MDLR BUILDERS P.LTD,NEW DELHI vs. DCIT, CENTRAL CIRCLE-14, NEW DELHI

PER R.K. PANDA, AM:

The above two appeals filed by the respective assessees are

directed against the separate orders dated 27.11.2018 of the CIT(A)-

26, New Delhi relating to A. Y. 2008-09. Since identical grounds have

been taken by the respective of assessees in these appeals, therefore,

these were heard together and are being disposed of by this common

order.

ITA No.8214/Del/2018 (MDLR Builders India Ltd.)

dealing in real estate land trading and development. A search was

conducted at the office premises of the company on 31.01.2008.

Accordingly notice u/s. 142 (1) was issued on 11.07.2009 and again

on 17.09.2009 with a questionnaire. However, the assessee did not

file any return of income in response to the statutory notices. Since

the assessee was not responding to the statutory notices issued u/s.

153A, 142 (1) and 143 (2), the Assessing Officer completed the

Page No. 2

assessment u/s. 144 of the Act on 21.12.2009 determining the total

income at Rs.110,12,38,532/-.

New Delhi under the provisions of section 264 on 14.06.2010. The

CIT(Central)-II, New Delhi vide order dated 16.03.2012 disposed of

the application of the assessee with a direction to the Assessing

officer to reframe the assessment afresh after making required

enquiries, investigation and verifications.

asking for various details. However, a perusal of the assessment

order shows that there was no proper compliance from the side of the

assesse. Therefore, the Assessing Officer proceeded to pass the order

again u/s. 144 of the IT Act on the basis of information collected from

third party enquiries during initial assessment and documents seized

at the time of search.

its share in the partnership firm M./s. Trishul Industries to M/s.

Vatika Ltd. and its promoter Shri Anil Bhalla during the year. M/s.

Page No. 3

Trishul Industries holds 11 acres of land along the NH-8 and has

license to set up and operate a resort cum hotel at this site. The

details of acquisition and transfer of partnership share in the firm

M/s. Trishul Industries has been narrated by the Assessing Officer

which is as under :-

a) On 15.06.05 M/s. MDLR Estates Private Ltd, M/s. MDLR Builders P. Ltd (M/s. MDLR Group companies) and Shri Gopal Kumar Goyal (CMD of MDLR Group of companies), entered into an “agreement to sell” with the existing partners of M/s. Trishul Industries, i.e. Shri Ravi Shankar, Shri S.C, Babber, Shri Satish Chandra Babber and Shri RL Kukreja for transfer of partnership share of the firm to MDLR Group of Companies as mentioned above. Total Payment of Rs.19.2 Cr was made to four partners in lieu of transfer of partnership shares by them. Rs.9,50,00,000/- was paid by M/s. MDLR Estates Pvt Ltd and Rs.9,50,00,000/- was paid by M/s. MDLR Builders Pvt. Ltd. b) On 25.10.06 a deed of retirement was signed between the above mentioned parties which formalized the agreement to sell signed on 15.06.05. As per the deed of retirement the original four partners retired from the firm and the place of business also changed to the registered office of MDLR Group of companies. By this deed of retirement the MDLR group took full control of the firm. The partnership shares were held as given below:-

Page No. 4

Name of MDLR Group entity Partnership Shares MDLR Estates Pvt Ltd 47.5%' MDLR Builders Pvt Ltd 47.5% Shri Gooal Goyal 5% . -

c) The retiring partners were given the capital back from the

firm. It is to be noted that they paid tax on capital gain in

assessment year 2007-08, earned from sell of partnership share

in M/s Trishul Industries.

d) On 29.11.07, the MDLR Group Companies entered into a

deed of retirement with M/s. Vatika Ltd. by which it agreed to

transfer 85% of partnership share in M/s Trishul Industries to

M/s. Vatika Ltd & Shri Anil Bhalla. The deed states that "the

amounts paid by the continuing partners is in consideration of all

rights, title and interest of the retiring partners in the said

partnership" i.e. M/s. Trishul Industries. This, according to the

Assessing Officer, means that the payments made by M/s. Vatika

Ltd to MDLR Group companies is for the partnership share in

M/s. Trishul Industries which includes the rights, title and

interest embedded in the partnership share.

e) On 15.12.07 a deed of partnership was signed between MDLR

Group and Vatika Group. By this deed 85% of partnership is

Page No. 5

transferred to M/s. Vatika Ltd and 1% to Shri Anil Bhalla by

MDLR Group. The deed does not contain any details regarding the

payments made for the purpose of acquisition of partnership share

by Vatika Group.

f) A total of Rs.178 Cr was paid to MDLR Group for acquisition

of the partnership firm. The details of payment as on 31.01.08 is

as under -:

