Indian Kanoon - Search engine for Indian Law

17. The moot point is as to whether the above transactions, in isolation or clubbed together, can be construed as 'distribution of assets' within the meaning of Section 45(4) of the Act. So far as revaluation of assets of the firm, and crediting of capital account of the Partner is concerned, notably the excessive of revaluation of assets is merely a book entry and none of the assets of the firm were actually transferred to any of the Partners either in account books or otherwise. It is well understood that revaluation is generally carried out to record the true value of assets in the books of account in place of historical cost of the assets. The expressions "transfer" and "distribution" can by no stretch of imagination be said to include a mere revaluation of assets.

16. In the facts before us the partnership asset was revalued by the partners at the start of the year and the difference on account of revaluation of asset was credited to the partners account. The revaluation of partnership assets was anterior to the introduction of new partners. Revaluation of assets by partnership firm does not attract capital gains. The revaluation of assets of partnership and the credit of revalued amount to the capital account of partners in their respective share ratio does not entail any transfer as defined under section 2(47) of the Act The introduction of new partners to a M/s Indian Extrusions Vs. ACIT-24(3) partnership firm owning immovable assets and consequent reduction in the share ratio of present partners does not entail any relinquishment of their rights partnership property. On introduction of new partners, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses if any of the partnership business. When any new partner is introduced into an existing partnership firm, the profit sharing ratio undergo a change which does not amount to transfer as defined under section 2(47) of the Act as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership and thus on realignment of profit sharing ratio, on introduction of new partners, there is no relinquishment of any non-existent share in the partnership assets as the asset remained with the firm. Such an arrangement is not covered by the provisions of section 45(4) of the Act which covers the case of dissolution of partnership firm. Accordingly no capital gain arises on such relinquishment of share ratio in the partnership firm. We confirm the order of CIT(A) and dismiss the grounds of appeal raised by the revenue."

(Underlined for emphasis by us) The second decision relied upon is ITO v. Fine Developers 55 SOT 122 (Mum), whose relevant portion reads as under:

"5.3 As per the settled principles of taxation revaluation of capital assets does not result in accrual or receipt of taxable income unless and until the capital asset is actually transferred. Secondly, revaluation of assets before conversion of a firm into company cannot be equated with dissolution of firm/transfer of assets of firm. If the above principle is applied to the basic facts of the case it can be safely held that re- valuation of the plot of land did not result in any profit or gain to the firm and hence question of distribution of profit by the firm does not arise. Thus, the basic ingredient for invoking provisions of section 45(4) of the Act is missing in the case under consideration. The twin requirements of the section 45(4) contemplate not only the retirement of the partners from the partnership firm but also the transfer by way of distribution of capital assets. It is a fact that retiring partners had withdrawn the sums to credit in their accounts, but such withdrawals cannot be treated as 'distribution of capital assets either on dissolution of firm or otherwise.

(Underlined for emphasis by us)

26. The aforesaid discussion by the Hon'ble High Court clearly reveals that mere a revaluation of assets and subsequent withdrawal of the revalued amount cannot lead to the inference that there was distribution of assets by the firm.

27. Before parting, we may also refer to the reliance placed by the Assessing on the decision of the Hon'ble Supreme Court in case of CIT v. Dewas Cine Corporation (supra). In our view, the said decision is distinguishable on facts as the said decision was pertaining to depreciation of assets and not on revaluation of assets or distribution of asset and hence not applicable to the facts of the present case.