Both appeals filed by revenue in case of two partners of same partnership firm are against separate orders of CIT(A) relating to same assessment year 1994-95 against order under section 143(3) read with section 147 of Income-tax Act, 1961. assessees in both appeals h v e independently filed cross-objections against reopening of assessment under provisions of section 147 of Income-tax Act. Both appeals by revenue and cross-objections raised by assessee though relating to separate assessees are on same issue, were heard together and are being disposed off by this consolidated order for sake of convenience. 2. Shri R.N. Parbat/Dilip Sharma, Departmental Representatives appeared f o r revenue and Shri Vijay Patil/Vishwas Mahindale, learned Counsel appeared for assessee and put forward their rival submissions. 3. In both appeals, issue raised by revenue is under: "On facts and in circumstances of case and in law Ld. CIT(A) erred in deleting addition of Rs. 10,65,863 - (in case of Shri Deviprasad L. Dave) Rs. 10,43,658 (in case of Smt. Paru D. Dave) being amount of short-term capital gains assessed in hands of assessee on account of assessee's assignment and relinquishment of rights in firm's assets on reconstitution of firm." 4. brief facts of case are that both assessees were partners in firm M/s. Rakhal Corporation having equal shares in profits of business. said firm owned factory premises, book value of which was shown at Rs. 79,452 up to 31-3-1993. No depreciation was claimed on said factory premises by firm. On 15-4-1993, said factory premises were revalued at Rs. 23 lakhs on basis of valuation report of Registered Valuer. difference in value was credited equally to capital accounts of both partners, i.e., Rs. 11,10,274 each. On 29-4-1993 partnership firm was reconstituted and five new partners of Shah Group were admitted. Because of reconstitution of partnership firm, total profit sharing ratio of old partners were reduced to 5 per cent i.e., 3 per cent of Shri D.L. Dave (HUF) and 2 per cent of Smt. Paru Dave. As per terms of partnership, capital of firm was fixed at Rs. 1 lakh, which was required to be contributed by partners in their profit sharing ratio. Subsequently, old partners withdrew total sum of Rs. 18,53,700 from their respective capital accounts. In case of both assessees, return of income was accepted by way of intimation under section 143(1)(a) of Income-tax Act. During course of assessment in case of firm M/s. Rakhal Corporation, difference in revaluation of factory premises of Rs. 22,20,548 was treated as short-term capital gains. On appeal CIT(A) deleted addition in hands of firm by observing that 'there is no doubt case for bringing this amount to tax in hands of partners since they have divested themselves of valuable rights and asset handed over same to new partners. But looking to firm itself, it cannot be said that firm has earned any income out of this transaction'. Based on abovesaid observation of CIT(A) assessment in case of both partners was reopened under section 147 of Income-tax Act. Assessing Officer observing that by admitting new partners in partnership firm and retaining only 5 per cent share, original partners have extinguished their rights in partnership property and assets, being factory premises, for consideration of Rs. 23 lakhs being revaluation amount. Accordingly sum of Rs. 10,65,863 was computed as short-term capital gain on sale of factory premises being proportionate gain on surrender of its right in partnership assets. It was observed by Assessing Officer that in view of consideration received assessee had assigned and relinquished his/her rights in partnership firm's assets. 5. Before CIT(A), it was contended that during subsistence of partnership, partner does not have any right over property and property is that of firm. It was also contended by assessee that there was no transfer of any right in property as revaluation, reconstitution and withdrawal of capital do not constitute any transfer and therefore, there was no liability to any capital gains. CIT(A) during course of appellate proceedings observed that firm had revalued factory shed and had credited difference in partners capital account prior to process of introducing new partners. Even after introduction of new partners and reduction in share of old partners, asset concerned remained in hands of firm and assessees could not have claimed any right or interest over said property. CIT(A) further observed that revaluation by itself does not generate any income. Reliance was placed on decision of Hon'ble Supreme Court in CIT v. Hind Construction Ltd. [1972] 83 ITR 211 for proposition that revaluation being mere book entry, does not generate any income. Further it was also observed by CIT(A) that it has been held in number of cases that partner has no interest in any assets of partnership during subsistence of partnership as partner does not have any interest or right in partnership asset and therefore, partner could not have transferred same for purpose of attracting capital gains. provisions of section 45(4) of Act dealing with transfer of capital assets by way of distribution of asset on dissolution of firm does not apply to present case. On question of revaluation, CIT(A) observed that as revaluation was done in preceding year and capital was withdrawn in subsequent year i.e., year under consideration, there is mere withdrawal of capital and it was held that said amount is not assessable as capital gains in hands of partners. revenue is aggrieved and hence this appeal. 6. learned DR for revenue stated that transaction in question was sham and colourable transaction to evade tax and even if take it at face value income from capital gains will arise as there is relinquishment of rights in terms of section 2(47) of Income-tax Act. Reliance was placed on decision of Hon'ble Madras High Court in S.V. Kumaragurupasamy v. CIT [2003] 260 ITR 127. learned DR further stated that in case of readjustment of share ratio, there is transfer as held by Hon'ble Supreme Court in Sree Narayana Chandrika Trust v. CGT [2003] 261 ITR 279 and CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 (SC). learned DR further submited that in case of transfer, consideration has to be there and in present case consideration was money introduced by incoming partners and withdrawn by old partners. incoming partners in addition to capital had also introduced money by way of loans and advances which in-turn was withdrawn by old partners as withdrawal of their capital account. learned DR further submitted that in succeeding year partnership firm has been taken over by company and de facto arrangement is transfer of assets. 