THE COMMISSIONER OF INCOME TAX,KOZHIKODE vs. SHRI.M.V.NARAYANAN,PONNANI,MALAPPURAM DT

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ITA/474/2009HC KeralaKLHC01025235200928 October 2010Bench: HONOURABLE MR.JUSTICE K.SURENDRA MOHAN,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR7 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the retirement of a partner from a firm does not constitute a 'transfer' within the meaning of Section 2(47) of the Income Tax Act, 1961. Consequently, there is no scope for assessment of capital gains on such retirement. The Court followed the Supreme Court decisions in Additional Commissioner of Income Tax, Gujarat v. Mohanbhai Pamabhai and Commissioner of Income Tax v. R. Lingmallu Raghukumar, which clearly held that retirement of a partner does not involve a 'transfer'. The Court found that Section 45(4) of the Act, which deals with capital gains on distribution of capital assets on dissolution of a firm, has no application in this case as the firm was continuing and there was no distribution of assets of the firm. The Court also noted that retirement of a partner is not specifically covered in the definition of 'transfer' or in Section 45 of the Act. Therefore, the appeals filed by the Revenue were dismissed.

What were the facts?

The appeals by the Revenue challenge common orders of the Income Tax Appellate Tribunal (ITAT) which held that amounts received by assessees for their retirement from a partnership firm did not attract capital gains tax. The assessees were partners in a firm operating a bar attached hotel, which owned land, building, and a bar license. During searches, it was discovered that in addition to an accounted sum of Rs. 7 lakhs received by each assessee, an unaccounted Rs. 7.5 lakhs was paid for their retirement. The Assessing Officer treated these retirement payments as a transfer attracting capital gains. The Commissioners (Appeals) had conflicting views, with one holding it as casual income and the other upholding the capital gains assessment. The ITAT, however, ruled that no capital gains arose from the retirement of partners.

What were the issues?

1. Whether the amount received by the assessees on retirement from a partnership firm constitutes a 'transfer' attracting capital gains under the Income Tax Act, 1961, specifically concerning the definition of 'transfer' in Section 2(47) and the chargeability of capital gains under Section 45. Assessee's Contention: The assessees argued that the retirement of a partner from a firm does not amount to a 'transfer' as defined under Section 2(47) of the Act, and therefore, no capital gains can be assessed. They relied on Supreme Court decisions in Additional Commissioner of Income Tax, Gujarat v. Mohanbhai Pamabhai and Commissioner of Income Tax v. R. Lingmallu Raghukumar. Revenue's Contention: The Revenue contended that the retirement of partners should be treated as a transfer. They also argued for the applicability of Section 45(4) of the Act, referencing a Kerala High Court decision in Commissioner of Income Tax v. Southern Tubes. The Revenue also referred to subsequent amendments concerning 'transfer'.

Which sections of the Income-tax Act were involved?

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

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN THURSDAY, THE 28TH OCTOBER 2010 / 6TH KARTHIKA 1932 ITA.No. 474 of 2009() ------------------------------ ITA.866/COCH/2004 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH .................... APPELLANT/REVENUE --------------------------------- THE COMMISSIONER OF INCOME TAX, CALICUT. BY SRI.P.K.R.MENON, SR.COUNSEL, GOI (TAXES) ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX.

RESPONDENT/ASSESSEE -------------------------------------- SRI.M.V. NARAYANAN, MAKKORAM VEETTIL HOUSE, PURANGU P.O., PONNANI, MALAPPURAM DISTRICT. BY ADV. SRI.P.BALAKRISHNAN. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 28/10/2010, ALONG WITH ITA NO.531 OF 2009 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: rs

C.N.RAMACHANDRAN NAIR & K. SURENDRA MOHAN, JJ. ------------------------------------------------------------ I.T.A NOS:474,531,549,569, 832,842,1015,1016,1196, 1225,1257,1471 OF 2009 ----------------------------------------------------------- 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

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