Capital gain Tax on crediting revaluation surplus to partners account settling their accounts on their retirement is taxable in the hands of such partners, not from the Firm, said the Mumbai bench of Income Tax Appellate Tribunal (ITAT).
Assessee in the instant case was a partnership firm engaged in the business of construction and begins as a builder and developer. During the year the firm acquired development rights over a piece of land admeasuring 9300 sq.yd at Mahul, Mumbai. Last year a new company joined to the firm as a partner and subsequently, vides deed of retirement & reconstitution three partners were retired from the partnership firm and took the amount credited to their accounts including surplus on account of revaluation to the said asset.
During the course of assessment proceedings the Assessing Officer (AO) found that the firm has tried to evade tax. And also noted that there has been a transfer of capital asset as per section 45(4) of the Income Tax Act because retiring partners took their share of valuation gain and the new partner company gain a larger share in the firm without paying any tax. According to him the work done by assessee in different years and work-in progress and found that the firm has not carried out any development work till the assessment was made by him, therefor the aforesaid land should be considered as a capital asset and not stock-in-trade. As per the provisions of section 45(4) of the act the AO assessed the entire revaluation surplus of Rs. 67,69,60,000 has already been distributed to the retiring partners as taxable in the hands of the assessee firm.
The bench including of Judicial Member Mahavir Singh and Accountant Member N.K.Pradhan has observed that, according to section 45(4) of the Income Tax Act The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co- operative society) or otherwise, shall be chargeable to tax as the income of the firm. But in this case the assessee has submitted the relevant documents which are reflected that there was no distribution asset or no dissolution of the firm and the retiring partners had been paid their capital including the capital credited due to revaluation.
“The purpose of Section 45(4) of the Income Tax Act is to bring such transactions which have an effect of transfer of capital asset without the asset being actually transferred. The purpose is to tax the actual beneficiary of such transactions. In the present case, the firm or the continuing partners are not the beneficiaries as no new tangible income or asset has arisen to them, rather the firm and continuing partners have purchased the share of retiring partner by paying cash. It is the retiring partners who have been benefitted by receiving much more than actual capital contributed by them on account of revaluation. Thus there can be no case of tax avoidance by colorable device by the firm on the facts and circumstances of the assessee firm’s case,” the bench said.Subscribe Taxscan AdFree to view the Judgment