Income Tax Appellate Tribunal - Madras
Deputy Commissioner Of Income Tax vs G.K. Enterprises on 31 December, 2001
Equivalent citations: (2003)79TTJ(MAD)82
ORDER
P. Mohanarajan, J.M. :
1. This appeal by the Revenue is directed against the order of the CIT(A)-VI, Chennai, dt, 27th Sept., 1991.
2. We have heard both the sides and perused the records. The brief facts of the case are as follows: For the asst. yr. 1988-89 the accounts of the assessee was closed on 30th June, 1987. On 1st March, 1988, a deed of retirement was executed between Sri G. Adiseshagiri and Smt. G. Nagaratnamma, who were the retiring partners and Sri G. Janardhana Reddy and Sri Venkatrama Reddy, who were the continuing partners, the accounts between the continuing partners and the retiring partners were settled on 29th Feb., 1988. The retiring partners, in consideration of their retirement from the assessee-firm, were allotted two grounds of land and building. The properties were described in portion A of Schedule A to the deed of retirement dt. 1st March, 1988. During the assessment proceedings a letter dt. 19th Nov., 1990, was filed by the assessee before the AO stating that the assessee-firm consisted of 4 partners viz., Shri G. Adiseshagiri Rao, Smt. G. Nagaratnamma, Sri G. Janardhana Reddy and Shri Venkatrama Reddy. This was constituted on 1st July, 1987, and it applied for registration for 1989-90 asst. yr. on 21st Aug., 1987, before the ITO Central Circle-IX, Chennai. It was further stated in the said letter that there was a change in the constitution of the assessee-firm on 29th Feb., 1988, when the partners Sri G. Adiseshagiri Rao and Smt. G. Nagaratnamma were retired and the continuing partners, Sri G. Janardhana Reddy and Sri Venkatrama Reddy were the remaining partners of the assessee-firm. Two of the new partners were admitted by the partnership deed of the assessee dt. 1st March, 1988, and the reconstituted firm filed Form No. 11A before the ITO, Central Circle-DC, Madras, on 3rd June, 1988. In the aforesaid letter filed by the assessee it was stated that Section 45(4) was inapplicable as the assessee-firm was not dissolved but it was reconstituted and it continued to carry on its business. Further, it was stated in that letter that the new partners brought in their share of capital and the two partners, who retired on 29th Feb., 1988, were paid their share of capital on that date. The assessee's claim that there was no transfer or any distribution of assets in view of the new partners and retired partners was not accepted by the AO. He applied the provisions of Section 45(4) of the Act and proceeded to assess the capital gains in the hands of the assessee. Aggrieved with the order of the AO, the assessee had filed an appeal before the first appellate authority where the CIT(A) after considering several aspects of the case and facts deleted addition made under the head 'capital gains'. Aggrieved with the order of the CIT(A), the Revenue is in appeal before us.
3. The learned Departmental Representative, Sri R. Venkatraman, vehemently argued that the CIT(A) is not justified in deleting the addition of Rs. 12,45,000 made by the AO by applying the provisions of Section 45(4) under the head 'capital gains'. It was urged that the transactions and the allotment of properties clearly reveal that there was a dissolution of the firm and subsequently there was a change in the constitution of the firm. The Asstt. CIT's finding that the assets worth of Rs. 15 lakhs owned by a group of persons had been transferred to others at much higher value without subjecting it to tax, in the course of change of constitution was completely overlooked by the CIT(A). This is clear case of tax avoidance by the assessee. The learned Departmental Representative fully supported the assessment order in every aspect.
4. On the other hand, the learned counsel for the assessee Sri B.S. Pattabiraman supported the order of the CIT(A) in every aspect. He filed paper books. The paper book No. 1 contains as many as eleven documents running pages from 1 to 45. The second paper book contains the written submissions, legal pronouncements, application for renewal of registration and the assessment order for the asst. yr. 1990-91 running pages from 1 to 20. It was argued by the learned counsel for the assessee that Section 45(4) of the Act is not applicable to the facts of this case as there was no distribution of capital assets. The AO came to the conclusion that at the moment when there was retirement of partners and allotment of shares in the form of assets after adjusting the accounts of the retiring persons the firm was dissolved. There is absolutely no merit in such contention raised by the Revenue. It was further argued that the retirement does not result in transfer. The learned counsel for the assessee also pointed out that the specific clauses providing for continuation of the business by the remaining partners of the assessee-firm vide deed of retirement dt. 1st March, 1988, are Clauses 2, 3 and 4. There is no iota of evidence for the AO to come to a conclusion that on the retirement of the two partners, the firm got dissolved. It was further argued that the AO has failed to consider clause No. 13 in the partnership deed dt. 31st July, 1987. In the aforesaid clause it was stated that death or insolvency or retirement of any partner shall not dissolve the firm. The intention of the remaining partners and the retiring partners was for continuance of the business. Both the retiring partners and the remaining partners expressly specified such an intention in the deed of retirement. It was further stated by the assessee's counsel that the AO without looking into these relevant, cogent and convincing materials considered the extraneous and irrelevant factors. Submitting as above, he argued that the order of the CIT(A) has to be upheld.
