Tax Case Appeal Nos. 365 & 366 Of 2009 v. The Assistant Commissioner Of Income Tax Business Circle – I [I/C]Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS RESERVED ON: 21.03.2019 DATED : 08.04.2019CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE C.V.KARTHIKEYAN Tax Case Appeal Nos. 365 & 366 of 2009 M/s. National Company[PAN: ]A Partnership Firm representedby its Managing PartnerDr.C.V.Ananthasayanam9, Kandaswamy Street,Mylapore, Chennai – 600 004.Petitioner/Respondent Vs. The Assistant Commissioner of Income Tax Business Circle – I [I/c]Chennai. Respondent/Appellant Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax AppellateTribunal, Chennai 'B' Bench, Chennai, dated 12.12.2008 made inITA No.1477/Mds/2007. M/s. National Company[PAN: ]A Partnership Firm representedby its Managing PartnerDr.C.V.Ananthasayanam9, Kandaswamy Street,Mylapore, Chennai – 600 004. Appellant/Petitioner/Respondent https://hcservices.ecourts.gov.in/hcservices/ Vs. The Assistant Commissioner of Income Tax Business Circle – I [I/c]Chennai. Respondent/Respondent/Appellant Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax AppellateTribunal, Chennai 'B' Bench, Chennai, dated 12.12.2008 in CrossObjections No. 111/Mds/2007 made in ITA No.1477/Mds/2007. Common Prayer in T.C.A.No.365 & 366/2009: Tax Case Appeal filed under Section 260 A of the Income TaxAct 1961, against the order of the Income Tax AppellateTribunal, Chennai 'B' Bench Chennai dated 12.12.2008 made inI.T.A. 1477/mds/2007 and C.O.NO. 111/mds/2007 Assessment year2004-2005 preferred against an order passed by the Ld.CIT(A)VIChennai dated 16.03.2007 relevant to the assessment year 2004-2005. The Assessee has filed T.C.A.No. 365 of 2009 under Section260-A of the Act challenging the order of the Income TaxAppellate Tribunal dated 12.12.2008 whereby the Tribunal hadallowed the Appeal of the Revenue which had been filedchallenging the order of the Commissioner of Income Tax(Appeals) – VI, Chennai, dated 16.03.2007 relevant to theAssessment Year 2004-2005. 2.The Assessee has also filed T.C.A.No. 366 of 2009under Section 260-A of the Act challenging the order of theIncome Tax Appellate Tribunal dated 12.12.2008 whereby theTribunal had dismissed the cross objections filed by theAssessee relating to the same order of the Commissioner ofIncome Tax (Appeals) – VI, Chennai dated 16.03.2007 relevant tothe Assessment Year 2004-2005. 3.Both the appeals have been admitted on the followingsubstantial questions of law:- “1.Whether the Appellate Tribunalwas right in holding that Section 45(4) ofthe Income Tax Act, 1961 applies toretirement of partner from partnershipbusiness?; 2.Whether the Appellate Tribunalwas right in the manner and application ofthe rule of ejusdem generis to Section 45(4) of the Income Tax Act, 1961?; 3.Whether the word 'otherwise' inSection 45(4) of the Income Tax Act, 1961takes into its sweep not only cases akinto dissolution of the firm but also casesof reconstitution of firm?; and 4.Whether the Appellate Tribunalerred in not appreciating that unlessthere is a 'transfer' within the meaningof Section 2(47), capital gains underSection 45(4) is not attracted?”. 3.Both the appeals have been admitted on the followingsubstantial questions of law:- “1.Whether the Appellate Tribunalwas right in holding that Section 45(4) ofthe Income Tax Act, 1961 applies toretirement of partner from partnershipbusiness?; 2.Whether the Appellate Tribunalwas right in the manner and application ofthe rule of ejusdem generis to Section 45(4) of the Income Tax Act, 1961?; 3.Whether the word 'otherwise' inSection 45(4) of the Income Tax Act, 1961takes into its sweep not only cases akinto dissolution of the firm but also casesof reconstitution of firm?; and 4.Whether the Appellate Tribunalerred in not appreciating that unlessthere is a 'transfer' within the meaningof Section 2(47), capital gains underSection 45(4) is not attracted?”. 