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2016 (7) TMI 603 - ITAT AHMEDABAD

2016 (7) TMI 603 - ITAT AHMEDABAD - TMI - Disallowance u/s.14A - Held that:- In view of the decision of Hon’ble Delhi High Court in the case of Joint Investments (P.) Ltd. vs. CIT (2015 (3) TMI 155 - DELHI HIGH COURT ), we direct that the disallowance u/s.14A in the present case be restricted to ₹ 55,604/-, being the exempt income earned by the assessee. - Revision u/s 263 - taxability of the amount received by the assessee as partner of the firm, its share on the revaluation of the as .....

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eld that act of the AO of those respective assessees of considering the amounts received by them on revaluation of assets of the firm to be capital receipt, to be as erroneous and prejudicial to the interest of the Revenue. The Coordinate Bench of Tribunal had held that order of AO to be a proper and logical in view of various decisions of Apex Court and High Courts. Before us, Revenue has not placed any material on record to controvert the findings of ld.CIT(A). In view of the aforesaid facts a .....

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another by the Revenue, are directed against the separate orders of the Commissioner of Income Tax(Appeals)-III, Baroda dated 18/04/2012 & 31/5/2012 for the Assessment Years 2008-09 & 2009-10 respectively. 2. First, we take up assessee s appeal in ITA No.1359/Ahd/2012 for AY 2008-09. 2.1. The relevant facts as culled out from the materials on record are as under:- 2.2. Assessee is a company stated to be engaged in the business of investments in partnership firms, investing in shares and .....

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in Appeal No.CAB/III-145/10-11) granted partial relief to the assessee. Aggrieved by the order of ld.CIT(A), assessee is now in appeal and has raised the following grounds: The Appellant submits the following grounds, which are without prejudice to one another. 1. The orders of the lower authorities are arbitrary, not based on proper evidences, without proper reasons, invalid and also bad in law. 2. (a) On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income .....

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ainst the debit balance in other partnership firms, while considering the value of investments for the purpose of applying rule 8D. 2.3. Before us, at the outset, ld.AR submitted that the sole controversy in the appeal is with respect to disallowance u/s.14A of the Act. 2.4. During the course of assessment proceedings, AO noticed that assessee had exempt income from share of profit of ₹ 55,604/- and assessee had also claimed interest of ₹ 1,45,52,632/- on its borrowings. The assessee .....

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partners was altogether tax-free and in such a situation, no disallowance u/s.14A of the Act was attracted. The submission of the assessee was not found acceptable to the AO as he was of the view that provisions of section 14A of the Act are applicable in the case as assessee has earned exempt income. He thereafter, following the method prescribed under Rule 8D of IT Rules, worked out the total disallowance u/s.14A at ₹ 1,02,82,049/-. Aggrieved by the order of AO, assessee carried the matt .....

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n case of some other person. Besides this, even if the appellant's contentions are accepted, then as per the provisions of sub-section (3) of Rule 8D, only the total assets are to be decreased on account of excluding the increase on account of revaluation of assets but the total investments of the appellant in the firm would not be decreased on account of the fact that there is no such provision in Rule 8D. This will give rise to an absurd situation where the total investments would be more .....

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ld.CIT(A) for deleting the entire addition of expenses u/s.14A of the Act. As an alternate plea, ld.AR submitted that the assessee has earned tax-free income in the form of share of profit from partnership-firm of only ₹ 55,604/-, whereas the disallowance u/s.14A has been worked out at ₹ 1,02,82,049/- and thus the disallowance of expenses is far more than the exempt income. He therefore submitted that the disallowance u/s.14A of the Act cannot be more than the exempt income and for t .....

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ther hand, supported the orders of AO and ld.CIT(A). 3. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The issue in the present case is with respect to disallowance u/s.14A of the Act. In the present case, it is an undisputed fact that the assessee has earned exempt income of ₹ 55,604/- and the disallowance u/s.14A r.w.s.Rule 8D has been worked out at ₹ 1,02,82,049/- and thus the disallowance u/s.14A .....

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e tax exempt income is ₹ 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., ₹ 52,56,197/-. By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the t .....

