TaxTMI 
TaxTMI 
2020 (12) TMI 103
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....ncy. During the year, the assessee derived income by way of salary from M/s. Kamat Hotels India Pvt. Ltd. in the capacity of a director Rs. 51,92,900/-, income from business of Rs. 29,419/- and income from other sources of Rs. 2,12,63,788/-. 3. The grounds raised by the Revenue are reproduced as under: "1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in holding the consideration received is retirement benefit without appreciating the fact that the same is in the nature of capital gain. 2. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in treating the same as retirement benefit without appreciating that the other partners of the firm have transferred the land of the project which was treated as long term capital gain and the assessee has taken the shade of the deed to avoid tax as per the provisions of sec. 45 of the Act. 3. On the facts and in the circumstances of the case and in law the Ld. CIT(A) failed to appreciate that consideration received by the assessee is towards the transfer of rights in the buildings, health club etc. which is a capital and the same is taxable as long t....
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....ect to takeover of debts and liabilities under the agreement dated 04.04.2008 net amount of Rs. 45,67,74,731/- which is not taxable and is taken to the capital account as shown in the balance sheet. Initially the assessee entered into a partnership business including construction and running of a club vide deed of partnership dated 06.05.1992 with the following partners: i) Smt. Amrabai Malsi 21.42% ii) Smt. Velbai Devsi Shah 21.42% iii) Shri Bipin Talakshi Shah 3.58% iv) Smt. Hirbai Nanji Sojpal 3.58% v) Shri Smir P. Shah 25% vi) Shri Vithal V. Kamat 25% 7. The assessee retired from the said partnership on 04.04.2008 and relinquished his rights, title and interest in the partnership properties. The assessee's account with the partnership was settled on his retirement on 04.04.2008 and a sum of Rs. 48.15 crore was received by him by way of retirement in full and final settlement of his account with the firm. The assessee filed the copy of deed of admission and retirement dated 04.04.2008 signed by the four incoming partners and retiring partner Mr. Vithal V. Kamat the assessee duly attested by the solicitor. The assessee rece....
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....tnership deed, the objective of the partnership firm was to develop the said land into flats, shops and to construct health club in the name of Kamat Klub Lokhandwala and thus this was a limited venture partnership concern. The AO noted that assessee had physical possession of the said immovable property. Vide deed of admission and retirement dated 04.04.2008, the four partners were retired namely Smt. Amrabai Malsi, Smt. Velbai Devsi Shah, Shri Bipin Talakshi Shah and Smt. Hirbai Nanji Sojpal and four new partners were taken in the partnership in the M/s. Runwal Developers Pvt. Ltd. namely; (1) M/s. Runwal Developers Pvt. Ltd. (2) Subhash S. Runwal (3) Sandeep S. Runwal and (4) Suboth S. Runwal According to the AO, the said deed was only signed by Mr. Vithal V. Kamat and not by other retiring partners. The AO also noted that the other partners sold their share in the land namely Shri Smt. Amrabai Malsi and Smt. Velbai Devsi Shah to M/s. Runwal Developers Pvt. Ltd. on 26.12.2007 for Rs. 11 crore and the amount was offered by the respective partners as long term capital gain in A.Y. 2008-09 and similarly Bipin T. Shah sold his share in the prop....
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....n Talakshi Shah her daughter's son was nominated in her place to have the benefit of all her share, right, title and interest in the firm and thus his share increased to 7.16% from 3.58%. Mr. Sameer Shah retired on 11th August, 2002 from the firm in terms of deed of retirement dated 29th January, 2003, and he transferred his share in the firm to the appellant thus the share of the appellant increased to 50%. (iv) Four persons (three individuals and one company) from Runwal group were admitted as partners of the firm and agreed to bring in capital, simultaneously, the appellant opted to retire from the partnership firm as from 1 ,4.2008. The Deed of Admission and Retirement dated 4.4.2008 was executed by four incoming partners and the appellant and was witnessed by reputed law firms in Mumbai. The appellant gave public notice in three prominent news papers and received Rs. 48.15 Crores as amount towards retirement from the firm in settlement of his accounts in the firm's books. (v) In order to verify the contention of the appellant the AO issued summons to the three outgoing and four incoming partners u/s 131 of the Act and recorded their statements of thre....
