9911796707
TMI Blog2012 (1) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... ciate that the share in profit on revaluation of partnership firm's assets amounting to Rs. 5,24,47,943/- received by the assessee on his retirement from a partnership firm which is continuing in business was not taxable either under s. 10(2A), s. 28(iv) or s. 28 (v) or s. 45(4) and in view of the laws laid down by Hon'ble Apex Court in (1987) 165 ITR 166 (SC) and (2001) 247 ITR 801 (SC) and in view of the decision of Hon'ble Mumbai High Court in (2010) 324 ITR 154 (Bom). The order passed by the lower authorities violates Art. 141 of Constitution of India. 4. On the facts and in the circumstances of the case and in law the Ld CIT(A) erred in holding that the profit apparently shown on account of revaluation of land but effectively and actually is on account of transfer of rights in the land by the retiring partners to the new partners of the firm and such profit is liable to be taxed under the head income from other sources. 5. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in holding that development agreement with M/s Gold Dream Builders, allowing entry of four partners of M/s Gold Dream Builders as new partners in M/s Krishna Villa Apartment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO has assessed the income at Rs. 5,24,47,943/-. 2.3 The assessee entered into an agreement of partnership with Shri Jitendra Agarwal on 15-07-06 for carrying out the real estate business. The firm was in the name of M/s.Krishna Villa Apartment in which the assessee was having 75% share while Shri Jitendra Agarwal was having 25% share. The firm purchased the land on 25-07-2006 for a sum of Rs. 1.05 crores in the village Siroli measuring 3.77 hectare. Such land was purchased from M/s. Pawan Creations (P) Ltd. (n short M/s. M/s.PCPL) This land was got converted into residential/ commercial land by M/s.PCPL . The necessary charges for conversion and other expenses were not deposited either by M/s.PCPL or by the owner / farmers of the land and therefore, the firm M/s.Krishna Villa Apartment deposited such charges and applied for group housing pattta from Jaipur Development Authority ( in short JDA). The JDA issued patta in the name of M/s.Krishna Villa Apartment and this firm entered into a development agreement on 30th Sept. 2006 with M/s. Gold Dream Developer, a partnership firm consisting of four partners Shri Shankar M Jethani, , Shri Arun Bansal, Shri Miraj Un Nabi Khan and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed exemption u/s 10(2A)). In this connection, the AO referred the observation of the Hon'ble Supreme Court in the Kedarnath Jute Manufacturing Co. Ltd. V/s CIT (1971) 82 ITR 363 is appropriate to quote: "Whether the assessee is entitled to a particular deduction or not will depend on the provisions of low relating thereto and not on the view which the assessee might take of his right, nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter." 2.4 The AO mentioned that the Department came into possession of several incriminating documents as the result of search on 6.8.2008 one of which is the page 33 from Annexure A 26 seized from 73-75, Talkatora and this paper indicates that the said facts and query were typed to be posed to Sh Manoj Chaudhary (written in top with Pencil) who is Chartered Accountant in the case of the firm, M/s Krishna Villa Apartment. The five queries deal with the trajectory of events described in the flow chart at Para 2 and the implications on income tax liability of the firm and the partners. This document seized during search clinches the answer arrived at in Para 6 of the order that the entire transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ender was under wrong belief. The assessee was not expert in taxation law. The search party convinced the assessee that the amount is taxable in the hands of the assessee so he made the surrender. The income tax can be levied as per the provisions of Income Tax Act: not on the basis of admission or agreements. There cannot be estoppels again the law. Since there is no provision in section under which this income can be treated as income of the assessee, therefore the same was not offered as taxation in the hands of the assessee. The provisions of section 10 (2A) of Income Tax Act is very clear in the regard. Further, the amount received by the retiring partner is capital receipt, not liable to tax. 2.6 The AO mentioned that the above reply of the assessee indicates the stand of the AO as to the directions and the alternative pleas that the assessee can take when confronted with uncomfortable questions and show cause notices. The tenor of the assessee through his A/R is clear - there is no provision in section under which this income can be treated as income of the assessee. The AO mentioned that the AR is foreclosing additions on account of capital gain, business income as is uneq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the series of events starting from development agreement (September 2006). Take over agreement (18.01.2007), revaluation of land crediting difference in capital account, merging of firm and admission of new partners (19.01.2007), retirement and withdrawal of capital account is nothing but colourable devices employed by the assessee with active collusion and 'expert advice' from tax practitioners so as to bar the applicability of all sections of Income Tax Act. To quote the Apex Court in the case of the CIT vs Durga Prasad More (1971) 082 IRT 540: "It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make selfserving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levied except by authority of law. There is no scope of intendment in a taxing statute. It was so laid down by the Hon'ble Apex Court of this land in celebrated judgment in the case of CIT vs. Elphinstone Spg. & Wvg. Mills Co. Ltd (1940) 40 ITR 142 (SC). In this regard a useful reference can also be made to Supreme Court in the case of Nalinikant Ambalal Mody Vs. S.A.L.Narayan Row, CIT [61 ITR 428 (SC)] as also Calcutta High Court decision in the case of CIT Vs. Justice R.M. Datta [180 ITR 86 (Cal)]. Learned authors Pithisaria & Chaturvedy in their commentary "Incometax Law" (Sixth Edition) Vol. 1 page 1126 have also, on the basis of above Calcutta High Court judgment, opined as under: If any receipt is income it has to be computed under one of the five heads of income provided under section 4 of the Income-tax Act, 1961. If, however it cannot be brought to tax by computation under those sections, they would not be included in the "total income" as defined in section 2(45), for the purpose of chargeability, [CIT Vs Justice R.M.Datta 180 ITR 86, 92 (Cal)] Specifying the head of income is not an idle formality but has very significant and substantive implications on the chargeabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it could have generated income in the hands of the firm only at the time of its sale by the firm. Therefore, by no stretch of imagination or logic the income could have been taxed in the hands of the partner/appellant. It will pertinent to quote the pronouncement of the Apex Court in respect of nature of interest of a partner in the assets of the firm as also the firm in general. The most important observation in this regard are found in the judgment in the case of Sunil Sidhharthbhai Vs CIT [156 ITR 509 (SC)]. On page 519 of the report, they observed: During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the later, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner's retirement. It obviously means that when a person a person did not have any specified interest in a specific asset of the firm, there is no question of any partner having any right or capacity to transfer either the asset itself