4.The Assessee, M/s. National Company, Chennai, isengaged in the business of construction. It also owns, managesand maintains a commercial complex, two theatres and two kalyanamandapams. N.Munuswamy Mudaliar originally started a soleproprietorship concern under the name of “National Company” inthe year 1950. He then converted it as a partnership firm inthe year 1974 and admitted his son, two daughters and one son-in-law, into the partnership. Since the son passed away in theyear 1994, the partnership firm was reconstituted and the otherson-in-law was also admitted as a partner. N.Munuswamy Mudaliarpassed away on 08.06.2001. Thereafter the partnership firm wasreconstituted and the partners were his two daughters,Dr.Chandra Ananthasayanam and Dr.Shanthi Shanmugasundaram andhistwosons-in-laws,Dr.C.V.AnanthasayanamandDr.V.Shanmugasundaram. 5.It is seen from the records that serious disputes aroseamong the partners. An Arbitrator Mr.M.S.Raghavan was appointedto settle the disputes. Dr.Shanthi Shanmugasundaram andDr.V.Shanmugasundaram agreed to retire from the partnershipbusiness with effect from 30.11.2003 and a Deed of Retirementwas also executed. The Firm continued with the remainingpartners Dr.Chandra Ananthasayanam and Dr.C.V.Ananthasayanam,who also admitted their son Arjun A. Raja as another partner. https://hcservices.ecourts.gov.in/hcservices/ 6.At the time of retirement of the two partners,valuation of the assets and liabilities of the firm andallottment of assets among the retiring and continuing partnerstook place. 7.For the Assessment Year 2004-2005, the partnership Firmdeclared an income of Rs.1,23,93,699/-. A random scrutiny wasundertaken and the Joint Commissioner of Income Tax, theAssessing Officer passed an Assessment Order dated 26.12.2006for a total income of Rs.9,77,05,330/-. An addition ofRs.8,53,11,630/- was made alleging long term capital gainsarising out of transfer of immovable properties by thepartnership firm to the retiring partners. 8.The Assessee/partnership firm preferred an appealbefore the CIT(A). This was allowed by order dated 16.03.2007and it was held that the properties obtained by the retiringpartners through a family arrangement was not “transfer” for thepurpose of capital gain. It was held that reconstitution of thepartnership firm would not attract the provisions of Section 45(4) of the Act 1961. The addition of Rs.8,53,11,630/- was setaside. 9.The Revenue then filed an appeal before the Tribunal.The Assessee filed cross objections affirming the order of theCIT (Appeals). The Tribunal passed an order dated 12.12.2008allowing the appeal of the Revenue and dismissing the crossobjections. The Tribunal held that Section 45(4) of the Actapplied to the Assessee and further held that there was“transfer” of assets within the meaning of Section 2(47)(vi) ofthe Act. 10.The Assessee is in appeal before us against the saidorder. Heard arguments advanced by Mr.P.H.Arvind Pandian,learnedAdditionalAdvocateGeneral,instructedbyMs.R.Maheswari, for the appellant and Mr.T.R.Ravikumar, learnedSenior Standing Counsel for the Revenue. 9.The Revenue then filed an appeal before the Tribunal.The Assessee filed cross objections affirming the order of theCIT (Appeals). The Tribunal passed an order dated 12.12.2008allowing the appeal of the Revenue and dismissing the crossobjections. The Tribunal held that Section 45(4) of the Actapplied to the Assessee and further held that there was“transfer” of assets within the meaning of Section 2(47)(vi) ofthe Act. 10.The Assessee is in appeal before us against the saidorder. Heard arguments advanced by Mr.P.H.Arvind Pandian,learnedAdditionalAdvocateGeneral,instructedbyMs.R.Maheswari, for the appellant and Mr.T.R.Ravikumar, learnedSenior Standing Counsel for the Revenue. 11.Mr.P.H.Arvind Pandian, learned Senior Advocate pointedout that Section 45(4) of the Income Tax Act would apply only ina case where there is “dissolution” of the partnership firm. Inthe present case, there was retirement of two partners and thefirm had not been dissolved. On the other hand, it continuedits business operations by inducting another partner. Theretiring partners did not receive any consideration for thetransfer of their interests in the firm. They had been allottedproperties to the extent of the credit balance in the capitalaccount. 