1. The assessee was a partnership firm originally constituted with four partners. The assessee had reconstituted the partnership firm and new partners were added. Then assessee after the reconstitution of the firm had revalued the assets and the same were credited to their capital account in their profit-sharing ratio. The assessee thereafter filed its return of income however the same was selected for assessment under section 147 of the I. T. Act.
 

2. The Assessing Officer (A.O) was of the view that, the assessee had revalued the capital assets thereby increasing the value of the assets and credited the same to their respective capital accounts which constituted as “transfer” which was liable for capital gains under section 45(4) of the l. T. Act. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the addition on account of short-term capital gains and held that was a clear distribution of the assets as partners had also withdrawn amount from their capital account. CIT(A) also observed that value of the assets of the firm which commonly belonged to all the partners of the partnership firm had been irrevocably transferred in their profit- sharing ratio to each partner. Therefore, according to CIT(A), conditions of section 45(4) of the I. T. Act were fulfilled and therefore, the assets to the extent of their value distributed would be deemed as income from capital gains in the hands of the assessee. The CIT (A) had relied on the following decisions of the Bombay High Court and passed order in favor of revenue.
2.1. Commissioner of Income tax Vs. A.N. Naik Associates and Or’s.,
2.2. Commissioner of Income Tax (Mumbai) Vs. Texspin Engg and Mfg. works, Mumbai.
 

3. The assessee preferred an appeal before the Income Tax Appellate Tribunal (ITAT). ITAT allowed the appeal and set aside the addition made by the CIT(A) towards Short Term Capital Gains by observing revaluation of the assets and crediting to partners’ capital account did not involve any transfer. Thereafter, High Court dismissed the appeals in favor of assessee. Thus, the Revenue approached the Supreme Court.
 

4. The primary question before the Supreme Court was regarding the applicability of Section 45(4) of the I.T. Act.
 

5. In order to attract capital gains, there must be transfer of a 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.
 

6. In the present case, the Supreme Court noted that the amount was available to the partners for withdrawal. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners was “transfer” and fell in the category of “Otherwise” Therefore, the provisions of section 45(4) of the l. T. Act will be applicable. Therefore, the judgements of the IT AT and High Court were held unsustainable and accordingly quashed and set aside and the order was passed in favor of revenue.