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TMI Blog2016 (11) TMI 1064X X X X Extracts X X X X X X X X Extracts X X X X ..... e any right in the property which is so transferred. There is no transfer of any capital asset of the assessee firm to its retiring partner and hence no capital gains chargeable to tax arises in hands of the assessee firm and section 45(4) has no application on the facts of the present case. - Decided in favour of assessee - ITA No. 5639/Mum/2012, ITA No. 6276/Mum/2012, C.O. No. 273/Mum/2013 - - - Dated:- 30-9-2016 - Shri Amit Shukla, Judicial Member And Shri Ashwani Taneja, Accountant Member Assessee by : Shri Rajan Vohra Revenue by : Shri B Pruseth ORDER Per Amit Shukla, J. M. The aforesaid cross appeals and cross objections have been filed by the assessee as well as by the revenue against impugned order dated 09.07.2012, passed by Ld. CIT (Appeals)-29, Mumbai for the quantum of assessment passed under section 143(3) r.w.s. 147 for the assessment year 2006- 07. 2. In the assessee s appeal, following grounds have been raised:- That the learned CIT (A) under the facts and circumstances of the case and in law has:- Reopening of assessment under section 147 of the Act 1. erred in upholding the reopening of assessment under section 147 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer by considering only cash received during the particular financial year without taking into account the value of construed area of 35,495 sq.ft. allotted to the retiring partner. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the entire cost of land is allowable as cost of acquisition against the partial sale consideration received for the purpose of section 45(4) of the Act. 3. For these and other reasons it is submitted that the order of the CIT(A) may be set-aside and that of the AO restored. 4. The appellant craves leave to amend or later any ground or add a new ground which may be necessary . Besides aforesaid grounds, revenue has also taken following as additional grounds:- Without prejudice to the main ground already raised the addition of ₹ 55,52,02,720/- made on account of distribution of transfer of constructed area or flats to the retiring partner should be considered as the sale or turnover of the assessee firm and assessed as its business income, if not considered under section 45(4) of the I.T. Act, 1961 . 4. In the Cross objection, the assessee has taken following objections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned the same, that is, at 50%. Since the construction of the project was ongoing during the FY 2005-06, therefore, no income accrued to the assessee from the construction business during the year ending 31st March, 2006. Later, on 30th April, 2005, vide Dissolution Deed , M/s Bharat Barrel Drum Mfg. Co. Ltd., one of the partners in the firm, retired from the firm on the following terms: a) ₹ 10 Crores to be paid against the amount of credit standing in the name of the Partner over and above sum of ₹ 6.3 crores already withdrawn from the capital account; b) Constructed area of 76,752 sq. ft. to be allotted out of stock-in-trade of the firm; c) The firm had the right to purchase the 41,257 sq. feet of the above mentioned area on or before 30th January, 2006; d) The firm exercised its right and purchased the area from the retiring partner for sum of ₹ 17,22,47,975/- during the year under consideration; and e) Balance area of 36,495 sq. feet was to be allotted to the retiring partner on the completion of the construction. As stated above, since the project was under construction and no taxable income had accrued to the assessee firm, therefore, it d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said land. Further, the retirement deed specified that the continuing partner had right to purchase 41257 sq. ft. out of 76752 sq. ft. from the retiring partner. As per the return of the firm filed for A. Y. 2007- 08, which is beyond time prescribed in the Income tax Act, an amount of ₹ 33,57,22,9751- and 35495 sq. ft. area valued at ₹ 18,13,79,450/- has been determined as consideration for the retiring partner. It means the retiring partner was eligible for a total consideration of ₹ 51,71,02,425/- as its share in the assets of the firm. Provision of sec. 45(4) reads as under:- The profits or gain arising from the transfer of a capital asset by way of distribution of capital asset on the dissolution of a firm or other association of persons or body of individuals (not being a company or 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 purpose 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 consideration received or accruing as a result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of distribution should be on dissolution of the firm or otherwise; (iv) In support of its contention, the assessee relied upon various judicial decision of the ITAT and also relied upon the following High Court decisions:- CIT vs. Vijayalaxmi Metal 256 ITR 540 (Mad); CIT vs. Kunnamkulam Mill Board 257 ITR 544 (Kar.); CIT vs. Manglore Ganesh Beed Works 285 ITR 659 (Kar); (v) The assessee finally submitted that charging of such income in the hands of partnership would lead to absurd result as the same income has already been taxed in the hands of partner and the same will lead to double taxation of the same income. In support of this contention, the assessee relied upon the decision of Hon. Mumbai ITAT in the case of Sudhakar Shetty 130 ITD 197. 