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M/s. Sharadha Terry Products Ltd. Versus The Assistant Commissioner of Income Tax, Salary Circle-I, Coimbatore and Vica-Verssa

2016 (4) TMI 1004 - ITAT CHENNAI

Capital gain computation - retirement from the partnership firm - extinguishment of partner's interest in partnership assets - transfer u/s 2(47) - Held that:- In Additional CIT Vs. Mohanbhai Pamabhai (1971 (9) TMI 56 - GUJARAT High Court) it was held that when a partner retires from partnership what he receives is his share in the partnership, which is worked out and realized and does not represent consideration received by him as a result of the extinguishment of his interest in partnership as .....

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from time to time during the subsistence of partnership, or on dissolution of a partnership firm, or on his retirement from partnership to get the valuation of his interest in the partnership asset which remains after debts and liabilities of partnership. On retirement share is determined on taking accounts of notional sale of partnership assets and given to him what he received is his share in the partnership and not any consideration for transfer of his interest in the partnership to the conti .....

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ection 28(iv), there is no receipt of any value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession by present assessee. It is only by retirement from the partnership firm, the assessee received the impugned amount.

Regarding the application of Sec.28(v) as discussed in earlier, what the assessee has received on retirement is his share in the value of the business carried on by the firm. The share in the value of the bus .....

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eipt which is in the capital field cannot be brought u/s.28(v) of the Act This contention of the ld.D.R cannot have any merit.

Additional payment even if made to the retiring partner in excess of capital account is not in nature of any profit or income within the meaning of sec.28(va) of the Act and it cannot be brought to tax as business income.

There is a serious doubt in the minds of the AO as well as the ld.D.R regarding the taxability of the same in the hands of the as .....

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was accrued to the assessee on 06.02.2009 vide that Memorandum of agreement. More so, when the assessee is following Mercantile system of accounting as noted by the AO in its first page of assessment order at serial No.8, there is no force in the argument of the ld.D.R to hold that the said amount to be taxed in the assessment year 2008-09 - Decided in favour of assessee

Re-computation of the deduction u/s.10B - setting off the depreciation loss of non-eligible units against the incom .....

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to be allowed without setting off brought forward unabsorbed losses or depreciation from earlier assessment year or current assessment year either in the case of non STP or in the case of from some other undertakings, being so depreciation loss of other units cannot be set off against the income for the assessee from the export purpose. - Decided in favour of assessee

Reduction of miscellaneous receipts from the eligible profits in the computation of deduction u/s.10B - Held that:- Th .....

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Court’s decision in the case of Liberty Liberty India Vs. CIT reported [2009 (8) TMI 63 - SUPREME COURT ], rejected this ground. We do not find any infirmity in the order of the Ld.CIT(A).

MAT computation - computation of book profit by treating the receipt of ₹ 27.99 crores as short term capital gain - Held that:- This amount is straight away taken to General Reserve account and not appearing in the P&L A/c and there is no allegation that brought on loss account was not prepar .....

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entic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory o .....

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BER For The Assessee : Mr.S.Sridhar,Advocate For The Revenue : Mr.Debendra N.Kar, CIT, D.R ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: These are cross appeals are directed against the order of the Learned Commissioner of Income Tax(A)-II, Coimbatore dated 08.01.214 pertaining to the assessment year 2009-10. 2.1 The assessee challenged in its appeal with regard to the findings of the CIT(A) that the receipt of amount of ₹ 26.99 crores on retirement as a partner from the firm of M/s. S.J.M .....

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ducts. The assessee-company has made adjustments to the profit and loss account as per books by adding back inadmissible and deducting admissible items under the Income-tax Act, thereby claimed deduction u/s.10B in respect of Unit-2 (100% ECU) and Unit- 3 (weaving division-100% ECU) amounting to ₹ 49.27,77,765/- and arrived at a loss of ₹ 5,67,51,537/- in the computation statement. Hence the assessee-company filed the Return of Income under the provisions of section 115JB admitting t .....

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rm by relinquishing its right of 99% vides retirement deed dated 06/03/2009. On relinquishing, the company was compensated by a sum of ₹ 26.99 crores as a share in surplus in the said firm and this has been treated as capital receipt and taken to the capital reserve. After perusing a note filed by the assessee company dated 08/12/2011, the assessee company received compensation from the firm. It is found that apart from the share capital of ₹ 99,000/- contributed by the company in th .....

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10 crores was withdrawn during the financial year 2007-08. Further it was noticed by the AO that there had been no activities in the firm SJM Property Developers and no business or development had taken place till the date of retirement of the assessee company. The note dated 08/12/2011 also reveals that the firm had entered into joint venture agreement with Metro Corp, Bangalore for development of land purchased by M/s SJM Property Developers. Since Metro Corp, Bangalore did not undertake the .....