12.The learned counsel for appellant - Assessee arguedthat this cannot be termed as “transfer” of assets and urgedthat Section 45(4) of the Income Tax Act would not apply to thefacts of the present case. He also submitted that the Tribunalhad relied on the Judgement of the Bombay High Court in CIT Vs.A.N.Naik Associates [2004] 265 ITR 346 (Bom). However a laterBench of the Bombay High Court in Prashant S. Joshi Vs. TheIncome Tax Office and Ors., reported in 2010 324 ITR 154 (Bom)had dealt with a similar fact situation and had held that onretirement of partners, when there is transfer of assets, itwould not attract the provisions of Section 45(4) of the Act.The learned Senior Counsel also very fairly stated that theJudgement of A.N.Naik Associates was not cited in Prashant S.Joshi. He also relied on the observations made in B.T.Patil &Sons Vs. Commissioner of Gift Tax reported in (2000) 163 CTR SC363 wherein the Hon'ble Supreme Court had held that when apartners retires and obtains in lieu of his interest in the firman asset of the firm, no transfer is involved. He thereforeurged that this Court should set aside the order of the Tribunaland restore the order of the CIT (Appeals). 13.On the other hand Mr.T.R.Ravikumar, learned SeniorStanding Counsel for the Revenue argued that the Judgement inA.N.Naik Associates laid down the correct proposition and statedthat when there is dissolution or otherwise of a partnershipfirm and when on such event there is transfer of assets to apartner then Section 45(4) of the Act would apply. The learnedSenior Standing Counsel insisted that the order of the Tribunalrequires no interference. 14.The substantial questions of law framed in the light ofthe above facts and the orders of the authorities revolve aroundthe issue whether Section 45(4) of the Act applies on retirementof a partner from the partnership business and whether the word“otherwise”, it would take into its sweep not only cases ofdissolution of partnership firm but also cases of reconstitutionof a partnership firm on retirement of a partner. 15.Chapter IV of the Act deals with computation of totalincome. Section 45 deals with computation of income fromcapital gains. Section 45 is as follows:-“45. Capital Gains.- (1) ......(2) ....(3) ...(4) The profits or gains arisingfrom the transfer of a capital asset byway of distribution of capital assets https://hcservices.ecourts.gov.in/hcservices/ 14.The substantial questions of law framed in the light ofthe above facts and the orders of the authorities revolve aroundthe issue whether Section 45(4) of the Act applies on retirementof a partner from the partnership business and whether the word“otherwise”, it would take into its sweep not only cases ofdissolution of partnership firm but also cases of reconstitutionof a partnership firm on retirement of a partner. 15.Chapter IV of the Act deals with computation of totalincome. Section 45 deals with computation of income fromcapital gains. Section 45 is as follows:-“45. Capital Gains.- (1) ......(2) ....(3) ...(4) The profits or gains arisingfrom the transfer of a capital asset byway of distribution of capital assets https://hcservices.ecourts.gov.in/hcservices/ on the dissolution of a firm or otherassociation of persons or body ofindividuals (not being a company or aco-operative society) or otherwise,shall be chargeable to tax as theincome of the firm, association orbody, of the previous year in which thesaid transfer takes place and for thepurposes of section 48, the fair marketvalue of the asset on the date of suchtransfer shall be deemed to be the fullvalue of the consideration received oraccruing as a result of the transfer................. ”16.It is clear that two primary requirements are essentialfor the application of Section 45(4) of the Act, namely, (i) there should be a transfer of a capital assets; and (ii) there should be distribution of capital assets on thedissolution of a firm or otherwise. 17.To examine this, it would be advantagous to refer tothe definition of the word “transfer” as defined under Section 2(47)(vi) of the Act.“Section 2. In this Act, unlessthe context otherwise requires.-(47) “transfer”, in relation to acapital asset, includes:-(vi) any transaction (whether byway of becoming a member of, oracquiring shares in, a co-operativesociety, company or other associationof persons or by way of any agreementor any arrangement or any arrangementor in any other manner whatsoever)which has the effect of transferring,or enabling the enjoyment of, anyimmovable property.” 