MBA (Finance)
Introduction:
Normally the partnership would stand dissolved on the death of a partner unless it is
otherwise contracted for, but if it is found from the subsequent conduct of the parties
that despite the death of partner, partnership business continued to function, then it
would be taken that it continued by virtue of contractual relationship. [Devji Goa vs.
Tricumji AIR 1945 PC 91] The dissolution must be established from the
circumstances leading clearly to such an inference [Gordhandas vs. Bhulabhai
AIR 1937 Bom 316].
Dissolution of the firm leads to the dissolution of partnership as between the partners
but the partnership itself subsists, through only for the purpose of winding up its
business and adjusting the rights of the partners inter se. [Chaturbhuj vs. Damodar
AIR 1960 Bom 424]
Up to the assessment year 1987-88 distribution of assets on dissolution of firm was
not subjected to capital gains taxation. As a matter of fact Sec. 47(ii) specifically
provided that it will not be considered to be a transfer. In Malabar Fisheries Co. vs.
CIT (1979) 120-ITR-49(SC), the Supreme Court held that distribution of assets
among partners on dissolution does not involve transfer as it is only because of pre-
existing rights. This settled position was upset by introduction of Sec. 45(4) and
deletion of Sec. 47(ii) with effect from 1-4-1988 i.e., A.Y. 1988-89 onwards. The
reasons for the introduction of the new Section and for disturbing the settled position
is explained by Circular No. 495, dated 22-9-1987, vide para 24.3. It was felt that
the route of dissolution was used in a scheme of tax avoidance, which enabled the
participants of the scheme to transfer assets from one hand to another hand without
payment of legitimate tax.
The Section since its introduction has been the subject matter of intense debate and
discussion, as it threw open a large number of complex and unresolved issues
including: Sec.2(47) of the Act which defines the term transfer has not been
amended to provide specifically for inclusion of the case of distribution of assets on
dissolution. In view of that, a doubt has arisen relating to the enforceability of Sec.
45(4).The Section covers the cases of dissolution or otherwise. In view of that, a
doubt has arisen about the applicability of Sec. 45(4) in cases of retirement and
withdrawal of assets.
The profits or gains are deemed to have arisen in the previous year in which the
transfer takes place. The identification of the year of transfer becomes an issue in
cases where the year of distribution happens to be different than the year of
dissolution. The term distribution is a legal and accounting concept which has given
rise to a debate as to whether the Section will apply in a case where all the assets
are taken away by one of the partners. An issue also has arisen as to whether the
sale of capital assets to a partner could be treated as distribution of assets or not. A
doubt has arisen about the entity in whose hands the deemed capital gain could be
taxable, i.e., whether the gain would be taxed in the hands of the firm or in the hands
of the group of partners as the firm has been dissolved and ceases to continue.