Our family split the firms by a settlement and gave assets to the partners who retired. There was no dissolution, so section 45(4) cannot apply, can it?
It can. The Bombay High Court held that otherwise in section 45(4) is not to be read ejusdem generis with dissolution. It goes with the words transfer of capital assets by way of distribution of capital assets, so where a subsisting firm hands assets to a retiring partner the firm's right in the property is extinguished and there is a transfer chargeable under section 45(4), with the fair market value on the date of transfer deemed to be the full value of consideration. The Court accepted that there was no dissolution and that the family settlement was genuine and not a device, but allowed the Revenue's appeals and restored the assessments.
Decided by the High Court (Bombay High Court - F.I. Rebello and P.V. Hardas, JJ; judgment by F.I. Rebello, J) on 2003-07-23, reported as [2004] 265 ITR 346 (Bom); (2004) 187 CTR (Bom) 162. It bears on section 45(4), section 2(47), section 47(ii) of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
This is the decision that opened section 45(4) beyond dissolution, and it is the answer to the argument that a reconstitution or a retirement cannot be caught. Its reasoning is purposive and historical: before 1988 the law was that a firm has no rights of its own in its assets, so distribution on dissolution or retirement was a mere adjustment of rights and no transfer, as Malabar Fisheries held; the Finance Act 1987 inserted sub-sections (3) and (4) to remedy that mischief, and at the same time omitted clause (ii) of section 47, which had kept distribution on dissolution outside transfer. The Court's point is that Parliament amended by deleting the exclusion rather than by touching section 2(47), so the unchanged definition proves nothing. Reading otherwise narrowly would let partners defeat the amendment simply by distributing assets to partners who then retire. The Court also usefully separates the genuineness of a family arrangement, which it upheld, from its tax consequences.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The respondents were parties to a memorandum of family settlement dated 30 January 1997 under which the business of six firms was to be divided and partitioned, the deed reciting that civil suits would damage the family since the business was a family business with an inherited nucleus. The settlement set out how the firms were to be reconstituted by retirement and admission of partners and provided that assets and liabilities allotted to a party in the schedule would be transferred or assigned irrevocably with possession made over. Deeds of reconstitution and of retirement followed on the same day; a new partner was admitted in the morning and the outgoing partners retired at the close of business. For assessment year 1997-98 the firms were assessed to capital gains under section 45(4). The appellate authority dismissed the appeal on 16 June 2000. The Tribunal allowed the assessee's appeal, holding that there was reconstitution and not dissolution, that the firm was in existence since 1985 and the arrangement was not a device to avoid tax, and that otherwise in section 45(4) must be read ejusdem generis so as to cover only situations akin to dissolution. The Revenue appealed.
Both appeals were allowed, the orders of the Tribunal set aside and the orders of assessment restored, each party bearing its own costs. On the first question, the family settlement did not amount to dissolution of the partnership under section 40 of the Indian Partnership Act: a new partner was admitted before the others retired, so the partnership subsisted with two partners and the business continued, and the Tribunal's finding of no dissolution could not be faulted. On the question of a device, the Tribunal's finding was upheld: the family disputes were real, the genesis of the arrangement was not disputed, the division of assets was clearly defined and the saving of tax was only a consequence of a normal event. On the third question, the word otherwise takes into its sweep not only cases of dissolution but also cases of subsisting partners transferring assets in favour of a retiring partner. Accordingly the transfer of the firm's assets to the retiring partners amounted to a transfer of capital assets chargeable under section 45(4).
The Court set the amendment against the law it replaced. Malabar Fisheries had held that a firm is not a distinct entity, that its rights in the partnership assets are not extinguished on dissolution, and that distribution to partners is a mutual adjustment of rights and not a transfer within section 2(47); the same view had been taken of a retiring partner's share in Mohanbhai Pamabhai and L. Raghukumar, and of a partner bringing personal assets into a firm in Sunil Siddharthbhai and Kartikeya V. Sarabhai. Sub-sections (3) and (4) were inserted by the Finance Act 1987 to block both escape routes - assets brought into a firm and assets taken out of it. Section 45 being a charging section enacted for that purpose, reading otherwise ejusdem generis with dissolution would let partners defeat the amendment by distributing assets to partners who then retire. The expression is therefore to be read with the words transfer of capital assets by way of distribution of capital assets, so that a distribution while the firm subsists is caught. When an asset of the partnership is transferred to a retiring partner, the firm's right in the property stands extinguished in his favour. The Court drew support from B.T. Patil and Sons, where the Supreme Court held that although no transfer is involved when a partner obtains an asset on dissolution or retirement in lieu of his interest, the position is different when during the subsistence of a partnership an asset of the partnership becomes the asset of one partner. On the objection that section 2(47) was never amended, the Court pointed out that the definition is inclusive and that the Finance Act 1987 achieved the change by omitting clause (ii) of section 47, which had excluded distribution of capital assets on dissolution from transfer.
the word "otherwise" takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner.