7. The Ld. Assessing Officer after analyzing the provision of section 45(4) and the decision of the Hon ble jurisdictional High Court in the case of CIT vs. A. N. Naik Associates, reported in [2004] 187 CTR 162, held that, firstly, the transaction carried out by the assessee firm has resulted into transfer within the meaning and scope of section 2(47), in the sense that the retiring partner has assigned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that the expression otherwise appearing in sub-section (4) of section 45 will take into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of the retiring partner. Accordingly, he calculated the value of consideration received by the retiring partner and also the taxable capital gain in the following manner:- As per the Deed of Retirement dated 30.04.2005 attached with the return of income filed in response to notice under section 148 of the Act, the retiring partner i.e. M/s. Bharat Barrel Drum Mfg. Co. Pvt. Ltd. was entitled for ₹ 16.30 crores in money and 76752 sq. ft. constructed area in the property to be developed by the assessee firm in lieu of relinquishment/transfer of rights in the assets/share of the firm. On verification of the record, it is also found that the retiring partner introduced the land at ₹ 19,00,00,000/- on 13.03.1997 and the same was credited to its Capital A/c as capital contribution in the firm. Thereafter, the retiring partner withdrew an amount of ₹ 6,34,16,412/- from the outstanding capital balance till 30.04.2005. Thereafter, the capital contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that, since, section 45(4) speaks about the distribution of the capital assets, therefore, he gave direction to the AO that balance amount should be taxed in the year of actual transfer of constructed area of 35,495 sq.ft. which was in the AY 2009-10; The ld. CIT(A) also computed the cost of acquisition at ₹ 30.96 Crores and after giving benefit of indexation (from FY 1996-97 to FY 2005-06) of ₹ 19 Crores, he finally computed the long term capital gains chargeable to tax in the AY 2006-07 at ₹ 2,56,41,418 (Rs.33,52,47,975 ₹ 30,96,06,557) and for balance amount for the constructed area to be allotted at the time of completion (which was in the AY 2009-10) he directed to be added in the AY 2009-10. 10. Before us, the Ld. Counsel Mr. Rajan Vohra submitted that, in view of the Retirement Deed of 30th April, 2005, the retiring partner was entitled for ₹ 16.30 crores in money and 76,751 sq.ft of the constructed area in the property to be developed by the assessee firm in lieu of all the rights, title, and interest in the assessee-firm. There was no transfer of any capital asset of the assessee firm but consideration to be paid to the retirin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, same should be taxable in the year of actual distribution that is, when it was actually transferred in AY 2009-10. In fact the Assessing Officer on the direction of the Ld. CIT (A)) regarding rest of the construed area which has been transferred /distributed (as per the agreement to the retiring partner) has made the addition of ₹ 18.13 Crores to the total income of the assessee in the AY 2009-10 under section 45(4) and taxed the same by reopening the assessment u/s 147. Aggrieved by the said assessment order of the Assessing Officer, the assessee is in appeal before the CIT(A) on the ground that:- a) There is no distribution of capital asset on retirement of partner from the firm in the AY 2009-10; b) In any case, firm was only to give stock in trade, merely because it was exchanged for some other asset (having same character of stock in trade i.e. constructed area in some other premises) as construction on plot was not progressing well, it cannot be brought to tax under section 45(4) of the Act. The appeal is still pending before the CIT (A) for disposal. 12. On the other hand, Ld. DR submitted that, what has been transferred is the right in the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee is a partnership firm constituted on 13th March, 1997 by two partners namely, M/s Bharat Barrel Drum Mfg. Co. Ltd. and M/s Urmi Real Estate Pvt. Ltd. The former had contributed to the Partnership, land admeasuring 15,663 sq. yards which was then valued at ₹ 19 crores and the later had decided to contribute funds and its expertise in the field of construction towards development of the land. Immediately, thereafter, on 30th June, 1997, two new partners were admitted, viz., Shri Vinod Tejraj Gowani and Shri Hitesh Tejraj Gowani. All the four partners continued until 30th April, 2005. By Deed of Retirement of same date, one of the partner, M/s Bharat Barrel Drum Mfg. Co. Ltd. who held 50% share as a partner, retired from the firm on the terms as mentioned above which though again for the sake of reference, is reproduced hereunder:- a) ₹ 10 Crores to be paid against the amount of credit standing in the name of the Partner over and above sum of ₹ 6.3 crores already withdrawn from the capital account; b) Constructed area of 76,752 sq. ft. to be allotted out of stock-in-trade of the firm; c) The firm had the right to purchase the 41,257 sq. feet o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . Thus the condition precedents for invoking the said provision are:- (i) There should be a distribution of capital assets of a firm; (ii) Such distribution should result in transfer of a capital asset by the firm in favour of the partner; (iii) On account of the transfer there should be a profit or gain derived by the firm; (iv) Such distribution should be on dissolution of the firm or otherwise. Hence the basic condition for invoking the provision of section 45(4) is that, gain should be on transfer of a capital asset by way of distribution of capital asset on the dissolution of firm. Here, in this case, admittedly there is no dissolution of the firm as the assessee-firm is continuing its business on as is where is basis with the remaining three partners. What the firm has paid is the compensation to the retiring partner for all its rights in the partnership firm and there is no transfer of any right/s in assets or property of the partnership firm. In actual there is no transfer of any capital asset of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing in the section 45(4) to canvass that it will cover the case where there is no dissolution and in support strong reliance has been placed on the decision of the Hon ble Bombay High Court in