2018 (8) TMI 1926 - AT - Income Tax

Long Term Capital Gain - money receipt pursuant to the dissolution of the firm - transfer u/s 2(47) - HELD THAT - In the arbitration proceedings also both the partners admitted that they were partners. In the concerned award passed it was clearly mentioned that the assessee was to retire from the said firm in lieu of the consideration to be given to him by Mrs. Vandana Suresh Punwani who was to continue as proprietor of the said firm thereafter. AO s premise that there was no existence of the partnership firm is not sustainable. Furthermore the arbitration award clearly mentions that the amount is being paid to the assessee upon his retirement from the partnership firm. Since the partnership firm consists of two firms which got dissolved upon his retirement so the proceeds have to be considered as sum received pursuant to the dissolution of the partnership firm and/or retirement of the assessee from the partnership firm. The matter has even travelled to the Hon ble Bombay High Court and the arbitration proceeding has been considered by the Hon ble Bombay High Court also. Hence the sum received by the assessee is clearly pursuant to the retirement of the assessee from the firm which cannot be taxed as capital gain. The agreement of acquisition of the development right was also in the name of the firm M/s. Vicky Developers and not in the name of the assessee. Hence the Assessing Officer s reference that the same was received by the assessee pursuant to his relinquishment of his right in the development right is not sustainable as the assessee has no individual right in the said agreement. Hon ble Bombay High Court in the case of CIT vs. Riyaz A. Sheikh 2013 (12) TMI 248 - BOMBAY HIGH COURT supports the case of the assessee. In this case it was held that the amount received by an erstwhile partner on his retirement from partnership firm arising on transfer of goodwill is not liable to be taxed as long term capital gain. Similar view was expounded by the Hon ble Apex Court in the case of CIT vs. R. Lingmallu Raghukar 1997 (1) TMI 74 - SUPREME COURT . In this case it was held that excess amount received by assessee on retirement from partnership firm was not assessable to capital gains as there was no transfer of any assets as contemplated by expression transfer as defined in section 2(47) of the Act. We hold that the Assessing Officer s view that there was no partnership firm and the amount received by the assessee cannot be said to be receipt on account of his retirement from the firm is not sustainable. Accordingly we do not find any infirmity in the order of the ld. Commissioner of Income Tax (Appeals) and accordingly we uphold the same. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (A.O.) amounting to Rs. 2,33,58,240/- on account of Long Term Capital Gain.
2. Validity of the existence of the partnership firm and its dissolution.
3. Taxability of the payment received by the assessee on retirement from the partnership firm.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Long Term Capital Gain:
The Revenue appealed against the deletion of an addition of Rs. 2,33,58,240/- made by the A.O. on account of Long Term Capital Gain. The A.O. argued that the payment of Rs. 2.95 Crores received by the assessee on settlement of arbitration proceedings should be taxed as 'Capital Gain'. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, stating that the amount received was a capital receipt not taxable in the hands of the assessee. The CIT(A) referred to various case laws, including CIT vs. A. N. Naik 265 ITR 346 and Chalasani Venkateswara Rao vs. ITO [2012] 349 ITR 423 (AP), to support this conclusion.

2. Validity of the Existence of the Partnership Firm and Its Dissolution:
The A.O. contended that the partnership firm, M/s. Vinky Developers, was not in existence as it was not registered, carried on no activity, and filed no return of income. However, the CIT(A) found that there was a valid partnership deed between the assessee and Mrs. Vandana Suresh Punwani, which was acknowledged in arbitration proceedings and by the Hon'ble Bombay High Court. The CIT(A) observed that the firm had a profit-sharing ratio of 50:50 and that the agreement for the development right was in the name of the firm, not the individual partners. Therefore, the CIT(A) concluded that the partnership firm was valid and its dissolution led to the distribution of assets, invoking section 45(4) of the Act.

3. Taxability of the Payment Received by the Assessee on Retirement from the Partnership Firm:
The CIT(A) held that the Rs. 2.95 Crores received by the assessee was for retirement from the partnership firm, not for relinquishment of rights in the property at Bandra. The CIT(A) noted that the firm, not the individual partners, had the development rights. The CIT(A) opined that the provisions of section 45(4) applied, making the amount a capital receipt not taxable in the hands of the assessee. The CIT(A) relied on the Hon'ble Bombay High Court decision in CIT vs. Riyaz A. Sheikh [2014] 41 taxmann.com 455 (Bom) and the Supreme Court decision in CIT vs. R. Lingmallu Raghukar (124 taxman 127 (SC)), which held that amounts received on retirement from a partnership firm are not taxable as long-term capital gains.

Conclusion:
The Tribunal upheld the CIT(A)'s order, agreeing that the partnership firm existed and that the amount received by the assessee was on account of retirement from the firm, not taxable as capital gain. The Tribunal dismissed the Revenue's appeals for both assessment years, confirming that the CIT(A)'s decision was correct and based on valid legal precedents. The order was pronounced in the open court on 27.08.2018.