REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8258 OF 2022

The Commissioner of Income Tax - 23 …Appellant(s)

Versus

M/s. Mansukh Dyeing and Printing Mills …Respondent(s)

WITH

CIVIL APPEAL NO. 8259 OF 2022

The Commissioner of Income Tax - 23 …Appellant(s)

Versus

M/s. Mansukh Dyeing and Printing Mills …Respondent(s)

J U D G M E N T

M.R. SHAH, J.

1.Feeling aggrieved and dissatisfied with the impugned judgment

and order dated 24.06.2013 passed by the High Court of Bombay

passed in Income Tax Appeal No. 1074 of 2009 (relating to A.Y. 1993-

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1994) and the judgment and order dated 24.06.2013 passed in Income

Tax Appeal No. 1174 of 2009 (relating to A.Y. 1994-1995) by which with

respect to the same assessee – M/s. Mansukh Dyeing and Printing Mills,

a partnership firm, the High Court has dismissed the said appeals and

has confirmed the respective orders passed by the Income Tax Appellate

Tribunal (hereinafter referred to as “ITAT”) deleting the short term capital

gains addition made by the Assessing Officer (AO), the Revenue has

preferred the present appeals.

2.The facts leading to the present appeals in nutshell are as under :-

2.1The respondent assessee, a partnership firm originally consisted

of four partners (all brothers) engaged in the business of Dyeing and

Printing, Processing, Manufacturing and Trading in Clothing. Under the

Family Settlement dated 02.05.1991, the share of one of the existing

partners – Shri M.H. Doshi having 25% profit share in the firm was

reduced to 12% and, for his balance 13% share, three new partners

were admitted namely, viz., Smt. Ranjan Doshi (11%), Shri Prakash

Doshi (1%) and Shri Rajeev Doshi (1%). It appears that thereafter, Shri

M.H. Doshi, Shri Manohar Doshi and Shri V.H. Doshi retired from the

partnership and reconstituted the partnership firm consisted of the

partners namely, viz., Shri Hasmukhlal H. Doshi, Smt. Rajan H. Doshi,

Shri Prakash H. Doshi & Shri Rajiv H. Doshi.

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2.2That on 01.11.1992, the firm was again reconstituted and three

more partners, namely, viz., Smt. Vaishali Shah (18%), Smt. Bhavna

Doshi (9%), Smt. Rupal Doshi (9%) and M/s. Ranjana Textile Pvt. Ltd.

(10%) were admitted as partners. The contribution of new partners was

as under:-

Smt. Vaishali Shah – Rs. 4.50 lakhs

M/s. Ranjana Textiles Pvt. Ltd. – Rs. 2.50 lakhs

Smt. Bhavna Doshi – Rs. 2.25 lakhs

Smt. Rupal Doshi – Rs. 2.25 lakhs

It was mentioned in the reconstituted partnership deed that two

partners, namely, viz., Shri Hasmukh H. Doshi and Smt. Ranjan Doshi

had decided to withdraw part of their capital.

2.3On 01.01.1993, the assets of the firm were revalued and an

amount of Rs. 17.34 crores were credited to the accounts of the partners

in their profit-sharing ratio. Two of the existing partners, viz., namely

Shri Hasmukhlal H. Doshi & Smt. Ranjan Doshi withdrew part of their

capital which was roughly Rs. 20 to Rs. 25 lakhs. Thus, according to the

Revenue, the new partners were immediately benefited by the credit to

their capital accounts of the revaluation amount, as Rs. 3.12 crores was

credited to Smt. Vaishali Shah (who contributed Rs. 4.50 lakhs); Rs.

1.56 crores to Smt. Bhavna Doshi (who contributed Rs. 2.25 lakhs); Rs.

1.56 crores to Smt. Rupal Doshi (who contributed Rs. 2.25 lakhs); and

Rs. 1.73 crores to M/s. Ranjana Textiles (who contributed Rs. 2.50 lakhs

only).

