2019 (5) TMI 1727 - AT - Income Tax

Taxability of compensation received on retirement from firm - CIT-A not accepting the fact that the amount over the tangible and intangible assets and right for profit of the firm and assessee was compensated with a sum over and above its capital contribution to the firm - HELD THAT - Assessee in this case was a partner in the partnership firm. He received compensation from the partnership firm upon retirement from the firm over and above the amount existing to the credit of his capital account. This was brought to tax by the assessing officer. It is noted that the partnership firm was continuing in existence. It was only that assessee retired from the partnership firm. There is no distribution of assets. In the circumstances the compensation received by the assessee has to be held to be capital receipt not chargeable to tax. This is supported by the Honourable Apex Court decision in the case of CIT Vs. V.R. Ringmallu Rahukumar ( 1997 (1) TMI 74 - SUPREME COURT ) . Further to the same effect is order of the honourable Hon ble Jurisdictional High Court in the case of Riaz A. Saikh ( 2013 (12) TMI 248 - BOMBAY HIGH COURT ) . - Decided against revenue Deemed rental income from unsold flats - AO has added notional rental income for the unsold flats in the hands of the assessee - HELD THAT - Upon careful consideration we note that the amendment in the Act bringing into the ambit of taxation the annual value of unsold flats in the hands of the real estate developer has been brought into the statue books by amendment w.e.f. 1.4.2018. The same has been held to be prospective. Hence on the touchstone of this amendment the additions made in the hands of the assessee for the present assessment year is not sustainable. As regards decision of Hon ble Delhi High Court in the case of Ansal Housing Finance and Leasing Co. Ltd. ( 2012 (11) TMI 323 - DELHI HIGH COURT ) relied upon by learned CIT(A) we note that there is a decision of Hon ble Gujarat High Court in the case of Neha Builders Pvt. Ltd. ( 2006 (8) TMI 105 - GUJARAT HIGH COURT ) in which identical issue has been decided in favour of the assessee. Hence the ITAT Mumbai in the case of Runwal Builders P. Ltd. ( 2018 (2) TMI 1707 - ITAT MUMBAI) by referring to Vegetable Products decision of Hon ble Apex Court ( 1973 (1) TMI 1 - SUPREME COURT) has decided the issue in favour of the assessee. Hence in this view of the matter also the issue is to be decided in favour of the assessee.

Summary

Issues Involved:
1. Taxability of compensation received on retirement from the partnership firm.
2. Notional addition on account of deemed rental income on unsold flats/units held as stock in trade.
3. Levy of interest under section 234C and 234D of the Act.
4. Initiation of penalty proceedings under section 271(1)(C) of the Act.

Detailed Analysis:

1. Taxability of Compensation Received on Retirement from the Partnership Firm:
The primary issue is whether the compensation received by the assessee on retirement from the partnership firm should be taxed as long-term capital gain. The Assessing Officer (AO) argued that the amount received over the capital contribution should be taxed under the head capital gain, as the assessee relinquished its rights over the firm's assets. The AO cited the case of Sudhakar Shetty to support his stance. However, the CIT(A) and the ITAT held that the amount received by the assessee was a capital receipt not chargeable to tax. The CIT(A) emphasized that there was no dissolution of the firm or distribution of capital assets, and thus, Section 45(4) of the Act was not applicable. The ITAT supported this view by referring to several judicial precedents, including the Supreme Court decision in CIT Vs. V.R. Ringmallu Rahukumar, which held that such compensation is not taxable as it does not constitute a transfer of capital asset.

2. Notional Addition on Account of Deemed Rental Income on Unsold Flats/Units Held as Stock in Trade:
The AO added notional rental income for the unsold flats held by the assessee as stock in trade under the head Income From House Property (IFHP). The CIT(A) upheld this addition by referring to the Delhi High Court decision in Ansal Housing & Finance and Leasing Co. Ltd. However, the ITAT overturned this decision, noting that the amendment to Section 23, which taxes the annual value of unsold flats held as stock in trade, is applicable from 1.4.2018 and is prospective in nature. The ITAT also referred to the Gujarat High Court decision in Neha Builders Pvt. Ltd., which ruled in favor of the assessee. Consequently, the ITAT decided that the notional rental income for the assessment year in question was not sustainable.

3. Levy of Interest under Section 234C and 234D of the Act:
The AO levied interest under sections 234C and 234D of the Act. The CIT(A) confirmed this action. However, the ITAT did not provide a detailed discussion on these points in the judgment, implying that these issues were either considered consequential or not contested separately.

4. Initiation of Penalty Proceedings under Section 271(1)(C) of the Act:
The AO initiated penalty proceedings under section 271(1)(C) of the Act. The CIT(A) confirmed this action. Similar to the levy of interest, the ITAT did not delve into a detailed discussion on this issue, suggesting that it was either not separately contested or considered consequential.

Conclusion:
The ITAT dismissed the Revenue's appeal and allowed the assessee's cross-objection. The compensation received on retirement from the partnership firm was held not taxable as long-term capital gain, and the notional addition of rental income on unsold flats was not sustained for the assessment year in question. The levy of interest and initiation of penalty proceedings were not specifically addressed in detail, indicating they were either consequential or not separately contested.