I retired from a firm and received a lump sum well above the balance in my capital account. The AO has assessed it as long-term capital gain in my hands and applied section 50C. Is that correct for a pre-2021 year?
No. The Tribunal held that the amount received by a retiring partner on the reconstitution of a firm is taxable in the hands of the partnership firm and not in the hands of the partner. The partner was never the owner of the firm's assets; on a reconstitution there is simply a revaluation of assets and liabilities so that the retiring partner's capital account can be settled. The revenue's appeal was dismissed and the deletion of the addition in the partner's hands was upheld.
Decided by the ITAT (Shri Amit Shukla, Judicial Member and Shri Gagan Goyal, Accountant Member) on 2023-03-21, reported as ITA No. 860/Mum/2020; Assessment Year 2016-17; Income Tax Appellate Tribunal, Mumbai Bench 'B'; heard 14 March 2023, pronounced 21 March 2023. It bears on section 45, section 45(4), section 9B, section 2(47), section 50C, section 143(3) of the Income Tax Act 1961, in Capital Gains and Assessment & Scrutiny matters.
This is a useful order for any pre-2021 retirement assessment that has been raised on the partner rather than the firm, and it is the more useful because it reaches that result while accepting CIT v. Mansukh Dyeing and Printing Mills, which the department normally cites the other way. The Tribunal's point is that Mansukh Dyeing decides where the charge falls, not that it falls on the partner: the credit of a revaluation surplus to partners' capital accounts is a 'transfer' falling within the word 'otherwise' in the old section 45(4), and section 45(4) charges the firm. The limits matter as much as the holding. The order does not say the receipt is untaxed; it says the wrong person has been assessed, which leaves the firm exposed. It does not deal with the section 50C point the AO had applied, although the revenue raised it as a ground. And it decides a year — assessment year 2016-17 — governed by the old section 45(4); from assessment year 2021-22 the charge on the firm is statutory and computed by formula rather than by the case law on the word 'otherwise'.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee, engaged in land development and construction and a partner in several builder and developer firms, filed his return for AY 2016-17 on 6 March 2017 declaring total income of Rs 10,27,510. The case was taken up for limited scrutiny. During the assessment it emerged that he had received Rs 2,59,50,000 as gain from his share in the firm M/s Astha Housing Corporation, under a deed of reconstitution of that firm dated 27 April 2015, and had shown the amount as exempt income. He produced the balance sheet, the partnership deed, the deed of reconstitution and judicial authority in support. The Assessing Officer rejected the explanation, treated the receipt as taxable under the head capital gains, applied section 50C, and assessed income of Rs 5,78,81,506 as long-term capital gain in addition to the returned income. The Commissioner of Income Tax (Appeals)-1, Thane allowed the assessee's appeal by order dated 18 November 2019. The revenue appealed, contending that the whole partnership arrangement was a device to avoid tax on the appreciation in the assessee's share in land acquired under a development agreement, that he had received a lump sum in excess of his capital account balance as consideration for relinquishing his interest in that land, that the firm had carried on no activity and had not disclosed the land as its property, and relying on Sudhakar M. Shetty and Savitri Kudur for the proposition that such a lump sum is a transfer under section 2(47) taxable in the partner's hands.
The revenue's appeal was dismissed and the order of the CIT(A) sustained. The amount received by a retiring partner on the reconstitution of a firm is taxable in the hands of the partnership firm and not in the hands of the partner; that was so under the substituted provision and, the Tribunal held, was equally so before it (para 5). The assessee was never an owner of the assets held by the firm, having only a right to share the profits in addition to interest and remuneration if the deed provided for them, and on a reconstitution there is simply a revaluation of assets and liabilities as on that date so that the capital account of the retiring partner can be settled (para 6). On the facts, the law laid down by the Supreme Court and the assessee's own submissions, the transaction was taxable in the hands of the partnership firm and not in the hands of the assessee, and there was no reason to interfere with the CIT(A)'s order (para 9).
