Income Tax Appellate Tribunal - Jabalpur
Assistant Commissioner Of Income-Tax vs Thermoflics India on 30 September, 1996
Equivalent citations: [1997]60ITD554(JAB)
ORDER
Shri G.D. Agrawal, A.M.
1. This appeal by the Revenue is directed against the order of CIT(A), Jabalpur.
2. The only ground raised in this appeal reads as under :
"The ld. CIT(A) erred in deleting the addition of Rs. 22,335 on account of short-term capital gains without appreciation of the fact and there was a dissolution giving rise to short-term capital gains within the meaning of section 45(4) of the Income-tax Act, 1961."
3. The facts of the case are that there was a partnership firm consisting of three partners, namely, Shri M.K. Minocha, Ku. Sudershan Minocha and Smt. Vidya Minocha. One of the partners, namely, Ku. Sudershan Minocha, expired on 28th January, 1989 and Smt. Vidya Minocha retired from the partnership with effect from the same date, i.e. 28th January, 1989. Consequently, Shri M.K. Minocha, the remaining partner took over all the assets and liabilities of the firm as it stood on the date of death of Ku. Sudershan Minocha and retirement of Smt. Vidya Minocha. The Assessing Officer made the addition of Rs. 22,335 as short-term capital gains by applying the provisions of section 45(4) of the Act. On appeal, the CIT(A) deleted the same. Hence this appeal by the Revenue.
4. At the time of hearing before us, the ld. DR submitted that the CIT(A) has relied upon the decisions of Supreme Court, which were prior to insertion of section 45(4) w.e.f. 1-4-1988. He submitted that due to deletion of section 47(2) and insertion of section 45(4), the Assessing Officer has rightly charged capital gains tax on the taking over of all the assets and liabilities by one partner of the dissolved firm.
5. The ld. counsel for the assessee relied upon the order of the CIT(A) and also the following decisions :
(i) Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC)
(ii) Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W (SC)
(iii) Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 (SC).
6. We have carefully considered the arguments of both the sides and have perused the materials places before us. Facts of the case we have already discussed earlier, i.e., there was a partnership firm consisting of three partners, one of the partners expired on 28th January, 1989. On the same day, another partner also retired and, therefore, all the assets and liabilities were taken over by the remaining partner. The question before us is whether in such circumstances, the firm can be charged to capital gains tax. This issue has been considered by the Hon'ble Supreme Court in various cases. In the case of CIT v. Dewas Cine Corpn. [1968] 68 ITR 240, the Hon'ble Supreme Court on consideration of the similar issue has held as under :
"that on the dissolution of the partnership, each theatre had to be returned to the original owner in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue, and, therefore, the amount of Rs. 44,380 could not be included in the total income of the partnership under the second proviso to section 10(2)(vii).
The expressions 'sale' and 'sold' are not defined in the Income-tax Act; those expressions are used in section 10(2)(vii) in their ordinary meaning. Sale', according to its ordinary meaning, is a transfer of property for a price, and adjustment of the rights of the partners in a dissolved firm by allotment of its assets is not a transfer, nor is it for a price."
7. The similar issue was again considered by their Lordships of Supreme Court in the case of CIT v. Bankey Lal Vaidya [1971] 79 ITR 594, and has held as under :
"that the arrangement between the partners of the firm amounted to a distribution of the assets of the firm on dissolution. There was no sale or exchange of the respondent's share in the capital assets to D; nor did he transfer his share in the capital assets. The sum of Rs. 65,000 could not be taxed on capital gains.
In the course of dissolution, the assets of a firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying the money value equivalent thereof. This is a recognised method of making up the accounts of a dissolved firm. In that case, the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm."
8. The similar view was reiterated by their Lordships of Supreme Court in the case of Malabar Fisheries Co. (supra) :
"Partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from that partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the I.T. Act, 1961. There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution."
9. From the above three decisions, which are of the Apex Court of the country, it is crystal clear that on the dissolution of the firm and upon the consequent distribution of the assets amongst the partners, there is no transfer of asset within the meaning of section 2(47) of the Income-tax Act, and, thus, there is no liability of capital gains tax. The submission of the ld. DR is that the above decision of Hon'ble Supreme Court will not hold good after 1-4-1988, because of insertion of section 45(4) and also deletion of section 47(2). Section 45(4) inserted by the Finance Act, 1987, w.e.f. 1-4-1988 reads as under :
"(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association of body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer."