18.In the background of the above provisions it has to bedetermined whether there would be a transfer of capital asset onretirement of a partner. Section 4 of the Partnership Act is asfollows:- “Section 4. Nature ofpartnership 'partnership' is the relationbetween persons who have agreed toshare the profits of a businesscarried on by all or any of themacting for all.Persons who have entered intopartnership with one another arecalled individually 'partners' andcollectively 'a firm' and the nameunder which their business iscarried on is called the 'firmname.'” 19.It is seen that three ingredients are required, namely, (i) there must be an agreement entered into by thepartners; (ii) the agreement must be to share the profits of abusiness; and (iii) the business must be carried out by all or any of thepersons concerned, acting for all. “Section 4. Nature ofpartnership 'partnership' is the relationbetween persons who have agreed toshare the profits of a businesscarried on by all or any of themacting for all.Persons who have entered intopartnership with one another arecalled individually 'partners' andcollectively 'a firm' and the nameunder which their business iscarried on is called the 'firmname.'” 19.It is seen that three ingredients are required, namely, (i) there must be an agreement entered into by thepartners; (ii) the agreement must be to share the profits of abusiness; and (iii) the business must be carried out by all or any of thepersons concerned, acting for all. 20.It is also to be noted that on the retirement of apartner from the firm, there will be allotment of his interestsin the firm. The interest of a partner in a partnership firm isa right to obtain share of profits from time to time during thesubsistance of the partnership and further, on dissolution ofthe partnership, or on his retirement from the partnership, toget the value of his share in the net partnership assets whichremain after deducting the debts and liabilities of thepartnership. This could be in the form of immovable assets or inthe form of cash in lieu of the immovable assets. Therefore,when a partner retires from a partnership and his share in thenet partnership assets is determined and allotted to him, whathe receives is his share in the partnership and not anyconsideration for transfer of his interest in the partnership tothe continuing partners. His share in the partnership is workedout by taking accounts in the manner prescribed by the relevantprovisions of the partnership law and it is this, namely, hisshare in the partnership which he receives in terms of money oras an asset. There is in this transaction no element oftransfer of interest in the partnership assets by the retiringpartner to the continuing partners. https://hcservices.ecourts.gov.in/hcservices/ capital gains tax must be one as a result of which considerationis received by the assessee or accrues to the assessee. When apartner retires from a partnership he receives his share in thepartnership and this does not represent consideration receivedby him in lieu of relinquishment of his interest in thepartnership asset. 22.In Commissioner of Income Tax Vs. A.N.Naik Associatesand Others reported in 2004 265 ITR 346 (Bom), the facts werethat the respondents were parties to a family settlement dated30.01.1997. Pursuant to the family settlement, there was a deedof reconstitution of various partnerships. One of the questionsof law which had been formulated for consideration was whetherthe deed of reconstitution of partnership by the Assessee firmwas a device to avoid tax. A further examination of the factsin that case reveal that it had been agreed between the partiesthat businesses of six firm would be distributed in terms of thefamily settlement, as the parties desired that various mattersconcerning the business and the assets thereto be dividedseparately and partitioned. In the settlement, the manner inwhich the assets were proposed to be divided were set out. Itwas also provided that all such documents, deeds, declarations,affidavits as are reasonably required for effecting suchtransfer would be executed. The Assessment was based on thefamily settlement and the subsequent deeds of