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Handle my notice → Ask a CA on WhatsAppIt can. The Bombay High Court held that otherwise in section 45(4) is not to be read ejusdem generis with dissolution. It goes with the words transfer of capital assets by way of distribution of capital assets, so where a subsisting firm hands assets to a retiring partner the firm's right in the property is extinguished and there is a transfer chargeable under section 45(4), with the fair market value on the date of transfer deemed to be the full value of consideration. The Court accepted that there was no dissolution and that the family settlement was genuine and not a device, but allowed the Revenue's appeals and restored the assessments. This was decided by the High Court (Bombay High Court - F.I. Rebello and P.V. Hardas, JJ; judgment by F.I. Rebello, J) and bears on section 45(4), section 2(47), section 47(ii) of the Income Tax Act 1961. It is reported as [2004] 265 ITR 346 (Bom); (2004) 187 CTR (Bom) 162. This is the decision that opened section 45(4) beyond dissolution, and it is the answer to the argument that a reconstitution or a retirement cannot be caught. Its reasoning is purposive and historical: before 1988 the law was that a firm has no rights of its own in its assets, so distribution on dissolution or retirement was a mere adjustment of rights and no transfer, as Malabar Fisheries held; the Finance Act 1987 inserted sub-sections (3) and (4) to remedy that mischief, and at the same time omitted clause (ii) of section 47, which had kept distribution on dissolution outside transfer. The Court's point is that Parliament amended by deleting the exclusion rather than by touching section 2(47), so the unchanged definition proves nothing. Reading otherwise narrowly would let partners defeat the amendment simply by distributing assets to partners who then retire. The Court also usefully separates the genuineness of a family arrangement, which it upheld, from its tax consequences. If it applies to you, the first step is this: Do not assume that avoiding dissolution avoids section 45(4); a transfer of firm assets to a retiring partner is within otherwise on this reasoning.
The respondents were parties to a memorandum of family settlement dated 30 January 1997 under which the business of six firms was to be divided and partitioned, the deed reciting that civil suits would damage the family since the business was a family business with an inherited nucleus. The settlement set out how the firms were to be reconstituted by retirement and admission of partners and provided that assets and liabilities allotted to a party in the schedule would be transferred or assigned irrevocably with possession made over. Deeds of reconstitution and of retirement followed on the same day; a new partner was admitted in the morning and the outgoing partners retired at the close of business. For assessment year 1997-98 the firms were assessed to capital gains under section 45(4). The appellate authority dismissed the appeal on 16 June 2000. The Tribunal allowed the assessee's appeal, holding that there was reconstitution and not dissolution, that the firm was in existence since 1985 and the arrangement was not a device to avoid tax, and that otherwise in section 45(4) must be read ejusdem generis so as to cover only situations akin to dissolution. The Revenue appealed. The matter was decided on 2003-07-23 by the High Court (Bombay High Court - F.I. Rebello and P.V. Hardas, JJ; judgment by F.I. Rebello, J). On those facts the High Court held as follows. Both appeals were allowed, the orders of the Tribunal set aside and the orders of assessment restored, each party bearing its own costs. On the first question, the family settlement did not amount to dissolution of the partnership under section 40 of the Indian Partnership Act: a new partner was admitted before the others retired, so the partnership subsisted with two partners and the business continued, and the Tribunal's finding of no dissolution could not be faulted. On the question of a device, the Tribunal's finding was upheld: the family disputes were real, the genesis of the arrangement was not disputed, the division of assets was clearly defined and the saving of tax was only a consequence of a normal event. On the third question, the word otherwise takes into its sweep not only cases of dissolution but also cases of subsisting partners transferring assets in favour of a retiring partner. Accordingly the transfer of the firm's assets to the retiring partners amounted to a transfer of capital assets chargeable under section 45(4).
The Court set the amendment against the law it replaced. Malabar Fisheries had held that a firm is not a distinct entity, that its rights in the partnership assets are not extinguished on dissolution, and that distribution to partners is a mutual adjustment of rights and not a transfer within section 2(47); the same view had been taken of a retiring partner's share in Mohanbhai Pamabhai and L. Raghukumar, and of a partner bringing personal assets into a firm in Sunil Siddharthbhai and Kartikeya V. Sarabhai. Sub-sections (3) and (4) were inserted by the Finance Act 1987 to block both escape routes - assets brought into a firm and assets taken out of it. Section 45 being a charging section enacted for that purpose, reading otherwise ejusdem generis with dissolution would let partners defeat the amendment by distributing assets to partners who then retire. The expression is therefore to be read with the words transfer of capital assets by way of distribution of capital assets, so that a distribution while the firm subsists is caught. When an asset of the partnership is transferred to a retiring partner, the firm's right in the property stands extinguished in his favour. The Court drew support from B.T. Patil and Sons, where the Supreme Court held that although no transfer is involved when a partner obtains an asset on dissolution or retirement in lieu of his interest, the position is different when during the subsistence of a partnership an asset of the partnership becomes the asset of one partner. On the objection that section 2(47) was never amended, the Court pointed out that the definition is inclusive and that the Finance Act 1987 achieved the change by omitting clause (ii) of section 47, which had excluded distribution of capital assets on dissolution from transfer. In the words reproduced by the source cited on this page: "the word "otherwise" takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner."
