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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM)
आदेश / O R D E R Per Shamim Yahya (Accountant Member)
This appeal by Revenue and Cross Objection by the assessee is directed against order of the Ld. CIT(A)-52, Mumbai, dated 21/04/2016 and pertain to Assessment Year 2012-13. The ground of appeal raised by the Revenue is as under:-
“1. On the facts and circumstances of the case, the Ld. CIT(A) Mumbai erred in deleting the addition made of Rs.4,46,34,096/- received by the assessee on retirement from the firm.” “2. On the facts and in the circumstances of the case, the Ld. CIT(A) Mumbai erred in not accepting the fact that the amount over the tangible and intangible assets and right for profit of the firm and assessee was compensated with a sum over and above its capital contribution to the firm.
Grounds of assessee’s cross objection:-
“On the facts and in the circumstances of the case the learned AO;
Taxability of compensation received on retirement from firm
erred in objecting the order of CIT(A) in deleting the addition made by AO under the head long term capital gain of Rs. 4,74,01,448/-, which was amount received by the assessee on retirement from the partnership firm;
2. erred in objecting the order of the CIT(A) on the ground that amount received on retirement from partnership firm includes relinquishment of its rights over the tangible and intangible assets and right for profit of the firm and assessee was compensated with a sum over and above its capital balance, thereby it is chargeable to tax;
3. without prejudice to above, erred objecting the order of CIT(A), wherein the AO has incorrectly mentioned the amount of long term capital gain of Rs. 4,74,01,448 as against addition made by the AO of Rs. 4,46,34,096/-;
II. On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (A) - I, [CIT(A)] has:—
Notional addition on account of deemed rental income on unsold flats/units held by the Appellant as stock in trade
4. erred in upholding the action of the learned AO in making notional addition to the income of the Appellant under the head Income From House Property (IFHP) of Rs. 287,000 (i.e. 70% of 410,000) under section 23(4) of the Act, on account of deemed rental income on unsold flats( i.e. flat in Monami CHS- Juhu)held as stock in trade;
failed to appreciate that, the unsold flats which are held as inventory in the business of construction, would amount to flats occupied for the purpose of Appellant's business and therefore by virtue of exemption given in section 22 of the Act, annual value of such flats cannot be brought to tax under the head IFHP;
6. without prejudice to the above, erred in upholding the action of the AO in not granting vacancy allowance with respect to the unsold stock in trade, as the entire stock in trade were vacant during the year under appeal;
7. without prejudice to the above, erred in upholding the action of the AO in computing the fair market rent at notional adhoc rate of Rs.11 per square feet as deemed rent from such house property;
Interest under section 234C of the Act erred in confirming action of AO in levy of interest under section 234C of the Act of Rs.960,276/-;
Interest under section 24D of the Act erred in confirming action of AO in levy of interest under section 234D of the Act of Rs. 633,750/-;
Interest under section 271(1)(C) of the Act
Erred in initiating penalty proceeding under section 271(1)(C) of the Act;
The brief, facts of the case are that during the course of assessment proceedings, the AO noticed that during the year, the assessee had received an amount of Rs. 4,74,01,448/- on retirement from a partnership firm, M/s. Skoda Construction and that the assessee had treated the same as a capital receipt and exempt from tax on the ground that there was no transfer of any asset, as it had only received back the capital in the said partnership firm. The AO observed that the assessee had been admitted as a partner of M/s.
