE PARTNER WHEN HE BRINGS HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM WHEN NEITHER CAN THE DATE OF DISSOLUTION OR RETIREMENT BE ENVISAGED NOR CAN T HERE BE ANY ASCERTAINMENT OF LIABILITIES AND PRIOR CHARGES WHIC H MAY NOT HAVE EVEN ARISEN YET. THEREFORE, THE CONSIDERATION WHICH A PA RTNER ACQUIRES ON MAKING OVER HIS PERSONAL ASSET TO THE FIRM AS HIS CONTRIBU TION TO ITS CAPITAL CANNOT FALL WITHIN THE TERMS OF SECTION 48 OF THE ACT. AND AS THAT PROVISION IS FUNDAMENTAL TO THE COMPUTATION MACHINERY INCORPORAT ED IN THE SCHEME RELATING TO THE DETERMINATION OF THE CHARGE PROVIDE D IN SECTION 45, SUCH A CASE MUST BE REGARDED AS FALLING OUTSIDE THE SCOPE OF CAPITAL GAINS TAXATION :-7-: ITA NO. 2614/MDS/2016 ALTOGETHER. IN COMING TO THE ABOVE CONCLUSION THE H ON'BLE COURT RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN ADDANK INARAYANAPPA V. BHASKARAKRISHNAPPA AIR 1966 SC 1300. THE HON'BLE SU PREME COURT IN THE SAID DECISION EXPLAINED THE NATURE OF PARTNERSHIP A ND THE RIGHT OF THE PARTNERS OVER THE ASSETS OF THE PARTNERSHIP AS FOLL OWS: '.... WHATEVER MAY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY THE PARTNERS WHEN THE PARTNERSHIP IS FORMED OR WHIC H MAY BE ACQUIRED IN THE COURSE OF THE BUSINESS OF THE PARTNERSHIP IT BE COMES THE PROPERTY OF THE FIRM AND WHAT A PARTNER IS ENTITLED TO IS HIS SHARE OF PROFITS, IF ANY, ACCRUING TO THE PARTNERSHIP FROM THE REALISATION OF THIS PRO PERTY, AND UPON DISSOLUTION OF THE PARTNERSHIP TO A SHARE IN THE MONEY REPRESEN TING THE VALUE OF THE PROPERTY. NO DOUBT, SINCE A FIRM HAS NO LEGAL EXIST ENCE, THE PARTNERSHIP PROPERTY WILL VEST IN, ALL THE PARTNERS, AND IN THA T SENSE EVERY PARTNER WAS AN INTEREST IN THE PROPERTY OF THE PARTNERSHIP. 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 SPE CIFIC ITEM OF THE PARTNERSHIP PROPERTY TO ANYONE. HIS RIGHT IS TO OBT AIN SUCH PROFITS, IF ANY, AS FALL TO HIS SHARE FROM TIME TO TIME AND UPON THE DI SSOLUTION OF THE FIRM TO L SHARE IN THE ASSETS OF THE FIRM WHICH REMAIN AFTER SATISFYING THE LIABILITIES SET OUT IN CLAUSE (A) AND SUB CLS. (I), (II) AND (III) OF CLAUSE (B) OF SECTION 48.' 6.2.3 THE POSITION WAS LATER EXPLAINED IN THE SAME JUDGMENT AS FOLLOWS: 'THE WHOLE CONCEPT OF PARTNERSHIP IS TO ENTRY UPON A JOINT VENTURE AND FOR THAT PURPOSE TO BRING IN AS CAPITAL MONEY OR EVEN P ROPERTY INCLUDING IMMOVABLE PROPERTY. ONCE THAT IS DONE WHATEVER IS B ROUGHT IN WOULD CEASE TO BE THE EXCLUSIVE PROPERTY OF THE PERSON WHO BROU GHT IT IN. IT WOULD BE THE TRADING ASSET OF THE PARTNERSHIP IN WHICH ALL THE P ARTNERS WOULD HAVE INTEREST IN PROPORTION TO THEIR SHARE IN THE JOINT VENTURE O F THE BUSINESS OF PARTNERSHIP. THE PERSON WHO BROUGHT IT IN WOULD, TH EREFORE, NOT BE ABLE TO CLAIM OR EXERCISE ANY EXCLUSIVE RIGHT OVER ANY PROP ERTY WHICH HE HAS BROUGHT IN, MUCH LESS OVER ANY OTHER PARTNERSHIP PROPERTY. HE WOULD NOT BE ABLE TO EXERCISE HIS RIGHT EVEN TO THE EXTENT OF HIS