Page No. 6

g) The partnership share in a firm according to the Assessing Officer is a capital asset within the meaning of Section 2 (14) of the Income Tax Act, 1961. The MDLR Group transferred partnership share held by it to Vatika Ltd and Anil Bhalla. This according to the Assessing Officer is covered well within the scope of transfer of capital assets defined in section 2(45) of the IT Act. h) The Assessing Officer noted that the deed of retirement dated 29.11.07 clearly states that in pursuance to the deed, rights, title and interests of the retiring partners i.e. MDLR Group have been transferred and money is being paid by Vatika Group in consideration for the rights, title and interests acquired by it. The rights, title and Interests referred to here, is a bundle of rights and interests which include the title to 11 Acres of land and license to operate and set up a hotel, held by M/s Trishul Industries. Thus by transferring the partnership share in the firm, the MDLR Group has transferred the rights, title, and interests held by it in the firm. These are capital assets within the meaning of section 2(14) and their transfer is transfer of capital assets u/s 2 (47) of the Income Tax Act,1961. The MDLR Group is therefore, liable to pay tax on capital gains earned on this transfer.

i) The transfer of partnership share together with rights, title and interests embedded in it took place within 36 months of its acquisition. Therefore the MDLR Group of companies is

liable to pay Short Term Capital Gains tax on Capital Gains accrued to it.

j) The Assessing Officer noted that while going through the electronic data seized during the search operation Annexure A-91 contained the valuation report of land belonging to M/s. Trishul Industries, at Vill-Shikohpur Distt-Gurgaon Haryana. The valuation has been done by Er. I.S. Chauhan and the purpose of valuation is to assess the fair market value of the property. In the said valuation report total value of the property has been evaluated at Rs.1800 million i.e. Rs.180,00,00,000/- (Rs.180 Crores). Therefore, he concluded that the receipt of Rs. 178,42,77,068/-in various companies is nothing but consideration for sale of land owned by M/s. Trishul Industries. k) Since a total of 85% of partnership share was transferred out of which 42.5% was transferred by the assessee company and since the total sale consideration received is Rs. 178,42,77,063/-, therefore, the Assessing Officer took half of this sum i.e. Rs.89,21.38,532/- as sale consideration received in the hands of the assessee company. The cost of acquisition in the hands of assessee is Rs.9,50,00,000/-. He accordingly determined the short term capital gain at Rs.79,71,38,532/- and added the same to the total income of the assessee. 6. The Assessing Officer further noted that assessee has admitted undisclosed income of Rs.30,41,00,000/- vide letter Page | 8

dated 16.06.2008. He, therefore, added the same to the total income of the assessee as undisclosed income.

income of the assessee at Rs.1,10,12,38,532/-.

and filed various details based on which the Ld. CIT(A) called

for a remand report from the Assessing Officer. The Assessing

Officer send three remand reports on various dates which were

confronted to the assessee. After considering the remand

reports of the Assessing Officer and the rejoinder of the

assessee to such remand reports the CIT(A) held that the sum

received on retirement from the partnership firm is taxable as

income of the assessee company as share of partner in

partnership firm is capital asset and on retirement of the firm

there is capital gain which accrues to the assesse which is

taxable as such. For the above proposition he relied on the

decision of Hon’ble Karnataka High Court of CIT Vs. Gurunath

Talkies reported in 328 ITR 59 (Karnataka) and the decision of

Hon’ble Bombay High Court in the case of CIT Vs. A. K. Naik

Associates reported in 265 ITR 346. He however noted from

the retirement deed dated 28.11.2007 between M/s. MDLR

Estate Private Limited, M/s. MDLR Builders Private Limited,

Mr. Gopal Kumar, M/s. Vatika Limited and Mr. Anil Bhalla

that sum infused by M/s. Vatika limited was

Rs.112,00,00,000/- and not Rs.178.42 crores as held by the

Assessing Officer. He, therefore, held that the sum paid by

Vatika Limited to any other entity of MDLR Group cannot be a

ground to bring to tax as capital gain in the hands of the

assessee on transfer of shares in M/s. Trishul Industries. He,

therefore, directed the Assessing Officer to exclude figure of

Rs.72.42 crores for computation of the capital gain in the

hands of the assessee on transfer of shares in the partnership

firm M/s. Trishul Industries. He further noted that the sum of

Rs.45.50 crores stands received in the case of the assessee,

Rs.47.12 crores in the case of MDLR Estate Private Limited

and Rs.3 crores in the hand of Sh. Gopal Kumar Goyal. The

Ld. CIT(A) in the case of Sh. Gopal Kumar Goyal has confirmed

the addition. Therefore, the Assessing Officer ought to have

adopted the sums based on the retirement deed at a figure of

Rs.112 crores with 47.50% share which workout to Rs.53.20 Page | 10

crores. After deducting the cost of share in the firm at

Rs.9,70,52,500/- the Ld. CIT(A) directed the Assessing Officer

to tax the amount of Rs.43,49,47,500/- as capital gain arising

to the assessee on the sum received on retirement from the

partnership firm.