Skoda Construction from 20/2/2006, along with five other partners, as per a Deed of Admission dated 17/2/2006. Thereafter, the assessee retired from the partnership firm with effect from 20/7/2011, through a Deed of Retirement dated 19/7/2011. The AO further observed that after the retirement of the assessee, the partnership concern continued the same business under the same name and style — M/s. Skoda Construction; as per the agreement, the assessee agreed to release to the continuing partners their respective shares and interest in the said business together with fixed assets, stock in trade, moneys, credits and effects and other assets including tangible and intangible assets; the continuing partners agreed to pay to the assessee such sum as may be standing to their credit in the books of accounts as on 20/2/2011, in full settlement of their claims in the capital, profits and assets of the partnership; the amount payable by the firm to the assessee had been determined by including the amount standing in their credit to their capital account as also their share in the assets of the firm; after retirement, the assessee would have no right, title or interest in the said partnership business nor in the profits and benefits thereof and further the assessee would transfer, release and assure unto the continuing partners all that share of the retiring partner in the partnership business and all its property, assets and credits, goodwill, book debts, fittings and fixtures, benefits of all contracts and orders and all effects thereof to the use of the continuing partners absolutely and forever; and that the assessee, in lieu of retirement from the partnership, received an amount of Rs.4,74,01,447/- over and above its capital contribution to the firm. Considering the above facts, the AO held the view that by retiring from the partnership from through a written agreement, the assessee had relinquished and extinguished its rights over the assets and rights for profits of the firm, for a compensation of Rs.4,74,01,447/- over and above its capital contribution to the firm. Accordingly, he required the assessee to explain as to why the amount received on retirement from the partnership firm should not be charged to tax under the head capital gain. The assessee objected to the proposal Of the AO, and contended that as long as there was no change in ownership of the firm and its properties for the simple reason that the partnership of the firm stood reconstituted, there was no transfer of capital asset. It was further contended by the assessee that when 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, and that in such cases, only the right to share the income of the properties is transferred in favour of the surviving partners, and, therefore, there was no transfer. The assessee also contended that the amount received on retirement was a capital receipt in its hands and was not liable to be taxed. The assessee also placed reliance on various case laws, in this regard. However, the AO held that the contentions of the assessee are not acceptable. In this regard, he observed as under :- The assessee was a partner of the firm where it had put its i) capital, thereby acquiring rights over the assets and profits that would derive out of utilization of assets of the firm. Therefore, the assessee was in possession of assets as soon as it was admitted to the firm on 20/2/2006. Thereby the assessee was in possession of capital asset within the meaning of section 2(14) of the Act.
The assessee retired from the partnership firm on 20/7/2011 ii) whereas the remaining partners continued the same. business, under the same name and style. At the time of retirement from the firm, as per the terms of the Deed of Retirement, the assessee released to the continuing partners their respective shares and interest in the business together with fixed assets, stock in trade, moneys, credits and effects and other assets including tangible and intangible assets. It transferred and released to the continuing partners all its share in the partnership business and all its property. Therefore, this event of retirement from partnership fell very well within the provisions of Sec.2(47) of the Act.
(ii) The continuing partners agreed to pay to the retiring partner
(assessee) a sum in full settlement of their claims in the capital, profits and assets of the partnership. The assessee received an amount of Rs.4,74,01,447/- over and above its capital contribution to the firm. Therefore, this amount received by the assessee, which is in excess of its capital, would be subject to tax under the head Capital Gain as per the provisions of Sec.45 of the Act.
The AO also held that most of the, case laws relied upon by the assessee pertained to taxation of capital gains in the hands of the firm, on retirement of partner, and, therefore, such decisions were not relevant to the facts of the present case. On the other hand, the AO stated that the decision of Hon'ble ITAT, Mumbai, in the case of Sudhakar Shetty -130 ITD 197 is applicable to the facts of the assessee's case. Considering the above facts, the AO held that on assessee's retirement from the partnership firm, there was a transfer of interest of the retiring partner over the assets of the partnership firm, and, therefore, long-term capital gains arising on such transfer is liable to be taxed in the hands of the assessee. He also held that the long-term capital gain should be worked out on the basis of capital introduced by the assessee and accretion of profit from year to year and allowing indexation for the years concerned. Accordingly, the long-term capital gain was worked out by the AO as under :- Financial Year Working of Indexation Indexed cost (Rs.) 2005-06 499955 * 785/495 7,89,667 2007-08 11133 *785/551 15,861 2010-11 23760000 * 785/711 2,62,32,911 2,70,38,440 Total Indexed Cost Amount received on retirement 7,16,72,536 Long-Term Capital Gain 4,46,34,096
The AO, accordingly, brought an amount of Rs.4,46,34,096/- to the tax in the hands of the assessee, as long-term capital gain arising on retirement from partnership firm.
