V.P. Mohan Kumar, J.
1. The assessee is a partnership firm carrying on business in the manufacture, of mill boards. For the assessment year 1989-90, the firm filed the return declaring a loss of Rs. 5,33,120. The Assessing Officer while finalising the assessment added Rs. 7,68,559 by invoking the provision of Section 45(4). It was alleged that during the previous year ending on March 31, 1989, there was a change in the constitution of the firm with the retirement of five partners after receiving the credit balances in their accounts. There was also a revaluation of the assets and it is the enhanced value of the assets that was credited equally in their accounts. The Assessing Officer took the view that on the retirement of five partners taking the enhanced value for the assets there amounted to a transfer of capital assets as envisaged in Section 45(4) and the profit arising from the transfer was liable to tax as the income of the asses-see-firm. He accordingly treated that sum, i.e., Rs. 7,63,559 to be representing the difference in the value of the assets and credited it in the account as the income of the assessee. In the appeal by the assessee, the first appellate authority held that the provisions of Section 45(4) were not applicable in this case, as there was neither dissolution of the firm nor distribution of capital assets when the partners retired from the firm.
2. The Revenue, aggrieved by the order of the Commissioner of Income-tax (Appeals) deleting the amount added as income under Section 45(4), filed appeal before the Tribunal. The Tribunal confirmed the order of the appellate authority. Thereupon the present appeal under Section 260A of the Income-tax Act, hereinafter referred to as 'the Act' has been filed by the Revenue raising substantive questions of law. The appellant has formulated the following question to be answered by this court, namely :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and facts in holding that the provisions of Section 45(4)have no application to the facts of the case and that the addition could not be sustained under that section
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the dictum laid down in McDowell has no application to the facts of the case
3. Whether, on the facts and in the circumstances of the case, is not the transaction under consideration a device contemplated in the case of McDowell and should not the Tribunal have considered the issue in the light of McDowell ?'
3. The assessee in question is a partnership firm. It had originally five partners and it was constituted under a deed executed on September 14, 1983. Subsequently, there was a change in the constitution of the partnership as evidenced by a new partnership deed executed on January 13, 1989. Two more partners were admitted at that time. At the time of admission of the new partners there was a revaluation made in respect of the assets of the firm. As per Clause 6 of the partnership deed it was agreed that the difference representing enhancement by revaluation of the assets would be credited to the accounts of the original partners and the two new partners would have no share in it. The relevant clause in the partnership deed dated January 13, 1989, reads as under :
'On reconstitution the assets of the firm, viz., land, building, machinery and furniture have been revalued on mutual agreement of the partners hereto. The difference in the revalued amounts shall belong to partners 1 to 5 inclusive and the respective amounts shall be credited to their account equally.'
4. The fixed assets of the firm had been thus revalued and that revaluation was credited equally in the accounts of the original five partners. The firm continued with seven partners for a short time and thereafter on January 31, 1989, the original five partners retired and the business was continued by the partnership consisting of the surviving two partners. A deed of retirement was executed on January 31, 1989, between the two continuing partners on the one hand and the five retiring partners on the other. Clause 3 of the deed shows that the retiring partners would be entitled to the credit balances in their accounts with the firm. In the assessment the Assessing Officer added the sum of Rs. 7,63,559 as the income of the assessee-firm under Section 45(4) and afterwards adding the said amount the assessment was completed. In this behalf, the Department took the stand that there was a transfer of capital asset within the meaning of Section 45(4) of the Income-tax Act as amended.
The relevant section for the purpose of adjudicating the question reads as follows :
'45. (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.'
5. What is postulated under Section 45(4) is 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 would be chargeable to tax as the income of the firm. The question that arises is whether by retirement of the partner of the firm there is a transfer of the assets of the firm in favour of the surviving partners within the meaning of Section 45(4) of the Act.
6. The firm, is the assessee while it had five partners or seven partners or even when it had only two partners. There is no change in the status of the asses-see. What further has to be noticed is that the firm has its own rights and liabilities and it can incur liabilities or own and possess properties. In a case of this nature what happens is that with the admission of new partners, the rights of the existing partner are reduced and that a right is created in favour of the newly inducted partners. But the ownership of the property does not change even with the change in the constitution of the firm. As long as there is no change in ownership of the firm and its properties merely for the simple reason that the partnership of the firm stood reconstituted, there is no transfer of capital asset. Likewise, if a partner retires he does not transfer any right in the immovable property in favour of the surviving partner because he had no specific right with respect to the properties of the firm. What transpires is the right to share the income of the properties stood transferred in favour of the surviving partners, and there is no transfer of ownership of the property in such cases.
