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TMI Blog2020 (12) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a transfer within the meaning of section 47(ii) of the Act and not liable to capital gain - Even we find merit in the alternative plea taken by the assessee that if the computational provision of capital gain as provided under section 48 of the Act breaks down then the charging provision as provided under section 45 of the Act would also fail as held in the case of CIT vs. B.C. Srinivasa Setty [ 1981 (2) TMI 1 - SUPREME COURT] - Decided in favour of assessee. Disallowance of finance charges - assessee submitted before the AO that the funds were borrowed during the preceding previous year for the purpose of business of the assessee which included hotel consultancy and trademark etc. - HELD THAT:- As assessee has not utilised the borrowed money for the purpose of his business. The Ld. CIT(A) has given a finding of fact that share of profit was assessed to tax on the income under the head Income from other sources which comprised of interest income from loans and deposits. We are in agreement with the conclusion drawn by the Ld. CIT(A) as the assessee has failed to establish that these expenses were incurred for the purpose of business of the assessee. Accordingly, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther partners of the firm have transferred the land of the project which was treated as long term capital gain and the assessee has taken the shade of the deed to avoid tax as per the provisions of sec. 45 of the Act. 3. On the facts and in the circumstances of the case and in law the Ld. CIT(A) failed to appreciate that consideration received by the assessee is towards the transfer of rights in the buildings, health club etc. which is a capital and the same is taxable as long term capital gain. 4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made under section 14A read with Rule 8D(2) of Income-tax Rules, 1962 holding that no disallowance has to be made where no exempt income was earned by the assessee in spite of the extant of circular of CBDT bearing No.05/2014 dated 11.02.2014 wherein the Board has clarified that provisions of section 14A of the Act are applicable in the cases of investments in shares which has not yielded any dividend/exempt income. 5. On the facts and circumstances of the case and in law, Rule 8D(2) of the Income-tax Rules, 1962 can be applied even when no exempt income has been earned during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v) Shri Smir P. Shah 25% vi) Shri Vithal V. Kamat 25% 7. The assessee retired from the said partnership on 04.04.2008 and relinquished his rights, title and interest in the partnership properties. The assessee s account with the partnership was settled on his retirement on 04.04.2008 and a sum of ₹ 48.15 crore was received by him by way of retirement in full and final settlement of his account with the firm. The assessee filed the copy of deed of admission and retirement dated 04.04.2008 signed by the four incoming partners and retiring partner Mr. Vithal V. Kamat the assessee duly attested by the solicitor. The assessee received ₹ 46.65 crore directly and ₹ 1.50 crores deposited in Escrow Account. Besides, the assessee furnished before the AO the deed of reconstitution dated 04.04.2008 and copies of cheques issued by the firm to the assessee. The AO brushed aside the submissions of the assessee and came to the conclusion that the money received by the assessee from the partnership concern ₹ 47,13,47,000/- after reducing ₹ 1,01,86,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alsi, Smt. Velbai Devsi Shah, Shri Bipin Talakshi Shah and Smt. Hirbai Nanji Sojpal and four new partners were taken in the partnership in the M/s. Runwal Developers Pvt. Ltd. namely; (1) M/s. Runwal Developers Pvt. Ltd. (2) Subhash S. Runwal (3) Sandeep S. Runwal and (4) Suboth S. Runwal According to the AO, the said deed was only signed by Mr. Vithal V. Kamat and not by other retiring partners. The AO also noted that the other partners sold their share in the land namely Shri Smt. Amrabai Malsi and Smt. Velbai Devsi Shah to M/s. Runwal Developers Pvt. Ltd. on 26.12.2007 for ₹ 11 crore and the amount was offered by the respective partners as long term capital gain in A.Y. 2008-09 and similarly Bipin T. Shah sold his share in the property to M/s. Runwal Developers Pvt. Ltd. for ₹ 5.86 crores on which the said partner has duly paid taxes in the capacity of executor of will late Shri Nanji Sojpar and Smt. Hirbai Nanji. Thus according to the AO the said deed of retirement and admission dated 04.04.2008 was signed by four incoming partners and one by Mr. Vithal V. Kamat and thus held that amount received by the assessee is a consideration for transfer of capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to 7.16% from 3.58%. Mr. Sameer Shah retired on 11th August, 2002 from the firm in terms of deed of retirement dated 29th January, 2003, and he transferred his share in the firm to the appellant thus