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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI N.K. PRADHAN, AM (A.Y:2004-05) Mrs. Kaushalya R. Sampat Income Tax Officer, Flat No.1A, Hill Top Society, 9(3)(2),Piramal Chambers, Pali Hill Road, Bandra(W) Vs. Lalbaug,Mumbai-400012 Mumbai-400050 PAN No.AAQPS06609F Appellant .. Respondent Assessee by .. Shri. K.Gopal, AR Revenue by .. Shri. M.V. Rajguru, DR Date of hearing .. 05-01-2017 Date of pronouncement .. 05-01-2017 O R D E R PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the order of CIT (A)-30, Mumbai, in appeal No. CIT(A)-30/ITO-19(3)(2)/IT-314/11-12 dated 19-02-2013. The Assessment was framed by ITO Ward-19(3)(2), Mumbai for the A.Y. 2004-05 vide order dated 01-12-2011 u/s 144 r. w. s. 147 of the Income Tax Act, 1961 (hereinafter ‘the Act’).
At the outset, the learned Counsel for the assessee stated that he has not interested in prosecuting the ground No.1, regarding ex-parte assessment u/s 144 of the Act and another addition of Rs. 5,00,000/- added u/s 68 of the Act vide ground no. 2. Following are ground Nos. 1 &2: - “1. On the facts and in the circumstance of the case and in law, the learned CIT(A) has erred in upholding the assessment order passed u/s 144 of the I.T. Act, which is invalid and bad in law.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the addition of Rs.5,00,000/- as income from undisclosed source u/s 68 of the I.T. Act.”
The learned Counsel for the assessee made endorsement on the grounds of appeal
that he has not interested in prosecuting this matter and hence, the same are dismissed as not pressed.
4. The only serving issue in this appeal of assessee against the order of CIT(A) confirming the addition of funds received by assessee from firm M/s Deccan Enterprises at the time of retirement amounting to Rs.36,42,860/-. For this assessee has raised three grounds: - “3. On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in upholding alleged addition of Rs.36,42,860/- received from Deccan Enterprise at the time of retirement from the said firm.
4. On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in not accepting the alternative submission (without prejudice) to treat the alleged addition of Rs.36,42,860/- received at the time of retirement as the income of the firm.
5. On the facts and in the circumstances of the case and in law , the learned CIT(A) has erred in not accepting the alternative submission (without prejudice ) to not to make addition u/s 68 as assessee has not maintained books of accounts..”
5. Briefly stated facts are that the assessee is partner in the firm M/s Deccan Enterprises and a survey was conducted by the department u/s 133A of the Act on 12-09- 2007. During the course of the survey certain incriminating documents and loos papers pertaining to the assessee was found from the premises of the firm. During the course of survey proceedings, the department found that the assessee partner has received a sum of Rs. 36,42,860/- being transferred / relinquishment of right by the assessee in the firm M/s Deccan Enterprises, Bangalore, but has not offered the sum to tax. The AO recorded this fact in Para 4 as under: - “4. Copies of impounded documents pertaining to the assessee were received from the JTO-19(3)(r), Mumbai. On perusal of retirement deed executed by the assessee in Feb2004 following Acts came to light. –
i. The assessee Mrs. Kaushalya Sampat and her family members namely Shri. Rajesh Sampat and Ms. Rashmi Sampat were partners in firm M/s Deccan Enterprises, No.52, MG Road, Bangalore-560001. ii. Vide above stated retirement deed the assessee and his family members relinquish their share and interest in the partnership firm and the property of the firm in favor of the continuing partners. iii. In lieu of the above transfer, consideration to the tune of Rs.36,42,860/- was received by Shri. Kaushalya Sampat which is as under:-
” According to AO, this income was not disclosed and hence, he reopened the assessment by issuing notice u/s 148 of the Act, for the reason that there is a escapement of income qua this receipt and finally he added the same to the return of income of the assessee by observing in Para 7.2 as under: - “In regard to receipt of Rs. 36,42,860/- as discussed in Para 4 and 4.5 above, the assessee has not declared the investment made in the firm Deccan Enterprises at Bangalore at any time when the investment was made. The assessee has also not declared the transaction and the income derived by her in the return of income field on 31-10-2004. In view of the discussions made above and that the assessee has not submitted any details, the total receipts of Rs. 36,42,860/- is treated as income from undisclosed sources u/s 68 of the IT Act and added to the total income of the assessee.
Aggrieved assessee preferred appeal before CIT(A), who also confirmed the action of the AO, but CIT(A) hold that this amount received is in the nature of goodwill and is liable to be taxed as such.
