DCIT 13(1), MUMBAI vs. MOHAMED HUSSAIN UMER MERCHANT, MUMBAI

The appeal filed by the revenue is directed against the order dated 22-03-2010 passed by Ld CIT(A)-24, Mumbai in the hands of the assessee for assessment year 2007-08 on the following issues:- (a) Deleting the addition of Rs.2.50 crores treating the same as capital receipt. (b) Deleting the addition of Rs.1.30 crores relating to the amount received from M/s Samarth Erectors & Decorators.

The facts relating to the issues are stated in brief. The assessee is a partner in a partnership firm named M/s Venus Builders. Besides, he is 2 आयकर अपील सं./ (�नधा�रण वष� / Assessment Year: 2007-08)

The first issue relates to the taxability of the amount of Rs.2.50 crores received by the assessee from the partnership firm M/s Venus Builders. The said partnership firm consists of two partners viz., the assessee and M/s M.D. Choksi Const. Co. P Ltd. It was formed on 19-10- 1998 and the firm was registered under the Indian Partnership Act on 01- 10-2003. The partnership firm was formed with an objective of developing a property, which was brought in by M/s M.D. Choksi Const. Co. P Ltd into the books of Partnership firm as its capital. As per the partnership deed, the assessee took up the responsibility to clear certain encumbrances attached to the property that was proposed to be developed. Subsequently disputes developed between the partners and when the matter went to Hon’ble High Court of Bombay, it appointed an arbitrator named Shri J.V. Chinai to arbitrate and settle the dispute between the partners. As per the decision of the arbitrator, the partnership firm was dissolved and the assessee received a sum of Rs.2.50 crores in full and final settlement of all his rights in the firm.

The issue contested before us is about the taxability of the amount of Rs.2.50 crores referred above. It is pertinent to note that the assessee declared the same as capital gains in its return of income and proposed to avail exemption u/s 54F of the Act by depositing the same in Capital Gains Scheme before purchasing a new residential house. However, during the course of assessment proceedings, the assessee changed his stand and contended the same represented capital receipt and hence not taxable.

The AO examined the claim of the assessee and took the view that the claim of existence of partnership firm itself is not acceptable for the following reasons:- (a) Even though it was claimed that the partnership agreement was entered on 19.10.1998, the same was registered only on 01.10.2003. (b) Under the deed of partnership, the role of the assessee is only to clear the encumbrances attached to a property, which was intended to be developed. (c) The partnersip firm did not maintain any books of accounts and it did not carry on any business activities. (d) The partnership firm did not file any income tax returns. Accordingly, the AO concluded as under in paragrapn 3.6 of his order:- “3.6 These are telling factors which invariably gravitate towards the conclusion that there was no partnership firm in existence at all during the sustenance of pact between the assessee and M/s M.D. Choksi Const. Co. Pvt Ltd for clearing the property in question belonging to M/s M.D. Choksi Const. Co. P Ltd of all its encumbrances. At best, it can be stated that it was an association of persons by which the services of the assessee were drafted with an express purpose for deriding the property belonging to M/s M.D. Choksi Const. Co. Pvt Ltd of all its attendant liabilities and encumbrances and in recognition of services rendered by the assessee, he was to receive the compensation from M/s M.D. Choksi Const. Co. P Ltd and that there was no partnership ride (sic. right) which was relinquished by the assessee for which he had received the compensation and that it in recognition of the services that the compensation came to be paid to him, the quantum whereof was under dispute which was ultimately resolved by the arbitrator in terms of consent terms dated 11.08.2006. The said deed of consent terms, however, does not throw any light on the manner in which or the basis on which the computation of quantum of compensation finally which came to be paid to the assessee was worked out. As far as the income tax proceedings are concerned, this was another aspect of inquiry which was precluded on account of incomplete data furnished by the assessee in this context. This 4 आयकर अपील सं./ (�नधा�रण वष� / Assessment Year: 2007-08)

In effect, the assessing officer did not accept the claim of existence of a partnership firm and hence he proceeded to examine about the nature of receipt and finally concluded that the same represents revenue receipt and in this regard, he placed reliance on the decision rendered by Hon’ble Delhi High Court, referred supra.