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lowed. 4. In the result, assessee s appeal in ITA No.1359/Ahd/2012 for AY 2008-09 is allowed. 5. Now we take up Revenue s appeal in 1641/Ahd/2012 for AY 2009-10. 5. 1. Facts as culled out from the material on record are as under: 5.2. Assessee was a partner in two partnership firms namely Fine Developers with capital contribution ratio of the assessee being 20% and in Mahul Construction Corporation with capital contribution ratio of assessee being 20% vide partnership deed dated 25th Nov 2005 an .....

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ssessee, Assessing Officer (AO) noticed that there was increase of ₹ 58,43,56,036/- in the Reserves and Surplus account in spite of the fact that the assessee had not carried out any business activity during the year. The assessee was therefore asked to explain the increase in the Reserves and Surplus to which assessee inter alia submitted that the firms in which the assessee was a partner had revalued the land at its fair market value with the objective of arranging finance on the securit .....

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assessee from the partnership, assessee got from the firm what belonged to it and that increase in reserves and surplus account was on that account. The submissions of the assessee was not found acceptable to the AO as he was of the view that on retirement assessee had relinquished its rights in the property in favour of the continuing partners and assessee s account was settled. He also noticed that the two firms in which the assessee was partner and from which assessee subsequently retired, d .....

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received ₹ 58,43,56,036/- in aggregate which was in excess of its investment and the submission of the assessee of having not bestowed any benefit to the partner was also not correct. He was of the view that the whole transaction namely different entities joining together to form a firm, acquiring a property, revaluing the property at market rate, distribution of revaluation gains amongst the partners and the subsequent retirement of the partner from the firm was a ploy to avoid tax as th .....

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ion of its share of revaluation of assets without the firm being dissolved and that neither the firm nor partner of the firm has paid any tax on such gains and that it was never the intention of the Legislature not to tax even if there is a gain in the hands of partner without the firm being dissolved. He was thus of the view that the gains were liable for tax u/s 45 of the Act and accordingly held that aggregate amount of ₹ 58,43,56,036/- (Rs 45,81,16,036/- plus ₹ 12,62,40,000/-) re .....

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in M/s, Fine Developers and ₹ 1,50,10,000/- in M/s. Mahul Construction Corporation, whereas after the revaluation of the property, the assessee has actually received back ₹ 45,81,16,036/- from M/s. Fine Developers and ₹ 2,62,40,000/- from M/s. Mahul Construction Corporation in excess of its investment and then retired from the firm. Therefore, assessee is not correct in stating that "it is only a book entry and does not bestow any benefit to it", rather it is nothing .....

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id Stamp duty for the Conveyance .deed to the State Government and Income tax on the profit, (since as per the Valuer's report based on which revaluation was done the property was revalued substantially high as per prevailing market rate). c) The whole transaction i.e. different entity joining together to form a firm, acquiring a property, revalued as per prevailing market rate, gain in revaluation distributed among partners and subsequent retirement from the firm, is only a ploy to avoid ta .....

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distribution takes place only on dissolution of a firm, e) In this case there is substantial gain to the partner by way of distribution of its n revaluation of assets without the firm being dissolved and neither the firm nor the partner i.e. assessee has paid tax on such gain. It was never the intention of the Legislature not to tax, even if, there is a gain in the hands of partner without the firm being dissolved. f) The assessee has relinquished all its rights on the property on the firm vide .....

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27.05.2008. Finally, as per Clause (vi) of section 2(47), if there is an effect of transferring or enabling enjoyment of any immovable property by way of agreement or arrangement or any other manner whatsoever, then it falls under the definition of "Transfer". In this case, it is discussed and established that, there was an arrangement to transfer the properties to HDIL. As discussed in earlier paras specifically Para-10, HDIL was having full control over the properties and due to the .....

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. Fine Developers & ₹ 12,62,40,000/- from M/s. Mahul Construction Corporation) in excess of its capital investment is held as income under the head Capital gain and taxable as short term capital gain. 9.2 The reasons given by the AO for making this addition is required to be examined in the light of the submissions made by the appellant's AR as also the judicial decisions relied upon by him. The first point is to be considered is as to whether the amount received from the firm by t .....