7. This position has been amply highlighted in a catena of decisions. To begin with, we may advert to the one reported in James Anderson v. CIT : [1960]39ITR123(SC) , in which the Supreme Court noticed the arguments and stated as under (page 130) :
'The purpose is this : as long as there is distribution of the capital assets in specie and no sale, there is no transfer for the purposes of the section ; but as soon as there is a sale of the capital assets and profits or gains arise therefrom, the liability to tax arises, whether the sale be by the administrator or the legatee.'
8. Again, this principle is reiterated by the subsequent decision of the Supreme Court in CGT v. N.S. Getti Chettiar : [1971]82ITR599(SC) . That is a case where the ownership of the gift in question was transferred. Discussing the question of transfer of possession, etc., the Supreme Court stated thus (page 605) :
'A reading of this section clearly goes to show that the words 'disposition', 'conveyance', 'assignment', 'settlement', 'delivery' and 'payment' are used as some of the modes of transfer of property. The dictionary gives various meanings for those words but those meanings do not help us. We have to understand the meaning of those words in the context in which they are used. Words in the section of a statute are not to be interpreted by having those words in one hand and the dictionary in the other. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose that they are intended to serve. If so understood, it is clear that the word 'disposition', in the context, means giving away or giving up by a person of something which was his own, 'conveyance' means transfer of ownership, 'assignment' means the transfer of the claim right or property to another, 'settlement' means settling the property, right or claim--conveyance or disposition of property for the benefit of another, 'delivery' contemplated therein is the delivery of one's property to another for no consideration and 'paymenf implies gift of money by someone to another. We do not think that a partition in a Hindu undivided family can be considered either as 'disposition' or 'conveyance' or 'assignment' or 'settlement' or 'delivery' or 'payment' or 'alienation' within the meaning of those words in Section 2(xxiv).'
9. These decisions are sufficient to explain the position. However, since learned counsel brought to our notice other decisions as well, we may advert to the same for the sake of their having been cited.
10. The next decision cited is B.T. Patil and Sons v. CGT [2001] 247 ITR 588. Therein their Lordship of the Supreme Court have succinctly stated as to what happened in such a situation as the one in hand (page 590) :
'Learned counsel for the assessee submitted to us that when there is already a subsisting shared interest in an asset, as in the case when a firm is continuing, the distribution of such asset to a partner would amount to replacing the shared interest with an exclusive interest in the asset and so there was no transfer. There was a transfer when individual interest in an asset was converted into a shared interest, when the asset was brought into the partnership. But there was no transfer when the shared interest in an asset was converted to an individual interest as happened on dissolution, retirement or pursuant to the desire of the partners to distribute.'
11. Our attention was drawn by learned counsel for the assessee to the judgment of this court in Sunil Siddharthbhai v. CIT : [1985]156ITR509(SC) , and, specifically, to a passage that stated that it had been held by it earlier (page 519) :
'that when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contemplated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realised by the receipt of only one of all theassets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realisation of a pre-existing right. The position is different, it seems to us, when a partner brings his personal asset into the partnership firm as his contribution to its capital. An individual asset is the sole subject of consideration. An exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest.'
12. Thus this decision is also identical and the same is the principle in Jagatram Ahuja v. CGT : [2000]246ITR609(SC) , where also an identical principle has been stated. The next decision cited, namely, B.T. Patil and Sons v. CGT : [1997]224ITR431(KAR) , rendered by the Karnataka High Court, which judgment was affirmed by the Supreme Court in B.T. Patil and Sons v. CGT [2001] 247 ITR 588. There is no need to multiply authorities.
13. In the light of what is stated above and in view of the catena of decisionsrendered, we are of the view that when a partnership is reconstituted by adding a new partner, there is no transfer of assets within the meaning of Section45(4) of the Income-tax Act. Therefore, the questions formulated have to beanswered against the Revenue and in favour of the assessee.
The appeal is dismissed.