June 2019

Sections 2(47) and 45(4) Capital gains Where retiring partners were paid sums on reconstitution of assessee-partnership firm in proportion to their share in partnership business / asset, no transfer of assets having taken place, no capital gains would arise

K. B. BHUJLE
Advocate

18

Principal CIT vs. Electroplast Engineers; [2019] 104 taxmann.com 444 (Bom)

Date of order: 26th March, 2019

A.Y.: 2010-11

 

Sections 2(47) and 45(4) Capital gains Where retiring partners were paid sums on reconstitution of assessee-partnership firm in proportion to their share in partnership business / asset, no transfer of assets having taken place, no capital gains would arise

 

Under a Deed of Retirement cum Reconstitution of the Partnership, the original two partners retired from the firm and three new partners redistributed their share. Goodwill was evaluated and the retiring partners were paid a certain sum for their share of goodwill in proportion to their share in the partnership. The assessee-partnership firm filed return of income. The A.O. was of the opinion that the goodwill credited by the assessee-partnership firm to its retiring partners was capital gain arising on distribution of the capital asset by way of dissolution of the firm or otherwise. Thus, the assessee-partnership firm had to pay short-term capital gain tax in terms of section 45(4) of the Income-tax Act, 1961.

 

The Commissioner (Appeals) agreed with the contention of the assessee-partnership firm that there was neither dissolution of the firm nor was the firm discontinued. He held that the rights and interests in the assets of the firm were transferred to the new members and in this manner amounted to transfer of capital asset. Thus, section 45(4) would apply. The Tribunal held that section 45(4) would apply only in a case where there has been dissolution of the firm and, thus, the conditions required for applying section 45(4) were not satisfied.

 

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

 

i)   As per the provision of section 45(4), profits or gains arising from transfer of capital asset by way of distribution of capital asset on dissolution of firm or otherwise shall

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