2020 (2) TMI 564 - AT - Income Tax

Capital receipt chargeable to tax u/s.45 - claim of exemption u/s.10(2A) - income within the meaning of Section 2(24) - Addition made by the ld AO under MAT provisions as pure capital receipt is not taxable under MAT - assessee had relinquished its interest in the partnership firm vide retirement deed - HELD THAT - The assessee retired from the partnership firm and received amount standing to its credit in the books of the partnership firm. Much prior to the retirement i.e. on 01/04/2007, the firm re-valued its asset i.e Development rights in land which resulted in appreciation of ₹ 262,12,92,699/- and correspondingly credited partner s current account in their respective profit sharing ratio in the books of that firm. The assessee s share thereon worked out to ₹ 10,48,51,708/-. In response to this revaluation, no entry was passed in the books of the assessee firm as on 31/03/2008, by correspondingly increasing the investment made in Pranik Landmark Associates with corresponding credit to current account of the partners of the assessee firm. The assessee passed this entry belatedly only in the year of receipt of actual money from Pranik Landmark Associates i.e. during the F.Y.2009-10 relevant to A.Y.2010-11 in which year, it retired from Pranik Landmark Associates. Pursuant to assessee passing this entry during A.Y.2010-11 in its books for the revaluation, the amounts ultimately received by the assessee from the partnership firm exactly matched with the investments made in the partnership firm. In other words, the assessee did not receive any sum over and above the value of its investments from Pranik Landmark Associates. Hence, there cannot be any levy of capital gains or any levy in the nature of income within the meaning of Section 2(24) of the Income Tax Act in the hands of the assessee. There was no transfer of relinquishment of rights in favour of the continuing partners. We find that in the instant case the firm i.e. Pranik Landmark Associates had only paid the amounts lying to the credit of the partner i.e. the assessee and had not paid even a penny more than the amount lying in the credit of the partner s current account - Decided against revenue. MAT computation - share of profit from the partnership firm was sought to be excluded while computing the book profits u/s.115JB by treating it as capital receipt - HELD THAT - Once, a receipt is classified as income then, the same would be liable for inclusion in book profits u/s.115JB of the Act even though the said income is exempt or otherwise deductible under other specific provisions of the Act. In our considered opinion, this is a subtle distinction, which needs to be understood. In other words, the profits and gains that are otherwise deductible u/s.10A/10B/Section 80IA / 80IB of the Act under normal provisions of the Act would still be liable for book profits u/s.115JB of the Act, since the provisions of section 115JB of the Act have an overriding effect over other provisions of the Act. But where a particular receipt from its inception is not at all income such as capital receipt as is present in the instant case, then, the said capital receipt would be outside the scope of inclusion as book profits u/s.115JB of the Act. We hold that the amount received from partnership firm in the sum requires to be reduced while calculating the book profits u/s.115JB of the Act. Accordingly, the ground No.2.1 received by the revenue is dismissed.

Summary

Issues Involved:
1. Deletion of ?6,72,30,150 assessed as capital gain.
2. Treatment of ?10,48,51,708 as capital receipt not chargeable to tax under Section 45.
3. Deduction of ?10,48,51,708 while computing book profit under Section 115JB.

Issue-wise Detailed Analysis:

1. Deletion of ?6,72,30,150 Assessed as Capital Gain:
The core issue revolves around whether the amount received by the assessee from the partnership firm upon retirement constitutes a capital gain. The assessee retired from the firm and received an amount credited to its account due to the revaluation of the firm's assets. The Assessing Officer (AO) treated this as a capital gain, arguing that the assessee relinquished its rights in the firm and its assets. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, relying on judicial precedents, including the CIT vs. Riyaz A. Sheikh case, which held that such receipts are not chargeable to tax as capital gains. The ITAT upheld the CIT(A)'s decision, noting that the amount received by the assessee was not over and above the investments made and did not constitute a transfer of interest under Section 2(47) of the Income Tax Act.

2. Treatment of ?10,48,51,708 as Capital Receipt Not Chargeable to Tax Under Section 45:
The CIT(A) and subsequently the ITAT concluded that the amount received by the assessee upon retirement from the partnership firm was a capital receipt and not chargeable to tax under Section 45. The ITAT referred to several landmark judgments, including the Supreme Court's decisions in CIT vs. Mohanbhai Pamabhai and Sunil Siddharthbhai vs. CIT, which established that amounts received by a retiring partner do not constitute a transfer and hence, are not liable to capital gains tax. The Tribunal also noted that the revaluation of assets by the firm was a notional increase and did not result in any real income to the assessee.

3. Deduction of ?10,48,51,708 While Computing Book Profit Under Section 115JB:
The CIT(A) allowed the deduction of ?10,48,51,708 while computing book profits under Section 115JB, treating it as a capital receipt. The ITAT upheld this decision, emphasizing that the amount received was a capital receipt and not income under Section 2(24) of the Income Tax Act. It referred to the Calcutta High Court's decision in Ankit Metal and Power Ltd., which held that capital receipts not falling within the definition of income cannot be included in book profits under Section 115JB. The ITAT also noted that the revaluation reserve was a notional profit and did not represent real income.

Conclusion:
The ITAT dismissed the revenue's appeal and upheld the CIT(A)'s order, confirming that the amount received by the assessee from the partnership firm upon retirement was a capital receipt and not chargeable to tax under Section 45. It also confirmed the exclusion of this amount from book profits under Section 115JB, as it did not constitute income under Section 2(24) of the Income Tax Act. The Tribunal relied on various judicial precedents to support its conclusions, ensuring that the legal principles were thoroughly examined and applied correctly.