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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI ASHWANI TANEJA
आदेश ORDER �ी अिमत शु�ला, �याियक सद�य PER AMIT SHUKLA, J.M.:
The aforesaid cross appeals and cross objections have been filed by the assessee as well as by the revenue against impugned order dated 09.07.2012, passed by Ld. CIT
2 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 (Appeals)-29, Mumbai for the quantum of assessment passed under section 143(3) r.w.s. 147 for the assessment year 2006- 07.
In the assessee’s appeal, following grounds have been raised:- That the learned CIT (A) under the facts and circumstances of the case and in law has:- “Reopening of assessment under section 147 of the Act 1 . erred in upholding the reopening of assessment under section 147 of the Act, without appreciating that reassessment order is bad in law and should have been quashed;
Computation of capital gain under section 45(4) of the Act
2 . erred in confirming the Long Term Capital Gain (‘LTCG’) on retirement of partner from the Appellant firm to the extent of Rs.2,56,41,418/- as against no liability towards capital gain as per the Appellant;
Applicability of section 45(4) of the Act
3 . erred in upholding the provisions of section 45(4) of the Act, in the hands of the Appellant firm, without appreciating the facts of the case;
4 . should have appreciated that conditions of section 45(4) of the Act with regard to the distribution of capital assets on dissolution or otherwise’ was not satisfied and in the absence of any distribution of capital assets, the impugned transaction is not chargeable to tax in the hands of Appellant firm;
5 . failed to appreciated that section 45(4) of the Act cannot be applied to retirement of partner, where amount due to retiring partner has been paid towards its share in the firm and hence the income cannot be charged to tax in the hands of the Appellant firm;
Double taxation of the same income
3 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 6 . erred in upholding the action of the AO in taxing the capital gain in the hands of the Appellant firm, without appreciating that the capital gain on account of retirement was assessed to tax in the hands of retiring partner;
7 . should have appreciated that if excess amount received by the retiring partner is taxable in the hands of concerned partner, same cannot be taxed in the hands of the firm, otherwise it would amount to double taxation;
Interest under Section 234A and 234B of the Act
8 . erred in levying interest under Section 234A of the Act, while computing the tax payable for the year;
9 . erred in levying interest under section 234B of the Act while computing the tax payable for the year;
10 . Without prejudice the above, on the fact of the case, interest under section 234A and 234B cannot be levy simultaneously”.
The revenue has taken following ground in its grounds of appeal:- “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the total consideration on account of transfer of rights in partnership assets as Rs.33,52,47,975/- as against Rs.55,52,02,720/- as computed by the Assessing Officer by considering only cash received during the particular financial year without taking into account the value of construed area of 35,495 sq.ft. allotted to the retiring partner.
On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the entire cost of land is allowable as cost of acquisition against the partial sale consideration received for the purpose of section 45(4) of the Act.
For these and other reasons it is submitted that the order of the CIT(A) may be set-aside and that of the AO restored.
The appellant craves leave to amend or later any ground or add a new ground which may be necessary”.
Besides aforesaid grounds, revenue has also taken following as additional grounds:- “Without prejudice to the main ground already raised the addition of Rs.55,52,02,720/- made on account of distribution
4 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 of transfer of constructed area or flats to the retiring partner should be considered as the sale or turnover of the assessee firm and assessed as its business income, if not considered under section 45(4) of the I.T. Act, 1961”.
In the Cross objection, the assessee has taken following objections in its grounds of ‘Cross Objection’:- On the facts and in the circumstances of the case the learned AO has:
Full Value of Consideration 1. erred in objecting the order of the CIT(A) on the ground that full value of consideration should be taken as 55,52,02,720/-, as against Rs. 33,52,47,975/- taken by Hon'ble CIT(A), without appreciating that the difference in consideration was due to constructed area to be given in AY 2009-10 (i.e. area of 35,495 sq. ft.), was held to be chargeable to tax in AY 2009- to by Hon'ble CIT(A) and the AO has already assessed the impugned sum in that year on substantive basis, and thereby suggesting double taxation;
Cost of acquisition 2. erred in objecting the order of CIT(A) on the ground that entire cost of land should not be allowed during the year under appeal, without appreciating that, as per scheme of the Income Tax Act, while computing capital gain, entire cost has to be allowed in the year of transfer itself; Without prejudice to the ground no 2, 3. the corresponding proportionate cost of land, along with indexation should be allowed, in AY 2009-10, wherein the partial consideration is brought to tax”. 5. We will first take up the assessee’s appeal wherein core issue of chargeability of capital gains u/s 45(4) has been raised which will have the implication on the grounds raised in department’s appeal as well as the cross objections. Brief background and facts qua the issue of chargeability of “capital gains” are that, the assessee is a Partnership firm engaged in the business of construction of housing and commercial projects in Mumbai. The said Partnership firm
5 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 was constituted on 13th March, 1997; vide ‘Partnership Deed’, which was constituted by two Partners, viz; M/s Bharat Barrel Drum Mfg. Co. Ltd.; and M/s Urmi Real Estate Pvt. Ltd. M/s Bharat Barrel Drum Mfg. Co. Ltd. contributed land admeasuring 15,663 sq. yards valued at Rs.19 crores in the Partnership firm whereas M/s Urmi Real Estate Pvt. Ltd decided to contribute funds and its expertise in the field of construction for the development of the land. Subsequently, two new partners, namely, Shri Vinod Tejraj Gowani and Shri Hitesh Tejraj Gowani were admitted in the firm on 30th June, 1997. Even after the admission of the new partners, the profit ratio of M/s Bharat Barrel Drum Mfg. Co. Ltd remained the same, that is, at 50%. Since the construction of the project was ongoing during the FY 2005-06, therefore, no income accrued to the assessee from the construction business during the year ending 31st March, 2006. Later, on 30th April, 2005, vide ‘Dissolution Deed’, M/s Bharat Barrel Drum Mfg. Co. Ltd., one of the partners in the firm, retired from the firm on the following terms:
a) Rs.10 Crores to be paid against the amount of credit standing in the name of the Partner over and above sum of Rs.6.3 crores already withdrawn from the capital account;
b) Constructed area of 76,752 sq. ft. to be allotted out of stock-in-trade of the firm;
c) The firm had the right to purchase the 41,257 sq. feet of the above mentioned area on or before 30th January, 2006;
d) The firm exercised its right and purchased the area from the retiring partner for sum of Rs.17,22,47,975/- during the year under consideration; and
6 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015
e) Balance area of 36,495 sq. feet was to be allotted to the retiring partner on the completion of the construction.