retirement ofpartnership. It is thus seen that there was a consciousdecision taken prior to reconstitution of the firms to transferassets and the liabilities by way of a family settlement. Itwas also consciously decided to execute all necessary deeds anddocuments to effect such transfer. A transfer of assets in suchcircumstances, though held was not a device to avoid tax wasstill held to be 'transfer' within the meaning of Section 2(47)of the Act. 23.In the light of the above facts, it was held inA.N.Naik Associates as follows:- “21. The expression “otherwise” in ouropinion, has not to be read ejusdemgeneris with the expression, “dissolutionof a firm or body or association ofpersons”. The expression “otherwise” hasto be read with the words “transfer ofcapital assets” by way of distribution ofcapital assets. If so read, it becomesclear that even when a firm is inexistence and there is a transfer ofcapital assets it comes within theexpression, “otherwise” as the object ofthe amending Act was to remove theloophole which existed whereby capital gain tax was not chargeable. In ouropinion, therefore, when the asset of thepartnership is transferred to a retiringpartnerthepartnershipwhichisassessable to tax ceases to have a rightor its right in the property standsextinguished in favour of the partner towhom it is transferred. If so read itwill further the object and the purposeand intent of the amendment of Section 45.Once, that be the case, we will have tohold that the transfer of assets of thepartnership to the retiring partners wouldamount to the transfer of the capitalassets in the nature of capital gains andbusiness profits which is chargeable totax under Section 45(4) of the Income TaxAct. We will, therefore, have to answerquestion No.3, by holding that the word“otherwise” takes into its sweep not onlycases of dissolution but also cases ofsubsisting partners of a partnership,transferring assets in favour of aretiring partner.” 24.The above judgement was also referred in T.C.A.No. 1458of 2005 decided on 31.10.2012, Commissioner of Income Tax,Trichy Vs. M/s. Nathan and Company, Trichy, by a Co-ordinateBench of this Court. In that case, the Assessee was a firmconstituted by six partners and running a printing press atTrichy and another at Chennai. They entered into an agreement on28.04.1989 whereby two partners, were permitted to carry on thebusiness under the same name at Chennai and four partners werepermitted to carry on the business at Trichy in the same name.It is seen that in that case, there was definitely an element oftransfer of assets since two of the partners gave up theirinterests in the business at Trichy and four of the partnersgave up their interest in the business at Chennai. The factsare certainly distinguishable to the facts of the present case. 25.However a directly contrary view to the view taken inA.N.NaiK Associates have been expressed in Prashant S. JoshiVs. The Income Tax Officer and Others reported in 2010 324 ITR154 (Bom) wherein a Division Bench of the Bombay High Court,again dealing with a fact situation in respect of a partnershipfirm dealing with development of real estate, when a partnerretired and agreed to receive sum of Rs.50 lakhs, in additionto the balance lying to his credit in the capital as reflectedin the books of accounts as final settlement of his dues onaccount of retirement, held that the same was not a transfer andtaxable under Section 45(4) of the Act. The reasoning of the Bombay High Court, is given below for better appreciation:- 25.However a directly contrary view to the view taken inA.N.NaiK Associates have been expressed in Prashant S. JoshiVs. The Income Tax Officer and Others reported in 2010 324 ITR154 (Bom) wherein a Division Bench of the Bombay High Court,again dealing with a fact situation in respect of a partnershipfirm dealing with development of real estate, when a partnerretired and agreed to receive sum of Rs.50 lakhs, in additionto the balance lying to his credit in the capital as reflectedin the books of accounts as final settlement of his dues onaccount of retirement, held that the same was not a transfer andtaxable under Section 45(4) of the Act. The reasoning of the Bombay High Court, is given below for better