A.N. Naik Associates (2004) 265 ITR 346. This entire controversy in hand before us and also the implication of the ratio laid down by Hon ble Bombay High Court while dealing with the words otherwise used in section 45(4) has been dealt and explained in detail by the Full Bench decision of the Hon ble Karnataka High Court in the case of CIT v Dynamic Enterprises, reported in [2003] 359 ITR 83, wherein, they have taken detail note of the decision of A.N. Naik Associates and the context in which this word otherwise has been used in the section and what was meant by the Hon ble Bombay High Court. In this case, the question of law referred for consideration of Full Bench was as under:- When a retiring partner takes only the money towards the value of his share, whether the firm should be made liable to pay capital gains even when there is no distribution of capital asset/assets among the partners under Section 45(4) of the I.T. Act? Or Whether the retiring partner would be li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old partners retired. This is a device adopted to transfer the immovable property. The incoming partners tried to evade capital gains tax as well as stamp duty and therefore, he held the capital gains tax is liable to be paid by the firm. In appeal, the appellate authority has affirmed the said order. The appellate authority held that the reconstitution of firm has taken place on 01.04.1994 i.e., nearly one year after the members of the Khemka family were introduced as partners. Therefore, it accepted the genuineness of the old firm as well as the new firm but it held it is a colourable device to evade payment of tax . The Hon ble Court after noting down the above facts and taking into consideration various decisions; analyzing the provisions of section 45 and sub-section (4) thereto; meaning of transfer as given in section 2(47); section 14 of Indian Partnership Act; and also the various decisions of the Hon ble Supreme Court, observed and held as under :- 24. Therefore, in order to attract Section 45(4) of the Act, the capital asset of the firm should be transferred in favour of a partner, resulting in firm ceasing to have any interest in the capital asset transferred an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongs to the partnership firm. It did not belong to the partners. The partners only had a share in the partnership asset. When the five partners came into the partnership and brought cash by way of capital contribution to the extent of their contribution, they were entitled to the proportionate share in the interest in the partnership firm. When the retiring partners took cash and retired, they were not relinquishing their interest in the immovable property. What they relinquished is their share in the partnership. Therefore, there is no transfer of a capital asset, as such; no capital gains or profit arises in the facts of this case. In that view of the matter, Section 45(4) has no application to the facts of this case. 27. In Gurunath s case (supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case of Commissioner of Income Tax vs A N Naik Associates (2004) 265 ITR 346 (BOMBAY). In Naik s case, the asset of the partnership firm was transferred to a retiring partner by way of a deed of retirement. A memorandum of family settlement was entered into and the business of those firms as set out therein was distributed in terms of the fam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Gurunath s case (supra) did not appreciate this distinguishing factor and by wrong application of the law laid down by the Bombay High Court held the assessee in that case is also liable to pay capital gains tax under Section 45(4). Therefore, the said judgment does not lay down correct law . (Emphasis added is ours) 16. Thus, if we apply the above ratio laid down by the Full bench decision of the Hon ble Karnataka High Court, on the facts of the present case, then it is ostensibly clear that the partnership firm, that is, the assessee did not transfer any right in the capital asset or any of the asset of the partnership firm in favour of the retiring partner and neither it ceases its hold on the property of the firm. Its right in the property of the firm was still intact and has not been extinguished at all. Even the retiring partner did not acquire any right in the property, albeit it has only surrendered its right and interest in the partnership firm. Here when the retiring partner took cash and also further cash in lieu of agreed constructed area from the stock in trade of the firm, it did not relinquishing its interest in the immovable property. What it relinquished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the scope of assessment order and a new angle or case cannot be roped in the proceedings before the Tribunal. In support, he relied upon the following decisions:- (i) Prakash I Shah -115 ITD 167(Mum)(SB); (ii) Maersk Global Service Centre India Pvt Ltd - 133 ITD 543; (iii) Mahindra Mahindra Ltd. -122 TTJ 577 (Mum SB). On the other hand, the Ld. DR submitted that, this issue is directly related to the subject matter and in the additional ground the revenue is pleading that, alternatively, the amount in transaction should be treated as sales and consequently taxed as business income. This is purely a legal ground and hence same can be taken up before the Tribunal. 20. After considering the aforesaid submissions and on perusal of the impugned orders passed by the revenue authorities, we find that the case of the Assessing Officer as well as the CIT(A) was that, the amount paid to the partner on the retirement is to be taxed as capital gains under deeming provision of section 45(4) At this stage, it would not be proper for the Department to come out with altogether different proposition contrary to its own stand taken because it was nobody s case that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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