High Court Of Karnataka
CIT & ANR. vs. Gurunath Talkies
Section 2(47), 45(3), 45(4), 47(ii)
Asst. Year 1995-96
D.V. Shylendra Kumar & Aravind Kumar, JJ.
IT Appeal No. 83 of 2004
7th July, 2009
Counsel Appeared :
K.V. Aravind for M.V. Seshachala, for the Appellants : B.V. Shankarnarayana Rao for K. Venugopalaraju, for the
Respondent
JUDGMENT
D.V. Shylendra Kumar, J. :
This is an appeal by the Revenue under s. 260A of the IT Act, 1961 (for short, ‘the Act’) directed against the order of the Tribunal, Bangalore in ITA No. 581/Bang/2002 rendered on 1st Oct., 2003.
2. The appeal had been admitted for examination on the following questions of law :
“1. Whether the colorable device adopted by the assessee in admitting two new partners namely, Sri. M. Venkataramaiah and Smt. Sujatha Venkataramaiah and permitting all the old partners to retire from the firm by receiving a consideration amount of Rs. 16,55,647 from the old partners (sic) would amount to a transfer attracting the capital gains provision as per the IT Act ?
2. Whether the Tribunal was correct in relying on various judgments of the apex Court and other Courts in arriving at the conclusion that there was no transfer on receipt of consideration amount by the retiring partners from the incoming partners without examining and applying the amended provisions of s. 45 of the Act ?”
3.1 The brief facts leading to the above appeal are as under : Assessee is a partnership firm and the relevant assessment year is 1995-96. The firm was carrying on the business of maintaining a cinema theatre, comprising of four partners who were entitled to share the profits of the firm. The previous year corresponding to the assessment year is from 1st April, 1994 to 31st March, 1995. A reconstitution of the partnership firm took place somewhere in July, 1994 by addition of two partners to the partnership firm. It is indicated in the books of accounts that the incoming partners brought about Rs. 17 lakhs towards their capital contribution to the firm and on 15th Dec., 1994 the firm was again reconstituted with the erstwhile four partners going out retiring from the partnership, the newly added partners remaining in the firm and continuing the firm. The firm had filed its returns of income for the year 1995-96 and it appears declared a loss of Rs. 2,60,104.
3.2 However, the AO, it appears, issued notice under s. 143(3) r/w s. 147 of the Act calling upon the assessee to file its revised return on the premise that the assessee had not declared the income attributable to the transfer of capital assets resulting in capital gains, during the relevant accounting period and after hearing the assessee and affording an opportunity, came to the conclusion that having regard to the statutory provisions of sub-ss. (3) and (4) of s. 45 and having regard to the ratio of the judgment of the Supreme Court in Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC), the AO is entitled to look behind the transaction and examined the true nature of the transaction, opined that the exercise of taking into new partners and subsequently the original four partners going out of the firm leaving the entire assets of the firm in the hands of the newly added partners, is virtually a transaction involving the transfer of the assets of the firm to the new partners, as firm continued in the hands of the new partners and in this view of the legal position and the need for the AO to examine the true nature of the transaction concluded that the transaction involved additional new two partners to the firm during July, 1994 and the erstwhile four partners retiring in the month of December, 1994 and going out with the amount which the new partners had brought in by way of their capital contribution to the firm and sharing that amount minus and WDV of the assets of the firm virtually amounted to transfer of assets to the new partners and, therefore, the firm was liable to be assessed on the gains attributable to the transaction the value of the sale consideration for the transfer of the assets was taken to be the amount brought in by the partners and shared amongst the earlier partners and determined the assessable income of the firm by applying s. 45(4) of the Act and called upon the assessee to pay the tax along with interest under ss. 234A and 234B of the Act. Separate penalty proceedings were also initiated under s. 45(3) of the Act.
3.3 The aggrieved assessee appealed to the CIT(A) but without much success.
3.4 The appellate authority after noticing the facts and noticing the development in terms of the judgment of the Supreme Court in Sunil Siddharthbhai’s case (supra) as also the subsequent judgment of a Division Bench of Bombay High Court in the case of CIT vs. A.N. Naik Associates (2004) 187 CTR (Bom) 162 : (2004) 265 ITR 346 (Bom) and being of the view that the above object of the legislation by reintroduction of sub-ss. (3) and (4) to s. 45 being designed to prevent leakage of revenue by assessees indulging in transactions which was camouflaged and even otherwise which are capable of escaping the net of the tax as capital gains, opined that the AO has rightly brought to tax the income attributable to the capital gain of the firm under s. 45 of the Act. Upholding the view of the AO and fortified the reasoning by referring to the provisions of s. 188 r/w s. 187(2) of the Act and noticing that there were two changes in the constitution of the partnership firm for the accounting period and at the end of the year, none of the erstwhile partners remained in the firm and the firm continued only in the hands of totally new partners who had been admitted to the firm midway in the accounting year it amounted to transfer of the assets of the firm in the hands of old set of partners to the new set of partners as though erstwhile firm comprised of four partners had transferred the assets of the firm to the new firm comprising of newly added partners. In this view of the matter he dismissed the appeal.