As stated above, since the project was under construction and no taxable income had accrued to the assessee firm, therefore, it did not filed any return of income for the assessment year 2006-07. The return of income was filed for the first time for the assessment years 2007-08, 2008-09 and 2009-10, all on one date, that is, on 03.12.2009. So far as the returns for the assessment years 2007-08 and 2008-09 are concerned, the Assessing Officer observed that the same were filed beyond the time limit prescribed under section 139(1). However from the note appearing in the Balance Sheet as on 31st March, 2007, filed along with the return of income for AY 2007-08, the AO found out that, one of the partner, M/s Bharat Barrel Drum Mfg. Co. Ltd has retired from the partnership firm, vide Deed of Agreement dated 30.05.2005 and as per the said Deed, the retiring partner was eligible for an amount of Rs.33,57,22,975/- and constructed area of 35,495 Sq. ft. @ Rs.5110/- per sq ft out of the building which was under construction in the plot. Since the return of income for the assessment year 2006-07 had not been filed by the assessee, he proposed to tax the assessee-firm under section 45(4) and accordingly, proceeded to reopen the case under section 147 by issuance of notice under section 148, dated 21st January, 2011 on the following “reasons recorded”:- “Assessee, M/s. Keshav & Co. came into existence on 13.03.1997 with two partner namely, (1) M/s. Bharat Barrel and Drum Manufacturing Co. Pvt. Ltd and (2) M/s. Urmi Real Estates Pvt. Ltd., both having equal profit and loss ratio, to develop a land situated at
7 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 95 Fergusson Road, Lower Parel, Mumbai. The first company/partner brought the piece of land admeasuring 25663 sq. yard and second partner contributed Rs. 5 lacs as initial contribution and the second partner agreed to bear all cost/expenses for developing the land from its source of fund. The assessee M/s. Keshav & Co. filed its return of income for A. Y. 2003-04 with ITO18 (2)-3, Mumbai on 28.3.2005 declaring Nil income and showing work-in-progress at Rs. 7,69,4021-. The record shows that no substantial development of the land was started before the date of retirement of first partner. The first partner i.e. M/s. Bharat Barrel and Drum Manufacturing Co. Pvt. Ltd. relinquished its right in the said land vide deed of retirement dated 30.04.2005 for a consideration of Rs. 16,30,00,0001- and constructed area of 76752 sq. ft. in the property to be developed by the firm on the said land. Further, the retirement deed specified that the continuing partner had right to purchase 41257 sq. ft. out of 76752 sq. ft. from the retiring partner. As per the return of the firm filed for A. Y. 2007- 08, which is beyond time prescribed in the Income tax Act, an amount of Rs. 33,57,22,9751- and 35495 sq. ft. area valued at Rs. 18,13,79,450/- has been determined as consideration for the retiring partner. It means the retiring partner was eligible for a total consideration of Rs. 51,71,02,425/- as its share in the assets of the firm. Provision of sec. 45(4) reads as under:-
"The profits or gain arising from the transfer of a capital asset by way of distribution of capital asset on the dissolution of a firm or other association of persons or body of individuals (not being a company or a company or a co- operative society) or otherwise shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purpose of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of the transfer"
A plain reading of the above provision makes it clear that the firm is chargeable to tax on the consideration received or accruing to the retiring partner as a result of transfer of asset/relinquishing of right in the assets. As per sec. 2(47)(ii) of the I T Act, transfer in relation to
8 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 capital assets include extinguishment of any right therein. In the instant case, the retiring partner' has relinquished its right in the land of the firm and has received consideration in relinquishing such right. So, for the purpose of I T Act, it is a transfer and provisions of capital gain is attracted and the firm is liable to pay tax on profit or gain arising from the transfer or right in the land by the retiring partner.
On verification of the record, it is seen that no return of income has been filed by the assessee for F. Y. 2005-06 relevant to A. Y 2006- 07 even though there was net gain of Rs. 32,71,02,4251- [Rs. 51,71,02,425 - 19,00,00,000 (book value of land) in the partnership firm)].
