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So long as there is no change in ownership of the firm and its properties, for the simple reason that the partnership of the firm stood reconstituted, there is no transfer of capital assets.
Income Tax Appellate Tribunal – Mumbai
A.R. Asher And 3 Others, Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'A' MUMBAI
BEFORE SHRI R.S. SYAL (AM) AND SMT ASHA VIJAYARAGHAVAN (JM)
The ITO 25(1)(3), A.R. Asher and 3 Others,
C-10, Pratyakshkar Bhavan, (Alies A.R. Asher & Co.),
BKC, Bandra (E), Devla Pada,
Mumbai-400 051 Vs. Borivali(W),
Appellant by: Shri Surendra Kumar
Respondent by: Shri Satish Mody
PER ASHA VIJAYARAGHAVAN (JM) This appeal filed by the Revenue is directed against the order of the Ld. CIT(A)-XXV Mumbai dated 7.7.2009 for the A.Y.2006-07.
2. Facts of the case are that the assessee is a partnership firm engaged in the business of supplying well water. The assessee firm is owning a piece of land admeasuring 2175 sq.mtrs situated at Magathane Village, Borivali. The well is constructed on this plot itself from where the water is supplied. The assessee firm was having four partners upto 31.1.2006. Five new partners were introduced on 1.2.2006 and the firm was reconstituted. Old four partners retired on 31.3.2006. Before 29.2.2006 plot owned by the firm was revalued at Rs. 36 lacs and the revaluation amount was transferred to the capital account of existing four partners in the capital sharing ratio i.e. 1/4th to each partner. The retiring partners when retired on 31.3.2006 carried away their capital which included revaluation amount of the plot in their capital account.
3. During the course of assessment proceedings, the Assessing Officer applied provisions of section 45(3) and 45(4) of the Income Tax Act in the light of judgment of Bombay High Court in the case of A.N. Naik & Associates 265 ITR 346 and computed Long Term Capital Gain of Rs 36 lacs.
4. Aggrieved assessee preferred an appeal before the Ld. CIT(A) and submitted as follows:
“During the course of appellate proceedings counsel of appellant filed that the appellant has not transferred the plot to the partners. The plot continues to be with the reconstituted firm even after 31.3.2006. Hence decision of Bombay High Court quoted in the proceding para would not be applicable to the case. He relied on the decision of ITAT Mumbai in the case of Smt. Paru D. Dave 110 ITD 410 and also decision of Kerala High Court in the case of CIT vs Kunnamkulam Mill Board 257 ITR 544.”
5. The Ld. CIT(A) held as follows:
“I have gone through the submissions. I have gone through all the three decisions one decision relied upon by the AO and two decisions relied upon by the appellant. Decision of Goa Bench of Bombay High Court in the case of A.N. Naik Associates & Others 265 ITR 346 held that in a case where Hindu Undivided partnership firm was reconstituted due to family settlement and some of the assets of the firm were distributed to the retiring partners and the firm continued with the other partners with some of the assets then it was held by Bombay High Court that section 45(3) and 45(4) of Income tax would be applicable in that case even though the firm was not dissolved as the retiring partners took away the assets of the firm. Handing over the assets to retiring partners would amount to ‘transfer’ within the meaning of section 2(47) and hence capital gain would be taxable. In the case of Smt. Paru D. Dave 110 ITD 410 (Mum) and Kerala High Court in the case of Kunnamkulam Mill Board 257 ITR 544. the facts were that some of the assets were revalued and the revalued surplus was transferred to the capital account of partners. When those partners retired they carried away that revaluation amount also as part of their interest in the firm while the firm continued with new partners and same assets. In the case of Paru D Dave, the findings given by Mumbai, ITAT are as under:
“The partnership firm is not a legal entity and property of the partnership vests in its partners in as much as all the partners have an interest in the partnership property. The partnership Act clearly provides that a property which is brought in by partners on the formation of partnership or acquired in the course of business of partnership, becomes the property of the firm. The partners of a firm are entitled to a share of the profits of the business to the extent of their profit sharing ratio.
During the subsistence of partnership no partner has any assigned right or share in the partnership property. During the continuance of the partnership the partners have only a right in the profits of the partnership and interest in each and every property of the partnership and interest in each and every property of the firm. No partner can deal with any portion of the partnership property as his own during the continuance of the partnership.