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2.4The respondent filed its Return of Income for the relevant

assessment years. The Return of Income was filed for A.Y. 1993-1994

@ Rs. 3,18,760/-. The same was accepted under Section 143(1) of the

Income Tax Act, 1961. However, thereafter, the assessment was

reopened under Section 147 of the Income Tax Act by issuance of the

notice under Section 148. The assessment was reassessed under

Section 143(3) read with Section 147 determining the total income of

Rs. 2,55,19,490/-. Addition of Rs. 17,34,86,772/- was made towards

short term capital gain under Section 45(4) of the Income Tax Act.

Similar addition was made for A.Y. 1994-1995.

2.5As per the A.O., the assessee revalued the land and building and

enhanced the valuation from Rs. 21,13,225/- to Rs. 17,56,00,000/- for

A.Y. 1993-1994 thereby increasing the value of the assets by

Rs. 17,34,86,772/- and therefore the revaluing of the assets, and

subsequently crediting it to the respective partners’ capital accounts

constitutes transfer, which was liable to capital gains tax under Section

45(4) of the Income Tax Act. As land and building was involved, the

assessee had claimed the depreciation on building, and the Assessing

Officer assessed the amount of short-term capital gain under Section 50.

2.6The Commissioner of Income Tax (Appeals) [CIT(A)] by order

dated 30.07.2004 confirmed the addition on account of Short-Term

Capital Gains and held that there is a clear distribution of assets as

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partners have also withdrawn amounts from the capital account. CIT(A)

also observed that value of the assets of the firm which commonly

belonged to all the partners of the partnership have been irrevocably

transferred in their profit-sharing ratio to each partner. To the extent that

the value has been assigned to each partner, the partnership has

effectively relinquished its interest in the assets and such relinquishment

can only be termed as transfer by relinquishment. Therefore, according

to the CIT(A), conditions of Section 45(4) are satisfied and therefore, the

assets to the extent of their value distributed would be deemed as

income by capital gains in the hands of the assessee firm. The CIT (A)

also observed that the transfer of the revalued assets had taken place

during the previous year and, therefore, the liability to capital gains

arises in the A.Y. 1993-1994. The CIT(A) relied upon the decision of the

Bombay High Court in the case of Commissioner of Income Tax Vs.

A.N. Naik Associates and Ors., (2004) 265 ITR 346 (Bom.) and

distinguished the decision of the Bombay High Court in the case of

Commissioner of Income-Tax Mumbai Vs. Texspin Engg. and Mfg.

Works, Mumbai, (2003) 263 ITR 345 (Bom.).

2.7In an appeal preferred by the assessee, the ITAT by judgment and

order dated 26.10.2006 and relying upon the decision of this Court in the

case of Commissioner of Income Tax, West Bengal Vs. Hind

Construction Ltd., (1972) 4 SCC 460 allowed the appeal and has set

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aside the addition made by the A.O. towards Short Term Capital Gains

by observing that as observed and held by this Court in the aforesaid

decision, revaluation of the assets and crediting to partners’ account did

not involve any transfer. The ITAT observed and held that the decision

of the Bombay High Court in the case of A.N. Naik Associates and

Ors. (supra) shall not be applicable and held that the decision of the

Bombay High Court in the case of Texspin Engg. and Mfg. Works,

Mumbai (supra) shall be appliable.

2.8Relying upon the decision of this Court in the case of Hind

Construction Ltd. (supra), by the impugned judgment and order the

High Court has dismissed the appeals preferred by the Revenue. Hence

the present appeals being Civil Appeal No. 8258 of 2022 (relating to A.Y.

1993-1994) and Civil Appeal No. 8259 of 2022 (relating to A.Y. 1994-

1995) have been filed by the Revenue.

3.Shri Rupesh Kumar, learned counsel appearing on behalf of the

Revenue has vehemently submitted that in the facts and circumstances

of the case and in law both, the ITAT as well as the High Court have

seriously erred in deleting the additions made by the A.O. towards short

term capital gain. It is vehemently submitted that in the present case as

the assets of the 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

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revalued amount was credited to the accounts of the partners in their

profit-sharing ratio and the credit of the asset’s revaluation amount to the

capital account of the partner was in effect distribution of the assets

valued at Rs. 17.34 crores to the partners and that during the years,

some new partners were inducted by introduction of small amounts of

capital ranging between 2.5 to 4.5 lakhs and these partners have huge

credits to their capital accounts immediately after joining the partnership,

which amount was available to the partners for withdrawal, the amount

so revalued and credited in the capital accounts of the respective

partners can be said to be “transfer” and therefore, the provisions of

Section 45(4) inserted into the Income Tax Act w.e.f. 01.04.1988 shall be

applicable.