In view of the above, / have reason to believe that income chargeable to tax on transfer of right in the said property by retiring partner to the extent of Rs. 32,71,02,4251- has escaped assessment for A. Y. 2006-07 within the meaning of Section 147 of the Act. Issued notice u/s 148 of the Act.”
The assessee objected to the initiation of reopening the case under section 147 r.w.s. 148 mainly on the ground that, firstly, any taxability of capital gains if at all would arise in the hands of the partner; and secondly, section 45(4) cannot be invoked as there is no distribution of the capital asset and also there was no dissolution of the firm as the assessee firm is still continuing. However, the said objection was rejected by the Assessing Officer vide separate letter dated 11.11.2011. On merits, the submissions of the assessee before the Assessing Officer were mainly as under: (i) There should be a specific provision in the Act to tax capital gain;
9 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 (ii) There is no transfer and if at all it is a transfer of right, title, and interest in the firm by retiring partner and the same cannot be charged tax in the hands of the firm; (iii) The following conditions should be satisfied to invoke section 45(4):- Transfer of capital asset; Transfer should be by way of distribution of capital asset; Transfer by way of distribution should be on dissolution of the firm or otherwise; (iv) In support of its contention, the assessee relied upon various judicial decision of the ITAT and also relied upon the following High Court decisions:- CIT vs. Vijayalaxmi Metal 256 ITR 540 (Mad); CIT vs. Kunnamkulam Mill Board 257 ITR 544 (Kar.); CIT vs. Manglore Ganesh Beed Works 285 ITR 659 (Kar); (v) The assessee finally submitted that charging of such income in the hands of partnership would lead to absurd result as the same income has already been taxed in the hands of partner and the same will lead to double taxation of the same income. In support of this contention, the assessee relied upon the decision of Hon. Mumbai ITAT in the case of Sudhakar Shetty 130 ITD 197.
The Ld. Assessing Officer after analyzing the provision of section 45(4) and the decision of the Hon’ble jurisdictional High Court in the case of CIT vs. A. N. Naik Associates, reported in [2004] 187 CTR 162, held that, firstly, the transaction carried out by the assessee firm has resulted into ‘transfer’ within the meaning and scope of section 2(47), in the sense that the retiring partner has assigned, released and relinquished its interest and share in the partnership and its
10 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 assets, which in this case is the land, in favour of the continuing partners and this is to reckoned as ‘property’ constituting a capital asset within the meaning of section 2(14) of the Act; and secondly, in any case section 45(4) itself is a charging provision and is a complete code in itself and therefore, section 2(47) and 2(14) need not be looked into the decide whether the transactions amount to transfer or not. He further observed that as regards the assessee’s claim that there was lump sum payment to retiring partner at the time of retirement is not factually correct, because the retiring partner got lump sum payment in form of money of Rs.16.3 crores as well as rights of 76,752 sq. ft of constructed area in the coming projects to be developed by the assessee firm on the land, which was brought by the retiring partner at the time of formation of the firm as his share of capital contribution. Therefore, there is a distribution of capital asset in the instant case in as much as the retiring partner who had brought the land as his capital contribution has relinquished his right in the said firm as well as firm's assets and in lieu thereof, he has been given right of 76,752 sq. ft in constructed area. Further, there was an option in the ‘Retirement Deed’ for the continuing partners to acquire 41,257 sq. ft from the retiring partner out of 76,752 sq. ft allotted to him. It is seen from the record that the assessee firm exercised this option in consideration of Rs.33,57,22,975/-. Further, the right of the retiring partner in remaining areas, i.e. 35,395 sq. ft. was exchanged with fully constructed area of 22500 sq.ft of Apsara Cinema Pvt. Ltd and the assessee replaced its liability towards retiring partner to Apsara Cinema Pvt. Ltd in the books of account for F.Y. 2008-09. The above act on the part of the assessee also
11 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 proves beyond doubt that there was a distribution of capital assets at the time of retirement of the partner viz. M/s. Bharat Barrel & Drum Mfg. Co. Pvt. Ltd, which was later on partly acquired by the firm itself and the remaining area was transferred in lieu of specific constructed areas in the project of M/s. Apsara Cinema Pvt. Ltd. Thereafter, referring to the various decisions, including Bombay High Court in the case of A.N. Naik Associates, he observed that the expression “otherwise” appearing in sub-section (4) of section 45 will take into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of the retiring partner. Accordingly, he calculated the value of consideration received by the retiring partner and also the taxable capital gain in the following manner:- “As per the Deed of Retirement dated 30.04.2005 attached with the return of income filed in response to notice under section 148 of the Act, the retiring partner i.e. M/s. Bharat Barrel & Drum Mfg. Co. Pvt. Ltd. was entitled for Rs.16.30 crores in money and 76752 sq. ft. constructed area in the property to be developed by the assessee firm in lieu of relinquishment/transfer of rights in the assets/share of the firm. On verification of the record, it is also found that the retiring partner introduced the land at Rs.19,00,00,000/- on 13.03.1997 and the same was credited to its Capital A/c as capital contribution in the firm. Thereafter, the retiring partner withdrew an amount of Rs.6,34,16,412/- from the outstanding capital balance till 30.04.2005. Thereafter, the capital contribution of the retiring partner remains with the firm at Rs.12,65,83,588/-” only as on the date of retirement. So, the cost o sale consideration received on retirement from the firm by the retiring partner is Rs.12,65,83,588/- only. It is seen from the notes below Balance Sheet as on 31.03.2007
12 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 filed along with the return of income for AY 2007-08 that the assessee has adopted the market value of the asset @ 5110/- per sq. ft. as per Ready Reckoner-2005. So, the total value of the consideration received by the retiring partner is calculated as under:- (Rs.) 75,752 sq.ft. @ Rs.5110/-: 39,22,02,720 (being fair market value of consideration Of area allotted to Retiring partner) Consideration by way of money 16,30,00,000 55,52,02,720
The Long term capital gain chargeable to tax is computed as under:-
Full value consideration received on account Of transfer of rights in Partnership assets as worked out above: 55,52,02,720/-
Less: Cost of acquisition as computed above: 12,65,83,588/- NET CAPITAL GAIN : 42,86,19,132/-
In the first appeal, the details submissions were made by the assessee which has been dealt and incorporated by the Ld. CIT(A) from pages 10 to 17 of the Appellate order. On the said written submissions, remand report was also called for which has been incorporated from pages 17 to 18 of the appellate order.
