THE COMMISSIONER OF INCOME TAX – 23 versus M/S. MANSUKH DYEING AND PRINTING MILLS

Citation: [2022] 8 S.C.R. 785 · Decided: 24-11-2022 · Supreme Court of India · Bench: M.R. SHAH · Disposal: Appeal(s) allowed

Judgment (excerpt)

A
B
C
D
E
F
G
H
785
   [2022] 8 S.C.R. 785
785
THE COMMISSIONER OF INCOME TAX – 23
v.
M/S. MANSUKH DYEING AND PRINTING MILLS
(Civil Appeal No. 8258 Of 2022)
NOVEMBER 24, 2022
[M. R. SHAH AND M. M. SUNDRESH, JJ.]
Income Tax Act, 1961: s.45(4) – Applicability of – Captial
gains – Profits or gains arising from the transfer of a capital asset
– Object of introducing s.45(4) – Held: s.45(4) states that the profits
or gain arising from the transfer of capital assets by way of
distribution of capital assets on account of dissolution of a firm or
other association of persons or body of individuals or otherwise
shall be chargeable to tax as the income of the firm – The object
and purpose of introduction of s.45(4) was to pluck the loophole
by insertion of s.45(4) and omission of s.2(47)(ii) – Earlier, there
was an exemption of the transfer by way of distribution of capital
assets from the ambit of the definition of “transfer” – The same
helped the assessee in avoiding the levy of capital gains tax by
revaluing the assets and then transferring and distributing the same
at the time of dissolution – By amendment, s.45(4) takes into 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 – In the instant case, assets of partnership firm were
revalued and the increased amount was credited to the accounts of
the partners in their profit-sharing ratio – 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 – Some new partners
inducted by introduction of small amounts of capital and had huge
credits to their capital accounts – The assets so revalued and the
credit into the capital accounts of the respective partners can be
said to be “transfer” which fell in the category of “otherwise” and
therefore, s.45(4) shall be applicable.
Allowing the appeal, the Court
HELD: 1. Sub-section (4) of Section 45 came to be amended
by the Finance Act, 1987 w.e.f. 01.04.1988.  The object and
purpose of introduction of Section 45(4) was to pluck the loophole
A
B
C
D
E
F
G
H
786
SUPREME COURT REPORTS
[2022] 8 S.C.R.
by insertion of Section 45(4) and omission of Section 2(47)(ii).
While introduction to Section 45(4), clause (ii) of Section 2(47)
came to be omitted. Earlier, omission of Clause (ii) of Section
2(47) and Section 47(ii) exempted the transform by way of
distribution of capital assets from the ambit of the definition of
“transfer”. The same helped the assessee in avoiding the levy of
capital gains tax by revaluing the assets and then transferring
and distributing the same at the time of dissolution. The said
loophole came to be plucked by insertion of Section 45(4) and
omission of Section 2(47)(ii).  The word used “OR OTHERWISE”
in Section 45(4) is very important. [Paras 7.1, 7.2][794-B-F]
2. In the present case, the assets of the partnership firm
were revalued to increase the value by an amount of Rs. 17.34
crores on 01.01.1993 (relevant to A.Y. 1993-1994) and 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 and that during the years, some new partners came
to be inducted by introduction of small amounts of capital ranging
between Rs. 2.5 to 4.5 lakhs 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 in fact some of the partners withdrew the amount
credited in their capital accounts. Therefore, 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” and therefore, the provision of Section 45(4)
inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable.
[Para 7.5][798-G-H; 799-A-B]
Commissioner of Income Tax v.  A.N. Naik Associates
and Ors., (2004) 265 ITR 346 (Bom.) – relied on
Commissioner of Income Tax, West Bengal v. Hind
Construction Ltd., (1972) 4 SCC 460 – held inapplicable
Commissioner of Income-Tax Mumbai v. Texspin Engg.
and Mfg. Works, Mumbai, (2003) 263 ITR 345 (Bom.)
– referred to
A
B
C
D
E
F
G
H
787
Case Law Reference
(1972) 4 SCC 460
held inapplicable
Para 2.7
CIVIL APP

Excerpt shown. Read the full judgment & AI analysis in Lexace.