or any interest therein. The Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clause (i), (ii) and (iii) of clause (b) of section 48." Again on Page 1304 "The whole concept of partnership is to enter upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. it would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of 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." It will be pertinent to mention here itself that the revaluation of "Land" (which was stock-in-trade of the firm) at the time of reconstitution of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the profit arose from revaluation of stock is a taxable income than also it cannot be assessed in the hands of the partners. The profit on account of revaluation of the stock arose in the hands of the partnership firm and if the same is treated as taxable income the computation of total income in the hands of M/s Krishna Kripa Apartment would be as under:- Net Loss as per P & L A/c (As per Computation filed with return of firm ) -39288 Add Expenses disallowed:- Project Revaluation 69930590 Total Income 69891302 Allocation of Total Income in between partners:- Shri Pawan Lashkary 75% 52418476 Shri Jitendra Agrawal 25% 7472826 Total 100% 69891302 By virtue of section 10(2A), the above profit cannot be taxed in the hands of the partner. The section 10(2A) of Income Tax Act is reproduced as under:- "In the case of person being a partner of a firm, which is separately assessed as such, his share in the total income of the firm." Here admitted the assessee was partner of M/s Krishna Villa Apartment. M/s Krishna Villa Apartment is firm and separately assessed under income Tax by the same AO. The above firm has file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention that "capital gains" are not considered as normal 'income'. In fact, the history of taxation of capital gains in India would show that there were times when capital gains were not taxablesame being not normally understood 'income'. It was for this reason that "Capital Gains" have been specifically included in the definition of "Income" in section 2(24) of the Income-tax Act, unlike "Salaries" or "Profit & Gains of Business & Profession" etc. this fact has a significant legal bearing because it means that income under the head "Capital Gains" is a deemed income and the law of land provides that any provisions prescribing tax on deemed income should be strictly construed. Under this head "Capital Gains" - which provides for tax on deemed income- there are further deeming provisions, viz section 45(3) and 45(4) etc. None of the sections dealing with this head of income applies to the facts of this case, much less by strict interpretation thereof. 3.9 The Hon'bel Supreme Court again in the case of CIT vs R.Lingamallu Raghukumar (2001) 247 ITR 801 (SC) reiterated its earlier view as laid down in the case of Sunil Siddharthabhai (Supra) and held that where a partner retires from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the farmers or of a private limited company or of a partnership firm. It has already been held by the Supreme Court that settlement of accounts for the purpose of dissolution of the firm or retirement of one or more partners does not amount to transfer of any asset(s) by the retiring partner. (Pl. Refer to SC Decision in the case of Bankey Lal Vaidya (supra). Section 45(1A) patently does not apply to the case of the appellant as the sub-section applies to receipts from insurance companies etc. Section 45(2) also does not apply in the present case because that sub-section deals with conversion of a capital asset into stock-in-trade which was enacted to overcome the decision of the Supreme Court in the case of Bai Sirin Kooka. Section 45(2A) is not applicable as the sub-section deals with gains arising on transfer of securities etc. to/by depository participants etc. Section 45(3) deals with a situation where a person transfers capital asset to a firm as his capital contribution, which obviously is not the case here. Section 45(4) is the sub-section which comes to mind the moment there is any mention of dissolution of firm or retirement of a partner. BUT very importantly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of repurchase etc of units of mutual funds etc. hence not applicable. As we have seen, no charging provision related to capital gains tax is applicable to the case of the appellant. 3.12 Realizing irrationality of taxing the difference in value at the time of settlement of accounts of the retiring partner under any of the heads of income provided in section 14 of the Act, the AO chose to remain silent about it and refrained from addressing the fundamental issue of taxability in the hands of the Partner/Appellant. It will be fitness of things to bring to your kind notice a recent judgment of the Bombay High Court in the case of Prashant S Joshi vs ITO [324 ITR 154 (Bom)] "During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On the dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner is entitled to a valuation of his share in the net assets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that there was no justification whatsoever to tax the amount received by the appellant on his retirement from the firm and therefore addition deserves to be deleted. 3.13 Allegation of intention of tax evasion is devoid of any merit as such. In paragraph 6 of the assessment order the AO has alleged that the transaction of induction of new partners and retirement of old partners was with an intention of tax avoidance is incorrect both legally and factually. The learned AO stated that in the accounts of the firm, the difference in valuation of the land/Project has been shown as an expense. While the continuing/ new partners may have chosen a particular accounting treatment for a particular item of expense, it does not become binding on the department. And it has not. In fact, the self same Assessing Officer while framing the assessment order of the firm for subsequent year (during which the Firm sold a part of the land to an outsiders)did not allow any deduction on account of difference in valuation of the land/project at the time of induction of new partners. Thus it is clear that the AO had framed the assessment with a prejudiced mind and did indulge in misstatement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heart that the assessee did not honour his statement made during the search and seizure proceedings and retracted thereon. It is trite law to say that: There is no estoppels against law; and Taxation is not a matter of contract- and the same can be levied only under the authority of law (Article 265 of the Constitution). Since there is no estoppels against law, even if the assessee has admitted to pay tax on any receipt which is not taxable in accordance with law, such admission cannot be held against him. It is more so because the assessing officer is duty bound to tax the correct and true income in accordance with law and there cannot be tax liability by contract. There is no allegation that in the statement recorded during the course of search in respect of this transaction assessee made any averment of 'facts' which he retracted later. Comprehension of income-tax law by a common citizen is a mere fiction. More so, during the strenuous environment of search and seizure proceeding. Not that it would have made much difference, the appellant was not allowed any assistance of a legal expert/consultant during the course of search or before recording of statement on the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Firm has been made in the status of Firm and not as AOP or any other status. The AO has also not challenged the genuineness of the transaction of sale of land by the company to the firm. If, such sale was genuine and the firm was genuine, there is no justification to hold that the land in question was owned by any of the partners. The Partnership Law in India provides that the assets of the firm are owned by the firm and not by the partners. The land was purchased by the firm in its own name, by paying consideration and also substantial amount of conversion Charges, stamp duty etc. the request for issue of the Patta for Group Housing Project was made by the firm and the Patta was also allotted to the firm only. The legal and beneficiary owner of the land was firm not partners. All these facts go to establish that no transaction or conduct of the assessee leading to his retirement from the partnership firm was driven by any intention of tax evasion. 