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time of retirement and the remaining partners continued in the firm for the assets and liabilities. Further, it was found that the assessee has taken a stand on the basis of the above note that there is no transfer of any property by the assessee-company at the time of retirement from the firm and so, compensation amount received cannot be taxed as income of the assessee-company. 3.2 In order to verify the claim of the assessee, further details like development agreement copies, retirement deed .....

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consideration of ₹ 52 crores. The assessee-company was asked to file a note on this. In response, assessee filed letter dated 19/12/2011 enclosing the following documents: i) Copy of property deed purchased on 06/02/2007 for SJM Property Developers for a consideration of ₹ 4 crores. ii) Memorandum of Understanding dated 06/02/2007 between the assessee-company, A.Srinivasan, S.Srinivasan, referred to as first party of this agreement and another firm MIs Metro Corp. Bangalore (copy of .....

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the firm as on 06/03/2009 has been filed, as stated in the retirement deed. iv) Copy of the bank account of SJM Property Developers with Vijaya Bank, R.S,Puram Branch, Coimbatore. Further the AO observed that Partnership firm deed dated 01.02.2007 was formed wherein assessee contributed a sum of ₹ 98,998/- as capital and Shri D.Srinivasan has contributed ₹ 1/-, Shri S.Srinivasan has contributed ₹ 1/-, Shri Keepak Krishnappa has contributed ₹ 500/- and Shri Uday Reddy has .....

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ngalore. As per Deed dated 06.02.2007 by partnership firm M/s. S.J.M. Property Developers, M/s. S.J.M. Property Developers has purchased property at Bangalore on 06.02.2007 for ₹ 4 crores measuring about 12 acre and 2 guntas. The said property was converted from agricultural to non-agricultural residential areas during the year 2005. The residential land owners entered into an agreement with M/s.Madhavi Assets Pvt. Ltd., on 19.05.2005 to develop residential township in the said land. Later .....

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ty Developers was relinquished in favour of M/s Metro Corp, Bangalore. As per this agreement dated 06.02.2007, assessee transferred 99% of the share capital in M/s. S.J.M. Property Developers and for that assessee has to receive ₹ 99,000/-. In the same deed in clause-2 on page-4 of the agreement, the assessee company agreed to advance ₹ 25 crores to M/s. S.J.M. Property Developers. As per clause-3 of the agreement, M/s Metro Corp has agreed to compensate the assessee -company a sum o .....

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admitted to the partnership firm with a contribution of ₹ 500/-. Accordingly, the balance sheet was drawn on 31.01.2009. The assessee company was contributed a sum of ₹ 2/- towards capital. Thus lead o total share capital contribution of the assessee company in the partnership firm is ₹ 99,000/- (99% of the share holding). Thus, once again Deed of retirement dated 06.03.2009. As per which outgoing partners has received ₹ 27 crores towards the amount lying in capital accou .....

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y M/s Metro Corp. The assessee pleaded before the AO that compensation received at ₹ 27 crores as capital receipt and not liable for taxation. However, the AO considered it as a revenue receipt in the hands of assessee received in lieu of relinquishment right in partnership firm i.e. M/s. S.J.M. Property Developers in favour of M/s Metro Corp, Bangalore. Even otherwise, according to the AO the amount of compensation received to be taxed as short term capital gains as interest in partnershi .....

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crores so as to determine the book profit u/s.115JB of the Act and added the same, though the assessee directly taken the same from General Reserve Account in balance sheet without routing through P&L A/c, the CIT(A) observed that in view of the Supreme Court decision in the case of Appollo Tyres reported in 255 TR 273, he allowed the claim and observed that the AO cannot consider this amount for the purpose of determining book profit. Against this Revenue is in appeal before us. 4. Before u .....

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9 and the account was settled on retirement and firm was continued by the remaining partners. According to the ld.A.R, the amount credited to the capital account of the assessee company being partner of M/s. S.J.M. Property Developers cannot be taxed in terms of sec.45(4) of the Act. 4(a)(i). He relied on the judgement of Kerala High Court in the case of Kunnamkulam Mills reported in 257 ITR 544 wherein it was held that: what is postulated under section 45(4) of the Income-tax Act, 1961, is that .....

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he does not transfer any right in the immovable property in favour of a surviving partner because he had no specific right with respect to the properties of the firm. What transpires is that the right to share the income of the properties stood transferred in favour of the surviving partners, and there is no transfer of ownership of the property in such cases. When a partnership is re-constituted by adding a new partner, there is no transfer of assets within the meaning of section 45(4) . 4(a)(i .....

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ount received by the retiring partner is not capital gain . 4.(a)(iii) Further, he relied on the judgement of Madras High Court in the case of V.Rangaswamy Naidu Vs.CIT reported in 31 ITR 711 wherein it was held that: the congress of rights which the assessee enjoyed under the partnership agreement of A&Co. and which he conveyed for a price to V.G.N. was a "capital asset" within the meaning of section 2(4A) of the Income-tax Act; (ii) what was payable under the managing agency agre .....

