TMI Blog2016 (7) TMI 603X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived 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 and in the absence of any contrary binding decision placed by Revenue, we are of the view that no interference to the order of CIT(A) is called for - Decided against revenue - I.T.A. No.1359/Ahd/2012, I.T.A. No.1641/Ahd/2012 - - - Dated:- 7-7-2016 - SHRI R.P. TOLANI, JUDICIAL MEMBER And SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER For The Assessee : Shri S.N. Soparkar, AR For The Revenue : Shri R.I. Patel CIT-DR ORDER PER SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER : These two appeals, one by the Assessee and 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for disallowing expenses u/s.14A in view of the fact that assessee had exempt income and had also paid interest to which assessee inter-alia submitted that the share of profit was in the nature of business income and though the same was exempt in the hands of partners but was taxable in the hands of the firm and, therefore, it was not correct to conclude the share income in the hands of 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 matter before the ld.CIT(A), who upheld the order of AO by holding as under:- 5.4 I have considered the facts of the case as also the observation of the AO. In this case, revaluation of assets has been made by the firm of its assets. The appellant is a partner in this firm and no revaluation of assets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of the Act which has been worked out is much more than the exempt income earned by the assessee in the form of dividend. We find that in the case of Joint Investments (P.) Ltd. vs. CIT(supra), the Hon ble Delhi High Court while considering disallowance u/s.14A and when the disallowance worked out was more than the exempt income has observed as under:- 9 . .The third, and in the opinion of this Court, important anomaly which we cannot be unmindful is that whereas the entire 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the by passing the entries, no income has accrued to the assessee, no benefit was bestowed on the assessee and further it was capital in nature. It was further submitted that on retirement of the 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, did not carry out any development work till the date of revaluation of the property. AO also noticed that against the investment of ₹ 12,50,01,841 in M/s Fine Developers and ₹ 1,50,10,000/- in Mahul Construction Corporation, after revaluation of the properties, assessee actually received ₹ 45,81,16,036 from Fine Developers and ₹ 12,62,40,000/- from Mahul construction corporation and that the assessee had against the actual aggregate investment of ₹ 14,00,11,841/- had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n stating that it is only a book entry and does not bestow any benefit to it , rather it is nothing but sham transaction to evade tax. b) Though the property was purchased in the name of the firm, there was never any intention to carry out business activity, no substantial or real business was carried out by the firm till retirement, rather the purpose of formation of a firm was only to purchase sale of the property through a device to evade tax. Had the property purchased were disposed off by the firm, before the retirement by some partners including the assessee, the firm would have paid 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 tax on the transaction made by the assessee company. d) The assessee is very much aware ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36/- from M/s. 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 the appellant on its retirement can be taxed as income in its hands or not. From the details in the assessment order as well submitted by the appellant, it is seen that on the date of retirement of the appellant, the balance sheet of the firm has been drawn and for this purpose the assets of the firm in the form of lands have been revalued on notional sale basis. The basis of revaluation in this manner has also been reproduced on page 27 of the assessment order. From this the liabilities have been 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded meaning to the term transfer by including within its scope and ambit two kinds of transactions which would not ordinarily constitute transfer in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But, even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires 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 charges and it was received in satisfaction of his share in the partnership; each of them realised his share in the partnership when the amount coming to his share was paid over to him. If there was no transfer of interest of any of the assessees in the goodwill within the meaning of section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 : 21. For that matter, we may note that in Mohanbhai Pamabhai's case (supra) there was a document in the form of minutes under which the partner retired, but it contained no assignment of his interest to the continuing partners: 22. At this stage we may note the judgment of this Court in CIT v. H.R. Aslot [1978] 115 ITR 255, the facts of which have much affinity to those before us. There was a partnership deed which contained an arbitration clause. Disputes having arisen, they were referred to 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 dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exists. The first question must, therefore, be answered in the negative and in favour of the revenue. 9.6 During the course of the appellate proceedings, the AR was asked to explain as how the issue 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 it is held that on retirement of a partner from the firm the amount received by him as lumpsum consideration is liable to tax in the hands of the retiring prtner. In the following paras the said decision of the H'ble Mumbai ITAT is discussed. 2) In para 20 of the said decision the H'ble ITAT has held that the share or interest of a partner in partnership and its assets is a property and therefore it is a capital asset. 3) Para 31 of the said decision reads as under: - ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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 the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners . His share in the partnership is worked out by taking accounts in the manner prescribed 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 transaction no element of transfer of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has summarised the conclusion on the issue as under:- (Emphasis supplied) 38. ------ 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 favour of the continuing partners, the transaction would amount to a transfer within the meaning of section 2(47) of the Act . 9) In para 41 of the said decision the H'ble ITAT has given its finding on the facts of the case as under:- 41--- Thus it was a case where instead of quantifying the assesse's share by taking account on the footing of notional sale, parties agreed to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour the continuing partners, -- 10), In para 45, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale was considered by taking valuation of the assets. (Valuation reports dated 5-4-2008 PB pages 219-228). The amount was accordingly credited to the account of the respective partners. Relevant clause no. 3 in the partnership deed dealing with the valuation is as under:- (PB 107-108. 