M/S. BHAGGYAM BUILDERS,CHENNAI vs. ACIT, CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

This is an appeal against the order of the Commissioner of

Income Tax (Appeals)-2, Chennai in ITA No. 65/CIT(A)-2/2013-14 dated

29.07.2016 for assessment year 2010-11.

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Bhaggyam Builders from 1993 onwards. This proprietary concern was

converted into a partnership firm w.e.f. 01.05.2003 in the same name of M/s.

Bhaggyam Builders admitting her son and daughter as partners. At the time

of conversion, the property measuring 1120 sq.ft. at New Boag Road,

purchased on 04.03.1996 by Mrs. B. Sakunthala for a consideration of Rs.

4,32,000/- vide doc 40496/1996 stood in her name, was shown as a Fixed

Assets in the schedule of M/s. Bhaggyam Builders, a partnership firm.

individual account in order to settle the property and this transaction was

reflected in the fixed asset schedule appended to the balance sheet as on

31.03.2010 of M/s. Bhaggyam Builders. By settlement deeds dated

14.07.2010 (Doc Nos. 1523& 1524/2010 & dated 14.07.2011. Mrs.Sakunthala

settled that property in favour of her daughter & son, respectively. Since, the

firm transferred the property as on 31.03.2010 to Mrs. B. Sakunthala, the AO

held that the firm/partner’s right in the said property was relinquished or

extinguished which amounts to transfer u/s. 2(47) and hence adopting the

guideline value as on 31.03.2010 as the sale consideration, the AO brought to

tax the LTCG. Aggrieved, the assessee filed an appeal before the CIT(A).

The CIT(A) held that the case laws relied on by the assessee are not

applicable as the sub sections (3) & (4) of section 45 were inserted by the

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Finance Act, 1987 w.e.f. 01.04.1988 aiming to bring to tax net, the

transactions where by the assets, which were brought into or taken out of the

firm. Relying on the decision of this tribunal in the case of ITO vs

International Rubber & Plastics (2010) 127 ITR 347 (Chennai), she held that,

when a firm is in existence and there is a transfer of capital assets, the

expression after wise appearing in section 45(4) is applicable & the object of

the amendment was to remove the loophole which has existed whereby

capital gains tax was not changeable. Aggrieved against the order of the

CIT(A), the assessee filed this appeal challenging the decision of the CIT(A).

and the relevant book entries. It is seen that the impugned asset value at Rs.

5,02,000/- is deducted from Mrs. B. Sakunthala, partner’s capital account as

on 31.03.2010 and thus, the fact recorded by AO & sustained by the CIT(A)

stood confirmed. The AR relying on various decisions reported in 142 ITR 792

(mad), 211 ITR 781 (Mad), 234 ITR 635 (mad), 241 ITR 668(Mad) submitted

that during the subsistence of partnership, no immovable property of the firm

can be transferred to partners by mere book entries and such transfer

required registration etc. Further, the AR relying on the decision reported in

383 ITR 258 (Mad) wherein it is held that when partnership firm is transferred

into a company , there is no transfer of capital asset as contemplated by

section 45(1) and hence submitted that the impugned transaction is not a

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transfer. Further, the AR relying on this tribunal decision in the case of ACIT

vsGoyal Dresses in ITA No. 1478/Mds/2007 for assessment year 2004-05

dated 22.08.2008, reported in 126 ITD 131 contended that capital gain is not

chargeable to tax also for the reason that the transfer of property to the

retiring partner was necessitated on account of family arrangement to avoid a

possible dispute. Per Contra, the DR supported the orders of lower authorities

and their reliance on this tribunal decision in the case of ITO vs International

Rubber & Plastics, supra. Further, the DR submitted that the assessee has

not laid any material to say what was the accounting treatment in assessment

year 2004-05 when the proprietary business was converted into partnership

business. When the assets brought into the firm is transferred to only one of

the partners, extinguishment happens, which is a transfer, and hence the

assessee is liable for capital gain.