the share of the appellant increased to 50%. (iv) Four persons (three individuals and one company) from Runwal group were admitted as partners of the firm and agreed to bring in capital, simultaneously, the appellant opted to retire from the partnership firm as from 1 ,4.2008. The Deed of Admission and Retirement dated 4.4.2008 was executed by four incoming partners and the appellant and was witnessed by reputed law firms in Mumbai. The appellant gave public notice in three prominent news papers and received ₹ 48.15 Crores as amount towards retirement from the firm in settlement of his accounts in the firm's books. (v) In order to verify the contention of the appellant the AO issued summons to the three outgoing and four incoming partners u/s 131 of the Act and recorded their statements of three outgoing partners and collected information from four incoming partners and used the same as evidence in making the assessment of the appellant, without giving opportunity to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d since 1992 and the cost of acquisition is taken at Nil because the assessee was having debit balance of ₹ 1,04,690/-in the firm. In the background of above admitted facts the rival submission is considered. 4.4.2 What is material here for the adjudication of the controversy is the status of the claimed land which is held to have been transferred along with the share, if any, of the appellant to decide whether any amount was taxable on account of money received by the appellant on the retirement from the partnership firm. 4.4.3 Admittedly, the land was not owned by the appellant and was brought in as their contribution to the capital of the firm by other partners. The said land was transferred by those partners directly to incoming partner without any involvement of the appellant. 4.4.4 The admitted position of both the appellant and revenue, is that the appellant had no right or claim over the land which was contributed by the other partners and the sale of the same was done by those partners directly. If the arguments of the A.O. is to be accepted that the retirement of the appellant from firm was nothing but a disguised sale of capital asset being land, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gain has already taken place and the taxes necessary are also reported to have been paid by the recipients of capital gains even by the AO. 4.4.8 If the contention of the A.O. that Deed of Admission and Retirement was prepared to camouflage the transaction of transfer of development right and right of possession is accepted for the sake of argument which though cannot be the case in terms of the law governing retirement of existing partners and admission of new partners, in that case the transfer of land is to be considered in the hands of the owner of the land being the partnership firm. As the A.O. has held that the firm was not dissolved when the existing partners moved out and the new set of partners moved in, the admitted continuity of the firm negates the further action of the A.O. as the appellant being a partner of the firm could not have owned the land which was owned by the partnership firm only. It is trite that a partnership firm is a separate legal entity under the provisions of the Partnership Act as well as the Income-tax Act. Eventhough the partners of the firm are jointly and severally responsible for the affairs of the partnership firm, the independe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mittedly the owners of the land being the outgoing partners other than the appellant have not suggested in any manner in their examination before the learned A.O. or otherwise that the appellant was the owner of the land at any point of time. The A.O. also has not considered the appellant to be the owner of the land. 4.4.15 That being the case, it follows that the appellant not being the owner of the land which is stated to have been transferred does not come under the purview of section 45 of the Act and therefore cannot be subjected to section 4 of the Act. It further follows that the appellant cannot be held liable to pay tax for the transfer of land as long term capital gains as simply put no transfer of land has been effected by the appellant for the simple reason that the appellant never owned the land. 4.4.16 Though this issue has not been the subject of consideration between the parties i.e. the appellant and the A.O. it is considered necessary to examine the status of the receipt of ₹ 48.15 cr in the hands of the appellant. The law laid down by the Hon'ble Apex Court : in the case of Kanpur Coal Syndicate [1964] 53 ITR 225 (SC) which is good law and applies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the Amending Act. The Court noticed that the position prior to the amendment by introduction of sec 45(4) by the Finance Act, 1987, was that there was no transfer of assets by the firm to the partners on dissolution or transfer of assets to the retiring partner on retirement. The term otherwise means even retirement of a partner will come under purview of sec 45(4). In view of sec 45(4) if there is any capital gain tax has to be levied in the assessment of the firm and not in the assessment of the partner. This view is even upheld by Chalasani Venkateshwara Rao vs. ITO 349ITR 413 (Andhra Pradesh HC). 