3.1It is submitted that the Hon’ble High Court has not properly

appreciated the object and purpose of introduction of Section 45(4). It is

submitted that the introduction of Section 45(4) was accompanied by the

omission of clause (ii) of Section 2(47). Section 47(ii) omitted, exempted

transform by way of distribution of capital assets from the ambit of the

definition of ‘transfer’. It is submitted that this helped the assessee in

avoiding the levy of capital gains tax by revaluing the assets and then

transferring and distributing the same on dissolution. This loophole was

sought to be plugged by insertion of Section 45(4) and omission of

Section 2(47)(ii).

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3.2It is submitted that therefore, in the facts and circumstances of the

case, the A.O. rightly made the addition towards the short-term capital

gains invoking Section 45(4) of the Income Tax Act, which was not

required to be deleted by the ITAT.

3.3It is submitted that after the insertion of Section 45(4), distribution

of capital assets to the partners’ account is deemed transfer of capital

assets and therefore assessable as capital gains in the hands of the

firm.

3.4Now, so far as reliance placed upon the decision of this Hon’ble

Court in the case of Hind Construction Ltd. (supra) relied upon by the

assessee, it is vehemently submitted that the said decision shall not be

applicable as the said decision was considering the provisions prior to

insertion of Section 45(4) of the Income Tax Act. It is submitted that

thereafter Section 45(4) of the Income Tax Act has been inserted with

specific object and purpose. It is submitted that therefore the said

decision shall not be applicable while considering the effect of Section

45(4) of the Income Tax Act.

3.5It is submitted that on the contrary, the decision of the Bombay

High Court in the case of A.N. Naik Associates and Ors., (supra) shall

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be applicable with full force as the same was dealing with Section 45(4).

It is submitted that in the case of A.N. Naik Associates and Ors.,

(supra), the Bombay High Court has interpreted the words “otherwise”

used in Section 45(4) of the Income Tax Act and has observed and held

that the word “otherwise” used in Section 45(4) takes into its sweep not

only cases of dissolution but also cases of subsisting partners of a

partnership, transferring assets in favour of a retiring partner.

3.6Making above submissions and relying upon the decision of the

Bombay High Court in the case of A.N. Naik Associates and Ors.,

(supra), it is prayed to allow the present appeals.

4.Both these appeals are vehemently opposed by Shri Kaustubh

Shukla, learned counsel appearing on behalf of the respondent

assessee.

4.1It is submitted that in the present case, admittedly there was no

dissolution of partnership firm and/or revaluation on dissolution of the

partnership firm. It is submitted that in the present case, there was

reconstitution of the partnership firm and on revaluation, the surplus

amount on account of such revaluation was credited to the partners’

capital account. It is submitted that the surplus on account of such

revaluation credited to the partners’ capital account cannot be said to be

transfer as per the provisions of Section 45(4) of the Income Tax Act.

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4.2It is submitted that as per the provisions of Section 45(4) of the

Income Tax Act, two conditions were required to be fulfilled. Firstly, there

must be a transfer by way of distribution of capital assets, secondly, that,

such transfer should be either on account of dissolution of partnership

firm or otherwise.

4.3It is submitted that in the present case, during the year there was

neither any distribution of assets of the partnership firm nor dissolution or

otherwise of the partnership firm has taken place. The surplus on

revaluation of assets was notionally credited to the partners’ capital

account of all the partners. It is submitted that therefore as rightly

observed and held by the ITAT confirmed by the Hon’ble High Court, it

was not a case of transfer/deemed transfer under Section 45(4) of the

Income Tax Act and therefore, both, the ITAT as well as the High Court

have rightly deleted the addition made towards the short-term capital

gains.

4.4Learned counsel appearing on behalf of the assessee in support of

his above submission that as there was no dissolution of the partnership

firm and therefore the transfer of the amount on revaluation to the capital

accounts of the respective partners cannot be considered as capital

gains. Heavy reliance is placed on the decision of this Court in the case

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of Hind Construction Ltd. (supra) as well as decision of the Bombay

High Court in the case of Texspin Engg. and Mfg. Works, Mumbai

(supra).