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he ld.A.R, the benefit derived by the assessee is a capital receipt and it cannot be liable to be taxed in the hands of assessee. According to the ld.A.R., Memorandum of Agreement on 06.02.2007 between the assessee, D.Srinivasan, S.Srinivasan and M/s Metro Corp, or agreement dated 07.03.2009 between M/s Metro Corp Infrastructure and the assessee to sell Villa in favour of Sharadha Terry Products Ltd., or Facility Agreement dated 07.03.2009 between M/s Metro Corp Infrastructure and assessee in fa .....

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The only relation between the assessee and M/S Metro Corp is that they were to act as developer of the property to be owned by the firm M/s. S.J.M. Property Developers. The said agreement was for a commitment by the developer and had nothing to do with any compensation as narrated by the AO. If he assessee proposed to retire from the partnership, as per the agreement cited, the AO has no basis for taking it as an evidence to hold that the amount received becomes taxable. The AO has to legally t .....

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neither Sec.28(va) or Sec.45 or Sec.46 or sec.56 are applicable to the facts of the case. Regarding non-valuation of assets when shri D.Srinivasan, Shri S.Srinivasan, and Shri Uday Reddy retired, to hold that the revaluation of assets when assessee retires is made believe story and ld.A.R submitted that revaluation of assets of the firm directly between partners and the AO cannot thrust upon the firm to revalue the assets on every time of retirement of the partners. Moreover, since revaluation .....

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e to avoid tax. According to him, the transaction was in normal course of the business operation of the assessee firm and it is a capital receipt in the hands of the assessee, not liable to be taxed in terms of sec.45(4) of the Act. He relied on the following higher judiciary pronouncements:- (i) Vana Silk Mills (P) Ltd., Vs. CIT reported in 191 ITR 647(SC) (ii) Marybong Kyel Tea Industries reported in 224 ITR 589(SC) (iii) CIT vs. Dynamic Enterprise reported in 359 ITR 83-FB (Karnataka High Cou .....

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the field of revenue account for investing ₹ 25 crores in M/s. S.J.M. Property Developers by way of loan and it is to be brought to tax. Further, he submited that the approach of assessee in revaluation of asset is not consistent and when on 31.01.2009 three partners were retired, there is no revaluation of assets. On 06.03.2009, only when the assessee was retired, there is revaluation of assets. He submited that if the provisions of the section 45(4) is not applicable, it should be asses .....

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ns to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute . 5(a)(ii) Further, he placed reliance in the case of CIT Vs.Manohar Glass Works reported in 232 ITR 302(All) wherein held that: the Appellate Tribunal being the final fact-finding body is under a legal obligation to record a correct finding of fact and as and when it feels some difficulty in recording a finding of fact on account .....

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re in the firm by retiring from the firm was surrendered al its rights therein, which were later to be enjoyed by the continuing partners. Its rights over the assets of the firm are not transferred free of cost, but for the consideration received from firm at ₹ 26.99 crores from the firm. Thus, the surrender of rights for consideration is a transfer within the meaning of Sec.2(14) of the Act. 5(a)(iii) He relied on the judgement of Bombay High Court in the case of CIT Vs. A. N. Naik Associ .....

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mily disputes amongst the partners and the genesis of the family arrangement was not disputed. The arrangement by way of division of the assets and business interests was clearly defined and was not an isolated transaction in respect of the firms. The finding by the Income-tax Appellate Tribunal that the deed of reconstitution by inducting a partner in the assessee-firm was not a device to avoid tax had to be upheld. However, the transfer of assets of the partnership to the retiring partners wou .....

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988, the assessee was entitled to the benefit thereof only with respect to the assets, he derived from the partnership firm and not to the excess amount. The excess amount was liable to tax as capital gains . 6.1 We have heard both the parties and carefully gone through the orders of the lower authorities and perused the Paper Book filed by the assesee before us including following documents : S.No. Date Particulars 1 01.02.2007 Partnership deed dated 01/02/2007 of M/s. S.J.M. Property Developer .....

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nivasan and Metrocrop represented by its Partners Deepak Krishnappa and Uday Reddy. 31.01.2009 Retirement cum Reconstitution of Partnership Deed - Admission of D.M.Devaraj & Retirement of D.Srinivasan, S.Srinivasan and Uday Reddy along with Balance Sheet as on 31.01.2009 before and after admission of a new partner. 8 06.03.2009 Memorandum of agreement of retirement from partnership by Sharadha Terry Products Ltd 9 07.03.2009 Agreement between Metrocorp and Sharadha Terry Products Ltd to sell .....

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and Uday Reddy along with Balance Sheet as on 06.03.2009 before and after retirement of Sharadha Terry Products Ltd. 13 31.03.2009 Annual Accounts for the year 2008 - 2009 6.2 At this point of time, it is appropriate to refer to certain provisions of the Act relevant to the facts of the present case. 6.2.1 Section 2(47) defines what is transfer and it reads as follows : '(47) "transfer", in relation to a capital asset, includes, (i) the sale, exchange or relinquishment of the asse .....