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....d interest in the property is taxable as capital gain under section 45(1) of the Act. This gain is assessed as long term capital gain of the assessee for the reason that the right was held since 1992 and the cost of acquisition is taken at Nil because the assessee was having debit balance of Rs. 1,04,690/-in the firm." In the background of above admitted facts the rival submission is considered. "4.4.2 What is material here for the adjudication of the controversy is the status of the claimed land which is held to have been transferred along with the share, if any, of the appellant to decide whether any amount was taxable on account of money received by the appellant on the retirement from the partnership firm. 4.4.3 Admittedly, the land was not owned by the appellant and was brought in as their contribution to the capital of the firm by other partners. The said land was transferred by those partners directly to incoming partner without any involvement of the appellant. 4.4.4 The admitted position of both the appellant and revenue, is that the appellant had no right or claim over the land which was contributed by the other partners and the sale of....
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.... as well as the revenue that the land was transferred by the partners other than the appellant in favour of the incoming partner. Consideration for which was paid to those partners by the new partners and on which the incidence of capital gain has already taken place and the taxes necessary are also reported to have been paid by the recipients of capital gains even by the AO. 4.4.8 If the contention of the A.O. that "Deed of Admission and Retirement was prepared to camouflage the transaction of transfer of development right and right of possession" is accepted for the sake of argument which though cannot be the case in terms of the law governing retirement of existing partners and admission of new partners, in that case the transfer of land is to be considered in the hands of the owner of the land being the partnership firm. As the A.O. has held that the firm was not dissolved when the existing partners moved out and the new set of partners moved in, the admitted continuity of the firm negates the further action of the A.O. as the appellant being a partner of the firm could not have owned the land which was owned by the partnership firm only. It is trite that a partnership....
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....r of the land. 4.4.13 As the basic ingredient of section 45 is not available i.e. the ownership of land in the hands of the appellant, the provisions of section 4 being the charging section would not apply to the case of the appellant. 4.4.14 Even otherwise admittedly the owners of the land being the outgoing partners other than the appellant have not suggested in any manner in their examination before the learned A.O. or otherwise that the appellant was the owner of the land at any point of time. The A.O. also has not considered the appellant to be the owner of the land. 4.4.15 That being the case, it follows that the appellant not being the owner of the land which is stated to have been transferred does not come under the purview of section 45 of the Act and therefore cannot be subjected to section 4 of the Act. It further follows that the appellant cannot be held liable to pay tax for the transfer of land as long term capital gains as simply put no transfer of land has been effected by the appellant for the simple reason that the appellant never owned the land. 4.4.16 Though this issue has not been the subject of consideration between the part....
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....ise 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 sec 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 term otherwise means even retirement of a partner will come under purview of sec 45(4). In view of sec 45(4) if there is any capital gain tax has to be levied in the assessment of the firm and not in the assessment of the partner. This view is even upheld by Chalasani Venkateshwara Rao vs. ITO 349ITR 413 (Andhra Pradesh HC). 4.4.19 The AO has himself negated the taxability of receipt in the hands of appellant u/s 45(4). From the conclusion of the AO it is seen that the sole basis for his conclu....
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....sive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the latter, the value will be represented, by his share in the net assets on the dissolution of the firm or upon the partner's retirement. (iv) Prashant S. Joshi [20101 324 ITR 154 fBom): "During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On a dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remains after meeting the debts and liabilities. An amount paid to a partner upon retirement, afte....
