40. National Co. vs. ACIT; [2019]
415 ITR 5 (Mad.) Date of order: 8th April, 2019;A.Y.: 2004-05
Sections 2(47) and 45(4) of ITA 1961 – Capital gains – Firm – Retirement
of partners – Consequential allotment of their shares in assets in firm – Not
transfer of capital assets – Provisions of section 45(4) not attracted – No
taxable capital gain arises
The assessee was a partnership firm with four
partners. Two of the partners agreed to retire from the partnership business
and the remaining two partners, with their son being admitted as another
partner, continued the business. At the time of retirement of the two partners,
the assets and liabilities of the firm were valued and the retiring partners
were allotted their share in the assets in the firm. The AO made an addition on
account of capital gains u/s 45 of the Income-tax Act, 1961 on the ground that the long-term capital gains arose out of transfer of immovable
properties by the assessee to the retiring partners.
The Commissioner (Appeals) held that the reconstitution
of the partnership would not attract the provisions of section 45(4) and
deleted the addition made on account of long-term capital gains. The Tribunal
allowed the appeal filed by the Department and held that section 45(4) applied
to the assessee and that there was transfer of assets within the meaning of
section 2(47)(vi) of the Act.
The Madras High Court allowed the appeal filed by
the assessee and held as under:
‘i) When a
partner retires from a partnership he receives his share in the partnership and
this does not represent consideration received by him in lieu of relinquishment
of his interest in the partnership asset. There is in this transaction no
element of transfer of interest in the partnership assets by the retiring
partner to the continuing partner.
ii) The
provisions of section 45(4) would not be attracted on the retirement of the two
partners and consequential allotment of their share in the assets in the
assessee firm. There was only reconstitution of the firm on the retirement of
the two partners and admission of another partner. The partnership continued.
There was only a division of the assets in accordance with their entitlement to
their shares in the partnership, on the retirement of the partners. There was
no element of transfer of interest u/s 2(47) in the partnership assets by the
retiring partners to the continuing partners in this transaction.
iii) We
therefore answer the substantial question of law in favour of the assessee and
against the Revenue. The appeals of the assessee are allowed.’