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t, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of or acquiring shares in, a cooperative society, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.' Explanation : For the purposes of sub-cls. (v) and (vi), "immovable property" shall have the same meaning as in cl. (d) of s. 269UA.' 6.2.2 Section 2(14) d .....

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would be property and, therefore, a capital asset within the meaning of the aforesaid definition. To this extent, there can be no doubt. The next question is as to whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under s. 45 of the Act. A look at how formation and dissolution of partnership was used as a device to evade tax on capital gains to convert an asset held individually in .....

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milarly, partnership assets were converted into individual assets on dissolution or otherwise. 6.2.2.2 Such introduction of capital asset as capital contribution by a partner up to 1st April, 1988 did not result in incidence of capital gain. It was so held by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The Hon'ble Supreme Court held that under the IT Act, 1961, where a partner of a firm makes over capital assets which are held by him to a firm .....

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determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate before hand what will be the position in terms of monetary value of a partner's share on that date. At that time when the partner transfers his personal asset to the partnership firm, there can be no reckon .....

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making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of s. 48 of the Act. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in s. 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. In coming to the above conclusion the Hon'ble Court relied on the decision of the Hon'ble Supreme Court in Adda .....

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led to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in, all the partners, and in that sense every partner was an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the prope .....

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rtnership is to entry upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim .....

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in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges." 6.2.4 Parliament with the avowed object of blocking this escape route for avoiding capital gains tax by the Finance Act, 1987, introduced sub-s. (3) to s. 45 w.e.f. 1st April, 1988. The effect of this was that the profits and gains arising from the transfer of a capital asset by a partner to a firm are chargeable as the partner's income of the previous year in w .....

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ip on dissolution amongst its partners and as to whether such distribution of assets would constitute transfer within the meaning of s. 2(47) of the IT Act as follows : "A partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or .....

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lution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of s. 2(47) of the Act. Further, it is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets tha .....

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In this sense there is no transfer of assets by the assessee (dissolved firm) to any person." 6.2.6 To plug this loophole the Finance Act, 1987, brought on the statute book a new sub-s. (4) in s. 45 of the Act, w.e.f. 1st April, 1988, which reads as follows : "The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other AOP or BOI (not being a company or a co-operative society) or otherwise, shall be c .....

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f a firm, body of individuals or other association of persons." Section 47 of the Act lays down which are the transactions not regarded as transfer for the purpose of s. 45 of the Act. 6.2.8 The Finance Act, 1987, w.e.f. 1st April, 1988, omitted this clause, the effect of which was that distribution of capital assets on the dissolution of a firm would w.e.f. 1st April, 1988 be regarded as "transfer". Therefore, instead of amending s. 2(47), the amendment was carried out by the Fin .....

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te of transfer was deemed to be the full value of the consideration received or accruing as a result of the transfer. 6.2.9 Thus Parliament brought into the tax net transactions whereby assets were brought into a firm or taken out of the firm. Thus s. 45(4) covers cases where there is dissolution of the firm and distribution of assets of the firm by the firm to its partners. 6.2.10 Dissolution and retirement are two different concepts. In the case of retirement, the retiring partner goes out of .....

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ment. This could be done either on the basis of settling amounts standing to the credit of his capital account or on a lump sum basis. There could be a second situation where the retiring partner is paid consideration in cash and he gives up his rights as partner including his rights over the assets of the partnership. This again can be done either on the basis of settling amounts standing to the credit of his capital account or on a lump sum basis. 6.2.12 In the first situation i.e., retirement .....

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firm and allotment of assets to retiring partners. The reconstitution had taken place pursuant to a family arrangement. The chargeability to capital gain tax in such circumstances was in issue before the Hon'ble Court. The Court dealt with the issue as to what would be the effect of partners of a subsisting partnership distributing assets to partners who retire from the partnership. Does the asset of the partnership, on being allotted to the retired partner/partners fall within the expressio .....

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tire. The firm then would not be liable to be taxed thus defeating the very purpose of the amending Act. The Court noticed that the position prior to the amendment by introduction of s. 45(4) by the Finance Act, 1987, was that there was no transfer of assets by the firm to the partners on dissolution 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 .....

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assets were brought into a firm or taken out of the firm. 6.2.13 Prior to the aforesaid decision, cases where on retirement, property was allotted to a partner by the firm in lieu of amounts payable to him were subjected to capital gains tax. In that scenario the assessees took a stand that retirement is also one form of dissolution of the firm because distribution of assets on retirement was not regarded as a transfer under s. 47(ii) of the Act. This was not accepted by Hon'ble Bombay High .....

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partners of the firm. The above decision in the case of A.N. Naik Associates (supra) however, treats distribution of assets of the firm to partners on dissolution or on retirement as falling within the ambit of s. 45(4). 6.2.14 The situation with which, we are concerned in this appeal is a case where the retiring partner is paid consideration in cash and he gives up his rights as partner including his rights over the assets of the partnership. There is divergence of view on the question as to w .....

