TaxTMI 
TaxTMI 
2016 (7) TMI 603
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.... and thereafter assessment was framed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") vide order dated 10/12/2010 and total loss was determined at Rs. 43,05,381/-. Aggrieved by the order of Assessing Officer (AO), assessee carried the matter before the ld.CIT(A), who vide order dated 18/04/2012 (in Appeal No.CAB/III-145/10-11) granted partial relief to the assessee. Aggrieved by the order of ld.CIT(A), assessee is now in appeal and has raised the following grounds: The Appellant submits the following grounds, which are without prejudice to one another. 1. The orders of the lower authorities are arbitrary, not based on proper evidences, without proper reasons, invalid and also bad in law. 2. (a) On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in upholding the AO's calculation of disallowance u/s.14A amounting to Rs. 1,02,82,049/-. (b) The learned CIT(Appeals), by applying narrow interpretation, erred in not excluding the amount represented by book entry from 'average value of investment' and 'average of total assets' while computing the amount of disallowance. (c) Without prejudic....
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....ts but the total investments of the appellant in the firm would not be decreased on account of the fact that there is no such provision in Rule 8D. This will give rise to an absurd situation where the total investments would be more than the total assets despite the absence of any liability. Under such circumstances, the appellant's contentions are not acceptable and it is held that the A.O. has rightly computed the deduction under Rule 8D as the provisions of sub-section (3) of Rule 8D are not applicable to the appellant. As a result, this ground of appeal is dismissed." 2.5. Aggrieved by the order of ld.CIT(A), assessee is now in appeal before us. 2.6. Before us, ld.AR reiterated the submissions made before the AO and ld.CIT(A) for deleting the entire addition of expenses u/s.14A of the Act. As an alternate plea, ld.AR submitted that the assessee has earned tax-free income in the form of share of profit from partnership-firm of only Rs. 55,604/-, whereas the disallowance u/s.14A has been worked out at Rs. 1,02,82,049/- and thus the disallowance of expenses is far more than the exempt income. He therefore submitted that the disallowance u/s.14A of the Act cannot be more tha....
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...., being the exempt income earned by the assessee. Thus, this ground of assessee is allowed. 4. In the result, assessee's appeal in ITA No.1359/Ahd/2012 for AY 2008-09 is allowed. 5. Now we take up Revenue's appeal in 1641/Ahd/2012 for AY 2009-10. 5. 1. Facts as culled out from the material on record are as under: 5.2. Assessee was a partner in two partnership firms namely Fine Developers with capital contribution ratio of the assessee being 20% and in Mahul Construction Corporation with capital contribution ratio of assessee being 20% vide partnership deed dated 25th Nov 2005 and 3rd January 2006 respectively. Fine Developers purchased a property situated at Kasaiwada, Kurla (East), Mumbai and Mahul Construction Company purchased a property at Mahul for the purpose of Development of commercial/housing project. Vide Deed of Admission dated 6th July 2007, one more partner, namely "Housing Development and Infrastructure Ltd (HDIL) was admitted as "incoming partner" in both the firms. Assessee retired from both the firms w.e.f. 27.5.2008. On pursing the Balance Sheet of the assessee, Assessing Officer (AO) noticed that there was increase of Rs. 58,43,56,036/- in the Reserves and Su....
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....as to purchase and sale of property through a devise to evade tax. He was of the view that the intention of the legislature was to levy tax on the firm on profits or gains arising from transfer of a capital asset by way of distribution of assets on dissolution of the firm, on the presumption that such distribution takes place only on dissolution of a firm. In the present case he was of the view that there was substantial gain to the partner by way of distribution of its share of revaluation of assets without the firm being dissolved and that neither the firm nor partner of the firm has paid any tax on such gains and that it was never the intention of the Legislature not to tax even if there is a gain in the hands of partner without the firm being dissolved. He was thus of the view that the gains were liable for tax u/s 45 of the Act and accordingly held that aggregate amount of Rs. 58,43,56,036/- (Rs 45,81,16,036/- plus Rs. 12,62,40,000/-) received from the firms on assessee's retirement to be taxable as short term capital gains and accordingly added to the income. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated CAB/III-202/11-12 decided....