3.15 The facts of the cases referred by the LD AO in the assessment order are not similar to the case of the assessee, hence the ration laid down in these cases are not applicable to the case of the assessee. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Krishna Villa Apartment on 19-03-2007 and 10-02-2007 respectively and after retirement of the assessee, the firm M/s.Krishna Villa Apartment consisted of four partner which were earlier partners of M/s.Gold Dream Builders and Developer. The apparent reason of retirement as mentioned in the deed is not true as the reason was to relinquish the right in the land as partner of the firm. The firm M/s.Krishna Villa Apartment consisting of two partners upto 19-01-2007, was having only one asset i.e. land. After joining of four new partners, which were erstwhile partners of M/s.Gold Dream Builders and Developer, the existing two partners who started the firm retired and thus relinquished their right, title and interest in the land and the objective was to avoid taxability of profit under the Income Tax Act. 4. The ld. CIT(A) mentioned that the decision of Hon'ble Apex Court in the case of CIT Vs. Bankey Lal Vaidya, 79 ITR 594 referred by the ld. AR is not applicable as the Act has been amended and Section 45(4) has been introduced. 5. The ld. CIT(A) has referred to the decision of Hon'ble Apex Court in the case of Shri Sunil Siddddhartha Vs. CIT 156 ITR 509 in which the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of Shri Jitendra Agarwal. The statement recorded during search in respect of the facts can be relied upon for taxation and the assessee should not have any grievance. Reference is made to the decision of The Hon'ble Bombay High Court in the case of Ramchandra & Co. Vs. CIT, 168 ITR 375 10. The ld. CIT(A) has also referred to the decision of The Hon'ble Kerala High Court in the case of V Kunhambu & Sons Vs. CIT, 219 ITR 235 in which Hon'ble High Court held that the assessee cannot challenge the correctness of the assessment in case the statement is voluntarily. The assessee has not established that the statement was under a mistaken belief of fact and law. Accordingly ld. CIT(A) confirmed the addition. 2.11 During the course of proceedings before us, the ld. AR has filed written submission. Page 1 to 3 of the written submission refers to the facts of the case and these facts have already been mentioned. It as submitted that two firms were merged to generate greater synergy of operations. However, the things were not destined to be that way. Shri Jitendra Agarwal found himself uncomfortable in new setting and therefore, desired to retired the newly constituted fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has transferred his controlling interest in land to the other partners. The retirement deed is placed at PB page 49- 53. There is no clause in the retirement deed to say the transfer of controlling interest in land in favour of other partners. Further the assessee has received no any consideration against the retirement or so called transfer of controlling interest and for this reason also, the amount cannot be held as capital gain of the assessee. The relevant clause in retirement deed is 5 (PB page 51), which is as under:- " 5. That balance in the capital account of the retiring partner will be paid to him within the period of three months from the date of the deed and no interest on such balance will be paid for this period of three months. After payment of this entire capital, the retiring partner shall not have any right in the business of the firm and also will not claim his share in the goodwill of the firm, if any." This clause contemplates three things (i) the payment of balance in capital of retiring partner (ii) no right in business of the firm and (iii) no right in goodwill of the firm. Therefore, this clause does not speak that the assessee has relinquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm is placed at (PB page 126-128) The amount received by the assessee is Capital Receipt not chargeable to tax in view of the law laid down by the Supreme Court in successive decisions to the effect that an amount paid to a retiring partner in a partnership firm does not amount to a transfer within the meaning of s. 2(47). During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does not involve an element of transfer within the meaning of s. 2(47). Chief Justice P.N. Bhagwati (as the learned Judge then was) speaking for a Division Bench of the Gujarat High Court in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) (Copy at PB page 188-200) dealt with the issue in the following observations:- "...When, therefore, a partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) that when 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 on taking accounts, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners. It may also be noted that in CIT vs. Tribhuvandas G. Patel (1978) 115 ITR 95 (Bom), (Copy at PB page 205-219) which was decided by a Division Bench of Bombay High Court, under a deed of partnership, the assessee retired from the partnership firm and was inter alia paid an amount of Rs. 4,77,941 as his share in the remaining assets of the firm. The Division Bench of this Court had held that the transaction would have to be regarded as amounting to a transfer within the meaning of s. 2(47) in as much as the assessee had assigned, released and relinquished his share in the partnership and its assets in favour of the continuing partners. This part of the judgment was reversed in appeal by the Supreme Court in Tribhuvandas G. Patel vs. CIT (1999) 236 ITR 515 (SC). (Copy at PB page 201-204) Further more, Hon'ble ITAT Jaipur Bench has also decided the similar issue in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) of s. 47. Therefore, the question was answered in favour of the assessee and against the Revenue. Sec. 47(u) which held the field at the material time provided that nothing contained in s. 45 was applicable to certain transactions specified therein and one of the transactions specified in cl. (ii) was distribution of the capital assets on a dissolution of a firm. Sec. 47(u) was subsequently omitted by the Finance Act of 1987 w.e.f. 1st April, 1988. Simultaneously, sub-s. (4) of s. 45 came to be inserted by the same Finance Act. Sub-s. (4) of s. 45 provides that 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 AOP or BOI (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. The fair market value of the assets 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 for the purpose of s. 48. Ex facie subs. (4) of s. 45 deals with a situation where there is a transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of his own preexistence of right or interest in the firm and no transfer of property in his favour which is not already (sic) his takes place. If that is so, it cannot amount to transfer of partner's interest on getting value of his share on retirement. Obviously, realisation of one's own interest in money value after evaluating