3.5 It is these two orders the assessee had further carried to the Tribunal. The assessee met with success. The Tribunal took the view that there is no dissolution of the firm, whereupon the assets had been transferred to the partners of the firm, and as there is no dissolution, s. 45(4) of the Act is not attracted and drawing support from a Division Bench judgment of the Kerala High Court in the case of CIT vs. Kunnamkulam Mill Board (2002) 178 CTR (Ker) 356 : (2002) 257 ITR 544 (Ker) and being of the view that the facts noticed by the Kerala High Court in Kunnamkulam’s case (supra) was very much akin to the facts prevailing in the present case applying the reasoning given by the Kerala High Court in Kunnamkulam’s case (supra) in the appeal before them and also being of the view that the Kerala High Court in taking the view having considered the views expressed by our High Court and Supreme Court in the following decisions : (i) B.T. Patil & Sons vs. CGT (1996) 134 CTR (Kar) : (1997) 224 ITR 431 (Kar); (ii) B.T. Patil & Sons vs. CGT (2000) 163 CTR (SC) 363 : (2001) 247 ITR 588 (SC); (iii) CGT vs. N.S. Getti Chettiar 1972 CTR (SC) 349 : (1971) 82 ITR 599 (SC); (iv) Jagatram Ahuja vs. CGT (2000) 164 CTR (SC) 1 : (2000) 246 ITR 609 (SC); (v) James Anderson vs. CIT (1960) 39 ITR 123 (SC); (vi) Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC); (vii) IT Appeal No. 65 of 1999, allowed the appeal and reversed the order passed by the AO confirmed in appeal by the first appellate authority.
It is in such circumstances, the Revenue is in appeal before us seeking for answer to the substantial questions of law referred to in the earlier part of this judgment.
We have heard Sri Aravind, learned standing counsel appearing for the CIT and Sri B.V. Shankaranarayana Rao, learned counsel appearing for the respondent-assessee. Submission of Sri Aravind learned counsel appearing for the Revenue is that the Tribunal has committed an error in simply following the reasoning and the judgment of the Kerala High Court in Kunnamkulam’s case (supra); that the Kerala High Court has made a mistake in not noticing the full effect of the provisions of s. 45(4) of the Act; that s. 45(4) being attracted not merely in the case of transfer of property involving dissolution of the firm but transfer in any other situation as is indicated under s. 45(4) has been overlooked and attention has been drawn to the applicability of the provisions of s. 45 to a situation where the assets of the firm on transfer otherwise than by way of dissolution of the firm and in the present case though there was no dissolution, in effect there being the transfer of the assets of the firm in the hands of four earlier partners to the firm later as it was held by the two incoming partners with addition and deletion of partners and that the two incoming new partners bringing capital investment of Rs. 17,00,000 out of which except for the amount which is the value calculated as WDV of the assets of the firm as reflected in the books of accounts of the firm, the balance of the contribution of the two incoming new partners having been shared by the four outgoing partners, it is clearly a case of transfer by the firm for consideration and therefore, the provisions of s. 45(4) is clearly attracted and the judgment of the Kerala High Court in Kunnamkulam’s case (supra) may not be of any assistance in the present situation.
It is also urged that the entire transaction being in the same accounting period and the effect of the reconstitution of the firm twice in the accounting year being as indicated above it in turn attracts the provisions of s. 45(4) of the Act and the amount which the outgoing partners had received through respective shares credited to their accounts, in the firm, necessarily reflects the gains which was initially in the hands of the firm and in turn distributed to outgoing partners is to be definitely taxed as capital gain and therefore the appeal deserves to be allowed.
Learned counsel would also draw sustenance from the judgment of the Supreme Court in the case of Sunil Siddartha (supra) to sustain the view taken by the AO and confirmed by the first appellate authority and submits that the Tribunal having reversed the order passed by the first appellate authority on a totally erroneous understanding of the provisions and by wrong application of the judgment of the Kerala High Court in Kunnamkulam’s case (supra), the matter warrants interference.
