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2010 Supreme(Kar) 1100
High Court of Karnataka
THE HONOURABLE MR. JUSTICE V.G. SABHAHIT & THE HONOURABLE MR. JUSTICE B. MANOHAR
B. Raghurama Prabhu Estate
Versus
Joint Commissioner of Income Tax
I.T.A.No.134 of 2000 C/W I.T.A.Nos.135 of 2000, 136 of 2000, 137 of 2000, 138 of 2000, 139 of 2000, 140 of 2000, 144 of 2000, 145 of 2000, 146 of 2000 & 147 of 2000
Decided On : 23-12-2010
For the Petitioner:Kulkarni for M/S. K.R. Prasad, Advocates.
For the Respondent:E.R. Indra Kumar, Advocate.
Headnote:INCOME TAX ACT, 1961 - Section 45: [V.G. Sabhahit & B. Manohar, JJ] Capital gain - Liability to pay - Dissolution of partnership firm - After dissolution assets sold amongst partners and sale proceeds distributed amongst outgoing partners to value of their share - Held, Appellants having received value of their share in net assets of firm, it amounts to transfer of capital assets and Appellants/ outgoing partner/s are liable for payment of capital gains.
INCOME TAX ACT, 1961 - Section 50-B: [V.G. Sabhahit & B. Mnohar, JJ] Dissolution of partnership firm - Sale conducted among partners - Shares of all partners in the firm which was fixed proportionate to profit sharing ratio, after dissolution of firm, they continue business as an association of persons and not as partners. What has been sold by outgoing partners was assets of firm. Value has been fixed on basis of report of Chartered Accountant and no separate valuation was made. Quantification made by erstwhile partners themselves and assets of firm has been sold by outgoing partners - Held, It would not be a slump sale and is liable to be taxed under capital gains.
INCOME TAX ACT, 1996 - Sections 45 & 2(47): [V.G. Sabhahit & B. Manohar, JJ] Capital gain - Dissolution of partnership firm - As per partnership deed firm was sold amongst partners who offered highest bid and sale proceeds distributed amongst outgoing partners - Outgoing partners having received amount towards value of share in net assets of firm - Held, In order to apply Section 45, there must be transfer of a capital asset. The expression ’transfer’ is defined in Section 2(47) and ’capital asset’ is defined in Section 2(14) of Income Tax Act. Such transfer must be affected in previous year and some profit or gain must arise from such transfer. If these conditions are fulfilled. Section 45 provides that such profit or gain is chargeable to income tax under head ’capital gains’ and same shall be deemed income of previously years in which transfer has taken place. Since section creates an item of ’artificial income’ its provisions should be strictly construed. Thus Section 45 brings to charge capital gains and its ingredients are - (i) the existence of a capital asset owned by assessee; (ii) The transfer of such asset during previous year; (iii) Arrisal of profits and gains from transfer of such assets; and (iv) Such profits and gains must accrue and arise to assessee.
In the instant case after dissolution of firm, assets of firm were required to be distributed amongst partners in proportion to their profit sharing ratio. However, in view of Partnership Deed sale was to be held among partners.
After winding up of partnership bid submitted by 3 partners was found to be highest bid and same was accepted and Official Liquidator was directed to distribute same among outgoing partner. Thereafter proceedings were taken in Company Petition filed by two of partners for dissolution of firm by realizing assets of firm in view of Partnership Deed and that out going partners have received their net share of value of assets of firm out of amount received by way of sale of assets of firm after deducting their individual liability in firm be disputed and therefore it was clear that there was transfer (sale) of capital assets and assets of firm were purchased by 3 erstwhile partner.
Erstwhile partners who purchased business of old firm succeed to firm and thereafter sale price distributed amongst outgoing partners and therefore what was received by partners was value of net asset of firm was established and therefore capital gain was attracted.
Thus, contention by outgoing partner/appellants that since transaction was only adjustment of shares by partners and there was no sale as such appellants were not parties to same therefore appellants who are erstwhile partners and received value of assets cannot be taxed for capital gain, not tenable.
1. I.T.A.Nos.134/2000, 135/2000, 136/2000,137/2000, 138/2000, 139/2000, 140/2000, 144/2000, 145/2000 147/2000 and 146/2000 arise out of common judgment passed by the Income Tax Appellate Tribunal, Bangalore Bench, Bangalore, (hereinafter called ITAT), in ITA Nos.946, 952 to 957 & 959/Bang/1998 (Assessment Year:1995-1996) dated 31.07.2000 wherein the ITAT has dismissed the appeals and confirmed the order passed by the Commissioner of Income Tax Appeals (CAT (A)). The appeals ITA No. 144/2000, 147/2000 and 146/2000 are filed by the Revenue being aggrieved by the observations made by the Vice-President of the Tribunal regarding calculation of the capital gain. These appeals along with the other five appeals filed by the Revenue against the order of the Tribunal was disposed of by common order dated 19.12.2002. Being aggrieved by the said order of the division bench of this court dated 19.12.2002 Civil Appeals Nos. 4232, 4242, 4234, 4233, 4235, 4236 and 5322/2005 were filed. Similarly, ITA Nos.69-70/2001 are filed by the revenue being aggrieved by the order passed by the Income Tax Appellate Tribunal in Appeal Nos.946, 952 to 957 and 959/Bang/1998 dated 19.12.2002 for the assessment year 1995-1996. The Hon’ble Supreme Court has passed common order on 28.01.2005 along with other appeals filed against the Income Tax Appeals by setting aside the order passed by this court in ITA Nos.134 to 140/2000 and remitted the matter to this court for fresh disposal in accordance with law for framing the substantial questions of law. In obedience to the direction of the Hon’ble Supreme Court dated 28.01.2005, the following substantial questions of law have been framed in these appeals after hearing the learned counsel appearing for the parties:
“i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the capital gains arising out of the sale of the assets of the firm was assessable in the hands of out going individual partners of the erstwhile firm?
ii) Whether, at any point of time, any association of persons comprised of 7 outgoing partners had come into existence which can be said to have become owner of the assets of the firm and had sold the same to the Association of Persons-3?
iii) Whether on the facts and in the circumstances of the case, it can be held that the transfer of business of the firm as going concern in favour of the Association of three persons was merely relinquishment of shares held by other out going partners?
iv) Whether in the facts of the present case, the Tribunal was right in concluding that the capital gains arising out of the sale of the business of the firm as a going concern was liable to be assessed in the individual hands of the erstwhile partners, except the three, who as association of persons have purchased the assets of the firm?
v) Whether the sale of the assets of the firm was a slump sale and if so, whether it was liable to capital gains tax?
vi) Whether the Vice-President of the Tribunal has committed an error of law in laying down the manner in which the capital gains is to be computed?
vii) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the income earned by an association consisting of 13 persons for a period of 234 days that is, till 20.11.1994 was assessable in the hands of those 13 persons or not?”
2. The above substantial questions of law were explained to the learned counsel appearing for the parties and the learned counsel appearing for the parties agreed that the above were only substantial questions of law that are required to be answered by this court.
3. The materials facts of the case giving rise to the above said substantial questions of law are as follows:
In 1939, late S.Raghuram Prabhu started the business of manufacturing beedies. Subsequently, his brother-in-law, Sri Madhav Shenoy also joined him in the business as a partner and thus M/s.Mangalore Ganesha Beedi Works (for short ‘