discrepancies in the computation of income. He, therefore,

issued an enhancement notice to the assessee, the details of

which are as under :-

“It is seen from the return and the submissions that you have declared income of Rs. 30.44 Crores app. It is, however, seen from the details about the transactions involving the retirement of the partners from M/s Trishul Industries that you have reportedly received a payment of Rs. 53.20 Crores and have claimed an expenditure of Rs. 9.7 crores. The same does not tally with the Return of Income nor with the Computation of Income. There is a short declaration of [Rs. 43.5 crores - 30.44] = 13.06 crores

Accordingly, you are required to show cause as to why your income be not enhanced by the like amount of Rs. 13.06 crores so as to reconcile the figures as above, to bring the due income as per law of tax. ”

of Rs.13.06 crores on account of purchase and sale of shares

the details of which are as under :-

arguments advanced by the assessee. He observed that the

aforesaid losses are on account of transactions between group

entities of shares of group entities. It is clearly a collusive

transaction that has been done only to offset the income on

sale of shares in the partnership firm M/s. Trishul Industries

and thus is not allowable losses. According to the Ld. CIT(A) it

is not a genuine loss since there is no corroborative evidence

in this regard. He, therefore, directed the Assessing Officer to

enhance the income of the assessee to this extent being the

loss claimed by the assessee on account of purchase and sale

of shares which is not allowable.

appeal before the Tribunal by raising the following grounds of

appeal :-

Grounds of appeal Tax effect Ground No. 1) That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in making a disallowance of Rs. 13,04,50,800/- Rs. 4,43,40,227/- representing the loss incurred on purchase and sale of shares. Ground No. 1.1) That the learned Commissioner of Income Tax (Appeals) while making the aforesaid disallowance has acted in excess of jurisdiction and therefore, Linked to ground no.l the same is beyond the scope and powers vested in the learned Commissioner of Income Tax (Appeals) under section 25 l(l)(a) of the Act.

Ground No.1.2) That no valid show cause notice was given by the learned Commissioner of Income Tax (Appeals) before making the impugned disallowance and hence the same on this ground alone is without jurisdiction and contrary to the Linked to ground no.l provisions contained in section 251(2) of the Act.

Ground No. 1.3) That even otherwise, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the documentary evidence furnished in support of the loss incurred by the assessee company and therefore, genuine business loss Linked to ground no.l incurred by the assessee ought to have been allowed as such.

Linked to ground no.l Ground No. 1.4) That the finding of the learned Commissioner of Income Tax (Appeals) that the aforesaid loss is of transaction between group entities of shares of group entities and it is clearly a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm of M/s. Tirshul Industries and thus is not allowable loss and the purported loss so claimed is clearly inadmissible transaction to artificially evade lawful tax obligations and it is not genuine less as there is no corroborative evidence in this regard, is factually incorrect, contrary to evidence on record, legally misconceived and wholly untenable in law and hence unsustainable.

Rs. 14,78,38,655/- Ground No. 2) That furthermore, the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding the inclusion of Rs. 43,49,47,500/- (sales consideration of Rs. 53,20,00,000 -cost of share in partnership firm of Rs. 9,70,52,500) representing the alleged capital gain arising on sum received by the assessee as partner on retirement from the partnership firm though the same is exempt under section 10(2A) of the Act.

Linked to ground Ground No. 2.1) That the learned Commissioner of Income Tax (Appeals) while upholding the inclusion, has failed to appreciate that no capital gain arose to the partner on retirement from the partnership firm and hence addition so made and sustained is invalid and therefore, unsustainable.

Ground No. 2.2) That the learned Commissioner of Income Tax (Appeals) has Linked to ground no.2 failed to appreciate that there is no estoppel against statute and mere declaration in the capital gain could not be a ground to sustain any addition.

Ground No. 2.3) That while upholding the addition, the learned Commissioner Linked to ground no.2 of Income Tax (Appeals) has failed to appreciate the evidence placed on record alongwith judicial pronouncements to submit that addition made and sustained is not in accordance with law.

Prayer It is therefore, prayed that it be held that sum received on account of retirement from the partnership firm was not assessable as income and therefore ought to have been excluded while computing income of the appellant company. Apart from the above, it be also held that enhancement of income by disallowing the loss claimed on purchase and sale of shares is also illegal, both on merits and even otherwise beyond the scope of powers of the learned Commissioner of Income Tax (Appeals) under section 251 of the Act. It is thus prayed that appeal of the appellant may kindly be allowed as such.

order of the CIT(A). He submitted that provisions of section 45

(4) do not apply to partner and applies to a firm. He submitted

that Ld. CIT(A) incorrectly came to the conclusion that the

amount of Rs.43,49,47,500/- represent the capital gain arising

on sum received by the assessee as partner on retirement from

the partnership firm, though the same is exempt u/s 10 (2A) of

the IT Act. He submitted that no capital gain arose to the

partner on retirement from the partnership firm and hence Page | 14

addition so made by the Assessing Officer which has been

sustained by the CIT(A) is invalid.