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....sets without the firm being dissolved and neither the firm nor the partner i.e. assessee has paid tax on such gain. It was never the intention of the Legislature not to tax, even if, there is a gain in the hands of partner without the firm being dissolved. f) The assessee has relinquished all its rights on the property on the firm vide the deed of retirement dated 27.05.2008. The assessee has also received additional amount of Rs. 58,43,56,036/-. Therefore, the company has earned income since the assessee has relinquished all its rights over the property/assets of the firm to the extent of its share/equity / capital contribution in the firm w.e.f. 27.05.2008, vide the deed of retirement dated 27.05.2008. Similarly, it can also be said that there is extinguishment of assessee's rights over the assets of the firm w.e.f. 27.05.2008. Finally, as per Clause (vi) of section 2(47), if there is an effect of transferring or enabling enjoyment of any immovable property by way of agreement or arrangement or any other manner whatsoever, then it falls under the definition of "Transfer". In this case, it is discussed and established that, there was an arrangement to transfer the properties....
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....9.4 In this respect the appellant has relied upon several decisions of the jurisdictional High Court and the Supreme Court to show that the amount received by the appellant on its retirement from the firm are not taxable as income in its hands. The first decision relied upon is in the case of Mohanbhai Pamabhai 91 ITR 393 (Guj.) which was subsequently approved by Hon'ble Supreme Court. The Jurisdictional High Court has held as follows in this decision: "" interest of a partner in the partnership is not 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 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 amount of his share in net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on footing of notional sale of partnership assets and given to him, what he receives is his share in partnership and not a....
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....uing to the assessee as a result of the transfer, the machinery section enacted in section 48 would be wholly inapplicable and it would not be possible to compute profits or gains arising from the transfer of the capital asset. The transaction in order to attract the charge of tax as capital gains must, clearly be such that consideration is received by the assessee or accrues to the assessee as a result of the transfer of the capital asset. Where transfer consists in extinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment, for then only it would be a transfer exigible to capital gains tax. What the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only in the surplus that the retiring partner is entitled to claim a share. It is, therefore, not possible to predicate that a particular amount is receive....
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....f the partnership or a mere retirement of the two partners, permitting the remaining partners to continue the business of the firm. The real legal effect of the award read with the agreement would not be controlled by how the transactions had been described by the arbitrator or by the parties and, therefore, the use by the arbitrator of the word 'dissolution' was not conclusive. The overall effect of the award and the agreement clearly was that the two outgoing partners were to be paid a certain sum and they were to execute the necessary documents required to assign and release in favour of the continuing partners their respective share and interest in the partnership. The judgment in Tribhuvandas G. Patel's case (supra) was a decision of a co-ordinate bench and was binding. The tests laid down therein were satisfied. Accordingly, there was a clear liability in respect of capital gains attracted on the footing that the transaction was not one of dissolution of partnership but of a retiring partner assigning in favour of the continuing partners his rights and interest in the partnership assets. 23. We have, in the instant case, held that the overall effect of the conse....
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....asis of settling amounts standing to the credit of his capital account or on a lump sum basis." 4) Thus the H'ble ITAT has divided the situation into two parts. In the first situation asset is given to the partner on retirement. In the second situation cash is given on retirement. Again in both the situations there can be two situations. Account of the retiring partner can be settled by giving the amount as per the capital balance in the books or can be given on lumpsum basis. 5) In the case of the present assessee cash is given to the retiring partner. On this aspect the H'ble ITAT observed in para 34 as under:-(Emphasis supplied) "34. The second situation with which, we are concerned in this appeal is a case where the retiring partner is paid consideration in cash and he gives up his rights as partner including his rights over the assets of the partnership. There is divergence of view on the question as to whether there is any transfer at all in such situation by the firm in favour of the retiring partner or by the retiring partner in favour of the firm and its continuing partners." 6) Thus before discussing case laws on the issue the H'ble ITAT agrees tha....
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....ount received by him would be assessable to capital gains tax under section 45." 7) In para 36, H'ble ITAT also referred to the decisions of other courts wherein also it is held that on retirement the amount received by the partner is not taxable in the hands of the retiring partner. This reads as under:- (Emphasis supplied) "36. The Hon'ble Court held that the extended definition of the term 'transfer' under section 2(47) of the Act, by which relinquishment and extinguishment of any right in a capital asset is considered as transfer would also not apply when a partner retires from the partnership and there would be no transfer of interest in the partnership assets. The Hon'ble Supreme Court confirmed the decision of the Hon'ble Guiarat High Court in Mohanbhai Pamabhai's case ( supra ). Similar view was also expressed by the Hon'ble Supreme Court in the case of CIT v. R. Lingmallu Raghukumar [2001] 247 ITR 801 following its decision in the case of Mohanbhai Pamabhai ( supra ). In CIT v. Kunnamkulam Mill Board [2002] 257 ITR 544 (Ker.). the Hon'ble Kerala High Court also expressed the view that where there is revaluation of assets of the firm ....
