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        Retirement sum not taxable as capital gains; Disallowed loss remanded for evidence; Jurisdiction of CIT(A) upheld.

        MDLR Builders P. Ltd. Versus DCIT And DCIT, Central Circle – 14, New Delhi

        MDLR Builders P. Ltd. Versus DCIT And DCIT, Central Circle – 14, New Delhi - TMI Issues Involved:
        1. Taxability of sum received on retirement from the partnership firm.
        2. Disallowance of loss incurred on purchase and sale of shares.
        3. Jurisdiction of CIT(A) to enhance income by disallowing the loss claimed on purchase and sale of shares.

        Issue-wise Detailed Analysis:

        1. Taxability of Sum Received on Retirement from the Partnership Firm:
        The primary issue was whether the sum received by the assessee on retirement from the partnership firm is taxable as capital gains. The Assessing Officer (AO) treated the sum as short-term capital gains, arguing that the partnership share is a capital asset, and its transfer constitutes a transfer of capital assets under Section 2(47) of the Income Tax Act, 1961.

        The CIT(A) upheld the AO's view but reduced the taxable amount, relying on the decisions of the Karnataka High Court in CIT Vs. Gurunath Talkies and the Bombay High Court in CIT Vs. A. K. Naik Associates, which were rendered in the context of Section 45(4) of the IT Act.

        However, the Tribunal referred to the Full Bench decision of the Karnataka High Court in CIT Vs. Dynamic Enterprises, which clarified that when a retiring partner takes only money towards the value of his share and there is no distribution of capital assets among the partners, there is no transfer of a capital asset, and consequently, no profits or gains are chargeable under Section 45(4) of the IT Act. The Tribunal also cited various other judicial precedents, including Prashant S. Joshi Vs. ITO and Chalasani Venkateswara Rao Vs. ITO, which held that the amount received by a partner on retirement does not involve an element of transfer within the meaning of Section 2(47).

        Conclusion:
        The Tribunal held that the assessee is not liable to any capital gains tax on the sum received on retirement from the partnership firm. The addition of Rs. 43,49,47,500/- was directed to be deleted.

        2. Disallowance of Loss Incurred on Purchase and Sale of Shares:
        The CIT(A) disallowed the loss of Rs. 13,04,50,800/- claimed by the assessee on the purchase and sale of shares, terming it a collusive transaction between group entities to offset the income on the sale of shares in the partnership firm.

        The Tribunal noted that the original assessments were ex-parte, and the assessee had not provided any details before the AO. The CIT(A) issued an enhancement notice and concluded that the loss was not genuine due to lack of corroborative evidence.

        Conclusion:
        The Tribunal held that the CIT(A) has the power to issue an enhancement notice in such cases. However, it remanded the issue back to the AO to allow the assessee to substantiate the genuineness of the loss with evidence. The AO was directed to decide the issue afresh after giving due opportunity to the assessee.

        3. Jurisdiction of CIT(A) to Enhance Income by Disallowing the Loss Claimed on Purchase and Sale of Shares:
        The assessee contended that the CIT(A) acted beyond his jurisdiction by enhancing the income and disallowing the loss claimed on the purchase and sale of shares, which was not considered by the AO in the original assessment.

        The Tribunal held that since the assessments were framed under Section 144 of the IT Act and the discrepancies were found during the appeal hearing, the CIT(A) was justified in issuing an enhancement notice. The Tribunal emphasized that the powers of the CIT(A) are conterminous with those of the AO.

        Conclusion:
        The Tribunal upheld the CIT(A)'s jurisdiction to issue the enhancement notice but remanded the matter to the AO for fresh consideration, allowing the assessee to provide evidence to substantiate the loss claimed.

        Final Outcome:
        The appeals filed by the respective assessees were partly allowed for statistical purposes. The AO was directed to delete the addition related to the retirement sum and reconsider the disallowance of the loss on the purchase and sale of shares after giving the assessee an opportunity to present evidence.

        Topics

        ActsIncome Tax
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