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n deducted and then the share of the appellant in the net partnership asset has been determined. The appellant has received this amount representing his share in the net assets of the firm on retirement. 9.3 The Assessing Officer has held that the appellant has relinquished all its rights on the properties in favour of HDIL vide the deed of retirement dated 27.05.2008 and hence it had earned income which is assessable as capital gain in its hands. Similarly it can also said that there is extingu .....

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taxable as income in its hands. The first decision relied upon is in the case of Mohanbhai Pamabhai 91 ITR 393 (Guj.) which was subsequently approved by Hon'ble Supreme Court. The Jurisdictional High Court has held as follows in this decision: interest of a partner in the partnership is not 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 o .....

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for transfer of his interest in partnership to 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. It is true section 2(47) defines "transfer&q .....

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tires from the partnership. Therefore it was held that, even if goodwill be assumed to be capital asset within the charging provision enacted in section 45, there was, in the instant case, no transfer of interest of any assessee in the goodwill within the meaning of section 2(47) when the assessee retired from the firm. Each assessee, undoubtedly, received certain amount on retirement, but this amount represented his share in the net partnership assets after deduction of liabilities and prior ch .....

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der the charging provision enacted in section 45, profit or gain is chargeable to tax as capital gains only if it is profit or gain arising from the "transfer" of a capital asset. The transfer of a capital asset, in order to attract the capital gains tax, must be a transfer as a result of which consideration is received by the assessee or accrues to the assessee. If there is no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted .....

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shment, for then only it would be a transfer exigible to capital gains tax. What the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only in the surplus that the retir .....

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goodwill of the firm and no part of the amount received by any of the assessees was assessable to capital gains tax under section 45." 9.5 Above mentioned decision of the Hon'ble Gujarat High court has been approved in by the Hon'ble Supreme Court vide its decision reported in 165 ITR 166(SC). But the Bombay High Court in its decision in the case of N A Mody[1986] 24 TAXMAN 219 (BOM) has distinguished the decision in the case of Mohanbhai Pamabhai (Supra) by observing that : " .....

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an arbitrator. He made an award. Its substance was that two partners were to stand retired as and from a particular date and the business was to be carried on by the continuing partners who were to pay to the retiring partners a quantified amount in satisfaction of their respective shares and interest in the partnership and its assets. The award stated that the partnership "stands dissolved by mutual consent so far as concerns the said H and N.,. (hereinafter referred to as the retiring pa .....

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d read with the agreement was a dissolution of the partnership or a mere retirement of the two partners, permitting the remaining partners to continue the business of the firm. The real legal effect of the award read with the agreement would not be controlled by how the transactions had been described by the arbitrator or by the parties and, therefore, the use by the arbitrator of the word 'dissolution' was not conclusive. The overall effect of the award and the agreement clearly was tha .....

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n was not one of dissolution of partnership but of a retiring partner assigning in favour of the continuing partners his rights and interest in the partnership assets. 23. We have, in the instant case, held that the overall effect of the consent terms is that they provide for the retirement of the assesses from the partnership. There is in the consent terms a clause providing for the assignment of the assesses's share in the partnership and its assets to the continuing partners. The facts ar .....

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ue in the present case is not covered by the decision in the case of N A Mody (supra). The decision of Mumbai ITAT in the case of Sudhakar Shetty, [2011] 130 ITD 197 (Mum.) was also discussed with him. The AR has made following submissions in this regard: "1) During the course of the hearing on 17-05-2012 the decision in the case of Sudhakar M. Shetty v. Assistant Commissioner of Income-tax , Central Circle-13, Mumbai [2011] 130 ITD 197 (Mum.) was discussed at length. In the said decision i .....

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"31. In the case of retirement of a partner there could be two situations. In the first situation there can be a retirement of a partner from the firm and the firm might continue its existence and the retiring partner might be given assets in lieu of amounts payable to him on retirement. 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 consider .....

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unt of the retiring partner can be settled by giving the amount as per the capital balance in the books or can be given on lumpsum basis. 5) In the case of the present assessee cash is given to the retiring partner. On this aspect the H'ble ITAT observed in para 34 as under:-(Emphasis supplied) "34. The second 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 .....

