TaxTMI 
TaxTMI 
TaxTMI 
2016 (11) TMI 1064
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....rm Capital Gain ('LTCG') on retirement of partner from the Appellant firm to the extent of Rs. 2,56,41,418/- as against no liability towards capital gain as per the Appellant; Applicability of section 45(4) of the Act 3. erred in upholding the provisions of section 45(4) of the Act, in the hands of the Appellant firm, without appreciating the facts of the case; 4. should have appreciated that conditions of section 45(4) of the Act with regard to the distribution of capital assets on dissolution or otherwise' was not satisfied and in the absence of any distribution of capital assets, the impugned transaction is not chargeable to tax in the hands of Appellant firm; 5. failed to appreciated that section 45(4) of the Act cannot be applied to retirement of partner, where amount due to retiring partner has been paid towards its share in the firm and hence the income cannot be charged to tax in the hands of the Appellant firm; Double taxation of the same income 6. erred in upholding the action of the AO in taxing the capital gain in the hands of the Appellant firm, without appreciating that the capital gain on account of retirement was assessed to tax in the hands of retiring ....
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....as against Rs. 33,52,47,975/- taken by Hon'ble CIT(A), without appreciating that the difference in consideration was due to constructed area to be given in AY 2009-10 (i.e. area of 35,495 sq. ft.), was held to be chargeable to tax in AY 2009- to by Hon'ble CIT(A) and the AO has already assessed the impugned sum in that year on substantive basis, and thereby suggesting double taxation; Cost of acquisition 2. erred in objecting the order of CIT(A) on the ground that entire cost of land should not be allowed during the year under appeal, without appreciating that, as per scheme of the Income Tax Act, while computing capital gain, entire cost has to be allowed in the year of transfer itself; Without prejudice to the ground no 2, 3. the corresponding proportionate cost of land, along with indexation should be allowed, in AY 2009-10, wherein the partial consideration is brought to tax". 5. We will first take up the assessee's appeal wherein core issue of chargeability of capital gains u/s 45(4) has been raised which will have the implication on the grounds raised in department's appeal as well as the cross objections. Brief background and facts qua the issue of chargeabi....
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.... that the same were filed beyond the time limit prescribed under section 139(1). However from the note appearing in the Balance Sheet as on 31st March, 2007, filed along with the return of income for AY 2007-08, the AO found out that, one of the partner, M/s Bharat Barrel Drum Mfg. Co. Ltd has retired from the partnership firm, vide Deed of Agreement dated 30.05.2005 and as per the said Deed, the retiring partner was eligible for an amount of Rs. 33,57,22,975/- and constructed area of 35,495 Sq. ft. @ Rs. 5110/- per sq ft out of the building which was under construction in the plot. Since the return of income for the assessment year 2006-07 had not been filed by the assessee, he proposed to tax the assessee-firm under section 45(4) and accordingly, proceeded to reopen the case under section 147 by issuance of notice under section 148, dated 21st January, 2011 on the following "reasons recorded":- "Assessee, M/s. Keshav & Co. came into existence on 13.03.1997 with two partner namely, (1) M/s. Bharat Barrel and Drum Manufacturing Co. Pvt. Ltd and (2) M/s. Urmi Real Estates Pvt. Ltd., both having equal profit and loss ratio, to develop a land situated at 95 Fergusson Road, Lower Par....
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....ein. In the instant case, the retiring partner' has relinquished its right in the land of the firm and has received consideration in relinquishing such right. So, for the purpose of I T Act, it is a transfer and provisions of capital gain is attracted and the firm is liable to pay tax on profit or gain arising from the transfer or right in the land by the retiring partner. On verification of the record, it is seen that no return of income has been filed by the assessee for F. Y. 2005-06 relevant to A. Y 2006- 07 even though there was net gain of Rs. 32,71,02,4251- [Rs. 51,71,02,425 - 19,00,00,000 (book value of land) in the partnership firm)]. In view of the above, / have reason to believe that income chargeable to tax on transfer of right in the said property by retiring partner to the extent of Rs. 32,71,02,4251- has escaped assessment for A. Y. 2006-07 within the meaning of Section 147 of the Act. Issued notice u/s 148 of the Act." 6. The assessee objected to the initiation of reopening the case under section 147 r.w.s. 148 mainly on the ground that, firstly, any taxability of capital gains if at all would arise in the hands of the partner; and secondly, section 45(4) c....
