S. 45(4) : Capital gains-Distribution of capital asset-Dissolution of firm – Introduction of new partner-Amount received by existing partner for sacrificing his profit-sharing ratio-Realignment of share ratio – No transfer of asset – No capital gain taxable on relinquishment of share ratio-Post amendment, 2021, Finance Act, 2021. [S. 2(14), 2(47), 9B, 45]
The assessee is a partner in CRCL LLP, who received ₹2,38,63,452 when Elior India Catering LLP was admitted as a new partner with a 51% stake in CRCL LLP. The amount was credited to the existing partner for their reduction in profit-sharing ratios, with the assessee’s share decreasing from 12% to 5.88%. The AO treated this amount as short-term capital gains under section 45 of the Income Tax Act, arguing it constituted consideration for relinquishing profit-share rights and goodwill, which was also upheld by the CIT(A). However, the ITAT overturned this and held that the reduction in profit-sharing ratio during the firm’s reconstitution without asset transfer, retirement, or dissolution did not qualify as a “transfer” under section 2(47). On realignment of profit-sharing ratio upon introduction of new partners, there is no transfer of assets as the assets remain with the partnership firm, and thus, such an arrangement is not covered under Section 45(4) of the Income Tax Act, which applies to dissolution or reconstitution scenarios involving asset distribution. It further noted that post-2021 amendments to Section 45(4) and Section 9B (which could tax such transactions) were prospective and inapplicable to the AY 2017–18, and therefore deleted the addition. Relied on CIT v. P.N. Panjawani 356 ITR 676 (Karn)(HC). [ITA No. 1088/Chny/2025 dt. 17.06.2025] [AY .2017-18]
Gokulakrishna v. DCIT (Chennai)(Trib.) www.itatonline.org.
[Coram : Hon’ble Shri George George K, VP and Hon’ble Shri Jagadish, AM]