material. The fact remains that Mrs.Sakunthala brought her proprietary

concern into a partnership firm with her son and daughter during assessment

year 2004-05 which comprised all the assets and liabilities including the

impugned asset, and then onwards it was common property of all the

partners. During assessment year 2010-11, the impugned asset is transferred

to her and subsequently in assessment year 2011-12 that property was also

registered in the name of her son & daughter. The assessee could not lay

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any material for dispute etc., and hence the case law relied on by the

assesseeis not applicable to the facts of this case. The other decisions were

rendered before the insertion of sub sections (3) & (4) of 345 by the Finance

Act, 1987 and hence they are not applicable to the facts and circumstances of

this case. This tribunal in the case of SharadhaTenny products Ltd vs ACIT

for assessment year 2009-10 dated 18.03.2016 reported in 180 TTJ 284

recorded the scope of the above amendment, the relevant portion is extracted

as under:

“ 6.2 At this point of time, it is appropriate to refer to certain provisions of the Act relevant to the facts of the present case. 6.2.1 Section 2(47) defines what is transfer and it reads as follows : "(47) "transfer", in relation to a capital asset, includes, (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of or acquiring shares in, a cooperative society, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.'

Explanation : For the purposes of sub-cls. (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA.'

6.2.2 Section 2(14) defines Capital asset, as meaning "property" of any kind held by the assessee, whether or not connected with his business or profession. The above exhaustive definition is subject to the following exclusions like stock-in-trade, consumable stores or raw material held for

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the purpose of business or profession, personal effects, agricultural land in India, certain gold bonds, special bearer bonds and gold deposit bonds. The share or interest of a partner in the partnership and its assets would be property and, therefore, a capital asset within the meaning of the aforesaid definition. To this extent, there can be no doubt. The next question is as to whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under section 45 of the Act. A look at how formation and dissolution of partnership was used as a device to evade tax on capital gains to convert an asset held individually into an asset of the firm in which the individual is a partner and conversion of capital assets into individual assets on dissolution or otherwise, is necessary.

6.2.2.1 Partnership is a form of carrying on business evolved so that two or more persons can to join together by pooling resources in the form of capital and expertise. One of the devices used by assessee to evade tax on capital gain was to convert in asset held individually into asset of the firm in which the individual is a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise.

6.2.2.2 Such introduction of capital asset as capital contribution by a partner up to 1st April, 1988 did not result in incidence of capital gain. It was so held by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The Hon'ble Supreme Court held that under the IT Act, 1961, where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of section 45 of the Act, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest. On such introduction of capital the partner's capital account is credited with the market value of the property. Such entry does not represent the true value of consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate before hand what will be the position in terms of monetary value of a partner's share on that date. At that time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of section 48 of the Act. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation

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altogether. In coming to the above conclusion the Hon'ble Court relied on the decision of the Hon'ble Supreme Court in AddankiNarayanappa v. BhaskaraKrishnappa AIR 1966 SC 1300. The Hon'ble Supreme Court in the said decision explained the nature of partnership and the right of the partners over the assets of the partnership as follows:

".... whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in, all the partners, and in that sense every partner was an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to L share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub cls. (i), (ii) and (iii) of clause (b) of section 48."

6.2.3 The position was later explained in the same judgment as follows:

"The whole concept of partnership is to entry upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the, of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges."

6.2.4 Parliament with the avowed object of blocking this escape route for avoiding capital gains tax by the Finance Act, 1987, introduced sub-section (3) to section 45 w.e.f. 1st April, 1988. The effect of this was that the profits and gains arising from the transfer of a capital asset by a partner to a firm are chargeable as the partner's income of the previous year in which the transfer took place and the amount recorded in the books of account of the firm, shall be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset.

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6.2.5 In the case of dissolution where partners are allotted capital assets of the firm, it was held that there was no transfer. In Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 /2 Taxman 409, the Hon'ble Supreme Court has explained the nature of distribution of assets of a partnership on dissolution amongst its partners and as to whether such distribution of assets would constitute transfer within the meaning of section 2(47) of the IT Act as follows :

"A partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly by or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Act. Further, it is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person."

6.2.6 To plug this loophole the Finance Act, 1987, brought on the statute book a new sub-section (4) in section 45 of the Act, w.e.f. 1st April, 1988, which reads as follows:

"The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other AOP or BOI (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer."

