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Income Tax Appellate Tribunal, “C”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
O R D E R PER R.C.SHARMA (A.M): These are appeals filed by the revenue against the order of CIT(A), Mumbai, for the assessment year 2008-2009.
Common grounds taken by the revenue in both the appeals reads as under :- 1. "On the facts and in the circumstances of the case and in law,, the Ld CIT(A) has failed to deliberate on the applicability of section 2(47), which has been relied by the Assessing Officer to add to the receipt on relinquishment of Right as Long Term Capital Gains income without appreciating the facts of the case.”
Rival contentions have been heard and record perused. Facts in brief are the assessee is a partner in firm. The firm was having an asset in the form of land. During the year the land was revalued and amount was credited in the capital account of the partners in the ratio of their profit sharing. Assessee withdrew the amount from his capital account. The AO treated the revaluation of the assets as extinguishment of the assessee’s right in the land and, therefore, the difference in revalued price was treated as capital gains in the hands of the partner by taking shelter of provisions of Section 2(47) of the I.T.Act. By the impugned order the CIT(A) deleted the addition after observing as under :- 5.3 I have considered the submissions of the appellant and the order of the A.O. 1. As the facts are not in dispute one has to evaluate the above facts in the light of the provisions of the Income Tax Act 1961 and established legal precedents on the subject. 2. The AO has held in para 5.6.4 of the order that the 'erstwhile partners of the firm have received an amount for relinquishment of rights in favor of new incoming partners which is transfer within the meaning of Sec 2 (47) of the IT Act. 3. I notice that AO has not correctly appreciated the following imperatives while drawing conclusion: That appellant continues to be partner in the firm. Thus, appellant was NOT an erstwhile partner. Partners in firm have contractual rights and there are no 'shares' or 'rights' which can be transferred. Partners are admitted or retired or 3 rights in profit sharing are realigned. None of these events is transfer u/s 2(47). AO further erred in treating the so called 'transfer of right in firm' synonymous as 'transfer of right in land'. Firm is distinct from its partners the firm itself has not relinquished any share in property in favor of new partners. The land continues to be with firm. As per Partnership Act, the rights of partners can be extended and/or restricted. The partnership continues and the erstwhile partners continue to have an interest in the partnership assets. Merely because, they have withdrawn money from the firm, it does not constitute consideration for proportionate reduction in their share in the firm. there was neither a transfer of right in firm nor land. The asset continued to be owned by the firm. Absence or presence of certain accounting entries would not change the substance of the transaction, particularly if a compound entry is passed instead of two separate ones No goodwill was accounted or paid so anyway no consideration arose for that. Withdrawal of partner's capital even if amount stands increased due to revaluation, is not income. there is no provision in the Act for levying capital gains on consideration even if received for reduction of share in profits of the firm. Appellant's statement on oath has to be examined with correct legal position and not judged by plain language used by appellant. Explanatory submission given by appellant and reproduced in assessment order should have been read along with statement on oath. There was no retraction. The appellant has not denied but explained his statement in the submission given to AO. The AO cannot ignore submissions given by appellant.
The legal position on partner's rights and consideration received on retirement is well settled by Supreme Court in Commissioner of Income- tax v. R. Lingmallu Raghukumar 247 ITR 801 (SC) that when a partner retires from a partnership what he receives is his share in the partnership which is worked out and realized and does not represent consideration received by him as a result of the extinguishment of his interest in the partnership assets.
