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2016 (5) TMI 326 - ITAT MUMBAI

2016 (5) TMI 326 - ITAT MUMBAI - TMI - Taxability of amount withdrawn by the partner from the firm - Applicability of section 2(47) - receipt on relinquishment of Right as Long Term Capital Gains - Held that:- On the reconstitution of firm, the profit share of assessee got reduced to 0.25%. The assessee (along with other two partners i.e. Smt. K Amin and Shri D Amin), on reconstitution, chose to withdraw the amount lying to his credit. The assessee continued as partner and had not retired from f .....

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hands of each of the partners. We found that even after introduction of the new partners and revaluation of the asset the partnership firm was continued and the assessee was continued as partner in the same firm and land remained the assets of the firm. Merely because the partners have withdrawn money from the firm does not constitute consideration for proportionate reduction in their share in firm. There was neither a transfer of assets of the firm to the partner nor the assets ceased to be ow .....

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f assessee - ITA No.5426/Mum/2012, ITA No.5427/Mum/2012 - Dated:- 23-3-2016 - SHRI R.C.SHARMA, AM AND SHRI AMARJIT SINGH, JM For The Revenue by : Shri Deepkant Prasad For The Assessee : Shri Rajiv Khandelwal, Shri Neelkanth Khandelwal ORDER PER R.C.SHARMA (A.M): These are appeals filed by the revenue against the order of CIT(A), Mumbai, for the assessment year 2008-2009. 2. Common grounds taken by the revenue in both the appeals reads as under :- 1. "On the facts and in the circumstances of .....

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the capital account of the partners in the ratio of their profit sharing. Assessee withdrew the amount from his capital account. The AO treated the revaluation of the assets as extinguishment of the assessee s right in the land and, therefore, the difference in revalued price was treated as capital gains in the hands of the partner by taking shelter of provisions of Section 2(47) of the I.T.Act. By the impugned order the CIT(A) deleted the addition after observing as under :- 5.3 I have conside .....

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t AO has not correctly appreciated the following imperatives while drawing conclusion: That appellant continues to be partner in the firm. Thus, appellant was NOT an erstwhile partner. Partners in firm have contractual rights and there are no 'shares' or 'rights' which can be transferred. Partners are admitted or retired or rights in profit sharing are realigned. None of these events is transfer u/s 2(47). AO further erred in treating the so called 'transfer of right in firm& .....

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proportionate reduction in their share in the firm. there was neither a transfer of right in firm nor land. The asset continued to be owned by the firm. Absence or presence of certain accounting entries would not change the substance of the transaction, particularly if a compound entry is passed instead of two separate ones No goodwill was accounted or paid so anyway no consideration arose for that. Withdrawal of partner's capital even if amount stands increased due to revaluation, is not i .....

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bmission given to AO. The AO cannot ignore submissions given by appellant. 4. The legal position on partner's rights and consideration received on retirement is well settled by Supreme Court in Commissioner of Incometax v. R. Lingmallu Raghukumar 247 ITR 801 (SC) that when a partner retires from a 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 .....

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and consequent reduction in the share ratio of present partners do not entail any relinquishment of their rights in the partnership property. On introduction of new partners, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses, if any, of the partnership business. When any new partner is introduced into an existing partnership firm, the profit sharing ratios undergo a change, which does not amount to transfer as defined under s. 2 .....

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ld that in context of the Act for taxability of income, the identity of the firm and that of the partners are separate and distinct. There is no provision in the Act for levying capital gains on consideration received for reduction of share in the firm. Further that contention of the tax department that the transaction is a colourable device had no substance. Taxation is not a matter of contract - and the same can be levied only under the authority of law (Article 265 of the constitution). Since .....

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" which he retracted latter. Comprehension of income tax 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 col .....

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n the matter of law, certainly, cannot form the basis of taxation. Reliance is placed on the following decisions:- (1) Commissioner of Income Tax Vs Mr.P.Firm, Muar (56 ITR 67)(SC), CIT vs Manik ( 74 ITR 1 (SC). In this case the assessee had given an undertaking to file a return for a year other than the year under appeal before ITAT. The Supreme Court disapproved enforcing such an undertaking. The case of Tribhuvandas G Patel is no longer good law because the same was reversed by SC reported in .....

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the business on that day. In para 27 of the order, it was (Bombay) held that on retirement of partner, the partner got his share, it was held that there was no extinguishment of right. 5. Thus, based on facts which are already on record and elaborately dealt with by the AO and evaluating them as per provisions of the Income Tax Act 1961 and by placing reliance on the judicial precedents above, I hold that reduction of partner's shares in profit is not relinquishment of rights in favour of ne .....

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(Karnataka), High Court of Karnataka, dtd 12.3.2012 held as under: Consideration received by existing partners for reduction of their share in the firm on admission of new partners not taxable as capital gains. Where 4 new partners were admitted to the firm and they introduced ₹ 3.50 crores as their capital contribution and the same was withdrawn as drawings equally ( ₹ 1,16,666.67 each) by the three existing partners whose shares were reduced as a result of admission of new partner .....

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Act although not so recognized by the Indian Partnership Act,1932. b) Since the Act treats a firm and its partners as separate entities, the landed property of the firm is that of the firm and not of its partners. There is no question of existing partners relinquishing any share therein to the new partners admitted. One can relinquish only what belongs to him and c) The existing partners did not retire from firm on admission of new partners but continued as partners albeit with reduced shares. .....

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rtners were admitted consequently the firm was reconstituted on 20/08/2007. The firm s constitution is as under :- S.No. Name of partner Share of profit before reconstitution Share of profit after reconstitution 1. Shri Parshuram M Amin 25% 0.25% 2. Smt. Kusumben Amin 50% 0.50% 3. Shri Dinesh P Amin 25% 0.25% 4. ABG Shipyard Ltd. Nil 98% 5. ABG international Pvt. Ltd. Nil 1% The major asset in the firm was land. The land was revalued to ₹ 5,31,36,000/- and such revalued amount credited to .....

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is credit. The assessee continued as partner and had not retired from firm. As per MOU between parties a goodwill account was to be created. However, after partnership deed no goodwill was credited or paid was not done. As per the partnership deed the rights and duties of partners have been decided interse. The AO treated the revaluation of asset and introduction of new partners as estinguishment of assessee s shares in the asst of the firm by treating the same as transfer within the meaning of .....

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