6.2.7 Before the introduction of sub-section (4) to section 45, there was clause (ii) of section 47 which read as under:

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"Any distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons."

Section 47 of the Act lays down which are the transactions not regarded as transfer for the purpose of section 45 of the Act.

6.2.8 The Finance Act, 1987, w.e.f. 1st April, 1988, omitted this clause, the effect of which was that distribution of capital assets on the dissolution of a firm would w.e.f. 1st April, 1988 be regarded as "transfer". Therefore, instead of amending section 2(47), the amendment was carried out by the Finance Act, 1987, by omitting section 47(ii), the result of which was that distribution of capital assets on the dissolution of a firm was regarded as "transfer". The effect was that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm's income in the previous year in which the transfer took place and for the purposes of computation of capital gains, the fair market value of the asset on the date of transfer was deemed to be the full value of the consideration received or accruing as a result of the transfer.”

In the case of the Commissioner Of Income-Tax. vsSothern Tubes And Another reported in 217 CTR 584 , the Kerala High Court held that “While counsel for the Revenue relied on the decisions of the Andhra Pradesh, Bombay and Karnataka High Courts reported in Rajlaxmi Trading Co. vs. CIT (2001) 169 CTR (AP) 140 : (2001) 250 ITR 581 (AP), CIT vs. A.N. Naik Associates (2004) 187 CTR (Bom) 162 : (2004) 265 ITR 346 (Bom) and Suvardhan vs. CIT (2006) 206 CTR (Kar) 226 : (2006) 287 ITR 404 (Kar) respectively, counsel appearing for the assessees relied on the unreported decision of this Court in IT Ref. Nos. 235 and 236 of 1997, dt. 29th Feb., 2002 and that of the Madras High Court in CIT vs. Vijayalakshmi Metal Industries (2002) 177 CTR (Mad) 43 : (2002) 256 ITR 540 (Mad). The Tribunal decided the issue in favour of the assessee following the decision of other Tribunals. The Tribunal has taken the view that s. 2(47) defining "transfer" does not take in the case of dissolution of a firm and since s. 45(4) is not a self-contained code for assessment of capital gains arising from the transfer of capital assets by way of distribution of capital assets on the dissolution of the firm, no assessment is permissible in the case of the assessee. We are unable to agree with the view taken by the Tribunal that s. 2(47) does not cover dissolution and distribution of assets of a firm because sub-cl. (vi) of s. 2(47) covers every agreement or arrangement in whatever manner which has the effect of transferring or enabling enjoyment of any immovable property. *In fact the transactions referred to in the latter part of cl. (vi) are exhaustive and in our view the scope of the section is such that if the result of arrangement or agreement of a transaction is a transfer of assets or enabling enjoyment of any immovable property, then the transaction which led to such result is a transfer. In this case the dissolution deed provides that land and factory building on dissolution will devolve upon one of the partners who wanted to continue business as a proprietor. Dissolution deed is an agreement and if the provisions of such deed provide for

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relinquishment of right of one partner on the assets, namely, immovable property in favour of another partner, then the latter becomes absolute owner of the property”.

*Emphasis supplied by us .

transfer has to be rejected. It is now clear that when the asset is

transferred to a partner, that falls within the expression "otherwise" and

the rights of the other partners in that asset of the partnership are

extinguished. Considering the amendment, there is clearly a transfer and

if, there be a transfer, it would be subject to capital gains tax. In the

above facts and circumstances, the order of the CIT(A) does not require

any interference and the assessee’s appeal grounds fail.

Order pronounced on Monday, the 22nd day of January, 2018 at Chennai.

Sd/- Sd/- (एसजयरामन) (धु�वु आर.एलरे"डी) (S. JAYARAMAN) (DUVVURU RL REDDY) लेखासद%य/Accountant Member $या�यकसद%य/JUDICIAL MEMBER

चे�नई/Chennai, 1दनांक/Dated: 22nd January, 2018 JPV आदेशक(+�त3ल4पअ5े4षत/Copy to: 1. अपीलाथ'/Appellant 2. +,यथ'/Respondent 3. आयकरआयु6त ) अपील(/CIT(A) 4. आयकरआयु6त/CIT 5. 4वभागीय+�त�न�ध/DR 6. गाड9फाईल/GF