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....r of Prashant S. Joshi (supra). 3. In the impugned order, the Tn'bunal does refer to the this Court in the matter of N.A. Modi (supra) and states that it follows, the decision of this Court in the matter of CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom.) and the same has been reversed by the Apex Court in Tribhuvandas G. Patel v. CIT [1999] 236 ITR 515. This Court in the matter of Prashant S. Joshi (supra) has also referred to the decision of Tribuvandas G. Patel (supra) rendered by this Court and its reversal by the Apex Court. Moreover, the decision of this Court in the case of Prashant S. Joshi (supra) placed reliance upon the decision of the Supreme Court in the case of CIT v. R. Lingamallu Rajkumar [2001] 247 ITR 801/12002] 124 Taxman 127 wherein it has been held that amounts received on retirement by a partner is not subject to capital gains tax." From the above it is clear that the Supreme Court, Bombay High Court and Karnataka Full Bench have held that on retirement of a partner from the firm there is no element of transfer of interest in partnership assets by the retired partner to the continuing partners and the amount received by him for his s....
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....on was envisaged and planned in order to circumvent the tax liability. The Ld. D.R. submitted that the assessee had entered into a partnership with five partners in the name of M/s. Post Field Construction vide deed dated 06.05.1992. Under the said deed of partnership the first four partners have brought in 15,250 sq. yards into the firm. The Ld. D.R. drew our attention to para 6 of the partnership deed wherein the land was valued at Rs. 1.5 crore as capital contribution of the four partners and other two partners Shri Samir P. Shah and Shri Vithal V. Kamat were to bring in minimum of Rs. 1.50 crores as their capital contribution. The purpose of the said partnership was to develop the said land, enter into agreements for sale of flats/shops and also establish a sports complex as may be decided by Shri Samir P. Shah and Shri Vithal V. Kamat and the said firm was to be dissolved upon the completion of the development of the property. The assessee was active partner and developed the land and brought the funds to construct the health club and thus assessee had the physical possession of the said property. The Ld. D.R. stated that in terms of the deed of admission and retirement dated ....
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....liability. Therefore, the Ld. D.R. prayed that the appeal of the Revenue may kindly be allowed by setting aside the order of the AO. 10. The Ld. A.R., on the other hand, relied heavily on the order of Ld. CIT(A) and submitted that the Ld. CIT(A) after considering the facts of the case and ratio laid down by the Hon'ble Apex Court and Hon'ble Karnataka High Court have reached a correct conclusion and rightly reversed the order of AO. The Ld. A.R. submitted that Shri Vithal V. Kamat who became the partner in the partnership vide deed of partnership dated 06.05.1992 determined partner in the firm till 01.04.2008. The Ld. A.R. submitted that the assessee received Rs. 48.15 crore upon retirement from the firm and disclosed the receipt of consideration on retirement from M/s. Sports Field Construction as exempt from tax. The Ld. A.R. submitted that the AO had also issued summons to other outgoing partners as well as incoming partners under section 131 of the Act and collected information from them. The Ld. A.R. submitted that AO collected this information behind the back of the respondent during the assessment proceedings without offering any opportunity to the respondent to cross....
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....ni NUF (vii) [2014] 41 taxmann.com 455 (Bombay) /[2014] 221 Taxman 118 (viii) (Bombay) (MAG.) CIT-III, Pune v. Riyaz A. Sheikh (viii) [2010] 189 Taxman 1 (Bombay) / [2010] 324 ITR (Bombay) / [2010] 230 CTR 232 (Bombay) Prashant S. Joshi v. ITO, Ward 19(2)(4) (ix) [2019] 104 taxmann.com 444 (Bombay) (2019) 263 Taxman 120 (Bombay) Pri. CIT - 30 v. Electroplast Engineers (x) (1997] 95 Taxman 9 (Gujarat) / [1997] ITR 221 (Gujarat) / [1997] 142 CTR 115 (Gujarat) CIT v. Anant Narhar Nimkar (HUF) (xi) [2013] 40/taxmann.com 318 (Karnataka) (FB) / [2014] 223 Taxman 331 (Karnataka) (FB) / [2013] 359 ITR 83 (Karnataka) (FB) / [2013] CIT v. Dynamic-Enterprises (xii) [2002) 257 ITR 544 (Kerala) / [2002] 125 TAXMAN 802 (KER.) CIT v. Kunnmkulam Mill Board (xiii) Order of ITAT A Bench, Mumbai in appeal ITA No.3609/M/2013 (A.Y. 2004-05) Mrs. Kaushalya R. Sampat v. ITO 9(3)(2) Mumbai (xiv) [2018] 89 taxmann.com 95 (Pune - Trib.) Smt.Vasumati-Prafullachand Sanghavi v. Deputy CIT, Cir-1, Jalgaon. (xv) Order of ITAT B Bench, Pune in appeal ITA No. 469/PN/11 (A.Y. 2007-08) ITO Wd. 3(2), Pune v, Shri Rajnish M. Bhan....
