Word "Otherwise" In Section 45(4), IT Act Also Covers Cases Of Partners Transferring Assets To Retiring Partner: SC Affirms Bombay HC's View

The Supreme Court has affirmed the view taken by the Bombay High Court in A.N. Naik Associates and Ors., wherein it was observed that the word "OTHERWISE" used in Section 45(4) of the Income Tax Act takes into its 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.

The bench of Justice MR Shah and Justice MM Sundresh was dealing with the question of applicability of Section 45(4) of the Income Tax Act as introduced by the Finance Act, 1987.

Section 45(4) provides that –

The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

Advocate Rupesh Kumar appeared on behalf of the Revenue-appellant whereas Advocate Kaustubh Shukla appeared on behalf of the respondent-assessee.

In the present case, it was the case on behalf of the assessee that unless there is a dissolution of partnership firm and thereby the transfer of the amount on revaluation to the capital accounts of the respective partners, Section 45(4) of the Income Tax shall not be applicable.

It is the case on behalf of the assessee that there can be no income just due to revaluation of the capital assets unless capital assets is also transferred.

However, the Court noted that in view of the amended Section 45(4) of the Income Tax Act inserted vide Finance Act, 1987, by which, "OR OTHERWISE" is specifically added, the aforesaid submission on behalf of the assessee has no substance.

The Court observed that in the present case, the assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores in 1993.

The Court further noted that 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.

The Court also observed that during the years, some new partners came to be inducted 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 some of the partners withdrew the amount credited in their capital accounts.

Therefore the Court held that 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".

Cause Title- The Commissioner of Income Tax – 23 v. M/s. Mansukh Dyeing and Printing Mills with Anr.

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