Back
2019 Supreme(Mad) 939
IN THE HIGH COURT OF JUDICATURE AT MADRAS
VINEET KOTHARI, C.V. KARTHIKEYAN, JJ.
M/s. National Company, A Partnership Firm Represented by its Managing Partner Dr. C.V. Ananthasayanam – Appellant
Versus
The Assistant Commissioner of Income Tax – Respondent
Tax Case Appeal Nos. 365 & 366 of 2009
Decided On : 08-04-2019
For the Appellant :P.H. Arvind Pandian, Senior Advocate Assisted by R. Maheswari, Advocate.
For the Respondent: T.R. Ravikumar, Senior Standing Counsel.
The central legal point established in the judgment is that the retirement of a partner from a partnership and the consequent allotment of their share in the assets does not constitute a transfer of capital assets, as the retiring partner receives their share in the partnership, not consideration for the transfer of their interest in the partnership assets to the continuing partners.
Headnote:
Section 45(4) - Retirement of Partner from Partnership Business - Income Tax Act, 1961, Section 45(4)
Fact of the Case:
The Assessee, M/s. National Company, Chennai, is engaged in the business of construction. Serious disputes arose among the partners, leading to the retirement of two partners and reconstitution of the partnership firm. The Revenue alleged long term capital gains arising from the transfer of immovable properties by the partnership firm to the retiring partners, which was contested by the Assessee.
Finding of the Court:
The Court analyzed the application of Section 45(4) of the Income Tax Act on the retirement of a partner from the partnership business. It considered the definition of 'transfer' and the nature of partnership, concluding that the provisions of Section 45(4) were not attracted on the retirement of the two partners and the consequential allotment of their share in the assets in the Assessee Firm.
Issues: The issues revolved around the application of Section 45(4) of the Income Tax Act on the retirement of a partner from the partnership business and the interpretation of the word 'otherwise' in the context of dissolution or reconstitution of a partnership firm.
Ratio Decidendi: The Court held that the retirement of a partner and the consequent allotment of their share in the assets did not constitute a transfer of capital assets, as the retiring partner received their share in the partnership, not consideration for the transfer of their interest in the partnership assets to the continuing partners.
Final Decision: The Court ruled in favor of the Assessee, holding that the provisions of Section 45(4) of the Income Tax Act were not attracted on the retirement of the two partners and the consequential allotment of their share in the assets in the Assessee Firm.
C.V. Karthikeyan, J.
1. The Assessee has filed T.C.A.No. 365 of 2009 under Section 260-A of the Act challenging the order of the Income Tax Appellate Tribunal dated 12.12.2008 whereby the Tribunal had allowed the Appeal of the Revenue which had been filed challenging the order of the Commissioner of Income Tax (Appeals) – VI, Chennai, dated 16.03.2007 relevant to the Assessment Year 2004-2005.
2. The Assessee has also filed T.C.A.No. 366 of 2009 under Section 260-A of the Act challenging the order of the Income Tax Appellate Tribunal dated 12.12.2008 whereby the Tribunal had dismissed the cross objections filed by the Assessee relating to the same order of the Commissioner of Income Tax (Appeals) – VI, Chennai dated 16.03.2007 relevant to the Assessment Year 2004-2005.
3. Both the appeals have been admitted on the following substantial questions of law:-
“1. Whether the Appellate Tribunal was right in holding that Section 45(4) of the Income Tax Act, 1961 applies to retirement of partner from partnership business?;
2. Whether the Appellate Tribunal was right in the manner and application of the rule of ejusdem generis to Section 45(4) of the Income Tax Act, 1961?;
3. Whether the word 'otherwise' in Section 45(4) of the Income Tax Act, 1961 takes into its sweep not only cases akin to dissolution of the firm but also cases of reconstitution of firm?; and
4. Whether the Appellate Tribunal erred in not appreciating that unless there is a 'transfer' within the meaning of Section 2(47), capital gains under Section 45(4) is not attracted?”.
4. The Assessee, M/s. National Company, Chennai, is engaged in the business of construction. It also owns, manages and maintains a commercial complex, two theatres and two kalyana mandapams. N.Munuswamy Mudaliar originally started a sole proprietorship concern under the name of “National Company” in the year 1950. He then converted it as a partnership firm in the year 1974 and admitted his son, two daughters and one son-in-law, into the partnership. Since the son passed away in the year 1994, the partnership firm was reconstituted and the other son-in-law was also admitted as a partner. N.Munuswamy Mudaliar passed away on 08.06.2001. Thereafter the partnership firm was reconstituted and the partners were his two daughters, Dr.Chandra Ananthasayanam and Dr.Shanthi Shanmugasundaram and his two sons-in-laws, Dr.C.V.Ananthasayanam and Dr.V.Shanmugasundaram.
5. It is seen from the records that serious disputes arose among the partners. An Arbitrator Mr.M.S.Raghavan was appointed to settle the disputes. Dr.Shanthi Shanmugasundaram and Dr.V.Shanmugasundaram agreed to retire from the partnership business with effect from 30.11.2003 and a Deed of Retirement was also executed. The Firm continued with the remaining partners Dr.Chandra Ananthasayanam and Dr. C.V. Ananthasayanam, who also admitted their son Arjun A. Raja as another partner.
6. At the time of retirement of the two partners, valuation of the assets and liabilities of the firm and allotment of assets among the retiring and continuing partners took place.
7. For the Assessment Year 2004-2005, the partnership Firm declared an income of Rs.1,23,93,699/-. A random scrutiny was undertaken and the Joint Commissioner of Income Tax, the Assessing Officer passed an Assessment Order dated 26.12.2006 for a total income of Rs.9,77,05,330/-. An addition of Rs.8,53,11,630/- was made alleging long term capital gains arising out of transfer of immovable properties by the partnership firm to the retiring partners.
8. The Assessee/partnership firm preferred an appeal before the CIT(A). This was allowed by order dated 16.03.2007 and it was held that the properties obtained by the retiring partners through a family arrangement was not “transfer” for the purpose of capital gain. It was held that reconstitution of the partnership firm would not attract the provisions of Section 45(4) of the Act 1961. The addition of Rs. 8,53,11,630/- was set aside.
9. The Revenue then fi
