ITO 25(3)(4), MUMBAI vs. FINE DEVELOPERS, MUMBAI

आदेश / O R D E R PER R.C.SHARMA (A.M):

3 (i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in concluding that the provisions of the section 45(4) are not applicable. 3(ii) On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in not taking into consideration the value of Kurla Land as per assessee's Valuation report for the purposes of computation of Capital Gains u/s 48 rws 45(4). 3 (iii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ignored the fact that reconstitution of the firm took place in FY 2008-09 and the surrender of rights by the retiring partners resulted in payment to the retiring partners; this being distribution of assets to the retiring partners ought to have been held as taxable u/s 45(4). 3 (iv) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that retirement of partners and enhancement of profit sharing ratio of HDIL to 90% actually resulted in dissolution of the firm and therefore amounts paid to retiring partners ought to have been taxed u/s 45(4) 4) Without prejudice to the above Grounds of Appeal agitated by the Revenue, in the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred, while deleting the addition u/s 45(4), in not upholding the transaction of transfer of Kurla land to SRA as business income, when the assessee firm itself has declared income under the head Business and Profession. 5) The appellant prays that the order of the Ld CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored. 6) The appellant craves leave to amend or alter any ground or add a new ground

3. Revised ground taken by the Department reads as under:- 1) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deciding the issue of natural justice in favour of the assessee. 2) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in concluding that the purchase of Kurla Land is stock in trade, whereas the same ought to have been treated as capital asset.

3 (i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in concluding that the provisions of the section 45(4) are not applicable. 3(ii) On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in not taking into consideration the value of Kurla Land as per assessee's Valuation report for the purposes of computation of Capital Gains u/s 48 rws 45(4). 3 (iii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ignored the fact that reconstitution of the firm took place in FY 2008-09 and the surrender of rights by the retiring partners resulted in payment to the retiring partners; this being distribution of assets to the retiring partners ought to have been held as taxable u/s 45(4). 3 (iv) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that retirement of partners and enhancement of profit sharing ratio of HDIL to 90% actually resulted in dissolution of the firm and therefore amounts paid to retiring partners ought to have been taxed u/s 45(4). 4) Without prejudice to the above Grounds of Appeal agitated by the Revenue, in the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred, while deleting the addition u/s 45(4), in not upholding the transaction of transfer of Kurla land to SRA as business income, when the assessee firm itself has declared income under the head Business and Profession. 5) The appellant prays that the order of the Ld CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.

4. Rival contentions have been heard and record perused. Facts in brief are that the assessee firm is a builder and developer of land and buildings which was constituted vide original Partnership Deed dated 25.11.2005, with the following partners.

M/s. Fine Developers Sr. No. Name of the Partner % of Profit / Loss Ratio 1. Sapphire Land Developers 60 -^ Vision Finstock Pvt, Ltd. 20 3, Nisha Capital Services Pvt. Ltd. 10 4. Suraksha Developers PvL. Ltd, 10 .

5. Thereafter, during the previous year relevant to A.Y. 2008-09, vide Partnership Deed dated 06.07.2007, M/s. Housing Development and Infrastructure Limited [HDIL] was admitted as new partner to supplement the financial resource and for augmenting the work force for diverse commercial consideration. The resulting profit/loss ratio amongst the partners was as under – Sr. No. Name of the Partner % of Prof it/ Loss Ratio 1. Sapphire Land Developer 10 2. Vision Finstock Pvt. Ltd. 20 3. Nisha Capital Services Pvt. Ltd. 10 4. Suraksha Developers Pvt. Ltd. 10 5. HDIL 50 M/s. Fine Developers 6. Meanwhile, HDIL vide agreement dated 15.10.2007 with Mumbai International Airport Limited [MIAL] was awarded the Slum Rehabilitation Project [SRP] pertaining to the modernization and up-gradation of the Chatrapati Shivaji International Airport [CSIL].

7. The book value of the said stock in trade stood at Rs.39,27,19,547 as on 31.03.2008.

8. On the basis of the above two events, the assessee has been subjected to addition Rs.186,72,80,452/- under Section 45(4) of the Act in the Assessment Year 2008-09 inter alia on the footing there has been a purported distribution of the Kurla land by the firm to the partners of the assessee as a result revaluation of the Kurla land in consequence of admission of partner (HDIL). The assessee firm preferred an appeal against the said addition which was deleted by the CIT(A) -35 vide his order dated 28.03.2011. The Revenue has challenged the said order before the Tribunal.

