Interesting Judgment or Tax Planning : Capital gains u/s 45(4) against Sum of a money received by retiring partner towards value of its share in firm

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Interesting Judgment or Tax Planning : Capital gains u/s 45(4) against Sum of a money received by retiring partner towards value of its share in firm

short Overview : When assessee in the capacity of retiring partner took only money towards value of its share and no capital asset was distributed there was no transfer of capital asset and, therefore, assessee was not liable to any capital gain tax on account of sum received by it as a partner on retirement from partnership-firm.

Assessee-company received certain sum of money on retirement from certain partnership firm. AO held that by transferring partnership share in the firm, assessee had transferred rights, title, and interests held by it in the firm. These were capital assets within the meaning of section 2(14) and their transfer was transfer of capital assets under section 2(47) and therefore, assessee was liable to pay tax on capital gains earned on this transfer.

It is held that When assessee in the capacity of retiring partner took only money towards value of its share and no capital asset was distributed there was no transfer of capital asset and, therefore, assessee was not liable to any capital gain tax on account of sum received by it as a partner on retirement from partnership-firm.

Decision: In assessee’s favour.

IN THE ITAT, DELHI BENCH

R.K. PANDA, A.M. & KULDIP SINGH, J.M.

MDLR Builders (P) Ltd. v. DCIT

ITA Nos. 8214 & 8215/Del/2018

11 June, 2019

Appellant by: Gautam Jain, Advocate and Lalit Mohan, CA

Respondent by: Paramita M. Biswas, CIT DR

ORDER

R.K. Panda, A.M.

The above two appeals filed by the respective assessees are directed against the separate Orders, dated 27-11-2018 of the Commissioner (Appeals)-26, New Delhi relating to assessment year 2008-09. Since identical grounds have been taken by the respective of assessees in these appeals, therefore, these were heard together and are being disposed of by this common order.

ITA No. 8214/Del/2018 (MDLR Builders India Ltd.)

  1. Facts of the case, in brief, are that the assessee is a company dealing in real estate land trading and development. A search was conducted at the office premises of the company on 31-1-2008. Accordingly notice under section 142(1) was issued on 11-7-2009 and again on 17-9-2009 with a questionnaire. However, the assessee did not file any return of income in response to the statutory notices. Since the assessee was not responding to the statutory notices issued under section 153A, 142(1) and 143(2), the assessing officer completed the assessment under section 144 of the Act on 21-12-2009 determining the total income at Rs. 110,12,38,532.
  2. The assessee moved an application before the CIT(Central)-II, New Delhi under the provisions of section 264 on 14-6-2010. The CIT(Central)-II, New Delhi videOrder, dated 16-3-2012 disposed of the application of the assessee with a direction to the assessing officer to reframe the assessment afresh after making required enquiries, investigation and verifications.
  3. The assessing officer thereafter issued notice to the assessee asking for various details. However, a perusal of the assessment order shows that there was no proper compliance from the side of the assessee. Therefore, the assessing officer proceeded to pass the order again under section 144 of the Income Tax Act on the basis of information collected from third party enquiries during initial assessment and documents seized at the time of search.
  4. The assessing officer noted that the assessee company has sold its share in the partnership firm M/s. Trishul Industries to M/s. Vatika Ltd. and its promoter Shri Anil Bhalla during the year. M/s. Trishul Industries holds 11 acres of land along the NH-8 and has license to set up and operate a resort cum hotel at this site. The details of acquisition and transfer of partnership share in the firm M/s. Trishul Industries has been narrated by the assessing officer which is as under :–

(a) On 15-6-2005 M/s. MDLR Estates Private Ltd., M/s. MDLR Builders (P) Ltd. (M/s. MDLR Group companies) and Shri Gopal Kumar Goyal (CMD of MDLR Group of companies), entered into an “agreement to sell” with the existing partners of M/s. Trishul Industries, i.e., Shri Ravi Shankar, Shri S.C, Babber, Shri Satish Chandra Babber and Shri RL Kukreja for transfer of partnership share of the firm to MDLR Group of Companies as mentioned above. Total Payment of Rs. 19.2 Cr. was made to four partners in lieu of transfer of partnership shares by them. Rs. 9,50,00,000 was paid by M/s. MDLR Estates Pvt. Ltd. and Rs. 9,50,00,000 was paid by M/s. MDLR Builders Pvt. Ltd.

