Case Law Details
PCIT Vs Electroplast Engineers (Bombay High Court)
Conclusion: Where partnership was reconstituted due to entrance of new partners who brought cash by way of capital contribution and the retiring partners take cash and retire, there was thus no dissolution of the firm and no distribution of capital asset. What was given to the retiring partners was money representing the value of their share in the partnership and no capital asset was transferred on the date of retirement. Therefore, no capital gains or profit could arise & section 45(4) had no application.
Held: Assessee firm was registered partnership firm, initially comprising of two partners. After carrying on the business for about 13 years, partnership was reconstituted to bring in three new partners. Almost immediately thereafter, a new Deed was executed under which the original two partners retired. Newly inducted three partners of the firm continued the business of the firm and the assets were redistributed. While doing so, the partnership evaluated its goodwill. The retiring partners were paid their share in the goodwill in proportion of their existing shares in the partnership business. AO was of the opinion that in terms of section 45(4) of the Income Tax Act, the firm had to pay short term capital gain tax on such amounts as goodwill was credited by the firm. Following the decision in case of Dynamic Enterprises 359 ITR 83 (Karn) [FB] wherein it was held that after retirement of partners, the partnership continued and the business was also carried on by the remaining partners. There was thus no dissolution of the firm and there was no distribution of capital asset. What is given to the retiring partners was money representing the value of their share in the partnership. No capital asset was transferred on the date of retirement. In absence of distribution of capital asset and in absence of transfer of capital asset in favour of retiring partners, no profit of gain arose in the hands of partnership firm. In the present case, admittedly there was no transfer of capital asset upon reconstitution of the firm. All that happened was the firm’s assets were evaluated and the retiring partners were paid their share of the partnership asset. There was clearly no transfer of capital asset.
FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT
This appeal is filed by the Revenue to challenge the Judgment of Income Tax Appellate Tribunal (“ITAT” for short). Following question was presented for our consideration:
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