(6) In pursuance of the said Retirement in this behalf the Retiring Partners doth hereby retire from the said partnership firm of M/s. Fine Developers w.e.f. the closing of business hours on 27th May, 2008 and the Retiring Partner do and each of them doth hereby covenant that the said Continuing Partners will remain partners in the said business and continue the said partnership business in the partnership between the Continuing Partners or any other Person/s upon the terms and conditions agreed between them from time to time with effect from the closing of the business hours 27th May, 2008, and they the Retiring Partners have seized to have any right, title and interest of any nature whatsoever in the said partnership business and the assets thereof. (8) The Retiring partners doth hereby confirm that on and from the close of business hours on 27th May, 2008, they shall have no share, right, title and/or interest of any nature whatsoever in the said partnership firm M/s. Fine Developers and/or in the assets, whether tangible or intangible and whether movable or immovable, belonging to partnership firm and/or against the Continuing Partners and same shall belong to the Continuing Partners subject to payment of all outgoings in respect of the said several premises. (9) The Retiring Partners do and each of them doth and also the Continuing Partners do and each of them doth hereby declare that none of them have at any time borrowed money or incurred any debt or guaranteed any liabilities or on account of or on behalf of the partnership which is not disclosed in writing to the other partners and if any time hereafter any liability, not so disclosed or come to light or be revalued, the partner/s who may have incurred such liability shall on his/her own pay and discharge the same and they have to keep indemnified the other or others of them against all actions, suits, proceedings and costs, charges and expenses in respect of any liabilities, not so disclosed to the other." On an analysis of the aforesaid clauses, it is clear that the retiring partners merely retired from the partnership firm without any distribution of assets of the firm amongst the original and new M/s. Fine Developers incoming partner. Since the reconstituted firm consists of 1 old partner and 1 new partner, it is not a case where firm with erstwhile partners was taken over by new partners only. For the sole and limited purpose of settlement of accounts of the Retiring Partners, the surplus on revaluation of was notionally credited to the Partner's Capita! A/c. of all the partners. After such mutual adjustment of rights amongst all the partners, the Retiring Partners were only paid the sum standing to the credit of their Capital A/c on 27.05.2008. It cannot be inferred that by crediting the surplus on revaluation to Capital A/c of 2 Continuing Partners and allowing the 3 Retiring Partners to take equivalent cash subsequently amounted to distribution of rights by the Continuing Partners to the Retiring Partners. A Partnership firm constituted of its partners is governed by the provisions of Partnership Act. The partnership firm is not a legal entity and property of the partnership vests in its partners inasmuch as all the partners have an interest in the partnership property. The provisions of the Partnership Act clearly provide that a property which is brought in by the partners on the formation of partnership or acquired in the course of business of partnership, becomes the property of the firm. The partners of a partnership firm are entitled to a share in the profits of the business to the extent of their share ratio. During the subsistence of partnership no partner has any assigned right or share in the partnership property. During the continuance of the partnership the partners have only a right in the profits of the partnership and no partner can deal with any portion of the partnership property as his DWH during the continuance of the partnership firm. In a partnership amongst partners, each and every partner of the firm has an interest in each and every property of the partnership firm. Till the accounts are settled and the residue/surplus is not distributed amongst the partners, no partner can claim any share in such assets of the partnership firm. Each partner is entitled to its share of profits in the partnership firm but the entitlement of right in the assets/property of the partnership firm arises only on dissolution. While the firm is subsisting, there cannot be any transfer of rights in the assets of the firm by any or all partners amongst themselves because during subsistence of partnership, the firm and partners do not exist separately. There can be no transfer to oneself. This could only happen when there is dissolution of the firm. Revaluation of assets by partnership firm does not attract capital gains. The revaluation of assets of partnership and the credit of revalued amount to the capital account of partners in their respective M/s. Fine Developers share ratio does not entail any transfer as defined under section 2(47) of the Income-tax Act. The introduction of new partners to a partnership firm owning immovable assets and consequent reduction in the share ratio of present partners does not entail any relinquishment of their rights in the partnership property. On introduction of new partners, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses, if any of the partnership business. Based on the above contention, in the case of ITO vs. Smt. Paru D. Dave [2008] 110 ITD 410 (Mum), the jurisdictional ITAT Mumbai held as under – "When any new partner is introduced into an existing partnership firm, the profit sharing ratios undergo a change, which does not amount to transfer as defined under section 2(7)j of the Act, as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership and thus on realignment of profit sharing ratio, on introduction of new partners, there is no relinquishment of any non-existent share in the partnership assets as the asset remained with the firm. Such an arrangement is not covered by the provisions of section 45(4) of the Act, which covers the case of dissolution of partnership firm. Accordingly, no capital gains arises on such relinquishment of share ratio in the partnership firm. " It cannot be contended that during the continuation of the partnership, the partners have a separate rights over the assets of the firm in addition to interest in share of profits because of the fact that the value of the interest of each partner qua an asset cannot be isolated or carved out from the value of partner's interest in the totality of the partnership assets. When an asset of the firm is allotted to a partner on dissolution or retirement of the firm, the shared interest of all the partners in the said asset, is replaced by the exclusive interest of the allotee partner for a consideration. Thus, there is an extinguishment of the "common interest" of all the partners of the firm in that particular asset and a resultant creation of "absolute ownership" of partner to whom it is allotted. Such a transaction would qualify as a "transfer" of capital asset within the meaning of Sec. 2(47). In the instant case, in absence of a transfer of partnership asset (being the Kurla land) by the appellate firm to the Retiring Partners, such that the shared interest of all the partners in the said asset is replaced by the • exclusive interest of the allottee partners, for a consideration, it cannot be held that there was a distribution of rights by Continuing Partners in favor of Retiring Partners. In fact, after M/s. Fine Developers revaluation of asset, there is no change of ownership as no interest of partners in the alleged capital asset is transferred to the Retiring Partners on the date of retirement, but remained in the books of the firm as on 27.05.2008, which was subsequently transferred to a third party being SRA vide Deed of Conveyance dated 03.11.2008. On the contrary to the AO's contention, it is not the firm which has transferred its rights, but it is the Retiring Partners who vide extinguishment of their shared rights in favor of the Continuing Partners who are liable to capita! gains tax. Sec. 2(47) of the Act while defining the "transfer" with regards to capital asset, covers under its purview, the "extinguishment of rights". The case of the AO fails because on one hand he says it is the erstwhile partners of the firm who have distributed their rights to themselves as well as new partners but proceeds to tax the firm for capital gain which as per his own findings seems to be a transferee and not the transferor.

