Pipelines India vs. ACIT; [2016] 67 taxmann.com 112 (Mad)
The partners of assessee-firm, constituted a private limited company. The company was admitted as partner in the assessee-firm. Later on, the natural partners executed a release deed giving up all their rights in assesseefirm, in favour of the company. As a consequence, the company became absolute owner of the assessee-firm. The natural partners were allotted shares in the company for relinquishing their rights in the assessee-firm. The Assessing Officer held that there was a transfer of assets by way of distribution of capital assets on dissolution of the assessee-firm. He accordingly computed capital gain and made a demand. The Tribunal upheld order of the Assessing Officer holding that it was a dissolution of the firm and not conversion of the firm into a company since the relationship inter se between the partners had come to an end, the moment they released their shares in favour of the company.
On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:
“i) F or attracting section 45(4), the following conditions are to be satisfied:
(a) profits and gains should arise;
(b) from the transfer of a capital asset;
(c) by way of distribution of capital assets;
(d) on the dissolution of a firm or other association of persons or body of individuals not being a company or a co-operative society and
(e) or otherwise.
ii) Unless these conditions are satisfied, section 45(4) would not get attracted. Every distribution of capital assets may not lead to the attraction of section 45(4) unless it happens on the dissolution of a firm or other entity. Similarly, every distribution of capital assets on the dissolution of a firm may not attract section 45(4) unless it was a case of transfer of a capital asset by way of such distribution.
iii) The expression ‘transfer’ is defined in section 2(47) to mean several things. A sale, exchange or relinquishment of the asset or the extinguishment of any rights therein are all covered by the expression ‘transfer’.
iv) In the case on hand, the partners have taken equity shares in the private limited company that was inducted as the partner. Therefore, whatever rights that they had in the capital assets of the firm by way of being its partners, continue to exist in the form of equity shares that they held in the private limited company. In other words, one form of ownership that they had as partners of the partnership firm, got converted into another form. Hence, this is not a case where there was either a transfer of a capital asset or the distribution of a capital asset. This aspect has been completely lost sight of by all the authorities.
v) Therefore, the questions of law are answered in favour of the assessee/appellant. The tax case appeal is allowed.”
