Commissioner of Income Tax vs Vijayalakshmi Metal Industries

R. Jayasimha Babu, J.—The Revenue seeks to levy capital gains tax on a transfer which had admittedly not taken place. It relies on the fact

that the firm which consisted of two partners stood dissolved by the death of one of them on March 3, 1989. There was no evidence to show that

after such dissolution, the property which had belonged to the firm was transferred either to the surviving partner or to the legal heirs of the

deceased partner. On the other hand what is found by the Tribunal is that even after the demise of one of the partners, the business continued and

assessment continued to be made on the firm.

The assessment year with which we are concerned is the year 1989-90. In that year there was a dissolution by operation of law by reason of

Section 42(c) of the Partnership Act. That however was not followed by the transfer of capital assets by way of distribution of capital assets on the

dissolution of the firm.

Section 45(4) of the Income Tax Act, 1961, reads as under :

(4) 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.

The section is concerned with the capital gains arising from transfer of a capital asset by way of distribution of capital assets on the dissolution of

a firm.

The section does not deem the date of dissolution as the date on which the transfer takes place. Dissolution by operation of law as in this case

may take place on the demise of one of two partners. That however does not imply that on that day there is a notional transfer of capital assets and

that any one or more of the capital assets owned by the erstwhile firm stands transferred to the other partner or to other persons entitled to claim

the share of the deceased partner. The relevant date for ascertaining the year in which the tax is to be levied is the year in which the transfer takes

place. That year may or may not be the year in which the dissolution of the firm takes place. Until such time such capital asset is transferred by way

of distribution of the assets on the dissolution of the firm no occasion arises for bringing to tax any capital gain on a transfer which has not taken

place. The section itself gives no room for doubt as the year in which the capital gain is to be brought to tax is, the previous year in which the said

transfer takes place.

As it is the finding of the Tribunal that no transfer had taken place in this year, the occasion for levying tax on any capital gain did not arise. The

question referred to us as to whether the Tribunal was right in law in holding that capital gain did not arise in this case is answered in favour of the

assessee and against the Revenue.