IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 16.09.2019 CORAM : Hon'ble Dr.Justice Vineet Kothari AND Hon'ble Mr.Justice C.Saravanan Tax Case (Appeal) No.716 of 2015 and M.P.No.1 of 2015 M/s. Vikas Academy, Vikas School Compound, Arapalayam Cross Road, Ponnagaram, Madurai. .. Appellant Vs. Income Tax Officer, Ward II(4), Madurai. .. Respondent Tax Case Appeal filed under Section 260A of Income Tax Act, 1961, against order passed by Income Tax Appellate Tribunal Chennai 'D' Bench, dated 12.06.2015 in ITA.No.2323/MDS/2014. For Appellant : Mr.R.Sivaraman Mr.P.Ramesh Kumar For Respondent : Mr.M.Swaminathan (Senior Standing Counsel) Ms.V.Pushpa (Junior Standing Counsel) http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 2/22 Judgement [Judgment of Court was pronounced by Dr. VINEET KOTHARI,J.] Heard Mr.R.Sivaraman & Mr.P.Ramesh Kumar, learned Counsels appearing for appellant assessee and Mr.M.Swaminathan, learned Senior Standing Counsel assisted by Ms.V.Pushpa, learned Junior Standing Counsel appearing for respondent Income Tax Department. 2. assessee has filed present Appeal under Section 260 of Income Tax Act, 1961, aggrieved by order passed by learned Income Tax Appellate Tribunal on 12.06.2015 for Assessment Year 2009-2010. 3. said appeal of assessee was admitted by Co-ordinate Bench of this Court on 29.07.2015 on following substantial questions of law arising from order of learned Tribunal:- i. Whether in facts and circumstances of case, Income Tax Appellate Tribunal is right in holding that there was transfer within meaning of clause (4) of Section 45 of Income Tax Act, http://www.judis.nic.in 1961? Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 3/22 ii. Whether in facts and circumstances of case, Tribunal is right in holding that in absence of amendment of Section 2(47) of Act, there is transfer within provisions of clause 4 of Sections 45 of Income Tax Act, 1961? iii. Whether on facts and circumstances of case, Income Tax Appellate Tribunal was correct in law in sustaining addition of interest under Section 234B of Income Tax Act, 1961 since charge was not created by Assessing Officer as part of order? 4. Both learned counsels fairly agreed that controversy involved in present case is covered by decision of co-ordinate Bench of this Court, in which, one of us (Dr.Vineet Kothari,J.) was party, decided on 08.04.2019 in T.C.A.Nos.365 and 366 of 2009 in M/s. National Company Vs. Assistant Commissioner of Income Tax . Cognate Bench of this Court, in that matter of M/s. National Company, on issue whether on reconstitution of Partnership Firm, asset transferred to outgoing partner or amount paid to him attracts capital gains tax liability in hands of http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 4/22 assessee/Partnership Firm or not in terms of Section 45(4) of Income Tax Act, Division Bench of this Court held as under :- 20. It is also to be noted that on retirement of partner from firm, there will be allotment of his interests in firm. interest of partner in partnership firm is right to obtain share of profits from time to time during subsistence of partnership and further, on dissolution of partnership, or on his retirement from partnership, to get value of his share in net partnership assets which remain after deducting debts and liabilities of partnership. This could be in form of immovable assets or in form of cash in lieu of immovable assets. Therefore, when partner retires from partnership and his share in net partnership assets is determined and allotted to him, what he receives is his share in partnership and not any consideration for transfer of his interest in partnership to continuing partners. His share in partnership is worked out by taking accounts in manner prescribed by relevant provisions of partnership law and it is this, namely, his share in partnership which he receives in terms of money or as asset. There is in this transaction no element of transfer of interest in partnership assets by retiring partner to continuing partners. 21. transfer of capital assets in order to attract capital gains tax must be one as result of http://www.judis.nic.in which consideration is received by assessee or Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 5/22 accrues to assessee. When partner retires from partnership he receives his share in partnership and this does not represent consideration received by him in lieu of relinquishment of his interest in partnership asset. 