appreciation:- “13. During the subsistence of apartnership, a partner does not possess aninterest in specie in any particular asset ofthe partnership. During the subsistence of apartnership, a partner has a right to obtaina share in profits. On a dissolution of apartnership or upon retirement, a partner isentitled to a valuation of his share in thenet assets of the partnership which remainafter meeting the debts and liabilities. Anamount paid to a partner upon retirement,after taking accounts and upon deduction ofliabilities does not involve an element oftransfer within the meaning of Section 2(47).Chief Justice P.N.Bhagwati (as the learnedJudge then was) speaking for a Division Benchof the Gujarat High Court in Commissioner ofIncome Tax, Gujarat V. Mohanbhai PamabhaiMANU/GJ/0015/1971 : (1973) 91 ITR 393 dealtwith the issue in the following observations: ... when, therefore, a partner retiresfrom a partnership and the amount of hisshare in the net partnership assets afterdeduction of liabilities and prior charges isdetermined on taking accounts on the footingof notional sale of the partnership assetsand given to him, what he receives is hisshare in the partnership and not anyconsideration for transfer of his interest inthe partnership to the continuing partners.His share in the partnership is worked out bytaking accounts in the manner prescribed bythe relevant provisions of the partnershiplaw and it is this and this only, namely, hisshare in the partnership which he receives interms of money. There is in this transactionno element of transfer of interest in thepartnership assets by the retiring partner tothe continuing partners: vide also therecent decision of the Supreme Court inCommissioner of Income Tax v. Bankey LalVaidya. It is true that Section 2(47)defines “transfer” in relation to a capitalasset and this definition gives anartificially extended meaning to the term“transfer” by including within its scope andambit two kinds of transactions which wouldnot ordinarily constitute “transfer” in the accepted connotation of that word, namely,relinquishment of the capital asset andextinguishment of any rights in it. But evenin this artificially extended sense, there isno transfer of interest in the partnershipassets involved when a partner retires fromthe partnership. The Gujarat High Court held that thereis, in such a situation, no transfer ofinterest in the assets of the partnershipwithin the meaning of Section 2(47). When apartner retires from a partnership, what thepartner receives is his share in thepartnership which is working out by takingaccounts and this does not amount to aconsideration for the transfer of hisinterest to the continuing partners. Therationale for this is explained as follows inthe judgement of the Gujarat High Court: accepted connotation of that word, namely,relinquishment of the capital asset andextinguishment of any rights in it. But evenin this artificially extended sense, there isno transfer of interest in the partnershipassets involved when a partner retires fromthe partnership. The Gujarat High Court held that thereis, in such a situation, no transfer ofinterest in the assets of the partnershipwithin the meaning of Section 2(47). When apartner retires from a partnership, what thepartner receives is his share in thepartnership which is working out by takingaccounts and this does not amount to aconsideration for the transfer of hisinterest to the continuing partners. Therationale for this is explained as follows inthe judgement of the Gujarat High Court: .... what the retiring partner isentitled to get is not merely a share in thepartnership assets; he has also to bear hisshare of the debts and liabilities and it isonly his share in the net partnership assetsafter satisfying the debts and liabilitiesthat he is entitled to get on retirement. Thedebts and liabilities have to be deductedfrom the value of the partnership assets andit is only in the surplus that the retiringpartner is entitled to claim a share. It is,therefore, not possible to predicate that aparticular amount is received by the retiringpartner in respect of his share in aparticular partnership asset or that aparticular amount represents considerationreceived by the retiring partner forextinguishment of his interest in aparticular asset. 