the value of existing interest in the firm cannot in any terms be considered as transfer unless a legal fiction exists to that for that purpose and in the absence of any transfer, there cannot be any question of arising of any capital gains for taxable purpose. In this case the decisions CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj); CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300, and decision in the case of Sunil Siddharthbhai vs. CIT (1985) 156 ITR 509 (SC) were followed. (iv) In Commissioner of Income Tax Vs Kunnamkulam Mill Board (2002) 257 ITR 544 (Kar), (Copy at PB page 244-248), Hon'ble Karnataka High Court held that on retirement of the partner of the firm there is no transfer of the assets of the firm in favour of the continuing partners. The facts of this case are that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tnership of the firm stood reconstituted, there is no transfer of capital asset. Likewise, if a partner retires he does not transfer any right in the immovable property in favour of the surviving partner because he had no specific right with respect to the properties of the firm. What transpires is the right to share the income of the properties stood transferred in favour of the surviving partners, and there is no transfer of ownership of the property in such cases." (v) In Addl. CIT vs.. Smt. Mahinderpal Bhasin (1979) 117 ITR 26 (All) , Allahabad High Court followed the decision of the Gujarat High Court in CIT vs. Mohanbhai Pamabhai (supra) and held that when a partner retires, what he receives is really his share in the partnership assets. It is not a consideration for transfer of his interest in the partnership to the continuing partners. In the case of a retirement of a partner, just as in the case of a dissolution of partnership, there is no element of transfer. It is only an adjustment of the right of the partners and not relinquishment or extinguishment of interest of retiring partner. (vi) The same view was followed in CIT vs. Madan Lal Bhargava (1980) 122 ITR 545 (Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult, in terms of the legal character of the payment as well as the consequences thereof, is precisely the same. For, as observed by the Gujarat High Court, in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj), (ix) Smt. Aruna A. Bhat Vs. Assistant Commissioner Of Income Tax ITAT, PUNE THIRD MEMBER BENCH : (2002) 81 lTD 218 (Pune)(TM) (Copy at PB page 274-291):- The main issue involved in this appeal is, whether the amount of Rs. 62.50 lakhs received by the assessee on retirement from the partnership firm of M/s A.V. Bhat & C.V. Shah is a capital receipt not liable to capital gains tax and whether the entirely new findings and different case made out by the CIT(A) holding that there was a systematic plan right from the beginning to avoid tax and various agreements entered into including the partnership deed was merely advice to avoid the tax is sustainable. The question whether the amount of Rs. 62.50 lakhs received by the assessee on retirement from the partnership firm of M/s A.V. Bhat & C.V. Shah is a capital receipt not liable to capital gains tax was answered in favour of the assessee by holding that the amount received by the assessee on retirement from the partnership fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners and the amount received by the retiring partner is not capital gain under s. 45 of the IT Act, 1961 held that credit of amount to capital account of partner on his retirement on revaluation of assets as per partnership law does not involve 'transfer' hence no capital gains arise. (xii) Deputy Commissioner of Income Tax Vs. Jayendra V. Sharma & Ors ITAT, AHMEDABAD 'C' BENCH (1993) 48 ITD 1 (Ahm) (Copy at PB page 299-302), Held that revaluation of assets of firm undertaken and appreciation as a result thereof credited to the account of assessee-partner, same cannot be brought to tax. Held that there being no transfer of capital assets on distribution of assets of firm among partners on dissolution of firm, no capital gains are attracted. McDowell & Co. vs. CIT (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) distinguished; CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj), Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC), CIT vs. Dewas Cine Corporation (1968) 68 ITR 240 (SC) and Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of revaluation of stock of the firm is treated as taxable income than also it can not be taxed in the hands of the partners. 3.5 Even if it is presumed that the land in question changed the hands from one set of persons to another set of persons, whether the tax can be charged from assessee more so when the assessee never remained the owner of the land and it is not a case of conversion of personal asset into asset of partnership firm in which the assessee is a partner and conversion of partnership asset into individual asset on retirement. The ld AO in para 4 at page 4 mentioned as under:- "in a matter of 8 months starting from 19.07.06 to 19.03.07, the Siroli land has virtually changed ownership from Pawan Lashkary and Jitendra Agarwal (Collectively M/s. Krishna Villa Apartments) to Sh. Shankar M Jethani, Shri Miraj Un Nabi Khan and Shri Naved Saidi (collectively, M/s. Gold Dream Developer) for a consideration of Rs. 6.99 crores. The said stock (land in this case) virtually is the hands of the M/s. Gold Dream Developers & Builders and its original partners, albeit in the name of M/s. Krishna Villa...." Here, the Ld AO wanted to say that the ownership of the land was tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Allahabad High Court in the case of Additional CIT Vs Smt. Mahinderpal Bhasin 117 ITR 26 (All) has held that consideration for relinquishment of interest in partnership firm is not revenue receipt as with the relinquishment of interest, the assessee's source of income entirely extinguished Specifying the head of income is not an idle formality but has very significant and substantive implications on the chargeability of receipt itself as also quantum of taxable part of it. It is essential because the conditions of taxation are different for different types of income. Until and unless it is specified as to under which head the income is proposed to be taxed, it will not be possible to see as to whether the receipt in question is taxable under the specified head and if at all it has to be taxed then to what extent. The elementary in jurisprudence of levy of income-tax that the receipt in question, first should be an 'income' and secondly it has to fall under one of the five heads of income stated in section 14 of the Income-tax Act, 1961. If a particular income does not fall in any of the Heads of Income, the same cannot be taxed as it is presumed that the same was not directed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p housing project inspite of great efforts made by original owners of the land. The original owners of the land were trying to develop a residential colony in the name of Krishna Villa since 2004 but they could go further except getting the order u/s 90B of Rajasthan Land Revenue Act, and when they completely tired, they sold the land to Pawan Creation Pvt Limited on 1.8.2005 by executing agreement to sale in favour of this company and by executing Registered Power of Attorney in favour of representative of the company Shri Arun Lashkary. After purchasing this land, this company was tried its best to get "Single Unit Patta" from JDA but it could not got success. The file was going up and down for one and another reason in JDA. In April 2006, Shri Jitendra Agarwal made a proposal to Shri Pawan Lashkary that he can get the work done from JDA provided this project of group housing on this land is done