|CORAM:||Chandra Poojari (AM), N.R.S. Ganesan (JM)|
|SECTION(S):||45, 45(4), 47(ii)|
|CATCH WORDS:||capital gains, Dissolution, Partnership, Retirement|
|COUNSEL:||K. B. Mohammed Kutty|
|DATE:||September 19, 2014 (Date of pronouncement)|
|DATE:||October 5, 2014 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|U/s 45(4), capital gains on transfer of capital assets on dissolution of firm has to be worked out on the basis of the fair market value of the capital asset on the date of transfer|
(i) Dissolution and retirement are two different concepts. In the case of retirement, the retiring partner goes out of the firm but the remaining partners continue to carry on the business of the partnership as a firm. In the case of dissolution, the firm no longer exists and the dissolution is between all the partners of the firm.
(ii) In the case of retirement of a partner there could be two situations. In the first situation there can be a retirement of a partner from the firm and the firm might continue its existence and the retiring partner might be given assets in lieu of amounts payable to him on retirement. This could be done either on the basis of settling amounts standing to the credit of his capital account or on a lump sum basis. There could be a second situation where the retiring partner is paid consideration in cash and he gives up his rights as partner including his rights over the assets of the partnership. This again can be done either on the basis of settling amounts standing to the credit of his capital account or on a lump sum basis.
(iii) In the first situation i.e., retirement of a partner from the firm and the firm continuing its existence and the retiring partner is given assets in lieu of amounts payable to him on retirement, it has been held by the Hon’ble Bombay High Court to be covered by the provisions of s. 45(4) of the Act viz., a transfer giving rise to a capital gain. The Hon’ble Bombay High Court, in the case of CIT vs. A.N. Naik Associates (2004) 187 CTR (Bom) 162 : (2004) 265 ITR 346 (Bom) was dealing with a case of reconstitution of firm and allotment of assets to retiring partners. The reconstitution had taken place pursuant to a family arrangement. The chargeability to capital gain tax in such circumstances was in issue before the Hon’ble Court.