2014 (12) TMI 1175 - AT - Income Tax

Retirement funds not taxable as capital gains; Deduction under section 54F allowed

R.F. Nangrani HUF, Versus DCIT & vice versa

The Tribunal allowed the appeal of the assessee, ruling that the amount received on retirement from the partnership firm was not taxable as capital gains ... Taxability for amount received from partnership firm on retirement, as per mutual agreement - treaed as capital gains chargeable to tax - Held that:- Hon’ble Gujarat High Court in CIT vs. Mohan Bhai Pama Bhai (1971 (9) TMI 56 - GUJARAT High Court) held that no transfer is involved when a retiring partner receives at the time of retirement from the firm, his share in the partnership asset either in cash or any other asset. The ratio laid down in P.H. Patel (1987 (8) TMI 40 - ANDHRA PRADESH High Court ) wherein it was held that when a partner retires from a partnership taking his share of partnership interest, there is no element of transfer of interest in the partnership asset by the retiring partner. Therefore, considering the totality of facts and the circumstances by applying the ratio laid down by Hon’ble jurisdictional High Court in the case of Riyaz A. Shekh [2013 (12) TMI 248 - BOMBAY HIGH COURT] wherein held Amounts received on retirement by a partner is not subject to capital gains tax - Decided against Revenue Deduction u/s 54 - Held that:- As there is uncontroverted finding in the impugned order that all the payments to the contractors were by cheque only, thus as per the provisions of section 54(2) of the Act, the assessee was to invest the capital gains as per the provision of the Act, we find no infirmity in granting deduction u/s 54 to the extent mention in the order thus we find no substance in the appeal of the Revenue. - Decided against Revenue Issues:Taxability of amount received by the assessee on retirement from the partnership firm, applicability of capital gains tax on the amount received by a partner on retirement, proportionate deduction under section 54F of the Act in respect of the amount invested in construction of a house against long term capital gain.Issue 1: Taxability of amount received on retirement from partnership firmThe case involved an appeal against the order confirming the amount received from a partnership firm on retirement as capital gains chargeable to tax. The assessee contended that there was no transfer of capital asset, hence no capital gain arose. The Assessing Officer disagreed and made the addition as long term capital gain. The Tribunal analyzed the legal position, including the decision of the Pune Bench and the Hon'ble jurisdictional High Court, which held that amounts received by a partner on retirement are exempt from capital gains tax. The Tribunal, following precedent, allowed the claim of the assessee and directed the Assessing Officer to delete the addition, thereby allowing the appeal of the assessee.Issue 2: Applicability of capital gains tax on amount received by a partner on retirementThe Tribunal considered various legal precedents and judgments, including the decision of the Hon'ble jurisdictional High Court, which held that amounts received on retirement by a partner are not subject to capital gains tax. The Tribunal also referred to the decision of the Hon'ble Apex Court in a similar case, reinforcing the non-taxability of amounts received on retirement by a partner. The Tribunal reversed the order of the Commissioner of Income tax (Appeals) based on the binding legal position established by the Hon'ble jurisdictional High Court, ultimately allowing the appeal of the assessee.Issue 3: Proportionate deduction under section 54F of the ActRegarding the proportionate deduction under section 54F of the Act in respect of the amount invested in the construction of a house against the long term capital gain, the Tribunal found no infirmity in granting the deduction as per the provisions of the Act. The Tribunal noted that all payments to the contractors were made by cheque only, complying with the Act's provisions. As the appeal of the assessee was allowed, the appeal of the Revenue remained for academic interest only. The Tribunal directed the Assessing Officer to proceed in the light of their decision in the appeal of the assessee, ultimately disposing of the Revenue's appeal.In conclusion, the Tribunal allowed the appeal of the assessee regarding the taxability of the amount received on retirement from the partnership firm, based on established legal precedents and judgments. The Tribunal also addressed the issue of proportionate deduction under section 54F of the Act, finding no infirmity in granting the deduction. The decision was pronounced in the open court, with the appeal of the assessee allowed and that of the Revenue disposed of accordingly.