TaxTMI 
TaxTMI 
2019 (6) TMI 845
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....urn of income in response to the statutory notices. Since the assessee was not responding to the statutory notices issued u/s. 153A, 142 (1) and 143 (2), the Assessing Officer completed the assessment u/s. 144 of the Act on 21.12.2009 determining the total income at Rs. 110,12,38,532/-. 3. The assessee moved an application before the CIT(Central)-II, New Delhi under the provisions of section 264 on 14.06.2010. The CIT(Central)-II, New Delhi vide order dated 16.03.2012 disposed of the application of the assessee with a direction to the Assessing officer to reframe the assessment afresh after making required enquiries, investigation and verifications. 4. The Assessing Officer thereafter issued notice to the assessee asking for various details. However, a perusal of the assessment order shows that there was no proper compliance from the side of the assesse. Therefore, the Assessing Officer proceeded to pass the order again u/s. 144 of the IT Act on the basis of information collected from third party enquiries during initial assessment and documents seized at the time of search. 5. The Assessing Officer noted that the assessee company has sold its share in the partnership firm M.....
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....hip share in M/s. Trishul Industries which includes the rights, title and interest embedded in the partnership share. e) On 15.12.07 a deed of partnership was signed between MDLR Group and Vatika Group. By this deed 85% of partnership is transferred to M/s. Vatika Ltd and 1% to Shri Anil Bhalla by MDLR Group. The deed does not contain any details regarding the payments made for the purpose of acquisition of partnership share by Vatika Group. f) A total of Rs. 178 Cr was paid to MDLR Group for acquisition of the partnership firm. The details of payment as on 31.01.08 is as under -:- g) The partnership share in a firm according to the Assessing Officer is a capital asset within the meaning of Section 2 (14) of the Income Tax Act, 1961. The MDLR Group transferred partnership share held by it to Vatika Ltd and Anil Bhalla. This according to the Assessing Officer is covered well within the scope of transfer of capital assets defined in section 2(45) of the IT Act. h) The Assessing Officer noted that the deed of retirement dated 29.11.07 clearly states that in pursuance to the deed, rights, title and interests of the retiring partners i.e. MDLR Group have been transferred and....
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....come. 7. The Assessing Officer accordingly determined the total income of the assessee at Rs. 1,10,12,38,532/-. 8. Before CIT(A) the assessee made elaborate submissions and filed various details based on which the Ld. CIT(A) called for a remand report from the Assessing Officer. The Assessing Officer send three remand reports on various dates which were confronted to the assessee. After considering the remand reports of the Assessing Officer and the rejoinder of the assessee to such remand reports the CIT(A) held that the sum received on retirement from the partnership firm is taxable as income of the assessee company as share of partner in partnership firm is capital asset and on retirement of the firm there is capital gain which accrues to the assesse which is taxable as such. For the above proposition he relied on the decision of Hon'ble Karnataka High Court of CIT Vs. Gurunath Talkies reported in 328 ITR 59 (Karnataka) and the decision of Hon'ble Bombay High Court in the case of CIT Vs. A. K. Naik Associates reported in 265 ITR 346. He however noted from the retirement deed dated 28.11.2007 between M/s. MDLR Estate Private Limited, M/s. MDLR Builders Private Limited, Mr. Go....
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....ch are as under :- 11. However, the Ld. CIT(A) was not satisfied with the arguments advanced by the assessee. He observed that the aforesaid losses are on account of transactions between group entities of shares of group entities. It is clearly a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm M/s. Trishul Industries and thus is not allowable losses. According to the Ld. CIT(A) it is not a genuine loss since there is no corroborative evidence in this regard. He, therefore, directed the Assessing Officer to enhance the income of the assessee to this extent being the loss claimed by the assessee on account of purchase and sale of shares which is not allowable. 12. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds of appeal :- Grounds of appeal Ground No. 1) That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in making a disallowance of Rs. 13,04,50,800/- representing the loss incurred on purchase and sale of shares. Tax effect Rs. 4,43,40,227/- Ground No. 1.1) That the learned Commissioner of Income Tax (Appeal....
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....the learned Commissioner of Income Tax (Appeals) has failed to appreciate that there is no estoppel against statute and mere declaration in the capital gain could not be a ground to sustain any addition. Linked to ground no.2 Ground No. 2.3) That while upholding the addition, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the evidence placed on record alongwith judicial pronouncements to submit that addition made and sustained is not in accordance with law. Linked to ground no.2 Prayer It is therefore, prayed that it be held that sum received on account of retirement from the partnership firm was not assessable as income and therefore ought to have been excluded while computing income of the appellant company. Apart from the above, it be also held that enhancement of income by disallowing the loss claimed on purchase and sale of shares is also illegal, both on merits and even otherwise beyond the scope of powers of the learned Commissioner of Income Tax (Appeals) under section 251 of the Act. It is thus prayed that appeal of the appellant may kindly be allowed as such. 13. The Ld. Counsel for the assessee strongly opposed the order of the CIT....
