CIT-23 vs. M/S MANSUKH DYEING

C.A. No.-008258-008258 - 2022Supreme Court2022 INSC 122524 November 2022Bench: HON'BLE MR. JUSTICE M.R. SHAH HON'BLE MR. JUSTICE M.M. SUNDRESHAuthor: HON'BLE MR. JUSTICE M.R. SHAH21 pages
For Respondent: VINODH KANNA B.
AI SummaryAllowed

What were the facts?

The Revenue is aggrieved by the High Court's dismissal of its appeals, which upheld the ITAT's deletion of short-term capital gains additions. The assessee, M/s. Mansukh Dyeing and Printing Mills, a partnership firm, underwent several reconstitutions. On January 1, 1993, the firm's assets were revalued, crediting Rs. 17.34 crores to partners' capital accounts. The Assessing Officer (AO) reopened assessments for A.Y. 1993-1994 and 1994-1995, treating the revaluation and credit to partners as a transfer under Section 45(4) of the Income Tax Act, 1961, leading to an addition of Rs. 17,34,86,772/-. The CIT(A) confirmed the addition, but the ITAT, relying on the Supreme Court's decision in CIT vs. Hind Construction Ltd., deleted it. The High Court upheld the ITAT's order.

What did the Supreme Court hold?

The Supreme Court held that the revaluation of assets of the partnership firm and crediting the revalued amount to the partners' capital accounts, particularly in the context of new partners being inducted with significant credits and some partners withdrawing amounts, constitutes a 'transfer' under Section 45(4) of the Income Tax Act, 1961. The Court emphasized that the insertion of the word 'otherwise' in Section 45(4) by the Finance Act, 1987, w.e.f. April 1, 1988, brought within its sweep transfers of capital assets even when the firm is in existence and assets are transferred to partners, thereby extending the scope beyond dissolution. The Court found that the decision in CIT vs. Hind Construction Ltd. was pre-amendment and therefore not applicable to interpret the amended Section 45(4). The Court agreed with the Bombay High Court's view in CIT vs. A.N. Naik Associates and Ors. Consequently, the impugned judgment of the High Court and the order of the ITAT were quashed and set aside, and the order of the Assessing Officer was restored. No issue was expressly left undecided.

What were the issues?

1. Whether the revaluation of assets of a partnership firm and crediting the revalued amount to the partners' capital accounts, particularly upon induction of new partners and withdrawal of capital by existing partners, constitutes a 'transfer' attracting capital gains tax under Section 45(4) of the Income Tax Act, 1961, considering the insertion of the word 'otherwise' in the provision. Assessee's Contention (as inferred from ITAT's reliance): The revaluation of assets and crediting to partners' accounts does not involve a transfer, as per the Supreme Court's decision in CIT vs. Hind Construction Ltd. The decision in CIT vs. Texspin Engg. and Mfg. Works, Mumbai was considered applicable. Revenue's Contention: The revaluation of assets and crediting to partners' capital accounts, especially with new partners being inducted and having substantial credits, amounts to a distribution of assets and thus a 'transfer' under Section 45(4) of the Income Tax Act, 1961. The High Court erred in deleting the additions made by the AO.

Which sections of the Income-tax Act were involved?

Section 45(4),Section 143(1),Section 147,Section 148,Section 143(3),Section 50,Section 47(11)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 8258 OF 2022 The Commissioner of Income Tax - 23 …Appellant(s) Versus M/s. Mansukh Dyeing and Printing Mills …Respondent(s) WITH CIVIL APPEAL NO. 8259 OF 2022 The Commissioner of Income Tax - 23 …Appellant(s) Versus M/s. Mansukh Dyeing and Printing Mills …Respondent(s)

J U D G M E N T M.R. SHAH, J.

1.

Feeling aggrieved and dissatisfied with the impugned judgment and order dated 24.06.2013 passed by the High Court of Bombay passed in Income Tax Appeal No. 1074 of 2009 (relating to A.Y. 1993- 1 1994) and the judgment and order dated 24.06.2013 passed in Income Tax Appeal No. 1174 of 2009 (relating to A.Y. 1994-1995) by which with respect to the same assessee – M/s. Mansukh Dyeing and Printing Mills, a partnership firm, the High Court has dismissed the said appeals and has confirmed the respective orders passed by the Income Tax Appellate Tribunal (hereinafter referred to as “ITAT”) deleting the short term capital gains addition made by the Assessing Officer (AO), the R

The order continues below.

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