It is also submitted that the facts as they prevail in the present appeal are more akin to the facts as obtained in the Bombay case, that the Bombay High Court has elaborately discussed not only the legislative history of reintroduction of the provisions of sub-ss. (3) and (4) of s. 45 but also has defined and discussed the impact of the deletion of cl. (ii) of s. 47 of the Act and the legislative intent is clearly to plug the leakage of revenue and the Bombay judgment clearly applies to the facts of the present case and the appeal should be allowed.
Sri Aravind would also draw attention of the Court to the earlier judgment of this Court in the case of Suvardhan vs. CIT (2006) 206 CTR (Kar) 226 : (2006) 287 ITR 404 (Kar). though this judgment was in all fairness brought to the notice of the Court by Mr. B.V. Shankaranarayana Rao learned counsel appearing for the respondent and not cited earlier in support of the case of the Revenue. Be that as it may, the Division Bench of this Court has followed the view taken by the Bombay High Court in A.N. Naik’s case (supra), rather than to follow the view taken by the Kerala High Court in Kunnamkulam’s case (supra) and therefore also we are bound to follow the view expressed by this Court in Suvardhan’s case (supra).
On the other hand appearing on behalf of the assessee Sri B.V. Shankaranarayana Rao would very vehemently urge that this is a fit case where this Court should dismiss the appeal; that provisions of s. 45(4) are not at all attracted to the facts of the present case; that the facts of the present case do not involve any dissolution of a partnership firm; that there is no actual transfer of any of the assets of the firm to any partners whether incoming or outgoing and in the absence of any transfer of capital assets there is no question of capital gain arising to the firm and therefore there is no transfer of capital assets in the hands of the firm. It is therefore submitted that nothing else follows to attract the provisions of s. 45 and therefore the order of the Tribunal should be confirmed and the appeal be dismissed. Elaborating the submissions, Sri Shankaranarayana Rao would submit that the word
‘transfer’ is defined in the Act in sub-s. (47) of s. 2 and it necessarily connotes transfer of a capital asset and would urge that the transaction of the reconstitution of the firm during July, 1994 by admitting new partners and another reconstitution of the firm in December, 1994, permitting four amongst the six partners to go out, may be the partners going out are the erstwhile partners of the firm, even then it would not come within the scope of any one of the six sub-clauses of cl. (47) of s. 2; that none of the assets of the firm has in fact been transferred to any of the partners old or new and no capital assets of incoming or outgoing partners has been contributed, that if at all the transactions have only resulted in a loss to the firm and not any gain, as the capital account of the firm which was around Rs. 16 lakhs and odd got reduced with payment being made to the four outgoing partners; that what remained with the firm was around Rs. 45,000 and therefore the transaction is one of loss and not of gain and there is no question of the firm being taxed on any gain; that there is neither transfer nor any gain. There is no question of the provisions of s. 45(4) being attracted and therefore the judgment of the appellate authority be affirmed.
In support of his submission Mr. Shankaranarayana Rao has drawn the attention of the Court to the decision in the case of CIT vs. Moped & Machines (2005) 198 CTR (MP) 608 : (2006) 281 ITR 52 (MP) and would submit that the Madhya Pradesh High Court having followed the view taken by the Kerala High Court and the view taken by the Kerala High Court as followed by the Madhya Pradesh High Court being the correct view commends for our acceptance and pleads for this view to be followed by this Court, in deciding the present appeal. Mr. Shankaranarayana Rao would distinguish the judgment of this Court in Suvardhan’s case (supra) by pointing out that on facts there is a distinction in the sense, that case involved dissolution of the firm and one of the erstwhile partner taking over the entire assets of the firm and in fact there was a transfer of assets and dissolution and one partner taking all the assets of the firm. Pointing out to the facts of the present case, submission of Mr. Shankaranayana Rao is that there is no transfer in the present case as the assets remained with the firm and none of the partners have taken out any of the assets of the firm.
We have bestowed our anxious consideration to the submissions made at the Bar and perused the records.
Sec. 45 of the Act has a chequered history. We are not sure whether it should be described as colourful history. It appears, in the parent Act s. 45 was all by itself and later was introduced subss. (2) to (4) by way of amendment in the year 1964. Sub-ss. (2) and (3) were omitted w.e.f 1st April, 1966 by Finance Act, 1964 and got back on the statute book by way of amendment through Taxation Laws (Amendment) Act, 1984 w.e.f 1st April, 1985 and again modified as per Finance Act, 1987, w.e.f 1st April, 1988 and so on and so forth. While this position continued for sometime by the Finance Act of 1987 sub-ss. (3) and (4) were reintroduced w.e.f. 1st April, 1988 and simultaneously cl. (ii) of s. 47 was omitted.