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....(Emphasised supplied) "49. In the case of the assessee the clauses in the retirement deed do convey interest in immovable property and further refers to the fact that the assessee will not have any interest over the assets of the firm. Thus it was a case of lump sum payment 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. We are of the view that the manner of retirement in the case of the assessee is such that it can be regarded as assigning or relinquishing by the retiring partner of his share or right in the partnership and its assets in favour of the continuing partners. We are therefore of the view that the assessee satisfies the parameters laid down by the Hon'ble Bombay High Court in the cases referred to above and therefore there was a transfer of interest of the retiring partner over the assets of the partnership on retirement. Therefore there was liability to tax on account of capital gain." 12) Thus the said decision is on the interpretation of the manner of retirement and the H'ble ITAT decided that it was a case of lump sum payment and hence liable t....
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....tle & Co. and all its assets including goodwill and outstandings but excluding the premises and the defendant's share in profit from 1st April, 1961 to 30th September, 1961 in favour of the plaintiffs in proportion to their respective shares and interest in the partnership of Little & Co. and that save as herein provided the defendant do have no claim or demand of any nature whatsoever against the partnership firm of Little & Co. or any of its partners". Thus, there was a transfer by the assessee within the meaning of s. 2(47) and liability to capital gains tax exists. The court held that lump sum consideration received for assignment of his share in a firm by partner on his retirement is liable for capital gains tax as there is transfer within the meaning of s. 2(47). In the said decision reference was made of the decision in the case of Mohanbhai Pamabhai(Supra). In para 21 it is observed by the H'ble High Court that "For that matter, we may not 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." The above observation sup....
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....arising of any capital gains for taxable purpose. Relying on the decision in the case of Sunil Siddharthbhai vs. CIT (supra), the Supreme Court in Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) : TC 20R.865 affirmed the decision of this Court in Mohanbhai Pamabhai's case referred to above. This Court had also occasion to consider the issue whether on retirement of a partner any receipt in lieu of his share in partnership assets amounts to sale, in the case of CIT vs. Dilip Engineering Works (1981) 21 CTR (Guj) 213 : (1981) 129 ITR 688 (Guj), Justice S.B. Majmudar, as he then was, negatived the contention of the Department and observed that where a retiring partner receives a share in the partnership, any cash or any other asset, it cannot be said that any asset is transferred or sold to him. As held in CIT vs. Balwantrai Vithaldas Shah (1992) 104 CTR (Guj) 10 : (1992) 196 ITR 379 (Guj) : TC 20R.876 to which one of us (Hon'ble R.K. Abichandani, J.), was party, held that the amount received by the assessee on his retirement from the firm was not assessable and cannot be exigible to capital gains tax either under s. 45 or under s. 28(iv) of the Act, 1961, after ref....
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....on for transfer of his interest in partnership to continuing partners and the same is not chargeable as capital gain. This decision was affirmed by the H'ble Supreme Court in 165 ITR 166. 19) The decision of the Gujarat High Court in Mohanbhai Pamabhai was also followed by the H'ble Gujarat high Court in the case of CIT v. Shreyas Chinubhai (1999) 237 ITR 358. Out of three questions framed by the H'ble High Court two are as under:- "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion( that the amount of Rs. 1,25,092 received by the assessee on retirement from the partnership firm of Arun Corporation (Estate Division) was not liable to tax under section 28(iv) of the Act ? 2. Whether,on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs. 1,25,092 received by the assessee on retirement from the partnership firm of Arun Corporation (Estate Division) was not liable to tax under section 45 of the Act? In para 3 it is held that"--in view of the settled legal position, we hold that the Tribunal was right in concluding that the a....
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....f retirement and mode of computation of amount to be paid to retiring partners are similar in the current case as well in the decision in the case of Mohanbhai Pamabhai. 9.7.1 Moreover, the decision in the case of N. A. Mody involved arbitration after which an award was made to the retiring partner. As relied upon by the appellant, Hon'ble Gujarat High Court in a similar case involving payment to the retiring partner as an award after arbitration, in its decision in the case of Ananat Narhar Nimkar (HUF) (supra), has held that the amount received by the retiring partner cannot be taxed in its hands. Thus in view of these binding judicial decisions of the jurisdictional High Court, it is held that the amounts received by the appellant on its retirements from these firms are not taxable in its hands. 10. This brings us to the second issue as to whether the amounts received by the appellant on retirements can be taxed in its hands on the basis of decision in the cases of Sunil Sidharthbhai and Dilip Hate (Supra) as held by the AO. The AO has first quoted excerpts from the decision of Hon'ble Supreme Court in the case of Sunil Sidharthbhai (supra) and on the basis of it, ha....