4 Further, in a similar case where there was no retirement and also revaluation, the jurisdictional Tribunal in ITO v SmtParu D Dave ITO ITD 410 (Mum) (2008) in a similar case held that the revaluation of assets of partnership and the credit of revalued amount to the capital account of partners in their respective share ratio do not entail any transfer as defined under s. 2(47) of the IT Act. The introduction of new partners to a partnership firm owning immovable assets and consequent reduction in the share ratio of present partners do 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. 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 s. 2(47) of the Act, as there is no change in the ownership of assets by the partnership firm. In a later decision of March 2012 in CIT v PN Panjawani (Kar)ITA 1316-1318, the issue before the Court was whether the admission of the new partners and assignment of right in the firm to new partners out of the rights of the taxpayer for consideration amounts to transfer in the hands of taxpayer under Section 2(47) of the Act, 1961 (the Act) and whether there is a liability u/s 45 of the Act. The Court held that in context of the Act for taxability of income, the identity of the firm and that of the partners are separate and distinct. There is no provision in the Act for levying capital gains on consideration received for reduction of share in the firm. Further that contention of the tax department that the transaction is a colourable device had no substance. Taxation is not a matter of contract - and the same can be levied only under the authority of law (Article 265 of the constitution). Since there is no estoppels against law, even if the assesee has admitted to pay tax on any receipt which is not taxable in accordance with law, such admission cannot be held against him. It is more so because the assessing officer is duty bound to tax the correct and true income in accordance with law and there cannot be tax liability by contract. There is no allegation that in the statement recorded during the course of search in respect of this transaction assessee made any averment of "facts" which he retracted latter. Comprehension of income tax by a common citizen is a mere fiction, more so, during the strenuous environment of search and seizure proceeding. Further the appellant was not allowed any assistance of a legal expert /consultant during the course of search or before recording of statement on the matters which are essentially questions of law. If the law requires that a certain tax is to be collected, it cannot be given up, and any assurance that it would not be collected, would 5 not bind the Government. The liability of the assessee to pay Income Tax is created by the Income Tax Act. The amount on which the tax is to be paid, the rates at which the tax has to be computed and the reliefs which the assessee are entitled to, must all be determined in accordance with the provisions of the Income Tax Act and the relevant Finance Act. The liability to pay tax cannot be founded on any agreement. Assessee's agreements or statements (as that of the appellant) in the matter of law, certainly, cannot form the basis of taxation. Reliance is placed on the following decisions:- (1) Commissioner of Income Tax Vs Mr.P.Firm, Muar (56 ITR 67)(SC), CIT vs Manik ( 74 ITR 1 (SC). In this case the assessee had given an undertaking to file a return for a year other than the year under appeal before ITAT. The Supreme Court disapproved enforcing such an undertaking. The case of Tribhuvandas G Patel is no longer good law because the same was reversed by SC reported in 236 ITR 515. The facts of HR Aslot and NA Mody's case are similar to Tribhuvandas G Paters case, therefore, the same also impliedly overruled by Hon'ble SC. Further, CIT v A N Naik 265 ITR 346, word "Otherwise" in section 45(4) covers not only the cases of dissolution but also Associates cases of subsisting partners of a partnership transferring assets in favour of a' retiring partner. In this case new partners were inducted in morning and old partners retired on close of the business on that day. In para 27 of the order, it was (Bombay) held that on retirement of partner, the partner got his share, it was held that there was no extinguishment of right.
5. Thus, based on facts which are already on record and elaborately dealt with by the AO and evaluating them as per provisions of the Income Tax Act 1961 and by placing reliance on the judicial precedents above, I hold that reduction of partner's shares in profit is not relinquishment of rights in favour of new partn.ers and there is no transfer u/s 2(47). The withdrawal of amount from the firm whether matches or not with revaluation amountOr-wrth'-aITiOuIitS5rought ill oy new partners IS no relevant to and would not still make it a transfer u/s 2(47). Further any partner having more control or being managing partner is well within Partnership Act and is not relevant to decide the taxability under the Income Tax Act 1961. 5.1 Recently, in the case of CIT vs P.N.Panjawani (2012) 21 Taxmann.com 458 (Karnataka), High Court of Karnataka, dtd 12.3.2012 held as under: Consideration received by existing partners for reduction of their share in the firm on admission of new partners not taxable as capital gains. Where 4 new partners were admitted to the firm and they introduced Rs.3.50 crores as their capital contribution and the same was withdrawn as drawings equally ( Rs.1,16,666.67 each) by the three existing partners whose shares were reduced as a result of 6 admission of new partners, the amount so received by existing partners as consideration for reduction of their shares was not taxable in the hands of the existing partners. There is no provision in the Act for levying capital gains on such consideration received for reduction of share in the firm. It is not correct to say that the existing partners relinquished any share in the landed property of the firm in favour of new partners since- a) The firm and the partners are recognized as separate entities by the Income Tax Act although not so recognized by the Indian Partnership Act,1932. b) Since the Act treats a firm and its partners as separate entities, the landed property of the firm is that of the firm and not of its partners. There is no question of existing partners relinquishing any share therein to the new partners admitted. One can relinquish only what belongs to him and c) The existing partners did not retire from firm on admission of new partners but continued as partners albeit with reduced shares. Further, the firm itself has not relinquished any share in property in favour of new partners. 5.2 Accordingly, the addition of Rs.1,45,75,658/- made by AO on account of capital gain is deleted.”