14.The appeal against the judgement ofthe Gujarat High Court was dismissed by aBench of three learned Judges of the SupremeCourt in Addl. Commissioner of Income Tax,Gujarat v. Mohanbhai Pamabhai : 165 ITR 166.The Supreme Court relied upon its judgementin Sunil Siddharthbhai v. Commissioner ofIncome Tax MANU/SC/0164/1985 : (1985) 156 ITR509 (S.C.). The Supreme Court reiterated the https://hcservices.ecourts.gov.in/hcservices/ same principle by relying upon the judgementin Addanki Narayanappa and Anr. Vs. BhaskaraKrishnappa and Ors. MANU/SC/0281/1966: (1966)SC 1300. The Supreme Court held that what isenvisaged on the retirement of a partner ismerely his right to realise his interest andto receive its value. What is realised isthe interest which the partner enjoys in theassets during the subsistence of thepartnership by virtue of his status as apartner and in terms of the partnershipagreement. Consequently, what the partnergets upon dissolution or upon retirement isthe realisation of a pre-existing right orinterest. The Supreme Court held that therewas nothing strange in existing right orinterest. The Supreme Court held that therewas nothing strange in the law that a rightor interest should exist in praesenti but itsrealisation or exercise should be postponed.The Supreme Court inter alia cited withapproval the judgement of the Gujaraj HighCourt in Mohanbhai Pamabhai (supra) and heldthat there is no transfer upon the retirementof a partner upon the distribution of hisshare in the net assets of the firm. InCommissioner of Income Tax V. R.LingmalluRaghukumar MANU/SC/0810/2001: (2001) 247 ITR801, the Supreme Court held, while affirmingthe principle laid down in Mohanbhai Pamabhalthat when a partner retires from apartnership and the amount of his share inthe net partnership assets after deduction ofliabilities and prior charges is determinedon taking accounts, there is no element oftransfer of interest in the partnershipassets b y the retired partner to thecontinuing partners. 26.It is seen that Bombay High Court held in the abovecase that when a partner retires and there is transfer of hisinterests in the partnership assets to him towards his share inthe assets, the same cannot be brought to tax as capital gain bytransfer of capital asset. 26.It is seen that Bombay High Court held in the abovecase that when a partner retires and there is transfer of hisinterests in the partnership assets to him towards his share inthe assets, the same cannot be brought to tax as capital gain bytransfer of capital asset. 27.In Sampath Iyengar's “Law of Income Tax” revised byS.Rajaratnam, 12[th] edition, it had been observed as follows:- “134. Or otherwise.- Thereshould ordinarily be no presumption oftransfer in dissolution except to the https://hcservices.ecourts.gov.in/hcservices/ extent directed under Section 45(4).Retirement is prima facie not covered bythe sub-section. But the Departmentalview is that the words “or otherwise”immediately succeeding “dissolution”under Section 45(4) would cover evenretirement. “Or Otherwise” can onlymean “before or after dissolution” incontradistinction to “on”. FurtherSection 45(4) when understood inconjunction with Section 45(3) can referto formations and dissolutions. Sincechange in constitution is a conceptrecognised in Chapter XVI-C of the Act,there is no reason why the law shouldnot have referred to change inconstitution along with dissolution, ifthat were the intent instead of theexpression “or otherwise”. 28.It is seen that even the learned author has expressedthe view with that Section 45(4) of the Act would not apply onretirement of a partner from a partnership firm and when thereis transfer of assets. 29.It may also be appropriate to refer to Commissioner ofIncome Tax Vs. R.Lingmallu Raghukumar reported in 2001 247 ITR801 SC. The entire Judgement is quoted below:- “1.This appeal by the Revenue isdirected against the Judgement of theAndhra Pradesh High Court dated July 21,1982, (see (1983) 141 ITR 674), inReferred Case No. 28 of 1977, wherebythe following question of law referredto the High Court was answered againstthe Revenue and in favour of theassessee (page 676): “Whether, on the facts and in thecircumstances of the case, the excessamount of Rs.46,500 received by theassessee on retirement from the twopartnership firms is assessable tocapital gains?” 