After considering the finding of the Assessing Officer, as well as submission made by the assessee, the Ld. CIT(A) gave part relief to the assessee, which can be summarized in the following manner: The money paid for Rs.33.52 Crores is nothing but money equivalent to the capital asset given to the retiring partner and accordingly, confirmed the AO’s addition made under section 45(4) of the Act;
13 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 He considered the full value of consideration of Rs.33.52 Crores for the purpose of taxing the capital gain which comprised of Rs.16.3 Crores as cash payment and balance Rs.17.22 Crores paid in cash in lieu of 41,257 sq. ft of the constructed area; He further observed that, since, section 45(4) speaks about the distribution of the capital assets, therefore, he gave direction to the AO that balance amount should be taxed in the year of actual transfer of constructed area of 35,495 sq.ft. which was in the AY 2009-10; The ld. CIT(A) also computed the cost of acquisition at Rs.30.96 Crores and after giving benefit of indexation (from FY 1996-97 to FY 2005-06) of Rs.19 Crores, he finally computed the long term capital gains chargeable to tax in the AY 2006-07 at Rs.2,56,41,418 (Rs.33,52,47,975 – Rs.30,96,06,557) and for balance amount for the constructed area to be allotted at the time of completion (which was in the AY 2009-10) he directed to be added in the AY 2009-10.
Before us, the Ld. Counsel Mr. Rajan Vohra submitted that, in view of the ‘Retirement Deed’ of 30th April, 2005, the retiring partner was entitled for Rs.16.30 crores in money and 76,751 sq.ft of the constructed area in the property to be developed by the assessee firm in lieu of all the rights, title, and interest in the assessee-firm. There was no transfer of any capital asset of the assessee firm but consideration to be paid to the retiring partner and, therefore, the provision of section 45(4) cannot be invoked in the hands of the assessee firm. Here, the retirement of the partner has not lead to any
14 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 dissolution of the firm as the firm is continuing its business on “as is where is” basis with the remaining partners. On the retirement of the partner, the firm has paid the compensation in lieu of its rights in the firm. There is no distribution of any capital asset on the dissolution of the firm and hence, it cannot be taxed under section 45(4). In support of his contention, he strongly relied upon the decision of ITAT Mumbai Bench in the case of Electroplast Engineers vs. ACIT, reported in (2015) 45 CCH 189 which in turn is based on the principle laid down in the decision of the Full Bench of the Hon’ble Karnataka High Court in the case of CIT v Dynamic Enterprises, reported in 359 ITR 93. Besides this, he also relied upon following decisions, viz., Delhi Industries & Enterprises (60 SOT 212) (Del Trib); M/s. Karnataka Agro Chemicals (ITA no.594 of 2013, dated 23 June 2014) Karnataka High Court; Arbuda Estate Corporation (ITA No.354/Ahd/2003) dated 20th November, 2009; M/s Vaibhav Industries (ITA No.3052/Mum/2014) dated 16 March, 2016.
Thus, he submitted that in view of the aforesaid decisions and also looking to the fact that there is absence of transfer of any capital asset as well as any distribution of asset on the dissolution of the firm or otherwise, therefore, section 45(4) cannot be invoked and hence, there cannot be any taxability in the hands of the assessee-firm.
Mr. Vohra further submitted that, what was given to the retiring partner was nothing but cash and certain portion of stock-in-trade and that too was finalized in terms of cash. Giving of stock-in-trade cannot be reckoned as ‘capital asset’ under section 2(14). Thus, there is no transfer of capital asset
15 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 albeit it is a transfer of stock-in-trade. Lastly, he submitted that the assessee had transferred 35,495 sq. feet of fully constructed area to Bharat Barrel & Drum Mfg. Pvt. Ltd in lieu of the outstanding liability as per the retirement deed entered in AY 2006-07. The entire amount was held to be taxable by the Assessing Officer in the AY 2006-07; however, the Ld CIT (A) has held that, since there was no distribution to the extent of balance area of 35,495 sq. feet (of stock-in- trade) therefore, same should be taxable in the year of actual distribution that is, when it was actually transferred in AY 2009-10. In fact the Assessing Officer on the direction of the Ld. CIT (A)) regarding rest of the construed area which has been transferred /distributed (as per the agreement to the retiring partner) has made the addition of Rs.18.13 Crores to the total income of the assessee in the AY 2009-10 under section 45(4) and taxed the same by reopening the assessment u/s 147. Aggrieved by the said assessment order of the Assessing Officer, the assessee is in appeal before the CIT(A) on the ground that:- a) There is no distribution of capital asset on retirement of partner from the firm in the AY 2009-10; b) In any case, firm was only to give stock in trade, merely because it was exchanged for some other asset (having same character of stock in trade i.e. constructed area in some other premises) as construction on plot was not progressing well, it cannot be brought to tax under section 45(4) of the Act. The appeal is still pending before the CIT (A) for disposal.