5. Upon assessee’s appeal learned CIT(A) elaborately considered the assessee submissions. He observed as under:-
“11. I have considered the facts of the case, submissions and contentions of the appellant, as also the order of the AO. In order to attract provisions of section 45(4), the condition precedent is that there should be a dissolution of the firm and distribution of capital asset among partners or in which the outgoing partners should acquire interest in the capital asset and consequently the firm should cease to have any interest in the capital asset so transferred. However this is not the case in the present matter. It is relevant that the assessee company became partner in the firm Skoda Construction way back in the year 2005-06 as per deed dated 26/02/2006. During the year under consideration (2011-12 ) the assessee company retired as partner from the firm after taking away its accumulated credit in the capital account . After the retirement of the present company, the partnership continued to exist and the business was carried on by the remaining five partners. There was no dissolution of the firm nor there was any distribution of capital assets . What was given to the retiring partners is cash representing the value of their share in the partnership. No capital asset was transferred on the date of retirement under the deed of retirement deed. 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 assessee company. Therefore, the question of the present company being assessed under section 45(4) and charging it to tax would not arise. It is relevant to mention that the property belonged to the partnership firm and not to the the partners. The partners only had a share in the partnership asset. What was relinquished by the partners was their share in the partnership firm. 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.
Thereafter he referred to several case laws.
The Ld. CIT(A) has concluded as under:-
“Similar judgement has been given by the Hon’ble ITAT Pune Bench in case of Riaz A. Saikh dated 29/10/2010 and revenue’s appeal against the said order was dismissed by the Hon’ble Mumbai High Court vide order dated 26/02/2013 in appeal no.1969 of 2011.
The AO relied upon the judgement of Hon’ble ITAT Mumbai in case of Sudhakar M. Shetty. However, in doing so the Hon’ble ITAT had followed ratio of Hon’ble Bombay High Court judgement in case of Tribhuvandas G. Patel vs CIT 155 ITR. However, judgement in this case was reversed by the Hon’ble Apex Court as per the order reported in 236 ITR 515. Therefore, the judgement in case of Sudhakar Shetty is no more a good precedent. On the contrary various judgements cited herein above are quite recent and from higher judicial authority.
16. In view of the above facts and legal position, I am of the view that no addition is warranted in the hands of the assessee u/s 45(4) of the Act, in respect of amount received by it on retirement from partnership. The same is therefore directed to be deleted.”
Against the above order Revenue is in appeal before us.
We have heard both the counsel and perused the records. Learned counsel of the assessee submitted that assessee has retired from the partnership firm He submitted that the amount received from the partnership firm upon retirement is capital receipt not chargeable to tax. He claimed that this transaction is payment received by the assessee towards his all rights, title and interest in the partnership firm. He submitted that the partnership firm did not seize to exist. He submitted that the partnership firm was continuing. Learned counsel pleaded that in this transaction there is no transfer of capital asset and hence it cannot be brought tax. In this regard learned counsel referred to a catena of case laws.
Referring to the above learned counsel of the assessee submitted that the order of teamed CIT-A deserves to be sustained. Learned counsel further submitted that the reliance by the assessing officer is misplaced.
Per Contra learned departmental representative relied upon the order of Assessing Officer.
Up on careful consideration we note that assessee in this case was a partner in the partnership firm. He received compensation from the partnership firm upon retirement from the firm over and above the amount existing to the credit of his capital account. This was brought to tax by the assessing officer. It is noted that the partnership firm was continuing in existence. It was only that assessee retired from the partnership firm. There is no distribution of assets. In the circumstances the compensation received by the assessee has to be held to be capital receipt not chargeable to tax. This is supported by the Honourable Apex Court decision in the case of CIT Vs. V.R. Ringmallu Rahukumar (247 ITR 80). Further to the same effect is order of the honourable Hon'ble Jurisdictional High Court in the case of Riaz A. Saikh (supra).