2.The High Court has held that therewas no transfer of any assets ascontemplated by the expression“transfer” as defined in Section 2(47)of the Income-tax Act. The High Court had placed reliance on the Judgement ofthe Gujarat High Court in CIT vs.Mohanbhai Pamabhai [1973] 91 ITR 393,wherein it has been held that where apartner retires from a partnership andthe amount of his share in the netpartnership assets after deduction ofliabilities and prior charges isdetermined on taking accounts in themanner prescribed by the relevantprovisions of the partnership law thereis no element of transfer of interest inthe partnership assets by the retiredpartner to the continuing partners. Thesaid Judgement of the Gujarat High Courthas been affirmed by this Court in Addl. CIT V. Mohanbhai Pamabhai [1987] 165 ITR166. In view of the said Judgement wefind no merit in this appeal and thesame is, therefore, dismissed. No orderas to costs.” 30.It is thus seen that the Hon'ble Supreme Court had alsoheld that on retirement, the settlement to a partner of hisshare in the assets of the partnership after deduction ofliabilities is not assessable to capital gains. 31.In CIT Vs. Surendra Kumar Gupta reported in [2004] 270ITR 325, the assets of the firm were taken over by one of thetwo partners on dissolution of the firm, on payment of an agreedamount to the other partner; it was held that the aforesaidtransaction did not result in any transfer of asset asunderstood in common law. 32.In CIT Vs. Kunnamkulam Mill Board reported in [2002]257 ITR 544 (Ker), it was held that on retirement of thepartner of the firm, there is no transfer of the assets of thefirm in favour of the continuing partners within the meaning ofSection 45(4) of the Act. 31.In CIT Vs. Surendra Kumar Gupta reported in [2004] 270ITR 325, the assets of the firm were taken over by one of thetwo partners on dissolution of the firm, on payment of an agreedamount to the other partner; it was held that the aforesaidtransaction did not result in any transfer of asset asunderstood in common law. 32.In CIT Vs. Kunnamkulam Mill Board reported in [2002]257 ITR 544 (Ker), it was held that on retirement of thepartner of the firm, there is no transfer of the assets of thefirm in favour of the continuing partners within the meaning ofSection 45(4) of the Act. 33.In the present case, very significantly, there was onlya reconstitution of the partnership firm by retirement of twopartners and admission of another partner. The partnership firmcontinued. It must also be further noted that the assets of thefirm originally belonged to the father of the retiring /continuing partners and there was only a division of the assetson retirement in accordance with their entitlement on the sharesin the partnership. As pointed out earlier, the NationalCompany was originally a sole proprietorship concern started by https://hcservices.ecourts.gov.in/hcservices/ N.Munuswamy Mudaliar. It was in the business of constructionand assets had been acquired even at that particular point oftime. The two daughters and two sons-in-laws of N.MunuswamyMudaliar were subsequently admitted as partners and on divisionof the assets, it can also be arguably pointed out that onedaughter and one son-in-law were allotted a share which theywere otherwise legally entitled to out of the holdingsN.Munuswamy Mudaliar. 34.In view of the peculiar facts of the case in hand, wehold that the provisions of Section 45(4) would not be attractedon the retirement of the two partners and consequentialallotment of their share in the assets in the Assessee Firm. Wetherefore answer the substantial question of law in favour ofthe Assessee and against the Revenue. 35.In the result, the Appeals of the Assessee are allowed.No costs. s/d- Assistant Registrar(CS VI) True Copy Sub-Assistant Registrar vsg To 1.The Assistant Commissioner of Income Tax Business Circle I(I/C) Chennai. 2. The Income Tax Appellate Tribunal Chennai 'B' Bench Chennai. +1 CC to Ms.R.Maheswari, Advocate sr 33774. +2 Ccs to M/s.T.Ravikumar, advocate sr 33734. Tax Case Appeal Nos. 365 & 366 of 2009 KAN(CO)SP(23/04/2019)