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partner in a partnership is not an interest in any specific item of the partnership property. It is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or on his retirement from the partnership to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. When therefore a partner retires from a partnership and the amount of his share in t .....

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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 partner. The transfer of a capital asset in order to attract capital gains tax must be one as a result of which consideration is received by the assessee or accrues to the assessee. When a partner retires from a partnership what he receives is his share in the partnership which is worked out and realized .....

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; under s. 2(47) of the Act, by which relinquishment and extinguishment of any right in a capital asset is considered as transfer would also not apply when a partner retires from the partnership and there would be no transfer of interest in the partnership assets. The Hon'ble Supreme Court confirmed the decision of the Hon'ble Gujarat High Court in Mohanbhai Pamabhai's case (supra). Similar view was also expressed by the Hon'ble Supreme Court in the case of R. Lingmallu Raghukuma .....

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ax. However, the Hon'ble Bombay High Court in the following cases: (a) Tribuvandas G. Patel's case (supra ); (b) CIT v. H.R. Aslot [1978] 115 ITR 255(Bom); (c) N.A. Modi's case [1986] (162 ITR 420). 6.2.16 After considering the decision in the case of Mohanbhai Pamabhai held as follows in the case of Tribhuvandas G. Patel (supra): "A couple of things emerge clearly from the aforesaid passages. In the first place, a retiring partner while going out and while receiving what is due .....

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two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what 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 in consideration of the retiring partner assigning or relinquis .....

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decisions relied upon by learned counsel for the assessee before us and has reiterated that the question of taxability of an amount received by a partner on retirement from firm would depend upon mode in which retirement is effected as laid down by the Hon'ble Bombay High Court in the cases of Tribhuvandas G. Patel (supra) and N.A. Modi's case ( supra). Before the Pune Bench, the assessee had argued that the decision of the Hon'ble Bombay High Court in the case of Tribhuvandas G. Pa .....

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han Lal Kanodia's case (supra) had concurred with the said proposition propounded by the Hon'ble Bombay High Court in the case of N.A. Modi (supra). Thus the question whether a transaction would amount to an assignment or release of interest by the continuing partner in favour of the continuing partners or not would depend upon what 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, p .....

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Modi (supra). 6.2.19 In the case of Tribhuvandas G. Patel (supra), the assessee was a partner in the firm of KEW. The assessee had served on the other two partners a notice of dissolution of the firm w.e.f. 31st Dec., 1960, which was not accepted by the other partners. The assessee, therefore, filed a suit for dissolution and accounts, but, ultimately, the disputes between the parties were amicably settled out of Court and under a deed dt. 19th Jan., 1962, the assessee retired from the firm w.e .....

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apital gains tax. The Hon'ble Court took up for consideration as to what is the real nature of the transaction when a partner retires from the partnership. Does the transaction amount to any relinquishment of his share or interest in the partnership in favour of the continuing partners, or does it stand on the same footing as an adjustment of his rights that results upon dissolution of the partnership. On behalf of the assessee it was contended that retirement of a partner and quantification .....

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the firm. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while in the case of dissolution of the firm as such no more exists and the dissolution is between all the partners of the firm. Thereafter the Hon'ble Court held that where accounts are taken and the partner is paid the amount standing to the credit of his capital account there would be no .....

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e following clauses : (at pp. 117 and 118) "And whereas the said sums of ₹ 1,00,000, ₹ 50,000 and ₹ 7,50,000 in all aggregating to a total sum of ₹ 9,00,000 thus became payable by the continuing partners to the retiring partner in full and final satisfaction of all his claims in respect of his undivided half share in the business of the said partnership firm of M/s Kumar Engineering Works and all assets thereof and whereas the continuing partners have taken over the .....

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reby release the continuing partners and each of them from all covenants, agreements, matters and things in the here before recited partnership dated, the 8th Jan., 1951, and the supplementary agreement dt. 24th Aug., 1957, contained and in further pursuance of the said agreement and in consideration of the premises aforesaid and without making any further payment of any amount to him the retiring partner as beneficial owner doth hereby assign and release upto the continuing partners and each of .....

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rtner doth hereby release, grant, convey and transfer and assure all that his individual half share in all the several pieces or parcels of land to have and to hold the said undivided half share and the premises hereby granted as expressed so as to be unto and to the use of the continuing partners absolutely as tenants-in- common in equal shares forever ....... " 6.2.20 Having regard to the particular mode employed by the assessee and the continuing partners to effect and bring about retire .....

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f N.A. Modi (supra) and H.R. Aslot's case (supra) the facts and manner of retirement and payment of consideration were identical. 6.3 Now, we are concerned with receipt of ₹ 26.99 crores by the assessee from M/s. S.J.M. Property Developers on 6th day of March, 2009 vide retirement deed 06.03.2009. As per this retirement deed, the continuing partners settled a sum of ₹ 27.00 crores towards current account balance and ₹ 99,000/- in capital account lying for its account as on .....

