IN THE HIGH COURT OF KERALA AT ERNAKULAM
ITA.No. 474 of 2009()
1. THE COMMISSIONER OF INCOME TAX,
... Petitioner
Vs
1. SHRI.M.V.NARAYANAN,
... Respondent
For Petitioner :SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)
For Respondent :SRI.P.BALAKRISHNAN (E)
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice K.SURENDRA MOHAN
Dated :28/10/2010
O R D E R
C.N.RAMACHANDRAN NAIR &
K. SURENDRA MOHAN, JJ.
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I.T.A NOS:474,531,549,569,
832,842,1015,1016,1196,
1225,1257,1471 OF 2009
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Dated this the 29th October, 2010.
JUDGMENT
Ramachandran Nair, J.
All the connected appeals filed by the revenue arise from
common orders of the Tribunal holding that the amount received by
the assessees towards consideration for the retirement from the
partnership firm does not amount to transfer attracting capital
gains. We have heard senior counsel appearing for the revenue and
counsel appearing for all the respondents.
2. All the assessees were partners of a firm which was
running a bar attached hotel. The firm had land and building
thereon where the business was carried on. Besides the land,
building and fixtures the other main asset that got transferred in
the course of retirement of assessees and substitution of new
partners is the bar licence. In the course of search carried out in
the premises of a newly inducted partner and one of the assessees,
it came to the notice of the department that besides the accounted
sum of Rs.7 lakhs received by each of the assessees, another Rs.7.5
ITA 474/2009 etc. 2
lakhs was paid towards unaccounted consideration for the
retirement. The Assessing Officer treated the retirement of each of
the assessees as a transfer and the consideration received was
assessed to capital gains. Same issue was decided by two
Commissioners (Appeals). While one of them held that the income
is assessable as casual income and not as capital gain, the other
held that the Officer rightly taxed the amount for capital gain.
Appeals filed by the assessees were allowed by the Tribunal holding
that there is no capital gain arising on the retirement of partners.
3. After hearing both sides and after going through the
orders impugned we find that systematically through retirement
and reconstitution all the old partners had retired from the firm
and new set of partners have taken over the firm. However, the
process of retirement and reconstitution did not lead to any
dissolution of the firm. Consequently transactions are pure and
simple retirement of all assessees as partners of a firm in the
course of time. In the decisions of the Supreme Court in
Additional Commissioner of Income Tax, Gujarat v. Mohanbhai
Pamabhai reported in 165 ITR 166 and in another decision of the
Supreme Court in Commissioner of Income Tax v. R. Lingmallu
Raghukumar reported in 247 ITR 801, the Supreme Court held
ITA 474/2009 etc. 3
that there is no ‘transfer’ within the meaning of Section 2(47)
involved in the retirement of a partner and consequently there is no
scope for assessment for capital gains on retirement of a partner
from a firm. Even though standing counsel referred to subsequent
amendments on transfer and the scope of Section 45(4) with
particular reference to our decision in Commissioner of Income
Tax v. Southern Tubes reported in 306 ITR 216 (Ker), we do not
find retirement of a partner is specifically covered either in the
definition clause for transfer or in Section 45 of the Act. So far as
department’s claim of application of Section 45(4) is concerned, we
do not think the Section has any application when the firm is
continuing and where there is no distribution of assets of the firm.
Following the above decision of the Supreme Court we dismiss the
appeals filed by the revenue.
4. The issue decided by us in the above appeals squarely
apply to Appeal Nos: 842/2009 & 1471/2009 wherein the
respondent-assessees were partners of the very same firm. Since
we have held that no capital gains are assessable at the hands of
the retiring partners in the batch case, the same findings apply to
these appeals wherein assessees are also partners of the same firm.
ITA 474/2009 etc. 4
Therefore, following our findings above we dismiss these appeals
also filed by the revenue.
C.N.RAMACHANDRAN NAIR
Judge
K. SURENDRA MOHAN
Judge
jj
ITA 474/2009 etc. 5