10. From the plain reading of the above sub-section, it is clear that it provides for chargeability of capital gains tax as income of the firm, Association of Persons or Body of Individuals, if the following conditions exist :
(i) Profit and gains is arising.
(ii) Such arising of profit and gain is from the transfer of capital assets.
(iii) The transfer of capital asset is by way of distribution of capital assets.
(iv) It is on dissolution of firm or Association of Persons or Body of Individuals or otherwise.
All the above conditions are cumulative and if all the above co-exist, then, the firm, Association of Persons or Body of Individuals, shall be chargeable to tax for the previous year in which the said transfer takes place.
Thus, it is apparently clear that the transfer of capital asset is sine qua non for the applicability of sub-section (4) of section 45. The capital gains tax would be chargeable in the previous year in which the transfer takes place.
Sub-section (47) of section 2 of the Income-tax Act, defines the word "Transfer" in relation to the capital assets as under :
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as stock-in-trade of a business carried on by him, such conversion or treatment; or
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property."
The above definition of the word "Transfer" is amended by the Finance Act, 1987, w.e.f. 1-4-1988 and above clauses (v) and (vi) are inserted. However, both the above clauses will not cover the case of dissolution of the firm. The other clauses of the above definition, namely, sale, exchange or relinquishment of asset or extinguishment of right were already considered by the Hon'ble Supreme Court in the cases discussed earlier. Therefore, in our opinion, the amendment in definition of word "Transfer" as per section 2(47), does not cover the case of distribution of assets among the partners on the dissolution of the firm.
11. One may be tempted to argue that sub-section (4) of section 45 is a separate code by itself and it by way of deeming provision provided for levy the capital gains tax on the distribution of assets among the partners on dissolution of the firm. Therefore, there is no necessity of referring to the definition of word "Transfer" in section 2(47). However, we find that in section 45, sub-section (2) was inserted by Taxation Laws (Amendment) Act, 1984, w.e.f. 1-4-1985. As per this sub section, [i.e., sub-section (2) of section 45] conversion of capital asset, by the owner thereof, as stock-in-trade, was brought within the net of capital gains tax. There was simultaneous amendment in sub-section (47)of section 2, i.e., (Definition of word "Transfer") and clause (iv) was inserted therein, so as to include, the conversion of any asset by owners thereof as stock-in-trade, within the definition of word "Transfer". Thus, the Legislature was aware that section 45 is not a complete code in itself and to charge assesses under section 45(2) for conversion of capital asset into stock-in-trade, simultaneous amendment in the definition of word "Transfer" under section 2(47) is essential. Amendment in definition of word "Transfer" under section 2(47) was so made by inserting clauses (iv). However, we find that sub-section (4) to section 45 was inserted by the Finance Act, 1987, w.e.f. 1-4-1988. By the same date, there were insertion of clauses (v) and (vi) in sub-section (47) of section 2, but these two clauses do not cover the cases of distribution of assets on the dissolution of the firm. Thus, the definition of the word "Transfer" is not amended or modified, so as to enlarge the definition of word "Transfer" to cover the cases of distribution of asset on the dissolutions of firm. We have already mentioned that for chargeability of capital gains tax as per the newly inserted sub-section (4) of section 45, "Transfer" of capital asset is essential. Unless there is "Transfer" of capital assets, the assessee cannot be charged to capital gains tax. Therefore, the decisions of Hon'ble Supreme Court in the cases of Dewas Cine Corpn. (supra), Bankey Lal Vaidya (supra) and Malabar Fisheries Co. (supra) still hold good.
12. The omission of sub-section (2) of section 47 w.e.f. 1-4-1988 will not make any difference. This sub-section, before its omission provides exemption from capital gains tax in respect of distribution of capital assets on the dissolution of the firm, body of individuals or association of persons. However, as we have held that the distribution of assets on the dissolution of firm is not "Transfer" so as to make the assessee liable for capital gains tax. Therefore, when the assessee is not liable to capital gains tax, there is no necessity for claiming any exemption under section 47(2).
13. In view of the above, we find no infirmity in the order of the CIT(A) deleting the addition of Rs. 22,335. The same is upheld.
14. In the result, the revenue's appeal is dismissed.