The Tribunal treated the question as a pure question of law, the facts as found by the AO and the CIT(A) being unchallenged (para 4). It set out the substituted section 45(4) alongside the pre-substitution text and reasoned from the fact that both charge the firm (para 4). It relied on Malabar Fisheries Company v. CIT, (1979) 120 ITR 49, for the proposition that a firm is not a distinct legal entity apart from the members constituting it and that in that sense there is no transfer of assets by the firm to any person, and noted that dissolution and reconstitution are two separate and distinct legal events with correspondingly different tax consequences (para 7). It then reproduced paragraphs 7.2, 7.3, 7.4, 7.5 and 8 of CIT v. Mansukh Dyeing and Printing Mills, (2022) 449 ITR 439, in which the Supreme Court held that the loophole left by the omission of clause (ii) of section 2(47) was plugged by the insertion of section 45(4), that the words 'OR OTHERWISE' in section 45(4) are important and, following the Bombay High Court in CIT v. A.N. Naik Associates, take into their sweep not only dissolution but also cases of subsisting partners transferring assets in favour of a retiring partner, and that the credit of a revaluation surplus to partners' capital accounts is in effect a distribution of the assets to the partners and is a 'transfer' within that word (para 8). The Tribunal observed that although that decision was in the revenue's favour, its ratio was directly relevant, and concluded that the ratio placed the charge on the firm (para 9).
we are of the considered view that the transaction under consideration is taxable under the hands of partnership firm and not in the hands of assessee under consideration
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Tribunal held that the amount received by a retiring partner on the reconstitution of a firm is taxable in the hands of the partnership firm and not in the hands of the partner. The partner was never the owner of the firm's assets; on a reconstitution there is simply a revaluation of assets and liabilities so that the retiring partner's capital account can be settled. The revenue's appeal was dismissed and the deletion of the addition in the partner's hands was upheld. This was decided by the ITAT (Shri Amit Shukla, Judicial Member and Shri Gagan Goyal, Accountant Member) and bears on section 45, section 45(4), section 9B, section 2(47), section 50C, section 143(3) of the Income Tax Act 1961. It is reported as ITA No. 860/Mum/2020; Assessment Year 2016-17; Income Tax Appellate Tribunal, Mumbai Bench 'B'; heard 14 March 2023, pronounced 21 March 2023. This is a useful order for any pre-2021 retirement assessment that has been raised on the partner rather than the firm, and it is the more useful because it reaches that result while accepting CIT v. Mansukh Dyeing and Printing Mills, which the department normally cites the other way. The Tribunal's point is that Mansukh Dyeing decides where the charge falls, not that it falls on the partner: the credit of a revaluation surplus to partners' capital accounts is a 'transfer' falling within the word 'otherwise' in the old section 45(4), and section 45(4) charges the firm. The limits matter as much as the holding. The order does not say the receipt is untaxed; it says the wrong person has been assessed, which leaves the firm exposed. It does not deal with the section 50C point the AO had applied, although the revenue raised it as a ground. And it decides a year — assessment year 2016-17 — governed by the old section 45(4); from assessment year 2021-22 the charge on the firm is statutory and computed by formula rather than by the case law on the word 'otherwise'. If it applies to you, the first step is this: Check the assessment year first. For years up to AY 2020-21 this order supports the argument that the assessment on the retiring partner is on the wrong person; for AY 2021-22 onwards the substituted section 45(4) makes the firm-level charge explicit and this order does not help with its computation.
