2016 (4) TMI 502 - AT - Income Tax

Taxability of the amount received from the partnership firm - assessee declared the same as capital gains in its return of income and proposed to avail exemption u/s 54F - Held that - CIT(A) has rightly referred to the provisions of sec. 45(4) of the Act, which provides for manner of taxation in case of dissolution of a partnership firm or other association of persons. We have earlier noticed that the assessing officer has proceeded the to assess the amount of ₹ 2.50 crores as revenue receipt only by rejecting the claim of existence of partnership firm. However, the finding of the Ld CIT(A) that there existed a Partnership firm and the assessee has received the impugned amount of ₹ 2.50 crores on dissolution of the Partnership firm, has not been challenged by the revenue, meaning thereby, the said finding of Ld CIT(A) has attained finality. We do not find any infirmity in the decision of Ld CIT(A) in holding that the assessing officer was not right in law in assessing the impugned amount of ₹ 2,50,00,000/- in the hands of the assessee. - Decided against revenue Taxability of amount received by the assessee from M/s Samarth Erectors & Developers - Held that - The assessee has spent money in connection with the land belonging to the Society cannot be disputed in this assessment year. Further, what the assessee received from M/s Samarth Erectors & Developers is the reimbursement of expenses already incurred by the assessee. When the said fact is confirmed by M/s Samarth Erectors & Developers in its capacity as the payer in final settlement of the claims of the assessee in respect of the land, we find no reason to suspect the same, particularly in view of the fact that the assessing officer has not brought any material on record to contradict the said claim. In that view of the matter, we are of the view that there is no scope to isolate the receipt of ₹ 1,30,00,000/- from the expenses incurred by the assessee, i.e., it cannot be treated that the receipt of ₹ 1,30,00,000/- as a separate source of income distinct and separate from the expenses incurred by the assessee on the land. It is also an admitted fact that the details of expenses incurred by the assessee are available in the books of accounts of the past years and further the assessee has also furnished the statement of expenses to the assessing officer during the course of assessment proceedings. Hence we are of the view that the Ld CIT(A) was justified in directing the AO to set off the expenses of ₹ 1,37,52,449/- against the receipt of ₹ 1,30,00,000/- - Decided against revenue

Summary

Issues Involved:
1. Deleting the addition of Rs. 2.50 crores treating the same as capital receipt.
2. Deleting the addition of Rs. 1.30 crores relating to the amount received from M/s Samarth Erectors & Decorators.

Issue-wise Detailed Analysis:

1. Deleting the addition of Rs. 2.50 crores treating the same as capital receipt:

The first issue concerns the taxability of Rs. 2.50 crores received by the assessee from the partnership firm M/s Venus Builders. The partnership firm, consisting of the assessee and M/s M.D. Choksi Const. Co. P Ltd, was formed to develop a property. Disputes arose between the partners, leading to arbitration and the eventual dissolution of the firm, with the assessee receiving Rs. 2.50 crores in full settlement of his rights in the firm.

The Assessing Officer (AO) contested the existence of the partnership firm, citing reasons such as delayed registration, lack of business activities, and absence of income tax returns. The AO concluded that the partnership firm did not exist and treated the Rs. 2.50 crores as revenue receipt, relying on the case of Manoranjan Pictures Corpn Pvt Ltd (1997)(228 ITR 202)(Delhi), which held that money received by a retiring partner is a revenue receipt.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that the partnership firm existed, evidenced by a partnership deed and registration under the Indian Partnership Act. The CIT(A) concluded that the Rs. 2.50 crores was received on the dissolution of the partnership firm and should be considered under section 45(4) of the Income Tax Act, which deals with the taxability of capital assets on the dissolution of a firm.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, noting that the AO's rejection of the partnership firm was unjustified. The ITAT emphasized that the partnership firm was validly constituted and dissolved, and the Rs. 2.50 crores was received on dissolution, not as revenue receipt. The ITAT also noted that the AO's reliance on the Manoranjan Pictures case was misplaced due to changes in the taxation scheme from AY 1993-94 onwards.

2. Deleting the addition of Rs. 1.30 crores relating to the amount received from M/s Samarth Erectors & Decorators:

The second issue pertains to the taxability of Rs. 1.30 crores received by the assessee from M/s Samarth Erectors & Developers. The assessee was tasked with clearing encumbrances on land owned by M/s Tatya Tope Nagar Co-op Society and incurred expenses over the years, which were disclosed in his returns as current assets.

The AO questioned the nature of the compensation received and disallowed the expenses claimed by the assessee, assessing the Rs. 1.30 crores on a gross basis.

The CIT(A) found that the assessee had disclosed the expenses in earlier years' accounts, which were scrutinized by the AO. The CIT(A) held that the expenses claimed should be allowed, as the assessee provided evidence of the expenses and confirmation from M/s Samarth Erectors & Developers.

The ITAT agreed with the CIT(A), stating that the AO's reasoning to disregard the expenses was meritless. The ITAT noted that the expenses were disclosed in earlier years' accounts and confirmed by the payer. The ITAT concluded that the Rs. 1.30 crores was a reimbursement of expenses, not a separate source of income, and upheld the CIT(A)'s decision to set off the expenses against the receipt.

Conclusion:

The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both issues. The Rs. 2.50 crores received on the dissolution of the partnership firm was treated as a capital receipt, and the Rs. 1.30 crores received from M/s Samarth Erectors & Developers was considered a reimbursement of expenses. The judgment emphasized the importance of evidence and proper classification of receipts in tax assessments.