COMMISSIONER OF INCOME TAX Vs. PURAYANNUR INDUSTRIES

JUDGEMENT

(1.) The question raised is whether the Tribunal was right in holding that the respondent assessee cannot be called upon to pay tax on capital gain under Section 45(4) of Income Tax. We have heard the standing counsel for the department and Adv. P. Balakrishnan appearing for the respondent. The counsel for the respondent assessee brought to our notice the Division Bench judgment of this court in ITA 1196 of 2009 wherein this court held that Section 45(4) does not apply to a case of reconstitution and continuation of partnership firm with change in partners. According to the respondent, the facts herein are the same as those in the above decided case. However, standing counsel brought to our notice that in this case one of the partners retired on 23.6.1998 and a reconstituted deed by the remaining partners was executed only on 24.6.1998. So much so, according to him, there is a dissolution of the first firm and formation of a new partnership deed on the next day. On going through the Tribunal's order, we notice that the Tribunal has entered a clear finding that the settlement of accounts among the partners made on 23.6.1998 was only for releasing one of the partners Sri P. Kunhunni and all remaining partners continued in the firm carrying on the very same business without any break. For this purpose, they made another partnership deed which is called a re constituted deed on the following day, that is 24.6.1998 and without any break the firm continued the business. Section 45(4) applies to a case of distribution of assets on dissolution of a firm and the same does not cover retirement of one or two partners without involving dissolution of the firm. In other words, settlement of accounts of a retiring partner is not covered by Section 45(4) which will be attracted only in a case of dissolution of a firm wherein assets should be distributed among the partners in general. In other words, Section 45 (4) is not attracted if the partnership after retirement of a partner continues the business without break after reconstitution and for applying the section the firm should not continue business after settlement of accounts of one or more partners. We therefore dismiss the appeal.