The Income Tax Appellate Tribunal (ITAT) held that a retiring partner took only money towards the value of his share on retirement and when there was no distribution of capital assets going to the partners, there was no transfer of capital asset and consequently, no profits or gain was chargeable under Section 45 (4) of the Income Tax Act, 1961.
Facts of the case:
The assessee, M/s. Alankar Saphire Developers is a company dealing in real estate, land trading, trading, and development. A search was conducted at the office premises of the company. Accordingly, notice under section 153A was issued.
The assessee filed a letter with a printout of return for the Assessment Year 2003-2004 and requested that return filed originally under Section 139 of the Income Tax Act, 1961, should be treated as return filed under section 153A of the Income Tax Act, 1961 and no details were furnished. Accordingly, proceedings were culminated by passing an order under section 153A/144 of the Income Tax Act, 1961.
Interpretation of law:
The assessee made elaborate submissions and filed various details based on which the Ld.CIT(A) called for a remand report from the Assessing Officer.
The Assessing Officer sent three remand reports on various dates which were confronted to the assessee. After considering the remand reports of the Assessing Officer and the rejoinder of the assessee to such remand reports the CIT(A) held that the sum received on retirement from the partnership firm is taxable as income of the assessee company as a share of a partner in a partnership firm is a capital asset and on the retirement of the firm there is the capital gain which accrues to the assessee which is taxable as such.
The tribunal consists of an Accountant Member, O.P. Kant, and a Judicial member Bhavnish Saini held that a retiring partner took only money towards the value of his share on retirement and when there was no distribution of capital assets going to the partners, there was no transfer of capital asset and consequently, no profits or gains was chargeable under Section 45 (4) of the Income Tax Act, 1961. “AO taxed short term capital gain on account of transfer of shares in the partnership firm by the assessee company to M/s. V Limited. According to AO, the partnership share in a firm was a capital asset within the meaning of section 2 (14) and their transfer was a transfer of capital asset within the meaning of section 2 (47).
The contention of the assessee that no capital gain arose on the sum received by a partner on retirement from the partnership firm was not accepted by AO on the ground that assessee had applied an unsuccessful technique to transfer his capital gain into its account from partnership firm without giving any tax. It was held when assessee in the capacity of retiring partner took only money towards value of its share and no capital asset was distributed there was no transfer of capital asset and, therefore, the assessee was not liable to any capital gain tax on account of the sum received by it as a partner on retirement from partnership-firm,” the tribunal observed.