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rs) situated at IIlathore Village, Kasaba Hobli, Devanahalil Taluk, Bangalore Rural District, the Party of the First Part, hoLding 98% of the Share Capital in the Firm M/s S J M Property Developers, shaLt surrender to the Party of the Second Part the entire 98% of Its holding, In the Capital of S J M Property Devetoper5, being the Capital / contributed by them, amounting to ₹ 99,000. 2. The Party of the First Part holding 99% of Share in the Partnership has agreed to advance a Loan of S .....

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the first part ₹ 99,000 (Rs ninety nine thousand). For ensuring and securing the aforeald repayments of the amounts to the Parties of the First Part, the Party of the Second Pasrt shall issue_post dated cheques for the requisite amount, from Vijaya Bank, Jatahatti Branch, Bangatore. The Party of the Second Part shall also issue a letter to Vijaya Bank, indicating that they will not issue a stop payrment instruction to the Bank, on the above mentioned cheques. The Party of the Second Part .....

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unts to the Parties of the First Part, the Party of the Second Part shall issue post / dated cheques for the requisite amount, from Vijaya Bank, Jatahlli Branch, Bangalore. The Party of the Second Part shall also Issue a Letter to Vijaya Bank, Indicating that they will not issue a stop payment instruction to the Bank, on the above mentioned cheques. compensation amount of ₹ 27,00,00,000. ... .... 4. The said compensation shall be paid by the party of the second part Irrespective of the pro .....

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,000 180th day - Rs, 16,00,00,000 The party of the second part shall take alt efforts to repay earlier than the days Indicated above. When the amount is paid earlier than the final dates, the post dated cheques related to the earlier payments shall be returned to the party of the second part. 6. The PARTIES OF THE FIRST PART who are the partners along with Si Deepak Knshnappa and Sri Uday Reddy of the firm SJM Property Developers hereby assure, covenant and confirm with the PARTY OF THE SECOND P .....

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rata basis from time to time. As far as the balance_30%: of the total sital area Is concerned, they will come forward either Individually or collectively to register the deeds of absolute sale and conveyance for and on behalf of the aforesaid firm, in favour of prospective purchasers of the sites in the Layout to be formed on the Schedule Property on thé receipt of the entire - consideration due from the PARTY OF THE SECOND PART under this agreement. 7. The Parties of the First Part and S .....

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99% in favor of the party of the second part. 9. Time is the essence of this agreement. 10. This agreement is prepared in duplicate and each one of them shall be treated as original. Sd/- S J M PROPERTY DEVELOPERS Sd/- For METROCORP Sd/- SHARADHA TERRY PRODUCTS LTD - PARTNER 6.4 The contention of the ld.D.R is that the assessee received the above amount of ₹ 26.99 cores on retirement, it should be taxed in the hands of assessee as a capital gain in terms of Sec.45(4) of the Act. The amoun .....

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annot be regarded as relinquishment by the retiring partner of its share or in the partnership firm and its asset in favour of continuing partners. 6.5 Further in the case of CIT Vs.Dynamic Enterprise reported in 359 ITR 83(Kar.) held that when retiring partner takes only money, towards value of its share and when there is no distribution of capital asset among partners, there is no transfer of capital asset and consequently no profit or gain is payable u/s.45(4) of the Act. 6.6 The Hon ble Andh .....

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the dissolution of a firm. 6.8 The learned AR submitted that the issue is covered in favour of the assessee by the decision of the Apex Court in Tribuvandas G. Patel v. CIT [1999] 236 ITR 515, wherein their Lordships held that any sum received by the assessee as his share of value of goodwill is not assessable as capital gains, wherein followed the decision in CIT v. B.C. Srinivas Setty [1981] 128 ITR 294(SC) and that even where a partner retires and some amount is paid to him towards his share .....

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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, 1961. In this view of the matter, we do not find any substance in the argument of the D.R. 6.9 It is worthwhile to mention herein that the Tribunal ,Hyderabad Bench in case of Smt.Girija Reddy Vs. ITO (52 SOT 113) has taken a contrary view by holding that lump sum payment received by a retiring partner ass .....

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decision of Tribunal ,Hyderabad in case of Doordana Khatoon Vs. ITO (52 SOT 113) was not placed before the Tribunal. That besides the aforesaid decision of Tribunal in the case of Smt.Girija Reddy was prior to the judgement of the Andhra Pradesh High Court in the case of Chalasani Venkateswara Rao Vs. ITO (25 Taxmann com.378). That apart, the amount received by the present assessee is on account of credit balance standing in capital account and current account and not for relinquishing or extin .....

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.Riyaz A.Shikh in 1969 of 2011 dated 26.02.2013 held that amount received by the retiring partner standing to the credit of his account not chargeable to tax in the hands of the partners. 6.9.1 In the case of N.Prasad,Executive Chairman, Matrix Laboratories Ltd., in ITA No.1200/Hyd./ 2010 dated 27.01.2014 observed as under: 13. We have considered the submissions of the parties and perused the materials on record. We have also carefully applied our mind to the decisions cited before us. Undispute .....