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....T (E) Vs. Ahay G. Piramal Foundation 52 taxmann.com 226 (Del) 5. CIT Vidarbha and Marathwada Vs. Smt. Archana R. Dhanwatay 136 ITR 355 (Bom) 6. Nirmala L. Mehta Vs. A. Balasubramaniam 269 ITR 1 (Bom) 17. Referring to the following decisions he submitted that reconstitution of firm does not result into invocation of section 45 (4) :- 1. CIT Vs. P. N. panjawani 356 ITR 676 (Karnataka) 2. DCIT Vs. G. K.Enterprises 79 TTJ 82 (Mad) 18. Referring to the following decisions he submitted that taxability of sum received by firm is neither a determinative and nor a conclusive consideration to determine the taxability of the sum received by partner from firm :- 1) Roshan Di Hatti Vs. CIT 107 ITR 938 (SC) 2) State bank of Travancore Vs. CIT 158 ITR 102 (SC) 3) Income Tax Officer Vs. Ch. Atchaiah 218 ITR 239 (SC) 4) Godhra Electricity Co. Ltd. Vs. CIT 225 ITR 746 (SC) 19. Referring to the decision of Hon'ble Karnataka High Court in the case of CIT Vs. Dynamic Enterprises he submitted that the Hon'ble High Court in the said decision has held that where retiring partner took cash towards value of his share in partnership firm and there was no distribution of capital ....
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....ment afresh, even then also there was total non compliance. She submitted that the Ld. CIT(A) has given valid reasons for bringing to tax the amount received by the assessee on account of relinquishment of its rights in the partnership firm. Similarly there are certain intra group transactions on account of purchase and sale of shares for which no details were filed either before the Assessing Officer or before the CIT(A). The assessee also failed to furnish any evidence that the share transactions were genuine. The basis of share pricing was also not provided. The Ld. CIT(A) passed the order after calling for three remand reports from the Assessing Officer. Accordingly the Ld.CIT(A), whose powers are conterminous with that of the powers of the Assessing Officer, issued an enhancement notice and after considering the submissions filed by the assesee held that the loss on account of transaction between group entities of shares of group entities is a collusive transaction which has been done only to offset the income on sale of shares in the partnership firm of M/s. Trishul Industries and therefore, is not an allowable deduction. She accordingly submitted that since the order of the ....
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.... above mentioned parties became partners of the firm M/s Trishul Industries and the status of all partners with Profit and Loss percentage was as under: As per Partnership Deed of M/s Trishul Industries dated 27.11.2006 Out of seven existing partner first four partners were retired and new profit and loss sharing ratio was as under: i) Shri R. L. Kukreja (First Partner) Profit/loss sharing ratio 1% ii) Shri Subhash Chandra Babbar (Second Partner) Profit/loss sharing ratio 1% iii) Shri Ravi Shanker (Third Partner) Profit/loss sharing ratio 1% iv) Shri Satish Chandra Babbar (Fourth Partner) Profit/loss sharing ratio 1% v) M/s MDLR Estates (P) Ltd. (Fifth Partner) Profit/loss sharing ratio 45% vi) M/s MDLR Builders (P) Ltd. (Sixth Partner) Profit/loss sharing ratio 45% vii) Sh. Gopal Kumar Goyal (Seventh Partner) Profit/loss sharing ratio 6% As per Partnership Deed of M/s Trishul Industries dated 27.11.2006 Out of seven existing partner first four partners were retired and new profit and loss sharing ratio was as under: i) Shri R. L. Kukreja (First Partner) (Retired) ii) Shri Subhash Chandra Babbar (Second Partner) (Retired) iii ) S....
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....partner is entitled to a valuation of his share in the net assets of partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does not involve an element of transfer within the meaning of section 2(47), Chief Justice P.N. Bhagwati (as the learned Judge then was) speaking for a Division Bench of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 dealt with the issue in the following observations:- "...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 by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. Th....
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....ing upon the judgment in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. The Supreme Court held that what is envisaged on the retirement of a partner is merely his right to realise his interest and to receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership by virtue of his status as a partner and in terms of the partnership agreement. Consequently, what the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. The Supreme Court held that there was nothing strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. The Supreme Court inter alia cited with approval the judgment of the Gujarat High Court in Mohanbhai Pamabhai's case (supra) and held that there is no transfer upon the retirement of a partner upon the distribution of his share in the net assets of the firm. In CIT v. R. Lingmallu Raghukumar [2001] 247 ITR 801 , the Supreme Court held, while affirming the principle laid down in Mohanbhai Pamabhai that when a partner retires from a partnership and the amount of his sha....