22. In Commissioner of Income Tax Vs. A.N.Naik Associates and Others reported in 2004 265 ITR 346 (Bom), facts were that respondents were parties to family settlement dated 30.01.1997. Pursuant to family settlement, there was deed of reconstitution of various partnerships. One of questions of law which had been formulated for consideration was whether deed of reconstitution of partnership by Assessee firm was device to avoid tax. further examination of facts in that case reveal that it had been agreed between parties that businesses of six firm would be distributed in terms of family settlement, as parties desired that various matters concerning business and assets thereto be divided separately and partitioned. In settlement, manner in which assets were proposed to be divided were set out. It was also provided that all such documents, deeds, declarations, affidavits as are reasonably required for effecting such transfer would be executed. Assessment was based on family settlement and subsequent deeds of retirement of partnership. It is thus seen that there was conscious decision taken prior to http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 6/22 reconstitution of firms to transfer assets and liabilities by way of family settlement. It was also consciously decided to execute all necessary deeds and documents to effect such transfer. transfer of assets in such circumstances, though held was not device to avoid tax was still held to be 'transfer' within meaning of Section 2(47) of Act. 23. In light of above facts, it was held in A.N.Naik Associates as follows:- 21. expression otherwise in our opinion, has not to be read ejusdem generis with expression, dissolution of firm or body or association of persons . expression otherwise has to be read with words transfer of capital assets by way of distribution of capital assets. If so read, it becomes clear that even when firm is in existence and there is transfer of capital assets it comes within expression, otherwise as object of amending Act was to remove loophole which existed whereby capital gain tax was not chargeable. In our opinion, therefore, when asset of partnership is transferred to retiring partner partnership which is assessable to tax ceases to have right or its right in property stands extinguished in favour of partner to whom it is transferred. If so read it will further object and purpose and http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 7/22 intent of amendment of Section 45. Once, that be case, we will have to hold that transfer of assets of partnership to retiring partners would amount to transfer of capital assets in nature of capital gains and business profits which is chargeable to tax under Section 45(4) of Income Tax Act. We will, therefore, have to answer question No.3, by holding that word otherwise takes into its sweep not only cases of dissolution but also cases of subsisting partners of partnership, transferring assets in favour of retiring partner. 24. above judgement was also referred in T.C.A.No. 1458 of 2005 decided on 31.10.2012, Commissioner of Income Tax, Trichy Vs. M/s. Nathan and Company, Trichy, by Co-ordinate Bench of this Court. In that case, Assessee was firm constituted by six partners and running printing press at Trichy and another at Chennai. They entered into agreement on 28.04.1989 whereby two partners, were permitted to carry on business under same name at Chennai and four partners were permitted to carry on business at Trichy in same name. It is seen that in that case, there was definitely element of transfer of assets since two of partners gave up their interests in business at Trichy and four of partners gave up their interest in http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 8/22 business at Chennai. facts are certainly distinguishable to facts of present case. 25. However directly contrary view to view taken in A.N.NaiK Associates have been expressed in Prashant S. Joshi Vs. Income Tax Officer and Others reported in 2010 324 ITR 154 (Bom) wherein Division Bench of Bombay High Court, again dealing with fact situation in respect of partnership firm dealing with development of real estate, when partner retired and agreed to receive sum of Rs.50 lakhs, in addition to balance lying to his credit in capital as reflected in books of accounts as final settlement of his dues on account of retirement, held that same was not transfer and taxable under Section 45(4) of Act. reasoning of Bombay High Court, is given below for better appreciation:- 13. During subsistence of partnership, partner does not possess interest in specie in any particular asset of partnership. During subsistence of partnership, partner has right to obtain share in profits. On dissolution of partnership or upon retirement, partner is entitled to valuation of his share in net assets of partnership which remain after meeting debts and liabilities. amount http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 9/22 paid to partner upon retirement, after taking accounts and upon deduction of liabilities does not involve element of transfer within meaning of Section 2(47). Chief Justice P.N.Bhagwati (as learned Judge then was) speaking for Division Bench of Gujarat High Court in Commissioner of Income Tax, Gujarat V. Mohanbhai Pamabhai MANU/GJ/0015/1971 : (1973) 91 ITR 393 dealt with issue in following observations: ... when, therefore, partner retires from partnership and amount of his share in net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on footing of notional sale of partnership assets and given to him, what he