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2009 Supreme(Kar) 444
High Court of Karnataka
THE HONOURABLE MR. JUSTICE D.V. SHYLENDRA KUMAR & THE HONOURABLE MR. JUSTICE ARAVIND KUMAR
The Commissioner of Income-tax & Another
Versus
M/s. Gurunath Talkies
I.T.A.No.83 of 2004
Decided on : 07-07-2009
For the Appellants:K.V. Aravind for M.V. Seshachala, Advocates.
For the Respondent:B.V. Shankarnarayana Rao for K. Venugopalaraju, Advocates.
The main legal point established in the judgment is the interpretation and application of the reconstitution of a partnership firm and the capital gains provision under Section 45(4) of the Income Tax Act.
Headnote:
Income Tax Act - Reconstitution of partnership firm - Section 260A - Colorable device adopted by the assessee in admitting new partners and permitting old partners to retire - Transfer attracting capital gains provision - Tribunal's reliance on judgments of the Apex Court and other Courts - Amended provisions of Section 45 not examined and applied - Appeal by Revenue - Questions of law referred to the court
Fact of the Case:
The case involved the reconstitution of a partnership firm, where new partners were admitted and old partners retired. The Assessing Officer concluded that the transaction involved the transfer of assets to the new partners, resulting in a tax liability for the firm. The Appellate Authority and the Income Tax Appellate Tribunal upheld the Assessing Officer's view, leading to the appeal by the Revenue.
Finding of the Court:
The court held that there was a transfer of capital asset attracting the capital gain transaction under Section 45(4) of the Income Tax Act. It also found that the Tribunal should have examined the appeal by applying the statutory provisions as they prevailed during the relevant accounting period, and not merely by following the principles of judgments rendered in a different context.
Issues: The issues involved the interpretation of the reconstitution of a partnership firm and the applicability of the capital gains provision under Section 45(4) of the Income Tax Act. The court also addressed the levy of interest and penalty in the context of the appeal.
Ratio Decidendi: The court's decision was based on the finding that there was a transfer of capital assets, and the Tribunal should have applied the statutory provisions as they prevailed during the relevant accounting period. The court also noted that the question of penalty is an independent proceeding and can be addressed separately.
Final Decision: The court answered the questions in favor of the Revenue, holding that there was a transfer of capital asset attracting the capital gain transaction under Section 45(4) of the Act. The court also noted that the question of penalty is an independent proceeding and can be addressed separately.
D.V. Shylendra Kumar, J.
This is an appeal by the Revenue under Section 260A of the Income Tax Act, 1961 (for short, 'the Act') directed against the order of the Income-Tax Appellate Tribunal, Bangalore in ITA 581/Bang/2002 rendered on 1-10-2003.
2. The appeal had been admitted for examination on the following questions of law:
1. Whether the Colorable device adopted by the assessee in admitting two new partners namely Sri. M. Venkataramaiah and Smt. Sujatha Venkataramaiah and permitting all the old partners to retire from the firm by receiving a consideration amount of Rs.16,55,647/-from the old partners would amount to a transfer attracting the capital gains provision as per the Income Tax Act.?
2. Whether the Tribunal was correct in relying on various judgments of the Apex Court and other Courts in arriving at the conclusion that there was no Transfer on receipt of consideration amount by the retiring partners from the incoming partners without examining and applying the amended provisions of Section 45 of the Act.?
3.1. The brief facts leading to the above appeal are as under: Assessee is a partnership firm and the relevant assessment year is 1995-96. The firm was carrying on the business of maintaining a cinema theatre, comprising of four partners who were entitled to share the profits of the firm. The previous year corresponding to the assessment year is from 1-4-1994 to 31-3-1995. A reconstitution of the partnership firm took place some where in July 1994 by addition of two partners to the partnership firm. It is indicated in the books of accounts that the incoming partners brought about 17 lakhs towards their capital contribution to the firm and on 15-12-1994 the firm was again reconstituted with the erstwhile four partners going out retiring from the partnership, the newly added partners remaining in the firm and continuing the firm. The firm had filed its returns of income for the year 1995-96 and it appears declared a loss of Rs.2,60,104/-.
3.2. However, the Assessing Officer, it appears, issued notice under Section 143(3) r/w 147 of the Act calling upon the assessee to file its revised return on the premise that the assessee had not declared the income attributable to the transfer of capital assets resulting in capital gains, during the relevant accounting period and after hearing the assessee and affording an opportunity, came to the conclusion that having regard to the statutory provisions of Sub-Section (3) and (4) of Section 45 and having regard to the ratio of the judgment of the Supreme Court in Sunil Siddhartha Bhai Vs. Commissioner of Income-Tax reported in 156 ITR 509, the Assessing Officer is entitled to look behind the transaction and examined the true nature of the transaction, opined that the exercise of taking into new partners and subsequently the original four partners going out of the firm leaving the entire assets of the firm in the hands of the newly added partners, is virtually a transaction involving the transfer of the assets of the firm to the new partners, as firm continued in the hands of the new partners and in this view of the legal position and the need for the assessing officer to examine the true nature of the transaction concluded that the transaction involved additional new two partners to the firm during July 1994 and the erstwhile four partners retiring in the month of December 1994 and going out with the amount which the new partners had brought in by way of their capital contribution to the firm and sharing that amount minus and written down value of the assets of the firm virtually amounted to transfer of assets to the new partners and therefore the firm was liable to be assessed on the gains attributable to the transaction the value of the sale consideration for the transfer of the assets was taken to be the amount brought in by the partners and shared amongst the earlier partners and determined the assessable income of the firm by applying Section 45(4) of the Act a