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to carry on the partnership business. As per the terms of the deed of retirement, the assessee was to be paid a lump sum amount of ₹ 1,25,00,000/-. The ITA no.l2oo of 2010 Shri N. Prasad ,Executive Chairman, Matrix Laboratories Limited. Relevant clause of the deed of retirement is extracted hereunder for convenience: it is agreed between the parties a that after taking into account the capital investment made by the retiring partner, the goodwill of the partnership business with regard to .....

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o tax the surplus amount of ₹ 25 Iakhs by treating it as a transfer of goodwill, the CIT (A) deleted the addition by holding that there is no transfer when a partner received his share in the partnership business. Keeping in view the aforesaid basic facts we will now examine the legal issue whether there at all is a transfer within the meaning of sec. 2(47) of the Act 15. The Hon ble Supreme Court in case of CiT vs. R. Lingamallu Raghu Kumar (supra) while considering the issue of excess am .....

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rix Laboratories limited. (supra) held that where there is a reconstitution of the firm consequent to the retirement of some of the partners it cannot be said that there was any transfer of any right in immovable property in favour of continuing partner. The larger bench of Karnatalca High Court in case of CIT vs. Dynamic Enterprises (supra) while interpreting section 45(4) of the IT Act held that in case of distribution of capital assets on the dissolution of the firm, there is a transfer of ca .....

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o have any right in the property which is so transferred. In other words, its right to the property should stand extinguished and the retiring partner acquires absolute title to the property. If we apply the aforesaid tests to the facts of the present case, the assessee received a lump sum amount of ₹ 1,25,000 from the partnership firm towards his share in the partnership. The partnership firm did not transfer any capital asset to the assessee to the extent by which the firm ceased to have .....

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to tax in view of the decision of Hon ble Supreme Court in case Tribhuvan Das G. Patel vs. CIT (236 1TR 515) and in case of CIT vs. R. Lingamallu Raghu Kumar (supra). While doing so, the Tribunal, Hyderabad Bench also held that in view of the decisions of Hon ble Supreme Court, judgments of Hon ble Delhi High Court and Hon ble Bombay High Court (supra) are not applicable. The Hon ble jurisdictional High Court in case of Chalasani Venkateswara Rao vs. ITO (supra) held as under: 20. In L Raghu Ku .....

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tion of the firm and that received on his retirement, since both of them stand on the same footing. 21. In P.H. Patel (supra), a Division Bench of the AP High Court noticed that the judgment m Mohanbhai Pamabhai (supra) was app the Supreme Court in Addl. CiT v. Mhanbhai Pamabhai [1987] 165 ITR166 following the judgment in L Raghukumar (supra) held that when a paer retires from a partnership firm taking his share of partnership interest, no element of transfer of interest in the partnership asset .....

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l gain. The appellant was correct in law in contending that the amount he received from Y. Kalyana Sundaram is towards the fufl and final settlement of his share and such adjustment of his right is not a transfer in the eye of law. It is a recognized method of making up the accounts of the dissolved firm and the receipt of money by him is nothing but a receipt of his share in the distributed asset of the firm. The appellant received the money value of his share in the assets of the firm. He did .....

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ther association of persons or body of individuals (not being a company or a co- operative society) or otherwise, 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 and, for the purpose of section 48, the fair market value of the asset 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. Thus it is clear that the legislature, even .....

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decision holding that the amount received by the partner on the dissolution of the firm or on his retirement stand on the same footing and no distinction can be drawn. The Hon ble High Court further referred to the decision of jurisdictional High Court in case of CiT vs. P.H. Patel (171 1TR 128) wherein it was held that when a partner retires from a partnership taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the co .....

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in the partnership and its asset in favour of the continuing partner will attract capital gain tax. The Income-tax Appellate Tribunal, Hyderabad Bench while coming to such conclusion had mainly relied upon the following decisions. i) CIT vs. Tribhuvan Das G. Patel (115 ITR 95) ii) CIT vs. H.R. Aslot iii) N.A. Moody vs. CIT (supra) iv) Mumbai Tribunal in the case of Sudhakar M. Shetty vs. ACIT (130 ITO 197) v) Shevanti Bhai vs. ITO (4 SOT 94) 17. However, it appears the decision of Income-tax App .....

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not for relinquishing or extinguishing his rights over any assets of the firm. The term goodwill, in our view has been loosely used in the aforesaid clause. Furthermore, a plain reading of the clause 4 will not in any manner indicate that payment of ₹ 25 lakhs was towards transfer of goodwill as 1TA no.1200 of 2010 Shri N. Prasad, Executive Chairman, Matrix Laboratories Limited., suggested by the Assessing Officer. Therefore, considering totality of facts and the circumstances of the case .....

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efore Bombay High Court whether Tribunal was correct in reversing this decision of CIT(A) and deleting the additions made by the AO towards long term capital gains on transfer of goodwill. Bombay High Court observed that Tribunal while holding that amount received by the partner on his retirement from partnership firm are exempt from capital gains tax, relied upon the decision in the case of Prashant S.Joshi Vs. ITO. In the case of N.A.Mody Vs. CIT(162 ITR 420) has followed the decision of the T .....