7. learned AR for assessee submitted that issue in present case is revaluation of asset and levy of capital gains to extent of revaluation of assets. learned AR further submitted that when partnership is continuing no partner can claim in share in assets of partnership firm. During continuance of partnership firm all partners are collectively owners of assets and no one can claim any specific share in any of assets of partnership firm and partners only have right in profits of firm and to get share in assets of partnership on its dissolution. It was further submitted by learned AR that provisions of section 2(47) of Income-tax Act are not applicable as there is no transfer of any asset. Assessing Officer while completing assessment had taxed capital gains on revalued value of factory premises. It was further clarified by learned AR that provisions of section 45(4) of Act are also not applicable as it talks of distribution of assets on dissolution of partnership firm and not on reduction of share of partners. For proposition that reduction in share ratio amounts to transfer or not, reliance was placed by learned AR on decision of Hon'ble Kerala High Court in CIT v. Kunnamkulam Mill Board [2002] 257 ITR 544. learned AR for assessee further clarified that ratio laid down by Hon'ble Supreme Court in Chhotalal Mohanlal's case (supra) was under Gift-tax Act and connotation of transfer under Gift-tax Act and under Income-tax Act are different. learned AR relied on decision of Hon'ble Supreme Court in Jagatram Ahuja v. CGT [2000] 246 ITR 609 for proposition that on reduction of share in partnership firm no gift-tax is attracted. Reliance was placed on various decisions for proposition that whether on reconstitution or retirement of partner there is relinquishment of any right in property of firm. 8. We have heard rival submissions and perused records. Both assessees before us were partners in partnership firm M/s. Rakhal Corporation with 50 per cent share of each. partnership firm owned factory building which was shown at cost in balance sheet from year to year and no depreciation was being claimed on said factory building. On 1-4-1993 i.e., start of accounting year, WDV of said factory building was reflected at Rs. 79,452. During year under consideration, said factory building was revalued at Rs. 23 lakhs and difference on account of revaluation of asset amounting to Rs. 22,20,548 was credited to respective partners account on date of revaluation i.e., 15-4-1993. On 29-4-1993 firm was reconstituted by admission of five new partners who inducted sum of Rs. 34 lakhs by way of capital contribution and loan and advances in partnership firm. shares of old partners from 100 per cent was reduced to 5 per cent. Subsequently, both partners had withdrawn sum of Rs. 9,65,100 by Shri Deviprasad L. Dave (HUF) and Rs. 9,35,000 by Smt. Paru Dave. said consideration received by individual partners was treated as assignment and relinquishment of their respective shares in partnership on assets in favour of new partners admitted to reconstituted firm and transaction amounts to transfer within meaning of section 2(47) of Income-tax Act. gain arising from transaction was held to be liable to be tax as capital gains under section 45 of Income-tax Act. 9. issue for our adjudication is whether short-term capital gain arises on surrender of rights in revalued partnership assets. Partnership firm constituted of its partners is governed by provisions of Partnership Act. partnership firm is not legal entity and property of partnership vests in its partners inasmuch as all partners have interest in partnership property. provisions of Partnership Act clearly provide that property which is brought in by partners on formation of partnership or acquired in course of business of partnership, becomes property of firm. partners of partnership firm are entitled to share in profits of business to extent of their share ratio. During subsistence of partnership no partner has any assigned right or share in partnership property. During continuance of partnership partners have only right in profits of partnership and no partner can deal with any portion of partnership property as his own during continuance of partnership firm. 10. Their Lordships of Hon'ble Supreme Court in S.V. Chandra Pandian v. S.V. Sivalinga Nadar [1995] 212 ITR 592 held that as under: ". . . above provisions make it clear that regardless of character of property brought in by partners on constitution of partnership, such property shall become property of firm and individual partner shall only be entitled to become property of firm and individual partner shall only be entitled to his share of profits, if any, accruing to partnership from realization of this property and upon dissolution of partnership to share in money representing value of property. It is well settled that firm is not legal entity, it has no legal existence, it is merely compendious name and hence partnership property would vest in all partners of firm. Accordingly, each and every partner of firm would have interest in property or asset of firm but during its subsistence no partner can deal with any portion of property as belonging to him, nor can he assign his interest in any specific item thereof to anyone." On true reading of award as whole, there was no doubt that it essentially dealt with distribution of surplus properties bringing to dissolved firms. award, therefore, did not require consideration under section 17(1) of Registration Act. 11. Their Lordships of Hon'ble Supreme Court in Addanki Narayanappa v. Bhaskara Krishtappa AIR 1966 SC 1300 had held as under: ". . . During subsistence of partnership, however, no partner can deal with any portion of property as his own. Nor can he assign his interest, in specific item of partnership property to anyone. His right is to obtain such profits, if any as fall to his share from time to time and upon dissolution of firm to share in assets of firm which remain after satisfying liabilities. . . ." 