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The Tax Publishers Pipelines India v. Asstt. CIT [Tax Case Appeal No. 348 of 2007, dt. 8-2-2016] : 2016 TaxPub(DT) 2212 (Mad-HC) Section 45(4) implication on relinquishment of existing partners in favour of a company. *Facts:* Assessee partnership firm had 4 partners. On 1-4-1990 a private ltd. company called Pipeline and Process Equipment (P.) Limited floated by the existing partners became a partner in the firm with 3/4 profit sharing percentage. Subsequently on 30-6-1990 the 4 partners executed a release deed by which they relinquished their partnership profit shares with equivalent shares in the private limited company. The private limited company thus became the sole proprietor of the erstwhile firm (as there is only one person in the partnership the firm cannot exist thereafter). The assessing officer read section 45(4) into the transfer and applied short-term capital gains, this was negated by the Commissioner (Appeals). On further appeal ITAT admitted the departmental appeal on grounds that it was a case of dissolution of firm and not conversion of firm into a company. On further appeal: Held in favour of the assessee that section 45(4) cannot be invoked. Conditions for invoking the section are: (i) profits and gains should arise (ii) from the transfer of a capital asset (iii) by way of distribution of capital assets (iv) on the dissolution of a firm or other association of persons or body of individuals not being a company or a cooperative society and (v) or otherwise. In this case it was held that the partners simply took the shares against their balances. Thus there was no distribution or transfer of any capital asset to fall in section 45(4). Note: The case pertains to earlier period when conversion of firm into company capital gains benefit provision did not exist. Nonetheless the issue whether section 45(4) can be drawn or otherwise is still valid due to the modus operandi adopted.

The Tax Publishers

Pipelines India v. Asstt. CIT [Tax Case Appeal No. 348 of 2007, dt. 8-2-2016] : 2016 TaxPub(DT) 2212 (Mad-HC)

Section 45(4) implication on relinquishment of existing partners in favour of a company.

Facts:

Assessee partnership firm had 4 partners. On 1-4-1990 a private ltd. company called Pipeline and Process Equipment (P.) Limited floated by the existing partners became a partner in the firm with 3/4 profit sharing percentage. Subsequently on 30-6-1990 the 4 partners executed a release deed by which they relinquished their partnership profit shares with equivalent shares in the private limited company. The private limited company thus became the sole proprietor of the erstwhile firm (as there is only one person in the partnership the firm cannot exist thereafter). The assessing officer read section 45(4) into the transfer and applied short-term capital gains, this was negated by the Commissioner (Appeals). On further appeal ITAT admitted the departmental appeal on grounds that it was a case of dissolution of firm and not conversion of firm into a company. On further appeal:

Held in favour of the assessee that section 45(4) cannot be invoked. Conditions for invoking the section are:

(i) profits and gains should arise

(ii) from the transfer of a capital asset

(iii) by way of distribution of capital assets

(iv) on the dissolution of a firm or other association of persons or body of individuals not being a company or a cooperative society and

(v) or otherwise.

In this case it was held that the partners simply took the shares against their balances. Thus there was no distribution or transfer of any capital asset to fall in section 45(4).

Note: The case pertains to earlier period when conversion of firm into company capital gains benefit provision did not exist. Nonetheless the issue whether section 45(4) can be drawn or otherwise is still valid due to the modus operandi adopted.