N. Kumar, J.

A Division Bench of this Court felt that there is a conflict between the proposition of law laid down in the case of Commissioner of Income Tax Vs. Mangalore Ganesh Beedi Works reported in (2004) 265 ITR 658 and in the case of Commissioner of Income Tax And Another Vs. Gurunath Talkies reported in (2010) 328 ITR 59. In order to resolve the said conflict, this matter was referred to the Full Bench by order dated 31.07.2012. On such reference, Hon'ble Chief Justice has passed an order on 27.08.2013 directing the matter to be listed before this Bench.

SUBSTANTIAL QUESTION OF LAW

2. The substantial questions of law referred for our consideration are as under:

"When a retiring partner takes only the money towards the value of his share, whether the firm should be made liable to pay capital gains even when there is no distribution of capital asset/assets among the partners under Section 45(4) of the I.T. Act?

or

Whether the retiring partner would be liable to pay for the capital gains?"

FACTUAL MATRIX

3. Before we proceed to answer the said substantial questions of law, it is necessary to have a look at the factual background.

4. M/s. Dynamic Enterprises-the respondent herein is a partnership firm which came into existence on 09.01.1985 with Sri Anurag Jain and Sri Nirmal Kumar Dugar as its partners. The firm was engaged in the business of buying landed properties, constructions of buildings thereon, construction of industrial sheds, commercial complexes etc. On 13.04.1987, the firm was reconstituted by which Sri Nirmal Kumar Dugar retired from the partnership and L.P. Jain (father of Anurag Jain) entered the partnership as he showed his willingness to contribute capital for purchase of land to construct housing complex. The firm purchased land bearing Sy.No.13/1, Jakkasandra Village, Begur Hobli, Bangalore South Taluk under a registered sale deed dated 13.5.1987 for a consideration of Rs.2,50,000/-. Another reconstitution took place on 1.7.1991 by which Sri L.P. Jain retired from the firm and Smt. Pushpa Jain and Smt. Shree Jain were inducted as partners. The firm was reconstituted and five partners belonging to Khemka Group were inducted into the firm by a deed dated 28.04.1993. Before the reconstitution, the assets of the firm were revalued as per the report of the registered valuer on 28.03.1993. The three old partners retired through deed of retirement dated 01.04.1994. The old partners received the enhanced value of property in financial year 1994-95.

5. As per the Assessing Officer there is transfer of property from old firm to the new firth on 01.04.1994. Hence, it is a transfer within the meaning of Section 2(47) of the I.T. Act. Accordingly, notice under Section 148 was issued on 27.03.2002. In reply to the said notice, the assessee firm contended that it has paid the amount to the retiring partners standing on credit side in respect of capital accounts. There is no transfer of asset and therefore, they are not liable to pay any capital gains tax.

6. The Assessing Officer held that the land was purchased when the firm was having two partners, namely, Shri Anurag Jain and Shri L.P. Jain. The firm had done no business all through its existence. The receipt of rents and commission for assessment year 1994-95 were found as bogus. The immovable property was not utilized to earn paltry sums during the existence of the firm. The new partners were introduced and the old partners retired. This is a device adopted to transfer the immovable property. The incoming partners tried to evade capital gains tax as well as stamp duty and therefore, he held the capital gains tax is liable to be paid by the firm. In appeal, the appellate authority has affirmed the said order. The appellate authority held that the reconstitution of firm has taken place on 01.04.1994 i.e., nearly one year after the members of the Khemka family were introduced as partners. Therefore, it accepted the genuineness of the old firm as well as the new firm bu