12. As partners have no right in assets of partnership firm, there was no transfer of any right in said property on reconstitution/retirement of partner. Their Lordships of Hon'ble Supreme Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 had held that when partner retired from firm and received share of amount calculated on value of net partnership assets including goodwill of firm, there was no transfer of interest of partner in goodwill and no part of amount received by him would be assessable as capital gains under section 45 of Income-tax Act. Similar view was taken by Hon'ble Supreme Court in CIT v. R. Lingamallu Raghukumar [2001] 247 ITR 801. In case any asset/property is allocated to partner in proportion to his share in profits of firm, there is no partition or transfer taking place nor there is any relinquishment of interest of other partners in allocated property, in sense of transfer or extinguishment of interest as envisaged under section 17 of Registration Act. Thus, when dissolution of partnership firm takes place and residue is distributed amongst partners after settlement of amounts, there is no transfer or relinquishment of interest as envisaged under section 17 of Registration Act. This view was held by Hon'ble Supreme Court in S.V. Chandra Pandian's case (supra). Income-tax Act has brought in by way of amendment to section 45 of Income-tax Act that on dissolution of partnership firm provisions of section 45(4) of Act shall be applicable which treats dissolution of partnership as deemed transfer of assets from partnership firm to its partners. 13. In partnership amongst partners, each and every partner of firm h s interest in each and every property of partnership firm. Till accounts are settled and residue/surplus is not distributed amongst partners, no partner can claim any share in such assets of partnership firm. Each partner is entitled to its share of profits in partnership firm but entitlement of right in assets/property of partnership firm arises only on dissolution. 14. other issue to be considered is whether there is relinquishment o f right in property of firm on reconstitution of partnership firm. partner of partnership firm has only interest in property during subsistence of partnership firm. There is no relinquishment of any right in partnership property on reconstitution/retirement of partner. 15. Their Lordship of Kerala High Court in Kunnamkulam Mill Board's case (supra) had held that-"ownership of property does not change on change in constitution of firm. As long as there is no distribution for simple reason firms total reconstitution, there is no transfer of capital assets." In facts of case before Kerala High Court, there was reconstitution of assets of firm wherein assets were revalued on mutual agreement of partners. difference in revalued amounts was credited to respective capital accounts of partners. There was reconstitution of partnership firm with introduction of two partners for short time and thereafter original five partners retired and business was carried on in partnership by surviving two partners. It was held that in such cases of reconstitution, ownership of property does not change with change in constitution of firm and accordingly there is no transfer of capital asset. It was further held that- "if partner retires, he does not transfer any right in immovable property in favour of surviving partner because he had no right with respect to properties of firm." learned DR had relied on decision of Hon'ble Supreme Court in Sree Narayana Chandrika Trust's case (supra), wherein chargeability to gift tax on reconstitution of firm was considered. This is not issue before us and principle laid down by Hon'ble Supreme Court is not applicable to issue before us. Similar was view taken by Hon'ble Supreme Court in Chhotalal Mohanlal's case (supra). 16. In facts before us partnership asset was revalued by partners at start of year and difference on account of revaluation of asset was credited to partners account. revaluation of partnership assets w s anterior to introduction of new partners. Revaluation of assets by partnership firm does not attract capital gains. revaluation of assets of partnership and credit of revalued amount to capital account of partners in their respective share ratio does not entail any transfer as defined under section 2(47) of Income-tax Act. introduction of new partners to partnership firm owning immovable assets and consequent reduction in share ratio of present partners does not entail any relinquishment of their rights in partnership property. On introduction of new partners, there is realignment of share ratio inter se between partners only to extent of sharing profits or losses, if any of partnership business. When any new partner is introduced into existing partnership firm, profit sharing ratios undergo change, which does not amount to transfer as defined under section 2(47) of Act, as there is no change in ownership of assets by partnership firm. As during subsistence of partnership firm, partners have no defined share in assets of partnership and thus on realignment of profit sharing ratio, on introduction of new partners, there is no relinquishment of any non- existent share in partnership assets as asset remained with firm. Such arrangement is not covered by provisions of section 45(4) of Act, which covers case of dissolution of partnership firm. Accordingly, no capital gains arises on such relinquishment of share ratio in partnership firm. We confirm order of CIT(A) and dismiss grounds of appeal raised by revenue. 17. cross-objections filed by assessees are against reopening of assessment under section 147 of Income-tax Act. learned AR for assessee had stated that grounds in cross-objections are not pressed and hence same are dismissed as not pressed. 18. In result, appeals being ITA No. 2583/Mum./1999 and ITA No. 5008/Mum./2002 filed by revenue are dismissed and cross-objections filed by assessees being CO No. 245/Mum./2003 and CO No. 72/Mum./2004 are also dismissed. *** INCOME TAX OFFICER v. SMT. PARU D. DAVE