The Kerala High Court has held that the transfer of the depreciable capital assets attracted capital gains tax under Section 45(4) of the Income Tax Act, 1961in the absence of distribution of any capital asset among the partners following a dissolution of the appellant firm.
PVR Tourist Home, the appellant assessee is a partnership firm engaged in the business of running a hotel to which a restaurant and bar are also attached. Reconstitution of the appellant firm with effect from July 7, 2011, in which one of the partners of the erstwhile firm retired from the partnership and three other new partners were admitted into the partnership. Just before the reconstitution of the firm with effect from July 7, 2011, the partnership firm had, on May 3, 2011, sold the land and building belonging to it to one Poonghat Shrinivas for a total value of Rs. 8.40 crores, of which Rs. 7.40 crores was the value of the building and Rs. 1 crore was the value of the land.
While submitting its returns for the assessment year 2012–2013, the appellant firm declared a taxable income of Rs. 67,59,315 in its return. The Assessing Officer, pursuant to a scrutiny of the return, completed the assessment by making a substantial addition to the declared income to the tune of Rs. 9,77,46,777. An amount of Rs. 6,50,77,334 was attributed to the short-term capital gains alleged to have accrued to the appellant firm by computing it in accordance with Section 50A of the Income Tax Act.
In an appeal before the First Appellate Authority, the Authority found that the Income Tax Assessing Authority, while making this computation of short-term capital gains, had not factored in the addition of the building valued at Rs. 7,40,00,000 that was brought into the firm by the incoming partner, namely, Poonghat Shrinivas.
On appeal by the Department against the order of the First Appellate Authority, the department contended that the capital gains had to be charged per Section 45(4) of the Income Tax Act and that the computation methodology adopted by the Assessing Officer and the First Appellate Authority was incorrect.
It was noted that Section 45(4) of the Income Tax Act is a provision that deals with the taxation of capital gains arising from the distribution of assets by a company to its shareholders. This provision aims to ensure that the tax liability for the distribution of assets is borne by the company instead of the shareholders. The division bench of the High Court comprising Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M. remanded the matter back to the Tribunal for computing the extent of short-term capital gains, if any, that would be brought to tax concerning the appellant.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