4. Under the Income-tax Act, only the real income cab be taxed which has accrued to the assessee, as held by various decisions in the case of 158 ITR 102 (SC), 204 ITR 1 (Bom), 225 ITR 746 (SC), 208 ITR 930 (Bom), 216 ITR (Bom) etc. It is a well settled principle that there can be no income just due to revaluation of capital asset unless the capital asset is actually transferred also. This principle has been upheld in case of CIT v. Hind Construction Limited (1972) 83 ITR 211 (SC); Sanjeev Wolten Mills v. CIT (2005) 279 ITR 434 (SC); CIT v. Hazarimal Surana (2002) 262 ITR 573 (RAJ). Revaluation of assets before conversion of firm into company is not a case of dissolution of firm nor transfer of assets of firm as held in ITO v, Gulubdas Printers [2010] 4 ITR 264 (Ahd.)(Trib.) Whenever any asset is revalued then as per accounting norms the corresponding notional surplus due to revaluation is required to be credited to revaluation reserve a/c incase of companies or credited to capital a/ c of partners in case of firm. This is only notional or book entry which is not represented by any additional tangible asset or income either in specie or in terms of equivalent money. Thus the act of revaluation of land and crediting the excess in Capital A/c of all the partners is only a notional book entry without any actual accretion in cash or other tangible assets in the hands of the appellant firm. Once it is established that there is no-profit or gain accrued to firm 'on revaluation resulting in real income, there can also be no distribution of such profits and gains. In the decisions reported in 239 ITR 505(SC), 82 ITR 363(SC), 116 ITR I(SC), 46 ITR 550(Bom), 117 ITDl (Ahd) (SB), 83 ITR 899(SC), 87 ITR 542(SC), 245 ITR 421(SC) it has been held that book entries are not conclusive to decide the nature of transaction / income. Hence making of book entries of crediting notional and intangible profit in M/s. Fine Developers the Capital a/c. of the partners on revaluation of asset is only an no extinguishment of firm's rights in the partnership assets. This can be better understood by taking a hypothetical example that in a case where surplus due to revaluation is credited to partner's capital a/c. but none of the partners retire during that year, then it cannot be said that there is distribution of capital assets u/ s 45(4) by the firm because there is no transfer by distribution on a/c of notional or intangible profit on mere revaluation to Continuing Partners. In the same situation, where no partner retires but some partners withdraws the sum lying to credit in his capital a/c, then also it cannot be said that there is any distribution of any capital asset to partners because it is a case of mere withdrawal from capita! a/c. thereby increasing the liability of partner to firm & other partners. Finally, in the same situation, if one of the partners retires and also withdraws the sum lying to credit in his capital a/ c, then also there is no distribution of capital asset by firm to partner because it is not the retirement alone which triggers the provisions of Sec. 45(4); rather it is the transfer bv way of distribution of capital asset by the the firm coupled with retirement or dissolution, which triggers the provision of Sec. 45(4). If the revaluation takes place in earlier year and the retirement of a partner takes place in subsequent year say after 5 years and the firm continues with remaining partners and there is no distribution of assets, then can Sec. 45(4) be invoked in the year of revaluation or subsequent year of retirement? The answer would be no for both years because it is the "transfer" which invokes sec. 45(4) and that too in the year of transfer. Hence the revaluation or retirement alone does not trigger the provisions of 45(4) and it has to he coupled with distribution of capital asset also. If the retirement alone could trigger the provisions of 45(4) then in case of appellant there will be incidence of 45(4) on each occasion when a partner retires even in subsequent years though there may not be any revaluation or distribution in those years. » This will result in absurd consequences and hence such interpretation has to be discarded. Hence if there is no transfer bv way of distribution of asset as already explained above then the mere fact that the retiring partners have withdrawn the sum lying to credit in their a/c. will not bring the case within the sweep of Sec. 45(4). Further, one of the conditions for application of 45(4) is that there should be distribution of capital asset either on 'dissolution' of the firm or 'otherwise'. The expression 'otherwise' used in section 45(4) has been explained on the principles of 'esjudem generis' in the case of A N Naik 265 ITR 346 (Bom), wherein the court has observed that the expression otherwise has to be read with the words 'transfer by way of distribution of capital assets' and not with the words 'dissolution', Thus the Bombay high court decision reinforces the M/s. Fine Developers conclusion that the transfer of the capital asset is the 'essence' for bringing any event within the sweep of Sec. 45(4) which has to be at the time of dissolution or even other similar event such as retirement. Until such time the shared rights of partners becomes the exclusive right of any retiring partner, no occasion arises for bringing to tax any capital gain u/s. 45(4), as also held in CIT vs. Vijayalakshmi Metal Industries (20O2) 256 ITR 54O (Mad). There is no extinguishment of any right in any asset of the firm by the continuing partners in favor of the retiring partners and hence there is no transfer of any kind within the meaning of section 2(47) by the firm to the retiring or continuing partners. The jurisdictional High Court in case of A N Naik (supra) has after considering the Madras High Court decision in the case of Vijaylakshmi Metal Industries (supra) has observed in para 20 of its order that - "The section itself gives no room for doubt as the year in which the capital gain is to be brought to tax is the 'previous year' in which the said 'transfer' takes place." The Bombay High Court in pard 8 of the same decision further observed as under – "With the above, we may now proceed to answer the questions as formulated. Sec. 45 is the charging section. Under Sec. 45, there must be a transfer of a capital asset by way of distribution of assets in the first instance. Capital asset under Sec. 2(14) of the IT Act, 1961, has been defined to mean property of any kind held by an assessee. In other words, the property transferred must fall within the ambit of capital asset..." The High court, in the case before A N Naik (supra) in para 23 has further observed as under:- "23. We may now consider the judgment in B. T. Patil& Sons vs. CGT (1996) 134 CTR (Kar) 77; (1997) 224 ITR 431 (Kar). We will advert to some facts. In that case, the issue before the Division Bench of the Karnataka High Court was, charging of gift-tax. In that case, there was a firm with five partners which owned several assets in the form of machinery. Certain debits were made to the respective accounts in July, 1977, stated to be the value of certain machinery distributed by the firm to the partners. Some machinery was given to the partners individually and one machine was given to all the five partners to be held by them jointly as co-owners. As a result, the firm ceased to be the owner of the said machinery and the five partners became the owners of the machinery so distributed either individually M/s. Fine Developers or as co-owners. The five partners shortly thereafter formed another partnership and contributed the machinery which was distributed to them by the assessee firm to the new firm by doing valuation. The new firm thereafter sold the machinery for a price. The GTO treated the difference at the price at which the machinery was distributed by the assessee-firm to its partners as deemed gift and subjected the sarre to gift-tax. The issue was whether distribution of machinery was a transfer in the nature of sale, for a consideration. The Division Bench of the Karnataka High Court considered the expression of "transfer" under s. 2(xxiv) of the GT Act, which defines "transfer of property" as any disposition, conveyance, assignment, settlement, delivery or other alienation of property. The Division Bench noted that the Act was self-contained and the definition of "property" is to rope in artificial devices which may include mere