TMI Blog2012 (1) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee because if two constructions are to possible then one has to adopt the construction which is favourable to the assessee. We had also noticed the distinguishing features in this case and it is not a simple case in which other partners joined the firm. This is a case where another firm has been taken over by the firm in which the assessee was a partner. Both the firms were having intangible rights arising from development agreement and right of constructing a housing / commercial complex and none of the firm valued such rights in the form of monetary consideration. Such rights remained with the firm even after retirement of the assessee. We therefore, hold that the ld. CIT(A) was not justified in confirming the addition of ₹ 5,24,47,943/-. - ITA No. 808/JP/2011 - - - Dated:- 6-1-2012 - R. K. Gupta (Judicial Member) And N. L. Kalra (Accountant Member) For the Petitioner : Vijay Goyal For the Respondent : Sunil Mathur ORDER N. L. Kalra (Accountant Member) The assessee has filed an appeal against the order of the ld. CIT(A)-Central, Jaipur dated 12-08-2011 for the assessment year 2007-08. 2.1 The assessee filed the revised form no. 36 req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apartment wherein she held that the cost of the land at revalued price will not be allowed for deduction for the purpose of part sale of the land in AY 2008-2009. The assessment of profit on account of revaluation of the land in the hands of retiring partners and not allowing the cost of the revaluation in the hands of the firm is amount to double taxation. 6. It is contended that while completing the assessment the learned DCIT Central Circle-2, Jaipur neither appreciated the facts of the case properly nor the provisions of Income tax Act and the learned A.O. passed the Assessment order u/s 153A/143(3) of Income Tax Act on presumption, assumption, surmises and conjectures based purely on no evidence or on irrelevant evidence; arbitrary or whimsical and ld CIT(A) confirmed the order of assessing officer without appreciating the facts of the case and provisions of Income Tax Law, thus, the Assessment Order u/s 153A/143(3) of Income Tax Act, is ab-initio void and bad in law and deserves to be annulled. 7. The Assessee prays for leave to Add, to amend, to delete, to modify the all or any grounds of appeal on or before the hearing of appeal. 2.2 The assessee is an indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47,943/- and ₹ 1,74,82,647/- respectively. A new partnership deed was executed on 19-1-2007 in which four partners of M/s.Gold Dream Builders and Developer were taken as partners in the firm M/s.Krishna Villa Apartment. Within one month of the constitution of the new firm, Shri Jitendra Agarwal retired from the firm w.e.f. 10-02-2007. The assessee also retired from the firm on 19-03- 2007 and thereafter a new partnership deed was executed in which four partners of M/s.Gold Dream Builders and Developer remained as partners in the firm M/s.Krishna Villa Apartment. The capital account of the assessee was credited on revaluation of the land on 18-01-2007 and this amount was withdrawn by the assessee. The case of the revenue is that all the arrangements have been made to transfer the land from the firm of two partners of erstwhile M/s.Krishna Villa Apartment to the four partners of M/s.Gold Dream Builders and Developer who became the partner of the firm of M/s.Krishna Villa Apartment w.e.f. 19-01-2007. In the profit and loss account of the firm i.e. M/s.Krishna Villa Apartment , the transaction of revaluation was taken as an expenditure under the head revaluation while the closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatement u/s 132 (4), the assessee surrendered ₹ 5.24 crores in his hands as undisclosed income for this assessment year. The binding nature of statement u/s 132 (4) on the assessee and its utility in assessment procedure has been clarified by various courts. In Rameshchand and Co. v CIT [1987] 168 ITR 375, the Bombay High Court observed that where an assessee has made a statement of facts, he can have no grievance if the taxing authority taxes him in accordance with that statement. In the case of Kunhambu (V) and Sons V. Commissioner of Income Tax (1996) 219 ITR 0235, Kerala High Court has held that addition made on the basis of statement u/s 132 (4) 132 (4) is valid. The AO mentioned that the assessee has not surrendered the above income in the return filed u/s 153A of Income Tax Act and reiterated his claim for exemption of ₹ 5.24 crores as his profit from firm. During the course of assessment proceedings, the assessee explained that since Shri Pawan Lashkary withdrawn his capital from firm, therefore the same cannot be treated as capital gain/business income in the hands of the partners because of the following reasons:- i) Shri Pawan Lashkary has not transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce exposed in order to tax a receipt which the assessee claims there is no provision in section under which this income can be treated as income of the assessee . The assessee through consultation has drafted a carefully worded agreement dated 19.01.2007 whereby the stock in trade (land in this case) of the firm has been revalued and the difference between the revalued value and the book value credited into the capital accounts of the partners. As per Accounting Standards (AS-2) stock is to be valued at cost or net realized value, WHICHEVER IS LOWER. By violation of this principle and valuing the stock at a substantially higher rate, the assessee has committed the first MISTAKE in accounting policies. Instead of creating a revaluation reserve, the assessee has credited the differential value to the capital account of the partners, which is mistake No. 2. These mistakes are committed with the ultimate intent of fattening the capital account which will be withdrawn post retirement. And in one innocent stroke of non availability for business , the assessee has retired from business and withdrawn the fattened capital account making it a capital receipt and NOT making it a capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Justice Chinnappa Reddy and the final judgment by Justice Ranganath Mishra, they have unequivocally stated that colourable devices cannot be part of tax planning. 2.8 Thus by crafting a carefully worded colourable device with active collusion and connivance with the opposite party and the tax practitioners, the assessee has claimed exemption in his computation of income (both in s. 139 and s. 153 A) that the receipt of ₹ 5.24 crores is his exempt income as profit from the Krishna Villa . As it is seen that such an amount has been taken as expenses in the hands of the firm, the same cannot be granted u/s 10(2A). by virtue of lifting the veil/unraveling a colourable device behind which the assessee is taking refuge that There is no provision in section under which this income can be treated as income of the assessee, the AO held that the amount of ₹ 5,24,47,943/- is taxable income of the assessee and the exemption claimed by the assessee as profit from firm Krishna Villa Apartment was denied/disallowed. 2.9 Before the ld. CIT(A), the assessee made the following submissions. 3.1 It is humbly submitted that the impugned assessment order suffers from fata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference in the value of land in the books of account vis- vis its estimated market value could AT BEST (saying it for the purpose of argument only) be taxed either under the head Profits Gains of Business Profession or under the head Capital Gains . 