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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep Gosain
This appeal by the Revenue is directed against the order of the CIT(A)- 34, Mumbai dated 28.02.2014 for A.Y. 2010-11.
The facts of the case, briefly, are as under: - 2.1 The assessee firm, engaged in the manufacture and processing of Bhagar and by-product Konda (used as cattle fodder), filed its return of income for A.Y. 2010-11 on 25.09.2010 declaring income of `39,12,761/-. The case was taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee firm constituted by Deed of Partnership on 01.01.2001 underwent a 50% change in constitution vide Deed of Retirement-cum-Admission dated 01.09.2008 whereby two partners holding 50% of the share of profit, i.e. (i) Smt. Vijaya Tilokchand Talera and (ii) Shri Manish Tilokchand Talera retired from the firm and were replaced by Shri Ashish Ashok Sakhala and Smt. Shweta Pritish Sakhala with each holding 25% of the profits and loss in the firm. In view of this change in constitution, the assessee firm, in accordance with the M/s. Vaibhav Industries regulations of MIDC, since it held leasehold rights in a factory situated at H- 32, MIDC, Ambad, Nashik, intimated MIDC this change in constitution and drafted and furnished a new Deed of Assignment dated 17.12.2009. The assessee paid stamp duty of `3,77,830/- for the limited purpose of registering the change in constitution of the firm and the name of the assessee firm, its business activity, place of operations remained the same and the leasehold rights in the said property continued to be vested with the assessee firm itself. 2.2 The AO, however, did not accept the assessee’s averments that , in the above factual matrix, there was no transfer of property as per the provisions of section 2(47) of the Act. The AO did not accept the explanations put forth by the assessee as he was of the view that the provisions of section 45(4) of the Act were applicable in view of the following reasons: - (i) There was a change of 50% in the constitution of the assessee firm by Deed of Assignment dated 17.12.2009. (ii) That there is a transfer of capital assets, i.e. transfer for leasehold rights by the firm to its retiring partners. (iii) There is a transfer of capital asset in the case on hand as it falls within the ambit of the expression “otherwise” in section 45(4) of the Act, as the firm ceases to have a right or its right in the property stands extinguished and in favour of the partner to whom it is transferred. In that view of the matter, the AO made an addition of `37,78,250/- under section 45(4) of the Act and accordingly completed the assessment under section 143(3) of the Act vide order dated 26.12.2002, wherein the income of the assessee was determined at `76,91,011/-.
On appeal, the learned CIT(A) held that the provisions of section 45(4) of the Act are not applicable for A.Y. 2010-11, the year under consideration, as there was no retirement of any partner during this period. Regarding the assessment/addition of `37,80,250/- under section 45(4) of the Act, on account of transfer of leasehold rights by the assessee firm to the retiring partners, observing that the leasehold rights in this said property continued to be vested with the assessee firm even after change in its constitution and that no consideration of any kind or in any form was given or credited to the accounts of the retiring partners except for the outstanding capital balance M/s. Vaibhav Industries standing to the credit of retiring partners, the learned CIT(A) deleted the addition of `37,80,250/- under section 45(4) of the Act holding that as per the provisions of section 45(4) of the Act, the indexed cost of acquisition of capital asset should be deducted from the full value of consideration computed under section 48 of the Act for determining the income chargeable to the head “Income from capital gains’. In this manner, the learned CIT(A) allowed the assessee’s appeal vide the impugned order dated 28.02.2014.
This appeal was fixed for hearing on five occasions and on all the scheduled dates, none was present on behalf of the assessee. It appears that even the notices for hearing sent by RPAD on three occasions have returned back unserved from the assessee’s given address. In these circumstances, we proceed to dispose off this appeal with the assistance of the learned D.R. for Revenue and the material on record.
Aggrieved by the order of the CIT(A)-34 dated 28.01.2014 for A.Y. 2010-11, the assessee had preferred this appeal raising the following grounds: - “
1. On the facts and in the circumstances of the case and in law, the Ld. ClT(A) erred in deleting the addition of Rs. 37,78,250/- made by the AC on account of 50% change in constitution of the partnership firm by applying provisions u/s. 45(4) of the Act, ignoring the facts that the Deed of Assignment was registered on 1711212009 and the value adopted by the Authority was Rs.75,56,000/-.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the assessee's appeal ignoring the facts that the change in constitution for firm was considered as relinquishment of rights by one partner in favour of another and such relinquishment was considered as transfer of capital asset as interpreted in the case of CIT v/s. A.N. Naik Associates (2004)136 Taxman 107 (Bom). The appellant prays that the order of the CIT(A) be set aside and matter be decided according to law. The appellant craves leave to amend or alter any ground or add new ground which may be necessary.” 5.1 The learned D.R. for Revenue placed strong reliance on the findings in the order of the AO and prayed that the impugned order of the learned CIT(A) be set aside.