agreements or arrangements, intended to confer gifts, which may not however, fall under the normal meaning of "transfer" as gifts and the definition of "gift" in s. 2(xii) to include many transactions which could not ordinarily be described as transfers of property and has a wider import than the meaning given to "gift" in s. 122 of the Transfer of Property Act. The Court after considering various judgments, held that the decisions which hold that there is no transfer of property when there is a distribution of assets on dissolution or when an asset is allotted to a partner on his retirement from the firm, will be inapplicable where an asset is brought in \by the partner into the partnership. The Court then observed that it follows there from that they will be inapplicable, even in a converse situation where a firm distributes or gives its assets to its partner by debiting the value thereof to the respective partner's account, without there being either dissolution or retirement. The Court noted that while dealing with the value of interest of each partner qua an asset cannot be isolated or carved out from the value of the partner's interest till the totality of the partnership assets, once it is allotted, it becomes the individual property of the partner, The Court then proceeded to hold that, thus, the shared interest becomes the exclusive interest of a partner. When an asset of the firm is allotted to a partner during the subsistence/ continuation of the partnership firm (as contrasted from, an allotment on dissolution of the firm or retirement of the partner), the shared interest of all the partners in the said asset, is replaced by the exclusive interest of the allottee, for consideration. To that extent, there is an extinguishment of the interests of the other partners of the firm, in the partnership asset in question and enlargement of the limited interest of the allottee into a full exclusive right in the asset. When the asset is a partnership asset, a partner cannot claim or exercise any specific share or right over such asset to the extent of his share in the business of the partnership (as a co-owner can do in respect of a co-ownership property), as his right during the subsistence of the partnership is only to get his share of profits. But, M/s. Fine Developers on allotment of the asset by the firm to the partner, such partner becomes entitled to exercise over the asset, all rights of an absolute owner. The Court then proceeded to observe what was a mere interest on allotment by the firm, enlarges into an absolute right, title and interest. The extinguishment of the common interest of the partners of the firm and creation of absolute ownership of the partner to whom it is allotted. Such a transactions therefore a transfer of property as defined in the GT Act, We may note that the partnership was subsisting and an asset of the partnership was made the absolute ownership of one of the subsisting partners. This judgment came up for consideration before the apex Court in B. T. Pat/7 & Sons vs. CGT (2000) 163 CTR (SC) 363 [2001] 247 ITR 588 (SC) upholding the judgment of the Karnataka High Court. The apex court observed as under : "In our view, when there is a dissolution of a partnership or a partner retires and obtains in lieu of his interest in the firm, an asset of the firm, no transfer is involved... But the posit/on is different when, during the subsistence of a partnership, an asset of the partnership becomes of only one of the partners thereof; there is, in such case, a transfer of that asset by the partnership to the individual partners. " The ratio of the judgment as can be culled out is that when a subsisting partner receives from the firm an asset then there is a transfer of that asset from the partnership to the individual partner. In other words under the WT (sic) Act when an asset of the partnership becomes the asset of one of the partners it amounts to a transfer", (emphasis supplied). Thus it is clear that even the jurisdictional high court in case of A N Naik relying upon the decision of apex court in the case of B. T. Patil & Sons (supra) has itself treated the allocation of assets of the firm to the retiring partner as the clinching factor for invocation of section 45(4). This inter alia means that transfer or allocation of exclusive interest of retiring partner in a capital asset is a must for invoking provisions of Sec. 45(4). In the case of A. N. Naik (supra) the court held that provisions of Sec. 45(4) was applicable because in that case the said outgoing partner was also given the assets of the firm on his retirement. It was in this context it was held by the Bombay High Court that even though there was no dissolution but there was distribution of assets which would fall within the sweep of 45(4), In case of the appellant also neither there is any dissolution nor is there any other event taking place, which has an effect of allocation of exclusive interest in any capital asset to the retiring partner and hence the conditions of 45(4) are not fulfilled as per the ratio of apex court in B T Patil & Son (supra) and Bombay High Court in A N Naik (supra). This is further borne out from the Bombay High Court's M/s. Fine Developers order while distinguishing Kunnamkulam Mill Board 257 ITP. 544 (Ker). In that case, the real controversy was whether by retirement of a partner of the firm there is a transfer of the assets of the firm in favor of the surviving partners within the meaning of s, 45(4) of the Act. The Division Bench of the Kerala High Court answered the same in the negative by holding that there was no transfer of assets, by ho/ding that as long as there is no change in ownership of the firm and its properties, there is no transfer of ownership on reconstitution of the firm. This is, therefore, not a case, where the assets were allotted to a retiring (emphasis supplied) Thus it is clear that in principle, the ratio of Kerala high court that unless and until there is change in ownership of the concerned property there is no distribution as contemplated in Section 45(4), was impliedly concurred by jurisdictional high court also in case of A N Naik, though the jurisdictional high court took a different view on facts of that case as there was allocation of asset also to the partner on retirement, which was not there in case before the Kerala High court. In the case of appellant also it is not case where any asset has been allotted to the retiring partners, just like in the case which was before Kerala High court. 5.The decision relied by AO in case of Gurunath Talkies 328 ITR 59 (Kar) is distinguishable. In that case all the old partners retired from the firm on introduction of two new partners and only the new partners continued the business of the firm and it was in this context it was held that there was transfer of capital asset u/s 2(47) attracting section 45(4). Thus it was a case of succession of firm by entirely new set of partners which resulted in transfer of capital asset by firm having erstwhile partners to the firm with same name with all new partners and hence the court held that there was transfer of assets as held by firm comprising erstwhile retired partners to the firm comprising all new partners. In the case of appellant it is not the case because out of 4 existing partners on 25.11.2005, 1 new and 1 old partner continued post reconstitution of 27.05.2008. The Ld AR has also placed on record the ITAT Mumbai A Bench decision in case of A R Asher and 3 others in dated 11.02.2011 wherein also there was similar revaluation of asset which was credited to capital a/ c of partners in their profit sharing ratio and on retirement the partners carried away the balances lying in the capital a/c including the amounts accredited on revaluation and the firm continued the business with newly admitted partners. The ITAT in the said case held that no capital gain was attracted in hands of firm u/s 45(4). The case of the appellant is not only similar but on a better footing because in the case of appellant there is only M/s. Fine Developers reconstitution of firm as only 3 of 5 original partners existing prior to revaluation retired on 27.05.2008 and the appellant firm continued with 1 old partner 1 newly inducted partner whereas in the case of A R Asher &. others (supra), it was a case of succession as all the partners have retired and firm was continued by all newly inducted partners on the same day.