(b) On 25-10-2006 a deed of retirement was signed between the above mentioned parties which formalized the agreement to sell signed on 15-6-2005. As per the deed of retirement the original four partners retired from the firm and the place of business also changed to the registered office of MDLR Group of companies. By this deed of retirement the MDLR group took full control of the firm. The partnership shares were held as given below :–

Name of MDLR Group entity Partnership Shares (%)
MDLR Estates Pvt. Ltd. 47.5
MDLR Builders Pvt. Ltd. 47.5
Shri Gopal Goyal 5

(c) The retiring partners were given the capital back from the firm. It is to be noted that they paid tax on capital gain in assessment year 2007-08, earned from sell of partnership share in M/s. Trishul Industries.

(d) On 29-11-2007, the MDLR Group Companies entered into a deed of retirement with M/s. Vatika Ltd. by which it agreed to transfer 85% of partnership share in M/s. Trishul Industries to M/s. Vatika Ltd. & Shri Anil Bhalla. The deed states that “the amounts paid by the continuing partners is in consideration of all rights, title and interest of the retiring partners in the said partnership”, i.e., M/s. Trishul Industries. This, according to the assessing officer, means that the payments made by M/s. Vatika Ltd. to MDLR Group companies is for the partnership share in M/s. Trishul Industries which includes the rights, title and interest embedded in the partnership share.

(e) On 15-12-2007 a deed of partnership was signed between MDLR Group and Vatika Group. By this deed 85% of partnership is transferred to M/s. Vatika Ltd. and 1% to Shri Anil Bhalla by MDLR Group. The deed does not contain any details regarding the payments made for the purpose of acquisition of partnership share by Vatika Group.

(f) A total of Rs. 178 Cr. was paid to MDLR Group for acquisition of the partnership firm. The details of payment as on 31-1-2008 is as under :–

Name of MDLR Group entity Debit Balance Credit Balance (Rs.)
Gopal Goyal 3,90,00,000
Alankar Saphire Developers (P) Ltd. 3,50,00,000
Ashutosh Developers (P) Ltd. 1,25,00,000
MDLR Developers & Promoters (P) Ltd. 13,00,00,000
Shiv Ganesh Builders (P) Ltd. 4,00,89,200
MDLR Estates (P) Ltd. 2,50,00,000
Wtiness Constn. (P) Ltd. 1,50,52,251
Kartikeya Buildcon (P) Ltd. 42,16,15,000
King Buildcon (P) Ltd. 20,612
MDLR Hotels (P) Ltd. 2,50,00,000
MDLR Airlines (P) Ltd. 2,00,00,000
Trishul Industries 1,06,00,00,000
Total (Rs.) 178,42,77,063 3,90,00,000

(g) The partnership share in a firm according to the assessing officer is a capital asset within the meaning of section 2(14) of the Income Tax Act, 1961. The MDLR Group transferred partnership share held by it to Vatika Ltd. and Anil Bhalla. This according to the assessing officer is covered well within the scope of transfer of capital assets defined in section 2(45) of the Income Tax Act.

(h) The assessing officer noted that the deed of retirement dated 29-11-2007 clearly states that in pursuance to the deed, rights, title and interests of the retiring partners, i.e., MDLR Group have been transferred and money is being paid by Vatika Group in consideration for the rights, title and interests acquired by it. The rights, title and Interests referred to here, is a bundle of rights and interests which include the title to 11 Acres of land and license to operate and set up a hotel, held by M/s. Trishul Industries. Thus by transferring the partnership share in the firm, the MDLR Group has transferred the rights, title, and interests held by it in the firm. These are capital assets within the meaning of section 2(14) and their transfer is transfer of capital assets under section 2(47) of the Income Tax Act, 1961. The MDLR Group is therefore, liable to pay tax on capital gains earned on this transfer.

