2016 (4) TMI 1004 - AT - Income Tax

Capital gain computation - retirement from the partnership firm - extinguishment of partner s interest in partnership assets - transfer u/s 2(47) - Held that - In Additional CIT Vs. Mohanbhai Pamabhai (1971 (9) TMI 56 - GUJARAT High Court) it was held that when a partner retires from partnership what he receives is his share in the partnership, which is worked out and realized and does not represent consideration received by him as a result of the extinguishment of his interest in partnership assets. Further, it was held that the extended definition of the term transfer u/s.2(47) of the Act, by which relinquishment or extinguishment of any right in a capital asset is considered as transfer would also not apply when a partner retires from the partnership and there would be no transfer of interest in the partnership assets. Interest of a partner in a partnership firm is not an interest in a specific item of partnership property. It is his right to obtain his share of profit from time to time during the subsistence of partnership, or on dissolution of a partnership firm, or on his retirement from partnership to get the valuation of his interest in the partnership asset which remains after debts and liabilities of partnership. On retirement share is determined on taking accounts of notional sale of partnership assets and given to him what he received is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. No element of transfer of interest in partnership assets by the retiring partners to the continuing partner no extinguishment of his interest in partnership assets. No transfer of his interest in the goodwill of the firm. Thus, no capital gains is chargeable u/s.45 of the Act. This decision was confirmed by the Hon ble Supreme Court in the case of Additional CIT Vs. Mohanbhai Pamabhai (1987 (2) TMI 59 - SUPREME Court ) Regarding the applicability of provisions of the section 28(iv), there is no receipt of any value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession by present assessee. It is only by retirement from the partnership firm, the assessee received the impugned amount. Regarding the application of Sec.28(v) as discussed in earlier, what the assessee has received on retirement is his share in the value of the business carried on by the firm. The share in the value of the business is a capital asset which include goodwill and as such, such receipts are capital receipts in their hands as held by the Hon ble Supreme Court in the case of Additional CIT Vs. Mohanbhai Pamabhai (supra) and that cannot be considered as business income of assessee u/s.28(v) of the Act and Sec.28(v) confined to any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by, partner of the firm, from such firm and it should be in revenue field. The receipt which is in the capital field cannot be brought u/s.28(v) of the Act This contention of the ld.D.R cannot have any merit. Additional payment even if made to the retiring partner in excess of capital account is not in nature of any profit or income within the meaning of sec.28(va) of the Act and it cannot be brought to tax as business income. There is a serious doubt in the minds of the AO as well as the ld.D.R regarding the taxability of the same in the hands of the assessee in terms of Sec.45(4) of the Act ,so that this argument has been addressed by the ld.D.R. In our opinion, when we have gone through the Memorandum of Agreement dated 06.02.2007, even if the amount of ₹ 27 crores is accrued to the assessee, it is not relating to the assessment year under consideration before us as the assessment year involved is 2008-09. How the transactions entered on 06.02.2007 would be brought to tax in the assessment year 2008-09, even it is admitted that income was accrued to the assessee on 06.02.2009 vide that Memorandum of agreement. More so, when the assessee is following Mercantile system of accounting as noted by the AO in its first page of assessment order at serial No.8, there is no force in the argument of the ld.D.R to hold that the said amount to be taxed in the assessment year 2008-09 - Decided in favour of assessee Re-computation of the deduction u/s.10B - setting off the depreciation loss of non-eligible units against the income of eligible units involved in the activity of export in the computation of taxable total income - Held that - The facts are that in this ground the assessee wants not to set off depreciation loss of other units against the income of the assessee from the export business, which runs several units. This issue is squarely covered by the Decision of Karnataka High Court in the case of CIT v. YOKOGAWA INDIA LTD. reported in 2011 (8) TMI 845 - Karnataka High Court held that exemption u/s.10A has to be allowed without setting off brought forward unabsorbed losses or depreciation from earlier assessment year or current assessment year either in the case of non STP or in the case of from some other undertakings, being so depreciation loss of other units cannot be set off against the income for the assessee from the export purpose. - Decided in favour of assessee Reduction of miscellaneous receipts from the eligible profits in the computation of deduction u/s.10B - Held that - The facts of the case are that the assessee s claim that the said amount of receipts were earned in the course of carrying on the business of 100% EOU i.e receipts from the sale of scrap will also qualify for deduction is unacceptable. Sec.10B(4) clearly states that profits derived from export of articles should alone be considered. Needless to say that the income attributable to an activity is one step removed from the income derived. We are of the view that Ld.CIT(A) placing reliance on Supreme Court s decision in the case of Liberty Liberty India Vs. CIT reported 2009 (8) TMI 63 - SUPREME COURT , rejected this ground. We do not find any infirmity in the order of the Ld.CIT(A). MAT computation - computation of book profit by treating the receipt of ₹ 27.99 crores as short term capital gain - Held that - This amount is straight away taken to General Reserve account and not appearing in the P&L A/c and there is no allegation that brought on loss account was not prepared in accordance with Part-II & III Schedules VI of Companies Act. Hence, the AO is precluded from disturbing the audited Accounts which is duly filed before the ROC as held by the Supreme Court in the case of Apollo Tyres Vs.CIT (2002 (5) TMI 5 - SUPREME Court) wherein held that the use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. - Decided against revenue