6. The AO has taxed the amount credited in capital a/c of retiring as well as continuing partners within the realm of 45(4). So far as the amounts credited to capita! a/c of the continuing partners are concerned, as already discussed, the continuing partners individually have no specific and coalesced right, title and interest in the immovable properties of the firm and hence upon revaluation of asset of the firm there is only mutual adjustment of rights in the firm and it cannot be said that there is increase in rights of continuing partners in the asset of the firm because it is the firm only which continues to be the owner of the property in question even after revaluation and hence there can be no question of any transfer or distribution to continuing partners. As the common saying goes that one cannot have the cake and eat it too; on the same logic it cannot be said that the firm earned profits on transfer or distribution of an capital asset to continuing partners though the partnership firm has transferred the said asset to a third party. Even otherwise, if the continuing partners whose capital a/c has been credited wanted to withdraw the credit balances without retiring, it can be onfy out of the cash funds of firm which can be out of loans or other sources but not out the revaluation surplus as the revaluation surplus is not represented by any actual tangible cash. If such withdrawals are made out of funds borrowed by firm, then it will result in increase of the loan liability of the firm which in turn shall increase the liability of the continuing partners are obliged to repay by virtue of their joint and several liabilities. Thus the continuing partners are not at all benefitted, even if they were to withdraw the sums credited in capital a/c on revaluation of asset and therefore there cannot be any case of distribution of any asset by way of credit entries also in hands of Continuing partners. Hence the provisions of Sec. 45(4) cannot be made applicable to the amounts credited to the capital a/ c of continuing partners by any stretch of interpretation.

