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TMI Blog2010 (9) TMI 746X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A)-37, Mumbai, relating to assessment year 2007-08. 2. Ground Nos. 1 to 4 raised by the assessee read as follows : (1) Learned CIT(A) erred in law and on facts in upholding the action of the Assessing Officer that the amount received by the appellant on retirement from partnership firm M/s. D.S. Corporation is taxable under the head capital gains on the mistaken belief that retirement from partnership amounts to transfer within the meaning of section 2(47) of the Income-tax Act. (2) Learned CIT(A) failed to appreciate the facts of the case and the relevant law on the subject. (3) Learned CIT(A) erred in not following the judgment of Supreme Court and of the jurisdictional Court. (4) Learned CIT(A) erred in constructing the deed of retirement, under which no transfer had taken place and without transfer there can be no capital gains tax liability. 3. The assessee is an individual. The assessee and one Mr. Rakesh Kumar Wadhwan were desirous of carrying on business of development and construction in partnership with each other of a property situate at Juhu Tara Road, Juhu, bearing S. Nos. 28A and B1, Plot No. 2 and bearing CTS Nos. 956, 956/1 to 956/8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 20% Smt. Hemlata S. Shetty 20% Prithvi Realtors Capital Private Limited 20% Shri Sarang R. Wadhwan 5% As per clause 8 of the said deed, the capital of the partnership business was to be contributed by the partners in the following proportion : Shri Rakesh Kumar Wadhwan 45% Shri Sudhakar M. Shetty 10% Smt. Hemlata S. Shetty 10% Prithvi Realtors Capital Private Limited 30% Shri Sarang R. Wadhwan 5% 7. The firm thereafter applied to the Maharashtra Tourism Development Corporation Ltd., and also to the Government of India, Ministry of Tourism to appropriate proposal for setting up a five star hotel on the said plot. The Maharashtra Tourism Development Corporation Ltd. vide their letter dated 18-1-2006 and the Government of India, Ministry of Tourism vide their letter dated 8-3-2006 granted their sanction for setting up a five star hotel on the said plot. In the meantime, out of 81 tenants, 77 tenants were paid compensation and they surrendered vacant possession. 8. In the meanwhile Smt. Hemlata S. Shetty, for diverse reason, expressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the sum standing in her capital account. A sum of Rs. 25,00,00,000 was paid on 25-3-2006 and the balance sum was to be paid on or before 30-4-2006. She retired from the firm D.S. Corporation as and from 27-3-2006. 12. As on 31-3-2006, the capital account of the assessee in the firm M/s. D.S. Corporation showed the following position : Opening balance as on 1-4-2005 nil Deposits during the previous year Rs. 4,45,00,000 Interest Rs. 26,85,963 Profit on revaluation Rs. 30,87,98,087 Total Rs. 35,59,84,050 Thus as on 31-3-2006 the sum standing to the credit of his capital account was Rs. 35,59,84,050. 13. On 22-5-2006, the assessee retired from the partnership firm and was paid the sum standing to the credit of his capital account. According to the Assessing Officer the sum of Rs. 30,87,98,087 was liable to tax either as profit on revaluation of assets in assessment year 2006-07 or as capital gain on retirement of partner in assessment year 2007-08.A protective assessment was made bringing the aforesaid sum to tax as profit on revaluation of assets in ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are revalued and revaluation effect is given to the partner s account by crediting to the partner s account. The assessee thus submitted that there would be no incidence give rise to capital gain either at the state of revaluation or at the stage of crediting to the account of partner. The assessee further brought to the notice of the Assessing Officer that the revaluation has been credited in the account of all the partners whether they have retired from the firm or not. 15. The Assessing Officer after referring to the sequence of events leading to the formation of partnership and re-constitution of partnership by admission of partners and retirement of partners, observed that in spite of unequal capital contribution by Shri Sudhakar M. Shetty and Mrs. Hemlata S. Shetty, they had received an equal amount on retirement from the firm. According to the Assessing Officer the assessee has adopted a colourable device to hoodwink the revenue. The Assessing Officer accordingly brought to tax a sum of Rs. 30,87,98,088 as income. He did not specify as to under which head it was to be brought to tax. A reading of the entire order suggests that the income was assessed as short-term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows : (47) transfer , in relation to a capital asset, includes, (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by loan as, stock-in-trade of a business carried on by him, such conversion or treatment; (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation. For the purposes of sub-clauses (v) and (vi), immovable property shall have the same meaning as in clause (d) of section 269UA; Capital asset has been defined in section 2(14) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is a notional value only, intended to be taken into account at the time of determining the value of the partner s share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate before hand what will be the position in terms of monetary value of a partner s share on that date. At that time when the partner transfers his persons asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of section 48 of the Act. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the, of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. 24. Parliament with the avowed object of blocking this escape route for avoiding capital gains tax by the Finance Act, 1987, introduced sub-section (3) to section 45, with effect from 1-4-1988. The effect of this was that the profits and gains arising from the transfer of a capital asset by a partner to a firm are chargeable as the partner s income of the previous year in which the transfer took place and the amount recorded in the books of account of the firm, shall be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset. 25. In the case of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the statute book a new sub-section (4) in section 45 of the Act, with effect from 1-4-1988, which reads as follows : The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. 27. Before the introduction of sub-section (4) to section 45, there was clause (ii) of section 47 which read as under : any distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons. Section 47 of the Act lays down which are the transactions not regarded as transfer for the purpose of section 45 of the Act. 28. The Finance Act, 1987, with effect from 1-4-1988, omitted this clause, the effect of which was that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court to be covered by the provisions of section 45(4) of the Act viz., a transfer giving rise to a capital gain. The Hon ble Bombay High Court in the case of CIT v. A.N. Naik Associates [2004] 265 ITR 3464 was dealing with a case of Reconstitution of firm and allotment of assets to retiring partners. The reconstitution had taken place pursuant to a family arrangement. The chargeability to capital gain tax in such circumstances was in issue before the Hon ble Court. The Court dealt with the issue as to what would be the effect of partners of a subsisting partnership distributing assets to partners who retire from the partnership. Does the asset of the partnership, on being allotted to the retired partner/partners fall within the expression otherwise ? The Court held that the purpose and object of the Act of 1987 was to bring to charge of tax arising on distribution of capital assets of firms which otherwise was not subject to taxation. If the language of sub-section (4) is construed to mean that the expression otherwise has to partake of the nature of dissolution or deemed dissolution, then the very object of the amendment could be defeated by the partners by distributing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner including his rights over the assets of the partnership. There is divergence of view on the question as to whether there is any transfer at all in such situation by the firm in favour of the retiring partner or by the retiring partner in favour of the firm and its continuing partners. 35. In CIT v. Mohanbhai Ramabhai [1973] 91 ITR 393 (Guj.) the question before the Hon ble Gujarat High Court was as to whether on retirement of a partner from a firm whether there is relinquishment of interest in partnership assets amounting to a transfer. The Hon ble Gujarat High Court held : The interest of a partner in a partnership is not an interest in any specific item of the partnership property. It is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or on his retirement from the partnership to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. When therefore a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h can be brought to tax. 37. However, the Hon ble Bombay High Court in the following cases : (a) Tribhuvandas G. Patel s case (supra) (b) H. R. Aslot s case (supra) (c) N.A. Modi s case (supra) after considering the decision in the case of Mohanbhai Pamabhai (supra) held as follows in the case of Tribhuvandas G. Patel (supra). A couple of things emerge clearly from the aforesaid passages. In the first place, a retiring partner while going out and while receiving what is due to him in respect of his share, may assign his interest by a deed or he may instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he had no more claim on his co-partners. The former type of transaction will be regarded as sale or release or assignment of his interest by a deed attracting stamp duty while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of section 2(47) of the Act. 39. We shall therefore examine the mode of retirement in the case of the assessee, to see if the same can be said to be a transfer or not on the principle laid down by the Hon ble Bombay High Court in the case of N.A. Modi (supra). 40. The sequence of events leading to the retirement of the assessee from the partnership firm are as follows : 1. The assessee and Mr. Rakesh Kumar Wadhwan entered into a partnership under a deed of partnership dated 1-8-2005 for the purpose of development of the property. 2. The name of the firm so termed was M/s. D.S. Corporation. 3. On 16-9-2005, another deed of admission cum partnership of partners was executed admitting Smt. Hemlata S. Shetty as partner of the firm. 4. On 23-9-2005, the firm M/s. D.S. Corporation purchased from one Mr. Percival Joseph Perieira the property for a consideration of Rs. 6.50 crores. The said plot was occupied by 81 tenants. The Stamp Duty Officer valued the said plot, which was occupied by 81 tenants, at that time at Rs. 6,50,00,000 and the stamp d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hemlata Shetty Rs. 30,87,98,087 Prithvi Realtors Capital (P.) Ltd. Rs. 30,87,98,087 Sarang R. Wadhwan Rs. 7,71,99,522 10. On 27-3-2006 Mrs. Hemlata Sudhakar Shetty was paid a sum of Rs. 31,40,48,088 being the sum standing in her capital account. She retired from the firm: D.S. Corporation as and from 27-3-2006. 