By Jagdish T. Punjabi, Chartered Accountant
[2018] 193 TTJ (Mumbai) 8
Mahul Construction Corporation vs. ITO
ITA NO. : 2784/MUM/2017
A. Y. : 2009-10
Dated: 24th November, 2017
FACTS
– The assessee firm was
engaged in the business of construction and was a builder and developer. This
firm vide an agreement acquired development rights over a piece of land for a
total consideration of Rs.4.67 crore. Subsequently, this partnership deed was
modified and new partners were inducted.
– Subsequently, vide deed of
retirement & reconstitution, three partners retired from the partnership
firm and took the amount credited to their accounts, including surplus on
account of revaluation of asset.
– The AO held that the
assessee firm had not carried out any development work till 1.4.2008.
Therefore, land was a capital asset and not stock-in-trade, and payment of
cash/bank balance by the firm for settlement of retiring partner’s revalued
capital balances amounted to distribution of capital asset as contemplated in
section 45(4).
– Aggrieved by the assessment
order, the assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the
action of the AO on both the issues by holding that the land was a capital
asset and not stock-in-trade, and
also that the amount distributed was taxable u/s. 45(4).
HELD
– The Retiring partners
merely retired from the partnership firm without any distribution of assets of
the firm amongst the original and new incoming partners. Since, the
reconstituted firm consisted of 3 old partners and 1 new partner, it was not a
case where firm with erstwhile partners was taken over by new partners only. It
was not a case of distributing capital assets amongst the partners at the time
of retirement and therefore provisions of section 45(4) were not applicable.
– It could not be inferred
that by crediting the surplus on revaluation to Capital account of 4 Continuing
Partners and allowing the 3 Retiring Partners to take equivalent cash
subsequently, amounted to distribution of rights by the Continuing Partners to the
Retiring Partners. Till the accounts are settled and the residue/surplus is not
distributed amongst the partners, no partner can claim any share in such assets
of the partnership firm. The entitlement of right in the assets/ property of
the partnership firm arises only on dissolution. While the firm is subsisting,
there cannot be any transfer of rights in the assets of the firm by any or all
partners amongst themselves because during subsistence of partnership, the firm
and partners do not exist separately. Therefore, it was not a case of
distributing capital assets amongst the partners at the time of retirement and,
therefore, provisions of section 45(4) were not applicable.
– The AO wanted to tax the
amount credited in capital account of retiring as well as continuing partners u/s. 45(4). So far as amount credited to capital account of retiring partners
is concerned, notwithstanding the fact that there is no distribution by firm to
retiring partners, the transferor and transferee are like two sides of the same
coin. The capital gain is chargeable only on the transferor, and not on the
transferee.
– In this case, the
transferor is the partners who on their retirement assign their rights in the
assets of the firm, and in lieu the firm pays the retiring partners the money
lying in their capital account. Hence, it is the firm and its continuing
partners who have acquired the rights of the retiring partners in the assets of
the firm by paying them lump sum amount on their retirement. So it cannot be
said that the firm is transferring any right in capital asset to the retiring
partner, rather it is the retiring partner who is transferring the rights in
capital assets in favour of continuing partners.
– Accordingly, the assessee
firm was not liable to capital gains on the above transaction.