The Division Bench of Bombay High Court in the case of A.N. Naik’s case (supra) has elaborarely noticed the legislative history, and in this background now the intention and the manner in which the present sub-ss. (3) and (4) of the Act is to be understood. We would simply, with respect agree with that view, instead of burdening this judgment with further discussion as we find the discussion there cannot be improved upon by our adding to it.
We also notice while the earlier Division Bench of this Court has in fact preferred the view taken by the Bombay High Court in preference to the view expressed by the Kerala High Court, while has distinguished the view expressed by the Madhya Pradesh High Court in Moped & Machines’ case (supra), which in turn had followed the Kerala High Court view in Kunnamkulam’s case (supra).
The net result of the above developments is that this Court has preferred the view expressed by the Bombay High Court in preference to the view expressed in Kerala and Madhya Pradesh High Courts in the matter of understanding the scope and intent of sub-ss. (3) and (4) of s. 45. We are of the view that the object of sub-ss. (3) and (4) should be given full effect and having regard to the legislative intent and the provisions having been brought back on statute book and at the same time taking care to delete cl. (ii) of s. 47 which, excluding cl. (ii) reads as under : “47. Nothing contained in s. 45 shall apply to the following transfers : (i) any distribution of capital assets on the total or partial partition of an HUF; (ii) ………………….. (omitted)” (iii) Sec. 47 was introduced to take out certain transactions which otherwise are transfers of capital assets and otherwise taxable under s. 45, from being taxed.
On the reintroduction of sub-s. (3) and (4) by the Finance Act, 1987. Clause (ii) of s. 47 has been expressly omitted removing the protective umbrella. The legislative intent is quite clear and in our opinion this is good enough to take care of any situation where in effect there is transfer of capital asset, by any mode and to ensure the gain being taxed the section has been amended and this is the view taken by the Bombay High Court.
As indicated earlier we are in respectful agreement with the view expressed by the Bombay High Court in A.N. Naik’s case (supra). We are of the view that in the present case the AO has rightly indicated that the series of transaction such as reconstitution of firm twice; once in July, 1994 and another in December, 1994 and entire assets retained in the hands of the newly added two partners, results in transfer of assets of the firm in the sense
that the assets of the firm as had been held by the erstwhile partners is transferred to the newly added two partners though all along the assets of the firm continued in the hands of the firm. Therefore, we hold there is transfer of capital assets within the meaning of s. 2(47) and we are unable to accept the submission contrary made by the learned counsel for the assessee.
In this view of the matter we answer the first question in the affirmative in favour of the Revenue holding that there was a transfer of capital asset attracting the capital gain transaction in terms of s. 45(4) of the Act. The second question is answered in the negative in favour of the Revenue and against the assessee holding that the judgments which were noticed by the Tribunal were in the context of the law as it existed prior to its amendment in the year 1987. Finance Act of 1987 having expressly and with definite purpose brought about the amendment to IT Act reintroducing sub-ss. (3) and (4) to s. 45 of the Act, the Tribunal should have examined the appeal before it merely by applying the statutory provisions as it prevailed during the accounting period relevant to the asst. yr. 1994-95 and not merely by following the principles, the ratio of the judgment of the Supreme Court which had been rendered slightly in a different context. Though Mr. Shankaranarayana Rao, learned counsel for the assessee would submit that the assessee had not indulged in any suppression or mis-representation and that the transactions were genuine and has been clearly disclosed in the return and therefore in the situation never warranted a levy of penalty as it was proposed in the assessment order and also does not warrant levy of interest, as a consequence of this appeal being allowed, it automatically restores the levy of interest; we are afraid that the Tribunal having not looked into this aspect and having merely examined merits of the appeal before it as to there being loss and there being gain and as this question is now answered against the assessee, there is no scope for us to independently examine the question of levy of interest. It remains. However, we notice the question of penalty is an independent proceeding and it is open to the assessee to urge such defence as is available to the assessee in an appropriate proceeding rather than to elicit a finding in this appeal.
Mr. Rao has brought to our notice that in respect of judgment of the Bombay High Court in A.N. Naik’s case (supra) and also the judgment of our High Court in Suvardhan’s case (supra) SLPs have been preferred by the assessee and leave has been granted to appeal and appeals are pending. May be the position is that but on that premise we do not think we should keep this appeal pending without answering the questions raised in this appeal as the law which governs the field has been applied and questions are answered herein. There is no question of postponing the decision in this appeal any further.
We place our appreciation of the quality assistance we received from the learned counsel for the Revenue and also the learned counsel for the assessee.
[Citation : 328 ITR 59]