The assessee, engaged in land development and construction and a partner in several builder and developer firms, filed his return for AY 2016-17 on 6 March 2017 declaring total income of Rs 10,27,510. The case was taken up for limited scrutiny. During the assessment it emerged that he had received Rs 2,59,50,000 as gain from his share in the firm M/s Astha Housing Corporation, under a deed of reconstitution of that firm dated 27 April 2015, and had shown the amount as exempt income. He produced the balance sheet, the partnership deed, the deed of reconstitution and judicial authority in support. The Assessing Officer rejected the explanation, treated the receipt as taxable under the head capital gains, applied section 50C, and assessed income of Rs 5,78,81,506 as long-term capital gain in addition to the returned income. The Commissioner of Income Tax (Appeals)-1, Thane allowed the assessee's appeal by order dated 18 November 2019. The revenue appealed, contending that the whole partnership arrangement was a device to avoid tax on the appreciation in the assessee's share in land acquired under a development agreement, that he had received a lump sum in excess of his capital account balance as consideration for relinquishing his interest in that land, that the firm had carried on no activity and had not disclosed the land as its property, and relying on Sudhakar M. Shetty and Savitri Kudur for the proposition that such a lump sum is a transfer under section 2(47) taxable in the partner's hands. The matter was decided on 2023-03-21 by the ITAT (Shri Amit Shukla, Judicial Member and Shri Gagan Goyal, Accountant Member). On those facts the ITAT held as follows. The revenue's appeal was dismissed and the order of the CIT(A) sustained. The amount received by a retiring partner on the reconstitution of a firm is taxable in the hands of the partnership firm and not in the hands of the partner; that was so under the substituted provision and, the Tribunal held, was equally so before it (para 5). The assessee was never an owner of the assets held by the firm, having only a right to share the profits in addition to interest and remuneration if the deed provided for them, and on a reconstitution there is simply a revaluation of assets and liabilities as on that date so that the capital account of the retiring partner can be settled (para 6). On the facts, the law laid down by the Supreme Court and the assessee's own submissions, the transaction was taxable in the hands of the partnership firm and not in the hands of the assessee, and there was no reason to interfere with the CIT(A)'s order (para 9).
The Tribunal treated the question as a pure question of law, the facts as found by the AO and the CIT(A) being unchallenged (para 4). It set out the substituted section 45(4) alongside the pre-substitution text and reasoned from the fact that both charge the firm (para 4). It relied on Malabar Fisheries Company v. CIT, (1979) 120 ITR 49, for the proposition that a firm is not a distinct legal entity apart from the members constituting it and that in that sense there is no transfer of assets by the firm to any person, and noted that dissolution and reconstitution are two separate and distinct legal events with correspondingly different tax consequences (para 7). It then reproduced paragraphs 7.2, 7.3, 7.4, 7.5 and 8 of CIT v. Mansukh Dyeing and Printing Mills, (2022) 449 ITR 439, in which the Supreme Court held that the loophole left by the omission of clause (ii) of section 2(47) was plugged by the insertion of section 45(4), that the words 'OR OTHERWISE' in section 45(4) are important and, following the Bombay High Court in CIT v. A.N. Naik Associates, take into their sweep not only dissolution but also cases of subsisting partners transferring assets in favour of a retiring partner, and that the credit of a revaluation surplus to partners' capital accounts is in effect a distribution of the assets to the partners and is a 'transfer' within that word (para 8). The Tribunal observed that although that decision was in the revenue's favour, its ratio was directly relevant, and concluded that the ratio placed the charge on the firm (para 9). In the words reproduced by the source cited on this page: "we are of the considered view that the transaction under consideration is taxable under the hands of partnership firm and not in the hands of assessee under consideration" The decision followed or applied CIT v. Mansukh Dyeing and Printing Mills, (2022) 449 ITR 439 (SC) — paras 7.2 to 7.5 and 8 reproduced and applied; Malabar Fisheries Company v. CIT, (1979) 120 ITR 49 (SC) — relied on; CIT v. A.N. Naik Associates, [2004] 136 Taxman 107 / 265 ITR 346 (Bombay) — approved within the passage quoted from Mansukh Dyeing.
