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Income Tax Appellate Tribunal, ‘ C’ BENCH : CHENNAI
Before: SHRI GEORGE MATHAN & SHRI S.JAYARAMAN
अपीलाथ" क" ओर से/ Appellant by : Shri T.Vasudevan ,Advocate ""यथ" क" ओर से /Respondent by : Shri Clement Ramesh Kumar, Additional CIT D.R सुनवाई क" तार"ख/Date of Hearing : 24-10-2018 घोषणा क" तार"ख /Date of Pronouncement : 24-10-2018 आदेश / O R D E R
PER GEORGE MATHAN, JUDICIAL MEMBER
This is an appeal filed by the assessee against the order of the Commissioner of Income-tax (Appeals),Salem in 14 dated 29.01.2015 for the assessment year 2010-11. Shri T.Vasudevan represented on behalf of the Assessee, 2. and Shri Clement Ramesh Kumar represented on behalf of the Revenue.
It was submitted by ld.A.R that two issues were raised in assessee’s appeal. The first one being the disallowance of the interest paid to the partners. It was a submission that in respect of this issue, :- 2 -: the assessee had claimed interest payments to two partners being Mr.Murugesan to an extent of `5 lakhs, and being Mr.Chandrasekaran to an extent of `1.5 lakhs. It was a submission that the ld. Assessing Officer had disallowed the interest payments on the ground that the said two partners had only debit balances. It was a submission that in respect of other partners, who had credit balance, no interest had been claimed. It was a submission that the partnership deed also permitted the payment of interest to the partners on their capital account. It was a submission that the ld.A.R had no objection, if the ld. Assessing Officer is directed to verify as to whether partnership deed provided for payment of interest to the partners, and if permitted, directed to allow interest on the credit balance of the partners, even though the same has not been specifically claimed.
In reply, ld.D.R submitted that he had no objection, if the 4. issue could be restored to the file of the AO for verification as to whether the partnership deed provided for interest to be paid to the partner’s capital account and if so provided, to allow the same.
We have considered the rival submissions. In regard to the first issue as to debit balance of the partner’s capital account, the disallowance of the interest has been rightly made by the ld. Assessing Officer and the same stands confirmed. In respect of the assessee’s claim that the partnership deed provided for payment of interest to the :- 3 -: partners capital account on the credit balance, the issue is restored to the file of ld. Assessing Officer for verification as to whether the partnership deed provided for the same, and if it is provided for the payment of interest to the partners capital account’s credit balance, then in view of provisions of the section 40(b)(iv) whether the interest has been claimed or charged, the same was liable to be allowed. To this extent the issue is restored to the file of ld. Assessing Officer.
The second issue was against the action of ld.CIT(A) confirming the order of the ld. Assessing Officer in bringing to tax the capital gains in respect of the agricultural lands gifted by the assessee firm to its partners. It was submitted by ld.A.R that during the relevant assessment year, assessee-firm has transferred three of its properties situated in the districts of Namakkal, Kanchipuram and Trichy to its five partners by way of three Settlement Deeds on 11.09.2009, 23.09.2009 and 22.09.2009 respectively. It was a submission that the ld. Assessing Officer, on the ground that the assessee has done tax planning to overcome tax liability u/s.45(4) of the Act and for the purpose of avoiding the probable tax liability in the hands of its partners u/s.56(1)(vii) of the Act, if the transfer had taken place after 01.10.2009, had held that the transfer was nothing but distribution of capital assets of the firm to all its partners and held that provisions of the section 45(4) are attracted. It was a submission that :- 4 -: admittedly amendment to Section 56(1)(vii) of the Act was in the public knowledge to be coming into effect from 01.10.2009. It was a submission that Section 56(1)(vii) of the Act provided for stamp duty value of the property received by the individual or HUF without consideration is to be chargeable to tax as income from other sources.
It was a submission that in the present case, clearly the properties belonged to the partnership firm and the partners represented the partnership firm. It was a submission that the transfer of the property by the Settlement Deed, which was the form of gift, took place on 11.09.2009 and 23.09.2009 much before the introduction of Section 56(1)(vii) of the Act. It was a submission that in fact Section 56(1)(vii) of the Act was to control the claim of gifts from unrelated persons.
Even after the introduction of this provisions of Section 56(1)(vii) of the Act, if the gift is from related persons, then provisions of Section 56(1)(vii) itself would not apply. It was a submission that in fact provisions of the section 47(iii) specifically provides for exclusion of the provisions of the section 45 of the Act in respect of transfers of any capital asset under gift. It was a submission that in the present case clearly the said Settlement Deed by which the assessee firm has given the gift to the partners, was before the introduction of Section 56(1)(vii) of the Act and in view of the fact that the provisions of the :- 5 -: section 47(iii) of the Act, the same could not be treated as giving rise to capital gains assessable u/s.45 of the Act.
In reply, the ld.D.R vehemently supported the order of the ld. Assessing Officer and the CIT(A). It was a submission that the gift deed was a colourable devices to avoid the levy of capital gains.
We have considered the rival submissions. The assessee is entitled to do all such actions as are liable to reduce its tax burden or incidence of tax. However, colourable device for evasion of tax is frowned upon. Avoidance of tax is fully accepted and recognized as a part of taxation system. In the present case, clearly gift has been given by the partnership firm to all its partners before the effective date of introduction of provisions of the section 56(1)(vii) of the Act.
Just because the date of effective introduction of provisions of the Section 56(1)(vii) of the Act is in the public knowledge, would not make the gift given by the assessee firm to its partners as colourable devices for tax evasion. In any case, there can be no tax evasion. In the present situation, provision of the section 47(iii) of the Act is available in the statute and the said provisions specifically provides that such gift is not to be considered as a transfer for the purpose of section 45 of the Act. Our view further stands fortified by the fact that even when the partners sell the said immovable property, which has been received by them as gift from the assessee firm, the cost of :- 6 -: acquisition for the purpose of indexation would obviously be the cost in the hands of the original owner, being the assessee-firm, as the property has been acquired by the partners through gift. Thus, even the argument that the assessee has attempted to evade the payment of capital gains tax, does not survive. In the circumstances, the findings of the Ld.CIT(A) and that of the ld. Assessing Officer stands reversed and the ld. Assessing Officer is directed to exclude the capital gains levied in respect of properties gifted by the partnership firm to its five partners.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court after conclusion of hearing on 24th October, 2018, at Chennai. (एस जयरामन) ( जॉज" माथन) (S. JAYARAMAN) (GEORGE MATHAN) लेखा सद"य/Accountant Member "या"यक सद"य/JUDICIAL MEMBER चे"नई/Chennai "दनांक/Dated: 24th October, 2018. K S Sundaram