Summary

Issues Involved:
1. Taxability of ?26.99 crores received by the assessee on retirement from the partnership firm under Section 45(4) of the Income Tax Act.
2. Deletion of addition of ?27 crores from book profit by the CIT(A).
3. Set-off of depreciation loss of non-eligible units against the income of eligible units for deduction under Section 10B.
4. Reduction of ?4,37,168/- being miscellaneous receipts from eligible profits in the computation of deduction under Section 10B.

Issue-wise Detailed Analysis:

1. Taxability of ?26.99 crores received by the assessee on retirement from the partnership firm under Section 45(4) of the Income Tax Act:
The assessee challenged the taxability of ?26.99 crores received on retirement from M/s. S.J.M. Property Developers, arguing it was a capital receipt and not taxable under Section 45(4). The assessee contended that the revaluation of assets and the increased value credited to the capital account did not constitute a transfer of property. The CIT(A) upheld the AO's view that the amount was taxable under Section 45(4), which considers profits from the transfer of capital assets on dissolution or reconstitution of a firm. However, the Tribunal found that the receipt of ?26.99 crores was not a lump sum payment for relinquishing the partnership share but rather a settlement of the capital account balance. Citing various judgments, including CIT Vs. Lingamallu Raghukumar and CIT Vs. Dynamic Enterprise, the Tribunal concluded that the transaction did not result in a transfer of capital assets and thus was not taxable under Section 45(4).

2. Deletion of addition of ?27 crores from book profit by the CIT(A):
The Revenue appealed against the CIT(A)'s decision to delete the addition of ?27 crores from the book profit, relying on the Supreme Court's decision in Apollo Tyres Vs. CIT. The Tribunal upheld the CIT(A)'s decision, stating that the amount was directly taken to the General Reserve account and not routed through the Profit & Loss account. The Tribunal emphasized that the AO could not disturb the audited accounts prepared in accordance with the Companies Act, as held in Apollo Tyres Vs. CIT.

3. Set-off of depreciation loss of non-eligible units against the income of eligible units for deduction under Section 10B:
The assessee argued against setting off the depreciation loss of non-eligible units against the income from eligible units engaged in export activities. The Tribunal referred to the Karnataka High Court's decision in CIT v. YOKOGAWA INDIA LTD., which held that exemption under Section 10A should be allowed without setting off brought forward unabsorbed losses or depreciation from other units. Consequently, the Tribunal allowed this ground in favor of the assessee.

4. Reduction of ?4,37,168/- being miscellaneous receipts from eligible profits in the computation of deduction under Section 10B:
The assessee contended that miscellaneous receipts, including scrap sales, should qualify for deduction under Section 10B. However, the CIT(A) and the Tribunal, relying on the Supreme Court's decision in Liberty India Vs. CIT, held that only profits derived from the export of articles should be considered for deduction under Section 10B. Therefore, the Tribunal upheld the CIT(A)'s decision to exclude the miscellaneous receipts from eligible profits.

Conclusion:
The Tribunal partly allowed the assessee's appeal by ruling that the ?26.99 crores received on retirement was not taxable under Section 45(4) and that depreciation loss of non-eligible units should not be set off against the income from eligible units for Section 10B deduction. The Tribunal dismissed the Revenue's appeal, upholding the deletion of ?27 crores from book profit and the exclusion of miscellaneous receipts from eligible profits for Section 10B deduction.