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.... not be looked into the decide whether the transactions amount to transfer or not. He further observed that as regards the assessee's claim that there was lump sum payment to retiring partner at the time of retirement is not factually correct, because the retiring partner got lump sum payment in form of money of Rs. 16.3 crores as well as rights of 76,752 sq. ft of constructed area in the coming projects to be developed by the assessee firm on the land, which was brought by the retiring partner at the time of formation of the firm as his share of capital contribution. Therefore, there is a distribution of capital asset in the instant case in as much as the retiring partner who had brought the land as his capital contribution has relinquished his right in the said firm as well as firm's assets and in lieu thereof, he has been given right of 76,752 sq. ft in constructed area. Further, there was an option in the 'Retirement Deed' for the continuing partners to acquire 41,257 sq. ft from the retiring partner out of 76,752 sq. ft allotted to him. It is seen from the record that the assessee firm exercised this option in consideration of Rs. 33,57,22,975/-. Further, the right of the ....
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....Ready Reckoner-2005. So, the total value of the consideration received by the retiring partner is calculated as under:- (Rs.) 75,752 sq.ft. @ Rs. 5110/-: 39,22,02,720 (being fair market value of consideration Of area allotted to Retiring partner) Consideration by way of money 16,30,00,000 55,52,02,720 The Long term capital gain chargeable to tax is computed as under:- Full value consideration received on account Of transfer of rights in Partnership assets as worked out above: 55,52,02,720/- Less: Cost of acquisition as computed above: 12,65,83,588/- NET CAPITAL GAIN : 42,86,19,132/- 8. In the first appeal, the details submissions were made by the assessee which has been dealt and incorporated by the Ld. CIT(A) from pages 10 to 17 of the Appellate order. On the said written submissions, remand report was also called for which has been incorporated from pages 17 to 18 of the appellate order. 9. After considering the finding of the Assessing Officer, as well as submission made by the assessee, the Ld. CIT(A) gave part relief to the assessee, which can be summarized in the following manner: * The money paid for Rs. 33.52 Crores is nothing bu....
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....Court in the case of CIT v Dynamic Enterprises, reported in 359 ITR 93. Besides this, he also relied upon following decisions, viz., * Delhi Industries & Enterprises (60 SOT 212) (Del Trib); * M/s. Karnataka Agro Chemicals (ITA no.594 of 2013, dated 23 June 2014) Karnataka High Court; * Arbuda Estate Corporation (ITA No.354/Ahd/2003) dated 20th November, 2009; * M/s Vaibhav Industries (ITA No.3052/Mum/2014) dated 16 March, 2016. Thus, he submitted that in view of the aforesaid decisions and also looking to the fact that there is absence of transfer of any capital asset as well as any distribution of asset on the dissolution of the firm or otherwise, therefore, section 45(4) cannot be invoked and hence, there cannot be any taxability in the hands of the assessee-firm. 11. Mr. Vohra further submitted that, what was given to the retiring partner was nothing but cash and certain portion of stock-in-trade and that too was finalized in terms of cash. Giving of stock-in-trade cannot be reckoned as 'capital asset' under section 2(14). Thus, there is no transfer of capital asset albeit it is a transfer of stock-in-trade. Lastly, he submitted that the assessee had transferred 35,49....
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.... the following decisions:- Sr. No. Citation Case laws 1 Girish Textiles 10 SOT 474(Mum Trib) 2 Mangalore Ganesh Beedi Works 265 ITR 685 (Kar HC) 3 Dehi Industries & Enterprisess 60 SOT 212 (Del Trib) 4 Arbuda Estate Corporation ITA 3052/M/2014 dated 20.11.2009 5 M/s Vaibhav Industries ITA 3052 of 2014 dated 16.03.2016 Even otherwise also, he submitted that it is a case of amount distributed to the partner in lieu of capital asset and hence the same would be taxable under section 45(4). He also strongly emphasized on the word "otherwise" which will cover such cases where there is no dissolution. In support of his contention, he strongly relied upon the order of the Assessing Officer as well as CIT (A). As an alternative plea, he submitted that it should be taken as sales turnover and taxed as business income of the assessee in this year, as raised in additional ground by the department. 13. We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material relied upon before us. Succinctly put, the relevant facts which have a bearing on the impugned issue of taxability of capital gain in th....
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.... comprised of Rs. 16.3 Crores paid in cash and Rs. 17.22 Crores paid in lieu of 41,257 Sq. feet of the constructed area. He thus directed that, the actual transfer of constructed area of 32,495 sq. ft was transferred in AY 2009-10 and same should be taxed in that year and the balance was directed to be taxed in this year. He computed the cost of acquisition at Rs. 30.96 Crores (after indexation on cost of sum of Rs. 19 Crores) and had finally Long-term-capital-gains chargeable to tax in AY 2006-07 was arrived at Rs. 2.56 Crores (Rs.33.52 Crores - Rs. 30.96 Crores). 14. The main issue here is, whether there is any transfer of a capital asset within the deeming provision of sub-section (4) of section 45, which reads as under:- "The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset o....