It was decided by the ITAT on 2023-03-21 and is reported as ITA No. 860/Mum/2020; Assessment Year 2016-17; Income Tax Appellate Tribunal, Mumbai Bench 'B'; heard 14 March 2023, pronounced 21 March 2023. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 45, section 45(4), section 9B, section 2(47), section 50C, section 143(3), 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 taxpayer. The revenue's appeal was dismissed and the order of the CIT(A) sustained. The amount received by a retiring partner on the reconstitution of a firm is taxable in the hands of the partnership firm and not in the hands of the partner; that was so under the substituted provision and, the Tribunal held, was equally so before it (para 5). The assessee was never an owner of the assets held by the firm, having only a right to share the profits in addition to interest and remuneration if the deed provided for them, and on a reconstitution there is simply a revaluation of assets and liabilities as on that date so that the capital account of the retiring partner can be settled (para 6). On the facts, the law laid down by the Supreme Court and the assessee's own submissions, the transaction was taxable in the hands of the partnership firm and not in the hands of the assessee, and there was no reason to interfere with the CIT(A)'s order (para 9). It arises in Capital Gains and Assessment & Scrutiny matters, on section 45, section 45(4), section 9B, section 2(47), section 50C, section 143(3) of the Income Tax Act 1961, and was decided by Shri Amit Shukla, Judicial Member and Shri Gagan Goyal, Accountant Member. 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. If the notice is on the partner, take the 'wrong person assessed' point as a distinct ground, separate from any argument that the receipt is not taxable at all — this order gives you the first but not the second. Expect the department to rely on CIT v. Mansukh Dyeing and Printing Mills; use paras 7.2 to 7.5 of that judgment, which this order reproduces, to show that the charge it upholds is a charge on the firm. Advise the firm that the revenue may raise or reopen a firm-level assessment on the same facts, and check the limitation position for the firm before treating the partner's success as the end of the matter. Do not take the commencement dates for the substituted section 45(4) from this order — see the editor note; verify them independently.
Superseded by amendment. The order decides assessment year 2016-17 under the pre-substitution section 45(4) and is correct for that period. It is listed as superseded because the scheme it applies was replaced from assessment year 2021-22: the substituted section 45(4) charges the firm on money or a capital asset received by a partner in connection with reconstitution to the extent it exceeds his capital account balance computed without the revaluation or self-generated-goodwill uplift, with the attribution machinery in Rule 8AB and section 48(iii); and section 9B separately deems a transfer by the firm where a partner receives a capital asset or stock in trade. The proposition that the charge falls on the firm and not on the retiring partner survives the change and is now written into the substituted sub-section itself. Whether this order has been carried further in appeal, and how other benches have treated it, was not checked this pass. 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.
At para 4 the Tribunal introduces the substituted section 45(4) as the position 'w.e.f. A.Y. 2022-23' and describes the pre-substitution text as the position 'till A.Y. 2021-22'. That dating is wrong. The substitution was made by the Finance Act 2021 and takes effect from assessment year 2021-22, as the Department's own page for section 9B records for the companion provision ('Inserted by Act No. 13 of 2021, w.e.f. 1-4-2021'). The error does not affect the outcome, because the year before the Tribunal was AY 2016-17 and the old section 45(4) applied on any view, but the dates in this order must not be repeated. Two further gaps: the AO had applied section 50C in raising the assessment to Rs 5,78,81,506 and the revenue's ground 7 complained that the CIT(A) had not adjudicated section 50C, but the order does not deal with section 50C at all; and the opening sentence of the order describes the appeal as 'This appeal by assessee' when it is in fact the revenue's appeal, as the cause title and the disposal both show. 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.
The revenue's appeal was dismissed and the order of the CIT(A) sustained. The amount received by a retiring partner on the reconstitution of a firm is taxable in the hands of the partnership firm and not in the hands of the partner; that was so under the substituted provision and, the Tribunal held, was equally so before it (para 5). The assessee was never an owner of the assets held by the firm, having only a right to share the profits in addition to interest and remuneration if the deed provided for them, and on a reconstitution there is simply a revaluation of assets and liabilities as on that date so that the capital account of the retiring partner can be settled (para 6). On the facts, the law laid down by the Supreme Court and the assessee's own submissions, the transaction was taxable in the hands of the partnership firm and not in the hands of the assessee, and there was no reason to interfere with the CIT(A)'s order (para 9).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
We charge fees for our public utility work. Does that cost us charitable status under s.2(15)?
My return was only processed under 143(1). Does that stop the department reopening it later?
Our JDA was never registered and the project collapsed. Am I still taxed on capital gains?
The court enhanced my acquisition compensation with interest. Which year is it taxed, and is the interest capital?