sum received on retirement from partnership firm which is

outstanding as capital balance to the credit of account of

partners account is not taxable :-

He also relied on various decisions of the coordinate benches

of the Tribunal on this proposition.

sum standing to the credit in the current account or capital

account of the retiring partner cannot be “deemed” as transfer

of interest in the assets of partnership firm u/s. 2 (47) of the

Act and as such there is no liability under the head “capital

gain” in the hands of the retiring partner u/s. 45 of the Act :-

1) CIT Vs. Dewas Cine Corpn 68 ITR 240

2) CIT Vs. Bankey Lal Vaidya 79 ITR 594 Page | 15

3) CIT Vs. Mohanbhai Pamabhai 165 ITR166

4) Tribhuvan G. Patel Vs. CIT 236 ITR 515

5) Prashant S. Joshi Vs. ITO 324 ITR 154 (Bom)

6) Chalasani Venkatsara Rao Vs. ITO 349 ITR 423 (A)

7) CIT Vs. L. Raghu Kumar 141 ITR 674 (AP)

8) CIT Vs. P. H. Patel 171 ITR 128 (AP)

9) CIT Vs. G. Seshagiri Rao 213 ITR 304 (AP)

10) Bankey Lal Vaidya Vs. CIT 55 ITR 400 (All)

11) CIT Vs. Kunamkulam Mill Board 257 ITR 544 (Ker)

there is no estoppel against statue and mere declaration of

capital gain in the return cannot be a ground to make addition

on account of short term capital gain :-

(SC)

303 (Del)

taxmann.com 226 (Del)

Dhanwatay 136 ITR 355 (Bom)

(Bom)

1) Roshan Di Hatti Vs. CIT 107 ITR 938 (SC) 2) State bank of Travancore Vs. CIT 158 ITR 102 (SC) 3) Income Tax Officer Vs. Ch. Atchaiah 218 ITR 239 (SC) 4) Godhra Electricity Co. Ltd. Vs. CIT 225 ITR 746 (SC)

Trishul Industries and therefore, is not an allowable deduction. She accordingly submitted that since the order of the CIT(A) is in accordance with law on both the issues, therefore, the same should be upheld.

partner on the sum received on retirement from the partnership firm. A chronological sequence of events that led to the retirement from the partnership firm is given by the Assessing Officer in his remand report dated 20.08.2018, copy of which is placed by the Ld. DR in the paper book and which is under :-

“As per Partnership Deed of M/s Trishul Industries dated 04.03.1985

On 04.03.1985 a partnership firm, named and styled as Trishul Industries had been formed by the following four partners: i) Shri Ravi Shanker ii) Shri Subhash Chandra Babbar iii) Shri Satish Chandra Babbar iv) Shri R. L. Kukreja and the firm acquired land measuring 11.28 acres for a cost of Rs. 11,41,895/-. As per Partnership Deed of M/s Trishul Industries dated 15.06.2005 An amount of Rs.19.2 Crores in the firm Trishul Industries contributed by the following mentioned parties with an agreement: M/s MDLR Builders (P) Ltd. i) ii) M/s MDLR Estates (P) Ltd. iii) Sh. Gopal Kumar Goyal Therefore as per partnership deed of M/s Trishul Industries dated

25.10.2006 the

all above mentioned parties became partners of the firm M/s Trishul Industries and the status of all partners with Profit and Loss percentage was as under:

i) Shri R. L. Kukreja (First Partner) Profit/loss sharing ratio 1% ii) Shri Subhash Chandra Babbar (Second Partner) Profit/loss sharing ratio 1% iii Shri Ravi Shanker (Third Partner) Profit/loss sharing ratio 1% ) iv) Shri Satish Chandra Babbar (Fourth Partner) Profit/loss sharing ratio 1% v) M/s MDLR Estates (P) Ltd. (Fifth Partner) Profit/loss sharing ratio 45% vi) M/s MDLR Builders (P) Ltd. (Sixth Partner) Profit/loss sharing ratio 45% vii) Sh. Gopal Kumar Goyal (Seventh Partner) Profit/loss sharing ratio 6% As per Partnership Deed of M/s Trishul Industries dated 27.11.2006 Out of seven existing partner first four partners were retired and new profit and loss sharing ratio was as under: i) Shri R. L. Kukreja (First Partner) (Retired) (Retired) ii) Shri Subhash Chandra Babbar (Second Partner) iii (Retired) Shri Ravi Shanker (Third Partner) ) iv Shri Satish Chandra Babbar (Fourth Partner) (Retired) ) v) M/s MDLR Estates (P) Ltd. (Fifth Partner) (47.5%) vi M/s MDLR Builders (P) Ltd. (Sixth Partner) (47.5%) ) Vii Shri Gopal Kumar Goyal (Seventh Partner) (5%) As per Partnership Deed of M/s Trishul Industries dated 22.11.2007 Out of three existing partner two new partners were entered and new profit and loss sharing ratio was as under:

