In the case between Income Tax Officer (ITO) and M/s. Fine Developers, Mumbai bench of Income Tax Appellate Tribunal (ITAT) recently ruled that capital gain tax under section 45(4) of the Income Tax Act 1961 does not attract at the time of admission or retirement of partners.
Assessee firm in the present case M/s. Fine Developers is a builder and developer of land and buildings which were constituted vide original partnership deed. During the assessment year 2008-09 the Assessee firm admitted a new partner M/s. Housing Development and Infrastructure Limited to supplement the financial resource and for augmenting the work force for diverse commercial consideration, whereas in the assessment year 2009-10 certain partners of the firm were expressed their desire to retire from the firm. The Assessee firm purchased a land located Kurla from M/s. Bhandary Metallurgical Corporation Limited for Rs.28 crores and the same was shown in the annual accounts of the Assessee as stock-in-trade. On retirement of some partners, purpose of settlement of accounts of the Retiring Partners, the said piece of land was revalued as on 01.04.2008 and their accounts were settled in accordance with revalued credit balances lying in respective capital accounts.
During the assessment period the Assessing Officer (AO) noticed that section 45(4) of the Act stood attracted on account of reconstitution of the Assessee and the Assessee firm asked for explanation regarding the same.in response the Assessee proposed to submit the requisite and essential information and details as desired by the AO and expound on facts and laws as to show the proposed addition is untenable and unsustainable.
However, the AO refused to accept the proposed submission of the Assessee and held that provisions of 45(4) are applicable not only in case of dissolution but also to the cases of subsisting partnership transferring the assets in favour of retiring partner and the term “otherwise” in sec, 45(4) read with “transfer of capital assets” by way of distribution of capital assets includes the transactions relating to “retirement”. He concluded that as a result of retirement cum admission there was distribution of rights of erstwhile partners amongst the retiring partners, subsisting partners and the new partners. Accordingly he computed the capital gain at Rs.206,19,20,209 being partial surplus on revaluation and treating the balance Rs.15,51,99,020 towards business profits as not being an arms length transaction.
On appeal CIT(A) granted relief to the Assessee by deleting the addition made by the AO. Aggrieved by the order of the authority, Revenue approached the Tribunal on appeal.
After considering the above narrated facts deeply the Tribunal bench comprising of Judicial member Amarjith Singh and Accountant Member R.C.Sharma upheld the order passed by the CIT(A) and observed that there is no provision to substitute Notional market value for computing business income. kurla land surrender to SRA is taxed as business income than said income will become cost of sale of FSI or TDR and thus the ultimate taxable business will be sale consideration of FSI/TDR as disclosed by the Assessee. However, since provisions of section 45(4) cannot be invoked in respect of stock-in-trade and there is no justification in the order of AO.
The division bench further observed that “section 45(4) is not applicable in the two situations such as admission of new partner and retirement of certain partners. In the present case continuing partners had not transferred any rights of the plot of the land in question in favour of the retiring partners and hence there was no transfer of capital asset within the meaning of section 2(47] by the firm to the retiring/continuing partners.”
Subscribe Taxscan Premium to view the Judgment
