2012 (1) TMI 216 - AT - Income Tax

Capital account balance received by the appellant on account of his retirement from the firm M/s. Krishna Villa Apartments - taxability - Held that - The Finance Minister in the budget speech for the year 2003 stated that no confession shall be obtained during search and seizure operation. The instructions were followed by CBDT by issue of a circular on the lines desired by the Finance Minister. There can be an estoppel on the issue of the facts but there cannot be estoppel on the principle of law. It is not the case of the revenue that the assessee was not disclosing the amount received as a result of retirement from the firm. The assessee obtained the legal advice and was of the opinion that such revaluation is capital receipt which is not liable to tax. Hence we feel that income cannot be added simply on the basis of surrender. The statement recorded u/s 132(4) can be rebutted by the assessee and the case of the assessee is that the amount is not liable to tax. After considering various case laws relied upon by both the parties we feel that the issue is to be decided in favour of the assessee because if two constructions are to possible then one has to adopt the construction which is favourable to the assessee. We had also noticed the distinguishing features in this case and it is not a simple case in which other partners joined the firm. This is a case where another firm has been taken over by the firm in which the assessee was a partner. Both the firms were having intangible rights arising from development agreement and right of constructing a housing / commercial complex and none of the firm valued such rights in the form of monetary consideration. Such rights remained with the firm even after retirement of the assessee. We therefore hold that the ld. CIT(A) was not justified in confirming the addition of Rs. 5, 24, 47, 943/-.

Issues Involved:
1. Validity of the assessment order under section 153A/143(3) of the Income Tax Act.
2. Taxability of the capital account balance received on retirement from the firm.
3. Applicability of section 10(2A), section 28(iv), section 28(v), and section 45(4) of the Income Tax Act.
4. Allegation of tax evasion through colorable devices.
5. Double taxation on revaluation of land.
6. Reliance on the statement made during search and seizure operations.

Detailed Analysis:

1. Validity of the Assessment Order under Section 153A/143(3):
The assessee contended that the assessment order passed under section 153A/143(3) was based on assumptions and conjectures without proper appreciation of facts and provisions of the Income Tax Act. The Tribunal found that the assessment was correctly made after considering all material evidences and facts on record, thereby upholding the validity of the assessment order.

2. Taxability of the Capital Account Balance Received on Retirement:
The assessee argued that the capital account balance received on retirement from the firm was not taxable as it did not involve any transfer of capital assets. The Tribunal noted that the retirement deed did not specify any consideration for relinquishment of the share in the partnership assets. The Tribunal referred to various Supreme Court and High Court decisions, including CIT v. R. Lingmallu Raghukumar (2001) 247 ITR 801 (SC), which held that the amount received by a retiring partner does not involve a transfer of interest in the partnership assets and is not taxable as capital gains. The Tribunal concluded that the amount received by the assessee on retirement was a capital receipt and not taxable.

3. Applicability of Section 10(2A), Section 28(iv), Section 28(v), and Section 45(4):
The assessee claimed exemption under section 10(2A) for the share of profit from the firm. The Tribunal observed that the revaluation of land was not considered for taxing the profit in the hands of the firm, and hence, the exemption under section 10(2A) was applicable. The Tribunal also noted that section 45(4) was not applicable as there was no dissolution of the firm, and the revaluation of stock did not result in any transfer of capital assets. The Tribunal held that the amount was not taxable under sections 28(iv), 28(v), or 45(4).

4. Allegation of Tax Evasion through Colorable Devices:
The Revenue alleged that the series of transactions, including the revaluation of land and retirement of partners, were colorable devices to evade tax. The Tribunal referred to the Supreme Court's decision in Union of India v. Azadi Bachao Andolan (263 ITR 706) and held that tax planning within the framework of law is permissible. The Tribunal found that the transactions were genuine and not sham, as the firm continued to exist and the revaluation was a common practice in business. The Tribunal rejected the allegation of tax evasion.

5. Double Taxation on Revaluation of Land:
The assessee argued that taxing the revaluation profit in the hands of the retiring partners and not allowing the revaluation cost in the firm's assessment amounted to double taxation. The Tribunal noted that the Assessing Officer did not allow the revaluation cost in the firm's assessment, and hence, the interest of the Revenue was protected. The Tribunal held that there was no double taxation.

6. Reliance on the Statement Made During Search and Seizure Operations:
The Revenue relied on the statement made by the assessee during the search, where he surrendered the revaluation amount as undisclosed income. The Tribunal referred to the Finance Minister's budget speech and CBDT circular, which instructed that no confession should be obtained during search operations. The Tribunal held that the statement recorded during the search could be rebutted by the assessee and that the income could not be added merely based on the surrender. The Tribunal concluded that the amount was not liable to tax based on the statement.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the capital account balance received on retirement was not taxable, the transactions were genuine, and there was no tax evasion or double taxation. The Tribunal also held that the assessment order under section 153A/143(3) was valid, but the addition of Rs. 5,24,47,943 was not justified.

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