with his partnership. Therefore, it was orally decided that a new partnership firm would be formed in between Pawan Lashkary and Jitnedra Agarwal and this project will be done in partnership with Shri Jitendra Agarwal. After getting assurance of partnership, Shri Jitendra Agarwal started ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of development agreement before the lower authorities as the same was lying with the office of M/s Krishna Villa Apartment and he did not think necessity to keep the copy thereof with him at the time of leaving office of the firm as partner. (iii) Merger of developer with the firm:- The Developer firm (M/s Gold Dreams Builders & Developers) started developing the land. After about four months, both the parties to the Development Agreement realized that merger of both the firms and their competencies and strengths will generate greater synergy of operations. Therefore, the decision for merger was a purely a commercial decision in business expediency with a motive to enlarge the scale of operations and to go further in some more projects with greater strength and experience. Therefore, it was decided to merge M/s Gold Dreams & Developers into M/s Krishna Kripa Apartment w.e.f 19.01.2007. (iv) Revaluation of land at market price. It is common practice to make the revaluation of the assets and liabilities at the time of reconstitution of firm as old partners never want to pass the existing appreciations or benefit to the new partners and similarly the new partners never w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frequently to look after his garment export business so it was not practically possible for the assessee to give much time for the business of M/s Krishna Villa Apartment, and his hardship exaggerated because the other old partner Shri Jitendra Agarwal left the firm. Further, the assessee could not adjust himself from the working style of the new partners. Therefore, the assessee decided to retire from the partnership and he retired from the partnership w.e.f 19.03.2007. It is also relevant to mention here that the new partners started working in defiance of business ethics, which the assessee did not like. This may be seen from the fact that later on (about in 2010) criminal cases were registered against the new partners for excess booking of flats and this news was also appeared in leading news paper. Had the assessee continued in the partnership, he would have also faced such criminal proceedings for the offence made by the new partners. Further, the retirement of the assessee was not only for name sake. There was actual and real retirement. The department has no material to show that the retirement of Shri Pawan Lashkary was name sake only and he remained real or beneficial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri C.V. Shah constituted an oral partnership. The husband of the assessee expired and assessee stepped into the business of her husband. The Partnership Deed was inked on 15th Dec., 1993 and it provided that the partnership deed shall be deemed to have commenced from 27th Oct., 1990. The assessee retired from the said partnership by executing a deed of retirement dt. 25th Jan., 1994. On retirement, the assessee received a sum of Rs. 62.50 lakhs. The learned CIT(A) interpreted various agreements and came to a finding that the series of agreements were nothing but an arrangement and the partnership entered into were a mere ploy to create an alibi that the sum were received on retirement. The question was answered by Hon'ble Tribunal in para 10 by holding as under:- "...There was nothing wrong/sham in entering into regular partnership with Shri Shah. In fact, it was her late husband who was in partnership with Shri Shah and after the unfortunate death of her husband, the assessee was bound to inherit her husband's share and, if in the process keeping in view the legal complications involved and her own perception of Shri Shah, she entered into a partnership deed, the whole thing w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the same can be levied only under the authority of law (Article 265 of the Constitution). Since there is no estoppel against law, even if the assessee has admitted to pay tax on any receipt which is not taxable in accordance with law, such admission cannot be held against him. It is more so because the assessing officer is duty bound to tax the correct and true income in accordance with law and there cannot be tax liability by contract. There is no allegation that in the statement recorded during the course of search in respect of this transaction assessee made any averment of 'facts" which he retracted later. Comprehension of income-tax law by a common citizen is a mere fiction, more so, during the strenuous environment of search and seizure proceeding. Further, the appellant was not allowed any assistance of a legal expert/ consultant during the course of search or before recording of statement on the matters which are essentially questions of law. If the law requires that a certain tax is to be collected, it cannot be given up, and any assurance that it would not be collected, would not bind the Government. The liability of the assessee to pay Income-tax is created by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat this profit was earned in lieu of giving the land to the new partners and he had not paid any tax on this profit. He accepted this profit as his undisclosed income and offered it for tax. (PI. refer question & answer to Q.Nos. 23, 24 and 28 reproduced on pg. 33 of the CIT(A) order) 3.3. In his computation of income the assessee showed Rs. 5,24,47,043/- as 'profit from the firm M/s Krishna Vila Apartment' but claimed it as exempt u/s 10(2A) of the IT. Act. 3.4. The A.O did not accept the contention of the assessee about theabove amount of Rs. 5,24,47,043/- being exempt. In view of the facts of this case, she was of the opinion that in a matter of 8 months starting from 15.07.2006 to 19.03.2007, the Siroii land had virtually changed ownership from Pawan Lashkary and Jitendra Agarwal(Collectively M/s Krishna Villa Apartments) to Sh. Shankar M.Jethani, Sh. Arun Bansal, Sh. Miraj Un Nabi Khan and Shri Naved Saidi(collectively, M/s Gold Dream Builders & Developers) for a consideration of Rs. 6.99 crores. The said stock (land in this case) virtually was in the hands of the M/s Gold Dream Builders & Developers and its original partners, albeit in the name of M/s Krishna Vil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y tax on this. He offered this amount for tax as his undisclosed income. 4. In this appeal the assessee has challenged the above decision of Ld. CIT(A)-Central. 4.1 In this respect first of all, I would like to submit that the case of the assessee is squarely covered by the decision of Hon'ble ITAT, Mumbai, Bench T in the case of Sudhakar M. Shetty vs. ACIT reported at (2011) 130 ITD 197Mumbai). 