Law:

Section:

Section 45, read with section 2(47), of the Income-tax Act, 1961 - Capital gains - Chargeable as - Assessment year 1995-96 - Assessee was a partnership firm comprising of four partners - In July, 1994, firm was reconstituted by addition of two partners in it - Incoming partners brought in about Rs. 17 lakhs as their capital contribution to firm - Later, on 15-12-1994 assessee-firm was again reconstituted with erstwhile four partners going out of firm with amount which new partners had brought in by way of their capital contribution to firm, leaving entire assets of firm in hands of newly added partners - Whether, on facts, there was a transfer of capital assets of firm from old partners to new partners attracting capital gains provisions in terms of section 45(4) - Held, yes FACTS The assessee was a partnership firm comprising of four partners. In July 1994, the firm was reconstituted by addition of two partners to the partnership firm. The incoming partners brought in about Rs. 17 lakhs towards their capital contribution to the firm. Later, on 15-12-1994, the firm was again reconstituted with the erstwhile four partners going out retiring from the partnership and the newly added partners remaining in the firm and continuing it. For the relevant assessment year, the assessee-firm filed the return of income declaring certain loss. The Assessing Officer opined that the exercise of taking in two new partners and, subsequently, the original four partners going out of firm with the amount which the new partners had brought in by way of their capital contribution to the firm, leaving the entire assets of the firm in the hands of the newly added partners, was virtually a transaction involving the transfer of the assets of the firm to the new partners, as firm continued in the hands of the new partners and, therefore, the assessee-firm was liable to be assessed on the gains attributable to the transaction. The Assessing Officer took the value of the sale consideration for the transfer of the assets to be the amount brought in by the partners and shared amongst the earlier partners and determined the assessable income of the firm by applying section 45(4) and called…

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