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ion of Supreme Court in the case of CIT Vs.R.Lingamallu Raghu Kumar(supra) and held that there is no capital gain tax on retirement. Further, in Additional CIT Vs. Mohanbhai Pamabhai (91 ITR 393)(Guj), it was held that when a partner retires from partnership what he receives is his share in the partnership, which is worked out and realized and does not represent consideration received by him as a result of the extinguishment of his interest in partnership assets. 6.9.3 Further, it was held that .....

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artnership, or on dissolution of a partnership firm, or on his retirement from partnership to get the valuation of his interest in the partnership asset which remains after debts and liabilities of partnership. On retirement share is determined on taking accounts of notional sale of partnership assets and given to him what he received is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. No element of transfer of int .....

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ssociates And Another reported in [2004] 265 ITR 346 (Bom), in our opinion it cannot be applied to the facts of the present case. In that case, the asset of the partnership firm was transferred to retiring partner by way of Deed of Retirement, it is based on this document and subsequent deeds of retirement of partnership that the order of assessment was made holding that the assessees are liable for tax on capital gains, in that context the Bombay High Court held that when the assets of the part .....

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hip firm, the assessee received the impugned amount. 6.9.6 Regarding the application of Sec.28(v) as discussed in earlier, what the assessee has received on retirement is his share in the value of the business carried on by the firm. The share in the value of the business is a capital asset which include goodwill and as such, such receipts are capital receipts in their hands as held by the Hon ble Supreme Court in the case of Additional CIT Vs. Mohanbhai Pamabhai (supra) and that cannot be consi .....

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Co-ordinate Bench of Chennai in the case of ACIT Vs. P.Shivakumar(HUF) in ITA No.1584 to 1590/Mds./2013 reported in (2014) 63 SOT 0091(Chennai)(URO) wherein held as follows:- Now the question to be considered is whether the Assessing Officer is justified in invoking Section 28(va) so as to treat this additional payment as business income It was held that the Revenue contention that the amounts received by the respondent-assessees were for the purpose of not carrying out any activity in relation .....

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carrying on business activities. Therefore, Section 28(va) is not applicable to the case of partners retiring from the business. That clause is more applicable to situations like non-competition agreement, etc. (Para 8, 9) There is no element of profit in such additional payments to the assessees. This is because the profit till the date of retirement has been worked out by the firms and the shares of the retiring partners have already been credited to their capital accounts. The capital account .....

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1. (Para 10) The additional payments made to the retiring partners were not in the nature of any profit or income within the meaning of Section 28(va) and were non- taxable capital receipts. The CIT (A) was justified right in holding that the amounts are not taxable. (Para 12, 13) Being so, in our opinion additional payment even if made to the retiring partner in excess of capital account is not in nature of any profit or income within the meaning of sec.28(va) of the Act and it cannot be brough .....

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ies of retirement and fresh partnership, but has to get over arrangement dated 06.02.2007 which were already in existence between the assessee company and Metro Crop Bangalore and the amount was actually received by the assessee from Metro Crop and not from firm M/s. S.J.M. Property Developers where the assessee is a partner. As seen from the argument of ld.D.R, this argument is totally contradictory to the earlier argument of the ld.D.R. There is a serious doubt in the minds of the AO as well a .....

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to tax in the assessment year 2008-09, even it is admitted that income was accrued to the assessee on 06.02.2009 vide that Memorandum of agreement. More so, when the assessee is following Mercantile system of accounting as noted by the AO in its first page of assessment order at serial No.8, there is no force in the argument of the ld.D.R to hold that the said amount to be taxed in the assessment year 2008-09 8. The next ground in the assessee s appeal is that the Ld.CIT(A) erred in sustaining .....

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ed by the Decision of Karnataka High Court in the case of CIT v. YOKOGAWA INDIA LTD. reported in [2012] 341 ITR 385 (Kar) held that exemption u/s.10A has to be allowed without setting off brought forward unabsorbed losses or depreciation from earlier assessment year or current assessment year either in the case of non STP or in the case of from some other undertakings, being so depreciation loss of other units cannot be set off against the income fo the assessee from the export purpose. Thus, th .....

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ll also qualify for deduction is unacceptable. Sec.10B(4) clearly states that profits derived from export of articles should alone be considered. Needless to say that the income attributable to an activity is one step removed from the income derived. We are of the view that Ld.CIT(A) placing reliance on Supreme Court s decision in the case of Liberty Liberty India Vs. CIT reported in 183 Taxman 349, rejected this ground. We do not find any infirmity in the order of the Ld.CIT(A). Hence this grou .....

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from disturbing the audited Accounts which is duly filed before the ROC as held by the Supreme Court in the case of Apollo Tyres Vs.CIT (255 ITR 273) wherein held that: The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, .....

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