M/s. Vaibhav Industries 5.2.1 We have heard the learned D.R. for Revenue and perused and carefully considered the material on record. The findings of the learned CIT(A), on the issue before us in this appeal, at paras 6 and 6.1 of the impugned order is as under: - “6. I have carefully considered the submissions made by the appellant and the impugned assessment order on this issue. It is found that the appellant firm was formed on 01/01/2001 with for partners with 25% share each in the profits and losses of the firm. On 01/09/2008, two partners retired and two new partners were admitted in the appellant firm with 25% share each in the profits and losses of the firm. The appellant firm had acquired leasehold rights in respect of a MTDC land in Ambad, Nashik under deed of assignment dated 27/03/2001. As per the rules and regulations of the MIDC, the appellant firm drafted a new deed of assignment on 17/12/2009 in respect of change in constitution of the firm and paid stamp duty on the same. The Authorised Representative of the appellant has argued that the partners of the firm retired on 01/09/2008 i.e. during the year ended 31.03.2009 i.e. A.Y. 2009-10 and so the question of applicability of provisions of Section 45(4) for AY. 2010-11 does not arise at all and assessment order is bad in law. The contention of the appellant is correct. The provisions of Section 45(4) are not applicable for A.Y. 2010- 11 as there is no retirement of any partner during this period. 6.1. Regarding addition of Rs. 37,78,250 made u/s 45(4) of the I.T. Act on account of transfer of lease rights by the appellant firm to its retiring partners, appellant firm has argued that there was no transfer of any capital asset from the firm to its retiring partners as the capital asset i.e; leasehold rights were still with the appellant firm even after the change in constitution of firm and the firm transferred.. the outstanding capital balance standing to the credit of retiring partners to their unsecured loan accounts on retirement. No consideration of any kind or in any form was given or credited to the accounts of retiring partners. The appellant had relied on the following decisions, which support the case of the appellant: - (a) Decision of Hon'ble Mumbai Income Tax Appellate Tribunal in the case of ITO vs Fine Developers (55 SOT 122) wherein it was held that provisions of 45(4) of the Income Tax Act cannot be invoked unless there is distribution of any capital asset by the, firm. . b) Recent case of CIT vs M/s Dynamic Enterprises (Order passed on 16/09/2013 - wherein the Hon'ble Karnataka, High Court has stated that "When a retiring partner takes only money towards the value of his share and when there is no distribution of capital asset/assets among the partners there is no transfer of a capital asset and consequently no profits or gains is payable under Section 45(4) of the Income Tax Act". The contention of the appellant is correct as there is no consideration paid to. the retiring partners and the assets of the firm are continued with the firm. So the Provisions of Section 45(4) do not operate.
M/s. Vaibhav Industries I agree with the following contentions of the Authorised Representative of the appellant: a) The provisions of Section 45(4) of the I.T. Act, 1961 are not applicable as there is no retirement of partners during the year ended 31.03.2010 i.e. A.Y. 2010-11. b) There is no transfer of leasehold rights by the firm to its retiring partners as they continue with the firm. The documents in support of that are filed. No compensation is paid to the retiring partners. Copy of the balance was filed. No partner had any individual lease rights in the land. Even after the change in constitution the lease rights are still with the appellant firm i.e. Vaibhav Industries. Value of Lease rights continue the same as on 01.04.2008 and 01.04.2009. c) The contention of the assessee is correct that the Income taxable under the provisions of Section 45(4) should be taxable under the head ‘Income from Capital Gains' and indexed cost of acquisition of capital asset should be deducted from the full value of consideration computed u/s 48 for determining income, chargeable under the head 'Income from Capital Gains' and cannot be taxable under the 'Profits and Gains of Business'. In view of the above, the Assessing Officer is directed to delete the addition of Rs. 37,78,250 made u/s. 45(4). The grounds taken are allowed.” 5.2.2 Before us, except for raising the grounds (supra), Revenue has not been able to bring on record any material to factually or legally controvert the findings of the learned CIT(A) (supra). In the legal and factual matrix of the case, we concur with the findings of the learned CIT(A), in deleting the addition of `37,78,250/- made by the AO under section 45(4) of the Act, by holding that : - (i) the provisions of section 45(4) of the Act are not applicable for the year under consideration, i.e. A.Y. 2010-11 as there is no retirement of any partner during this period. (ii) there is no transfer of leasehold rights in the said property by the assessee firm to the retiring partners; which continue to stay vested in the assessee firm even after the change in the constitution of the assessee firm. (iii) as per the provisions of section 45(4) of the Act the income is not to be taxable under the head ‘business income’ but rather the income should be exigible to tax under the head ‘Income from Capital Gains’ and the indexed cost of acquisition of the capital asset should be deducted from the full value of consideration computed under section 48 of the Act.