(i) The transfer of partnership share together with rights, title and interests embedded in it took place within 36 months of its acquisition. Therefore the MDLR Group of companies is liable to pay Short Term Capital Gains tax on Capital Gains accrued to it.

(j) The assessing officer noted that while going through the electronic data seized during the search operation Annexure A-91 contained the valuation report of land belonging to M/s. Trishul Industries, at Vill-Shikohpur Distt-Gurgaon Haryana. The valuation has been done by Er. I.S. Chauhan and the purpose of valuation is to assess the fair market value of the property. In the said valuation report total value of the property has been evaluated at Rs. 1800 million, i.e., Rs. 180,00,00,000 (Rs. 180 Crores). Therefore, he concluded that the receipt of Rs. 178,42,77,068 in various companies is nothing but consideration for sale of land owned by M/s. Trishul Industries.

(k) Since a total of 85% of partnership share was transferred out of which 42.5% was transferred by the assessee company and since the total sale consideration received is Rs. 178,42,77,063, therefore, the assessing officer took half of this sum, i.e., Rs. 89,21.38,532 as sale consideration received in the hands of the assessee company. The cost of acquisition in the hands of assessee is Rs. 9,50,00,000. He accordingly determined the short-term capital gain at Rs. 79,71,38,532 and added the same to the total income of the assessee.

  1. The assessing officer further noted that assessee has admitted undisclosed income of Rs. 30,41,00,000 videLetter, dated 16-6-2008. He, therefore, added the same to the total income of the assessee as undisclosed income.
  2. The assessing officer accordingly determined the total income of the assessee at Rs. 1,10,12,38,532.
  3. Before Commissioner (Appeals) the assessee made elaborate submissions and filed various details based on which the learned Commissioner (Appeals) called for a remand report from the assessing officer. The assessing officer send three remand reports on various dates which were confronted to the assessee. After considering the remand reports of the assessing officer and the rejoinder of the assessee to such remand reports the Commissioner (Appeals) held that the sum received on retirement from the partnership firm is taxable as income of the assessee company as share of partner in partnership firm is capital asset and on retirement of the firm there is capital gain which accrues to the assessee which is taxable as such. For the above proposition he relied on the decision of Hon’ble Karnataka High Court ofCIT v. Gurunath Talkies (2010) 328 ITR 59 (Karnataka) : 2010 TaxPub(DT) 0580 (Karn-HC) and the decision of Hon’ble Bombay High Court in the case of CIT v. A. K. Naik Associates (2004) 265 ITR 346 (Bom) : 2004 TaxPub(DT) 0785 (Bom-HC). He however noted from the retirement deed dated 28-11-2007 between M/s. MDLR Estate Private Limited, M/s. MDLR Builders Private Limited, Mr. Gopal Kumar, M/s. Vatika Limited and Mr. Anil Bhalla that sum infused by M/s. Vatika limited was Rs. 112,00,00,000 and not Rs. 178.42 crores as held by the assessing officer. He, therefore, held that the sum paid by Vatika Limited to any other entity of MDLR Group cannot be a ground to bring to tax as capital gain in the hands of the assessee on transfer of shares in M/s. Trishul Industries. He, therefore, directed the assessing officer to exclude figure of Rs. 72.42 crores for computation of the capital gain in the hands of the assessee on transfer of shares in the partnership firm M/s. Trishul Industries. He further noted that the sum of Rs. 45.50 crores stands received in the case of the assessee, Rs. 47.12 crores in the case of MDLR Estate Private Limited and Rs. 3 crores in the hand of Sh. Gopal Kumar Goyal. The learned Commissioner (Appeals) in the case of Shri Gopal Kumar Goyal has confirmed the addition. Therefore, the assessing officer ought to have adopted the sums based on the retirement deed at a figure of Rs. 112 crores with 47.50% share which workout to Rs. 53.20 crores. After deducting the cost of share in the firm at Rs. 9,70,52,500 the learned Commissioner (Appeals) directed the assessing officer to tax the amount of Rs. 43,49,47,500 as capital gain arising to the assessee on the sum received on retirement from the partnership firm.
  4. The learned Commissioner (Appeals) while deciding the appeal found certain discrepancies in the computation of income. He, therefore, issued an enhancement notice to the assessee, the details of which are as under :–

