The Supreme Court bench of Justice M R Shah and Justice M M Sundresh recently held that, the transfer of assets in favour of retiring partners on revaluation of assets of the partnership firm attracts tax under the Section 45(4) of the Income Tax Act, 1961.
The two-judge bench examined whether the transfer to capital accounts of retiring and subsisting partners attracts short term capital gains taxable under Section 45(4) of the Act. The assessee, M/s Mansukh Dyeing and Printing Mills was revalued after the partners had reconstituted the firm with four newly added partners. Two of the subsisting partners withdrew part of their capital.
Rupesh Kumar, submitted on behalf of the Revenue that, the partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal, the amount so revalued and credited in the capital accounts of the respective partners can be said to be “transfer” and therefore, the provisions of Section 45(4) inserted into the Income Tax Act w.e.f. 01.04.1988 shall be applicable.
On behalf of the respondent-assessee, Kaustubh Shukla submitted that there was no dissolution of partnership firm and/or revaluation on dissolution of the partnership firm. It is submitted that in the present case, there was reconstitution of the partnership firm and on revaluation, the surplus amount on account of such revaluation was credited to the partners’ capital account.
It was also submitted that surplus on account of such revaluation credited to the partners’ capital account cannot be said to be ‘transfer’ as per the provisions of Section 45(4) of the Income Tax Act.
The Supreme Court Bench observed that, the amended Section 45(4) of the Income Tax Act inserted vide Finance Act, 1987, by which, “OR OTHERWISE” is specifically added, the aforesaid submission on behalf of the assessee has no substance.
It was thus held in favour of the Department that, “the assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” and which fall in the category of “OTHERWISE” and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable.”
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