4.2. In this case the assessee Sh. Sudhakar M. Shetty entered into a partnership with one Sh. Rakesh Wadhwan to carry on the business of building and development of immovable properties. The partnership firm was named M/s D.S. Corporation. Subsequently, some more relatives and associates of these two partners were admitted but essentially the partnership remained under the control of the Shetty and Wadhwan groups. This partnership firm bought a land in Mumbai for Rs. 6.5 crores and made expenditure for clearing and regularizing this land. Later the firm admitted 4 more partners from outside the two main groups viz. Sh. Ashok Gupta, Sh. Waryam Singh, Sh. Kapil Rajesh Kumar and Sh. Sunpreet Singh into the partnership. Just before admitting these new partners the land was got revalue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled discussion Hon'ble Tribunal has held as under: (I) Thus, the question whether a transaction would amount to an assignment or release of interest by the retiring partner in favour of the continuing partners or not would depend upon the way a particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum amount in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of section 2(47). In the instant case, the assesse retired from the partnership firm and was paid the sum standing to the credit of his capital account, but for the re-valuation 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 had been artificially increased just to ensure that the retiring partner was paid consideration standing to the credit of his capital account. Thus, it was a case where instead of quantifying the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of the deed and no interest on such balance will be paid for this period of three months. After payment of his entire capital, the retiring partner shall not have any right in the business of the firm and also will not claim his share in the good will of the firm, if any". Thus, in this case also the retiring partner has assigned or relinquished his share or right or interest in the business of the partnership firm in the favour of the continuing partners. Therefore, the case of the assessee is squarely covered by the decision of Hon'ble ITAT Mumbai in the case of Sudhakar M.Shetty and therefore the amount of Rs. 5,24,47,943/- has been rightly taxed by the A.O as the income of the assessee. 5. In the case of Sudhakar M. Shetty out of the two groups of original partners only one group retired from the partnership. Still Hon'ble ITAT held that the amount received by the retiring partner will be taxed in his hand as capital gain. In the case of the assessee, the assessees have gone one step further. Both the original partners have retired from the partnership firm and the remaining partners are the 4 partners who were newly admitted. Therefore, this is a clear c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case is also a case where through a colorable device the two persons Sh. Pawan Lashkary(assessee) and Sh. Jitendra Agarwal transferred their controlling interests in the land to a group of 4 persons. The profit earned by the assessee and Sh. Jitendra Agarwal has been rightly held as taxable by Ld. CIT(A) in the hands of these two persons. 6. As regards the grounds taken by the assessee in the modified/additional grounds filed on 31.10.2011, my submissions are as follows: Ground no. 1: In this ground, the assessee has termed the orders of the lower authorities as against law, weight of evidence and probability of the case . In this respect, it is submitted that in view of the submissions made above and the discussion made in the orders of the A.O and Ld. CIT(A), the addition of the income of Rs. 5, 24, 47,943/- has been made in the hands of the assessee as per law and on correct appreciation of the evidences. Ground no. 2: In ground no. 2, the assessee has claimed that the amount of Rs. 5,24,47,943/- cannot be taxed as his income since this is capital account balance received on account of his retirement from the firm M/s Krishna Villa Apartment and also because the said firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as in the case of our assessee, there was no admission of new partners in the existing firm, no revaluation of the land at the time of admitting new partners, and the retiring partners were not paid the surplus of the revalued land. Thus, the facts of the case of the assessee and those of the case of Prashant Joshi are totally different. Ground no. 4: In this ground, the assessee has contended that Ld. CIT(A) has wrongly treated the amount of Rs. . 5,24,47,943/- as transfer of right of land by the retiring partners to the new partner of the firm and has held it as taxable under the head income from other sources. In this respect, it is submitted that as discussed in his order, Ld. CIT(A) has rightly held the sequence of events in this case as a colourable device to relinquish controlling interest in the land in favour of the new partners of M/s Krishna Villa Apartments by Sh. Pawan Lashkary and Sh. Jitendra Agarwal. Since these two persons have earned profit on relinquishment of the controlling interest therefore such profit needs to be taxed as their income only. Ld. CIT(A) has held this amount as taxable under the 'income from other sources' only to counter the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that there is double taxation of the same amount as in the assessment order OF M/s Krishna Villa Apartment the A.O had not allowed the closing stock of land to be taken at the enhanced revalued amount In this respect it is submitted that for A.Yrs. 2007-08 and 2008-09, the A.O had to pass the assessment u/s144 as the notices sent u/s 143(2) was refused. Thus these assessments were best judgement assessments made on the basis of the material on record. During these assessment proceedings the assessee firm did not explain the nature of the revalued value of the land and hence the AO rejected the claim of revalued value as expenditure as discussed in para 7 and 8 of her order for A. Y 2007-08(APB Pg. 166,167). The A.O rejected the claim of the assessee on the ground that the stock, as per accounting standard AS-2, is to be valued at cost or market price whichever is lower but the assessee valued it at a higher rate which was not allowable . The A.O had to make this disallowance because there was no explanation by the assessee firm on this issue. Therefore, it cannot be said to be a case of double taxation. Ground no: 6: In this ground the assessee has claimed that the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual assets on dissolution or otherwise, was necessary. [Para 21] Partnership as a form of carrying on business was evolved so that two or more persons could join together by pooling resources in the form of capital and expertise. One of the devices used by the assesses to evade tax on capital gain was to convert an asset held individually into an asset of the firm in which the individual was a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise. [Para 22] Such an introduction of capital asset as capital contribution by a partner upto 1.4.1988 did not result in incidence of capital gain. It was so held by the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W. The Supreme Court held that under the Act, where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of section 45 because an exclusive interest of the partner in the personal assets is reduced, on his entry into the firm into a shared interest. On such introduction of capital the partner's capital account is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of section 45. [Para 27] The Finance Act, 1987 omitted clause (ii) of section 47 with effect from 1.4.1988, the effect of which was that distribution of the capital assets on the dissolution of a firm would be regarded as 'transfer' with effect from 1.4.1988. Therefore, instead of amending section 2(47), the amendment was carried out by the Finance Act, 1987, by omitting section 47(ii), the result of which was that distribution of the capital assets on the dissolution of a firm was regarded as 'transfer'. The effect was that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm's income in the previous year in which the transfer took place and for the purposes of computation of capital gains, the fair market value of the asset on the date of transfer was deemed to be the full value of the consideration received or accruing as a result of the transfer. [Para 28] Thus, the Parliament brought into the tax net transactions whereby assets were brought into a firm or were taken out of the firm. Thus, section 45(4) covers cases where there is a dissolution of the firm and distri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the firm. The decision in the case of A.N.Naik Associate (supra), however, treats distribution of the assets of the firm to partners on dissolution or on retirement as falling within the ambit of section 45(4). The second situation with which the instant appeal was concerned was a case where the retiring partner was paid consideration in cash and he gave up his rights as a partner, including his rights over the assets of the partnership. There was divergence of views on the question as to whether there was any transfer at all in such situation by the firm in fvour of the retiring partner or by the retiring partner in fvour of the firm and its continuing partners. Thus the question whether a transaction would amount to an assignment or release of interest by the retiring partner in favour of the continuing partners or not would depend upon the way of particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum amount in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al by the assessee was to be dismissed." 