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1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 23RD DAY OF JUNE 2014
PRESENT
THE HON'BLE MR. JUSTICE N. KUMAR
AND
THE HON’BLE MR. JUSTICE B MANOHAR
ITA No.594 OF 2013
BETWEEN;
1.Commissioner of Income-Tax-iv, C.R.Building, Queens Road, Bangalore.
2.The Assisstant Commissioner of Income-Tax, Circle-8(1), Bangalore.
...APPELLANTS
(By Sri E R Indrakumar, Sr.Adv. for Sri E I Sanmathi, Adv.)
AND:
M/s.Karnataka Agro Chemicals No.180, Multiplex House, 1st Main, Mahalakshmi Layout Extn., Bangalore-560 086.
...RESPONDENT
(By Sri A Shankar and Sri M Lava, Advocates)
-0-0-0-0-0-
This ITA is filed under Section 260-A of I.T. Act, 1961 arising out of Order dated 31.7.2013 passed in ITA No.764/Bang/2012 for the Assessment Year 2008- 09 to decide the foregoing question of law and such
2 other questions of law as may be formulated by this Court and to set aside the order dated 31.7.2013 passed by the ITAT, `A’ Bench, Bangalore in the appeal proceedings ITA No.764/Bang/2012 for the assessment year 2008-09.
This appeal coming on for admission this day, N. KUMAR, J. delivered the following:-
JUDGMENT
This appeal is by the revenue challenging the order passed by the Tribunal upholding the order passed by the Assistant Commissioner who has held that there is no transfer and in view of the circular of CBDT notional transfer cannot be subject to taxation.
In the course of assessment proceedings, the assessing Officer noticed that the assessee firm had created and self-generated assets in the form of good- will of business to an extent of Rs.7,59,28,000/- and transferred it to the current accounts of the four partners proportionately consequent to reconstitution of assessee firm. The assessing authority felt that this good-will is chargeable to tax under the head “capital gains” and accordingly, brought it to tax as “long term
3 capital gains”. Similarly, the assessing authority noticed that one of the partners Sri Mahesh G. Shetty had introduced Rs.40 Lakhs as capital in the appellate firm. On going through the capital account of the partner, the assessing authority found that there was no mention about this amount. Therefore, the assessing authority treated this as an unexplained cash credit under Section 68 of the Act and added the income returned by the assessee. Aggrieved by this order, the assessee preferred an appeal to the Commissioner of Income Tax(Appeals).
The appellate Authority sought a remand report from the Assessing Authority, which was submitted on 9.2.2012. After careful examination of the material on record and the remand report, the appellate authority held that in the remand report it is mentioned that the assessing authority and Additional CIT has verified the books of accounts and documents produced by the assessee and found that a sum of Rs.40 Lakhs was entered into the current accounts of Sri.Mahesh G.
4 Shetty on 31.3.2008 and the sources are loans taken from three different parties. When the said loans were taken by way of cheques and were properly accounted, the addition was unjustified and therefore, it was ordered to be deleted. Insofar as goodwill is concerned, the remand report showed that there is no transfer involved within the terms of Section 45 and Section 2(47) of the Income Tax Act. It is the case of revaluation of assests and the goodwill was carried in the balance sheet of the firm. There were no transfer of any assets by the firm to the retiring partners. No assets were allotted to the retiring partners. The accounts of the retiring partners were settled by actual payment of sums due to them. Therefore, it held that there is no transfer and in view of Circular of CBDT notional transfer cannot be subjected to taxation and therefore an order for deduction of Rs.7,59,28,000/- was made and accordingly, the appeal was allowed. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal.
The Tribunal after reappreciation of the entire material on record held that as is clear from the remand report a sum of Rs.40,00,000/- was entered in the current account of Mahesh G. Shetty on 31.3.2008 and sources for such introduction are loans taken from three different parties by way of cheque and therefore, Setion 68 of the Act is nto attracted. The Appellate Authority was justified in deleting such addition. Insofar as addition on account of goodwill is concerned, when the Appellate Authority accepted the contention of the assessee during the remand proceedings that there was no transfer of goodwill, Section 45(4) is not attracted and accordingly, it found no ground to entertain the appeal. Aggrieved by the said order, the present appeal is filed.
The learned Senior Counsel appearing for revenue assailing the impugned order fairly conceded that the finding of the Appellate Authority insofar as unexplained cash credit of Rs.40,00,000/- is reflected in
6 the accounts and properly explained and no grievance can be had on that account. Insofar as the transfer of goodwill which resulted in capital gains is concerned, he submitted once the goodwill is valued and it is proportionately distributed to four partners, when two partners paid the consideration while the other two partners walked out of the partnership firm after taking the consideration for the goodwill which was credited to their account, it constitutes a transfer. He relied on the judgment of the Bombay High Court wherein while interpreting Section 45(4) of the Act it has explained the meaning of the word “otherwise”. Therefore, he submits that it falls under the category of “otherwise” and the appellate authorities were not justified in interfering with the order passed by the assessing authority.
Per contra, the learned counsel appearing for the assessee submitted that the condition precedent for attracting Section 45 is there should be transfer of asset. In the instant case, admittedly the retiring partners took money and walked out of the partnership
7 firm. No asset much less capital asset was transferred in their favour. Therefore, Section 45 is not at all attracted much less Section 45(4) of the Act. Therefore, he submits that the order passed by the authorities cannot be found fault with.
From the aforesaid facts and the rival contentions, it is clear that the assets of the partnership was revalued and for the first time they valued the goodwill at Rs.7,59,28,000/-. Thereafter it was credited to the four partners in accordance with the profit sharing ratio. Two of the partners retired. They have been paid actual amount due to them in the books of the partnership firm. The goodwill continued with the firm. No portion of the goodwill is transferred to the retiring partners. Therefore, rightly in the remand report it had been stated that there is no transfer of the capital asset. If there is no transfer of capital asset, Section 45(4) is not attracted. In fact the Full Bench of this Court while interpreting Section 45(4) of the Act
8 after reviewing the case law on the point has held as under:-
“Sub-Section (4) of Section 45 deals with a distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals or otherwise. If in the course of such distribution of capital asset there is a transfer of a capital asset by the firm in favour of a person and it results in profits or gains to the firm, then the said profits or gains shall be chargeable to tax as income of the firm and again for computing such income, Section 48 is attracted. In other words, in the process of a dissolution of a firm, if a capital assest is transferred to a partner which results in profits or gains, then that income is chargeable at the hands of the firm under this provision. In order to attract sub-section (4) of section 45, the condition precedent is,
(1)there should be a distribution of capital assets of a firm;
9 (2)such distribution should result in transfer of a capital asset by firm in favour of the partner;
(3)on account of the transfer there should be a profit or gain derived by the firm; and
(4)such distribution should be on dissolution of the firm or otherwise.”
Thereafter, it has proceeded to hold that to attract Section 45(4) there should be transfer of capital asset from the firm to the retiring partners, by which the firm ceases to have any right in the property which is so transferred. In other words, the right to property should stand extinguished and the retiring partners should acquire absolute title to the property.
In the instant case, the partnership firm did not transfer any right in the capital asset much less the goodwill in favour of the retiring partners. The partnership firm did not cease to hold the property. Consequently, its right to the property is not
10 extinguished. On the other hand, the retiring partners did not acquire any right in the property as no property was transferred in their favour. In that view of the matter, we do not see any merit in this appeal. No substantial questions of law do arise for consideration in this appeal.
Accordingly, the appeal is dismissed.
Sd/-
JUDGE.
Sd/- JUDGE.
*alb/-.