2017 (12) TMI 1406 - AT - Income Tax

Amount received on the retirement of the partner from the firm - taxability of the said receipt under the specific provisions of section 56(2)(vi) - Held that - The order of the CIT(A) is deficient on reasons for not treating the rights surrendered by the partners, i.e. assessee and Smt. Shakuntala S. Sanghavi to the firm, as the adequate consideration for receiving the said amount. Therefore, in our view, the said finding of the CIT(A) as given in Para Nos. 9.1 to 9.3 suffers from major setback on this issue of surrender of rights/share in the firm for receipt of said consideration by the partners. As such, it is not the case of the Revenue that the assessee continues to be the partner of the firm even after the receipt of the consideration and the assessee has not surrendered the rights of every kind in the firm. From this perspective, the order of the CIT(A) which decided the issue against the assessee relying on the said provisions of section 56(2)(vi) of the Act, is erroneous and therefore, the said order of CIT(A) is required to be reversed and the same is in favour of the assessee. Accordingly, Ground Nos. 2 to 7 by the assessee are allowed.

Issues Involved:
1. Validity of reassessment proceedings under Section 148.
2. Taxability of the amount received on retirement from the partnership firm under Section 56(2)(vi).
3. Consideration of the amount received as taxable income from other sources.
4. Applicability of previous ITAT decisions and judicial precedents.
5. Levy of interest under Section 234A.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 148:
The assessee challenged the reassessment proceedings initiated under Section 148, arguing that the reopening was bad in law. However, during the proceedings, the assessee did not press this ground, and thus, the tribunal dismissed it as 'not pressed.'

2. Taxability of the Amount Received on Retirement from the Partnership Firm under Section 56(2)(vi):
The primary issue was whether the amount of ?21,52,73,777 received by the assessee on retirement from the partnership firm was taxable under Section 56(2)(vi). The CIT(A) had held that the amount was received without consideration and thus taxable under Section 56(2)(vi). However, the assessee argued that the amount was received as consideration for surrendering her rights in the firm, which does not fall under 'without consideration' as stipulated by Section 56(2)(vi).

3. Consideration of the Amount Received as Taxable Income from Other Sources:
The AO initially taxed the amount as income from long-term capital gains and alternatively as income from other sources. The CIT(A) upheld the taxability under Section 56(2)(vi) but did not consider it as long-term capital gains. The assessee argued that the amount received was not without consideration since it was in exchange for surrendering her partnership rights.

4. Applicability of Previous ITAT Decisions and Judicial Precedents:
The assessee relied on the ITAT decision in the case of Smt. Shakuntala S. Sanghavi, where on similar facts, the amount received on retirement was not taxed as income from capital gains or other sources. The tribunal in the current case also referred to various judicial precedents, including the Supreme Court's decision in ACIT Vs. Mohanbhai Pamabhai and others, which held that amounts received on retirement from a partnership firm are not taxable as capital gains.

5. Levy of Interest under Section 234A:
The assessee contested the levy of interest under Section 234A, arguing that since the original return was filed, there was no basis for such interest. This ground was not elaborated upon in the tribunal's decision.

Tribunal's Findings:
The tribunal found that the amount received by the assessee on retirement was in consideration of surrendering her rights in the partnership firm. Thus, it could not be considered as received 'without consideration.' Consequently, Section 56(2)(vi) was not applicable. The tribunal also noted that similar receipts in the case of Smt. Shakuntala S. Sanghavi were not taxed as income from other sources or capital gains, reinforcing the assessee's position.

Conclusion:
The tribunal allowed the appeal in favor of the assessee, reversing the CIT(A)'s decision on the applicability of Section 56(2)(vi). The reassessment proceedings were dismissed as 'not pressed,' and the levy of interest under Section 234A was not addressed in detail. The tribunal's decision was based on judicial precedents and the principle that the amount received on retirement was not without consideration.

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