i) M/s. MDLR Estates (P) Ltd (First Party) Profit/ Loss sharing ratio 5%

ii) M/s. MDLR Builders (P) Ltd (First Party) Profit/ Loss sharing ratio 5%

iii) Sh. Gopal Kumar Goyal (First Party) Profit/ Loss sharing ratio 5%

iv) M/s. Vatika Limited (second Party) Profit/ Loss sharing ratio 84%

v) Sh. Anil Bhalla (second party) Profit/ Loss sharing ratio 1%

As per partnership Deed of M/s. Trishul Industries dated 28.11.2007

Out of five existing partner first three partners were retired and new profit and loss sharing ratio was as under :

i) M/s. MDLR Estates (P) Ltd. (First Party) Retired ii) M/s. MDLR Builders (P) Ltd. ( First party) Retired iii) Sh. Gopal Kumar Goyal (First Party) Retired iv) M/s. Vatika Limited (Second party) Profit / loss sharing ratio 99% Profit / loss sharing ratio 1% v) Sh. Anil Bhalla (second party)

26.1 We find an identical issue had come up for consideration before the Hon’ble Bombay High Court in the case of Prashant S. Joshi Vs. ITO (supra). We find in the said case under a deed of dissolution, the petitioner assessee received a sum of Rs. 50 lacs on retirement from the partnership firm which were claimed as capital receipt and not offered to tax. The revenue initiated the proceedings u/s. 147 to bring to tax the above amount. In the writ petition filed by the assessee, the Hon’ble High Court held as under :-

relation to a capital asset and this definition gives an artificially extended meaning to the term "transfer" by including within its scope and ambit two kinds of transactions which would not ordinarily constitute "transfer" in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partnership." The Gujarat High Court held that there is, in such a situation, no transfer of interest in the assets of the partnership within the meaning of section 2(47). When a partner retires from a partnership, what the partner receives is his hare in the partnership which is worked out by taking accounts and this does not amount to a consideration for the transfer of his interest to the continuing partners. The rationale for this is explained as follows in the judgment of the Gujarat High Court:— "...What the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only in the surplus that the retiring partner is entitled to claim a share. It is, therefore, not possible to predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration

received by the retiring partner for extinguishment of his interest in a particular asset." The appeal against the judgment of the Gujarat 14. High Court was dismissed by a Bench of three learned Judges of the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 . The Supreme Court relied upon its judgment in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The Supreme Court reiterated the same principle by relying upon the judgment in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. The Supreme Court held that what is envisaged on the retirement of a partner is merely his right to realise his interest and to receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership by virtue of his status as a partner and in terms of the partnership agreement. Consequently, what the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. The Supreme Court held that there was nothing strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. The Supreme Court inter alia cited with approval the judgment of the Gujarat High Court in Mohanbhai Pamabhai's case (supra) and held that there is no transfer upon the retirement of a partner upon the distribution of his share in the net assets of the firm. In CIT v. R. Lingmallu Raghukumar [2001] 247 ITR 801 , the Supreme Court held, while affirming the principle laid down in Mohanbhai Pamabhai 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, Page | 27

there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners. At this stage, it may be noted that in CIT v. 15. Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom.), which was decided by a Division Bench of this 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 section 2(47) inasmuch 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 v. CIT [1999] 236 ITR 515. Following the judgment of the Supreme Court in Sunil Siddharthbhai's case {supra), the Supreme Court held that even when a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (it) of section 47. Therefore, the question was answered in favour of the assessee and against the revenue. Section 47(ii) which held the field at the material time provided that nothing contained in section 45 was applicable to certain transactions specified therein and one of the transactions specified in clause (ii) was distribution of the capital assets on a dissolution of a firm. Section 47(ii) was subsequently omitted by the Finance Act of 1987 with effect from 1-4-1988. Simultaneously, sub-section (4) of section 45 came to be Page | 28

inserted by the same Finance Act. Subsection (4) of section 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 association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place. 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 section 48. Ex facie sub- section (4) of section 45 deals with a situation where there is a transfer of a capital asset by way of a distribution of capital assets on the dissolution of a firm or otherwise. Evidently, on the. admitted position before the Court, there is no transfer of a capital asset by way of a distribution of the capital assets, on a dissolution of the firm or otherwise in the facts of this case. What is to be b noted is that even in a situation where sub-section (4) of section 45 applies, profits or gains arising from the transfer are chargeable to tax as income of the firm.

