Recently Supreme ruled that Section 45(4) of the Income Tax Act applied to circumstances where a partnership was still in existence and the remaining partners transferred assets to a retiring partner.

The primary question posed for consideration before the Court was regarding the applicability of Section 45(4) of the Income Tax Act.

Section 45(4) provides that –

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 bench in the current case stated that the partners had access to the money in order to withdraw it. The assets so revalued and the credit made to the capital accounts of the individual partners were therefore a “transfer” and came under the category of “OTHERWISE.” As a result, the clause in Section 45(4) was applicable.

CASE : The Commissioner of Income Tax v. M/s. Mansukh Dyeing and Printing Mills