As the partners have no right in the assets of the partnership firm there is no transfer of any right in the said property on reconstitution retirement of a partner. In case any asset property is allocated to a partner in proportion to his share in the profits of the firm there is no partition or transfer taking place nor there is any relinquishment of interest of other partners in the allocated property, in the sense of transfer or extinguishment of interest as envisaged under 17 of the Registration Act”.
Kerala High Court also held similar findings in the case (quoted supra).
6. The Ld. CIT(A) further held as follows:
In the case of appellant the retiring partners did not take away the plot, but only took away the revalued amount i.e. their interest in the firm. The plot continued to be the property of the firm even after 31.3.2006 when the firm was reconstituted with the new partners. As no asset is transferred to the retiring partners decision of A.N. Naik (quoted supra) would not be applicable. The partners only took away their interest in the [profit of the partnership firm. They have not taken away the property of the firm. In view of above, capital gain taxed by the A.O. on retirement of the partners is not taxable. No capital gain would also be taxable on revaluation of plot as the plot was property of the firm since its inception which is clear from the partnership deed dated 15.6.1995. In view of above, addition is deleted and the appeal stands allowed”
7. The Ld. Departmental Representative relied on the order of the AO and insisted that the case of A.N. Naik & Associates 265 ITR 346 has to be followed.
8. The Ld. Counsel for the assessee Shri Satish Mody relied on the order of the Ld. CIT(A).
9. We heard both the parties. In the case of Smt. Paru D. Dave 110 ITD 410, the facts are as follows:
“Both the assesses were partners in a partnership firm having equal share in the profits of business. The firm owned a factory building which was shown at cost in the balance sheet from year to year and no depreciation was being claimed thereon. On 1.4.1993, the book value of the said factory building was reflected at Rs. 79,452. On 15.4.1993, the said building was revalued at Rs. 23 lakhs and the difference on account of revaluation of asset i.e. Rs. 22,20,548 was credited equally to the capital accounts of both the partners. On 29.4.1993, the firm was reconstituted by the admission of give new partners and total profit sharing ratio of the old partners was reduced to 5 per cent. Subsequently, both the partners had withdrawn a sum of Rs. 18,53,700 from their respective accounts. The said consideration received by the partners was treated as assignment and relinquishment of their respective shares in the partnership assets in favour of the new partners admitted to the reconstituted firm. The transaction was treated as transfer within the meaning of section 2(47) and the gain arising therefrom was held liable to be taxed as capital gains u/s. 45.”
10. Similarly, the Kerala High Court in the case of CIT Vs Kunnamkulam Mill Board 257 ITR 544 it has been held as follows:
“What is postulated u/s. 45(4) of the I.T. Act, 1961, is that 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 would be chargeable to tax as the income of the firm. Ownership of property does not change with the change in the constitution of the firm. As long as there is no change in ownership of the firm and its properties, for the simple reason that the partnership of the firm stood reconstituted, there is no transfer of capital assets. Likewise, if a partner retires he does not transfer any right in the immovable property in favour of a surviving partner because he had no specific right with respect to the properties of the firm. What transpires is that 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. When a partnership is reconstituted by adding a new partner, there is no transfer of assets within the meaning of Sec. 45(4).”
11. In the present case the assessee has not transferred the plot to the partners. The plot continues to be with the reconstituted firm even after 31.3.2006. Further revaluation by itself will not result in capital gain because there is no transfer. However, the cost of acquisition of plot of land to the firm will continue to be original cost of acquisition and not the revalued value. Following the decision in the case of Smt. Paru D. Dave 110 ITD 410 (supra) and CIT Vs Kunnamkulam Mill Board 257 ITR 544 (supra), we allow the assessee’s appeal.
12. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on this 11th day of February, 2011 Sd/- Sd/-
(R.S. SYAL) (ASHA VIJAYARAGHAVAN)
Accountant Member Judicial Member
Mumbai, Dated 11th February, 2011.
1. The Appellant
2. The Respondent
3. The CIT-concerned
4. The CIT(A)-Central - I concerned
5. The DR 'A ' Bench
Asst. Registrar, I.T.A.T, Mumbai