ITAT upheld that s 45(4) was inapplicable as no partner had retired in the AY

1. The assessee firm, engaged in the manufacture and processing of Bhagar and by-product Konda (used as cattle fodder), filed its return of income for A.Y. 2010-11 declaring income of Rs 39,12,761/-. The case was taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee firm constituted by Deed of Partnership underwent a 50% change in constitution vide Deed of Retirement-cum-Admission whereby two partners holding 50% of the share of profit retired from the firm and were replaced by four new partners, with each holding 25% of the profits and loss in the firm. In view of this change in constitution, the assessee firm, in accordance with the regulations of MIDC, since it held leasehold rights in a factory, intimated MIDC this change in constitution and drafted and furnished a new Deed of Assignment. The assessee paid stamp duty of Rs 3,77,830/- for the limited purpose of registering the change in constitution of the firm and the name of the assessee firm, its business activity, place of operations remained the same and the leasehold rights in the said property continued to be vested with the assessee firm itself. The AO, held that there was no transfer of property u/s 2(47) (of Income Tax Act, 1961). AO held that s 45(4) were applicable. AO made an addition of Rs 37,78,250/- u/s 45(4) (of Income Tax Act, 1961) and accordingly completed the assessment u/s 143(3) (of Income Tax Act, 1961), wherein the income of the assessee was determined at Rs 76,91,011/-.

2. CIT(A) held that the section 45(4) (of Income Tax Act, 1961) was not applicable for A.Y. 2010-11, the year under consideration, as there was no retirement of any partner during this period. CIT(A) deleted the addition of Rs 37,80,250/- under section 45(4) (of Income Tax Act, 1961).

3. On appeal, the ITAT held as under:

4. Before us, except for raising the grounds (supra), Revenue has not been able to bring on record any material to factually or legally controvert the findings of the learned CIT(A) (supra). In the legal and factual matrix of the case, we concur with the findings of the learned CIT(A), in deleting the addition of Rs 37,78,250/- made by the AO under section 45(4) (of Income Tax Act, 1961), by holding that : -

(i) the provisions of section 45(4) (of Income Tax Act, 1961) are not applicable for the year under consideration, i.e. A.Y. 2010-11 as there is no retirement of any partner during this period.

(ii) there is no transfer of leasehold rights in the said property by the assessee firm to the retiring partners; which continue to stay vested in the assessee firm even after the change in the constitution of the assessee firm.

(iii) as per the provisions of section 45(4) (of Income Tax Act, 1961) the income is not to be taxable under the head 'business income' but rather the income should be exigible to tax under the head 'Income from 'Capital Gains' and the indexed cost of acquisition of the capital asset should be deducted from the full value of consideration computed under section 48 (of Income Tax Act, 1961).

5. In the light of the factual and legal matrix of the case on hand, as discussed above, we find that no interference is called for the impugned order of the learned CIT(A), in respect of the issue before us and consequently uphold the same. The grounds raised at S. Nos. 1 & 2 by the Revenue (supra) are dismissed.”

Case Reference- DCIT vs M/s. Vaibhav Industries

IN THE INCOME TAX APPELLATE TRIBUNAL "F" Bench, Mumbai Before Shri Jason P. Boaz, Accountant Member and Shri Sandeep Gosain, Judicial Member ITA No. 052/Mum/2014(Assessment Year: 2010-11)