SHARE IN THE BUSINESS OF THE PARTNERSHIP. AS ALREADY STATED, HIS RIGHT DURING TH E SUBSISTENCE OF THE PARTNERSHIP IS TO GET HIS SHARE OF PROFITS FROM TIM E TO TIME AS MAY BE AGREED UPON AMONG THE PARTNERS AND AFTER THE DISSOLUTION O F THE PARTNERSHIP OR WITH HIS RETIREMENT FROM PARTNERSHIP OF THE, OF HIS SHAR E IN THE NET PARTNERSHIP ASSETS AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER A DEDUCTION OF LIABILITIES AND PRIOR CHARGES.' 6.2.4 PARLIAMENT WITH THE AVOWED OBJECT OF BLOCKING THIS ESCAPE ROUTE FOR AVOIDING CAPITAL GAINS TAX BY THE FINANCE ACT, 1987 , INTRODUCED SUB-SECTION (3) TO SECTION 45 W.E.F. 1ST APRIL, 1988. THE EFFEC T OF THIS WAS THAT THE PROFITS AND GAINS ARISING FROM THE TRANSFER OF A CAPITAL AS SET BY A PARTNER TO A FIRM ARE CHARGEABLE AS THE PARTNER'S INCOME OF THE PREVI OUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND THE AMOUNT RECORDED IN THE BOOKS OF ACCOUNT OF THE FIRM, SHALL BE DEEMED TO BE THE FULL VALUE OF CONSI DERATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER OF THE CAPITAL ASS ET. :-8-: ITA NO. 2614/MDS/2016 6.2.5 IN THE CASE OF DISSOLUTION WHERE PARTNERS ARE ALLOTTED CAPITAL ASSETS OF THE FIRM, IT WAS HELD THAT THERE WAS NO TRANSFER. I N MALABAR FISHERIES CO. V. CIT [1979] 120 ITR 49 /2 TAXMAN 409, THE HON'BLE S UPREME COURT HAS EXPLAINED THE NATURE OF DISTRIBUTION OF ASSETS OF A PARTNERSHIP ON DISSOLUTION AMONGST ITS PARTNERS AND AS TO WHETHER SUCH DISTRIB UTION OF ASSETS WOULD CONSTITUTE TRANSFER WITHIN THE MEANING OF SECTION 2 (47) OF THE IT ACT AS FOLLOWS : 'A PARTNERSHIP FIRM UNDER THE INDIAN PARTNERSHIP AC T, 1932 IS NOT A DISTINCT LEGAL ENTITY APART FROM THE PARTNERS CONSTITUTING I T AND EQUALLY IN LAW THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN T HE PARTNERSHIP ASSETS AND WHEN ONE TALKS OF THE FIRM'S PROPERTY OR FIRM'S ASS ETS ALL THAT IS MEANT IS PROPERTY OR ASSETS IN WHICH ALL PARTNERS HAVE A JOI NT OR COMMON INTEREST. IF THAT BE THE POSITION IT IS DIFFICULT TO ACCEPT THE CONTENTION THAT UPON DISSOLUTION THE FIRM'S RIGHTS IN THE PARTNERSHIP AS SETS ARE EXTINGUISHED. THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN T HE PARTNERSHIP ASSETS BUT IT IS THE PARTNERS WHO OWN JOINTLY BY OR IN COMMON THE ASSETS OF THE PARTNERSHIP AND, THEREFORE, THE CONSEQUENCE OF THE DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TO THE PARTNERS WHICH FLOWS UPO N DISSOLUTION AFTER DISCHARGE OF LIABILITIES IS NOTHING BUT A MUTUAL AD JUSTMENT OF RIGHTS BETWEEN THE PARTNERS AND THERE IS NO QUESTION OF ANY EXTING UISHMENT OF THE FIRM'S RIGHTS IN THE PARTNERSHIP ASSETS AMOUNTING TO A TRA NSFER OF ASSETS WITHIN THE MEANING OF SECTION 2(47) OF THE ACT. FURTHER, IT IS NECESSARY THAT THE SALE OR TRANSFER OF ASSETS MUST BE BY THE ASSESSEE TO A PER SON. NOW EVERY DISSOLUTION MUST IN POINT OF TIME BE ANTERIOR TO TH E ACTUAL DISTRIBUTION, DIVISION OR ALLOTMENT OF THE ASSETS THAT TAKES PLAC E AFTER MAKING UP