The Ld CIT(A) however held that the assessee has received the impugned amount from a partnership firm and accordingly held that the same is not taxable in the hands of the assessee and taxability of the same may be considered in the hands of the partnership firm u/s 45(4) of the Act, if other conditions of sec.45(4) are satisfied. The relevant observations made by the Ld CIT(A) are extracted below:- “6. In my opinion, on the facts of the case the addition made in the hands of the appellant is not justified because it is undisputed that the appellant was a partner in a firm by name and style of M/s Venus Builders (India) which was registered on 1/10/2003 w.e.f. 19/10/1998 and evidenced by a deed of partnership on stamp paper

Thus, we notice that the Ld CIT(A), upon appreciation of the evidences and facts prevailing in the instant case, has given a clear finding that there existed a “Partnership firm” and the assessee has received the impugned amount of Rs.2.50 crores on dissolution of the said partnership firm. We have earlier noticed that the assessing officer has proceeded the to assess the amount of Rs.2.50 crores as revenue receipt only by rejecting the claim of existence of partnership firm. However, the finding of the Ld CIT(A) that there existed a Partnership firm and the assessee has received the impugned amount of Rs.2.50 crores on dissolution of the Partnership firm, has not been challenged by the revenue, meaning

Even otherwise the very fact that the fact that the Partnership firm is evidenced by a partnership deed; that it was registered under Indian Partnership Act (though belatedly, which is permissible under that Act); that the Hon’ble High Court of Bombay has appointed an arbitrator accepting the fact of existence of partnership; that the arbitrator has expressly passed an order stating that the partnership firm shall stand dissolved clearly support the finding given by the Ld CIT(A). Hence we are of the view that the assessing officer was not justified in rejecting the partnership firm, merely because the partnership firm did not file return of income or it did not produce the books of accounts before the arbitrator. The very fact that the partnership firm was registered under the Indian Partnership Act way back in October, 2003 (we are dealing with AY 2007- 08) clearly shows that the formation of partnership cannot be considered to be a make belief arrangement, since at the point of time of formation of the partnership in 1988 and its registration in 2003, it could not be said that the assessee could have visualised the dispute. Hence, we uphold the order of Ld CIT(A) in holding that the assessee has received the impugned

The assessing officer has held the impugned amount of Rs.2.50 crores as revenue receipt by placing reliance on the decision rendered by Hon’ble Delhi High Court in the caseof Manoranjan Pictures Corporation Pvt Ltd (1997)(228 ITR 202). We notice that the assessment year considered by Hon’ble Delhi High Court was assessment year 1971-72 and the scheme of taxation of partnership firm and its partners has undergone a sea change from AY 1993-94 onwards. Hence, in our view, the assessing officer should have not placed reliance on the above said decision, which was rendered in the context of the provisions then existing in the Act.

We are of the view that the Ld CIT(A) has rightly referred to the provisions of sec. 45(4) of the Act, which provides for manner of taxation in case of dissolution of a partnership firm or other association of persons. The said section reads as under:- “45(4) 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 full value of the consideration received or accruing as a result of the transfer.”

In view of the foregoing discussions, we do not find any infirmity in the decision of Ld CIT(A) in holding that the assessing officer was not right in law in assessing the impugned amount of Rs.2,50,00,000/- in the hands of the assessee. Accordingly we uphold his decision on this issue.