9. The purpose of 45(4) \s to bring such transactions which have an effect of transfer of capital assei without the asset being actually transferred. The purpose is to tax the actual beneficiary of such transactions. In the present case, the firm or the continuing partners are not the beneficiaries as no new tangible income or asset has arisen to them; rather the firm and continuing partners have purchased the share of retiring partner by paying cash. It is the retiring partners who have been benefitted by receiving much more M/s. Fine Developers than actual capital contributed by them on account of revaluation. Thus there can be no case of tax avoidance by colorable device by the firm on the facts and circumstances of the appellant's case. 10.The fact that the impugned land has been treated consistently as stock in-trade and not as capital asset by the appellant which is also evident from the discussion in the aforesaid grounds, is yet another important independent factor which goes in favor of the appellant firm while considering the application of Sec. 45(4). 11.The alternate argument presented by the AR by applying Sec. 45(4) and its consequent nullifying ramifications are quite valid, forceful and convincing. But I have adjudicated the matter purely on the invocation of Sec. 45(4) or otherwise and thereby 1 abstain from passing a judgment on this alternate contention. 12.Keeping in view of the above factual analysis as well as relying upon the various legal precedents, pronouncements, judgments and orders and in the absence of the fundamental requisite of the impugned property being a capital asset, I am of the considered opinion that there is no distribution of capital asset as envisaged u/s. 45(4). Hence on the facts and circumstances of the appellant's case, no income is chargeable u/s. 45(4) in the hands of the firm and therefore the entire addition of Rs.206,19,20,209/- is directed to be deleted. 4.4 Ground no. 5 in respect of year of taxability and double assessment of the same transaction. 4.4.1. Appellant's Contention : The Appellant firm has already been subjected to addition Rs. 186,72,80,452/- under Sec. 45(4) of the Act in the Assessment Year 2008-09 inter alia on the same footing that there has been a alleged distribution of the Kurla land by the firm to the partners of the Appellant firm as a result revaluation of the Kurla land in consequence of retirement and admission of partners as projected in the Assessment Order. The excerpts of the impugned Assessment Order for the Assessment Year 2008-09, wherein the AO has emphatically concluded by erroneously invoking provisions of Sec.45(4) r.w.s. 2(47), that the said Kurla land is transferred by the Appellant firm, are as under - Para ll(b), Page 6 - "Further, the conduct of HDIL in entering into Memorandum of Association (MOU) with Mumbai International Pvt. Ltd. (MIAL) for slum rehabilitation, clearly shows that the properties of the firm have M/s. Fine Developers already been transferred to HDIL and, therefore HDIL has a/ready acquired all the rights to deal with the property." Para 11.4, Page 8 - "... factually 100%of the share of the only property of the firm has been transferred to HDIL in the Financial Year 2007-08 pertaining to Assessment Year 2008-09, itself." Para 13, Page 11 – "... it is held that provisions of 45(4) r.w.s. 2(47) are attracted in this case as fact there is transfer of assets of firm being land situated at Kurla at two points of time. Firstly, 50% of the land was transferred to HDIL on 06.07.2007 when HDIL introduced as new partner in firm and 50% share of profit was transferred to HDIL and the balance 50% transfer took place on 15.10.2007 when HDIL signed MOU with MIAL from slum t rehabilitation at Kurla land on its own name. Though the assessee's records show that HDIL became the partner of 90% interest of the firm, on 27.05.2008, the effective transfer of the entire interest of the firm along with the land had already taken place during the financial year 2007-08, before the HDIL entered into MOU with MIAL on 15.1O.20O7." Against the impugned Assessment Order for AY 2008-09, the Appellant firm filed an appeal before the CIT (Appeals) - 35, who in turn deleted the said addition, vide his Appellate Order dated 28.03.2011, However, the Department has maintained that the Appellant firm is bound to be taxable u/s. 45(4) r.w.s. 2(47) and thereby preferred an appeal before the ITAT, Mumbai. The relevant extract of Grounds of Appeal from the Form No. 36 filed by the Revenue is as under – "On the facts and in the circumstances of the case, and in law, the id. CIT(A) erred in directing the A.O. to delete the entire addition of capital gain u/s. 45(4) of the Income Tax Act 1961, without appreciating the fact that HDIL was permitted as partner in the partnership firm with 50% share of profit, by this arrangements' 50% of the interest of the existing partners have been transferred in the favor of incoming partner w.e.f. 06-07-2007 resulting in transfer of assets within the meaning of section 45(4) r.w.s. 2(47) of the Income Tax Act, 1961." Moreover, the same transactions constituting retirement and admission of the respective partners has once again been doubly taxed Rs. 206,10,20,209/- under Section 45'4) of the Act in the Assessment year 2009-10 vide order dated 15.12.2011 on the alleged second distribution of the Kurla land by the Appellant firm to the M/s. Fine Developers concerned partners. In addition, the Appellant firm is brought to tax pro tanto Rs, 15,51,99,120/- as business income for so called sale of land to HDIL. If in the opinion of the AO, the Appellant firm already distributed the Kurla land to the partners in Assessment Year 2008-09 invoking Section 45(4) coupled with the fact that, according to AO, the land is already transferred by HDIL to MIAL vide agreement dated 15.10.2007, then the moot question is how can the Kurla land be transferred again for the nth number of time to the partners by the Appellant firm in the Assessment Year 2009-10 applying Section 45(4). A person can convey the land if only he is the owner and not otherwise, then how can one even in a worst scenario contemplate the triggering of Sec. 45(4) in both Assessment Years 2008-09 or 2009- 10. It well established law that an Assessee cannot be charged to tax on the same transactions twice over. In the premises, the overlapping of the additions under Sections 45(4) and Section 28 to the extent of Rs. 186,72,80,452/- plus Rs.15,51,99,120/- aggregating Rs. 202,24,79,572/- respectively on an identical and that very taxable event is, absolutely and totally untenable and unsustainable in law resulting in the transgression and gross contravention of the principle of double taxation, it does not He in the mouth of the Revenue to subject the same transaction to tax twice over. Furthermore, It is learnt that on the same transaction for the same A.Y. 2009-10, demand has also been raised on the Retiring Partners i.e. Vision Finstock Pvt. Ltd., Nisha Capital Services Pvt. Ltd. and Suraksha Developers Pvt. Ltd. by their respective Assessing Officers. Even on this count, the substantial question of law pertaining to double taxation arises, as to how the same income can be taxed in hands of more than one assessee and hence the aforementioned sum cannot be once more be exposed to tax and ought to be excluded from chargeability.