129-130) The account of the Retiring Partners have been amicably settled . For settling the accounts of the Retiring Partners, the assets of the partnership have been revalued at a value as mutually agreed between the Retiring Partners and the 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 put their signatures to the said Balance Sheet and Profit Loss Account. Thus, what is paid to the retiring partner was the exact amount to their credit. This is not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the appellant are reproduced as under:- It is also settled what a partner gets at the time of his retirement is not through transfer of an asset for the consideration. What really he gets at the end of the relationship with the firm is the value of the interest he already had in the firm which he was enjoying jointly and which grows or diminishes with the growth or fall in the prosperity of the partnership firm. He does not get any new right at the time of dissolution or his retirement. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , does not involve any transfer of capital asset resulting in accrual or receipt of income chargeable to tax as capital gain in the hands of recipient partner , and the Tribunal was justified in not treating the amount of ₹ 1,88,950 taxable as capital gain. 17) Similar issue had arisen in the case of SMT. DURDANA KHATOON vs. DEPUTY COMMISSIONER 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 partner. The H'ble ITAT followed the decisions of the jurisdictional High Court in the cases of vs. L Raghu Kumar (1982) 31 CTR (AP) 192 : (1983) 141 ITR 674 (AP) and CIT vs. G. Seshagiri Rao (1995) 129 CTR (AP) 148 : (1995) 213 ITR 304 (AP). It held that 20. As we have followed the decision of the jurisdictional High Court and the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 considering that facts in the case of other decisions cited by the Department are not on similar facts and also that the amount received by the appellant was after valuing the interest in the firm on notional sale basis (PI. refer page 27 of the assessment order) the addition made by the learned AO needs to be deleted. 9.7 It is observed from the submissions made by the AR that since in the present case, the appellant's shares in the firms have been determined by quantifying its share by taking 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be bogus firms. The facts relating to the formation of these firms as discussed in the assessment order and also submitted by the appellant are as follows: a) M/s Fine Developers: i) The firm 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 new entity M/s Housing Development and Infrastructure Ltd (HDIL) inducted as partner of the firm and the shareholding was reconstituted. But the appellant's share in the profit of the firm remained 20%, which was also the original share in the profit of the firm before its reconstitution. v) After its constitution, the firm has made following expenditure till 01/04/2008: Additional costs Stamp d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th share in P L A/c of 20%. HDIL 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 partnership firm, and after that has immediately retired from the partnership firm and received certain amounts in respect of the asset contributed by it to the firm. Under such circumstances, the facts of the decision in the case of Mr Dilip Hate (supra) become totally different and inapplicable to the facts of the current case. In the case of Dilip Hate (supra), the assessee had acquired the development agreement in his individual name and then had entered in a partnership and contributed his right in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new sub-section (3) in section 45. The effect of this amendment is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner's income of the previous year in which the transfer took place. For purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accrued as 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 in which the transfer took place and for the purposes of computation of capital gains the fair market value of the asset on the date of transfer shall be deemed to be the full value of the consideration received or accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 capital gain tax was not chargeable. In our opinion, therefore, when the asset of the partnership is transferred to a retiring partner the partnership which is assessable to tax ceases to have a right or its right in the property stands extinguished in favour of the partner to whom it is transferred. If so read, it will further the object and the purpose and intent of assets in the nature of capital gains and business profits which is chargeable to tax under section 45(4) of the Income-tax Act. We 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Bankey Lal Vaidya, 79. ITR 554 (SC), held that where a large majority of the assets are incapable of physical division, and the partners agreed that the assets be taken over by D at a valuation, 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 have continued to hold the assets in the firm. Hence the 'profits and gains' arising from the transfer of the capital assets by way of distribution of capital asset on retirement of the appellant and other partners from the firms in above discussed manner are taxable as capital gain in the hands of these firms as per the provisions of sub-section (4) of section 45 of the IT. Act, 1961 and no income is taxable in the hands of the partners on this account. 10.6.3 It is to be noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egally 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 the hands of the partners. It were the firms which were owning the properties all along and hence the profits and gains resulting on account of the transactions discussed above can be taxed in their hands only and not in the hands of the partners. Accordingly the other facts discussed by the AO relating to these transactions like, representations made by HDIL before authorities in relation to these lands, the control of HDIL and the remaining partner of M/s Fine Developers after the retirement of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its share on the revaluation of the assets of the firm in which it was a partner. We find that Ld CIT(A) by a well reasoned and speaking order and after referring to various decisions of Supreme Court and High Courts has decided the issue in favour of the assessee We also find that in case of the other partners, wherein against the order passed by CIT u/s 263 wherein he had held 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 and in the absence of any contrary binding decision placed by Revenue, we are of the view that no interference to the order of CIT(A) is called for. Thus the ground of Revenue is dismissed. 8. In the result, the appeal of Revenue is dismissed. 9. In the combined result the appeal of the assessee is allowed, whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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