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SUPREME COURT OF INDIA
M.R. SHAH, M.M. SUNDRESH, JJ.
The Commissioner of Income Tax -23 - Appellant
Versus
M/s. Mansukh Dyeing and Printing Mills - Respondent
Civil Appeal No. 8258, 8259 of 2022
Decided on : 24-11-2022
Income Tax Act, 1961 – Section 45(4) – Reassessment – Total income – Addition made towards short term capital gain – Assets of partnership firm were revalued to increase value by an amount of Rs. 17.34 Crores on 01.01.1993 (relevant to A.Y. 1993-1994) and revalued amount was credited to accounts of partners in their profit-sharing ratio and credit of assets’ revaluation amount to the capital accounts of partners can be said to be in effect distribution of assets valued at Rs. 17.34 Crores to partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital ranging between Rs. 2.5 to 4.5 lakhs and said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to partners for withdrawal and in fact some of partners withdrew amount credited in their capital accounts – Assets so revalued and credit into capital accounts of respective partners can be said to be “transfer” and which fall in category of “OTHERWISE” and provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable. (Para 7.5)
Result : Appeals allowed.
JUDGMENT :
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. 1993-1994) 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 Revenue has preferred the present appeals.
2. The facts leading to the present appeals in nutshell are as under :-
2.1 The respondent assessee, a partnership firm originally consisted of four partners (all brothers) engaged in the business of Dyeing and Printing, Processing, Manufacturing and Trading in Clothing. Under the Family Settlement dated 02.05.1991, the share of one of the existing partners – Shri M.H. Doshi having 25% profit share in the firm was reduced to 12% and, for his balance 13% share, three new partners were admitted namely, viz., Smt. Ranjan Doshi (11%), Shri Prakash Doshi (1%) and Shri Rajeev Doshi (1%). It appears that thereafter, Shri M.H. Doshi, Shri Manohar Doshi and Shri V.H. Doshi retired from the partnership and reconstituted the partnership firm consisted of the partners namely, viz., Shri Hasmukhlal H. Doshi, Smt. Rajan H. Doshi, Shri Prakash H. Doshi & Shri Rajiv H. Doshi.
2.2 That on 01.11.1992, the firm was again reconstituted and three more partners, namely, viz., Smt. Vaishali Shah (18%), Smt. Bhavna Doshi (9%), Smt. Rupal Doshi (9%) and M/s. Ranjana Textile Pvt. Ltd. (10%) were admitted as partners. The contribution of new partners was as under:-
• Smt. Vaishali Shah – Rs. 4.50 lakhs
• M/s. Ranjana Textiles Pvt. Ltd. – Rs. 2.50 lakhs
• Smt. Bhavna Doshi – Rs. 2.25 lakhs
• Smt. Rupal Doshi – Rs. 2.25 lakhs
It was mentioned in the reconstituted partnership deed that two partners, namely, viz., Shri Hasmukh H. Doshi and Smt. Ranjan Doshi had decided to withdraw part of their capital.
2.3 On 01.01.1993, the assets of the firm were revalued and an amount of Rs. 17.34 crores were credited to the accounts of the partners in their profit-sharing ratio. Two of the existing partners, viz., namely Shri Hasmukhlal H. Doshi & Smt. Ranjan Doshi withdrew part of their capital which was roughly Rs. 20 to Rs. 25 lakhs. Thus, according to the Revenue, the new partners were immediately benefited by the credit to their capital accounts of the revaluation amount, as Rs. 3.12 crores was credited to Smt. Vaishali Shah (who contributed Rs. 4.50 lakhs); Rs. 1.56 crores to Smt. Bhavna Doshi (who contributed Rs. 2.25 lakhs); Rs. 1.56 crores to Smt. Rupal Doshi (who contributed Rs. 2.25 lakhs); and Rs. 1.73 crores to M/s. Ranjana Textiles (who contributed Rs. 2.50 lakhs only).
2.4 The respondent filed its Return of Income for the relevant assessment years. The Return of Income was filed for A.Y. 1993-1994 @ Rs. 3,18,760/-. The same was accepted under Section 143(1) of the Income Tax Act, 1961. However, thereafter, the assessment was reopened under Section 147 of the Income Tax Act by issuance of the notice under Section 148. The assessment was reassessed under Section 143(3) read with Section 147 determining the total income of Rs. 2,55,19,490/-. Addition of Rs. 17,34,86,772/-was made towards short term capital gain under Section 45(4) of the Income Tax Act. Similar addition was made for A.Y. 1994-1995.
2.5 As per the A.O., the assessee revalued the land and building and enhanced the valuation from Rs. 21,13,225/-to Rs. 17,56,00,000/-for A.Y. 1993-1994 thereby increasing the value of the assets by Rs. 17,34,86,772/-and therefore the revaluing of the assets, and subsequently crediting it to the respective partners’ capital accounts constitute
SupremeToday
Reassessment – Assets revalued and credit into capital accounts of respective partners can be said to be “transfer”.
Mere reduction in profit-sharing ratio of existing partners upon new partner's admission into firm, without retirement, does not constitute transfer u/s 2(47); amount credited from new contribution n....
Discounts given for prompt payment are legitimate business expenses and cannot be disallowed without corroborating evidence, particularly following a search where no incriminating materials were seiz....
The main legal point established is that the applicability of Section 45(3) of the Income Tax Act depends on whether the transfer is of a capital asset, and the revaluation of assets must be justifie....
The court established that amounts received by a retiring partner as settlement of their share do not constitute a taxable transfer of capital assets under the Income Tax Act.
Point of Law : Consideration, which a partner acquires on making over a personal asset to the firm as his contribution to its capital cannot fall within the terms of Section 48 and as that provision ....
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