4.4.19 The AO has himself negated the taxability of receipt in the hands of appellant u/s 45(4). From the conclusion of the AO it is seen that the sole basis for his conclusion depends on his understanding that certain rights in the nature of capital assets were transferred in lieu of consideration received on the date of retirement and the same is taxable as long term capital gains u/s 45(1) of the Act. Detailed discussion in the preceding para clearly establishes that argument of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 latter, the value will be represented, by his share in the net assets on the dissolution of the firm or upon the partner's retirement. (iv) Prashant S. Joshi [20101 324 ITR 154 fBom): 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 a 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 remains 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 section 2(47). A Division Bench of the Guj'arat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393/?e/d that when a partner retires from a partnership, what the partner receives is his share in the partnership which is worked out by taking accounts and this does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also referred to the decision of Tribuvandas G. Patel (supra) rendered by this Court and its reversal by the Apex Court. Moreover, the decision of this Court in the case of Prashant S. Joshi (supra) placed reliance upon the decision of the Supreme Court in the case of CIT v. R. Lingamallu Rajkumar [2001] 247 ITR 801/12002] 124 Taxman 127 wherein it has been held that amounts received on retirement by a partner is not subject to capital gains tax. From the above it is clear that the Supreme Court, Bombay High Court and Karnataka Full Bench have held that on retirement of a partner from the firm there is no element of transfer of interest in partnership assets by the retired partner to the continuing partners and the amount received by him for his share of net partnership assets and goodwill is not assessable to capital gains. The argument of the appellant that the land belonged to and continued to be owned and possessed by the partnership firm for 16 years, right from year 1992 to year 2009 is not in dispute. Legally, both under the provisions of the Partnership Act, 1932 (Section 14} and the Clauses of the Deed of Partnership dated 6.5.1992 and as held by the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crore as capital contribution of the four partners and other two partners Shri Samir P. Shah and Shri Vithal V. Kamat were to bring in minimum of ₹ 1.50 crores as their capital contribution. The purpose of the said partnership was to develop the said land, enter into agreements for sale of flats/shops and also establish a sports complex as may be decided by Shri Samir P. Shah and Shri Vithal V. Kamat and the said firm was to be dissolved upon the completion of the development of the property. The assessee was active partner and developed the land and brought the funds to construct the health club and thus assessee had the physical possession of the said property. The Ld. D.R. stated that in terms of the deed of admission and retirement dated 04.04.2008, the assessee retired from the partnership w.e.f. 01.04.2008 relinquishing right, title and interest in the properties and under the said deed four new partners from Runwal Group were taken as incoming partners. On his retirement, the assessee was given a payment of ₹ 48.15 crores out of which ₹ 1.5 crore was kept in Escrow Account with the solicitor M/s. Kanga Co. for discharging the club members liability. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly reversed the order of AO. The Ld. A.R. submitted that Shri Vithal V. Kamat who became the partner in the partnership vide deed of partnership dated 06.05.1992 determined partner in the firm till 01.04.2008. The Ld. A.R. submitted that the assessee received ₹ 48.15 crore upon retirement from the firm and disclosed the receipt of consideration on retirement from M/s. Sports Field Construction as exempt from tax. The Ld. A.R. submitted that the AO had also issued summons to other outgoing partners as well as incoming partners under section 131 of the Act and collected information from them. The Ld. A.R. submitted that AO collected this information behind the back of the respondent during the assessment proceedings without offering any opportunity to the respondent to cross examine the parties on the statement on the basis of which the AO drew the adverse inference. The Ld. A.R. also submitted that the allegation of the AO that admission cum retirement deed was not a deed in the nature of retirement deed as the same was not signed by all these parties. The belief of the AO that assessee has development