Getting `firm’ on transfer gains
WHEN a person, on becoming a partner, brings in capital assets into the firm by way of capital contribution or otherwise, is he liable for capital gains tax? Similarly, when capital asset is distributed among partners on dissolution or otherwise, is there a liability on the firm for capital gains tax? In the Malabar Fisheries Ltd (120 ITR 49) and Karthikeya Sarabai (154 ITR) cases, the Supreme Court addressed these issues, but the decision went against the Revenue.
The only contention advanced is that Section 2(47) has not been amended and consequently, even if Section 45(4) has been brought in by the amendment yet there is no transfer. In our opinion, that would not be the correct position. First, the definition of transfer itself is inclusive. Before the introduction of sub-section (4), there was clause (ii) of Section 47 which reads thus:
“Any distribution of capital assets on the dissolution of a firm, body of individuals or other association or persons.”
Considering this clause as earlier contained in Section 47, it meant that the distribution of capital assets on the dissolution of the firm, and so on, were not regarded as “transfer”. The Finance Act, 1987 with effect from April 1, 1988, omitted this clause, the effect of which is that the distribution of capital assets on the dissolution of a firm would henceforth be regarded as `transfer’.
Therefore, instead of amending Section 2(47), the amendment was carried out by the Finance Act, 1987, by omitting Section 47(ii), the result of which is that distribution of capital assets on the dissolution of a firm would be regarded as `transfer’.
Thus, the contention that it would not amount to a transfer has to be rejected.
It is now clear that when the asset is transferred to a partner, that falls within the expression `otherwise’ and the rights of the other partners in that asset of the partnership are extinguished.
That was the position earlier as well, but considering that on retirement the partner only got his share, it was held that there was no extinguishment of right.
Considering the amendment, there is clearly a transfer, and if there be a transfer, it would be subject to capitals gains tax.
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