3.3 In case the AO wanted to tax the difference under the head Profits Gains of Business Profession in the hands of the appellant, it was essential to prove that the assessee was carrying on a business and the receipt in question pertained to that business. Carrying on business by the firm in which assessee is partner cannot be said to be business carried on by partner, more so because no tax is leviable on partner in respect of business income of/from the firm. It would have been less incomprehensible if the AO had attempted to tax the difference in the hands of the firm who owned the land as its stock-in-trade. But the AO has taxed it in the hands of the partner defying all rules of accountancy and Income Tax Law. It is not the case that the land was owned by the partners even before its purchase by the firm from a private limited company. The local authority (JDA) permitted the change of land use to the Firm for g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 972] 86 ITR 109 and the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393, 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 realized by the receipt of only one of all the assets. 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 not transfer. It is the realization of a pre-existing right. (Emphasis supplied) 3.5 A very illuminating exposition of law in respect of interest of a partner in the assets of the firm is found in the case of Addanki Narayanappa v. Bhaskara Krishnappa [AIR 1966 SC 1300], wherein the Hon ble Supreme Court explained (p. 1303 of AIR) the nature of interest of the Partner in the firm as under: .. whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 79] ITR 594 (SC). Dissolution of the firm and reconstitution of the firm leading to retirement of one or more partners stand on the same footing and as per aforesaid decision of the Supreme Court in the case of Bankey Lal Vaidya, the retiring partner cannot be taxed in this regard because what he gets on retirement is capital receipt. The present appellant received the money value of his share in the assets of the firm; he did not agree to sell, exchange or transfer his share in the assets of the firm. The observations of the Ho ble Court in above decision are quite instructive in this regard: In the course of dissolution the assets of the firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying the money value equivalent thereof. This is a recognized method of making up the accounts of a dissolved firm. In that case the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm. The respondent received the money value of his share in the assets of the firm; he did not agree to sell, exchange or transfer his share in the assets of the firm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of Income Tax Act 1- 5-2008. The assessment of this firm under Income Tax Act was made by the same AO on 27/12/2010. The copy of assessment order for AY 2007-2008 is at PB page 161-168. Therefore, all the ingredients of section 10(2A) is fulfilled and therefore, if the profit on account of revaluation of stock of the firm is treated as taxable income than it can be taxed in the hands of the partnership firm not in the hands of the partner. 3.7 The LD AO in Para at page 4 mentioned as under:- in a matter of 8 months starting from 19.017.06 to 19.03.07, the Siroli land has virtually changed ownership from Pawan Lashkary and Jitendra Agrawal (Collectively M/s. Krishna Villa Apartments) to Sh. Shankar M Jethani, Shri Miraj Un Nabi Khan and Shri Naved Saidi (collectively, M/s. Gold Dream Developer) for a consideration of ₹ 6.99 crores. The said stock (land in this case) virtually is the hands of the M/s. Gold Dream Developers Builders and its original partners, albeit in the name of M/s. Krishna Villa . Here, the LD AO says that the ownership of the land was transferred from M/s Krishna Villa Apartment to M/s Gold Dream Developers. In this regard, we submit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a firm and the amount of his share in the partnership assets after deduction of liabilities and prior charges is determined on taking account in the manner prescribed by the partnership law there is no element of transfer of the manner prescribed by the partnership law there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners and the amount received by the retiring partner is not capital gain under section 45 of the Income-tax Act. Similar reiteration of the view of the Hon ble Supreme Court is found in the case of Addl. CIT vs Mohanbhai Pamabhai (1987) 165 ITR 166 (SC). 3.10 Ignoring a series of judgments of highest court of the land directly on the subject, it is humbly submitted, would be in violation of Article 141 of the Constitution of India, which reads as under: Article 141: Law declared by Supreme Court to be binding on all courts: The law declared by the Supreme Court shall be binding on all courts within the territory of India. It has been laid down by the Supreme Court in the case of Dwarikesh Sugar Industries Ltd. Vs Prem Heavy Engineering Works (P) Ltd. [1997] 6 SCC 450 (Para 32) tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tner. BUT very importantly this deeming provision creates a fiction by which the FIRM/AOP (as the case may be) becomes liable to tax- the section states: 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 . Obviously this section cannot be invoked to tax the partner of the firm or member of AOP or BOI. While at Section 45(4), it will be pertinent to note that since capital gains tax itself is levy of tax on deemed income, and in any case the levy of tax on transfer/distribution of assets by the firm is by virtue of a deeming provision, the fiction created under this sub-section cannot be extended beyond the purpose for which it was enacted as held by Supreme Court in the case of CIT vs. Amarchand N. Shroff [1963] 48 ITR 59 (SC) and also in the case of CIT vs Ajax Products Limited [1965] 55 ITR 741. Since section 45(4) and all other sub-sections of section 45 are charging sections and therefore, according to Calcutta High Court [ref: the case of Justice R. M. Datta (Supra)], the rule of construction adopted by Rowlatt J. in the case of Cape Brandy Syndicate vs. IRC ([1921] 1 KB 64) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does not involve an element of transfer within the meaning of section 2(47). Chief Justice P.N.Bhagwati (as the learned judge then was) speaking for a Division Bench of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 dealt with the issue in the following observations (page 402): When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment with a prejudiced mind and did indulge in misstatement of facts. Taking the said stand of the department a step further, it is logical to presume that in subsequent assessments of the firm also no such deduction shall be allowed by the department. And thus, in effect, the difference in valuation of the land would get taxed. Therefore, the allegation that there has been any tax evasion is devoid of the any truth. The absence of any concrete evidence/argument for alleging tax avoidance/evasion by means of series of transaction has been attempted to be made up by the assessing officer by use of high sounding, repetitive and verbose language. Use of intemperate language bordering on defamation does not make a good argument, much less evidence. Multilateral transactions recorded/documented contemporaneously in the presence of witnesses and duly attested by government officials/government approved agencies (Notary Public), necessitated and driven by pure commercial considerations cannot be overlooked by mere high sounding verbose or poetic language. The Assessing Officer did precious little to prove any of the transaction to be sham/non-genuine or part of a pre-ordained ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expert/consultant during the course of search or before recording of statement on the matters which are essentially questions of law. If that be so, by the same logic the assessing officer (who is duly educated