TaxTMI 
TaxTMI 
TaxTMI 
2019 (12) TMI 312
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....cted the AO to recomputed capital gain u/s.45(3) r.w.s 50C of the I.T Act. 2) The Learned C.I.T. (A)-1, Rajkot has erred in deleting remuneration from the firm amounting to Rs. 1,58,79,299/- in which the appellant had claimed deduction u/s.80IB(10).. 3) The Learned C.I.T.(A)-1, Rajkot has erred in deleting the interest on capital amounting to Rs. 1,02,557/- 2. The 1st issue raised by the Revenue is that the learned CIT(A) erred in deleting the addition made by the AO for Rs. 27,36,800/- on account of transfer of land by the partners to the partnership firm. 3. The assessee in the present case is an individual and drawing his income from the source of salary and share of profit from the partnership firm namely M/s Swapnalok Developers comprising of 10 partners in total. All the partners of the firm are having equal profit sharing ratio. The assessee along with other partners held a piece of land which was purchased by all of them (partners) for Rs. 63 Lacs. All the partners brought such land to the partnership firm as capital contribution dated 5 July 2004 which was recorded by the firm as stock-in-trade at the book value. 4. However, the AO was of the view that such transfer....
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....in the hands of the partner. The consideration of the CIT (A) is needed to be discarded that the law and the act are made on the very ground of the facts, logic and to establish the natural law of justice. As per the statement, the phrase "recorded an amount according to which no capital gain arises" is the sole and fine basis to invoke the sec. 147 of the Act, the believe to reopen the case, and the assessee adopted a convenient and comfortable way to record a transaction which guaranteed for the escapement of the income. The recording of the amount in the transaction involved is not justified by the assessee whereas the AO under the circumference and discussion of the section 50C found a sound ground to add the evaded tax judiciously. In addition to the discussion it pertinent here to state that the assessee made no compliance regarding the following queries via notice u/s 142(1) dated 11.03.2015 :- a) Details of project completed viz. shop/flat along with area of them on the land introduced as capital b) The plan layout of the project c) The ratio/proportion of the sale of flat/shop of the total project with that of proportionate portion of land. 8.1 The Ld.D.R further st....
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....nsformed with the development work and construction activity which were later sold on as residential units and it was so done under the name of Swapnalok Developers. So the argument here to treat it as stock in trade without having gone through any conversion is valid , sound and judicious as the capital assets must be considered under the phrase " conversion or treatment". 8.2 The Ld.D.R also relied upon the judgment of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT (1985)156 ITR 509 SC was dealing with the situation where an individual makes over his capital asset to a partnership as a contribution towards capital and the asset was valued for the purpose at the market value, and in that event it was held by the Hon'ble Supreme Court that there was asset within the meaning of section 45 of the Income Tax Act, 1961. 8.3 Even, such a transaction now takes care of by section 45(3) of the Income-tax Act, 1961, inserted from the assessment year 1988-89. Sub- Section (3) of section 45 of the Act, effective from assessment year 1988-89, enacts that the profits and gains arising from the transfer of a capital asset by a person to a firm, in which he is or becom....
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.... caution emphasized by the Hon'ble Supreme Court, whether the transfer of land in question as capital contribution by the assessee to a partnership firm in which the assessee became a partner was merely a device or ruse for converting the land into money which would substantially remain available for assessee' s benefit without liability to income-tax. 9. On the other hand, the learned AR before us filed a paper book running from pages 1 to 10 and submitted as under: a. A.O. has treated the difference between value of contribution of land by partners and stamp duty as capital gain of partner u/s.45(2) for A.Y. 2007-08. b. In fact, partner contributed his personal land to the firm on dated 02-12- 2014(A.Y. 2005-06) and not this year, hence there can't be question of gain to him in A.Y. 2007-08 (PB page 1,4,5 and 10). c. Amount recorded by the firm u/s 45(3) can't be disturbed by the A.O u/s.50C or otherwise. d. Land given by partner became stock-in-trade in business of the firm and not of the partner; sec. 45(2) not attracted in partner's case; he did not sell any land in A.Y. 2007-08 at all. e. Besides in A.Y. 2005-06 contribution by partner of land as capital of fir....
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.... partnership firm for such remuneration and interest on capital as per the provisions of section 40(b) of the Act. Accordingly the AO added the amount of remuneration and interest amounting to Rs. 1,58,79,299/- and Rs. 1,02,557/- respectively to the total income of the assessee. 14. Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO by observing as under: 7.1 In the separate appeal no.228/14-15 filed in case of the said firm, I have by my separate order held that the said remuneration does not become a deduction in the hands of the firm and hence the claim of deduction u/s.80IB(10) could not have been reduced to that extent. Moreover, I also find that the A.O. never allowed the remuneration or interest to partners as deductible expenditure in assessment of the firm, in view specific provisions of Sec. 28(v), the said amount cannot be treated as income of the partner, being the appellant before me. In view of the same, as a corollary thereof, the addition in the hands of the appellant being a partner of the firm cannot be sustained. Hence, the fifth ground of appeal is allowed. 8. The sixth ground of appeal pertains to addition....
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....tnership firm comes into existence with mutual understanding between the persons. These understanding can be reduced in writing or otherwise. Thus, it is clear that it is not necessary to execute the deed of partnership in writing. However, in the current scenario, it is not possible to work under the module of the partnership without executing the partnership deed in black and white. It is because to run the business one needs to have a bank account, PAN, etc. which is not possible to obtain without having the deed of partnership. Thus, the deed of the partnership will reveal the understanding on the basis of which partners agreed to work together. 18.2 Thus it can be inferred that the clauses mentioned in the partnership deed are not mandatory but made to avoid any ambiguity and misunderstanding between the partners. As such, there is no dispute among the partners for not claiming the remuneration/interest on capital in the profit and loss account of the firm. Therefore, in our considered view the conduct of the partners of the firm suggests that it was agreed not to claim any remuneration/interest on the capital account. In holding so, we find support and guidance from the orde....
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....x Act, 1961." 9.6. The aforesaid clauses of the partnership deed are clearly enabling clauses since the word used in both the clauses are "the partners shall be entitled...". This shows that the partners were entitled to get interest on the capital and to draw remuneration for their services without binding them to do so. This, in my opinion, is not a mandatory provision in the partnership deed which would be worded like " the partners shall be provided/given....". Further, it is also mentioned in both these clauses, that the rate or rates of interest and the remuneration would be mutually settled by the partners at the end of each financial year. Now, a partnership, by its very name and as per the provisions of Partnership Act is by will of the partners. There are only two partners in this firm, both having equal shares. The accounts drawn up at the end of the year reveal that no interest on the capital or remuneration to the partners has been provided in the accounts of the firmM/s.Dynamech. This act by itself signifies that the partners have agreed not to provide interest on their capital or to charge remuneration for their services. In my opinion, the terms of the partnersh....