2023 (10) TMI 661 - AT - Income Tax

Assessee Wins Appeal: Relinquished Partnership Rights Deemed Capital Asset, Eligible for Section 54F Deduction on Flat Investment

The Tribunal allowed the Assessee's appeal, ruling that the relinquishment of a right in a partnership firm is a capital asset under Section 2(14) of the ... Deduction u/s. 54F - Relinquishment of right in a Partnership Firm - Whether it is not a capital asset, consequently no benefit of deduction can be granted to the assessee? - HELD THAT:- As rightly pointed out by Assessee as per Section 2(14) capital asset means property of any kind held by the assessee, whether or not connected with his business or profession, but does not include stock-in-trade, raw materials held for the purpose of business or profession. A.O. in the computation of income has accepted the receipt on relinquishment of his share from the Partnership Firm as capital gain, but only denied the benefit of Section 54F of the Act, which in our considered opinion legally not correct. As relying on M/S. MANSUKH DYEING AND PRINTING MILLS [2022 (11) TMI 1180 - SUPREME COURT] and AN NAIK ASSOCIATES AND ANOTHER, [2003 (7) TMI 46 - BOMBAY HIGH COURT] no hesitation in holding the receipt on relinquishment of assessee’s share from partnership firm is a capital gain wherein the claim of reinvestment on residential flats is an allowable claim deduction under section 54F of the Act. Therefore the disallowance made by the Lower Authorities are hereby set aside. Thus the grounds raised by the Assessee is hereby allowed. Issues Involved:1. Whether the relinquishment of a right in a partnership firm constitutes a capital asset under Section 2(14) of the Income Tax Act, 1961.2. Whether the assessee is entitled to a deduction under Section 54F for the investment made in a residential flat from the capital gains received on relinquishment of his share in the partnership firm.Summary:Issue 1: Relinquishment of Right as a Capital AssetThe Assessee, a partner in M/s. Jyoti Quarry Works, filed a return of income for AY 2013-14, claiming a deduction under Section 54F for the investment made in a residential flat from the sum received on relinquishment of his share in the partnership firm. The Assessing Officer (AO) issued a show cause notice questioning the validity of the claim, arguing that the relinquishment of a right in a partnership firm is not a capital asset as per Section 2(14) of the Act. The AO disallowed the deduction, treating the sum of Rs. 26,52,850/- as income.Issue 2: Entitlement to Deduction under Section 54FThe Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the appellant's case did not match the precedents where relinquishment was considered a capital asset. The CIT(A) found that the partnership deed did not indicate any relinquishment of rights but merely documented the appellant's retirement from the firm.Upon appeal, the Assessee argued that the AO had accepted the receipt of Rs. 70,38,450/- as capital gain but erroneously denied the deduction under Section 54F. The Assessee relied on the Supreme Court judgment in CIT Vs. Mansukh Dyeing and Printing Mills, which held that the transfer of assets to a retiring partner constitutes a transfer for capital gains purposes.Tribunal's Decision:The Tribunal reviewed the materials and precedents, including the Supreme Court's decision in Mansukh Dyeing and Printing Mills and the Hyderabad Tribunal's decision in Smt. Girija Reddy P. It concluded that the receipt of Rs. 70,38,450/- on relinquishment of the Assessee's share from the partnership firm is indeed a capital gain. Therefore, the investment in the residential flat qualifies for deduction under Section 54F. The Tribunal set aside the disallowance made by the lower authorities and allowed the Assessee's appeal.Conclusion:The appeal filed by the Assessee was allowed, confirming that the relinquishment of a right in a partnership firm constitutes a capital asset and that the Assessee is entitled to the deduction under Section 54F for the investment made from the capital gains received.