4.5It is submitted that there can be no income just due to revaluation

of capital asset unless the capital asset is also transferred. It is

submitted that whenever an asset is revalued, even as per the

accounting norms the corresponding notional surplus due to revaluation

is required to be credited to revaluation reserve account in case of

companies or credited to capital account of partners in case of

partnership firm. This is only notional or book entry which is not

represented by any additional tangible asset or income. It is submitted

that once it is established that there is no profit or gain accrued to firm on

revaluation resulting in real income, there can also be no distribution of

such profits and gains and therefore, the same cannot be added in the

income of the partnership firm as capital gains.

4.6It is submitted that the decision of the Bombay High Court in the

case of A.N. Naik Associates and Ors., (supra) shall not be applicable

as in that case before the Bombay High court, the assets of the

partnership firm was transferred to a retiring partner by way of a deed of

retirement and as a family settlement was entered into and the business

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of those firms as set out therein was distributed in terms of the family

settlement as the party desired that various matters consisting of the

business and assets thereto be divided and separately partitioned. It is

submitted that once that be the case, the transfer of assets of the

partnership to the retiring partners would amount to transfer of capital

assets in the nature of capital gains and business profits which are

chargeable to tax under Section 45(4) of the Income Tax Act. It is

submitted that in that context, it was held that the word “otherwise” takes

into its sweep not only cases of dissolution but also cases of subsisting

partners of a partnership, transferring assets in favour of a retiring

partner. It is submitted that in this context, the Bombay High Court held

that Section 45(4) shall be attracted.

4.7Making above submissions, it is prayed to dismiss the present

appeals.

5.We have heard the learned counsel appearing for the respective

parties at length.

6.The short question, which is posed for the consideration of this

Court is the applicability of Section 45(4) of the Income Tax Act as

introduced by the Finance Act, 1987.

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7.The relevant portion of Section 45, with which we are concerned,

is sub-section (4), which 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.”

7.1Sub-section (4) of Section 45 came to be amended by the Finance

Act, 1987 w.e.f. 01.04.1988. From a reading of the above sub-section,

to attract the capital gains, what would be required is as under:-

1. Transfer of capital asset by way of distribution of capital

assets;

a. On account of dissolution of a firm;

b. Or other association of persons;

c. Or body of individuals;

d. Or otherwise;

shall be chargeable to tax as the income of the firm,

association or body of persons.”

7.2The object and purpose of introduction of Section 45(4) was to

pluck the loophole 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

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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). At this stage, it is

required to be noted that the word used “OR OTHERWISE” in Section

45(4) is very important.

7.3In the present case, it was the case on behalf of the assessee

relying upon the decision of this Court in the case of Hind Construction

Ltd. (supra) that unless there is a dissolution of partnership firm and

thereby the transfer of the amount on revaluation to the capital accounts

of the respective partners, Section 45(4) of the Income Tax shall not be

applicable. It is the case on behalf of the assessee that there can be no

income just due to revaluation of the capital assets unless capital assets

is also transferred. According to the assessee, the amount credited on

revaluation to the capital accounts of the partners is only notional or

book entry, which is not represented by any additional tangible assets or

income. Therefore, the sum and substance of the submission on behalf

of the assessee is that unless there is a dissolution of the partnership

firm, and there is only transfer of the amount on revaluation to the capital

14

accounts of the respective partners, Section 45(4) of the Income Tax Act

shall not be applicable.