For this he observed in Para 6.2 as under: - “6.2 I have perused the facts of the case. I find that the amount has been received by the appellant consequent to her retirement form partnership. Admittedly, there were assets in the partnership and in immovable property, the share of which to appellant had not been received. In such a situation, it is obvious that the amount received is in the nature of goodwill which s liable to be taxed as income of the appellant. The addition made by the A.O. is therefore upheld although invocation of Se.68 of the present facts is not justified.”
Aggrieved, now assessee is in second appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee along with her other family members Shri Rajesh Sampath and Miss Rashmi Sampath were partners in the firm M/s Deccan Enterprises Bangalore and vide retirement deed dated 20-02-2004, the assessee retired and received the above payments along with Shri Rajesh and Sampath Rashmi. These parties acknowledge the receipt payment in full settlement of their shares and agree that the remaining parties will carry on the business of partnership and property of the firm vide clause 5 and 6 which reads as under: - “5. That in pursuance of the agreement and in consideration stated above, the retiring partners does hereby assign and release unto the continuing partners parties in the partnership business and the property of the firm, to hold the same unto the continuing partners absolutely in proposition to the payments made by the continuing partners.
6. That the continuing partners shall be at liberty to collect all the assets of the partnership and to demand, sue for, recover, receive and give full and effectual receipts and discharge for all debts and effects of or due or owing or belonging to the partnership business and to compound for or release any debts or claims belonging thereto and to institute any actions or other proceedings for compelling payments or delivery thereof and for the purpose aforesaid or any of them to use the name of the retiring partner for identifying him/her against all costs and liability incurred by such use.”
In view of the above, we are of the view that this is a clear cut case of assessee receiving a sum of money on retirement from the firm. Whether, such sum receipt on retirement is taxable or not is answered by Hon’ble Bombay High Court in the case of CIT Vs. Riyaz A. Sheikh (2014) 41 taxman.com 455 (Bom), wherein considering the judgment of Hon’ble Bombay High Court in the case of Prashant S. Joshi v. ITO (2010) 324 ITR 154 (Bom) has held as under:- “3. In the impugned order, the Tribunal does refer to the decision of this Court in the matter of N.A. Mody (supra) and states that it follows the decision of this Court in the matter of CIT V/s. Tribhuvandas G. Patel reported in 115 ITR 95 and the same has been reversed by the Apex Court in Tribhuvandas G. Patel V/s. CIT reported in 263 ITR 515. This Court in the matter of Prashant S. Joshi (supra) has also referred to the decision of Tribuvandas G. Patel (supra) rendered by this Court and its reversal by the Apex Court. Moreover, the decision of this Court in the case of Prashant S. Joshi (supra) placed reliance upon the decision of the Supreme Court in the case of CIT V/s. R. Lingamallu Rajkumar reported in [2001] 247 ITR 801, wherein it has been held that amounts received on retirement by a parnter is not subject to capital gains tax. In the above circumstances, we see no reason to entertain the proposed question of law.”
Further, the reliance placed by the learned Counsel for the assessee on judgment of Hon’ble Bombay High Court in the case of Prashant S. Joshi (supra), Hon’ble Bombay High Court held has under: - “13. During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On a dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does not Page 5 of 8 involve an element of transfer within the meaning of Section 2(47). Chief Justice P.N. Bhagwati (as the learned Judge then was) speaking for a Division Bench of the Gujarat High Court in Commissioner of Income Tax, Gujarat V/s. Mohanbhai Pamabhai3 dealt with the issue in the following observations :-
When, therefore, 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 on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners : vide also the recent decision of the Supreme Court in Commissioner of Income-tax v. Bankey Lal Vaidya. It is true that section 2(47) defines "transfer" in 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 share 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 (Page No.405) :-
"... 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 Page 6 of 8 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 High Court was dismissed by a Bench of three learned Judges of the Supreme Court in Addl. Commissioner of Income Tax, Gujarat V/s. Mohanbhai Pamabhai4. The Supreme Court relied upon its judgment in Sunil Siddharthbhai v. Commissioner of Income Tax, (1985) 156 ITR 509 (S.C.). The Supreme Court reiterated the same principle by relying upon the judgment in Addanki Narayanappa & Anr. V/s. Bhaskara Krishnappa & Ors. [(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 4 165 ITR 166 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 (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 Commissioner of Income-Tax V/s. R. Lingmallu Raghukumar5, 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, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners.
Admittedly, in the present case the assessee has not taken any property while relinquishing her share in the partnership firm rather she has taken equllant amount on retirement. The assets and firm is retained by the surviving partners. In such situation, respectfully following the judgment in the case of Prashant S. Joshi (supra) and Riyaz A. Sheikh (supra), we hold that the retirement funds received are not subject to tax and not in Page 7 of 8 the nature of goodwill also. Accordingly, we reverse the orders of the lower authorities and allow the appeal of the assessee.
In the result, the appeal of assessee is allowed. Order pronounced in the open court on 05-01-2017.