in the discipline of taxation/accounts and law) has also defaulted- in the first instance taxing the amount in the hands of the appellant and then barely a few months later taking a diametrically opposite stand in the case of the Firm. BUT THE LAW IS THAT THERE CANNOT BE ESTOPPEL AGAINST LAW-WHETHER IT BE ASSESSEE OR THE ASSESSING OFFICER. If the law requires that a certain tax is to be collected, it cannot be given up, and any assurance that it would not be collected, would not bind the Government. The liability of the assessee to pay Income-tax is created by the Income-tax Act. The amount on which the tax is to be paid, the rates at which the tax has to be determined in accordance with the provisions of the Income-tax Act and the relevant Finance Act. The liability to pay tax cannot be founded on any agreement. Assessee s agreements or statements (as that of the appellant) in the matter of law, certainly, cannot form the basis of taxation. So much for the argument of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, hence the ration laid down in these cases are not applicable to the case of the assessee. The assessee has cited several direct decisions of Apex Court and other courts which are relevant for the case of the assessee. 2.10 The ld. CIT(A) after considering the submissions gave the following finding which are summarized as under:- 1. The assessee entered into a partnership agreement with Shri Jitendra Agarwal on 15-07-2006. Within 9 days of the constitution of the firm, land measuring 3.77 hectare was purchased for a consideration of ₹ 1.05 crores by the firm namely M/s.Krishna Villa Apartment in which the assessee and Shri Jitendra Agarwal were partners. The land was purchased from M/s.PCPL. M/s.PCPL is the company in which the assessee and his son were directors. A sum of s 25.00 lacs was paid by the firm to the company on 18-07-2006 i.e. just after 3 days of the formation of the firm and second cheqe of ₹ 24.25 lacs was given on 20-07-2006. The funds were mostly provided by the assessee which the ld. CIT(A) noticed from the ledger account of the assessee in the books of M/s.Krishna Villa Apartment. Such land was purchased by M/s.PCPL vide agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) has referred to the decision of Hon'ble Apex Court in the case of Shri Sunil Siddddhartha Vs. CIT 156 ITR 509 in which the Hon'ble Apex Court held that if transfer of personal asset to the firm represent a real attempt to contribute the share capital of the partnership firm then it will not be chargeable to capital gain (before introduction of Section 45(4) of Income Tax Act) and in case the revenue establishes that it is a device or rouse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on capital gain then such transaction is to be taxed. Thus one will have to take a decision as to whether the transaction is sham or genuine. From the sequence of events, the ld. CIT(A) held that the assessee by making an arrangement of transferring the land had used this arrangement as a device to evade the tax. 6. The ld. CIT(A) has referred to the decision of Hon'ble Apex Court in the case of Mc Dowell and Co. Ltd. Vs. CTO, 154 ITR 148 in which the Hon'ble Apex Court held that colourable device cannot be a part of tax planning. The ld. CIT(A) has referred to the decision of Mc Dowell Co. Ltd. (supra) in which Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stined to be that way. Shri Jitendra Agarwal found himself uncomfortable in new setting and therefore, desired to retired the newly constituted firm. On the retirement of Shri Jitendra Agarwal, the accounts of the firm were made up and he was allowed to withdraw balance in his capital account. The assessee s main business was garment manufacturing and export business. In respect of such business, the assessee was required to go abroad frequently and hence was not in a position to give time in the business of M/s.Krishna Villa Apartment. The assessee could not adjust himself from the working style and conduct of the new partners and accordingly decided to retire from the firm w.e.f. 19-03-2007. The submissions of the assessee filed before us are reproduced as under:- 3.1 It is humbly submitted that the impugned assessment order suffers from fatal illegalities of law and facts, is perverse because of consideration of irrelevant facts while ignoring the relevant facts. We are submitting our detailed explanation on the following points which are relevant to the issue under appeal:- (i) Whether there was any transfer of controlling interest in land by the assessee:- (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in capital of retiring partner (ii) no right in business of the firm and (iii) no right in goodwill of the firm. Therefore, this clause does not speak that the assessee has relinquished his right in the land or other assets of the firm. Therefore, nothing has been mentioned in the deed to say that the assessee has transferred his controlling interest in the land in favour of other partners. Further, no where it has been mentioned that the assessee will not have any right in the assets of the firm. The business of the firm and assets of the firm are two different things and cannot be taken at same meaning. Business indicates the activity of purchase, sell, production, trade, dealing etc. Therefore, according to this clause, the assessee will not have any right in the business activities of the firm or result of the business activities i.e. profit or loss. Further, it has been specifically mentioned that the assessee will not have any right in goodwill of the firm. Further, the incoming partners have not brought substantial capital in the firm. The balance in their capital account as on 31.03.2007 was only ₹ 28,63,000/- (Capital A/c PB Page 134). Therefore, it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g for a Division Bench of the Gujarat High Court in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) (Copy at PB page 188-200) dealt with the issue in the following observations:- ...When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners : vide also the recent decision of the Supreme Court in CIT vs. Bankey Lal Vaidya (1971) 79 ITR 594 (SC). It is true that s. 2(47) defines Transfer in relation to a capital asset and this definition gives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment was reversed in appeal by the Supreme Court in Tribhuvandas G. Patel vs. CIT (1999) 236 ITR 515 (SC). (Copy at PB page 201-204) Further more, Hon ble ITAT Jaipur Bench has also decided the similar issue in the case of Hemchand Govil Vs ACIT 30 Taxworld 14 (Copy at PB Page 177- 178) wherein Hon ble bench has fallowed the decision of Hon ble Supreme Court in the case of R Lingmallu Raghukumar (2001) 247 ITR 801 (SC) and held that there is no element of transfer of interest in the firm on retirement in favour of remaining partners. There are series of decision of Gujarat High Court, Madras High Court, Kerala High Court, Allahabad High Court, Andra Pradesh High Court, and Calcutta High Court on this issue. Further more, Bombay High Court has also changed its view after the reversion of its earlier decision in the case of Tribhuvandas G Patel by Hon ble Apex Court on this issue. The assessee also relies on the following decisions:- (i) Prashant S. Joshi Vs. Income Tax Officer Anr.