7.4However, in view of the amended Section 45(4) of the Income Tax

Act inserted vide Finance Act, 1987, by which, “OR OTHERWISE” is

specifically added, the aforesaid submission on behalf of the assessee

has no substance. The Bombay High Court in the case of A.N. Naik

Associates and Ors., (supra) had an occasion to elaborately consider

the word “OTHERWISE” used in Section 45(4). After detailed analysis of

Section 45(4), it is observed and held that the word “OTHERWISE” used

in Section 45(4) takes into its 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. While holding so, it is observed in

paragraphs 14, 21, 22 and 24 as under:-

“14. Pursuant to the inclusion of sub-section (4) in

section 45, on the dissolution of a partnership the profits

or gains arising from the transfer of capital asset are

chargeable to tax as income of the firm. It is contended on

behalf of the assessee that even after introduction of

section 45(4), the position will be the same as the

definition clause i.e. namely section 2(47) has not been

amended. Secondly it is contended that the expression

“otherwise” must be read edjusdem generis with the

expression dissolution of firm. So considered, there is no

dissolution on the firm. So considered, there is no

dissolution on the facts of the case. On behalf of the

revenue, it was, however, argued that the amendment

was brought about to remove the mischief occasioned by

15

parties avoiding to pay tax, considering the law as

declared and to plug the loopholes. The expression

otherwise must be read to mear transfer of capital assets

of the assessee firm include to a partner. As the section is

a self contained code, there was no need to amend the

definition of transfer under section 2(47) of the Act. The

Position therefore, will have to be examined in the context

of the law as amended after 1988………………..

XXXXXXXXXXXXXX

21. With the above, we may now proceed to answer

the issue. On retirement of a partner or partners from an

existing firm, and who receives assets from the firm, the

law before 1998 would really be of no support, as by

section 45(4) what was otherwise not taxable has been

made taxable. Section 45(4) seems to have been

introduced with a view to overcome the judgment of the

Apex Court in Malabar Fisheries Co. v. Commissioner of

Income-Tax, Kerala (supra) and other judgments which

took a view that the firm on its own has no right but it is

the partners who own jointly or in common the asset and

thereby remedy the mischief occasioned. Distribution of

capital assets on dissolution now is subject to capital

gains tax unless it does not fall within the definition of

transfer under section 2(47) What would be the effect of

partners of a subsisting partnership distributing assets to

partners who retire from the partnership. Does the asset

of the partnership, on being allotted to the retired

partner/partners fall within the expression “otherwise”. As

noted earlier on behalf of the assessee it has been

contended that the expression “otherwise” would have to

be read “ejusdem generis” with “dissolution of partner or

body of individuals” and for that purpose reliance was

placed on a judgment of the Division Bench in

(Commissioner of Income-Tax, Bombay City II v. Trustees

of Abdulcadar Ebrahim Trust), 1975 (100) I.T.R. 85.

Section 45 is a charging section. The purpose and object

of the Act of 1988 was to charge tax arising on distribution

16

of capital assets of firms which otherwise was not subject

to taxation. If the language of sub-section (4) is construed

to mean that the expression “otherwise” has to partake in

the nature of dissolution or deemed dissolution, then the

very object of the amendment could be defeated by the

partners, by distributing the assets to some partners who

may retire. The firm then would not be liable to be taxed

thus defeating the very purpose of the Amending Acts.

Prior to the Finance Act, 1987 in case of a partnership it

was held that the assets are of the partners and not of the

partnership. Therefore if on retirement a partner receive

his share of the assets, may be in the form of a single

asset, it was held that there was no transfer and similarly

on dissolution of the partnership. Another device resorted

to by an assessee was to convert an asset held

independently as an asset of the firm in which the

individual was a partner. The decision of the Supreme

Court in (Kartikeya v. Sarabhai v. C.I.T.), 1985 (156) I.T.R.

509 took a view that this would not amount to transfer

and, therefore, fell outside the scope of capital gain. The

rationale being that the consideration for the transfer of

the personal asset was indeterminate, being the right

which arose or accrued to the partner during the

subsistence of the partnership to get his share of profit

from time to time and on dissolution of the partnership to

get the value of his share from the not partnership asset.

Parliament with the avowed object of blocking this escape

route for avoiding capital gains tax by the Finance Act,

1987 has introduced sub-section (3) of section 45. The

effect of this was that the profits and gains arising from

the transfer of a capital asset by a partner to a firm is

chargeable as the partner's income of the previous year in

which the transfer took place. On a conversion of the

partnership assets into individual assets on dissolution or

otherwise also formed part of the same scheme of tax

avoidance. To plug these loophole the Finance Act, 1987

brought on the statute book a new sub-section (4) in

section 45 of the Act. The effect is that the profits or gains

arising from the transfer of a capital asset by a firm to a

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partner on dissolution or otherwise would be chargeable

as the firm's income in the previous year in which the

transfer took place and for the purposes of computation of

capital gains, the fair market value of the asset on the

date of transfer would be deemed to be the full value of

the consideration received or accrued as a result of

transfer. Therefore, if the object of the Act is seen and the

mischief it seeks to avoid, it would be clear that intention

of Parliament was to bring into the tax not transactions

whereby assets were brought into a firm or taken out of

the firm.