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....with respect to the properties of the partnership firm. In the cases of partnership firm where there is distribution of the assets the capital gain can only be charged under the deeming provision of section 45(4) for which the basic condition precedent is that the distribution of the capital asset should be on the dissolution of the firm and otherwise. If in the course of such distribution of capital asset there is transfer of a capital asset by the firm in favour of the partner and it results in profits or gains to the firm, then such profits or gains are chargeable to tax as capital gain of the firm. In other words, in the process of dissolution of a firm, if capital asset is transferred to a partner which results in gains then that income is taxable in the hands of the firm under this sub-section 4. Thus, to attract Section 45(4) there should be transfer of capital asset from the firm to the retiring partner by which the firm ceases to have any right in the property which is so transferred. The words "otherwise" will also not obliterate this position, which we will deal hereinafter. 15. The department has immensely harped upon the words "or otherwise" appearing in the section 4....
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....ed as per the report of the registered valuer on 28.03.1994. The three old partners retired through deed of retirement dated 01.04.1994. The old partners received the enhanced value of property in financial year 1994-95. 5. As per the Assessing Officer there is transfer of property from old firm to the new firm on 01.04.1994. Hence, it is a transfer within the meaning of Section 2(47) of the I.T. Act. Accordingly, notice under Section 148 was issued on 27.03.2002. In reply to the said notice, the assessee-firm contended that it has paid the amount to the retiring partners standing on credit side in respect of capital accounts. There is no transfer of asset and therefore, they are not liable to pay any capital gains tax. 6. The Assessing Officer held that the land was purchased when the firm was having two partners, namely, Shri Anurag Jain and Shri L.P. Jain. The firm had done no business all through its existence. The receipt of rents and commission for assessment year 1994-95 were found as bogus. The immovable property was not utilized to earn paltry sums during the existence of the firm. The new partners were introduced and the old partners retired. This is a device ad....
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....resenting the value of their share in the partnership. No capital asset was transferred on the date of retirement under the deed of retirement deed dated 01.04.1994. In the absence of distribution of capital asset and in the absence of transfer of capital asset in favour of the retiring partners, no profit or gain arose in the hands of the partnership firm. Therefore, the question of the firm being assessed under Section 45(4) and charging them tax for the profits or gains which did not accrue to them would not arise. 26. It was contended on behalf of the revenue that five incoming partners brought money into the firm. Three erstwhile partners who retired from the partners on 01.04.1994 took money and left the property to the incoming partners. It is a device adopted by these partners in order to evade payment of profits or gains. As rightly held by this Court in Gurunath's case (supra) it is taxable. This argument proceeds on the premise that the immovable property belongs to the erstwhile partners and that after retirement, the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs to the partnership firm. It did not belong to t....
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....ature of capital gains and business profits which is chargeable to tax under Section 45(4) of the Income Tax Act. In that context, it was held the word "otherwise" takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. It is in this context the Bombay High Court held that Section 45(4) was attracted. Therefore, to attract Section 45(4) there should be a transfer of a capital asset from the firm to the retiring partners, by which the firms ceases to have any right in the property which is so transferred. In order words, its right to property should stand extinguished and the retiring partners acquire absolute title to the property. 29. In the instant case, the partnership firm did not transfer any right in the capital asset in favour of the retiring partner. The partnership firm did not cease to hold the property and consequently, its right to the property is not extinguished. Conversely, the retiring partner did not acquire any right in the property as no property was transferred in their favour. The Division Bench in Gurunath's case (supra) did not appreciate this distinguish....
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...., we hold that there is no transfer of any capital asset of the assessee firm to its retiring partner and hence no capital gains chargeable to tax arises in hands of the assessee firm and section 45(4) has no application on the facts of the present case. Accordingly, the capital gain tax levied on the assessee firm is directed to be deleted and consequently the grounds raised by the assessee on this score are allowed. 17. In view of our above finding, the ground relating to the validity of reopening u/s 147 is not adjudicated upon as it has been rendered purely academic hence is treated as in- fructuous. Similarly, the other grounds raised have also been rendered in-fructuous and consequently appeal of assessee appeal of the assessee is treated as allowed. 18. Similarly the ground taken in the revenue's appeal and assessee's Cross Objection have been rendered in-fructuous, in view of our finding and observations given in the assessee's appeal. Hence they are treated as dismissed. 19. Coming to the additional ground raised by the revenue, the Ld. Counsel, at the outset objected that the said ground is outside the scope of assessment order and a new angle or case cannot be roped i....