Kerala High Court
The Commissioner Of Income Tax vs Shri.M.V.Narayanan on 28 October, 2010
Bench: C.N.Ramachandran Nair, K.Surendra Mohan
IN THE HIGH COURT OF KERALA AT ERNAKULAM
ITA.No. 474 of 2009()
1. THE COMMISSIONER OF INCOME TAX,
... Petitioner
Vs
1. SHRI.M.V.NARAYANAN,
... Respondent
For Petitioner :SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)
For Respondent :SRI.P.BALAKRISHNAN (E)
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice K.SURENDRA MOHAN
Dated :28/10/2010
O R D E R
C.N.RAMACHANDRAN NAIR &
K. SURENDRA MOHAN, JJ.
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I.T.A NOS:474,531,549,569,
832,842,1015,1016,1196,
1225,1257,1471 OF 2009
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Dated this the 28th October, 2010.
JUDGMENT
Ramachandran Nair, J.
All the connected appeals filed by the revenue arise from common orders of the Tribunal holding that the amount received by the assessees towards consideration for the retirement from the partnership firm does not amount to transfer attracting capital gains. We have heard senior counsel appearing for the revenue and counsel appearing for all the respondents.
2. All the assessees were partners of a firm which was running a bar attached hotel. The firm had land and building thereon where the business was carried on. Besides the land, building and fixtures the other main asset that got transferred in the course of retirement of assessees and substitution of new partners is the bar licence. In the course of search carried out in the premises of a newly inducted partner and one of the assessees, it came to the notice of the department that besides the accounted sum of Rs.7 lakhs received by each of the assessees, another Rs.7.5 ITA 474/2009 etc. 2 lakhs was paid towards unaccounted consideration for the retirement. The Assessing Officer treated the retirement of each of the assessees as a transfer and the consideration received was assessed to capital gains. Same issue was decided by two Commissioners (Appeals). While one of them held that the income is assessable as casual income and not as capital gain, the other held that the Officer rightly taxed the amount for capital gain. Appeals filed by the assessees were allowed by the Tribunal holding that there is no capital gain arising on the retirement of partners.
3. After hearing both sides and after going through the orders impugned we find that systematically through retirement and reconstitution all the old partners had retired from the firm and new set of partners have taken over the firm. However, the process of retirement and reconstitution did not lead to any dissolution of the firm. Consequently transactions are pure and simple retirement of all assessees as partners of a firm in the course of time. In the decisions of the Supreme Court in Additional Commissioner of Income Tax, Gujarat v. Mohanbhai Pamabhai reported in 165 ITR 166 and in another decision of the Supreme Court in Commissioner of Income Tax v. R. Lingmallu Raghukumar reported in 247 ITR 801, the Supreme Court held ITA 474/2009 etc. 3 that there is no 'transfer' within the meaning of Section 2(47) involved in the retirement of a partner and consequently there is no scope for assessment for capital gains on retirement of a partner from a firm. Even though standing counsel referred to subsequent amendments on transfer and the scope of Section 45(4) with particular reference to our decision in Commissioner of Income Tax v. Southern Tubes reported in 306 ITR 216 (Ker), we do not find retirement of a partner is specifically covered either in the definition clause for transfer or in Section 45 of the Act. So far as department's claim of application of Section 45(4) is concerned, we do not think the Section has any application when the firm is continuing and where there is no distribution of assets of the firm. Following the above decision of the Supreme Court we dismiss the appeals filed by the revenue.
4. The issue decided by us in the above appeals squarely apply to Appeal Nos: 842/2009 & 1471/2009 wherein the respondent-assessees were partners of the very same firm. Since we have held that no capital gains are assessable at the hands of the retiring partners in the batch case, the same findings apply to these appeals wherein assessees are also partners of the same firm. ITA 474/2009 etc. 4 Therefore, following our findings above we dismiss these appeals also filed by the revenue.
C.N.RAMACHANDRAN NAIR Judge K. SURENDRA MOHAN Judge jj ITA 474/2009 etc. 5