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....e appellant became partner in M/s. Fine Developer on 25th November 2005 with a share of profit and loss of 20%. This firm made payments for purchase of the property and also made payments to workers as compensation during the period 25.11.2007 to 06.07.2007 after which HDIL was inducted as partner. Even after this, the appellant's share in the profit and loss of the firm remained unchanged. Thus the original firm continued for about 19 months before HDIL was inducted as a partner. Moreover, it was the firm which purchased the property and made payments for compensation to workers etc. Thus, it was the firm and not the appellant who was all along owner of the assets of the firm and the appellant was having only its interest in these assets as a partner. Thus the constitution of this firm cannot be held to be a sham transaction. 10.2 So far as Mahul Construction Corporation is concerned, this firm was constituted on 09.11.2005 and purchased the property on 23.11.2005. Only after this the appellant became a partner on 03.01.2006 w.e.f. 01.01.2006 with 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 ....
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....ital gains on transfer of firms' assets to partners and vice versa and by way of compulsory acquisition 24.1 One of the devices used by assessees to evade tax on capital gains is to convert an asset held individually into an asset of the firm in which the individual is a partner. The decision of the Supreme Court in Kartikeya V. Sarabhai v. CIT[1985] 156 ITR 509 has set at rest the controversy as to whether such a conversion amounts to transfer. The Court held that such conversion fell outside the scope of capital gain taxation, The rationale advanced by the Court is, that the consideration for the transfer the personal asset is indeterminate, being the right which arises or accrues to the partner during the subsistence of the partnership to get his of the profits from time to time and on dissolution of the partnership to get the value of his share from the net partnership assets. Finance Act, 1987 24.2 With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987 has inserted 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 ....
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....he properties of these firms to HDIL can arise in the hands of the firms' only and not in the hands of the partners. 10.6 Further, the AO has stated in his order that unless and until the firm is dissolved, the amount of distribution of any benefits from the firm cannot be taxed in the hands of the firm. But this is a legally incorrect statement. The expression "otherwise" in the sub-section 4 of section 45 was legally analyzed by Hon'ble Bombay High Court in its decision in the case of A.N. Naik Associates (136 Taxman 107) (2004) wherein the court held that the expression "otherwise" in section 45 (4) of the Act has to be read with the words "transfer of capital assets" by way of distribution of capital assets. The relevant portion of judgment of the court is reproduced below: ""The expression "otherwise" in our opinion, has not to be read ehysden generis with the expression "dissolution of a firm or body or association of persons". The expression "otherwise" has to be read 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 ....
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....39;s case. We are of the view that in the present case, the Assessing Officer has rightly indicated that the series of transaction such as reconstitution of firm twice; once in July, 1994 and another in December, 1994 and entire assets retained in the hands of the newly added two partners, result in transfer of assets of the firm in the sense that the assets of the firm as had been held by the erstwhile partners are transferred to the newly added two partners though all along the assets all along the assets of the firm continued in the hands of the firm....". 10.6.2 In the present case, the assets of the firm have been revalued and the liabilities have been deducted from these. The partners' shares in such net amount have been credited to their capital account. After this, some partner's have retired from the firms after taking the amount in their capital accounts and others have continued as partners. Hon'ble Supreme Court has, in its decision 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 respond....
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.... Land Development (P) Ltd. However, at the end the land was effectively with M/s. HDIL although all along the firm - M/s. Fine Developers - continued and subsisted. (iv) The whole transaction can be equated with following transactions: A firm with partners i) Suraksha Developer (P) Ltd. (10%) A firm with partners ii) Vision Finstock (P) Ltd. (20%) Transferred of i) HDIL (90%)& Kurla Land ii) Saphphire land Development (P) Ltd. iii) Nisha Capital Services (P) Ltd.(10% (10% iv) Sapphire Land Had above illustrated transaction taken place, the assessee would have to pay capital gain tax on the transaction of the "Kurla Land". In order to avoid the payment of legally 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 profi....