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....the transfer for the purpose of section 48. Ex facie subsection (4) of section 45 deals with a situation where there is a transfer of a capital asset by way of a distribution of capital assets on the dissolution of a firm or otherwise. Evidently, on the. admitted position before the Court, there is no transfer of a capital asset by way of a distribution of the capital assets, on a dissolution of the firm or otherwise in the facts of this case. What is to be b noted is that even in a situation where sub-section (4) of section 45 applies, profits or gains arising from the transfer are chargeable to tax as income of the firm. 26.2 We find, the Hon'ble AP High Court in the case of Chalasani Venkateswara Rao Vs. ITO (supra) held that amount received by a partner in full and final settlement of its shares on dissolution of the firm does not result in transfer. The relevant observation of the Hon'ble High Court reads as under :- 19. In Bankey Lai Vaidya (supra), the Supreme Court held that a partner in a firm (carrying on business of manufacturing and selling pharmaceutical products and literature relating thereto) whose assets (which included good will, machinery, furniture, medicin....
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....i Pamabhai (supra) was approved by the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 and following the judgment in L. Raghukumar (supra) held that when a partner retires from a partnership firm taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved. 22. In the light of the above decisions, which are binding on us, we hold that the l.T.A.T. was not correct in confirming the orders passed by the C.I.T. (Appeals) and the respondent. When the appellant was paid Rs. 15.00 lakhs by Y. Kalyana Sundaram in full and final settlement towards his 50% share on the dissolution of the firm, mere was no "transfer" as understood in law and consequently there cannot be tax on alleged capital gain. The appellant was correct in law in contending that the amount he received from Y. Kalyana Sundaram is towards the full and final settlement of his share and such adjustment of his right is not a "transfer" in the eye of law. It is a recognized method of making up the accounts of the dissolved firm and the receipt of money by him is nothing but a receipt of his share in th....
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.... this court felt that there is a conflict between the proposition of law laid down in the case of CIT Vs. Mangalore Ganesh Beedi works [2004] 265 ITR 658/136 Taxman 42 (Kar.) and in the case of CIT Vs. Gurunath Talkies [2010] 328 ITR 59 /189 Taxman 171 (kar.) in order to resolve the said conflict, passed an order on 27.08.2013 directing the matter to be listed before the Bench. Substantial question of law "The substantial question of law referred for our consideration are as under :- "When a retiring partners takes only the money towards the value of his share, whether the firm should be made liable to pay capital gains even when there is no distribution of capital asset/ assets among the partners Or Whether the retiring partner would be liable to pay for the capital gains ?" 28. We find the Hon'ble High Court decided the issue in favour of the assessee holding that when a retiring partner takes only money towards the value of his share and when there is no distribution of capital asset/ assets going to the partners, there is no transfer of capital asset and consequently no profits or gains is chargeable u/s. 45 (4) of the IT Act 1961. The relevant observation of t....
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....ied on by the remaining five partners. There " no dissolution of the firm, or at any rate there was no distribution of capital asset on 01.04.1994 when three partners retired from the partnership firm. What was given to the retiring partners-is cash representing the value of retirement share in the partnership. No capital asset was' transferred on the date of retirement under the deed of retirement deed dated 0l.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 s 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 Court in Guninaths Talkies' case (supra) it is taxable. This argument proce....
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....inguished in favour of the partner to whom it is transferred. If so read, it will further the object and the purpose and intent of the amendment of Section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would amount to the transfer of capital assets in the nature 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 other words, its right to the property should stand extinguished and the retiring partners acquires 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 partnershi....
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....a partner on retirement from the partnership firm. The order of the CIT(A) on this issue is accordingly set aside and the Assessing Officer is directed to delete the addition of Rs. 43,49,47,500/- sustained by the CIT(A). 31. The grounds of appeal No. 2 to 2.3 are accordingly allowed. 32. So far as the ground No. 1 to 1.4 are concerned the same relate to the order of the CIT(A) in making a disallowance of Rs. 13,04,50,800/- representing the loss incurred on purchase and sale of shares. It is an admitted fact that there is no such discussion by the Assessing Officer in the body of the assessment order. Only while processing the appeal, certain discrepancies were found in the income computation for which the Ld. CIT(A) issued an enhancement notice. After considering the various arguments advanced by the assessee Ld. CIT(A) held that the loss on account of transaction between group entities of shares of group entities is a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm of M/s. Trishul Industries and therefore, is not an allowable loss. It is the submission of the Ld. Counsel for the assessee that the Ld. CIT(A) has no p....
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....4,600/- representing the loss incurred on purchase and sale of shares Rs. 4,43,55,115/- Ground No.1.1)That the learned Commissioner of Income Tax (Appeals) while making the aforesaid disallowance has acted in excess of jurisdiction and therefore, the same is beyond the scope and powers vested in the learned Commissioner of Income Tax (Appeals) under section 251 (l)(a) of the Act. Linked to ground no.l Ground No.1.2) That no valid show cause notice was given by the learned Commissioner of Income Tax (Appeals) before making the impugned disallowance and hence the same on this ground alone is without jurisdiction and contrary to the provisions contained in section 251(2) of the Act. Linked to ground no.l Ground No.1.3) That even otherwise, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the documentary evidence furnished in support of the loss incurred by the assessee company and therefore, genuine business loss incurred by the assessee ought to have been allowed as such. Linked to ground no.l Ground No.1.4) That the finding of the learned Commissioner of Income Tax (Appeals) that the aforesaid loss is of transaction between group entities of shar....