* HIGH COURT OF BOMBAY (2010) 324 ITR 154 (Copy at PB page 231- 239) In this case Hon ble Court quashed the notice issued u/s 148 by the department fallowing the principles la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assets 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 for the purpose of s. 48. Ex facie subs. (4) of s. 45 deals with a situation where there is a transfer of a capital asset by way of a distribution of capital assets on the dissolution of a firm or otherwise. Evidently, on the admitted position before the Court, there is no transfer of a capital asset by way of a distribution of the capital assets, on a dissolution of the firm or otherwise in the facts of this case. What is to be noted is that even in a situation where sub-s. (4) of s. 45 applies, profits or gains arising from the transfer are chargeable to tax as income of the firm. (ii) Commissioner Of Income Tax Vs. G. Seshagiri Rao (1995) 213 ITR 304 (AP) (Copy at PB page 258-260):- The brief facts of the case are that there was a partnership under the name and style of M/s White Field Industrial Corporation, Bangalore. It purchased certain land under a registered sale deed dt. 15th May, 1972. The assessee was partner in this firm. The land which was purchased was converted for industrial purposes and was revalued at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kunnamkulam Mill Board (2002) 257 ITR 544 (Kar), (Copy at PB page 244-248), Hon ble Karnataka High Court held that on retirement of the partner of the firm there is no transfer of the assets of the firm in favour of the continuing partners. The facts of this case are that the assessee is a partnership firm. It had originally five partners and it was constituted under a deed executed on 14th Sept., 1983. Subsequently, there was a change in the constitution of the partnership as evidenced by a new partnership deed executed on 13th Jan., 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 cl. 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 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 31st Jan., 1989, the original five partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of a dissolution of partnership, there is no element of transfer. It is only an adjustment of the right of the partners and not relinquishment or extinguishment of interest of retiring partner. (vi) The same view was followed in CIT vs. Madan Lal Bhargava (1980) 122 ITR 545 (All) (Copy at PB page 253-257), wherein it was observed that all that the assessee received on his retirement from the firm in respect of his share in the goodwill was its value to which he was all along entitled and that the case need not fall within the purview of s. 2, cl. (47) and consequently s. 45 had no application. (vii) In CIT vs. Bhupinder Singh Atwal (1981) 128 ITR 67 (Cal) (Copy at PB page 261-267), Hon ble Calcutta High Court has held when a partner retires from the partnership the amount of his share in the partnership asset after deduction of liabilities and prior charges is determined and on taking the accounts, what he received is the share in the partnership and there is no consideration for any transfer of his interest in his partnership to the continuing partners. Consequently there is no transfer or sale as contemplated by s.45 of the IT Act, 1961. The Calcutta High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the amount of ₹ 62.50 lakhs received by the assessee on retirement from the partnership firm of M/s A.V. Bhat C.V. Shah is a capital receipt not liable to capital gains tax was answered in favour of the assessee by holding that the amount received by the assessee on retirement from the partnership firm was not liable to tax as capital gains. (xi) Second Wealth Tax Officer Vs. P Thirumalai Nainar Anr ITAT, MADRAS BENCH (1983) 17 TTJ (MAD) 535 (Copy at PB page 292- 295A), The facts of the case are that the assessee partners retired from a partnership firm. As a result the retiring partners were paid ₹ 2,86,494 and 3,99,110 respectively which amounts have been arrived by mutual agreement. The ITO assessed the excess of the payment received by the retiring partner over their respective credit balances to capital gains as in his view the excess payment was on account of assignment and relinquishment of their rights in the partnership assets and therefore fell within the mischief of s 2(47) and consequently liable to capital gains tax. Hon ble Tribunal held that when a partner retires from partnership there is no transfer of interest in partnership asset and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. McDowell Co. vs. CIT (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) distinguished; CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj), Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC), CIT vs. Dewas Cine Corporation (1968) 68 ITR 240 (SC) and Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC) relied on. 3.4 Whether the share of profit on revaluation of assets of the partnership firm is chargeable to tax in the hands of the partner. We submit that there would be no incidence give rise to capital gain either at the stage of revaluation or at the stage of crediting to the account of partner. We submit that Hon ble Supreme Court in the case of CIT vs. Hind Construction Ltd. (1972) 83 ITR 211 (SC) has held that when assets of a partnership firm are revalued and revaluation is credited to the partner s account, there is no transfer of any assets and as such there is no question of liability on account of capital gain when the assets are revalued and revaluation effect is given to the partner s account by crediting to the partner s account.. Further, for argument sake only even if it is presumed that the profit arose from revaluatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rement. The ld AO in para 4 at page 4 mentioned as under:- in a matter of 8 months starting from 19.07.06 to 19.03.07, the Siroli land has virtually changed ownership from Pawan Lashkary and Jitendra Agarwal (Collectively M/s. Krishna Villa Apartments) to Sh. Shankar M Jethani, Shri Miraj Un Nabi Khan and Shri Naved Saidi (collectively, M/s. Gold Dream Developer) for a consideration of ₹ 6.99 crores. The said stock (land in this case) virtually is the hands of the M/s. Gold Dream Developers Builders and its original partners, albeit in the name of M/s. Krishna Villa . Here, the Ld AO wanted to say that the ownership of the land was transferred from M/s Krishna Villa Apartment to M/s Gold Dream Developers. Even on this presumption of ld AO, the assessee cannot be taxed in respect to the so called profit arose on account of so called transfer. Further the assessee never remained the owner of the land at any stage. The original owner of the land was farmers who sold the land to M/s Pawan Creations Pvt Limited which is a separate legal person under the Act, and M/s Pawan Creations Pvt Ltd sold the land to the partnership firm who is also separate person as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of taxation are different for different types of income. Until and unless it is specified as to under which head the income is proposed to be taxed, it will not be possible to see as to whether the receipt in question is taxable under the specified head and if at all it has to be taxed then to what extent. The elementary in jurisprudence of levy of income-tax that the receipt in question, first should be an income and secondly it has to fall under one of the five heads of income stated in section 14 of the Income-tax Act, 1961. If a particular income does not fall in any of the Heads of Income, the same cannot be taxed as it is presumed that the same was not directed by the Parliament to be taxed. Article 265 of the Constitution provides that no tax shall be levied except by authority of law. There is no scope of intendment in a taxing statute. It was so laid down by the Hon ble Apex Court of this land in celebrated judgment in the case of CIT Vs. Elphinstone Spg. Wvg. Mills Co. Ltd (1940) 40 ITR 142 (SC). In this regard a useful reference can also be made to Supreme Court in the case of Nalinikant Ambalal Mody Vs. S.A.L.Narayan Row ,CIT [61 ITR 428 (SC)] as also Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative of the company Shri Arun Lashkary. After purchasing this land, this company was tried its best to get Single Unit Patta from JDA but