Ita/594/2013 Of Commissioner Of Income Tax-Iv v. M/S. Karnataka Agro

IN THB HIGH COURT OF KARNATAKA AT BANGALOREDATED THIS THE 23 DAY OF JUNE 2014 PRESEHBN THR HON BLE MR. JUSTICE N. KUMAR. AND THR HON’BLE MR. JUSTICK B MANOHAR. ITA No.594 OF 2013 BETWEEN; 1.Commissioner of Income-Tax-iv, C.R.Building, Queens Road, Bangalore. . The Assisstant Commissioner otIncome-Tax, Cuircle-8(1),_Bangalore._ APPKRLLANTS (By Sri E R Indrakumar, Sr.Adv. for Sri E I Sanmathi, Adv.) AND: M/s.Karnataka Agro ChemicalsNo.180, Multiplex House, 1[$5]Main,Mahalakshmi Layout Extn.,Bangalore-560 O86... RESPONDENT (By Sri A Shankar and Sri M Lava, Advocates) -0-0-0-0-O0- This ITA is filed under Section 260-A of I.T. Act,|1961 arising out of Order dated 31.7.2013 passed inITA No.764/Bang/2012 for the Assessment Year 2008-O9 to decide the foregoing question of law and such other questions of law as may be formulated by thisCourt and to set aside the order dated 31.7.2013 passedby the ITAT, A’ Bench, Bangalore in the appealproceedings ITA No./64/Bang/2012 for the assessmentyear 2008-09. This appeal coming on for admission this day,|N,KUMAR, J.delivered the following:- JUDGMENT This appeal is by the revenue challenging theorder passed by the Tribunal upholding the orderpassed by the Assistant Commissioner who has heldthat there 1s no transfer and in view of the circular ofCBDT notional transfer cannot be subject to taxation. _ D _In the course of assessment proceedings, theassessing Officer noticed that the assessee firm hadcreated and self-generated assets in the form of good-will of business to an extent of Rs.7,59,28,000/- andtransferred it to the current accounts of the four'partners proportionately consequent to reconstitution ofassessee firm. The assessing authority felt that thisgood-will is chargeable to tax under the head “capitalgains” and accordingly, brought it to tax as “long term capital gains”. similarly, the assessing authority|noticed that one of the partners Sri Mahesh G. Shettyhad introduced Rs.40 Lakhs as capital in the appellatefirm. On going through the capital account of thepartner, the assessing authority found that there wasno mention about this amount. Therefore, the)assessing authority treated this as an unexplained cashcredit under Section 68 of the Act and added the incomereturned by the assessee. Aggrieved by this order, theassessee preferred an appeal to the Commissioner ofIncome Tax(Appeals). | The appellate Authority sought a remand reportfrom the Assessing Authority, which was submitted onQ990O12. After careful examination of the material on/§record and the remand report, the appellate authorityheld that in the remand report it is mentioned that theassessing authority and Additional CIT has verified thebooks of accounts and documents produced by theassessee and found that a sum ot Rs.40 Lakhs was§entered into the current accounts of Sri.Mahesh G.| shetty on 31.3.2008 and the sources are loans takenfrom three different parties. When the said loans weretaken by way of cheques and were properly accounted,the addition was unjustified and therefore, it wasordered to be deleted. Insofar as goodwill is concerned,the remand report showed that there is no transferinvolved within the terms of Section 45 and Section|2(47) of the Income Tax Act. It is the case of revaluationof assests and the goodwill was carried in the balanceSheet of the firm. There were no transfer of any assetsby the firm to the retiring partners. No assets wereallotted to the retiring partners. The accounts of theretiring partners were settled by actual payment ofsums due to them. Therefore, it held that there is no)transfer and in view of Circular of CBDT notional|transfer cannot be subjected to taxation and thereforean order for deduction of Rs.7,99,28,000/- was madeand accordingly, the appeal was allowed. Aggrieved bythe said order, the revenue preferred an appeal to theTribunal. The Tribunal after reappreciation of the entirematerial on record held that as is clear from the remandreport a sum of Rs.40,00,000/- was entered in thecurrent account of Mahesh G. Shetty on 31.3.2008 andsources for such introduction are loans taken from|three different parties by way of cheque and therefore,setion 68 of the Act is nto attracted. The AppellateAuthority was justified in deleting such addition.Insofar as addition on account of goodwill is concerned,when the Appellate Authority accepted the contention ofthe assessee during the remand proceedings that therewas no transfer of goodwill, Section 45(4) is notattracted and accordingly, it found no ground toentertain the appeal. Aggrieved by the said order, thepresent appeal is filed. 