THE COMMISSIONER OF INCOME TAX – 23 vs. M/S. MANSUKH DYEING AND PRINTING MILLS

CIVIL APPEAL No. 8258/2022Supreme Court[2022] 8 S.C.R. 78524 November 2022Bench: 2 JudgesAuthor: M.R. SHAH, M.M. SUNDRESH15 pages
AI SummaryAllowed

What were the facts?

The Revenue is in appeal against the High Court of Bombay's decision which upheld the Income Tax Appellate Tribunal's (ITAT) deletion of additions made by the Assessing Officer (AO) towards short-term capital gains. The assessee, M/s. Mansukh Dyeing and Printing Mills, a partnership firm, revalued its assets on January 1, 1993, to Rs. 17.34 crores. This revalued amount was credited to the partners' capital accounts in their profit-sharing ratio. Subsequently, new partners were inducted with small capital contributions, but they received substantial credits to their capital accounts from the revaluation. Some partners also withdrew amounts credited to their accounts. The AO made an addition of Rs. 17,34,86,772/- as short-term capital gain under Section 45(4) for Assessment Year 1993-1994, and a similar addition for AY 1994-1995. The ITAT deleted these additions, and the High Court upheld the ITAT's order.

What did the Supreme Court hold?

The Supreme Court held that Section 45(4) of the Income Tax Act, 1961, as amended by the Finance Act, 1987, is applicable. The object of introducing Section 45(4) and omitting Section 2(47)(ii) was to prevent assessees from avoiding capital gains tax by revaluing and distributing assets at the time of dissolution or otherwise. The Court found that the revaluation of assets by Rs. 17.34 crores and crediting this amount to the partners' capital accounts, particularly when new partners with small capital contributions received substantial credits, constituted a 'transfer' falling under the 'otherwise' category of Section 45(4). This is because the credit to capital accounts effectively amounted to a distribution of assets, extinguishing the firm's rights in those assets in favour of the partners. The Court distinguished the case of Commissioner of Income Tax, West Bengal v. Hind Construction Ltd., (1972) 4 SCC 460, as it was decided prior to the amendment of Section 45(4) and the inclusion of the word 'otherwise'. The Court agreed with the Bombay High Court's decision in Commissioner of Income Tax v. A.N. Naik Associates and Ors. The AO's addition of Rs. 17,34,86,772/- as short-term capital gain under Section 45(4) was restored. The appeals were allowed.

What were the issues?

1. Whether the credit of revalued assets to the partners' capital accounts, including those of newly inducted partners with small capital contributions, constitutes a 'transfer' under Section 45(4) of the Income Tax Act, 1961, making it chargeable to capital gains tax? Assessee's Contention (Implied from ITAT/High Court decision): The credit to capital accounts was not a 'transfer' in the nature contemplated by Section 45(4). The revaluation and credit did not result in the distribution of capital assets in a manner that would attract capital gains tax. Revenue's Contention: The revaluation of assets and crediting the increased amount to the partners' capital accounts, especially with the induction of new partners receiving disproportionately large credits relative to their capital contribution, amounts to a 'transfer' under the 'otherwise' clause of Section 45(4). This action was intended to circumvent capital gains tax, and the amendment to Section 45(4) by the Finance Act, 1987, was specifically to plug such loopholes. The Revenue relies on the Bombay High Court's decision in Commissioner of Income-Tax Mumbai v. Texspin Engg. and Mfg. Works, Mumbai, (2003) 263 ITR 345 (Bom.) and the principle laid down in Commissioner of Income Tax v. A.N. Naik Associates and Ors., (2004) 265 ITR 346 (Bom.).

Which sections of the Income-tax Act were involved?

Section 45(4),Section 2(47)(ii),Section 47(ii)

AI-generated summary — verify with the full judgment below

A B C D E F G H 785 [2022] 8 S.C.R. 785 785 THE COMMISSIONER OF INCOME TAX – 23 v. M/S. MANSUKH DYEING AND PRINTING MILLS (Civil Appeal No. 8258 Of 2022) NOVEMBER 24, 2022 [M. R. SHAH AND M. M. SUNDRESH, JJ.] Income Tax Act, 1961: s.45(4) – Applicability of – Captial gains – Profits or gains arising from the transfer of a capital asset – Object of introducing s.45(4) – Held: s.45(4) states that the profits or gain arising from the transfer of capital assets by way of distribution of capital assets on account of dissolution of a firm or other association of persons or body of individuals or otherwise shall be chargeable to tax as the income of the firm – The object and purpose of introduction of s.45(4) was to pluck the loophole by insertion of s.45(4) and omission of s.2(47)(ii) – Earlier, there was an exemption of the transfer by way of distribution of capital assets from the ambit of the definition of “transfer” – The same helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same at the time of dissolution – By amendment, s.45(4) takes into sweep not only the cases of dissolution but also cases of subs

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 45(4)

All 107 judgments and leading authorities on Section 45(4) →

Recent GST High Court judgments

Search GST case law →