it could not got success. The file was going up and down for one and another reason in JDA. In April 2006, Shri Jitendra Agarwal made a proposal to Shri Pawan Lashkary that he can get the work done from JDA provided this project of group housing on this land is done with his partnership. Therefore, it was orally decided that a new partnership firm would be formed in between Pawan Lashkary and Jitnedra Agarwal and this project will be done in partnership with Shri Jitendra Agarwal. After getting assurance of partnership, Shri Jitendra Agarwal started work on the file. When the assessee saw some positive progress on the file, it was decided to take Shri Jitendra Agarwal as partner and partnership deed was inked on 15.07.2006 in the name style M/s Krishna Villa Apartment and the land belonging to M/s Pawan Creations Pvt Ltd was purchased by this partnership firm. Further, it has been wrongly mentioned by the CIT(A) at page 25 of his order that the land was already converted land and the firm has not done any worthwhile activity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he firms and their competencies and strengths will generate greater synergy of operations. Therefore, the decision for merger was a purely a commercial decision in business expediency with a motive to enlarge the scale of operations and to go further in some more projects with greater strength and experience. Therefore, it was decided to merge M/s Gold Dreams Developers into M/s Krishna Kripa Apartment w.e.f 19.01.2007. (iv) Revaluation of land at market price. It is common practice to make the revaluation of the assets and liabilities at the time of reconstitution of firm as old partners never want to pass the existing appreciations or benefit to the new partners and similarly the new partners never want to take responsibilities of the work/liabilities of the old partners. In the case of the assessee, the land was only asset which was required to put at market price in the books on the reconstitution of the firm. Therefore at the time of admission of new partner market value of all the assets was appraised and the old partners and incoming partners found that the market value of the land has substantially increased because of issuance of Patta for Group Housing Project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w.e.f 19.03.2007. It is also relevant to mention here that the new partners started working in defiance of business ethics, which the assessee did not like. This may be seen from the fact that later on (about in 2010) criminal cases were registered against the new partners for excess booking of flats and this news was also appeared in leading news paper. Had the assessee continued in the partnership, he would have also faced such criminal proceedings for the offence made by the new partners. Further, the retirement of the assessee was not only for name sake. There was actual and real retirement. The department has no material to show that the retirement of Shri Pawan Lashkary was name sake only and he remained real or beneficial partner even after the retirement was inked on 19.03.2007. Further more the Ld AO herself treated the firm genuine. In fact, even when the assessment of the Firm has been made in the status of Firm and not as AOP or any other status. The AO has also not challenged the genuineness of the transaction of sale of land by the company to the firm. If, such sale was genuine and the firm was genuine. All the government authorities like JDA has accepted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 62.50 lakhs. The learned CIT(A) interpreted various agreements and came to a finding that the series of agreements were nothing but an arrangement and the partnership entered into were a mere ploy to create an alibi that the sum were received on retirement. The question was answered by Hon ble Tribunal in para 10 by holding as under:- There was nothing wrong/sham in entering into regular partnership with Shri Shah. In fact, it was her late husband who was in partnership with Shri Shah and after the unfortunate death of her husband, the assessee was bound to inherit her husband s share and, if in the process keeping in view the legal complications involved and her own perception of Shri Shah, she entered into a partnership deed, the whole thing was within the framework of law and such an arrangement cannot be termed as a mere ploy to create an alibi that sums were received on retirement, as held by the learned CIT (A). In fact, the CIT(A) has reversed the finding of the AO that the arrangement was not sham without bringing on record any material whatsoever. He has overlooked the facts that as early as on 14th July, 1991, the assessee and Shri Shah had reaffirmed thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be tax liability by contract. There is no allegation that in the statement recorded during the course of search in respect of this transaction assessee made any averment of facts which he retracted later. Comprehension of income-tax law by a common citizen is a mere fiction, more so, during the strenuous environment of search and seizure proceeding. Further, the appellant was not allowed any assistance of a legal expert/ consultant during the course of search or before recording of statement on the matters which are essentially questions of law. If the law requires that a certain tax is to be collected, it cannot be given up, and any assurance that it would not be collected, would not bind the Government. The liability of the assessee to pay Income-tax is created by the Income-tax Act. The amount on which the tax is to be paid, the rates at which the tax has to be computed and the reliefs which the assesses are entitled to, must all be determined in accordance with the provisions of the Income-tax Act and the relevant Finance Act. The liability to pay tax cannot be founded on any agreement. Assessee s agreements or statements (as that of the appellant) in the matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 'profit from the firm M/s Krishna Vila Apartment' but claimed it as exempt u/s 10(2A) of the IT. Act. 3.4. The A.O did not accept the contention of the assessee about theabove amount of ₹ 5,24,47,043/- being exempt. In view of the facts of this case, she was of the opinion that in a matter of 8 months starting from 15.07.2006 to 19.03.2007, the Siroii land had virtually changed ownership from Pawan Lashkary and Jitendra Agarwal(Collectively M/s Krishna Villa Apartments) to Sh. Shankar M.Jethani, Sh. Arun Bansal, Sh. Miraj Un Nabi Khan and Shri Naved Saidi(collectively, M/s Gold Dream Builders Developers) for a consideration of ₹ 6.99 crores. The said stock (land in this case) virtually was in the hands of the M/s Gold Dream Builders Developers and its original partners, albeit in the name of M/s Krishna Villa Apartments. The A.O felt that whether in the name of M/s Krishna Villa Apartments or M/s Gold Dream Developers, through a series of almost conspiratorial and well orchestrated moves, Sh. Shankar M Jethani, Sh. Miraj Un Nabi Khan, Sh. Arun Bansal and Sh. Naved Saidi had the ownership of the Siroii land from Sh. Pawan Lashkary and Sh. Jitendra Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Sudhakar M. Shetty vs. ACIT reported at (2011) 130 ITD 197Mumbai). 