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red to the decision in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj.) "35. In CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj.) the question before the Hon'ble Gujarat High Court was as to whether on retirement of a partner from a firm whether there is relinquishment of interest in partnership assets amounting to a transfer. The Hon'ble Gujarat High Court held: "The interest of a partner in a partnership is not an interest in any specific item of the partnershi .....

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mined 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 in the relevant provisions of the partnership law and it is this, namely, his share in the partnership which he receives in terms of money. There is in this tran .....

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ent of his interest in partnership assets. Hence, when an assessee retires from a firm and receives an amount in respect of his share in the partnership there is no transfer of interest of the assessee in the goodwill of the firm and no part of the amount received by him would be assessable to capital gains tax under section 45." 7) In para 36, H'ble ITAT also referred to the decisions of other courts wherein also it is held that on retirement the amount received by the partner is not t .....

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sion of the Hon'ble Guiarat High Court in Mohanbhai Pamabhai's case ( supra ). Similar view was also expressed by the Hon'ble Supreme Court in the case of CIT v. R. Lingmallu Raghukumar [2001] 247 ITR 801 following its decision in the case of Mohanbhai Pamabhai ( supra ). In CIT v. Kunnamkulam Mill Board [2002] 257 ITR 544 (Ker.). the Hon'ble Kerala High Court also expressed the view that where there is revaluation of assets of the firm on reconstitution of a firm consequent to r .....

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- 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, parties agree 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 .....

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the partnership and its assets in favour the continuing partners, -" 10), In para 45, the H'ble ITAT observed as under:- "45 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 transfer. If, on the other hand, the partner is paid a lump sum consideration for transferring or releasing his interest in the partnership assets to the continuing partners then there would be .....

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further refers to the fact that the assessee will not have any interest over the assets of the firm. Thus it was a case of lump sum payment 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. We are of the view that the manner of retirement in the case of the assessee is such that it can be regarded as assigning or relinquishing by the retiring partner of his share or right in the partnersh .....

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decided that it was a case of lump sum payment and hence liable to capital gain in the hands of the retiring partner. After stating in para that there are divergent views, the H'ble ITAT followed the jurisdictional Court's decision. At the same time it has not stated that the decision of the Gujarat High Court in the case of Mohanbhai Pamabhai is not a good law. 13) As against the above decision the facts in the case of the appellant are that notional sale was considered by taking valua .....

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Continuing Partners. After giving effect of the revaluation of the assets, the Balance sheet and Profit & Loss account at 1st April, 2008 have been prepared. The copy of the Balance Sheet and Profit and Loss Account of the firm for the year ended 31st March 2008, and for the period ended 30th April 2008 is annexed hereto and marked Annexure "A". In token of the acceptance of the said Balance Sheet and Profit and Loss Account, the Retiring Partners and the Continuing Partners have .....

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. CIT ri986) 162 ITR 420 (Bom). In that case the overall effect of the consent terms agreed upon was that they provide for the retirement of the assessee from the partnership. There is in the consent terms clause 15 providing for the assignment of the assessee's share in the partnership to the continuing partner. The clause reads as under:- "15.Order that the decree do operate as assignment of- the share, right, title interest claim and demand of the defendant in foe firm Little & C .....

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he assessee within the meaning of s. 2(47) and liability to capital gains tax exists. The court held that lump sum consideration received for assignment of his share in a firm by partner on his retirement is liable for capital gains tax as there is transfer within the meaning of s. 2(47). In the said decision reference was made of the decision in the case of Mohanbhai Pamabhai(Supra). In para 21 it is observed by the H'ble High Court that "For that matter, we may not that in Mohanbhai P .....

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um payment to the retiring partner. In view of the above the facts of the case of N.A. Mody (supra) is different from the facts of the case of the appellant. Hence the said decision cannot be applied to this case. 16) Reference is invited to the decision of the jurisdictional High Court in the case of COMMISSIONER OF INCOME TAX vs. ANANT NARHAR NIMKAR (HUF) T1997) 224 ITR 221 (Guj). It was also dealing with the amount received by the retiring partner. Paras relevant to the facts of this case of .....

