TMI Blog2011 (1) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... bour charges for making ornaments - CIT(A) restricted the addition made by the AO from 10% to 2% - Order of CIT(A) sustained Software expenditure - amount paid to SMB Inc., for their efforts in trying to develop tailor-made software for the Assessee’s business. Finally the software could not be developed and the amount was paid to SMB Inc. for the time they spent in developing the software and that no software in fact was purchased or owned by the Assessee. - Held as revenue expenditure and allowed in favor of assessee. - 7320/MUM/08 - - - Dated:- 7-1-2011 - N.V. VASUDEVAN, JUDICIAL MEMBER J, AND R.K. PANDA, ACCOUNTANT MEMBER J, D.R. Raiyani for the Appellant. S.K. Singh for the Respondent. ORDER Per N.V. Vasudevan, Judicial Member : This is an appeal by the Assessee against the order dated20-10-2008of CIT(A)-XXV, Mumbai, relating to AY 03-04. 2. Ground No.1 raised by the assessee reads as follows: 1( a ) The CIT(Appeals) was not justified in sustaining the short term capital gain of Rs. 34,39,643 on account of assets transferred to the two retiring partners u/s. 45(4) relying on the decision in the case of CIT v. A.N. Naik Associates [2004] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership) The firm had its registered office in Borivali (West), Mumbai, with a branch atPalace Road, Plot No.1 Corner,Rajkot, Gujrat. The business premises inRajkotwas a rented premises. The business of the firm comprised manufacture, purchase and sale, export and import of gold, silver, diamonds and American Diamond ornaments. Under Clause 15 of the Partnership deed dated1-4-2001, retirement, death, or insolvency of any of the partners, does not result in dissolution of the partnership and the remaining partners were entitled to continue the business. 4. Consequent to certain changes in the affairs of the families of which the above partners are members, the partners at ( i ) and ( iii ) above desired to retire from the firm with effect from 31-8-2002. Accordingly a deed of retirement was drawn up on 31-8-2002. Briefly the result of this retirement deed was that the business of the assessee in Rajkot was taken over by the two retiring partners in equal shares and the three continuing partners at ( ii ), ( iv ) and ( v ) above took one more person (Mrs. Asha V. Minawala) and continued the business with its office in Borivali (West), Mumbai. Thus the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... la : Assets Takenover Amount Liabilities Taken over Amount Goodwill 3439642 LoanChimanlal J. Minawala HUF 107132 Fixed Assets 1669721 Loan Jayshree C.Minawala 2217758 Stock in Trade 14798497 Girish J. Minawala 4393501 Sundry Debtors 29150 Nayana Minawala 3824930 Deposits 141285 Sundry Creditors for expenses 102268 Loans advances to staff 7200 Sundry Creditors for Labour Charges 60122 Prepaid Shop Rent 8000 TDS Payable 31993 Cash 59282 Provisions-Rajkot 165965 Central Bank-10526 2924 Advance from Customers 35850 CCBRajkot1022 100387 Payable to NKJMumbai 721771 Receivable from CJM 1434037 Payable to Kamlesh M.wala 1434037 Liabilities trfd on retirement 13095325 Net Assets Takenover 7160758 Gross Assets trfd on retirement 20256083 20256083 6. The sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47) of the I.T. Act, cases of retirement of partners from a firm are not covered by section 45(4) of the I.T. Act. 8. It was further submitted that a mere entry in books of account creating goodwill account for Rs. 68,79,284 and crediting the same equally to the accounts of the partners in their profits sharing ratio will not result in the firm deriving capital gains. It was argued that before capital gains can be said to have arisen, there should be a capital asset within the meaning of section 2(14) of the I.T. Act and the same should have been transferred in one of the modes of transfer defined under section 2(47) of the Income-tax Act, 1961 and the sale proceeds of such capital asset should exceed the cost of capital asset (or indexed cost) resulting in surplus to the transferor. Mere revaluation of assets and showing the excess resulting on account of such revaluation, as good will in the accounts, does not have the effect of brining in capital gain. On this issue the assessee relied on the decision of the ITAT Mumbai Bench in ITO v. Smt. Paru D. Dave reported at 303 ITR (AT) 469 (Mum.). 9. It was further submitted that section 45(4) of the I.T. Act is in the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the value of the stock in trade should be excluded while ascertaining the value of assets taken over by the retiring partner because stock-in-trade is not capital asset within the meaning of the definition of the term capital Asset under section 2(14) of the Act. If the value of stock-in-trade taken over by the retiring Partners is excluded then there would be short term capital loss to the firm because the value of liabilities taken over is in excess of the assets taken over. Such excess was more than the amount that the retiring partners have to receive from the firm as per the credit in their capital account. In such an event there would be a short term capital loss to the firm as per the chart below. Chimanlal J. Minawala: Amount. Gross Assets transferred on Retirement 20256083 Less : Value of Stock in Trade Transferred which is not a capital asset u/s. 2(14) 14798497 Net amount of other assets transferred on retirement 5457586 Net Liabilities takenover on retirement 13095325 Excess of other liabilities taken over vis-a-vis other assets(A) 7637739 Kamlesh C. Minawa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution or transfer of assets to the retiring partner on retirement. The effect was that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm's income in the previous