rights and right of possession in the plot of land which was transferred f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 (Gujarat) / [1997] 142 CTR 115 (Gujarat) CIT v. Anant Narhar Nimkar (HUF) (xi) [2013] 40/taxmann.com 318 (Karnataka) (FB) / [2014] 223 Taxman 331 (Karnataka) (FB) / [2013] 359 ITR 83 (Karnataka) (FB) / [2013] CIT v. Dynamic-Enterprises (xii) [2002) 257 ITR 544 (Kerala) / [2002] 125 TAXMAN 802 (KER.) CIT v. Kunnmkulam Mill Board (xiii) Order of ITAT A Bench, Mumbai in appeal ITA No.3609/M/2013 (A.Y. 2004-05) Mrs. Kaushalya R. Sampat v. ITO 9(3)(2) Mumbai (xiv) [2018] 89 taxmann.com 95 (Pune - Trib.) Smt.Vasumati-Prafullachand Sanghavi v. Deputy CIT, Cir-1, Jalgaon. (xv) Order of ITAT B Bench, Pune in appeal ITA No. 469/PN/11 (A.Y. 2007-08) ITO Wd. 3(2), Pune v, Shri Rajnish M. Bhandari 11. The Ld. A.R. therefore prayed that in view of the ratio laid down by the Hon ble Supreme Court and various High Courts and also co-ordinate benches of the Tribunal, the appeal of the Revenue may kindly be dismissed and the order of the Ld. CIT(A) may kindly be upheld being a reasoned and speaking order passed after following the ratio laid down by the various judicial forums. 12. The Ld. A.R. also without prejudice submitted that in para No.6.13 of the assessment order the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputes arose between Shri Samir T. Shah and the assessee and the firm filed a suit in Bombay High Court seeking the dissolution of the firm, however, the same was resolved by filing Consent Terms under which Shri Samir P. Shah retied on 11.08.2002 from the said firm vide deed of retirement dated 29.01.2003 and his share in terms of the Consent Terms was transferred to the assessee and thus assessee s share in the firm increased to 50% in terms of deed of retirement dated 29.01.2003. Finally, in between the firm also entered into a MOU with M/s. Runwal Developers Pvt. Ltd. dated 12.11.2003 for the development of the plot on certain terms and conditions which could not materialize. Thereafter, a deed of admission cum retirement was executed on 04.04.08 retiring all the existing partners and inducting four new partners namely M/s. Runwal Developers Pvt. Ltd. and the three nominees. Upon said retirement Shri Vithal V. Kamat he received a consideration of ₹ 48.15 crore as share in the assets of the firm as full and final settlement of his account in the firm. The AO added ₹ 47,13,14,000/- as long term capital gain in the hands of the assessee by holding that the said amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove and in view of the ratio laid down in the above decisions by the Apex Court, we are inclined to dismiss the appeal of the Revenue by upholding the order of Ld. CIT(A) on this ground. ITA No.3909/Mum/2018(Assessee s Appeal) 14. The various grounds raised by the assessee are reproduced below: 1. DISALLOWANCE OF FINANCE CHARGES OF ₹ 2,74,4627-: On the facts and circumstances of the case and in law, the Id. Commissioner (Appeals) erred in confirming the disallowance made by the Assessing Officer in respect of finance charges being interest paid by the appellant to his bankers of ₹ 2,74,462/-. 2. DISALLOWANCE U/S 14A OF THE INCOME-TAX ACT READ WITH RULE 8-D: (a) On the facts and circumstances of the case and in law, the Id. Commissioner (Appeals) erred in confirming the disallowance of ₹ 3,59,793/- made by the Assessing Officer u/s 14A of the Act read with Rule 8-D in relation to exempt income earned by the appellant, which is erroneous both on facts and in law (b) The Id. Commissioner (Appeals) erred in failing to appreciate that the Assessing Officer has not recorded any satisfaction with regard to the claim of the appellant that no expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et fee ₹ 10,57,809/-, doesn t require any borrowed capital. The AO also observed that similar expenses were disallowed in the earlier year also which has been accepted by the assessee and finally disallowed and added ₹ 2,74,462/- to the income of the assessee by observing that the borrowed funds were not used for the purpose of business. Similarly, the Ld. CIT(A) has dismissed the appeal of the assessee on this issue by observing and holding as under: This ground relates to the disallowance of finance charges of ₹ 2,74,462/- u/s 36(1)(iii) of the Act. Consistently, the appellant earned interest income from loans and deposits, which was credited to his capital account, as in earlier years and assessed under the head income from other sources . It is a fact that the appellant did not utilize the funds borrowed from banks for earning any income for the year. The A.O. noted that similar expenses have been disallowed in the appellant's own case in earlier years which had been accepted by the appellant. Accordingly the AO disallowed the finance charges debited to profit and loss account of the appellant u/s 36(1)(iii) of the Act. I find no reason to deviate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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