TaxTMI 
TaxTMI 
2010 (9) TMI 746
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....ment of Supreme Court and of the jurisdictional Court. (4) Learned CIT(A) erred in constructing the deed of retirement, under which no transfer had taken place and without transfer there can be no capital gains tax liability. 3. The assessee is an individual. The assessee and one Mr. Rakesh Kumar Wadhwan were desirous of carrying on business of development and construction in partnership with each other of a property situate at Juhu Tara Road, Juhu, bearing S. Nos. 28A and B1, Plot No. 2 and bearing CTS Nos. 956, 956/1 to 956/83 of Village Juhu, Taluka Andheri, within the registration district of Andheri, district Mumbai suburban, Greater Mumbai, admeasuring 14,022 square yards i.e., 11,723.79 square meters, consisting of land and buildings and structures occupied by tenants standing thereon formerly known as Perieira Estate and later known as Unity compound, hereinafter referred to as "the Property". They entered into a partnership under a deed of partnership dated 1-8-2005 for the aforesaid purpose. The partnership deed refers to the fact that the assessee and Mr. Rakesh Kumar Wadhwan have been carrying on business as builders and developers of several immovable prope....
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....ism Development Corporation Ltd. vide their letter dated 18-1-2006 and the Government of India, Ministry of Tourism vide their letter dated 8-3-2006 granted their sanction for setting up a five star hotel on the said plot. In the meantime, out of 81 tenants, 77 tenants were paid compensation and they surrendered vacant possession. 8. In the meanwhile Smt. Hemlata S. Shetty, for diverse reason, expressed her desire to retire from the partnership which was accepted by the other partners. For sealing the accounts of retiring partner, the assets of the partnership firm was revalued as mutually agreed between the retiring and continuing partners and whatever surplus available on account of revaluation were credited to the capital account of retiring partners as well as continuing, partners in their profit-sharing ratio. The registered valuer one Mr. A.R. Nigam, inspected the property on 25-3-2006 and gave a certificate of valuation dated 5-4-2006. As per the said certificate the property was valued at Rs. 193,90,60,000. 9. A deed of retirement-cum-admission and reconstitution dated 27-3-2006 was entered into by which Mrs. Hemalata Sudhakar Shetty retired from the firm and one Mr. ....
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....t year 2006-07 or as capital gain on retirement of partner in assessment year 2007-08.A protective assessment was made bringing the aforesaid sum to tax as profit on revaluation of assets in assessment year 2006-07 but that addition was elected by the CIT(A). That order of CIT(A) to the best of knowledge of the D.R. has not been questioned by the revenue before the Tribunal in 2007-08, the assessment year to which the present appeal relates, the Assessing Officer wanted to tax the said sum as short-term capital gain. According to the revenue the interest of a partner in the partnership firm is a capital asset and on transfer of such interest by relinquishing his interest in the firm, the assessee had made a transfer of a capital asset and the aforesaid sum was a short-term capital gain on such transfer which has to be brought to tax accordingly. 14. The stand of the assessee was that it was a well settled principle of law that the settlement of account of retiring partners from the partnership firm does not involve any transfer, the reason being that as long as the partnership firm continues, no partner can claim any shares in any of the assets of the partnership firm and as suc....
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.... sum of Rs. 30,87,98,088 as income. He did not specify as to under which head it was to be brought to tax. A reading of the entire order suggests that the income was assessed as short-term capital gains. Even learned CIT(A) has proceeded on this basis while deciding the appeal of the assessee against the order of the Assessing Officer. 16. On appeal by the assessee, the CIT(A) held that the sum in question was liable to be assessed as short-term capital gain. He held that there was a transfer of a capital asset resulting in a capital gain and that all the conditions contemplated under section 45 and section 48 were satisfied. The CIT(A) in coming to the above conclusion, referred to the various clauses in the retirement deed and held that there was an assignment of the interest of the assessee in the partnership in favour of the continuing partners. According to him, the decision in the case of Mohanbhai Pamabhai (supra) did not apply because in that case, there was only minutes under which a partner retired and it contained no assignment of interest in favour of continuing partners. The CIT(A) then concluded that relinquishment of interest would be "transfer" within the meaning....
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....nabling the enjoyment of, any immovable property. Explanation.-For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA; Capital asset has been defined in section 2(14) of the Act, as meaning "Property" of any kind held by the assessee, whether or not connected with his business or profession. The above exhaustive definition is subject to the following exclusions like stock-in-trade, consumable stores or raw material held for the purpose of business or profession, personal effects agricultural land in India, certain Gold bonds, special bearer bonds and Gold deposit bonds. 20. The share or interest of a partner in the partnership and its assets would be property and, therefore, a capital asset within the meaning of the aforesaid definition. To this extent, there can be no doubt. The next question is as to whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under section 45 of the Act. 21. A look at how formation and dissolution of Partnership was used as a device to evade tax on cap....