4. Against the above order of CIT(A), the revenue is in further appeals before us.
We have considered rival contentions, carefully gone through the orders of authorities below and found from the record that assessee was having 25% as profit sharing ratio in the firm M/s Vipul Shipyard. Two new partners were admitted consequently the firm was reconstituted on 20/08/2007. The firm’s constitution is as under :- S.No. Name of partner Share of Share of profit before profit after reconstitution reconstitution 1. Shri Parshuram M Amin 25% 0.25% 2. Smt. Kusumben Amin 50% 0.50% 3. Shri Dinesh P Amin 25% 0.25% 4. ABG Shipyard Ltd. Nil 98% 5. ABG international Pvt. Ltd. Nil 1% 7 The major asset in the firm was land. The land was revalued to Rs.5,31,36,000/- and such revalued amount credited to the assessee partner proportionately along with the other partners. New partners ABG Shipyard Ltd (ABG) & ABG International Ltd. (ABG Intl.), were inducted. The amount of capital contribution by new partners was Rs.5,82,02,630/- and Rs.1,00,000/- respectively. Thus, on the reconstitution of firm, the profit share of assessee got reduced to 0.25%. The assessee (along with other two partners i.e. Smt. K Amin and Shri D Amin), on reconstitution, chose to withdraw the amount lying to his credit. The assessee continued as partner and had not retired from firm. As per MOU between parties a goodwill account was to be created. However, after partnership deed no goodwill was credited or paid was not done. As per the partnership deed the rights and duties of partners have been decided interse. The AO treated the revaluation of asset and introduction of new partners as estinguishment of assessee’s shares in the asst of the firm by treating the same as transfer within the meaning of Section 2(47) and tax the difference as capital gain in the hands of each of the partners. We found that even after introduction of the new partners and revaluation of the asset the partnership firm was continued and the assessee was continued as partner in the same firm and land remained the assets of the firm. Merely because the partners have withdrawn money from the firm does not constitute consideration for proportionate reduction in their share in firm. There was neither a transfer of assets of the firm to the partner nor the assets ceased to be owned by the firm.
Hon’ble Bombay High Court in the case of Prashant S. Joshi, 189 Taxman 1 held that amount paid to a partner upon retirement and upon deduction of liabilities does not involve an element of transfer within the meaning of Section 2(47). The Hon’ble High Court further held that payment made to a partner in realization of his share in the net value from the assets upon his retirement from the firm does not fall under clause v of Section 28.
Hon’ble Gujarat High Court in the case of Mohanbhai Pamabhai, 91 ITR 393 held that where assessee retired from a firm and received amount which included in its break up proportionate share in the value of goodwill, there was no transfer of interest by any of the assessee in the goodwill within the meaning of section 2(47) and, therefore, amount received by them in respect of goodwill should not be regarded as capital gain chargeable to tax. We have found that CIT(A) has dealt with the issue threadbare and after applying to provision of law laid down by various High Courts recorded a finding that there was no transfer of assets on extinguishment of right of the assessee partner merely on introduction of new partner in the firm. Accordingly amount withdrawn by the assessee partner was not liable to tax as capital gain. We do not find any infirmity in the order of CIT(A) for deleting the addition so made. In the result appeal of the revenue is dismissed. 8. Facts in the case of ITA No.5427/Mum/2012 pertains to another partner Mr. Dinesh P Amin having same facts, following the reasoning 9 ITA No.5426&5427/12 given hereinabove, we confirm the action of CIT(A) for deleting the addition made on account of capital gain. 9. In the result, both appeals of the revenue are dismissed. Order pronounced in the open court on this 23/03/2016.