26.2 We find, the Hon’ble AP High Court in the case of Chalasani Venkateswara Rao Vs. ITO (supra) held that amount received by a partner in full and final settlement of its shares on dissolution of the firm does not result in transfer. The relevant observation of the Hon’ble High Court reads as under :-

In Bankey Lai Vaidya (supra), the Supreme 19. Court held that a partner in a firm (carrying on business of manufacturing and selling pharmaceutical products and literature relating thereto) whose assets (which included good will, machinery, furniture, medicines, library and copy right) were valued at Rs. 2,50,000/-, was paid towards his half share, on the dissolution of the firm, a sum of Rs. 1,25,000/- in lieu of his share, the arrangement between the partners of the firm amounted to a distribution of the assets of the firm on dissolution. It held that there was no sale or exchange of the respondent's share in the capital assets to the other partner. The Supreme Court of India further held as follows: "in the course of dissolution the assets of a firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying the money value equivalent thereof. This is a recognized method of making up the accounts of a dissolved firm. In that case the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm. The respondent received the money value of his share in the assets of the firm : he did not agree to sell, exchange or transfer his share in the assets of the firm. Payment of the amount agreed to be paid to

the respondent under the arrangement of his share was therefore not in consequence of any sale, exchange or transfer of assets." The Supreme Court upheld the contention of the assessee that no part of the amount of Rs. 1,25,000/- received by the assessee represented capital gains and relied on Dewas Cine Corporation (supra) referred to above. It held that .adjustment of the rights of the partners in a dissolved firm by allotment of its assets is not a transfer for a price. The facts of the instant case are identical with the facts of the case in Bankey Lai Vaidya (supra). In L. Raghu Kumar (supra), a Division Bench 20. of the Andhra Pradesh High Court followed the judgment of the Gujarat High Court in CIT v. Mohanbhai Pamabhai[1973] 91 ITR 393 (Guj.) and held that no transfer is involved when a retiring partner receives at the time of retirement from the firm, his share in the partnership assets either in cash or any other asset. It further held that for the purpose of Section 45 of the I.T. Act, no distinction can be drawn between an amount received by the partner on the dissolution of the firm and that received on his retirement, since both of them stand on the same footing. In PH. Patel (supra), a Division Bench of the AP 21. High Court noticed that the judgment in Mohanbhai Pamabhai (supra) was approved by the Supreme Page | 31

Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 and following the judgment in L. Raghukumar (supra) held that when a partner retires from a partnership firm taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved. In the light of the above decisions, which are 22. binding on us, we hold that the l.T.A.T. was not correct in confirming the orders passed by the C.I.T. (Appeals) and the respondent. When the appellant was paid Rs. 15.00 lakhs by Y. Kalyana Sundaram in full and final settlement towards his 50% share on the dissolution of the firm, mere was no "transfer" as understood in law and consequently there cannot be tax on alleged capital gain. The appellant was correct in law in contending that the amount he received from Y. Kalyana Sundaram is towards the full and final settlement of his share and such adjustment of his right is not a "transfer" in the eye of law. It is a recognized method of making up the accounts of the dissolved firm and the receipt of money by him is nothing but a receipt of his share in the distributed asset of the firm. The appellant received the money value of his share in the assets of the firm. He did not agree to sell, exchange or transfer his share in the assets of the firm. Payment of the amount agreed to be paid to the appellant under the compromise was

not in consequence of any share, exchange or transfer of assets to Y. Kalyana Sundaram. Moreover , as rightly contended by the assessee, up to the assessment year 1987-1988, Section 47 (ii) of the Income Tax Act, 1961 excluded these transactions. From assessment year 1988-89, in the case of dissolution of a firm, only the firm is taxable on capital gains on dissolution under Section 45(4) of the Income Tax Act, 1961 and not the partner. S.45(4) states as follows: "S.45(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the 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 the consideration received or accruing as a result of the transfer." Thus it is clear that the legislature, even though it was aware of the above decisions, did not choose to amend the law by making the partner liable when it amended the I.T Act, 1961 by introducing clause (4) to s.45 by the Finance Act,1987 w.e.f 1.4.1988 and made only the firm liable. Therefore the contention of

the assessee has to be accepted and that of the Revenue is liable to be rejected.

Or Whether the retiring partner would be liable to pay for the capital gains ?”

(4) Such distribution should be on dissolution of the firm Or otherwise. 24. Therefore, in order to attract Section 45(4) of the Act. the capital asset of the firm should be transferred in our of a partner, resulting in firm ceasing to have any interest in the capital asset transferred and the partners should acquire exclusive interest in the capital asset. In other words, the interest the firm has in the capital asset should be extinguished and the partners in whose favour the transfer is made should acquire that interest. Then only the profits or gains arising- from such transfer is liable to tax under Section 45(4.) of the Act. 25. In the instant case, the partnership firm had purchased the property under a registered sale deed in the name of firm. The property did-not stand in the name of any individual partners. No individual partners brought that ital asset as capital contribution into the firm. Five partners brought /in cash by way of capital when the firm' reconstituted on 28.04.1993. Nearly a year thereafter on 01.04.1994 by way of retirement, the erstwhile three partners took their, share in the partnership asset and went out of the partnership. After the retirement of three partners, the partnership continued to exist and the business was carried on by the remaining five partners. There " no dissolution of the firm, or at any rate there was no distribution of capital asset on 01.04.1994 when three partners retired from the partnership firm. What was given to the retiring partners-is cash representing the value of retirement share in the partnership. No capital asset was’ transferred on the date of retirement under the deed of retirement deed dated 0l.04.1994. In the absence of distribution of capital asset and in the absence of transfer of capital asset in favour of the retiring partners, no profit or gain arose in the hands of the partnership firm. Therefore, the question of the firm being assessed under Section 45 (4) and charging them tax for the profits or s which did not accrue to them would not arise.