4.2. In this case the assessee Sh. Sudhakar M. Shetty entered into a partnership with one Sh. Rakesh Wadhwan to carry on the business of building and development of immovable properties. The partnership firm was named M/s D.S. Corporation. Subsequently, some more relatives and associates of these two partners were admitted but essentially the partnership remained under the control of the Shetty and Wadhwan groups. This partnership firm bought a land in Mumbai for ₹ 6.5 crores and made expenditure for clearing and regularizing this land. Later the firm admitted 4 more partners from outside the two main groups viz. Sh. Ashok Gupta, Sh. Waryam Singh, Sh. Kapil Rajesh Kumar and Sh. Sunpreet Singh into the partnership. Just before admitting these new partners the land was got revalued at ₹ 193,90,60,000/- and the surplus amount of ₹ 154,39,90,435/- was credited to the accounts of the existing partners in their profit sharing ratio. The amount credited to the capital account of the assessee Sh. Sudhakar Shetty was ₹ 30,87,98,087/- During F.Yr. 2006-07, the assessee retired from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum amount in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of section 2(47). In the instant case, the assesse retired from the partnership firm and was paid the sum standing to the credit of his capital account, but for the re-valuation of the asset, the capital account of the partner would not have shown a sum of ₹ 35,59,84,050/-. To the extent of ₹ 30,87,98,087/- the capital account had been artificially increased just to ensure that the retiring partner was paid consideration standing to the credit of his capital account. Thus, it was a case where instead of quantifying the assessee's share by taking accounts on the footing of notional sale, parties had agreed to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners. Thus, the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm, if any . Thus, in this case also the retiring partner has assigned or relinquished his share or right or interest in the business of the partnership firm in the favour of the continuing partners. Therefore, the case of the assessee is squarely covered by the decision of Hon'ble ITAT Mumbai in the case of Sudhakar M.Shetty and therefore the amount of ₹ 5,24,47,943/- has been rightly taxed by the A.O as the income of the assessee. 5. In the case of Sudhakar M. Shetty out of the two groups of original partners only one group retired from the partnership. Still Hon'ble ITAT held that the amount received by the retiring partner will be taxed in his hand as capital gain. In the case of the assessee, the assessees have gone one step further. Both the original partners have retired from the partnership firm and the remaining partners are the 4 partners who were newly admitted. Therefore, this is a clear case where the assessees have used the colorable device described by the A.O in paras 3, 4 and 5 of her order to sell land owned by them to a set of people and have not paid any tax on the profit earned in this sale. In paras 4, and 4.1 to 4.2 Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jitendra Agarwal has been rightly held as taxable by Ld. CIT(A) in the hands of these two persons. 6. As regards the grounds taken by the assessee in the modified/additional grounds filed on 31.10.2011, my submissions are as follows: Ground no. 1: In this ground, the assessee has termed the orders of the lower authorities as against law, weight of evidence and probability of the case . In this respect, it is submitted that in view of the submissions made above and the discussion made in the orders of the A.O and Ld. CIT(A), the addition of the income of ₹ 5, 24, 47,943/- has been made in the hands of the assessee as per law and on correct appreciation of the evidences. Ground no. 2: In ground no. 2, the assessee has claimed that the amount of ₹ 5,24,47,943/- cannot be taxed as his income since this is capital account balance received on account of his retirement from the firm M/s Krishna Villa Apartment and also because the said firm was not dissolved and continued as a going concern. In this respect, it is submitted that the balance in the capital account is not the tax paid profit of the firm M/s Krishna Villa Apartment. Rather it includes an amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surplus of the revalued land. Thus, the facts of the case of the assessee and those of the case of Prashant Joshi are totally different. Ground no. 4: In this ground, the assessee has contended that Ld. CIT(A) has wrongly treated the amount of Rs. . 5,24,47,943/- as transfer of right of land by the retiring partners to the new partner of the firm and has held it as taxable under the head income from other sources. In this respect, it is submitted that as discussed in his order, Ld. CIT(A) has rightly held the sequence of events in this case as a colourable device to relinquish controlling interest in the land in favour of the new partners of M/s Krishna Villa Apartments by Sh. Pawan Lashkary and Sh. Jitendra Agarwal. Since these two persons have earned profit on relinquishment of the controlling interest therefore such profit needs to be taxed as their income only. Ld. CIT(A) has held this amount as taxable under the 'income from other sources' only to counter the persistent argument of the assessee that this profit cannot be taxed under any head of income under the IT. Act,1961. If Hon'ble ITAT desires, since the controlling interest in the land is a pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced revalued amount In this respect it is submitted that for A.Yrs. 2007-08 and 2008-09, the A.O had to pass the assessment u/s144 as the notices sent u/s 143(2) was refused. Thus these assessments were best judgement assessments made on the basis of the material on record. During these assessment proceedings the assessee firm did not explain the nature of the revalued value of the land and hence the AO rejected the claim of revalued value as expenditure as discussed in para 7 and 8 of her order for A. Y 2007-08(APB Pg. 166,167). The A.O rejected the claim of the assessee on the ground that the stock, as per accounting standard AS-2, is to be valued at cost or market price whichever is lower but the assessee valued it at a higher rate which was not allowable . The A.O had to make this disallowance because there was no explanation by the assessee firm on this issue. Therefore, it cannot be said to be a case of double taxation. Ground no: 6: In this ground the assessee has claimed that the assessment order u/s 153A is bad-in-law and void because the A.O has not considered the evidences and has made assessment based on the assumptions and conjectures. In this respect, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s could join together by pooling resources in the form of capital and expertise. One of the devices used by the assesses to evade tax on capital gain was to convert an asset held individually into an asset of the firm in which the individual was a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise. [Para 22] Such an introduction of capital asset as capital contribution by a partner upto 1.4.1988 did not result in incidence of capital gain. It was so held by the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W. The Supreme Court held that under the Act, where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of section 45 because an exclusive interest of the partner in the personal assets is reduced, on his entry into the firm into a shared interest. On such introduction of capital the partner s capital account is credited with the market value of the property. Such an entry does not represent the true value of the consideration. It is a notional value only, intended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that distribution of the capital assets on the dissolution of a firm would be regarded as transfer with effect from 1.4.1988. Therefore, instead of amending section 2(47), the amendment was carried out by the Finance Act, 1987, by omitting section 47(ii), the result of which was that distribution of the capital assets on the dissolution of a firm was regarded as transfer . 