No Capital gain tax firm if it doesn’t distribute any capital asset to retiring partners

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IN THE ITAT MUMBAI BENCH ‘F’

Income-tax Officer – 25(3)(4)

v.

Fine Developers

IT APPEAL NO. 4630 (MUM.) OF 2011

[ASSESSMENT YEAR 2008-09]

OCTOBER 12, 2012

 

Allocation of assets of the firm to the retiring partners is the basis for invocation of provisions of Section 45(4). In the case under consideration, neither there was any dissolution nor other event took place that had an effect of allocation of exclusive interest in any capital asset to the retiring partners. In these circumstances, FAA was justified in holding that conditions of Section 45(4) were not fulfilled. In our opinion the firm or the continuing partners were not liable to be taxed under the head ‘capital gains’, as held by the FAA. Retiring partners had relinquished their rights in the assets of the firm and in lieu of that firm had paid the retiring partners money lying in their capital account. Obviously, assessee-firm had not transferred any right in capital asset to the retiring partners rather it is the retiring partners who have transferred the rights in capital assets in favour of the continuing partners. So, even if capital gain has to be taxed it has to be in the hands of the retiring partners not in the case of the assessee-firm.