11. As on 31-3-2006, the capital account of the assessee in the firm M/s. D.S. Corporation showed the following position: Opening balance as on 1-4-2005 Nil Deposits during the previous year Rs. 4,45,00,000 Interest Rs. 26,85,963 Profit on revaluation Rs. 30,87,98,087 Total Rs. 35,59,84,050 Thus as on 31-3-2006 the sum standing to the credit of his capital account was Rs. 35,59,84,050. 41. On 22-5-2006, the assessee retired from the partnership firm and was paid the sum standing to the credit of his capital account but for the revaluation of the asset, the capital account of the partner would not have shown a sum of Rs. 35,59,84,050. To the extent of Rs. 30,87,98,087 the capital account has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iring Partner in full and final settlement of his claim in the capital and assets of the partnership firm. The said sum of Rs. 35,59,84,050 (Rupees Thirty Five Crores Fifty Nine Lakhs Eighty Four Thousand and Fifty Only) has/shall be arranged for/brought in by the continuing partners into the said partnership firm and has/shall be paid to the retiring partner. The said sum Rs. 35,59,84,050 (Rupees Thirty Five Crores Fifty Nine Lakhs Eighty Four Thousand and Fifty Only), has been paid to the retiring partner on or prior to the execution hereof (payment and receipt whereof the retiring partner both hereby admit and acknowledge). (5) The Retiring Partner both retire from the said partnership and has ceased to have any interest in any of the business and assets of the said firm and the continuing partners shall forever be entitled to the share, right, title and interest of the retiring partner in the said business of the erstwhile partnership firm, together with the benefit of all premises and stock-in-trade, moneys, credits and effects belonging thereto including the said property at Juhu Tara Road, Juhu bearing Survey Nos. 28A and B, Plot No. 2, and bearing CTS Nos. 956, 956/1 to 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Modi (supra) and H.R. Aslot (supra) are material to appreciate the aspect as to whether there was any assigning or relinquishing of the retiring partners share of right in the partnership and its assets in favour of the continuing partners by the retiring partner. 43. In the case of Tribhuvandas G. Patel (supra), the assessee was a partner in the firm of KEW. The assessee had served on the other two partners a notice of dissolution of the firm with effect from 31-12-1960, which was not accepted by the other partners. The assessee, therefore, filed a suit for dissolution and accounts, but, ultimately, the disputes between the parties were amicably settled out of court and under a deed dated January 19, 1962, the assessee retired from the firm with effect from 31-8-1961, and the remaining partners continued to carry on the business of the firm. On the occasion of such retirement, the assessee was paid: (1) 1 lakh as his share of profits of the firm for the broken period ended 31-8-1961, (2) Rs. 50,000 as his share of the value of the goodwill, and (3) Rs. 4,77,941 as his share in the remaining assets of the firm. 44. The issue relevant for our purpose is the liability of the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of M/s. Kumar Engineering Works and all assets thereof and whereas the continuing partners have taken over the said business carried on by the said old firm of M/s. Kumar Engineering Works constituted up to 31st August, 1961, as the entire business as a going concern together with all its assets, liabilities and goodwill, benefits of trade-name, tenancy rights, import licences and/or quota rights..... And this indenture further witnesseth that in consideration of the premises aforesaid they the continuing partners do and each of them doth hereby release the retiring partner and the retiring partner doth hereby release the continuing partners and each of them from all covenants, agreements, matters and things in the herebefore recited partnership dated, the 8th January, 1951, and the supplementary agreement dated 24th August, 1957, contained and in further pursuance of the said agreement and in consideration of the premises aforesaid and without making any further payment of any amount to him the retiring partner as beneficial owner doth hereby assign and release upto the continuing partners and each of them all that his right, title interest and undivided half share in the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was a transfer of interest of the retiring partner over the assets of the partnership on retirement. Therefore there was liability to tax on account of capital gain. 50. The learned counsel for the assessee relied on a recent decision of the Hon ble Bombay High Court in the case of Prashant S. Joshi v. ITO [2010] 324 ITR 1549. In the aforesaid case, the facts were that the assessee who was an individual entered into a partnership deed on 5-5-2003 with two others to carry on the business of real estate development. On 11-3-2005, the firm was dissolved. The assessee received a sum of Rs. 50 lakhs on retirement in addition to the balance lying to the credit of the capital and current account as per the books of account in full and final settlement of his dues on retirement. The assessee received Rs. 17 lakhs in financial year 2004-05 and Rs. 33 lakhs in financial year 2005-06. The returns for assessment year 2005-06 and 2006-07 were filed by the assessee in which the amounts received on retirement were duly shown as capital receipt and it was claimed by the assessee that the sums received were not taxable as they were in the nature of capital receipts. An intimation under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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