By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Bhadresh Doshi
Chartered Accountants
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4. (2013) 55 SOT 122 (Mumbai)
ITO vs. Fine Developers
ITA No.4630 (Mum.) of 2011
A.Y.2008-09. Dated 12-10-2012
Sections 45(4) read with section 2(47) of the Income Tax Act, 1961 – Capital gain tax cannot be levied on firm on mere admission of partner if there was no distribution of any capital asset.
Facts
During the relevant assessment year, the assesseefirm of builders and developers admitted HDIL as a new partner with 50% share. The Assessing Officer held that on the date of admission, there was a plot of land costing Rs. 28 crore held by the firm and 50% of such amount was transferred in favour of the new partner HDIL on its admission in the firm. Accordingly to the Assessing Officer the assesseefirm was, therefore, liable to capital gain tax u/s. 45(4).
The CIT(A) held that :
a. During the relevant assessment year there was only admission of HDIL as new partner in the firm.
b. There was neither retirement nor distribution of assets nor revaluation of plot of land during the assessment year under consideration.
c. Mere admission of partners did not attract provisions of section 45(4).
d. During the continuance of the partnership-firm, rights of the partners were confined to obtaining the share of the profit and no partner could have exclusive claim to any assets.
Accordingly, the addition made by the Assessing Officer was set aside.
Held
On appeal by the Revenue, the Tribunal dismissed the appeal. The Tribunal noted as under :
1. It is not a case where firm was taken over by the new partner so that provisions of section 45(4) can be invoked. As per the settled principles of law of partnership, during the continuation of the partnership, partners do not have separate right over the assets of the firm in addition to interest in share of profits. The basis of the said proposition is that value of the interest of each partner with reference to the assets of the firm cannot be isolated and carved out from the value of the partners’ interest in the totality of the partnership assets.
2. In the case under consideration, asset of the firm, i.e., plot of land, was never transferred to anybody – it always remained with the assesseefirm only. From the date of purchase of the plot till 27-05-2008, when three partners retired, it was the asset of the firm and there was no change in the ownership of the said plot. Thus, there was no extinguishment of rights, as envisaged by section 2(47), in the case of assessee-firm.
3. From the very beginning of the partnership, the plot of land in question was treated as stockin- trade by the assessee-firm. Even on 31-03- 2008 it was shown as current asset (i.e. W-I-P) in the balance sheet. The Assessing Officer has nowhere rebutted/doubted this factual position.