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....nt of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of section 48 of the Act. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. In coming to the above conclusion the Hon'ble Court relied on the decision of the Hon'ble Supreme Court in Addanki Narayanappa v. Bhaskara Krishtappa AIR 1966 SC 1300. The Hon'ble Supreme Court in the said decision explained the nature of partnership and the right of the partners over the assets of the Partnership as follows (p. 1303 of AIR) : ".....whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership fr....
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.... the partner's income of the previous year in which the transfer took place and the amount recorded in the books of account of the firm, shall be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset. 25. In the case of dissolution where partners are allotted capital assets of the firm, it was held that there was no transfer. In Malabar Fisheries v. CIT [1979] 120 ITR 493 (SC), the Hon'ble Supreme Court has explained the nature of distribution of assets of a partnership on dissolution amongst its partners and as to whether such distribution of assets would constitute transfer within the meaning of section 2(47) of the Income-tax Act as follows : "A partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own on the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position it is difficult to accept the contention that upon dissolution the firm's....
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....ution of a firm, body of individuals or other association of persons." Section 47 of the Act lays down which are the transactions not regarded as transfer for the purpose of section 45 of the Act. 28. The Finance Act, 1987, with effect from 1-4-1988, omitted this clause, the effect of which was that distribution of capital assets on the dissolution of a firm would with effect from 1-4-1988 be regarded as "transfer". Therefore, instead of amending section 2(47), the amendment was carried out by the Finance Act, 1987, by omitting section 47(ii), the result of which was that distribution of capital assets on the dissolution of a firm was regarded as "transfer". The effect was that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would 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 was deemed to be the full value of the consideration received or accruing as a result of the transfer. 29. Thus Parliament brought into the tax net transactions whereby assets wer....
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....l assets of firms which otherwise was not subject to taxation. If the language of sub-section (4) is construed to mean that the expression "otherwise" has to partake of the nature of dissolution or deemed dissolution, then the very object of the amendment could be defeated by the partners by distributing the assets to some partners who may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the Amending Act. The Court noticed that the position prior to the amendment by introduction of section 45(4) by the Finance Act, 1987, was that there was no transfer of assets by the firm to the partners on dissolution or transfer of assets to the retiring partner on retirement. The effect was that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would 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 would be deemed to be the full value of the consideration received or accrued as a result of the transfer. Therefore, if the object of the Act ....
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....rtnership 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 interest in the partnership assets by the retiring partner to the continuing partner. The transfer of a capital asset in order to attract capital gains tax must be one as a result of which consideration is received by the assessee or accrues to the assessee. When a partner retires from a partnership what he receives is his share in the partne....
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....terest by a deed attracting stamp duty while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners for 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 of 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." 38. The above decision was followed by the Hon'ble Bombay High Court in the other two cases of N.A. Modi (supra) and H.R. Aslot (supra). The Pune Bench of the ITAT in the case of Shevantibhai C. Mehta v. ITO [2004] 83 TTJ 5427 had considered the aforesaid decision of Hon'ble Bombay High Court and other decisions relied upon by learned counsel f....
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....ing Smt. Hemlata S. Shetty as partner of the firm. 4. On 23-9-2005, the firm M/s. D.S. Corporation purchased from one Mr. Percival Joseph Perieira the property for a consideration of Rs. 6.50 crores. The said plot was occupied by 81 tenants. The Stamp Duty Officer valued the said plot, which was occupied by 81 tenants, at that time at Rs. 6,50,00,000 and the stamp duty was paid on the basis of the said valuation. The conveyance was duly registered. 5. On 26-9-2005, another deed of admission cum reconstitution of partnership was executed. The following 2 more partners were admitted to the partnership :- (1) Prithvi Realtors & Capital Private Limited (2) Shri Sarang R. Wadhwan 6. The firm thereafter applied to the Maharashtra Tourism Development Corporation Ltd. and also to the Government of India, Ministry of Tourism to approve a proposal for setting up a five star hotel on the said plot. The Maharashtra Tourism Development Corporation Ltd. vide their letter dated 18-1-2006, and the Government of India, Ministry of Tourism vide their letter dated 8-3-2006, granted their sanction for setting up a five star hotel on the said plot. In the me....