22. The expression “otherwise” in our opinion, has

not to be read ejusdem generis with the expression,

dissolution of a firm or body or assets of persons. The

expression “otherwise” has to be read with the words

‘transfer of capital assets” by way of distribution of capital

asset's. If so read, it becomes clear that even when a firm

is in existence and there is a transfer of capital assets it

comes within the expression “otherwise” as the object of

the amending Act was to remove the loophole which

existed whereby capital gain tax was not chargeable. In

our opinion, therefore, when the asset of the partnership

is transferred to a retiring partner the partnership which is

assessible to tax ceases to have a right or its right in the

property stands extinguished in favour of the partner to

whom it is transferred. If so read it will further the object

and the purpose and intent of amendment of section 45.

Once, that be the case, we will have to hold that the

transfer of assets of the partnership to the retiring

partners would amount to the transfer of the capital

assets in the nature of capital gains and business profits

which is chargeable to tax under section 45(4) of the I.T.

Act. We will, therefore, have to answer question No. 3 by

holding that the word “otherwise” takes into its sweep not

only the cases of dissolution but also cases of subsisting

partners of a partnership, transferring assets in favour of

a retiring partner.

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XXXXXXXXXXXXXX

24. Considering this clause as earlier contained in

section 47, it meant that the distribution of capital assets

on dissolution of a firm etc. were not regarded as transfer.

The Finance Act, 1987 w.e.f. 1-4-1988, omitted this

clause, the effect of which is that distribution of capital

assets on the dissolution of a firm would henceforth be

regarded as ‘transfer’. Therefore, instead of amending

section 2(47), amendment was carried out by the Finance

Act, 1987, by omitting section 47(11), the result of which

is that distribution of capital assets on the dissolution of a

firm would be regarded as ‘transfer’. Therefore, the

contention that it would not amount to a transfer has to be

rejected. It is now clear that when the asset is transferred

to a partner, that falls within the expression otherwise and

the rights of the other partners in that asset of the

partnership is extinguished. That was also the position

earlier but considering that on retirement the partners only

got his share, it was held that there was no

extinguishment of right. Considering the amendment,

there is clearly a transfer and if, there be a transfer, it

would be subject to capital gains tax.”

7.5In 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

19

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.

7.6Now, so far as the reliance placed upon the decision of this Court

in the case of Hind Construction Ltd. (supra) is concerned, at the

outset, it is required to be noted that the said decision was pre-insertion

of Section 45(4) of the Income Tax Act inserted by Finance Act, 1987

and in the earlier regime – pre-insertion of Section 45(4), the word

“OTHERWISE” was absent. Therefore, in the case of Hind

Construction Ltd. (supra), this Court had no occasion to consider the

amended / inserted Section 45(4) of the Income Tax Act and the word

used “OTHERWISE”. Under the circumstances, for the purpose of

interpretation of newly inserted Section 45(4), the decision of this Court

in the case of Hind Construction Ltd. (supra) shall not be applicable

and/or the same shall not be of any assistance to the assessee. As

such, we are in complete agreement with the view taken by the Bombay

20

High Court in the case of A.N. Naik Associates and Ors., (supra). We

affirm the view taken by the Bombay High Court in the above decision.

8.In view of the above and for the reasons stated above, the

impugned judgment and order passed by the High Court and that of the

ITAT are unsustainable and the same deserves to be quashed and set

aside and are accordingly quashed and set aside. The order passed by

the Assessing Officer is hereby restored.

Present appeals are accordingly allowed. However, in the facts

and circumstances of the case, there shall be no order as to costs.

………………………………….J.

[M.R. SHAH]

NEW DELHI; ………………………………….J.

NOVEMBER 24, 2022. [M.M. SUNDRESH]

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