Transfer Of Depreciable Capital Assets Attracts Capital Gains Tax: Kerala High Court

The Kerala High Court has held that the transfer of the depreciable capital assets attracted capital gains tax under Section 45(4) of the Income Tax Act, in the absence of distribution of any capital asset among the partners following a dissolution of the appellant firm.The bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M., while upholding the order of the tribunal that the charge of short-term capital gains had to be in accordance with the provisions of Section 45(4) of the Income Tax Act, observed that the Appellate Tribunal did not, however, proceed to determine the tax effect, if any, that would follow pursuant to its finding as regards the charge of short-term capital gains. Section 45(4) of the Income Tax Act is a provision that deals with the taxation of capital gains arising from the distribution of assets by a company to its shareholders. This provision aims to ensure that the tax liability for the distribution of assets is borne by the company instead of the shareholders.The appellant/assessee is a partnership firm engaged in the business of running a hotel to which a restaurant and bar are also attached. There was a reconstitution of the appellant firm with effect from July 7, 2011, in which one of the partners of the erstwhile firm retired from the partnership and three other new partners were admitted into the partnership. Just prior to the reconstitution of the firm with effect from July 7, 2011, the partnership firm had, on May 3, 2011, sold the land and building belonging to it to one Poonghat Shrinivas for a total value of Rs. 8.40 crores, of which Rs. 7.40 crores was the value of the building and Rs. 1 crore was the value of the land. Poonghat Shrinivas was one of the persons who subsequently became partners in the firm upon its reconstitution, with effect from July 7, 2011. He brought back the building that he had purchased from the firm to the accounts of the firm at the same value at which he had purchased it from the erstwhile firm, namely, Rs 7.40 crore.While submitting its returns for the assessment year 2012–2013, the appellant firm declared a taxable income of Rs. 67,59,315 in its return. The Assessing Officer, pursuant to a scrutiny of the return, completed the assessment by making a substantial addition to the declared income to the tune of Rs. 9,77,46,777. An amount of Rs. 6,50,77,334 was attributed to the short-term capital gains alleged to have accrued to the appellant firm by computing it in accordance with Section 50A of the Income Tax Act.In an appeal carried by the appellant before the First Appellate Authority, the Authority found that the Assessing Authority, while making this computation of short-term capital gains, had not factored in the addition of the building valued at Rs. 7,40,00,000 that was brought into the firm by the incoming partner, namely, Poonghat Shrinivas. Hence the written-down value as of March 31, 2012, at the end of the previous year, after allowing depreciation, would be Rs. 41,94,640. He, therefore, found that the addition of Rs. 6,50,77,334 made by the Assessing Officer had to be deleted.In an appeal carried by the Department against the order of the First Appellate Authority, the Department raised an additional ground, which was accepted on record by the Appellate Tribunal. The department contended that the capital gains had to be charged in accordance with Section 45(4) of the Income Tax Act and that the computation methodology adopted by the Assessing Officer and the First Appellate Authority was not correct.The court noted that a reading of the provisions of Section 45(4) would indicate that the computation has to be in the manner prescribed under Section 48, as modified by Section 50(1) of the Act. The consequence of an application of the said provisions of the Income Tax Act to the income assessed in respect of the appellant firm has not been discussed by the Tribunal in the impugned order. The court stated that the Tribunal ought to have considered this aspect while disposing of the appeal preferred by the department, especially because the order of the First Appellate Authority, which was challenged by the department before it, was in favor of the appellant.The court, while upholding the finding of the Tribunal that the charge of short-term capital gains has to be as mandated in Section 45(4) of the Income Tax Act, remanded the matter back to the Tribunal for computing the extent of short-term capital gains, if any, that would be brought to tax in relation to the appellant herein. The Appellate Tribunal would have to do the exercise by taking into account the totality of transactions effected.Citation: 2024 LiveLaw (Ker) 414Counsel For Appellant: Mohan PulikkalCounsel For Respondent: P.K. Ravindranatha MenonCase Title: PVR Tourist Home Versus CITCase No.: ITA NO. 203 OF 2019Click Here To Read The Order

Transfer Of Depreciable Capital Assets Attracts Capital Gains Tax: Kerala High Court

Mariya Paliwala

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