M/s. Fine Developers to attract capital gains tax what would be required would be as under : (1) transfer of capital asset by way of distribution of capital assets : (a) on account of dissolution of a firm ; (b) or other association of persons ; (c) or body of individuals ; (d) or other-wise ; the gains shall be chargeable to tax as the income of the firm, association or body of persons. The expression "otherwise" has to be read with the words "transfer of capital assets.... It is now clear that when the asset is transferred to a partner, that falls within the expression "otherwise" and the rights of the other partners in that asset of the partnership are extinguished." 5.3.3. From the above, it can safely be held that allocation of assets of the firm to the retiring partners is the basis for invocation of provisions of Section 45(4).In the case under consideration, neither there was any dissolution nor other event took place that had an effect of allocation of exclusive interest in any capital asset to the retiring partners. In these circumstances, FAA was justified in holding that conditions of Section 45(4) were not fulfilled. In our opinion the firm or the continuing partners were not liable to be taxed under the head 'capital gains', as held by the FAA. Retiring partners had relinquished their rights in the assets of the firm and in lieu of that firm had paid the retiring partners money lying in their capital account. Obviously, assessee-firm had not transferred any right in capital asset to the retiring partners rather it is the retiring partners who have transferred the rights in capital assets in favour of the continuing partners. So, even if capital gain has to be taxed it has to be in the hands of the retiring partners not in the case of the assessee-firm.