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ot; "Thus, it is apparent that Court in Sunil Siddharthbhai's case (supra), reiterated the view taken in Malabar Fisheries' case (supra) that the distribution of the asset on the dissolution does not amount to a transfer to the erstwhile partners. If there is no transfer of assets to the partner concerned, the question of arising of a capital gain on transfer of a capital * assets would not arise." "The aforesaid decisions state the position of law clearly that what the pa .....

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r unless a legal fiction exists to that for that purpose and in the absence of any transfer, there cannot be any question of arising of any capital gains for taxable purpose. Relying on the decision in the case of Sunil Siddharthbhai vs. CIT (supra), the Supreme Court in Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) : TC 20R.865 affirmed the decision of this Court in Mohanbhai Pamabhai's case referred to above. This Court had also occasion to consider the issue whether on retireme .....

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R (Guj) 10 : (1992) 196 ITR 379 (Guj) : TC 20R.876 to which one of us (Hon'ble R.K. Abichandani, J.), was party, held that the amount received by the assessee on his retirement from the firm was not assessable and cannot be exigible to capital gains tax either under s. 45 or under s. 28(iv) of the Act, 1961, after referring to decision of this Court in Addl. CIT vs. Mohanbhai Pamabhai's case as affirmed by the Supreme Court in (1987) 165 ITR 166 (SC) : TC 20R.865. It must, therefore, be .....

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ISSIONER OF INCOME TAX f2005) 93 TTJ (Hyd) 753 : (2005) 93 ITD 15 (Hyd). H'ble Hyderabad ITAT held that when a partner receives his or her share in the assets of the partnership or even something in excess of such share, either on retirement or on dissolution of the firm, the same is not exigible to tax as capital gain under s. 45 r/w s. 2(47) as there is no transfer. In that case assets of the partnership were revalued and l/3rd of this value (his share in profit) was given to the retiring .....

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f the jurisdictional High Court which is upheld by the Supreme Court and hold that the amount in question cannot be brought to tax as capital gain under s. 45 r/w s. 2(47) of the IT Act as there is no transfer." 18) In view of the above the jurisdictional decisions need to be followed. In the case of Commissioner of Income-tax v. Mohanbhai Pamabhai [1973] 91 ITR 393 (GUJ.) the H'ble Gujarat High Court held that when a partner retires from a partnership and amount of his share in net par .....

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followed by the H'ble Gujarat high Court in the case of CIT v. Shreyas Chinubhai (1999) 237 ITR 358. Out of three questions framed by the H'ble High Court two are as under:- "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion( that the amount of ₹ 1,25,092 received by the assessee on retirement from the partnership firm of Arun Corporation (Estate Division) was not liable to tax under section 28(iv) of the A .....

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from the firm was not liable to tax under section 28(/V) and the question No.l is answered in the affirmative against the revenue. In para 45 it held that "- In view of this settled legal position, we are of the opinion that the Tribunal was right in concluding that the said amount was not liable to capital gain tax and question No. 2 is, accordingly, answered in the affirmative against the revenue." 20) Thus in view of the decision of the jurisdiction Courts on similar facts and consi .....

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king accounts on the footing of notional sale and no payment of lump sum amount in consideration of the retiring partner assigning or relinquishing its share or right in the partnership firm's assets in favour of the continuing partners has been made, hence the decisions in the case of N. A. Mody(supra) and Sudhakar Shetty (supra) are not applicable in this case. I agree with these contentions. In the present case, the mode of determining the shares of appellant at the time of its retirement .....

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ssession of the entire properties of the firm as a going concern. Lastly the deed also provided that the amount determined in the deed to be paid to retiring partners was in lieu of all their rights, interest and share in the partnership firm and each of them voluntarily gives up his right, title and interest in the partnership firm. Thus the deed of retirement and mode of computation of amount to be paid to retiring partners are similar in the current case as well in the decision in the case of .....

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decisions of the jurisdictional High Court, it is held that the amounts received by the appellant on its retirements from these firms are not taxable in its hands. 10. This brings us to the second issue as to whether the amounts received by the appellant on retirements can be taxed in its hands on the basis of decision in the cases of Sunil Sidharthbhai and Dilip Hate (Supra) as held by the AO. The AO has first quoted excerpts from the decision of Hon'ble Supreme Court in the case of Sunil .....

