2019 (6) TMI 845 - AT - Income Tax

Capital gain u/s 45 - sum received on retirement from the partnership firm - transfer u/s 2(47) or not? - eligibility of exemption u/s 10 (2A) - HELD THAT - Various decisions relied on the assessee CHALASANI VENKATESWARA RAO. VIJAYAWADA VERSUS INCOME TAX OFFICER. WARD-IV. VIJAYAWADA 2012 (9) TMI 12 - ANDHRA PRADESH HIGH COURT , PRASHANT S. JOSHI AND DATTARAM SHRIDHAR BHOSALE VERSUS INCOME-TAX OFFICER 2010 (2) TMI 271 - BOMBAY HIGH COURT support his case to the proposition that amount paid to partner on retirement does not involve an element of transfer within the meaning of section 2 (47). Thus we hold that the assessee is not liable to any capital gain tax on account of the sum received by it as a partner on retirement from the partnership firm. The order of the CIT(A) on this issue is accordingly set aside and the Assessing Officer is directed to delete the addition - Decided in favour of assessee. Disallowance of loss incurred on purchase and sale of shares - CIT(A)'s power to enhance assessment by bringing a new sources of income - assessments were framed u/s 144 and since the discrepancies were found in the income computation during the appeal hearing order passed by the Ld. CIT u/s. 264 - HELD THAT - Since the assessments were framed u/s 144 and since the discrepancies were found in the income computation during the appeal hearing, therefore, the CIT(A) in our opinion, has absolute power to issue enhancement notice to the assessee in the instant case. Therefore, the various decisions relied by assessee that CIT(A) has no power to enhance assessment by bringing a new sources of income is not tenable under the facts and circumstances of the case. Thus enhancement notice issued by CIT(A) in the instant case is justified. However, we find from the order of the CIT(A) that while enhancing the income he has given a finding that no corroborative evidences were filed by the assessee to substantiate that the loss is genuine. Considering all we deem it proper to restore this issue to the file of the AO with a direction to give an opportunity to the assessee to substantiate with evidence to his satisfaction regarding the genuineness of the loss on account of purchase and sale of shares of group companies. order passed by the Ld. CIT u/s. 264 - Assessee's ground allowed for statistical purpose.

Summary

Issues Involved:
1. Taxability of sum received on retirement from the partnership firm.
2. Disallowance of loss incurred on purchase and sale of shares.
3. Jurisdiction of CIT(A) to enhance income by disallowing the loss claimed on purchase and sale of shares.

Issue-wise Detailed Analysis:

1. Taxability of Sum Received on Retirement from the Partnership Firm:
The primary issue was whether the sum received by the assessee on retirement from the partnership firm is taxable as capital gains. The Assessing Officer (AO) treated the sum as short-term capital gains, arguing that the partnership share is a capital asset, and its transfer constitutes a transfer of capital assets under Section 2(47) of the Income Tax Act, 1961.

The CIT(A) upheld the AO's view but reduced the taxable amount, relying on the decisions of the Karnataka High Court in CIT Vs. Gurunath Talkies and the Bombay High Court in CIT Vs. A. K. Naik Associates, which were rendered in the context of Section 45(4) of the IT Act.

However, the Tribunal referred to the Full Bench decision of the Karnataka High Court in CIT Vs. Dynamic Enterprises, which clarified that when a retiring partner takes only money towards the value of his share and there is no distribution of capital assets among the partners, there is no transfer of a capital asset, and consequently, no profits or gains are chargeable under Section 45(4) of the IT Act. The Tribunal also cited various other judicial precedents, including Prashant S. Joshi Vs. ITO and Chalasani Venkateswara Rao Vs. ITO, which held that the amount received by a partner on retirement does not involve an element of transfer within the meaning of Section 2(47).

Conclusion:
The Tribunal held that the assessee is not liable to any capital gains tax on the sum received on retirement from the partnership firm. The addition of ?43,49,47,500/- was directed to be deleted.

2. Disallowance of Loss Incurred on Purchase and Sale of Shares:
The CIT(A) disallowed the loss of ?13,04,50,800/- claimed by the assessee on the purchase and sale of shares, terming it a collusive transaction between group entities to offset the income on the sale of shares in the partnership firm.

The Tribunal noted that the original assessments were ex-parte, and the assessee had not provided any details before the AO. The CIT(A) issued an enhancement notice and concluded that the loss was not genuine due to lack of corroborative evidence.

Conclusion:
The Tribunal held that the CIT(A) has the power to issue an enhancement notice in such cases. However, it remanded the issue back to the AO to allow the assessee to substantiate the genuineness of the loss with evidence. The AO was directed to decide the issue afresh after giving due opportunity to the assessee.

3. Jurisdiction of CIT(A) to Enhance Income by Disallowing the Loss Claimed on Purchase and Sale of Shares:
The assessee contended that the CIT(A) acted beyond his jurisdiction by enhancing the income and disallowing the loss claimed on the purchase and sale of shares, which was not considered by the AO in the original assessment.

The Tribunal held that since the assessments were framed under Section 144 of the IT Act and the discrepancies were found during the appeal hearing, the CIT(A) was justified in issuing an enhancement notice. The Tribunal emphasized that the powers of the CIT(A) are conterminous with those of the AO.

Conclusion:
The Tribunal upheld the CIT(A)'s jurisdiction to issue the enhancement notice but remanded the matter to the AO for fresh consideration, allowing the assessee to provide evidence to substantiate the loss claimed.

Final Outcome:
The appeals filed by the respective assessees were partly allowed for statistical purposes. The AO was directed to delete the addition related to the retirement sum and reconsider the disallowance of the loss on the purchase and sale of shares after giving the assessee an opportunity to present evidence.