receives is his share in partnership and not any consideration for transfer of his interest in partnership to continuing partners. His share in partnership is worked out by taking accounts in manner prescribed by relevant provisions of partnership law and it is this and this only, namely, his share in partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in partnership assets http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 10/22 by retiring partner to continuing partners: vide also recent decision of Supreme Court in Commissioner of Income Tax v. Bankey Lal Vaidya. It is true that Section 2(47) defines transfer in relation to capital asset and this definition gives artificially extended meaning to term transfer by including within its scope and ambit two kinds of transactions which would not ordinarily constitute transfer in accepted connotation of that word, namely, relinquishment of capital asset and extinguishment of any rights in it. But even in this artificially extended sense, there is no transfer of interest in partnership assets involved when partner retires from partnership. Gujarat High Court held that there is, in such situation, no transfer of interest in assets of partnership within meaning of Section 2(47). When partner retires from partnership, what partner receives is his share in partnership which is working out by taking accounts and this does not amount to consideration for transfer of his interest to continuing partners. rationale for this is explained as follows in judgement of Gujarat High Court: http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 11/22 .... what retiring partner is entitled to get is not merely share in partnership assets; he has also to bear his share of debts and liabilities and it is only his share in net partnership assets after satisfying debts and liabilities that he is entitled to get on retirement. debts and liabilities have to be deducted from value of partnership assets and it is only in surplus that retiring partner is entitled to claim share. It is, therefore, not possible to predicate that particular amount is received by retiring partner in respect of his share in particular partnership asset or that particular amount represents consideration received by retiring partner for extinguishment of his interest in particular asset. 14. appeal against judgement of Gujarat High Court was dismissed by Bench of three learned Judges of Supreme Court in Addl. Commissioner of Income Tax, Gujarat v. Mohanbhai Pamabhai : 165 ITR 166. Supreme Court relied upon its judgement in Sunil Siddharthbhai v. Commissioner of Income Tax MANU/SC/0164/1985 : (1985) 156 ITR http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 12/22 509 (S.C.). Supreme Court reiterated same principle by relying upon judgement in Addanki Narayanappa and Anr. Vs. Bhaskara Krishnappa and Ors. MANU/SC/0281/1966: (1966) SC 1300. Supreme Court held that what is envisaged on retirement of partner is merely his right to realise his interest and to receive its value. What is realised is interest which partner enjoys in assets during subsistence of partnership by virtue of his status as partner and in terms of partnership agreement. Consequently, what partner gets upon dissolution or upon retirement is realisation of pre-existing right or interest. Supreme Court held that there was nothing strange in existing right or interest. Supreme Court held that there was nothing strange in law that right or interest should exist in praesenti but its realisation or exercise should be postponed. Supreme Court inter alia cited with approval judgement of Gujaraj High Court in Mohanbhai Pamabhai (supra) and held that there is no transfer upon retirement of partner upon distribution of his share in net assets of firm. In Commissioner of Income Tax V. R.Lingmallu Raghukumar MANU/SC/0810/2001: (2001) 247 ITR http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 13/22 801, Supreme Court held, while affirming principle laid down in Mohanbhai Pamabhal that when partner retires from partnership and amount of his share in net partnership assets after deduction of liabilities and prior charges is determined on taking accounts, there is no element of transfer of interest in partnership assets b y retired partner to continuing partners. 26. It is seen that Bombay High Court held in above case that when partner retires and there is transfer of his interests in partnership assets to him towards his share in assets, same cannot be brought to tax as capital gain by transfer of capital asset. 27. In Sampath Iyengar's Law of Income Tax revised by S.Rajaratnam, 12th edition, it had been observed as follows:- 134. Or otherwise.