ITAT, BENCH ‘A’ Applicability of section 45(4) of IT Act, 1961 in case of distribution of capital asset on retirement of one partner

Applicability of section 45(4) of IT Act, 1961 in case of distribution of capital asset on retirement of one partner



The term used in section 45(4) ‘distribution of capital assets on the dissolution of a firm or otherwise’ cannot be extrapolated to bring retirement of one partner into the ambit of this section.





ITAT, BENCH ‘A’ CHENNAI

ACIT

v.

Goyal Dresses

ITA No. 1478/Mds/2007

August 22, 2008

RELEVANT EXTRACTS:

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9. Now, the core of dispute here is whether the term 'distribution of capital assets on the dissolution of a firm or other Association of Persons or Body of Individuals or otherwise' would include retirement of a partner from a firm. Hon'ble Bombay High Court in A.N. Naik's case cited above was dealing with a case of transfer of assets to retiring partners. The Hon'ble High Court had held that the transfer of assets of the partnership to the retiring partners would amount to the transfer of capital assets in the nature of capital gains and business profits which were chargeable to tax u/s 45(4). ITAT, Chennai Benches in the case of G.K. Enterprises case had held that, Section 45(4) would have no application in the case of retirement of a partner.

10. Hon'ble Kerala High Court in the Kunnamkulam case cited above was dealing with a case where there was a change in the constitution of the firm with the retirement of five partners after receiving the credit balance in their accounts, that there had been a revaluation of the assets and it was the enhanced value of the assets that was credited equally in their accounts. The Assessing Officer was of the opinion that five partners taking enhanced value for the assets on retirement amounted to a transfer of capital asset u/s 45(4). The CIT and the Tribunal were of the opinion that Section 45(4) was not applicable in this case and this view was confirmed by the Hon'ble Kerala High Court. The Hon'ble High Court on p.547 has held as under:-

"Likewise, if a partner retires he does not transfer any right in the immovable property in favour of the surviving partner because he had not specific right with respect to the properties of the firm. What transpires is the right to share the income of the properties stood transferred in favour of the surviving partners, and there is no transfer of ownership of the property in such cases."

In the background of aforesaid discussion we find that in the cases being dealt with by the Hon'ble High Courts above, there was retirement of more than one partner. However, in the present case, there is retirement of only one partner. Hon'ble Apex Court exposition on the meaning of the term 'distribution' in the Punjab Distilling Industries Ltd. case cited above is relevant here. Hon'ble Apex Court has expounded that the expression 'distribution' necessarily involves the idea of division between several persons which is the same as payment to several persons. In this view of the matter, the term used in Section 45(4) 'distribution of capital assets on the dissolution of a firm or otherwise' cannot be extrapolated to bring retirement of one partner into the ambit of this Section.

11. Though there is a decision of the Chennai Tribunal in G.K. Enterprises case cited above which favours the assessee, the decision of Hon'ble Bombay High Court in A.N. Naik's case cited above has been claimed to be in favour of Revenue. We further find that there is a decision of Hon'ble Kerala High Court in the case of CIT Vs. Kunnamkulam Mill Board 257 ITR 544 which is in favour of the assessee. Admittedly, there is no Hon'ble Jurisdictional High Court decision on the issue. It is also not the case of the Revenue that ITAT decision in the G.K. Enterprises case has been reversed by the Hon'ble High Court. It has been only claimed that the case is pending before the Hon'ble High Court. We further find that Hon'ble Apex Court has held that in cases where two views are possible, the one favourable to the assessee should be adopted. CIT v. Podar Cements Ltd. and another 226 ITR 625 (SC) and Mysore Minerals Ltd. Vs. Commissioner of Income Tax 239 ITR 775 (SC). In the background of aforesaid discussion and precedent, we are of the opinion that there is no infirmity in the order of the learned Commissioner of Income Tax (Appeals) in holding that Section 45(4) is not attracted on the facts of this case.

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