erstwhile partners who retired from the partners on 01.04.1994 took money and left the property to the incoming partners. It is a device adopted by these partners in order to evade payment of profits or gains. As rightly held by Court in Guninaths Talkies' case (supra) it is taxable. This argument proceeds on the premise that the immovable property belongs to the erstwhile partners and that after the retirement the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs 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 Talkies' case {supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case CIT v. A.N. Naik Associates [2004] 265 ITR 346/136 Taxman 107 (Bom.). In A.N. Naik Associates' case {supra), 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 family settlement as the party desired that various matters consisting the business and assets thereto be divided Page | 37

separately and partitioned. The term has also provided that such of those assets or liabilities belonging to or due from any of the firms allotted, the parties thereto in the schedule annexed shall be transferred or assigned irrevocably and possession made over and all such documents, deeds, declarations, affidavits, petitions, letters and alike as are reasonably required by the party entitled to such transfer would be effected. It is based on this document and subsequent deeds of retirement of partnership that the order of assessment was made holding that the assessees are liable for tax on capital gains. . 28. In that context, the Bombay High Court held that when the assets of the partnership is transferred to a retiring partner, the partnership which is assessable to tax ceases to have a right or its right in the property stands "distinguished in favour of the partner to whom it is transferred. If so read, it will further the object and the purpose and intent of the amendment of Section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would amount to the transfer of capital assets in the nature of capital gains and business profits which is chargeable to tax under Section 45(4) of the Income Tax Act. In that context, it was held the word "otherwise" takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. It is in this context the Bombay High Court held that Section 45(4) was attracted. Therefore, to attract Section 45(4) there should be a transfer of a capital asset from the firm to the retiring partners, by which the firms ceases to have any right in the property which is so transferred. In other words, its

right to the property should stand extinguished and the retiring partners acquires absolute title to the property. In the instant case, the partnership firm did not 29. transfer any right in the capital asset in favour of the retiring partner. The partnership firm did not cease to hold the property and consequently, its right to the property is not extinguished. Conversely, the retiring partner did not acquire any right in the property as no property was transferred "in their favour. The Division Bench in Gurunath Talkies' 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 that case is also liable to pay capital gains tax under Section 45(4). Therefore, the said judgment does not lay the correct law.

We would like to add that several other aspects of 30. Section 45(4) was addressed in the course of the arguments by both sides which are not relevant to adjudicate the present issue, as in the present case there is no distribution of assets and hence, one of the condition precedent for invoking Section 45(4) does not exist and hence Section 45(4) is not attracted to the facts of this case.

ANSWER

The reference is answered as under : 31.

“When a retiring partner takes only money towards the value of his share and when there is no distribution of capital asset/ assets among the partners there is no transfer of a capital asset and consequently no profits or gains is payable under section 45 (4) of the IT Act. ?

In so far as the substantial question of law “whether 32. Page | 39

the retiring partner would be liable to pay capital gain” is concerned, the said question does not arise for consideration in the appeal as the only question which arose for consideration was, whether the firm is liable to pay capital gain tax. Therefore, the said question of law is not answered.

For the aforesaid reasons, we pass the following : 33. (i) The substantial question of law is answered in favour of the assessee and against the revenue. (ii) Consequently, the appeal stands dismissed (iii) No costs. Therefore, the decisions relied on by Ld. CIT(A) are distinguishable and not applicable to the facts of the present case. 29. The various other decisions relied on by Ld. Counsel for the assessee also support his case to the proposition that amount paid to partner on retirement does not involve an element of transfer within the meaning of section 2 (47). 30. Respectively following the above decisions cited (supra) we hold that the assessee is not liable to any capital gain tax on account of the sum received by it as a partner on retirement from the partnership firm. The order of the CIT(A) on this issue is accordingly set aside and the Assessing Officer is directed to delete the addition of Rs.43,49,47,500/- sustained by the CIT(A). 31. The grounds of appeal No. 2 to 2.3 are accordingly allowed. 32. So far as the ground No. 1 to 1.4 are concerned the same relate to the order of the CIT(A) in making a disallowance of Page | 40