The next issue contested by the revenue relates to the taxability of Rs.1.30 crores received by the assessee from M/s Samarth Erectors & Developers. The facts relating to the same are that the assessee was entrusted with the job of clearing encumbrances attached to a land owned by a society named M/s Tatya Tope Nagar Co-op Society in the year 1987, since the society proposed to develop the said land. The assessee spent money from time to time over the years on the said land. All the expenses were debited to the land account over the years and the same has been duly disclosed in the returns of income filed for the earlier years. The assessee also allocated a part of indirect expenses towards the land. The Land account disclosed a balance of Rs.1,30,83,179/-, Rs.1,31,88,474/- and Rs.1,36,31,449/- respectively in the years relevant to the assessment years 2004-05, 2005-06 and 2006-07. It is also an undisputed fact that the assessee declared this land as his current asset, since he treated the dealing in the said land as his business activity.

Subsequently, the above said society entered into a development agreement with M/s URJA Holdings Pvt Ltd for development of the above said land under SRA scheme. However, M/s URJA holdings Ltd could not proceed in the matter of development and hence it transferred its rights to M/s Samarth Erectors & Developers. In this regard, the assessee received a sum of Rs.1,30,00,000/- from M/s Samarth Developers as reimbursement of expenses incurred by him in clearing the encumbrances in settlement of his dues. The assessee declared a loss of Rs.7,52,449/- (Rs.1,37,52,449/- less Rs.1,30,00,000/-), since the amount received by him was lesser than the actual expenditure incurred by him.

The assessing officer took the view that the assessee does not have any document to explain the nature of compensation paid by M/s Samarth Erectors & Developers. He further observed that the assessee has failed to furnish copy of accounts submitted by him to M/s Samarth Erectors & Developers. Accordingly the AO held that the expenditure of Rs.1,37,52,449/- claimed by the assessee against the receipt of Rs.1,30,00,000/- is not acceptable, in the absence of primary evidence for connecting the expenditure to income. Accordingly, he assessed the sum of Rs.1,30,00,000/- referred on gross basis.

The Ld CIT(A) noticed that the accounts of the assessee pertaining to earlier years, which were also subjected to scrutiny by the AO, disclosed the details of expenses. Further, the assessee has also furnished the details of expenses before the AO and also confirmation obtained from M/s Samarth Erectors & Developers to the AO. Accordingly the Ld CIT(A) held that the expenditure of Rs.1,37,52,449/- claimed by the assessee should be allowed.

We heard the rival contentions on this issue and perused the record. In our view, the approach of the assessing officer in this matter and the reasoning given by him to disregard the claim of expenses are devoid of merits. There is no dispute with regard to the fact that the assessee was entrusted with some work in connection with the land by the Society, referred above. It is also an undisputed fact that the assessee has incurred expenditure over the years in connection therewith and the same has been duly disclosed in the books of accounts of the earlier years. It is an admitted fact that the books of accounts of the assessee pertaining to the earlier years have been subjected to scrutiny assessments. Hence the fact that the assessee has spent money in connection with the land belonging to the Society cannot be disputed in this assessment year. Further, what the assessee received from M/s Samarth Erectors & Developers is the reimbursement of expenses already incurred by the assessee. When the said fact is confirmed by M/s Samarth Erectors & Developers in its capacity as the payer in final settlement of the claims of the assessee in respect of the land, we find no reason to suspect the same, particularly in view of the fact that the assessing officer has not brought any material on record to contradict the said claim. In that view of the matter, we are of the view that there is no scope to isolate the receipt of Rs.1,30,00,000/- from the expenses incurred by the assessee, i.e., it cannot be treated that the receipt of Rs.1,30,00,000/- as a separate source of income distinct and separate from the expenses incurred by the assessee on the land. It is also an admitted fact that the details of expenses incurred by the assessee are available in the books of accounts of the past years and further the assessee has also furnished the statement of expenses to the assessing officer during the course of assessment proceedings. Hence we are of the view that the Ld CIT(A) was justified in directing the AO to set off the expenses of 11 आयकर अपील सं./ (�नधा�रण वष� / Assessment Year: 2007-08)

In the result, the appeal filed by the revenue is dismissed.