It was decided by the High Court on 2003-07-23 and is reported as [2004] 265 ITR 346 (Bom); (2004) 187 CTR (Bom) 162. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 45(4), section 2(47), section 47(ii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. Both appeals were allowed, the orders of the Tribunal set aside and the orders of assessment restored, each party bearing its own costs. On the first question, the family settlement did not amount to dissolution of the partnership under section 40 of the Indian Partnership Act: a new partner was admitted before the others retired, so the partnership subsisted with two partners and the business continued, and the Tribunal's finding of no dissolution could not be faulted. On the question of a device, the Tribunal's finding was upheld: the family disputes were real, the genesis of the arrangement was not disputed, the division of assets was clearly defined and the saving of tax was only a consequence of a normal event. On the third question, the word otherwise takes into its sweep not only cases of dissolution but also cases of subsisting partners transferring assets in favour of a retiring partner. Accordingly the transfer of the firm's assets to the retiring partners amounted to a transfer of capital assets chargeable under section 45(4). It arises in Capital Gains and How Tax Law Is Read matters, on section 45(4), section 2(47), section 47(ii) of the Income Tax Act 1961, and was decided by Bombay High Court - F.I. Rebello and P.V. Hardas, JJ; judgment by F.I. Rebello, J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Compute the charge on fair market value on the date of transfer, which the sub-section deems to be the full value of consideration, and provide for it in the settlement. Keep the genuineness argument separate and support it - the existence of real family disputes, a firm running since 1985 and a defined division persuaded the Tribunal and the Court that this was not a device. Meet the section 2(47) point by pointing to the omission of section 47(ii) from 1 April 1988 rather than arguing about the definition of transfer.
Still good law. The judgment has been followed in a long line of later decisions, several of them in the High Courts, and it has been affirmed by the Supreme Court in terms. In CIT-23 v Mansukh Dyeing and Printing Mills (24 November 2022) the Court noted at para 7.4 that 'The Bombay High Court in the case of A.N. Naik Associates and Ors. had an occasion to elaborately consider the word OTHERWISE used in Section 45(4)', and held: 'we are in complete agreement with the view taken by the Bombay High Court in the case of A.N. Naik Associates... We affirm the view taken by the Bombay High Court in the above decision.' That is express affirmance by the Supreme Court, adopted as the ground of its own ruling on the revaluation and credit of assets to partners' capital accounts. High Courts have applied it on the same footing - CIT v Rita Mechanical Works (Punjab and Haryana, 24 September 2010) on capital gains in the hands of retiring partners, and the Madras High Court in M/s National Company v ACIT (8 April 2019) holding that a transfer on reconstitution is a transfer even where it is not a device to avoid tax. Nothing overruling, doubting or confining it has been traced. One thing a practitioner must check before applying it to a current year: s.45(4) was substituted and s.9B inserted by the Finance Act 2021 with effect from assessment year 2021-22, so this construction of the word 'otherwise' in the old s.45(4) governs earlier years - which is exactly what the Supreme Court was dealing with in 2022. That amendment is not established by the later citations collected here and should be checked against the statutory text itself. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment does not state the assets distributed, their values or the amount of capital gain assessed, so it gives no guidance on quantification beyond the statutory direction to take fair market value on the date of transfer. It does not deal separately with question 4 on the device point in its operative paragraph, having upheld the Tribunal on that issue in the body of the judgment while allowing the appeals on questions 2, 3 and 5. Several decisions are cited in the text without citations. The reasoning applies B.T. Patil, a gift tax case, to the income tax provision, and the Court's own summary of that ratio at paragraph 19 refers to the Wealth-tax Act, which appears to be a slip for the Gift-tax Act. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were allowed, the orders of the Tribunal set aside and the orders of assessment restored, each party bearing its own costs. On the first question, the family settlement did not amount to dissolution of the partnership under section 40 of the Indian Partnership Act: a new partner was admitted before the others retired, so the partnership subsisted with two partners and the business continued, and the Tribunal's finding of no dissolution could not be faulted. On the question of a device, the Tribunal's finding was upheld: the family disputes were real, the genesis of the arrangement was not disputed, the division of assets was clearly defined and the saving of tax was only a consequence of a normal event. On the third question, the word otherwise takes into its sweep not only cases of dissolution but also cases of subsisting partners transferring assets in favour of a retiring partner. Accordingly the transfer of the firm's assets to the retiring partners amounted to a transfer of capital assets chargeable under section 45(4).
TaxSphere, “CIT v A.N. Naik Associates”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-a-n-naik-associates/ (validity last checked 2026-08-29)
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