- There should ordinarily be no presumption of transfer in dissolution except to extent directed under Section 45(4). Retirement is prima facie not covered by sub-section. But Departmental view is that words or otherwise immediately succeeding dissolution under Section 45(4) would cover http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 14/22 even retirement. Or Otherwise can only mean before or after dissolution in contradistinction to on . Further Section 45(4) when understood in conjunction with Section 45(3) can refer to formations and dissolutions. Since change in constitution is concept recognised in Chapter XVI-C of Act, there is no reason why law should not have referred to change in constitution along with dissolution, if that were intent instead of expression or otherwise . 28. It is seen that even learned author has expressed view with that Section 45(4) of Act would not apply on retirement of partner from partnership firm and when there is transfer of assets. 29. It may also be appropriate to refer to Commissioner of Income Tax Vs. R.Lingmallu Raghukumar reported in 2001 247 ITR 801 SC. entire Judgement is quoted below:- 1. This appeal by Revenue is directed against Judgement of Andhra Pradesh High Court dated July 21, 1982, (see (1983) 141 ITR 674), in Referred Case No. 28 of 1977, whereby following question of law referred to High Court was answered against Revenue and in favour of assessee (page 676): http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 15/22 Whether, on facts and in circumstances of case, excess amount of Rs.46,500 received by assessee on retirement from two partnership firms is assessable to capital gains? 2. High Court has held that there was no transfer of any assets as contemplated by expression transfer as defined in Section 2(47) of Income-tax Act. High Court had placed reliance on Judgement of Gujarat High Court in CIT vs. Mohanbhai Pamabhai [1973] 91 ITR 393, wherein it has been held that where partner retires from partnership and amount of his share in net partnership assets after deduction of liabilities and prior charges is determined on taking accounts in manner prescribed by relevant provisions of partnership law there is no element of transfer of interest in partnership assets by retired partner to continuing partners. said Judgement of Gujarat High Court has been affirmed by this Court in Addl. CIT V. Mohanbhai Pamabhai [1987] 165 ITR 166. In view of said Judgement we find no merit in this appeal and same is, http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 16/22 therefore, dismissed. No order as to costs. 30. It is thus seen that Hon'ble Supreme Court had also held that on retirement, settlement to partner of his share in assets of partnership after deduction of liabilities is not assessable to capital gains. 31. In CIT Vs. Surendra Kumar Gupta reported in [2004] 270 ITR 325, assets of firm were taken over by one of two partners on dissolution of firm, on payment of agreed amount to other partner; it was held that aforesaid transaction did not result in any transfer of asset as understood in common law. 32. In CIT Vs. Kunnamkulam Mill Board reported in [2002] 257 ITR 544 (Ker), it was held that on retirement of partner of firm, there is no transfer of assets of firm in favour of continuing partners within meaning of Section 45(4) of Act. 33. In present case, very significantly, there was only reconstitution of partnership firm by retirement of two partners and admission of another partner. partnership firm continued. It must also be further noted that assets of firm originally http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 17/22 belonged to father of retiring / continuing partners and there was only division of assets on retirement in accordance with their entitlement on shares in partnership. As pointed out earlier, National Company was originally sole proprietorship concern started by N.Munuswamy Mudaliar. It was in business of construction and assets had been acquired even at that particular point of time. two daughters and two sons-in-laws of N.Munuswamy Mudaliar were subsequently admitted as partners and on division of assets, it can also be arguably pointed out that one daughter and one son-in-law were allotted share which they were otherwise legally entitled to out of holdings N.Munuswamy Mudaliar. 34. In view of peculiar facts of case in hand, we hold that provisions of Section 45(4) would not be attracted on retirement of two partners and consequential allotment of their share in assets in Assessee Firm. We therefore answer substantial question of law in favour of Assessee and against Revenue. 