On the other hand, Ld. DR submitted that, what has been transferred is the right in the partnership firm and such
16 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 a surrender of right tantamount to transfer of ‘capital asset’. This is evident from copy of retirement Deed, (the copy of which is appearing at page 47 to 81 of the PB) and our specific attention was drawn to para 4 clause ‘b’ wherein, it has been stated that “the retiring partner shall receive the amount as mentioned herein, in lieu of and in full satisfaction, that is, 50% share in the partnership firm and assets thereof”. Section 2(14) defines that, ‘capital asset’ is property of any kind and it contains “bundle of rights” and, therefore, such a transfer of rights amounts to transfer of capital asset and hence chargeable to tax under the head “capital gains”. Since the transfer has taken place in this year, therefore, the same has to be taxed in this year only. In support, he relied upon the following decisions:- Sr. Citation Case laws No. 1 Girish Textiles 10 SOT 474(Mum Trib) 2 Mangalore Ganesh Beedi 265 ITR 685 (Kar HC) Works 3 Dehi Industries & 60 SOT 212 (Del Trib) Enterprisess 4 Arbuda Estate Corporation ITA 3052/M/2014 dated 20.11.2009 5 M/s Vaibhav Industries ITA 3052 of 2014 dated 16.03.2016
Even otherwise also, he submitted that it is a case of amount distributed to the partner in lieu of capital asset and hence the same would be taxable under section 45(4). He also strongly emphasized on the word “otherwise” which will cover such cases where there is no dissolution. In support of his contention, he strongly relied upon the order of the Assessing Officer as well as CIT (A). As an alternative plea, he submitted that it should be taken as sales turnover and taxed as
17 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 business income of the assessee in this year, as raised in additional ground by the department.
We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material relied upon before us. Succinctly put, the relevant facts which have a bearing on the impugned issue of taxability of capital gain in the hands of the assessee firm are that, the assessee is a partnership firm constituted on 13th March, 1997 by two partners namely, M/s Bharat Barrel Drum Mfg. Co. Ltd. and M/s Urmi Real Estate Pvt. Ltd. The former had contributed to the Partnership, land admeasuring 15,663 sq. yards which was then valued at Rs.19 crores and the later had decided to contribute funds and its expertise in the field of construction towards development of the land. Immediately, thereafter, on 30th June, 1997, two new partners were admitted, viz., Shri Vinod Tejraj Gowani and Shri Hitesh Tejraj Gowani. All the four partners continued until 30th April, 2005. By Deed of Retirement of same date, one of the partner, M/s Bharat Barrel Drum Mfg. Co. Ltd. who held 50% share as a partner, retired from the firm on the terms as mentioned above which though again for the sake of reference, is reproduced hereunder:- a) Rs.10 Crores to be paid against the amount of credit standing in the name of the Partner over and above sum of Rs.6.3 crores already withdrawn from the capital account; b) Constructed area of 76,752 sq. ft. to be allotted out of stock-in-trade of the firm;
18 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 c) The firm had the right to purchase the 41,257 sq. feet of the above mentioned area on or before 30th January, 2006; d) The firm exercised its right and purchased the area from the retiring partner for sum of Rs.17,22,47,975/- during the year under consideration; and e) Balance area of 36,495 sq. feet was to be allotted on the completion of the construction. After the retirement, the firm continued its business on “as is where is” basis with the remaining three partners. The case of the Department is that, firstly¸ there is a transfer within the meaning of section 2(47) as the retiring partner has assigned its rights and relinquished its interest and share in the favour of the partnership firm along with its assets which in this case is the land in favour of the continuing partners and this transfer of the right is to reckoned and construed as “capital assets” within the meaning of section 2(14); and secondly, it is chargeable to capital gains in the hands of the assessee- firm under section 45(4). The Ld. CIT(A) has held that amount of money to the extent of Rs.33.52 Crores is nothing but a capital asset going to the retiring partner and, therefore, the same is taxable under section 45(4). The said sum comprised of Rs.16.3 Crores paid in cash and Rs.17.22 Crores paid in lieu of 41,257 Sq. feet of the constructed area. He thus directed that, the actual transfer of constructed area of 32,495 sq. ft was transferred in AY 2009-10 and same should be taxed in that year and the balance was directed to be taxed in this year. He computed the cost of acquisition at Rs.30.96 Crores (after indexation on cost of sum of Rs.19 Crores) and had finally Long-term-capital-gains chargeable to
19 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 tax in AY 2006-07 was arrived at Rs.2.56 Crores (Rs.33.52 Crores – Rs.30.96 Crores).
The main issue here is, whether there is any transfer of a capital asset within the deeming provision of sub-section (4) of section 45, which reads as under:- “The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer”.
