2011 (3) TMI 1644 - AT - Income Tax

Summary

Issues Involved:
1. Whether the retirement from the firm and receiving a sum in lieu of giving up all rights constitutes a transfer of a capital asset giving rise to capital gains tax.
2. Alleged mistakes in the Tribunal's order regarding the treatment of the transaction and the application of relevant legal provisions.

Summary:

Issue 1: Transfer of Capital Asset and Capital Gains Tax

The Tribunal had to adjudicate whether the Assessee's retirement from the firm M/S. D.S. Corporation and receiving a sum of Rs. 35,59,84,050/- in lieu of giving up all his rights as a partner constituted a transfer of a capital asset, thereby giving rise to capital gains tax. The Tribunal held that the Assessee's share in the partnership and its assets was a capital asset within the meaning of section 2(14) of the Income Tax Act, 1961. On retirement, the Assessee was paid something over and above the sum standing to the credit of his capital account, thus resulting in a capital gain.

Issue 2: Alleged Mistakes in Tribunal's Order

1. The Assessee pointed out that the Tribunal's discussion on tax avoidance by bringing an asset into a partnership and then retiring was academic and not applicable to the Assessee's case.

2. The Assessee argued that the property acquired by the firm remained its property, and any capital gain tax should be on the firm, not the retiring partner, to avoid double taxation.

3. The Tribunal allegedly relied on the decision in N.A. Mody vs. CIT, which was rendered before the introduction of section 45(4) of the Act. The Assessee contended that post-section 45(4), any taxable sum should be in the hands of the firm.

4. The Tribunal allegedly failed to appreciate the ratio in Prashant Joshi 324 ITR 154 (Bom), which stated that under section 45(4), the charge to capital gain tax can only be in the hands of the partnership.

5. The Tribunal was accused of not following the decision in Prashant Joshi by stating that the Bombay High Court had not considered the earlier decision in N.A. Mody. The Assessee argued that the Tribunal, being a subordinate body, could not disagree with the High Court's judgment.

6. The Tribunal allegedly did not consider the argument that whatever is received by an Assessee from the firm cannot be taxed in the hands of the partner, relying on section 10(2A) of the Act.

7. The Tribunal allegedly failed to consider the decision of a co-ordinate Bench in ITO Vs. Smt. Paru D. Dave, which held that there is no incidence of capital gain tax on the retirement of a partner. The Assessee argued that the Tribunal should have referred the matter to a larger Bench if it disagreed with this view.

8. The Tribunal allegedly wrongly held that the Assessee was paid a lump sum amount over and above the amount standing to his capital account.

The Tribunal dismissed the Miscellaneous Application (M.A.), stating that the objections raised did not constitute mistakes apparent from the record. The Tribunal emphasized that its power u/s 254(2) is confined to rectifying any mistake apparent from the record and does not extend to reviewing or revising its order. The Tribunal concluded that the Assessee's arguments were hypothetical and did not demonstrate any patent, obvious, or clear error in the Tribunal's original order.

Order pronounced in the open court on 23rd March 2011.