3.|The learned Senior Counsel appearing forrevenue assailing the impugned order fairly concededthat the finding of the Appellate Authority insofar asunexplained cash credit of Rs.40,00,000/- is reflected in the accounts and properly explained and no grievancecan be had on that account. [Insofar as the transfer otsoodwill which resulted in capital gains is concerned, hesubmitted once the goodwill is valued and it isproportionately distributed to four partners, when twopartners paid the consideration while the other twopartners walked out of the partnership firm after takingthe consideration for the goodwill which was credited totheir account, it constitutes a transfer. He relied on thejudgment of the Bombay High Court wherein whileinterpreting Section 45(4) of the Act it has explained themeaning of the word “otherwise”. Therefore, he submitsthat it falls under the category of “otherwise” and theappellate authorities were not justified in interferingwith the order passed by the assessing authority. 4Per contra, the learned counsel appearing forthe assessee submitted that the condition precedent forattracting Section 45 is there should be transfer ofasset. In the instant case, admittedly the retiringpartners took money and walked out of the partnership firm. No asset much less capital asset was transferredin their favour. Therefore, Section 45 is not at all.attracted much less Section 45(4) of the Act. Therefore,he submits that the order passed by the authoritiescannot be found fault with. 5HRFrom the aforesaid facts and the rivacontentions, it is clear that the assets of the partnershipwas revalued and for the first time they valued thesoodwill at Rs.7,59,28,000/-. Thereaiter it was creditedto the four partners in accordance with the profitsharing ratio. Two of the partners retired. They havebeen paid actual amount due to them in the books ofthe partnership firm. The goodwill continued with thefirm. No portion of the goodwill is transferred to theretiring partners. MTherefore, rightly in the remandreport it had been stated that there is no transfer of thecapital asset. If there is no transfer of capital asset,section 45(4) is not attracted. In fact the Full Bench ofthis Court while interpreting Section 459(4) of the Act aiter reviewing the case law on the point has held asunder:-. “Sub-Section (4) of Section 45 dealswith a distribution of capital assets on|the dissolution of a firm or_ otherassociation of persons or body _ oindividuals or otherwise. If in the|course of such distribution of capital|asset there is a transfer of a capital|asset by the firm in favour of a person|and it results in profits or gains to the|firm, then the said profits or gains shall|be chargeable to tax as income of the|firm and again for computing such|income, Section 48 is attracted. In other|words, in the process of a dissolution ofa firm, tf a capital assest is transferred|to a partner which results in profits or|gains, then that income is chargeable at|the hands of the firm under this|provision. In order to attract sub-section|(4) of section 45, the condition precedent|1S, (1)there should be a distribution ofcapital assets of a firm; (2)such distribution should result intransfer of a capital asset by firm infavour of the partner; (1)there should be a distribution ofcapital assets of a firm; (2)such distribution should result intransfer of a capital asset by firm infavour of the partner; (SJon account of the transfer thereShould be a profit or gain derived by the|firm; and (4)such distribution should be ondissolution of the firm or otherwise.” Thereafter, it has proceeded to hold that to attractsection 49(4) there should be transfer of capital assetfrom the firm to the retiring partners, by which the firmceases to have any right in the property which is sotransferred. In other words, the right to propertyshould stand extinguished and the retiring partnersshould acquire absolute title to the property. 6.|In the instant case, the partnership firm didnot transfer any right in the capital asset much less thegoodwill in favour of the retiring partners. Thepartnership firm did not cease to hold the property.Consequently,1tsrightTO theproperty1Snot extinguished. On the other hand, the retiring partnersdid not acquire any right in the property as no propertywas transferred in their favour. In that view of the'|matter, we do not see any merit in this appeal. Nosubstantial questions of law do arise for considerationin this appeal. [|Accordingly, the appeal is dismissed. Sd/-| JUDGE. JUDGE. Sd/-. *alb/-.