Thus the condition precedents for invoking the said provision are:- (i) There should be a distribution of capital assets of a firm;
(ii) Such distribution should result in transfer of a capital asset by the firm in favour of the partner;
(iii) On account of the transfer there should be a profit or gain derived by the firm;
(iv) Such distribution should be on dissolution of the firm or otherwise.
Hence the basic condition for invoking the provision of section 45(4) is that, gain should be on transfer of a capital asset by way of distribution of capital asset on the dissolution of firm. Here, in this case, admittedly there is no dissolution of the
20 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 firm as the assessee-firm is continuing its business on “as is where is” basis with the remaining three partners. What the firm has paid is the compensation to the retiring partner for all its rights in the partnership firm and there is no transfer of any right/s in assets or property of the partnership firm. In actual there is no transfer of any capital asset of the assessee firm to its partner in this year, albeit money has been given to the retiring partner in lieu of transfer of partners’ right, title and interest in the partnership firm and not for any asset or property of the firm. Even where the partner has contributed a land at the time of constitution of the firm, then regardless of the character of property brought, such property becomes the property of the firm which inter-alia implies that the partnership property would vest in all the partners of the firm and the individual partner ceases with his individual rights in the property and he is only entitled to his share of profits, if any, accruing to the partnership firm from the exploitation or realization of such property and in case of dissolution of the partnership firm, to a share in the money representing the value of the property. If the payment has been made to the partner for relinquishing of all his rights in the assessee-firm and not in the property of the partnership firm, then capital gains cannot be taxed in the hands of the assessee-firm, because, when a partner retires, he does not transfer any right in the immovable property or asset in favour of the surviving partner as he himself has no right with respect to the properties of the partnership firm. In the cases of partnership firm where there is distribution of the assets the capital gain can only be charged under the deeming provision of section 45(4) for which the basic condition precedent is that the distribution of the capital asset should be on the
21 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 dissolution of the firm and otherwise. If in the course of such distribution of capital asset there is transfer of a capital asset by the firm in favour of the partner and it results in profits or gains to the firm, then such profits or gains are chargeable to tax as capital gain of the firm. In other words, in the process of dissolution of a firm, if capital asset is transferred to a partner which results in gains then that income is taxable in the hands of the firm under this sub-section 4. Thus, to attract Section 45(4) there should be transfer of capital asset from the firm to the retiring partner by which the firm ceases to have any right in the property which is so transferred. The words “otherwise” will also not obliterate this position, which we will deal hereinafter.
The department has immensely harped upon the words “or otherwise” appearing in the section 45(4) to canvass that it will cover the case where there is no dissolution and in support strong reliance has been placed on the decision of the Hon’ble Bombay High Court in A.N. Naik Associates (2004) 265 ITR 346. This entire controversy in hand before us and also the implication of the ratio laid down by Hon’ble Bombay High Court while dealing with the words “otherwise” used in section 45(4) has been dealt and explained in detail by the Full Bench decision of the Hon’ble Karnataka High Court in the case of CIT v Dynamic Enterprises, reported in [2003] 359 ITR 83, wherein, they have taken detail note of the decision of A.N. Naik Associates and the context in which this word “otherwise” has been used in the section and what was meant by the Hon’ble Bombay High Court. In this case, the question of law referred for consideration of Full Bench was as under:-
22 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 “When a retiring partner takes only the money towards the value of his share, whether the firm should be made liable to pay capital gains even when there is no distribution of capital asset/assets among the partners under Section 45(4) of the I.T. Act? Or Whether the retiring partner would be liable to pay for the capital gains?”
Relevant facts and case of the revenue were as under:-
“4. M/s Dynamic Enterprises-the respondent herein is a partnership firm which came into existence on 09.01.1985 with Sri Anurag Jain and Sri Nirmal Kumar Dugar as its partners. The firm was engaged in the business of buying landed properties, constructions of buildings thereon, construction of industrial sheds, commercial complexes etc. On 13.04.1987, the firm was reconstituted by which Sir Nirmal Kumar Dugar retired from the partnership and L.P. Jain (father of Anrag Jain) entered the partnership as he showed his willingness to contribute capital for purchase of land to construct housing complex. The firm purchased land bearing Sy.No. 13/1, Jakkasandra Village, Begur Hobii, Bangalore South Taluk under a registered sale deed dated 13.5.1987 for a consideration of Rs. 2,50,000/-. Another reconstitution took place on 1.7.1991 by which Sri L.P. Jain retired from the firm and Smt. Pushpa Jain and Smt. Shree Jain were inducted as partners. The firm was reconstituted and five partners belonging to Khemka Group were inducted into the firm by a deed dated 28.04.1993. Before the reconstitution, the assets of the firm were revalued as per the report of the registered valuer on 28.03.1994. The three old partners retired through deed of retirement dated 01.04.1994. The old partners received the enhanced value of property in financial year 1994-95.
As per the Assessing Officer there is transfer of property from old firm to the new firm on 01.04.1994.
23 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 Hence, it is a transfer within the meaning of Section 2(47) of the I.T. Act. Accordingly, notice under Section 148 was issued on 27.03.2002. In reply to the said notice, the assessee-firm contended that it has paid the amount to the retiring partners standing on credit side in respect of capital accounts. There is no transfer of asset and therefore, they are not liable to pay any capital gains tax.