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irm M/s fine developers was constituted on 25.11.2005 with the appellant along with 3 other persons partners. This firm purchased a property situated at Kasaiwada ,Kurla (East) at a cost of ₹ 29,50,00,000 during the FY 2005-06. The appellant's share in the profit and loss was 20%. In the subsequent years, some more expenses were incurred relating to the acquiring of the said property and as on 31.3.2008, the cost was shown as ₹ 39,27,19,546. ii) By another deed dated 06/07/2007 a .....

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Int. on partners' capital 2,74,01,621/- FY 05-06 and 06-07 Interest on loans 1,98,77,246/- FY 06-07 and 07-08 Miscellaneous expenses 7,61,771/- FY 05-06 06-07 and 07-08 b) M/s Mahul Construction Corporation: i) This firm was constituted on 9.11.2005 with 3 partners. The appellant was not an original partner of this firm. ii) This firm purchased a property situated at LU Gadkari Road, Mahul, Mumbai on 23.11.2007 for a consideration of ₹ 4,67,00,000. iii) The appellant along with 2 other .....

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ss of 20%. This firm made payments for purchase of the property and also made payments to workers as compensation during the period 25.11.2007 to 06.07.2007 after which HDIL was inducted as partner. Even after this, the appellant's share in the profit and loss of the firm remained unchanged. Thus the original firm continued for about 19 months before HDIL was inducted as a partner. Moreover, it was the firm which purchased the property and made payments for compensation to workers etc. Thus, .....

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DIL was inducted as a partner on 06.07.2007 but at that time too, the appellant's share remained at 20%. Thus again the constitution of this firm cannot be held to be a sham transaction. Also, the property of this firm was never the individual property of the appellant. In fact the appellant was not even a partner when the property in question was purchased by this firm. 10.3 Thus these are not the cases where the appellant had acquired a property 1st. and then transferred it to a partnershi .....

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he property in the form of development agreement as capital. After this within a short span of 11 days, he had retired from the firm by taking his capital and also some other payments. Even the stamp paper for executing the retirement deed was purchased on the same day as the date of formation of the firm. Under these peculiar circumstances, the ITAT held that constitution of the firm and retirement of the assessee were sham transaction and it was a case of sale of development right by the asses .....

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w coming to the reliance placed by the AO on the comments of the Hon'ble Supreme Court in the case of Sunil Sidharthbhai (supra), it is pertinent to note that after this decision, section 45 of the IT. Act, 1961 was amended by Finance Act, 1987 w.e.f. from 01.04.1988 vide which sub-section 3 and sub-section 4 were inserted. The intention behind such amendment has been explained by CBDT vide circular No. 495 dated 22.09.1987. The relevant parts of this circular are reproduced below: "Cap .....

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de the scope of capital gain taxation, The rationale advanced by the Court is, that the consideration for the transfer the personal asset is indeterminate, being the right which arises or accrues to the partner during the subsistence of the partnership to get his of the profits from time to time and on dissolution of the partnership to get the value of his share from the net partnership assets. Finance Act, 1987 24.2 With a view to blocking this escape route for avoiding capital gains tax, the F .....

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s a result of the transfer of the capital asset. 24.3 Conversion of partnership assets into individual assets on dissolution or otherwise also forms part of the same scheme of tax avoidance. Accordingly, the Finance Act, 1987 has inserted new sub-section (4) in section 45 of the Income-tax Act, 1961. The effect is that profits and gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise shall be chargeable as the firm's income in the previous year .....

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tances i.e. conversation of asset held individually into an asset of firm and conversion of partnership assets into individual assets on dissolution or otherwise. In the present case, first type of scheme is not involved, but the second type is involved. If the allegations of a colourable device is to be levelled in this case, then it has to be levelled in the hands of the firm on account of the fact that the firm's property has been transferred to the hands of some partners by paying the re .....

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y high as per prevailing market rate). Thus the tax liability on account of transfer of the properties of these firms to HDIL can arise in the hands of the firms' only and not in the hands of the partners. 10.6 Further, the AO has stated in his order that unless and until the firm is dissolved, the amount of distribution of any benefits from the firm cannot be taxed in the hands of the firm. But this is a legally incorrect statement. The expression "otherwise" in the sub-section 4 .....