35. In result, Appeals of Assessee are allowed. No costs. http://www.judis.nic.in 5. facts found by learned Tribunal in present case, Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 18/22 are also quoted below for reference :- 9. We have heard both parties and carefully perused materials available on record. case of assessee is very simple. During year under consideration assessee firm was reconstituted wherein one of partners Mrs.Arunan Visvewar had retired and therefore reconstituted partnership deed was drawn on 30.05.2008 whereby assessee firm has transferred one of its immovable asset being land to retiring partner Mrs.Aruna Visvewar valued at Rs.9,04,10,000/- as mentioned in partition deed entered between firm and outgoing partner. question that arises before us is whether transfer of land belonging to firm to retiring partner is liable to be taxed under head capital gains and if so in whose hands. It is pertinent to mention here that transfer of asset is by firm which is legal entity to retiring partner another distinct legal entity being individual . Therefore, it is crystal clear that capital gain will arise in hands of transferor viz. assessee firm and not transferee viz. retiring partner Mrs.Aruna Visvewar. Provisions of Section 45(4) of Act are reproduced herein below for reference:- Section-45(4):- profits or gains arising from transfer of capital asset by way of distribution of capital assets on dissolution http://www.judis.nic.in of firm or other association of persons or Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 19/22 body of individuals (not being company or co-operative society) or otherwise, shall be chargeable to tax as income of firm, association or body, of previous year in which said transfer takes place, and for purpose of section 48, fair market value of asset on date of such transfer shall be deemed to be full value of consideration received or accruing as result of transfer. words OR OTHERWISE have been elaborately explained in following decisions:- i) ACIT V. D.D.International (Global) [2009]125 TTJ (Asr.) 112 word 'otherwise', used in Section 45(4) is not to be read ejusdem generis with dissolution of firm or AOP. expression 'otherwise' has to be read with words 'transfer of capital asset' by way of distribution of capital assets on dissolution of firm. word 'otherwise' in Section 45(4) takes within its sweep not only cases of dissolution but also cases of subsisting partners of partnership transferring assets to retiring partners. (ii) New Gujarat Tin Printing Works V. ITO [2010] 8 taxmann.com 24/[2011] 128 ITD 182(Ahd.) word 'otherwise' as occurring in Section http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 20/22 45(4) covers situation, where capital asset of firm is distributed to its partners otherwise than on dissolution of firm. (iii) CIT Vs. A.N.Naik Associates [2004] 136 Taxman 107/265 ITR 346(Bom.) expression 'otherwise' has not to be read ejusdem generis with expression' dissolution of firm or body of individuals or association of persons. expression 'otherwise' has to be read with words 'transfer of capital assets' by way of distribution of capital assets. If so read, it becomes clear that even when firm is in existence and there is transfer of capital assets, it comes within expression 'otherwise' as object of amending Act was to remove loophole which existed whereby capital gain tax was not chargeable. Therefore, when asset of partnership is transferred to retiring partner, partnership which is assessable to tax cases to have right or its right in property stands extinguished in favour of partner to whom it is transferred. If so read, it will further object and purpose and intent of amendment of Section 45. Once that be case, transfer of assets of partnership to retiring partners would amount to transfer of capital assets in nature of capital gains and business profits which are chargeable to tax u/s. 45(4). Therefore, word 'otherwise' takes into its http://www.judis.nic.in Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 21/22 sweep not only cases of dissolution but also cases of subsisting partners of partnership, transferring assets in favour of retiring partner. (iv) Burlingtons Exports V. ACIT [1993] 45 ITD 424(Bom. Trib.) words 'or otherwise' are used as alternate to words 'on dissolution' and therefore, in both situations, i.e. on dissolution or otherwise, distribution of capital asset is must. From above it is crystal clear that Section 45(4) of Act mandates assessee firm to be liable for capital gain tax arising out of transfer of its asset to retiring partner even in circumstances when partnership is reconstituted on retirement of partner. Further, loan taken by assessee firm for purpose of asset which is transferred cannot be factored because loan does not alter cost of assets purchased or value of asset transferred to transferee. Therefore, we do not have any hesitation to confirm order of Ld. CIT (A) as well as order of Ld. Assessing Officer. 10. In result, appeal of assessee is dismissed. http://www.judis.nic.in DR.VINEET KOTHARI, J. Order dt. 16.09.2019 in Tax Case (Appeal)No.716 of 2015 [M/s. Vikas Academy vs. Income Tax Officer] 22/22 and C.SARAVANAN, J. sni 6. In view of aforesaid agreement between learned counsels, present appeal of assessee is also allowed in terms of judgment of this Court in case of National Co. (supra) and questions of law framed above are answered in favour of assessee and against Revenue. No costs. Connected miscellaneous petition is closed. V.K.J. C.S.N.J., 16.09.2019 Index/Yes/No sni/sd To 1. Income Tax Officer, Ward II(4), Madurai. 2. Income Tax Appellate Tribunal, 'D' Bench, Chennai. Tax Case (Appeal) No.716 of 2015 Vikas Academy v. Income-tax Officer, WardII(4), Madurai