M/s. Fine Developers 17. Rival contentions have been heard and record perused.

M/s. Fine Developers 21. On 27/5/2008 i.e. AY 09-10 vide Deed of retirement and reconstitution Sapphire land developers (continued with 10% share) and HDIL (continued with 90% share). The retiring partners withdrew amounts standing to the credit of their accounts. During the year assessee had sold FSI and TDK for total of Rs 46,66,22,771/- obtained on conveyance dated 3/11/2008 between assessee, HDIL and SRA, i.e. surrender of land. For earlier AY 2008-2009, A.O. had applied S.45(4) on admission of HDIL as well as on retirement of partners in AY 09-10. The CIT(A) declined in favour of assessee. In an appeal filed by Department, the Hon'ble ITAT for AY 08-09 has held that S.45(4) would not be applicable, thus decided the issue in favour of assessee. The order of the Tribunal for the A.Y.2008-09 has already been reproduced hereinabove.

M/s. Fine Developers 29. In its order dated 12/10/2012, the Tribunal have dealt with each and every objection of the AO and with regard to applicability of provisions of Section 45(4) held as under:- "A bare perusal of Deed of Admission (dtd. 06. 07. 2007) and Retirement Deed (dtd.27.05.2008) prove that on both the occasions there was no distribution of assets of the assessee-firm. On 06.07.2007 HDIL was admitted as a new partner In our humble opinion admission of a new partner to the existing partnership-firm does not result in distribution of assets. Similarly, on 27th May. 2008: when three partners retired and remaining two partners continued the business of the firm; there was no redistribution of assets of the firm. After going through the above retirement deed we are of the opinion that it is not a case where firm was taken over by the new partner and thus provisions of section 45(4) of the Act can be invoked." "From the date of purchase of the plot from the BMCL till 27.05.2008, when three partners retired, it was the asset of the firm and there was no change in the ownership of the said plot." After considering the decision of Bombay High Court in A.N. Naik 265 ITR 346 considered by the AO, ITAT at Para 5.3.2 held "As stated earlier, in the present case, -there was no extinguishment of rights of any of the assets owned by the firm. In other words, continuing partners had not transferred any rights of the plot of the land in question in favour of the retiring partners and hence there was no transfer of capital asset within the meaning of section 2(47] by the firm to the retiring/continuing partners.”

, the issue of whether Kurla Land is Stock in trade or capital asset becomes academic. The Ld CIT(A) has given its findings at Para 4.2.2 Pg 19-20. We found that Kurla Land is stock in trade and Section 45(4) is not applicable as assessee had always shown the said land as stock in trade. Further Sale of TDR arising on account of surrender of said land was offered as business income and accepted as business Income.

37. For this purpose reliance can be placed on the following decisions:-  G. Venkataswamy Naidu & Co v CIT (1959) 35 ITR 594 (SC) (610)  Saathi Developers Pvt. Ltd., vs. ITO A.Y.2006-07 Dt. 15/06/2011 P.319 to 326

38. AO has made an addition of Rs.15,51,99,020/- taxed as business income accrued on transfer of land to SRA by treating land as stock in trade. The AO has dealt with the issue at para 15.5.2 at page 19 and CIT(A) has dealt with the issue at para 4.6 at page 77 of his appellate order. In its order, AO held that if Kurla land is treated as stock in trade than income of assesse on transfer of land is to be computed as under :- Market Value of Land as per valuation report(A) - Rs 268 crores Business income offered by Assessee(B) - Rs 46 crores M/s. Fine Developers A-B - Rs 221 crores Income taxed as capital Gains - Rs 206 crores Hence, Income taxed as business Income (balance) - Rs 15 crore 39. Before A.O. assessee had given detailed submission that M.V. of land as per valuation report is not FMV of land for Section 45(4). We found that Valuation report as on 1.4.2008 was on the basis of TDR rate of Rs 3,500/- whereas when land was surrendered to SRA, TDR rate was Rs 1,050/-. Assessee also gave valuation by substituting TDR rate prevailing in March 2009. TDR rate in march was supported by newspaper such as Times of India and DNA. Also TDR was sold at arms length price. However, A.O. in his order merely stated that sale of TDR was not at arms length without rebutting the submissions of assessee. 40. Assessee has filed detailed submission before the AO regarding market value of TDR. From the record we found that in original grounds it was the case of the revenue that there was transfer of land to HDIL. Now it is contended that taxable event is transfer of land to SRA. As per our considered view if taxable event is transfer of land to HDIL then no addition can be made as there is no transfer of Kurla land from assessee to HDIL as held by Hon'ble ITAT for earlier year ie., if S.45(4) does not apply as there is no transfer of land from assessee to HDIL then even business income does not accrue. 41. With respect to contention of transfer of land to SRA, we observe that there is no provision to substitute Notional market value for computing Business income.

M/s. Fine Developers 42. It is also a matter of record that books of accounts so maintained by assessee was not rejected by the AO. Furthermore provisions of Section 43CA is prospective in nature and applicable from AY 2014-15.For this purpose reliance may be placed on Neelkamal Realtors & Erectors India (P.) Ltd. v DCIT [2013] 145 ITD 217 (Mumbai - Trib.) affirmed GIT vs. Neelkamal Realtros & Erectors India P. Ltd. (2017) 246 taxmann.com 274 (Bom.)(HC) P. 314 to 318.