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ehysden generis with the expression "dissolution of a firm or body or association of persons". The expression "otherwise" has to be read with the words "transfer of capital assets" by way of distribution of capital assets. If so read, it becomes clear that even when a firm is in existence and there is a transfer of capital assets it comes within the expression "otherwise " as the object of the Amending Act was to remove the loophole which existed whereby c .....

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e will, therefore, have to question no. 3 by holding that the word "otherwise" takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership transferring assets in favour of a retiring partner". 10.6.1 This decision of the Bombay High Court has been followed by Hon'ble Karnataka High Court in its decision in the case of CIT vs Gurunath Talkies, 189 Taxman 171 (KAR). The facts of this decision are identical to the present case. In thi .....

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ot;......On the ^introduction of sub-section (3) and (4) by the Finance Act, 1987, clause (ii) of section 47 has been expressly omitted removing the protective umbrella. The legislative intent is quite clear and in our opinion, this is good enough to take case of any situation where in effect there is transfer of capital asset by any mode and to ensure the gain being taxed, the section has been amended and this is the view taken by the Bombay High Court..." While deciding the aforesaid case .....

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nother in December, 1994 and entire assets retained in the hands of the newly added two partners, result in transfer of assets of the firm in the sense that the assets of the firm as had been held by the erstwhile partners are transferred to the newly added two partners though all along the assets all along the assets of the firm continued in the hands of the firm….". 10.6.2 In the present case, the assets of the firm have been revalued and the liabilities have been deducted from the .....

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aluation, and the respondent be paid his share of value in money, then such an agreement amounted to distribution of the assets of the firm on dissolution. This decision has been relied upon by Hon'ble Mumbai Bench of ITAT in its decision in the case of Vijay Talkies, 16 SOT 370 (Mumbai). Facts of the present case are also identical to these decisions as after the revaluation of the assets on notional sale basis, some partners have taken cash and retired from the firm and balance partners ha .....

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that the AO of M/s. Fine Developers ,ITO 25(3)(4), Mumbai has passed the assessment order under section 143(3) for the assessment year 2009-10 on 15.12.2011. In this order, the ITO has taxed the profits and gains arising on account of distribution of capital asset in the hands of the firm. For this, he has placed reliance on the decisions in the case of P.N. Naik (Supra) and Gurunath Talkies (Supra) and has held as follows:- "14.3.3. The above mentioned case of Gurunath Talkies is squarely .....

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of control over the usage of land is kept in mind, there was no need to retire M/s. Sapphire Land Development (P) Ltd. from Fine Developers as this entity was effectively controlled by HDIL or its group concerns/persons. (iii) At the start, the land was with M/s. Fine Developers with its four partners - M/s. Suraksha Developers (P) Ltd. M/s. Vision Finstock (P) Ltd. M/s. Nisha Capital Services (P) Ltd. M/s. Sapphire Land Development (P) Ltd. However, at the end the land was effectively with M/s .....

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ital gain tax on the transaction of the "Kurla Land". In order to avoid the payment of legally due tax, the whole sham arrangement was made by the assessee-firm with the help of its old and new partners, So it is held that provisions of section 45(4) of the Act read with section 2(47) of the Act is attracted in the case of the assessee." 11. From these discussions it is clear that even if a sham transaction is to be alleged, it can be alleged in the hands of the firms and not in t .....

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appellant from this firm, namely M/s Sapphire Land Developers Pvt Ltd, being in the same hands etc are relevant for the purposes of assessment of these firms and not for the assessment of the appellant. 12. Hence on the basis of above discussions, it is held that no part of amount received by the appellant on its retirement from the firms is taxable in its hands as short term capital gain and accordingly, these grounds of appeal are allowed and the additions made by the AO are directed to be de .....

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ble Supreme Court in the case of Mcdowell reported in 154 ITR 148. 2. On the facts and in the circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer. 6.1 Before us, Ld DR took us through the various observations of AO and supported the order of AO. Ld AR on the other hand reiterated the submissions made before AO and CIT(A) and further submitted that in the case of two other partners of the firm namely, Nisha Capital Services Pvt. Ltd. and Suraksha .....

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