The Assessing Officer held that the land was purchased when the firm was having two partners, namely, Shri Anurag Jain and Shri L.P. Jain. The firm had done no business all through its existence. The receipt of rents and commission for assessment year 1994-95 were found as bogus. The immovable property was not utilized to earn paltry sums during the existence of the firm. The new partners were introduced and the old partners retired. This is a device adopted to transfer the immovable property. The incoming partners tried to evade capital gains tax as well as stamp duty and therefore, he held the capital gains tax is liable to be paid by the firm. In appeal, the appellate authority has affirmed the said order. The appellate authority held that the reconstitution of firm has taken place on 01.04.1994 i.e., nearly one year after the members of the Khemka family were introduced as partners. Therefore, it accepted the genuineness of the old firm as well as the new firm but it held it is a colourable device to evade payment of tax”.
The Hon’ble Court after noting down the above facts and taking into consideration various decisions; analyzing the provisions of section 45 and sub-section (4) thereto; meaning of transfer as given in section 2(47); section 14 of Indian Partnership Act; and also the various decisions of the Hon’ble Supreme Court, observed and held as under :-
“24. Therefore, in order to attract Section 45(4) of the Act, the capital asset of the firm should be transferred in favour of a partner, resulting in
24 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 firm ceasing to have any interest in the capital asset transferred and the partners should acquire exclusive interest in the capital asset. In other words, the interest the firm has in the capital asset should be extinguished and the partners in whose favour the transfer is made should acquire that interest. Then only the profits or a gain arising from such transfer is liable to tax under Section 45(4) of the Act.
In the instant case, the partnership firm had purchased the property under a registered sale deed in the name of the firm. The property did not stand in the name of any individual partners. No individual partners brought that capital asset as capital contribution into the firm. Five partners brought in cash by way of capital when the firm was reconstituted on 28.04.1993. Nearly a year thereafter on 01.04.1994 by way of retirement, the erstwhile three partners took their share in the partnership asset and went out of the partnership. After the retirement of three partners, the partnership continued to exist and the business was carried on by the reaming five partners. There was no dissolution of the firm or at any rate there was no distribution of capital asset on 01.04.1994 when three partners retired from the partnership firm. What was given to the retiring partners is cash representing the value of their share in the partnership. No capital asset was transferred on the date of retirement under the deed of retirement deed dated 01.04.1994. In the absence of distribution of capital asset and in the absence of transfer of capital asset in favour of the retiring partners, no profit or gain arose in the hands of the partnership firm. Therefore, the question of the firm being assessed under Section 45(4) and charging them tax for the profits or gains which did not accrue to them would not arise.
It was contended on behalf of the revenue that five incoming partners brought money into the firm. Three erstwhile partners who retired from the partners on 01.04.1994 took money and left the property to the incoming partners. It is a device adopted by these
25 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 partners in order to evade payment of profits or gains. As rightly held by this Court in Gurunath’s case (supra) it is taxable. This argument proceeds on the premise that the immovable property belongs to the erstwhile partners and that after retirement, the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs to the partnership firm. It did not belong to the partners. The partners only had a share in the partnership asset. When the five partners came into the partnership and brought cash by way of capital contribution to the extent of their contribution, they were entitled to the proportionate share in the interest in the partnership firm. When the retiring partners took cash and retired, they were not relinquishing their interest in the immovable property. What they relinquished is their share in the partnership. Therefore, there is no transfer of a capital asset, as such; no capital gains or profit arises in the facts of this case. In that view of the matter, Section 45(4) has no application to the facts of this case.
In Gurunath’s case (supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case of Commissioner of Income Tax vs A N Naik Associates – (2004) 265 ITR 346 (BOMBAY). In Naik’s case, the asset of the partnership firm was transferred to a retiring partner by way of a deed of retirement. A memorandum of family settlement was entered into and the business of those firms as set out therein was distributed in terms of the family settlement as the party desired that various matters consisting the business and assets thereto be divided separately and portioned. The term has also provided that such of those assets or liabilities belonging to or due from any of the firms allotted, the parties thereto in the schedule annexed shall be transferred or assigned irrevocably and possession made over and all such documents, deeds, declarations, affidavits, petitions, letters and alike as are reasonably required by the party entitled to such transfer
26 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 would be effected. It is based on this document and subsequent deeds of retirement of partnership that the order of assessment was made holding that the assessee are liable for tax on capital gains.
In that context, the Bombay High Court held that when the assets of the partnership is transferred to a retiring partner, the partnership which is assessable to tax ceases to have a right or its right in the property stands extinguished in favour of the partner to whom it is transferred. If so read, it will further the object and purpose and intent of amendment of Section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would be amount to the transfer of capital assets in the nature of capital gains and business profits which is chargeable to tax under Section 45(4) of the Income Tax Act. In that context, it was held the word “otherwise” takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. It is in this context the Bombay High Court held that Section 45(4) was attracted. Therefore, to attract Section 45(4) there should be a transfer of a capital asset from the firm to the retiring partners, by which the firms ceases to have any right in the property which is so transferred. In order words, its right to property should stand extinguished and the retiring partners acquire absolute title to the property.