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....p firm and was paid the sum standing to the credit of his capital account but for the revaluation of the asset, the capital account of the partner would not have shown a sum of Rs. 35,59,84,050. To the extent of Rs. 30,87,98,087 the capital account has been artificially increased just to ensure that the retiring partner is paid consideration standing to the credit of his capital account. Thus it was a case where instead of quantifying the assessee's share by taking accounts 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 of the continuing partners. Thus the retiring partner was paid something over and above the sum standing to the credit of his capital account and therefore there was a capital gain. 42. We shall now see as to whether there was any assigning or relinquishing of any share or right in the partnership and its assets in favour of the continuing partners by the retiring partner. The terms of the deed of dissolution dated 22-5-2006 by which the assessee retired from the firm in so far as it is material to the present case ....
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....d business of the erstwhile partnership firm, together with the benefit of all premises and stock-in-trade, moneys, credits and effects belonging thereto including the said property at Juhu Tara Road, Juhu bearing Survey Nos. 28A and B, Plot No. 2, and bearing CTS Nos. 956, 956/1 to 956/83 of Village Juhu, Taluka Andheri, within the Registration District of Andheri District Mumbai suburban, Greater Mumbai admeasuring 14,022 square yards i.e., 11,723.79 square meters considering of land with buildings and structures, occupied by the tenants, amending thereon, formerly known as Perieira Estate and now known as Unity Compound and the Continuing partners shall be solely entitled to the said business together with the assets, liabilities together with the benefit of all premises and stock-in-trade, moneys, credits and effects including the said property belonging to the partnership firm M/s. D.S. Corporation. (6) In consideration of the premises herein stated, the Retiring Partner both hereby release the Continuing Partners and the Continuing partners do and each of them doth hereby release the Retiring Partner of and from all covenants entered into between them prior hereto an....
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....ssessee was paid: (1) 1 lakh as his share of profits of the firm for the broken period ended 31-8-1961, (2) Rs. 50,000 as his share of the value of the goodwill, and (3) Rs. 4,77,941 as his share in the remaining assets of the firm. 44. The issue relevant for our purpose is the liability of the sum of Rs. 4,77,941 or any part thereof to capital gains tax. The Hon'ble Court took up for consideration as to what is the real nature of the transaction when a partner retires from the partnership. Does the transaction amount to any relinquishment of his share or interest in the partnership in favour of the continuing partners, or does it stand on the same footing as an adjustment of his rights that results upon dissolution of the partnership. On behalf of the assessee it was contended that retirement of a partner and quantification of his share and payment thereof to him stands on the same footing as adjustment of rights that results upon dissolution of a firm and, therefore, since there was no transfer of any capital asset in the instant case, the sum of Rs. 4,77,941 or any part thereof was not liable to be charged under the head "Capital gains". This was not accepted by Hon'ble Bomba....
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....f the said agreement and in consideration of the premises aforesaid and without making any further payment of any amount to him the retiring partner as beneficial owner doth hereby assign and release upto the continuing partners and each of them all that his right, title interest and undivided half share in the said partnership firm and all his share and interest on the said pieces of land, hereditaments and premises, structures and buildings standing thereon....and machinery, plant, equipment, etc...To hold the same unto the continuing partners absoultely in equal shares as tenants-in-common... And this indenture further witnesseth that in pursuance of the said agreement and in consideration of the premises aforesaid the retiring partner doth hereby release, grant, convey and transfer and assure all that his individual shall share in all the several pieces or parcels of land-hereditaments ... To have and to hold the said undivided half share and the premises hereby granted as expressed so as to be unto and to the use of the continuing partners absoultely as tenants-in-common in equal shares forever....." 47. Having regard to the particular mode employed by the assessee....
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....ancial year 2005-06. The returns for assessment year 2005-06 and 2006-07 were filed by the assessee in which the amounts received on retirement were duly shown as capital receipt and it was claimed by the assessee that the sums received were not taxable as they were in the nature of capital receipts. An intimation under section 143(1) was issued in respect of the said returns. A notice under section 148 was issued on the ground that in the assessment of the firm the amount paid to the retiring partner was allowed as a deduction by the CIT(A) and hence the same had to be assessed as income in the hands of the assessee. The validity of initiation of reassessment proceedings was challenged before the Hon'ble Bombay High Court. The Hon'ble Court while dealing with the issue as to whether there existed "reasons to behave that income has escaped assessment", analyzed that law with regard to payment of consideration on retirement of a partner from a firm. The Hon'ble Court held that there was no basis for formation of belief that any income chargeable to tax has escaped assessment. The Hon'ble Court accordingly quashed the notice under section 148. 51. According to the learned counsel ....