2.14 Alongwith written submission, the ld. DR also enclosed the copy of letter signed by Shri Arun Lashkari and addressed to Dy. Commissioner, JDA on 27-02-2006. In this letter, the request was made to issue a single unit patta in the name of the company. However, the name of the firm is mentioned in hand writing as M/s.Krishna Villa Apartment. From this, the ld. DR submitted that firm was in existence in Feb, 2006 and all the subsequent actions represent arrangements for evading the tax. 21.5 The ld. AR submitted a rejoinder and the contention as given in the rejoinder are as under:- Income has been defined in section 2(24) of Income Tax Act. In sub clause (vi) specifies that any capital gain chargeable under section 45 is income. Section 45 contemplates that profit or gains arising from transfer of capital assets effected in the previous year shall, save other wise provided be chargeable to income Tax under the head "Capital Gain" Therefore in order to charge tax on capital gain two conditions must be satisfied (i) there should be capital asset and (ii) There should be transfer of capital asset. Therefore any thing which is not a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the individual is a partner and conversion of capital assets into individual assets on dissolution or otherwise, is necessary. 22. Partnership as a form of carrying on business evolved so that two or more persons can to join together by pooling resources in the form of capital and expertise. One of the devices used by assessee to evade tax on capital gain was to convert an asset held individually into asset of the firm in which the individual as a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise." In the case of the assessee there is no such findings of the lower authorities. 3. (Para 42). Hon'ble Mumbai "I" bench of the Tribunal took the note of clauses of Retirement Deed as mentioned in Para 42. Cls. 2, 4, 5 and 7 of the deed of retirement clearly envisages an extinguishment of rights of the retiring partners and assignment rights over the partnership and its properties in favour of the continuing partners/firm. Further it has been specifically mentioned that the capital account balance Rs. 35,59,84,050/- payable to the retiring partner in full and final settlement of his claim in the capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more partner introduced as incoming partners and thereafter all the old four partners retired. New partners brought amount in the firm towards their capital contribution and old partners shared that amount minus WDV of assets. The controversy was whether there was transfer of assets of the firm to newly added partners. Held that provisions of section 45(4) are applicable and firm is liable to pay capital gain tax. In this cases retirement of all the old partners, continuation of business of firm by new partners, the taxability of capital gain was not held in the hands of retiring partners. 5 CIT Vs A.N. Naik Associates 265 ITR 346 (Bombay) Word "Otherwise" in section 45(4) covers not only the cases of dissolution but also cases of subsisting partners of a partnership transferring assets in favour of a retiring partner. In this case new partners were inducted in morning and old partners retired on close of the business on that day. In para 27 of the order it was held that on retirement of partner, the partner got his share, it was held that there was no extinguishment of right. In this cases retirement of all the old partners, continuation of business of firm by new partners, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st relinquishment of his share on retirement from partnership. 8 CIT Vs H.R.Aslot 115 ITR 255 (Bombay) In this case, lump sum amount received by retiring partner for assigning and releasing his share in the partnership in favour of continuing partner was held to be liable for capital gain tax, following its earlier decision in the case of CIT Vs Tribhuvandas G Patel 115 ITR 95 2.16 In the rejoinder, the ld. AR submitted that the name of the firm is mentioned in hand writing while the entire letter stands typed. The ld. AR also filed the copies of the order sheet from the file maintained in the office of JDA. The order sheet entry showed that the request was made by M/s. PCPL company for issuing a single unit patta. We are not aware as to how the name of the firm has been mentioned in the copy of letter filed by the ld. DR. Such entry may be a subsequent interpolation. 2.17 We have heard both the parties. The copy of partnership deed dated 15-07-2006 in which the assessee and Shri Jitendra Agarwal were partners is available at pages 31 to 33 of the paper book. The partnership was a partnership at will. As per clause 13 of the partnership deed , it was provided that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of any details of sharing of the built up area between two firms, we are unable to comment further. But it is clear that merging firm will get the benefit of the project. The share of profit to the erstwhile partners was to the extent of 50% in the firm constituted on 19-01-2007. As per clause 12of the partnership deed, it is mentioned that no partner shall mortgage or charge his share into partnership or any part thereof or make any person a partner with him without written previous consent of other partners. The three partners of M/s.Gold Dream Builders and Developer were considered as working partners in the partnership deed dated 19-01-207 and such partners were to be allowed remuneration in the ratio as mutually decided. These partners were required to devote their time and attention to the conduct of the affairs / day today working of the firm. 2.19 Thus the firm M/s.Krishna Villa Apartment got benefit of the services of three partners of erstwhile M/s.Gold Dream Builders and Developer. Clause 16 of the partnership deed stated that any person can include in the firm as new partner only after the clear and mutual consent of all the partners. It was further provided that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continuing partners. In the partnership deed dated 19-03-2007, the clauses in respect of retirement of the partners, the assignment of right of the partners and admission of new partners are the same as in the earlier partnership deed. 2.23 In the documentary evidences filed before the lower authorities, it is clearly mentioned that both the partners have retired on account of their other commitment relating to their own business. It is not the contention of the revenue that such facts mentioned in the partnership deed are facade. Sham means which is good in appearance but false in fcts. The word 'sham' also means