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 was deemed to be the full value of the consideration received or accruing as a result of the transfer. [Para 28] Thus, the Parliament brought into the tax net transactions whereby assets were brought into a firm or were taken out of the firm. Thus, section 45(4) covers cases where there is a dissolution of the firm and distribution of the assets of the firm by the firm to its partners. [Para 29] Dissolution and retirement are two different concepts. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners on dissolution or on retirement as falling within the ambit of section 45(4). The second situation with which the instant appeal was concerned was a case where the retiring partner was paid consideration in cash and he gave up his rights as a partner, including his rights over the assets of the partnership. There was divergence of views on the question as to whether there was any transfer at all in such situation by the firm in fvour of the retiring partner or by the retiring partner in fvour of the firm and its continuing partners. Thus the question whether a transaction would amount to an assignment or release of interest by the retiring partner in favour of the continuing partners or not would depend upon the way of particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum amount in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners the transaction would amount to a transfer within the meaning of section 2(47). In the insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of letter signed by Shri Arun Lashkari and addressed to Dy. Commissioner, JDA on 27-02-2006. In this letter, the request was made to issue a single unit patta in the name of the company. However, the name of the firm is mentioned in hand writing as M/s.Krishna Villa Apartment. From this, the ld. DR submitted that firm was in existence in Feb, 2006 and all the subsequent actions represent arrangements for evading the tax. 21.5 The ld. AR submitted a rejoinder and the contention as given in the rejoinder are as under:- Income has been defined in section 2(24) of Income Tax Act. In sub clause (vi) specifies that any capital gain chargeable under section 45 is income. Section 45 contemplates that profit or gains arising from transfer of capital assets effected in the previous year shall, save other wise provided be chargeable to income Tax under the head Capital Gain Therefore in order to charge tax on capital gain two conditions must be satisfied (i) there should be capital asset and (ii) There should be transfer of capital asset. Therefore any thing which is not a capital asset or which is not amount to transfer cannot be put to charge capital gain. Capital A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of partnership was used as a device to evade tax on capital gains to convert an asset held individually into an asset of the firm in which the individual is a partner and conversion of capital assets into individual assets on dissolution or otherwise, is necessary. 22. Partnership as a form of carrying on business evolved so that two or more persons can to join together by pooling resources in the form of capital and expertise. One of the devices used by assessee to evade tax on capital gain was to convert an asset held individually into asset of the firm in which the individual as a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise. In the case of the assessee there is no such findings of the lower authorities. 3. (Para 42). Hon ble Mumbai I bench of the Tribunal took the note of clauses of Retirement Deed as mentioned in Para 42. Cls. 2, 4, 5 and 7 of the deed of retirement clearly envisages an extinguishment of rights of the retiring partners and assignment rights over the partnership and its properties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were in firm; one partner relinquished his share in favour of other partner. The controversy was whether the firm sold its assets to the partner and whether the firm is liable to pay capital gain tax. In this cases retirement of all the old partners, continuation of business of firm by new partners, the taxability of capital gain was not held in the hands of retiring partners. 4 CIT Vs Gurunath Talkies 328 ITR 59 (Karnataka) Four partners were in firm; two more partner introduced as incoming partners and thereafter all the old four partners retired. New partners brought amount in the firm towards their capital contribution and old partners shared that amount minus WDV of assets. The controversy was whether there was transfer of assets of the firm to newly added partners. Held that provisions of section 45(4) are applicable and firm is liable to pay capital gain tax. In this cases retirement of all the old partners, continuation of business of firm by new partners, the taxability of capital gain was not held in the hands of retiring partners. 5 CIT Vs A.N. Naik Associates 265 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in this case has not approved the decision of Hon'ble Gujarat High Court in the case of CIT Vs Mohanbhai Pamabhai 91 ITR 393. Hon'ble SC confirmed the decision of Gujarat High Court in the case of Mohanbhai Pamabhai reported in 165 ITR 166 (SC) and reversed the decision of Bombay High Court given in the case of CIT Vs Tribhuvandas G Patel reported in 236 ITR 515 (SC). Further, the Bombay High Court has also changed its earlier view in its recent decision Prasant S Joshi Vs ITO reported in 324 ITR 154 (Bom). However, on the facts this case differs from the case of the assessee as in the case of the assessee, the retirement deed does not specify any consideration against relinquishment of his share on retirement from partnership. 8 CIT Vs H.R.Aslot 115 ITR 255 (Bombay) In this case, lump sum amount received by retiring partner for assigning and releasing his share in the partnership in favour of continuing partner was held to be liable for capital gain tax, following its earlier decision in the case of CIT Vs Tribhuvandas G Patel 115 ITR 95 2.16 In the rejoinder, the ld. AR submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in book value and revalued value was to be transferred to the capital account of the contuning partners i.e. assessee and Shri Jitendra Agarwal. In view of such take over agreement, the new partners were admitted.. 2.18 We had already mentioned that the clause 13 of the partnership deed dated 15-07- 2007 provided the partners to admit other partners on the terms and conditions as may be mutually agreed upon. Thus the terms and conditions was that stock in trade will be revalued and the merging firm will provide its expertise and financial position and they were to have benefit of development agreement. The development agreement was to build a housing complex/ commercial complex building in which both the firms would have right to some extent. In absence of any details of sharing of the built up area between two firms, we are unable to comment further. But it is clear that merging firm will get the benefit of the project. The share of profit to the erstwhile partners was to the extent of 50% in the firm constituted on 19-01-2007. As per clause 12of the partnership deed, it is mentioned that no partner shall mortgage or charge his share into partnership or any part thereof or ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nkar M Jethani 30% 3. Shri Arun Bansal 10% 4. Shri Meraj Un Nabi Khan 10% 5. Shri Naved Saidi 10% From the above, it is clear that profit sharing ratio of 12.5% of Shri Jitendra Agarwal was not transferred to the four partners of erstwhile M/s.Gold Dream Builders and Developer in case the intention was to transfer the land to the four persons of the erstwhile M/s.Gold Dream Builders and Developer then share of the erstwhile partners of M/s.Gold Dream Builders and Developer should have been increased by the share of Shri Jitendra Agarwal. The share of the assessee also stood increased from 37.5% to 40%. This fact indicate that the transaction of forming fresh deed is genuine and not sham. 2.22 The assessee also retired from the firm on 19-03-2007 and fresh partnership deed was executed and i.e. available at pages 49 to 53 of the paper book.. In this deed, it is mentioned that the assessee due to his non-availability for the business of the firm has given notice to the continuing partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 831 at 850 where referring to McDowell's case [1985] 154 ITR 148 (SC), the court observed :- The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act ; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case [1958] 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. This accords with our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year and debited in the purchases account. In case the market price is less than the cost price then anticipated loss can be taken into account but anticipated profit in shape of appreciated value of the closing stock is not brought into the account as no prudent trader will care to show the increase in the profit before actual realization. 