Rs.13,04,50,800/- representing the loss incurred on purchase and sale of shares. It is an admitted fact that there is no such discussion by the Assessing Officer in the body of the assessment order. Only while processing the appeal, certain discrepancies were found in the income computation for which the Ld. CIT(A) issued an enhancement notice. After considering the various arguments advanced by the assessee Ld. CIT(A) held that the loss on account of transaction between group entities of shares of group entities is a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm of M/s. Trishul Industries and therefore, is not an allowable loss. It is the submission of the Ld. Counsel for the assessee that the Ld. CIT(A) has no power to enhance the assessment by bringing in income from new source. For the above proposition, the Ld. counsel for the assessee relied on various decisions. However, it is a matter of record that the original assessments as well as assessment subsequent to the order passed by the Ld. CIT u/s. 264 are exparte assessments and the assessee at no point of time had given any details before the Assessing Officer so as to enable him to pass the order as per law. Since the assessments were framed u/s 144 of the IT Act and since the discrepancies were found in the income computation during the appeal hearing, therefore, the CIT(A) in our opinion, has absolute power to issue enhancement notice to the assessee in the instant case. Therefore, the various decisions relied by the

Ld. Counsel for the assessee that CIT(A) has no power to enhance assessment by bringing a new sources of income is not tenable under the facts and circumstances of the case. It is the settled proposition of law that the powers of CIT(A) are conterminous with that of the powers of the Assessing Officer. Therefore, we hold that the enhancement notice issued by CIT(A) in the instant case is justified. However, we find from the order of the CIT(A) that while enhancing the income he has given a finding that no corroborative evidences were filed by the assessee to substantiate that the loss is genuine. Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore this issue to the file of the Assessing Officer with a direction to give an opportunity to the assessee to substantiate with evidence to his satisfaction regarding the genuineness of the loss of Rs.13,04,95,600/- on account of purchase and sale of shares of group companies. Needless to say the Assessing officer shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds of appeal No. 1 to 1.4 are accordingly allowed for statistical purpose. 33. In the result, the appeal filed by the assessee is allowed for statistical purpose.

ITA No. 8215/Del/2018 (MDLR Estate Private Limited) The assessee raised following grounds of appeal :-

Grounds of Appeal Tax Effect

Ground No. 1 ) That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in making a disallowance of Rs. 13,04,94,600/- Rs. 4,43,55,115/- representing the loss incurred on purchase and sale of shares

Ground No.1.1)That the learned Commissioner of Income Tax (Appeals) while making the aforesaid disallowance has acted in excess of jurisdiction and therefore, Linked to ground the same is beyond the scope and powers vested in the learned Commissioner of no.l Income Tax (Appeals) under section 251 (l)(a) of the Act.

Ground No.1.2) That no valid show cause notice was given by the learned Linked to ground no.l Commissioner of Income Tax (Appeals) before making the impugned disallowance and hence the same on this ground alone is without jurisdiction and contrary to the provisions contained in section 251(2) of the Act.

Ground No.1.3) That even otherwise, the learned Commissioner of Income Tax Linked to ground no.l (Appeals) has failed to appreciate the documentary evidence furnished in support of the loss incurred by the assessee company and therefore, genuine business loss incurred by the assessee ought to have been allowed as such.

Ground No.1.4) That the finding of the learned Commissioner of Income Tax Linked to ground (Appeals) that the aforesaid loss is of transaction between group entities of shares no.l of group entities and it is clearly a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm of M/s. Trishul Industries and thus is not allowable loss and the purported loss so claimed is clearly inadmissible transaction to artificially evade lawful tax obligations and it is not genuine loss as there is no corroborative evidence in this regard, is factually incorrect, contrary to evidence on record, legally misconceived and wholly untenable in law and hence unsustainable.

Rs. 14,78,38,655/- (Ground No. 2) That furthermore, the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding the inclusion of Rs. 43,49,47,500/- (sales consideration of Rs. 53,20,00,000 -cost of share in partnership firm of Rs. 9,70,52,500) representing the alleged capital gain arising on sum received by the assessee as partner on retirement from the partnership firm though the same is exempt under section 10(2A) of the Act.

Ground No. 2.1) That the learned Commissioner of Income Tax (Appeals) while L inked to ground no.2 upholding the inclusion, has failed to appreciate that no capital gain arose to the partner

on retirement from the partnership firm and hence addition so made and sustained is invalid and therefore, unsustainable. Ground No. 2.2) That the learned Commissioner of Income Tax (Appeals) has Linked to ground no.2 failed to appreciate that there is no estoppel against statute and mere declaration in the capital gain could not be a ground to sustain any addition.

Linked to ground no.2 Ground No. 2.3)That while upholding the addition, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the evidence placed on record alongwith judicial pronouncements to submit that addition made and sustained is not in accordance with law.

Prayer It is therefore, prayed that it be held that sum received on account of retirement from the partnership firm was not assessable as income and therefore ought to have been excluded while computing income of the appellant company. Apart from the above, it be also held that enhancement of income by disallowing the loss claimed on purchase and sale of shares is also illegal, both on merits and even otherwise beyond the scope of powers of the learned Commissioner of Income Tax (Appeals) under section 251 of the Act. It is thus prayed that appeal of the appellant may kindly be allowed as such.

Sd/- Sd/- (KULDIP SINGH) (R.K PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER *Neha* Date:- 11.06.2019 Page | 44