Other case laws referred by the learned counsel of the assessee above also support this proposition. Furthermore, we note that ITAT in the case of Ramal P. Advani in & 6493/Mum/2016 vide order dated 27.8.2018 on similar issue has held referring to these case laws as under :
In this connection, the decision of the Hon'ble Bombay High Court in the case of CIT vs. Riyaz A. Sheikh [2014] 41 taxmann.com 455 (Bom) supports the case of the assessee. In this case, it was held that the amount received by an erstwhile partner on his retirement from partnership firm arising on transfer of goodwill is not liable to be taxed as long term capital gain. Similar view was expounded by the Hon’ble Apex Court in the case of CIT vs. R. Lingmallu Raghukar (124 taxman 127 (SC)). In this case it was held that excess amount received by assessee on retirement from partnership firm was not assessable to capital gains as there was no transfer of any assets as contemplated by expression 'transfer' as defined in section 2(47) of the Act.
Furthermore, Hon'ble Jurisdictional High Court in recent order in of 2016 vide order dated 18.4.2018 has affirmed the view expounded in the case of Riyaz A. Sheikh (supra).
Accordingly in the background of aforesaid discussion and precedent we affirm the order of learned CIT(A).
Accordingly, Revenue’s appeal on this issue stands dismissed.
CO No.311/Mum/2017
15. Ground No.1 to 3 are supportive of the order of the Ld. CIT(A) in Revenue’s appeal.
Other ground relates to deemed rental income from unsold flats. The assessee is a real estate developer. The AO has added notional rental income for the unsold flats in the hands of the assessee.
Upon assessee’s appeal learned CIT(A) referred to Hon'ble Delhi High Court decision in the case of Ansal Housing & Finance and Leasing Co. Ltd. 354 ITR 180 and confirmed the Assessing Officer’s order.
Against the above order assessee is in appeal before us.
We have heard both the counsel and perused the records. Learned Counsel of the assessee contended that impugned issue is now covered in favour of the assessee by several decisions of ITAT Mumbai. He further submitted that subsequent to the decision of Hon'ble Delhi High Court relied upon by learned CIT(A) Hon'ble Supreme Court had occasion to deal with the issue in the case of Chennai Properties and Investments Ltd. Learned Counsel sought to draw support from this decision. Furthermore, he submitted that on identical issue Hon'ble Gujarat High Court has decided in favour of the assessee. He also referred to Mumbai Tribunal decision, wherein referring to the decision of Hon'ble Delhi High Court and Hon'ble Gujarat High Court, the Tribunal had applied Hon'ble Apex Court ruling in the case of Vegetable Products and decided the issue in favour of the assessee. Learned Counsel of the assessee further submitted that amendment of section 23 by insertion of sub-section 5 by the Finance Act, 2017 which brings into the ambit of taxation the annual value in case of flats held as stock in trade in the hands of real estate developers is applicable w.e.f. 1.4.2018 and the same is prospective in nature. Accordingly, learned Counsel of the assessee submitted that the issue should be decided in favour of the assessee.
Per contra, learned Departmental Representative relied upon the orders of the authorities below.
Upon careful consideration we note that the issue here is the eligibility to tax of annual value of unsold flats of the assessee, who is a real estate developer and these flats are his stock in trade. Upon careful consideration we note that the amendment in the Act bringing into the ambit of taxation the annual value of unsold flats in the hands of the real estate developer has been brought into the statue books by amendment w.e.f. 1.4.2018. The same has been held to be prospective. Hence, on the touchstone of this amendment the additions made in the hands of the assessee for the present assessment year is not sustainable.
As regards decision of Hon'ble Delhi High Court in the case of Ansal Housing & Finance and Leasing Co. Ltd. (supra) relied upon by learned CIT(A), we note that there is a decision of Hon'ble Gujarat High Court in the case of Neha Builders Pvt. Ltd. (296 ITR 661), in which identical issue has been decided in favour of the assessee. Hence the ITAT Mumbai in in the case of Runwal Builders P. Ltd. by referring to Vegetable Products decision of Hon'ble Apex Court has decided the issue in favour of the assessee. Hence in this view of the matter also the issue is to be decided in favour of the assessee.
In the background of aforesaid discussion and precedent we set aside the orders of the authorities below and decide the issue in favour of the assessee.
Other grounds in the cross objection are consequential.
In the result, the appeal of Revenue is dismissed and cross objection of the assessee is allowed as above. Order pronounced in the Open Court on 09/05/2019