In the instant case, the partnership firm did not transfer any right in the capital asset in favour of the retiring partner. The partnership firm did not cease to hold the property and consequently, its right to the property is not extinguished. Conversely, the retiring partner did not acquire any right in the property as no property was transferred in their favour. The Division Bench in Gurunath’s case (supra) did not appreciate this distinguishing factor and by wrong application of the law laid down by the Bombay High Court held the
27 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 assessee in that case is also liable to pay capital gains tax under Section 45(4). Therefore, the said judgment does not lay down correct law”. (Emphasis added is ours) 16. Thus, if we apply the above ratio laid down by the Full bench decision of the Hon’ble Karnataka High Court, on the facts of the present case, then it is ostensibly clear that the partnership firm, that is, the assessee did not transfer any right in the capital asset or any of the asset of the partnership firm in favour of the retiring partner and neither it ceases its hold on the property of the firm. Its right in the property of the firm was still intact and has not been extinguished at all. Even the retiring partner did not acquire any right in the property, albeit it has only surrendered its right and interest in the partnership firm. Here when the retiring partner took cash and also further cash in lieu of agreed constructed area from the stock in trade of the firm, it did not relinquishing its interest in the immovable property. What it relinquished was its share in the partnership firm. Therefore, there is no transfer of a capital asset within the scope of section 45(4), because to attract Section 45(4), there should be a transfer of a capital asset from the firm to the retiring partners, by which the firms ceases to have any right in the property which is so transferred. In order words, its right to property should stand extinguished and the retiring partners acquire absolute title to the property. So far as allotting of some area in the constructed area which was agreed to be given to the retiring partner, it is undisputed that in lieu thereof cash has been paid to the retiring partner. No property or the asset of the partnership firm has been handed over or given to the retiring partner. The emphatic contention of the revenue that the
28 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 word “otherwise” will cover such situation where there is no dissolution and strong reliance on Hon’ble Bombay High Court Judgment has been explained and well clarified by the Full Bench (as highlighted above by us) and therefore, this premise of the revenue for taxing the capital gains in the hands of the assessee firm has also no legs to stand. Thus, respectfully relying upon the ratio and decision of the aforesaid Hon’ble Karnataka High Court, Full Bench, we hold that there is no transfer of any capital asset of the assessee firm to its retiring partner and hence no capital gains chargeable to tax arises in hands of the assessee firm and section 45(4) has no application on the facts of the present case. Accordingly, the capital gain tax levied on the assessee firm is directed to be deleted and consequently the grounds raised by the assessee on this score are allowed.
In view of our above finding, the ground relating to the validity of reopening u/s 147 is not adjudicated upon as it has been rendered purely academic hence is treated as in- fructuous. Similarly, the other grounds raised have also been rendered in-fructuous and consequently appeal of assessee appeal of the assessee is treated as allowed.
Similarly the ground taken in the revenue’s appeal and assessee’s Cross Objection have been rendered in-fructuous, in view of our finding and observations given in the assessee’s appeal. Hence they are treated as dismissed.
Coming to the additional ground raised by the revenue, the Ld. Counsel, at the outset objected that the said ground is outside the scope of assessment order and a new angle or
29 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 case cannot be roped in the proceedings before the Tribunal. In support, he relied upon the following decisions:- (i) Prakash I Shah -115 ITD 167(Mum)(SB); (ii) Maersk Global Service Centre India Pvt Ltd - 133 ITD 543;
(iii) Mahindra & Mahindra Ltd. -122 TTJ 577 (Mum SB).
On the other hand, the Ld. DR submitted that, this issue is directly related to the subject matter and in the additional ground the revenue is pleading that, alternatively, the amount in transaction should be treated as sales and consequently taxed as business income. This is purely a legal ground and hence same can be taken up before the Tribunal.
After considering the aforesaid submissions and on perusal of the impugned orders passed by the revenue authorities, we find that the case of the Assessing Officer as well as the CIT(A) was that, the amount paid to the partner on the retirement is to be taxed as capital gains under deeming provision of section 45(4) At this stage, it would not be proper for the Department to come out with altogether different proposition contrary to its own stand taken because it was nobody’s case that the said amount paid to the retiring partner is to be treated as part of sales or turnover. The Ld. DR also cannot set up altogether new case or raise altogether new contention de-hors the view taken by the AO as well as by the CIT(Appeals). The DR can support the order of the AO or CIT(Appeals) by taking any different plea, however, he cannot make out a new case before the Tribunal. If the stand taken by the AO was erroneous then remedy lies under different provisions like section 263 or section 147, etc. Accordingly, we do not find any merits in the additional
30 Keshav and Company ITA 5639/Mum/2014 ITA 6276/Mum/2014 CO No.273/Mum/2015 ground raised by the Department before us and hence same is dismissed.
To sum-up: Assessee’s appeal stands allowed and that of the revenue’s appeal and Cross Objection of the assessee stands dismissed.
Order pronounced in the open court on 30th September, 2016.
Sd/- Sd/- (अशवनी तनेजा) (अिमत शु�ला) लेखा सद�य �याईक सदस (ASHWANI TANEJA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 30th September, 2016. ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT (Appeal) –Concerned___, Mumbai. 4) The CIT-Concerned____ Mumbai 5) िवभागीय �ितिनिध “A”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “A” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, मुंबई Dy./Asstt. Registrar I.T.A.T., Mumbai *च�हान व.िन.स *Chavan, Sr.PS