year in which the transfer took place and for the purposes of computation of capital gains, the fair market value of the asset on the date of transfer would be deemed to be the full value of the consideration received or accrued as a result of the transfer. Therefore, if the object of the Act is seen and the mischief it seeks to avoid, it would be clear that the intention of Parliament was to bring into the tax net transactions whereby assets were brought into a firm or taken out of the firm. 12. Relying on the aforesaid decision, the CIT(A) held that on retirement of the partner there was a transfer giving raise to tax incidence on capital gain. The CIT(A) by implication held that entry in the capital account of the partner regarding goodwill will not give raise to capital gain in the hands of the firm. The CIT(A) however held that the manner of computation of capital gain has to be done on the basis of the alternative c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultural land in India, Certain Gold bonds, special bearer bonds and Gold deposit bonds. According to him, the value of stock in trade of the firm which was taken over by the retiring partners should therefore be excluded while computing capital gain. If done so, there would be capital loss. In this regard our attention was drawn to the decision of the ITAT Mumbai Bench in the case of ACIT v. Vijay Talkies [2007] Vol. 16 SOT 370 (Mum.) wherein it was held that the expression capital asset excludes stock in trade. The learned counsel reiterated the stand of the Assessee on this issue as was put forth before the CIT(A) which we have already referred to in the earlier part of this order. 15. The learned D.R. relied on the order of the CIT(A). 16. We have considered the rival submissions. The question that arises for consideration is as to what is transferred on retirement? Is it the share or interest of a partner in the partnership firm or the property of the firm itself? The Hon ble Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa [1966] 3 SCR 400; AIR 1966 SC 1300 explained the nature of partnership and the right of the partners over the asssets of the Part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of liabilities and prior charges." What is the subject-matter of transfer in the case of dissolution of a firm is the share or interest of a partner in the partnership and its assets and this would be property which is subject-matter of transfer. This would be the capital asset within the meaning of the aforesaid definition. Therefore it is not correct to segregate the value of stock-in-trade from the assets that is given to a retiring partner to arrive at capital gain that the firm derives on retirement and settling accounts of the retiring partner. 17. The Capital gain is computed by looking at the accounts to find out as to whether the partner was paid the sum standing to the credit of his capital account or something more than that. It is only when something over and above the sum standing to the credit of his capital account it can be said that there was capital gain. The issue can be analyzed from the provisions relating to computation of capital gain also. Section 48 of the Act lays down the manner of computation of capital gain. It says that from the full value of consideration received or accruing as a result of transfer of a capital asset one has to reduce, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm which includes its stock-in-trade. The stock-in-trade in that event looses its character as stock in trade and becomes a capital asset which is used as a mode of settlement of the claim of the retiring partner by giving it at a value to the retiring partner. For the reasons stated above, we reject the argument of the learned counsel for the Assessee to the effect that value of stock-in-trade has to be excluded while determining capital gain because what is transferred on retirement of a partner from the firm is the share or interest of a partner in the partnership and its assets and not the individual items of properties of the firm which is allotted on retirement to the retiring partner. For the aforesaid reasons, we confirm the order of CIT(A) and dismiss ground No.1 ( a ) to ( d ) raised by the Assessee. 19. Ground No.2 raised by the Assessee reads as follows: 2.( a ) The first Appellate authority was not justified in sustaining disallowance of 2% of the labour charges as claimed by the appellant. ( b ) CIT (Appeals) should have seen that the books of account of the appellant firm were audited and the labour charges paid to workman were directly related to the ornam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d vouchers on their own. Even in such cases expenditure is substantiated by self made vouchers prepared by employees of assessee on which signatures of respective karigars are obtained. Where TDS provisions are applicable, TDS was also deducted from payment to the karigars. Zerox copy of TDS return was also filed. The assessee also filed zerox copy of bills and vouchers of labour charges submitted at the time of assessment proceedings. The assessee filed details of labour charges in this year and also in the preceding year which was as under : Assessment year Sales turnover Gross Profit Labour Charges paid Labour charges as% of Turnover Disallowance of labour charges in assessment order if any. 2003-04 10,66,44,020 2,02,91,458 51,76,783 4.85% 5,17,783 2002-03 8,94,66,019 1,97,27,493 67,54,829 7.55% It was requested to delete the addition. 22. The CIT(A) restricted the addition made by the AO from 10% to 2% observing as follows : 7.3 I have gone through the submissions and find that appellant firm was constituted in 2001. This is the seco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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