ACCOUNTS AND DISCHARGING THE DEBTS AND LIABILITIES DUE BY TH E FIRM. UPON DISSOLUTION THE FIRM CEASES TO EXIST, THEN FOLLOWS THE MAKING U P OF ACCOUNTS, THEN THE DISCHARGE OF DEBTS AND LIABILITIES AND THEREUPON DI STRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TAKES PLACE INTER SE BETWEEN TH E ERSTWHILE PARTNERS BY WAY OF MUTUAL ADJUSTMENT OF RIGHTS BETWEEN THEM. TH E DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TO THE ERSTWHILE PARTNERS, I S NOT DONE BY THE DISSOLVED FIRM. IN THIS SENSE THERE IS NO TRANSFER OF ASSETS BY THE ASSESSEE (DISSOLVED FIRM) TO ANY PERSON.' 6.2.6 TO PLUG THIS LOOPHOLE THE FINANCE ACT, 1987, BROUGHT ON THE STATUTE BOOK A NEW SUB-SECTION (4) IN SECTION 45 OF THE ACT , W.E.F. 1ST APRIL, 1988, WHICH READS AS FOLLOWS: 'THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION O F A FIRM OR OTHER AOP OR BOI (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCI ATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLAC E AND, FOR THE PURPOSES OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON T HE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDE RATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER.' 6.2.7 BEFORE THE INTRODUCTION OF SUB-SECTION (4) TO SECTION 45, THERE WAS CLAUSE (II) OF SECTION 47 WHICH READ AS UNDER: :-9-: ITA NO. 2614/MDS/2016 'ANY DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUT ION OF A FIRM, BODY OF INDIVIDUALS OR OTHER ASSOCIATION OF PERSONS.' SECTION 47 OF THE ACT LAYS DOWN WHICH ARE THE TRANS ACTIONS NOT REGARDED AS TRANSFER FOR THE PURPOSE OF SECTION 45 OF THE ACT. 6.2.8 THE FINANCE ACT, 1987, W.E.F. 1ST APRIL, 1988 , OMITTED THIS CLAUSE, THE EFFECT OF WHICH WAS THAT DISTRIBUTION OF CAPITAL AS SETS ON THE DISSOLUTION OF A FIRM WOULD W.E.F. 1ST APRIL, 1988 BE REGARDED AS 'T RANSFER'. THEREFORE, INSTEAD OF AMENDING SECTION 2(47), THE AMENDMENT WA S CARRIED OUT BY THE FINANCE ACT, 1987, BY OMITTING SECTION 47(II), THE RESULT OF WHICH WAS THAT DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION O F A FIRM WAS REGARDED AS 'TRANSFER'. THE EFFECT WAS THAT THE PROFITS OR GAIN S ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A FIRM TO A PARTNER ON DISSOL UTION OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRM'S INCOME IN THE PREVIOUS YEA R IN WHICH THE TRANSFER TOOK PLACE AND FOR THE PURPOSES OF COMPUTATION OF C APITAL GAINS, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER W AS DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. IN THE CASE OF THE COMMISSIONER OF INCOME-TAX. VSSO THERN TUBES AND ANOTHER REPORTED IN 217 CTR 584 , THE KERALA HI GH COURT HELD THAT WHILE COUNSEL FOR THE REVENUE RELIED ON THE DECISIO NS OF THE ANDHRA PRADESH, BOMBAY AND KARNATAKA HIGH COURTS REPORTED IN RAJLAXMI TRADING CO. VS. CIT (2001) 169 CTR (AP) 140 : (2001) 250 ITR 581 (AP), CIT VS. A.N. NAIK ASSOCIATES (2004) 187 CTR (BOM) 162 : (20 04) 265 ITR 346 (BOM) AND SUVARDHAN VS. CIT (2006) 206 CTR (KAR) 22 6 : (2006) 287 ITR 404 (KAR) RESPECTIVELY, COUNSEL APPEARING FOR THE ASSE SSEES RELIED ON THE UNREPORTED DECISION OF THIS COURT IN IT REF. NOS. 2 35 AND 236 OF 1997, DT. 29TH FEB., 2002 AND THAT OF THE MADRAS HIGH COURT I N CIT VS. VIJAYALAKSHMI METAL INDUSTRIES (2002) 177 CTR (MAD) 43 : (2002) 256 ITR 540 (MAD). THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASS ESSEE FOLLOWING THE DECISION OF OTHER TRIBUNALS. THE TRIBUNAL HAS TAKEN THE VIEW THAT S. 2(47) DEFINING 'TRANSFER' DOES NOT TAKE IN THE CASE OF DI SSOLUTION OF A FIRM AND SINCE S. 45(4) IS NOT A SELF-CONTAINED CODE FOR ASS ESSMENT OF CAPITAL GAINS ARISING FROM THE TRANSFER OF CAPITAL ASSETS BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION OF THE FIRM, NO ASSESSMEN T IS PERMISSIBLE IN THE CASE OF THE ASSESSEE. WE ARE UNABLE TO AGREE WITH T HE VIEW TAKEN BY THE TRIBUNAL THAT S. 2(47) DOES NOT COVER DISSOLUTION A ND DISTRIBUTION OF ASSETS OF A FIRM BECAUSE SUB-CL. (VI) OF S. 2(47) COVERS EVER Y AGREEMENT OR ARRANGEMENT IN WHATEVER MANNER WHICH HAS THE EFFECT OF TRANSFERRING OR ENABLING ENJOYMENT OF ANY IMMOVABLE PROPERTY. * IN FACT THE TRANSACTIONS REFERRED TO IN THE LATTER PART OF CL. (VI) ARE EXHAU STIVE AND IN OUR VIEW THE SCOPE OF THE SECTION IS SUCH THAT IF THE RESULT OF ARRANGEMENT OR AGREEMENT OF A TRANSACTION IS A TRANSFER OF ASSETS OR ENABLING ENJOYMENT OF ANY IMMOVABLE PROPERTY, THEN THE TRANS ACTION WHICH LED TO SUCH RESULT IS A TRANSFER. IN THIS CASE THE DISSOLUTION DEED PROVIDES THAT LAND AND FACTORY BUILDING ON DISSOLUTION WILL DEVOLVE UPON ONE OF THE PARTNERS WHO WANTED TO CONTINUE BUSINESS AS A PROPR IETOR. DISSOLUTION DEED IS AN AGREEMENT AND IF THE PROVISIONS OF SUCH DEED PROVIDE FOR :-10-: ITA NO. 2614/MDS/2016 RELINQUISHMENT OF RIGHT OF ONE PARTNER ON THE ASSET S, NAMELY, IMMOVABLE PROPERTY IN FAVOUR OF ANOTHER PARTNER, THEN THE LAT TER BECOMES ABSOLUTE OWNER OF THE PROPERTY. *EMPHASIS SUPPLIED BY US . 6. THEREFORE, THE ASSESSEES CONTENTION THAT IT WOU LD NOT AMOUNT TO A TRANSFER HAS TO BE REJECTED. IT IS NOW CLEAR THAT W HEN THE ASSET IS TRANSFERRED TO A PARTNER, THAT FALLS WITHIN THE EXP RESSION 'OTHERWISE' AND THE RIGHTS OF THE OTHER PARTNERS IN THAT ASSET OF T HE PARTNERSHIP ARE EXTINGUISHED. CONSIDERING THE AMENDMENT, THERE IS C LEARLY A TRANSFER AND IF, THERE BE A TRANSFER, IT WOULD BE SUBJECT TO CAP ITAL GAINS TAX. IN THE ABOVE FACTS AND CIRCUMSTANCES, THE ORDER OF THE CIT (A) DOES NOT REQUIRE ANY INTERFERENCE AND THE ASSESSEES APPEAL GROUND S FAIL. 7. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. ORDER PRONOUNCED ON MONDAY, THE 22 ND DAY OF JANUARY, 2018 AT CHENNAI. SD/- ( . ' ) (DUVVURU RL REDDY) $% /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) % /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED: 22 ND JANUARY, 2018 JPV (+3454 /COPY TO: 1. ' / APPELLANT 2. +,' /RESPONDENT 3. 6 ) ( /CIT(A) 4. 6 /CIT 5. 4+ /DR 6. 9 /GF