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....e partnership deed, the said plot was to be brought into the partnership firm and other partners also to contribute their respective contribution. Thereafter, Smt. Hirbai Nanji Sojpal died on 22.08.2001 leaving behind her will and testament dated 10.10.2000 under which Shri Bipin Talakshi Shah as executor and trustee and nominated him in her place in the partnership firm and accordingly the share of the said person increased to 7.16% from 3.58%. Pertinent to state that certain disputes arose between Shri Samir T. Shah and the assessee and the firm filed a suit in Bombay High Court seeking the dissolution of the firm, however, the same was resolved by filing Consent Terms under which Shri Samir P. Shah retied on 11.08.2002 from the said firm vide deed of retirement dated 29.01.2003 and his share in terms of the Consent Terms was transferred to the assessee and thus assessee's share in the firm increased to 50% in terms of deed of retirement dated 29.01.2003. Finally, in between the firm also entered into a MOU with M/s. Runwal Developers Pvt. Ltd. dated 12.11.2003 for the development of the plot on certain terms and conditions which could not materialize. Thereafter, a deed of admis....
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....t. Even we find merit in the alternative plea taken by the assessee that if the computational provision of capital gain as provided under section 48 of the Act breaks down then the charging provision as provided under section 45 of the Act would also fail as held by the Hon'ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (128 ITR 294). Therefore, the case of the assessee is squarely covered by the decisions of the Hon'ble Apex Court as discussed above and in view of the ratio laid down in the above decisions by the Apex Court, we are inclined to dismiss the appeal of the Revenue by upholding the order of Ld. CIT(A) on this ground. ITA No.3909/Mum/2018(Assessee's Appeal) 14. The various grounds raised by the assessee are reproduced below: "1. DISALLOWANCE OF FINANCE CHARGES OF Rs. 2,74,4627-: On the facts and circumstances of the case and in law, the Id. Commissioner (Appeals) erred in confirming the disallowance made by the Assessing Officer in respect of finance charges being interest paid by the appellant to his bankers of Rs. 2,74,462/-. 2. DISALLOWANCE U/S 14A OF THE INCOME-TAX ACT READ WITH RULE 8-D: (a) On the facts and ....
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.... income from other sources. Thus the assessee submitted that the interest paid is allowable expense. The said submission of the assessee did not find favour with the AO and after observing that assessee has received income from royalty of Rs. 55,500/- and trade market fee Rs. 10,57,809/-, doesn't require any borrowed capital. The AO also observed that similar expenses were disallowed in the earlier year also which has been accepted by the assessee and finally disallowed and added Rs. 2,74,462/- to the income of the assessee by observing that the borrowed funds were not used for the purpose of business. Similarly, the Ld. CIT(A) has dismissed the appeal of the assessee on this issue by observing and holding as under: "This ground relates to the disallowance of finance charges of Rs. 2,74,462/- u/s 36(1)(iii) of the Act. Consistently, the appellant earned interest income from loans and deposits, which was credited to his capital account, as in earlier years and assessed under the head "income from other sources". It is a fact that the appellant did not utilize the funds borrowed from banks for earning any income for the year. The A.O. noted that similar expenses hav....