2016 (7) TMI 603 - AT - Income Tax

Disallowance u/s.14A - Held that - In view of the decision of Hon ble Delhi High Court in the case of Joint Investments (P.) Ltd. vs. CIT (2015 (3) TMI 155 - DELHI HIGH COURT ), we direct that the disallowance u/s.14A in the present case be restricted to ₹ 55,604/-, being the exempt income earned by the assessee. Revision u/s 263 - taxability of the amount received by the assessee as partner of the firm, its share on the revaluation of the assets of the firm in which it was a partner - CIT(A) held that no part of amount received by the assessee on its retirement from the firms is taxable in its hands as short term capital gain - Held that - We find that Ld CIT(A) by a well reasoned and speaking order and after referring to various decisions of Supreme Court and High Courts has decided the issue in favour of the assessee. We also find that in case of the other partners, wherein against the order passed by CIT u/s 263 wherein he had held that act of the AO of those respective assessees of considering the amounts received by them on revaluation of assets of the firm to be capital receipt, to be as erroneous and prejudicial to the interest of the Revenue. The Coordinate Bench of Tribunal had held that order of AO to be a proper and logical in view of various decisions of Apex Court and High Courts. Before us, Revenue has not placed any material on record to controvert the findings of ld.CIT(A). In view of the aforesaid facts and in the absence of any contrary binding decision placed by Revenue, we are of the view that no interference to the order of CIT(A) is called for - Decided against revenue

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act.
2. Taxability of amounts received by the assessee on retirement from partnership firms.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The assessee, engaged in investments, declared a total loss of ?1,45,31,828 for AY 2008-09. The AO, during scrutiny, disallowed expenses under Section 14A r.w.s. Rule 8D, amounting to ?1,02,82,049, due to exempt income earned by the assessee. The assessee contended that the share of profit was business income and taxable at the firm level, thus not attracting Section 14A disallowance. The CIT(A) upheld the AO's decision. On appeal, the ITAT observed that the disallowance under Section 14A exceeded the exempt income of ?55,604. Citing the Delhi High Court's decision in Joint Investments (P.) Ltd. vs. CIT, the ITAT restricted the disallowance to the exempt income of ?55,604, allowing the assessee's appeal.

2. Taxability of amounts received by the assessee on retirement from partnership firms:

The assessee, a partner in two firms, received substantial amounts on retirement after the firms revalued their properties. The AO treated the amounts as short-term capital gains, arguing that the transactions were a ploy to avoid tax. The CIT(A) reversed this, citing Supreme Court and High Court rulings that amounts received on retirement from a partnership, determined by notional sale, do not constitute a transfer under Section 2(47) and are not taxable as capital gains. The CIT(A) emphasized that the firms' revaluation and subsequent payments were genuine transactions, not sham devices.

On appeal by the Revenue, the ITAT upheld the CIT(A)'s decision, noting the consistency with judicial precedents and the absence of any contrary binding decision. The ITAT also referenced similar cases of other partners where the Tribunal had ruled in favor of the assessee, reinforcing that the amounts received on retirement were capital receipts and not taxable.

Conclusion:

The ITAT allowed the assessee's appeal regarding the Section 14A disallowance, restricting it to the exempt income earned. It dismissed the Revenue's appeal on the taxability of amounts received on retirement, affirming that such receipts are not taxable as capital gains. The judgments were pronounced in open court on 07/07/2016.