2.27 Before us, the ld. AR has referred to assessment order of the firm for the assessment year 2008-09. The AO while making assessment for the assessment year 2008-09 in the case of the firm has not allowed deduction on account of revaluation relating to part of the eland which has been sold. Thus the AO in the case of the firm has taxed the profit on the basis of the cost price of the land and therefore, the anticipated profit on account of revaluation has not accrued to the partners to be assessed. 2.28 The Hon'ble Apex Court in the case of ALA firm Vs. CIT, 189 ITR 285 has referred to the decision of in the case of N. Muhammad Ussain Sahib and another Vs. S.N. Adbul Gafoor Sahib and others, AIR (37) 1950 758 at page 306 and mentioned that valuation of the assets durng the subsistence of the partner is an immaterial and can be ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi Sipani (ITA No.399/JU/07 dated 19-02-2008), (supra), that anything done by the firm and any entry made in the books cannot be taxed in the hands of the partner. Since partners are consistent entities and separate from the firm, any income of the firm cannot be taxed, per se, in the hands of the partner. The revaluation entry in the books of accounts of the firm is notional and unilateral act. As per the provisions of Section 10(2)(a), the partner s share in the total income of the firm is exempt. Therefore, the provisions of Section 45(4) relate to the case of partnership firm only and not that of its partners. Any amount credited in the capital account of a retired partner upon revaluation of assets of firm is not taxable as a capital gain as there is no transfer. In the case of CIT Vs. R Lingmallu (Raghukmar 247 ITR 801) (SC), it was held that there was no element of transfer of interest in partnership assets by the retired partner to the continuing partners and the amount received by him was not assessable to capital gains. In view of the above facts and the decision of the Hon'ble Supreme Court in the case of R Lungmallu Raghukumar (supra), we find no infirmity in the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset by the partner is transfer but the consideration as reflected in the books cannot be considered as a consideration for the purpose of capital gain. The Hon'ble Apex Court at page 522 has observed as under:- What is the profit or gains which can be said to accrue or arise to the assessee when lie makes over his personal asset to the partnership firm as his contribution to its capital ? The consideration, as we have observed, is the right of a partner during the subsistence of the partnership to get his share of profits from time to time and after the dissolution of the partnership or with his retirement from the partnership, to receive the value of the share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. When his personal asset merges into the capital of the partnership firm, a corresponding credit entry is made in the partner's capital account in the books of the partnership firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or the partner retires. It evidences no debt due by the firm to the partner. Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence was in that case that the asset was not stock in trade. As a result of series of transactions of reconstitution of the firm twice, the Hon'ble Karnataka High Court held that the Section 45(4) will be applicable and the difference was to be taxed in the hands of the firm. Here the same AO while passing the assessment order in the case of the firm has taken the book value before revaluation for taxing the profit arising from part of the sale of land in subsequent assessment year. 2.33 The ITAT Chennai Bench in the case of ACIT Vs. Goyal Dresses, 126 ITD 131 held that distribution of capital asset on dissolution of a firm or otherwise cannot be extrapolated to bring retirement of one partner into ambit of this Section. In the instant case, there has been no dissolution of the firm. The partnership deed that firm will continue and cannot be dissolved due to retirement of one of the partner. Partner can retire as partnership is at will. There is a retirement of one of the partner. The Hon'ble Madras High Court in the case of Siddharth Media Holdings Pvt. Ltd. v. DCIT 260 ITR 286 had an occasion to consider the claim of the assessee of capital loss on the ground that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit in the hands of the firm. It is true that in the case of retirement of one of the partner from the firm due to reconstitution of the firm, it is being held by the Hon'ble High Court that capital gain is liable in the hands of the firm. However, some of the Hon'ble High Courts have held otherwise. In the following decisions, the Hon'ble Apex Court held that in case two views are possible then the view favourable to the assessee is to be adopted. 1. CIT Vs. . Vegetable Products Limited. , 88 ITR 192, (SC) 2. Bajaj Tempo Limited. Vs. CIT, 196 ITR 188 (SC) 3. Kerala State Industrial Development Corporation Ltd. Vs. CIT, 259 ITR 51 (SC) 2.35 Before us, the ld. DR stated that in case the amount on revaluation to the extent of amount credited in the account of an assessee is not being confirmed then the same should be directed to be considered in the hands of firm u/s 45(4)of Income Tax Act. The revaluation is of stock and not of capital asset or investment. The AO while making assessment in the hands of the firm has not given credit for revaluation which means that the revenue is of the opinion that the increase in revaluation of stock will not be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e search should be video recorded. This will indeed add to the confidence of the taxpayer in the impartiality of the system. 2.38 The Finance Minister in the budget speech for the year 2003 stated that no confession shall be obtained during search and seizure operation. The instructions were followed by CBDT by issue of a circular on the lines desired by the Finance Minister. There can be an estoppel on the issue of the facts but there cannot be estoppel on the principle of law. It is not the case of the revenue that the assessee was not disclosing the amount received as a result of retirement from the firm. The assessee obtained the legal advice and was of the opinion that such revaluation is capital receipt which is not liable to tax. Hence, we feel that income cannot be added simply on the basis of surrender. The statement recorded u/s 132(4) can be rebutted by the assessee and the case of the assessee is that the amount is not liable to tax. 2.39 After considering various case laws relied upon by both the parties, we feel that the issue is to be decided in favour of the assessee because if two constructions are to possible then one has to adopt the construction which is ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