5. We have considered the rival submissions. Insofar as, the facts relating to retirement of two partners, admission of two new partners, filing of Form No. 11A and adjustment of accounts of retiring partners are not in dispute. The main dispute by the Revenue is that by virtue of retirement as well as allotment of shares to retiring partners make the firm dissolved and the allotment of shares to retiring partners after adjusting their accounts does amount to distribution or transfer of property to them. Therefore, the AO came to the conclusion that capital gains tax is exigible in the hands of the assessee and Section 45(4) is squarely applicable to the facts of this case. We are unable to persuade ourselves to accept that there is a dissolution at the moment when two partners retired from the assessee-firm. From the facts appearing on record it is seen that two partners retired during the assessment year and the shares were given back to them by release of land and building measuring two grounds, after adjusting their liability or profit, if any. The transactions which are borne out by the documents are filed with the authorities and before this Tribunal also. In the assessment order, the AO has narrated the true history of the assessee's case which is extracted below ;
"The assessee-firm originally consisted of 4 partners. It purchased a property of about 14 grounds with a building therein, in Court's auction in the year 1979. Further construction was undertaken during the period 30th June, 1981 to 30th June, 1984. The value of the asset, as shown in the balance sheet relevant for the asst. yr. 1984-85 (year ending 30th June, 1983--the assessee follows June year as its previous year) is at Rs. 14,90,504 (building and land at cost of Rs. 4,27,781 + construction during 30th June, 1981, to 30th June, 1983 Rs. 10,62,723), During the next accounting year a little more construction was undertaken and finally as on 30th June, 1985, the value of this asset is at Rs. 15,00,586. The partners existing as on this date i.e., on 30th June, 1985, were as under :
G. Adiseshagiri Rao 25 per cent G. Nagarathnamma 25 per cent G. Hanumantha Rao 25 per cent G. Ramesh Babu 25 per cent During the accounting year ended 30th June, 1986, while the same partners were continuing, the asset value appearing in the books was appreciated by a sum of Rs. 6 lakhs in the capital account (each partner originally contributed capital of Rs. one lakh) and the capital account of each partner was credited with a sum of Rs. 1.5 lakhs towards appreciation in the value of assets. Thereafter, there was a change in the constitution of the firm w.e.f. 1st July, 1986 (relevant for the asst. yr. 1988-89--previous year being the year ended 30th June, 1987) when S/Shri G. Hanumantha Rao and G. Ramesh Babu retired and in their places M/s Padmalaya Studios (P) Ltd. had entered the partnership with 50 per cent share. On 30th June, 1987, i.e., on the last date of the accounting year of this assessment year, the assets were further appreciated and the accounts of these partners were credited with sums of Rs. 4,75 lakhs to the accounts of G. Audiseshagiri Rao and G. Nagarathnamma who were having 25 per cent share and with Rs. 9,5 lakhs to the account of Padmalaya Studios (P) Ltd. who was having 50 per cent share, and the asset value is shown at Rs, 40,00,586. Again, these are only book entries. There was a change in the constitution of the firm w.e.f. 1st July, 1987, i.e., the first day of the accounting year relevant for the assessment year 1989-90. through deed dt. 31st July, 1987, when M/s Padmalaya Studios (P) Ltd. who was having 50 per cent share retired from the partnership and two new partners viz., S/Shri B. Venkatrama Reddy and G. Janardhana Reddy joined the partnership with 25 per cent share each. During the same accounting year, on 29th Feb., 1988, book entries were passed as extracted earlier."
6. From the above it is clear that the assessee-firm consisted of 4 partners. The assessee had purchased a property of about 14 grounds with a building therein, in Court's auction in the year 1979. Some development had been made in the property. As on 30th June, 1985, the following partners were in existence :
G. Adiseshagiri Rao 25 per cent G. Nagarathnamma 25 per cent G. Hanumantha Rao 25 per cent G. Ramesh Babu 25 per cent Thereafter there was a change in the constitution of the firm w.e.f. 1st July, 1986. Sri G. Hanumantha Rao and Sri Ramesh Babu retired and in their places, M/s Padmalaya Studios (P) Ltd. had entered into the partnership business with 50 per cent share. On 31st July, 1987, M/s Padmalaya Studios (P) Ltd. had also retired from the partnership and two new partners viz., Shri B. Venkatrama Reddy and Sri G.Janardhaha Reddy joined the partnership with 25 per cent share each. These are the previous history of the firm as found in the assessment order. Taking note of the entire facts, it is not understandable as to how the AO concluded that the transaction amounts to either distribution or transfer of property.
