COMMISSIONER OF INCOME TAX Vs. KUNNAMKULAM MILL BOARD

JUDGEMENT

(1.) THE assessee is a partnership firm carrying on business in the manufacture, of mill boards. For the assessment year 1989-90, the firm filed the return declaring a loss of Rs. 5,33,120. THE Assessing Officer while finalising the assessment added Rs. 7,68,559 by invoking the provision of Section 45(4). It was alleged that during the previous year ending on March 31, 1989, there was a change in the constitution of the firm with the retirement of five partners after receiving the credit balances in their accounts. THEre was also a revaluation of the assets and it is the enhanced value of the assets that was credited equally in their accounts. THE Assessing Officer took the view that on the retirement of five partners taking the enhanced value for the assets there amounted to a transfer of capital assets as envisaged in Section 45(4) and the profit arising from the transfer was liable to tax as the income of the asses-see-firm. He accordingly treated that sum, i.e., Rs. 7,63,559 to be representing the difference in the value of the assets and credited it in the account as the income of the assessee. In the appeal by the assessee, the first appellate authority held that the provisions of Section 45(4) were not applicable in this case, as there was neither dissolution of the firm nor distribution of capital assets when the partners retired from the firm.

(2.) THE Revenue, aggrieved by the order of the Commissioner of Income-tax (Appeals) deleting the amount added as income under Section 45(4), filed appeal before the Tribunal. THE Tribunal confirmed the order of the appellate authority. THEreupon the present appeal under Section 260A of the Income-tax Act, hereinafter referred to as "the Act" has been filed by the Revenue raising substantive questions of law. THE appellant has formulated the following question to be answered by this court, namely :

(3.) WHAT is postulated under Section 45(4) is 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 would be chargeable to tax as the income of the firm. The question that arises is whether by retirement of the partner of the firm there is a transfer of the assets of the firm in favour of the surviving partners within the meaning of Section 45(4) of the Act.