that the act done by document executed by he parties to the sham which are intended by them , to give to third parties or to the Court, the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. The onus is on the party which wants to plead that the transaction is sham. The clauses in the partnership deed and arguments of the ld. AR indicate that the merger of the firm was not sham transaction. The three partners of the merged firm i.e. M/s.Gold Dream Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, three trust deeds for the benefit of the assessee, his wife and children in identical terms were prepared under section 21(2) of the Wealth-tax Act. The Revenue placed reliance on McDowell's case [1985] 154 ITR 148 (SC). Both the learned judges of the Bench of this court gave separate opinions. Chief Justice Pathak, in his opinion said (at page 486) : "Reliance was also placed by learned counsel for the Revenue on McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). That decision cannot advance the case of the Revenue because the language of the deeds of settlement is plain and admits of no ambiguity." Justice S. Mukharji said, after noticing McDowell's [1985] 154 ITR 148 (SC) case (at page 487) : "Where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made, it has to be noted and rejected." In Mathuram Agrawal v. State of Madhya Pradesh [1999] 8 SCC 667 at para. 12 another Constitution Bench had occasion to consider the issue. The Bench observed (page 673) : We are unable to agree with the submission that an act which is otherwise valid in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belong to the firm of whatever fluctuations there may be in the value of that asset, the benefit or the loss of it could accrue to the firm 2.29 The ld. DR has referred to the order of the Mumbai Bench in the case of Sudhakar M Shetty (supra). In that case, one of the party threw his assets into the firm and formed the partnership. Such throwing of assets into the firm is transfer u/s 45(3) of the Act . In that case, the capital assets were revalued. The ITAT Mumbai has observed that there is divergence of view on the question as to whether there is any transfer at all by the firm in favour of the retiring partner or by the retiring partner in favour of the assessee and its continuing partner. The Mumbai Tribunal in that case observed that if instead of quantifying his share by taking accounts on fottings of notional sale, parties agrees to pay a lumpsum in consideration of retiring partner assigning or relinquishing his share or right in partnership and its assets in favour of continung partners, transaction would amount to a transfer within meaning of Section 2(47) of the Act. Section 2(47) refers to transfer of capital assets. It is not applicable to the transfer of stock in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or rights. As per the classical English Partnership law cited by Linday, abd adopted by Indian Courts in Narayanapa Vs. Bhaskara Krishnapa (AIR 1966 SC 1300) and Dewas Cine Corporation 68 ITR 240 (SC), a partner's monetary rights are two folds. Firstly , during his tenure as partner, whereas he has no specific right in any individual asset of the partnership , his right is only to receive his share of profit. Secondly, on dissolution or retirement, he has a right to a share in the net estate of the firm (i.e. assets minus liabilities and winding up expenses valued on the bais of a ntoinal sale ) as on the date of the retirement or dissolution. This bundle of right constitutes the 'share ' of the partner. So when a partner retires, the accounts of the firm was made up - valuing the assets on basis of a notional sale, the liabilities and notional winding up expenses are deducted and the amount due to the retiring partner towards his share , as worked out by this arithmetic, is determined as payable to him. On retirement, the retiring partners takes away his money and the share of the continuing partners remained intact. There is no transfer of any property from the retiring partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently incurred by the firm, even in the very accounting year in which the capital account is credited. Having regard to the nature and quality of the consideration which the partner may be said to acquire on introducing his personal asset into the partnership firm as his contribution to its capital, it cannot be said that any income or gain arises or accrues to the assessee in the true commercial sense which a businessman would understand as real income or gain." The Hon'ble Jurisdictional High Court in the case of CIT Vs. Marudhar Hotel (P) Ltd. 269 ITR 310 had an occasion to consider the above decision of Hon'ble Apex Court and held that there is only notional consideration. The Hon'ble Jurisdictional High Court observed as under:- "It is only where a transfer of property is for "inadequate consideration", that the question of finding the market price can arise. As noticed above when an asset is brought into partnership the contributor partner acquires in consideration the right to obtain his share in the profits from time to time and also the right to share in the net assets of the firm on its dissolution or on his retirement in accordance with the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of accounts and it cannot be said the losses was on account of any transfer of capital. In the instant case also, the retiring partners were given their share. Hence, there cannot be any increase in profit or income. 2.34 The Hon'ble Apex Court in the case of Tribhuvandas G. Patel Vs. CIT , 236 ITR 515 had an occasion to consider the case in which one of the partner retired from the firm and received share of his profit and also share from goodwill of the firm and share in the asset of the firm. The Hon'ble Apex Court held that the same is not assessable as capital gain . It is true that at that relevant time that the provisions of Section 45(3) and 45(4) were not applicable in the statute book but still the decision will be applicable because the provisions of Section 45(4) will make the amount includible in the hands of the firm as capital gain. In the instant case, the AO is taxing it as business profit. Another interesting feature in this case is that the land was purchased by the firm in which the assessee was having 75% share. The firm made investment and got the approval for constructing the flats for housing society. The right to have a license of Green Housing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protected. 2.36 We have considered the additional evidences fled by the Department and the additional evidences filed by the ld. AR as rejoinder against the additional evidences filed. According to us, these additional evidences have no relevance for deciding the issue before us. Moreover, the additional evidences filed by the Department is not substantiated that the entry in the letter is in the handwriting of Shri Arun Lashkary and that too at the time of filing of application. We therefore, ignore these additional evidences for deciding the issue as not relevant. 2.37 The revenue has relied upon the statement of the assessee recorded during the course of search in which the assessee surrendered the amount on account of revaluation of land as undisclosed income. Kelkar Panel studied the problem of confessions and surrenders during its studies and deliberations in para 3.27 and the same is reproduced as under:- "A cross section of people cutting across 4trade and industry complained of a high handed behaviour of raiding parties particularly while recording a statement. It was pointed out that overenthusiastic aiding parties would often coerce a 'surrender'. As a result all fol ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