7. It is rightly contended by the assessee's counsel that retirement does not result in transfer. The interest of a partner in the partnership is not interest in any specific item of the partnership property. It is a right to obtain share of profits from time to time during the subsistence of the partnership and to get the value of his share in the net partnership assets remaining after satisfying the debts and liabilities of the partnership. What a partner receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. The share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provision of the partnership law. In this context, there is a decision by the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj). The question before the Gujarat High Court was that whether the retirement of the assessee as a partner from the firm amounted to dissolution of the firm and, therefore, the capital gains, if any, was exigible to tax in view of the provisions of Section 47(ii) of the IT Act, 1961. Of course, the provisions of Section 47(ii) were omitted by the Finance Act, 1987, w.e.f. 1st April, 1988. Considering the facts on identical issue, the Gujarat High Court opined that in such a case the retirement of a partner from the firm does not amount to dissolution when the firm is carrying on the business by the remaining partners. The decision of the Gujarat High Court was affirmed by the Full Bench decision of the apex Court in Addl. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC). Though the order is very short for better appreciation of the case the same is extracted below:
"Having regard to the view taken by this Court in Sunn Siddharthbhai v. CIT and Karthikeya V. Saiabhai v. CIT (1985) 156 ITR 509 (SC), these appeals must be dismissed."
8. In the present case, the transactions are genuine. The partnership is also genuine. From the history of this case, it is seen that the partnership firm carried on the business right from 1979. The retired partners had not introduced their property into the assessee-firm and the new partners paid the share capital at the time when they became partners at 25 per cent each of the total holdings. Therefore, it cannot be said that this is a device to reduce the tax by the assessee. The Hon'ble Madras High Court in the case of CIT v. N. Palaniappa Gounder (1983) 143 ITR 343 (Mad) considered a similar issue and held that "Whether the retiring partner receives a lump sum consideration or whether the amount is paid to him after a general taking of accounts after ascertainment of his share in the net assets of the partnership as on the date of retirement, the result, in terms, of the legal character of the payment as well as the consequences thereof, is precisely the same...What he receives is what he has already put in by way of his share capital or by way of his exertions as a partner. In a true sense, therefore, whether it is a dissolution or retirement and whether in the latter case, the retirement is on the basis of a general taking of accounts or on the basis of an ad hoc payment to the retiring partner, what the partner obtains is nothing more and nothing less than his own share in the partnership, A transaction of this kind is more fittingly described as mutual release or mutual relinquishment... The idea of mutual release is appropriate to a partnership because a retired partner will have no hold over the future properties of the firm and the partners who remain in the partnership release the retired partner from all further obligations towards the liabilities of the firm."
We, therefore, find convincing material in the case of the assessee. Further, there is nothing on record to show that the firm was dissolved by virtue of retirement of the partners. From the facts available on record and the documents filed it is clinchingly established that there was no dissolution at all. From the deeds executed from time to time, it is clear that the remaining partners continued the business of the assessee-firm and the application for registration was accepted by the Revenue authorities. The facts and circumstances of the case, if considered in proper perspective, the transaction will not fall within the mischief of Section 45(4) because there was no dissolution of the firm in the present case. The case relied on by the Revenue in the case of Mrs. Arathi Shenoy and Ors. v. Jt. CIT (2000) 69 TTJ (Bang) 779 : (2000) 75 ITD 100 (Bang) is not at all applicable to the facts of the present case. There were litigations amongst the partners and when the matter went up before the High Court, it directed to fix the asset price and hand over the asset of the firm for running the business who makes the highest bid. There was a sale of business in the aforesaid transaction but in this case, in view of the evidence brought by the assessee-firm, it is clear that there was no sale. There was no dissolution. There was only retirement of partners. Even after the retirement of the partners according to the deeds executed between the parties, the business of the firm was to continue and the retired partners shall have no rights in the business of the assessee. We, therefore, find much force in the stand taken by the assessee. The CIT(A) had meticulously considered all the aspects of this case in his order. The Revenue, at the time of proceedings before us, had not brought any convincing material to assail the order of the CIT(A). On a careful consideration of the entire facts, submissions and the documents, we do not find any infirmity in the order of the CIT(A).
Considering all the facts and totality of the circumstances of the case, we uphold the order of the CIT(A). Ordered accordingly.
9. In the result, the appeal of the Revenue is dismissed.