Income Tax Act, 1961: s.45(4) – Applicability of – Captial gains – Profits or gains arising from the transfer of a capital asset – Object of introducing s.45(4) – Held: s.45(4) states that the profits or gain arising from the transfer of capital assets by way of distribution of capital assets on account of dissolution of a firm or other association of persons or body of individuals or otherwise shall be chargeable to tax as the income of the firm – The object and purpose of introduction of s.45(4) was to pluck the loophole by insertion of s.45(4) and omission of s.2(47)(ii) – Earlier, there was an exemption of the transfer by way of distribution of capital assets from the ambit of the definition of “transfer” – The same helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same at the time of dissolution – By amendment, s.45(4) takes into sweep not only the cases of dissolution but also cases of subsisting partners of a partnership, transferring the assets in favour of a retiring partner – In the instant case, assets of partnership firm were revalued and the increased amount was credited to the accounts of the partners in their profit-sharing ratio – The credit of the assets’ revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets – Some new partners inducted by introduction of small amounts of capital and had huge credits to their capital accounts – The assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” which fell in the category of “otherwise” and therefore, s.45(4) shall be applicable.
Allowing the appeal, the Court
HELD: 1. Sub-section (4) of Section 45 came to be amended by the Finance Act, 1987 w.e.f. 01.04.1988. The object and purpose of introduction of Section 45(4) was to pluck the loophole by insertion of Section 45(4) and omission of Section 2(47)(ii). While introduction to Section 45(4), clause (ii) of Section 2(47) came to be omitted. Earlier, omission of Clause (ii) of Section 2(47) and Section 47(ii) exempted the transform by way of distribution of capital assets from the ambit of the definition of “transfer”. The same helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same at the time of dissolution. The said loophole came to be plucked by insertion of Section 45(4) and omission of Section 2(47)(ii). The word used “OR OTHERWISE” in Section 45(4) is very important. [Paras 7.1, 7.2][794-B-F]
2. In the present case, the assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores on 01.01.1993 (relevant to A.Y. 1993-1994) and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets’ revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets valued at Rs. 17.34 crores to the partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital ranging between Rs. 2.5 to 4.5 lakhs and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” and which fall in the category of “OTHERWISE” and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable. [Para 7.5][798-G-H; 799-A-B]
Commissioner of Income Tax v. A.N. Naik Associates and Ors., (2004) 265 ITR 346 (Bom.) – relied on
Commissioner of Income Tax, West Bengal v. Hind Construction Ltd., (1972) 4 SCC 460 – held inapplicable Commissioner of Income-Tax Mumbai v. Texspin Engg. and Mfg. Works, Mumbai, (2003) 263 ITR 345 (Bom.) – referred to
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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