2021 (5) TMI 304 - AT - Income Tax

Capital receipt chargeable to tax u/s.45 - claim of exemption u/s.10(2A) - amount received by the assessee partner from the partnership firm - amount received by partner on retirement from a firm - HELD THAT - Similar ground of appeal was raised in the case of co-partner of the said firm PLA, M/s Rahas Investments Private Limited (now merged with the assessee i.e Lupin Investments Private Limited) 2020 (2) TMI 564 - ITAT MUMBAI 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. Undisclosed / unaccounted /out of books income / investment - HELD THAT - It cannot be said that the purpose behind restructuring of the partnership firm (i.e admission and retirement) was done primarily for tax avoidance as contended by the ld AO. In fact the firm PLA held the property as its owner which was also reflected in its audited accounts. When the said property was sold as a result of the said restructuring to the new firm PLA-2 , the due tax was paid by the firm and this cannot be re-taxed in the hands of the assessee as tax avoidance. The said amount is the amount of devaluation of the investment which is forming part of the books of accounts. Hence, it is completely misconceiving to treat the same amount as undisclosed income / investments. We find that the ld CIT-A had duly appreciated the contentions of the assessee and had rightly deleted the addition made in this regard, on which, we do not find any infirmity. Accordingly, the Ground No. 4 raised by the revenue is dismissed. Correct head of income - rent received as business income or income from house property - HELD THAT - CIT-A rightly observed that the assessee had leased the factory premises along with plant machinery to Lupin Ltd for which it was paid rental income of ₹ 500 per month. Further , the assessee was offering ₹ 12 lakhs per annum as tax under the head income from business. However, the ld AO computed this income as income from house property. The ld CITA by placing reliance on following decisions held that rental income in letting factory building and plant and machinery would be business income for exploitation of commercial assets and this was also accepted in the past assessment years. We find that the ld CIT-A also applied the rule of consistency by stating that assessee offering business income in this regard has been accepted by the revenue since Asst Year 2006-07 and there was absolutely no change in facts and circumstances of the instant case for the year under consideration. Hence, we do not find any infirmity in the order of the ld CIT-A in this regard - Decided against revenue. Addition made on account of notional interest to interest free deposit received by the assessee on Ankleshwar factory premises and Santacruz property - HELD THAT - We find that the assessee placed reliance on the decision of J K Investors (Bombay ) Ltd 2000 (6) TMI 9 - BOMBAY HIGH COURT wherein it was pointed out that computation of property income was concerned with annual value or actual rent and not notional interest on interest free deposits. The assessee also placed reliance on CIT vs Moni Kumar Subba 2011 (3) TMI 497 - DELHI HIGH COURT wherein it was categorically held that notional interest on interest free deposit cannot be taken as determinative factor to arrive at the fair rent . It is duty of the ld AO to find out or bring on record the reasonable or fair rent or standard rent and then compare the same with the actual rent received or receivable to find out the Annual Value.This should be done after due inquiries being conducted by the ld AO. None of these facts have been brought on record by the ld AO in the instant case. Hence we find that the ld CITA had rightly deleted the notional interest on interest free deposit. - Decided against revenue.

Issues Involved:
1. Taxability of ?135,38,77,722/- received by the assessee from the partnership firm as capital receipt.
2. Deletion of long-term capital gains of ?134,68,82,688/- assessed in the hands of the assessee.
3. Allowing deduction of ?135,57,86,616/- while computing book profits u/s 115JB of the Act.
4. Deletion of the addition of ?119,85,18,833/- as undisclosed/unaccounted out of books income/investment.
5. Classification of rent received as business income instead of income from house property.
6. Deletion of the addition of notional interest on interest-free deposit received by the assessee on Ankleshwar factory and Santacruz property.

Detailed Analysis:

1. Taxability of ?135,38,77,722/- as Capital Receipt:
The tribunal examined whether the amount received by the assessee partner from the partnership firm should be treated as a capital receipt not chargeable to tax. The assessee had claimed exemption under Section 10(2A) of the Act. The tribunal noted that the assessee received ?92,18,852/- upon retirement from the firm PLA and held that this amount is not liable to capital gains tax. The tribunal relied on precedents, including the case of CIT vs. Mohanbhai Pamabhai, where it was held that amounts received by a retiring partner are not subject to capital gains tax.

2. Deletion of Long-Term Capital Gains:
The tribunal referred to the earlier case of M/s Rahas Investments Private Limited, where it was established that the amount received by a partner on retirement is not taxable under the head 'capital gains'. The tribunal reiterated that the amount received by the assessee was not over and above the investment made in the partnership firm, thus not attracting capital gains tax.

3. Allowing Deduction while Computing Book Profits u/s 115JB:
The tribunal held that the amount received from the partnership firm, being a capital receipt, should be excluded while computing book profits under Section 115JB. The tribunal cited the decision of the Hon'ble Calcutta High Court in Ankit Metal and Power Ltd., which stated that capital receipts not falling within the definition of "income" under Section 2(24) cannot form part of book profits.

4. Deletion of Addition as Undisclosed Income:
The tribunal examined the addition of ?119,85,18,833/- made by the AO as undisclosed income. It was found that the revaluation and subsequent devaluation of the firm's capital asset were reflected in the firm's audited accounts. The tribunal concluded that the AO did not provide evidence of any unaccounted money flowing to the assessee and that the transaction was already taxed as capital gains in the hands of the firm. Thus, the tribunal upheld the CIT(A)'s decision to delete the addition.

5. Classification of Rent Received:
The tribunal analyzed whether the rent received should be classified as business income or income from house property. The assessee had leased the factory premises along with plant and machinery, treating the rent as business income. The tribunal upheld the CIT(A)'s decision, noting that the rental income from letting factory building and plant and machinery should be considered business income, consistent with past assessments.

6. Deletion of Addition of Notional Interest:
The tribunal addressed the addition of notional interest on interest-free deposits received by the assessee. The AO had added notional interest to the income from house property. The tribunal, referencing the decision in CIT vs. J K Investors (Bombay) Ltd., held that notional interest on interest-free deposits cannot be considered for computing annual value. The tribunal found that the AO did not bring on record the reasonable or fair rent, thus upholding the CIT(A)'s deletion of the notional interest addition.

Conclusion:
The tribunal dismissed the revenue's appeal and allowed the assessee's appeal, concluding that the amounts received by the assessee were capital receipts not chargeable to tax, and the additions made by the AO were not justified based on the facts and legal precedents. The tribunal's decision emphasized the importance of adhering to established legal principles and precedents in tax assessments.

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