CIT Vs Mansukh Dyeing and Printing Mills (Supreme Court)
Whether amount credited on account of revaluation of fixed assets and credited to the partners’ account is liable to be taxed u/s 45(4) of the Income-tax Act,1961?
The department has made a major win today in the above case when the Supreme Court held that upon revaluation of fixed asset, the credit which is made to the Partners’ capital account is liable to be taxed u/s 45(4) and approved the decision of the Bombay high Court in the case of CIT Vs A.N. Naik Associates and Ors(2004) 265 ITR 346(Bom).
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.
After detailed analysis of Section 45(4), it is observed and held that the word “OTHERWISE” used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partners of a partnership, transferring the assets in favour of a retiring partner.
This decision will have huge implications for all those assessees who had resorted to revaluation and credited partners’ capital account.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. Feeling aggrieved and dissatisfied with the impugned judgment Signature Not Verified Digitally signed by Neetu Sachdeva and order dated 24.06.2013 passed by the High Court of Bombay Date: 2022.11.24 12:53:49 IST Reason: passed in Income Tax Appeal No. 1074 of 2009 (relating to A.Y. 1993- 1994) and the judgment and order dated 24.06.2013 passed in Income Tax Appeal No. 1174 of 2009 (relating to A.Y. 1994-1 995) by which with respect to the same assessee – M/s. Mansukh Dyeing and Printing Mills, a partnership firm, the High Court has dismissed the said appeals and has confirmed the respective orders passed by the Income Tax Appellate Tribunal (hereinafter referred to as “ITAT”) deleting the short term capital gains addition made by the Assessing Officer (AO), the Revenue has preferred the present appeals.
2. The facts leading to the present appeals in nutshell are as under :-
2.1 The respondent assessee, a partnership firm originally consisted of four partners (all brothers) engaged in the business of Dyeing and Printing, Processing, Manufacturing and Trading in Clothing. Under the Family Settlement dated 02.05.1991, the share of one of the existing partners – Shri M.H. Doshi having 25% profit share in the firm was reduced to 12% and, for his balance 13% share, three new partners were admitted namely, viz., Smt. Ranjan Doshi (11%), Shri Prakash Doshi (1%) and Shri Rajeev Doshi (1%). It appears that thereafter, Shri M.H. Doshi, Shri Manohar Doshi and Shri V.H. Doshi retired from the partnership and reconstituted the partnership firm consisted of the partners namely, viz., Shri Hasmukhlal H. Doshi, Smt. Rajan H. Doshi, Shri Prakash H. Doshi & Shri Rajiv H. Doshi.
2.2 That on 01.11.1992, the firm was again reconstituted and three more partners, namely, viz., Smt. Vaishali Shah (18%), Smt. Bhavna Doshi (9%), Smt. Rupal Doshi (9%) and M/s. Ranjana Textile Pvt. Ltd. (10%) were admitted as partners. The contribution of new partners was as under:-