“It is seen from the return and the submissions that you have declared income of Rs. 30.44 Crores app. It is, however, seen from the details about the transactions involving the retirement of the partners from M/s. Trishul Industries that you have reportedly received a payment of Rs. 53.20 Crores and have claimed an expenditure of Rs. 9.7 crores. The same does not tally with the Return of Income nor with the Computation of Income. There is a short declaration of [Rs. 43.5 crores – 30.44] = 13.06 crores. Accordingly, you are required to show cause as to why your income be not enhanced by the like amount of Rs. 13.06 crores so as to reconcile the figures as above, to bring the due income as per law of tax. “

  1. The assessee filed detailed submissions and claimed loss of Rs. 13.06 crores on account of purchase and sale of shares the details of which are as under :–
S. No. Date of Sale No. of Shares Rate Amount of Sale Date of Purchase No. of Share Rate Amount of Purchase Profit & Loss on Sale of Investment
1. 17-10-2007 46,70,000 (Sold to Shri Gopal Goyal) 5.62 2,62,45,400 23-10-2006 30,00,000 10 3,00,00,000
16-11-2006 16,70,000 10 1,67,00,000
Total 46,70,000 4,67,00,000 (2,04,54,600)
2. 25-2-2008 1,20,00,000 (Sold to Shri Gopal Goyal) 83 99,60,00,000 5-3-2007 50,00,000 10 5,00,00,000
18-7-2007 70,00,000 10 7,00,00,000
Total 1,20,00,000 12,00,00,000 (11,00,40,000)
TOTAL 1,66,70,000 3,62,05,400 1,66,70,000 16,67,00,000 (13,04,94,600)
  1. However, the learned Commissioner (Appeals) was not satisfied with the arguments advanced by the assessee. He observed that the aforesaid losses are on account of transactions between group entities of shares of group entities. It is clearly a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm M/s. Trishul Industries and thus is not allowable losses. According to the learned Commissioner (Appeals) it is not a genuine loss since there is no corroborative evidence in this regard. He, therefore, directed the assessing officer to enhance the income of the assessee to this extent being the loss claimed by the assessee on account of purchase and sale of shares which is not allowable.
  2. Aggrieved with such order of the Commissioner (Appeals), the assessee is in appeal before the Tribunal by raising the following grounds of appeal :–
Grounds of appeal Tax effect
Ground No. 1. That the learned Commissioner (Appeals) has erred both in law and on facts in making a disallowance of Rs. 13,04,50,800 representing the loss incurred on purchase and sale of shares. Rs. 4,43,40,227
Ground No. 1.1. That the learned Commissioner (Appeals) while making the aforesaid disallowance has acted in excess of jurisdiction and therefore, the same is beyond the scope and powers vested in the learned Commissioner (Appeals) under section 251(1)(a) of the Act. Linked to ground no. 1
Ground No. 1.2. That no valid show cause notice was given by the learned Commissioner (Appeals) before making the impugned disallowance and hence the same on this ground alone is without jurisdiction and contrary to the provisions contained in section 251(2) of the Act. Linked to ground no. 1
Ground No. 1.3. That even otherwise, the learned Commissioner (Appeals) has failed to appreciate the documentary evidence furnished in support of the loss incurred by the assessee company and therefore, genuine business loss incurred by the assessee ought to have been allowed as such. Linked to ground no. 1
Ground No. 1.4. That the finding of the learned Commissioner (Appeals) that the aforesaid loss is of transaction between group entities of shares of group entities and it is clearly a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm of M/s. Tirshul Industries and thus is not allowable loss and the purported loss so claimed is clearly inadmissible transaction to artificially evade lawful tax obligations and it is not genuine less as there is no corroborative evidence in this regard, is factually incorrect, contrary to evidence on record, legally misconceived and wholly untenable in law and hence unsustainable. Linked to ground no. 1
Ground No. 2. That furthermore, the learned Commissioner (Appeals) has erred both in law and on facts in upholding the inclusion of Rs. 43,49,47,500 (sales consideration of Rs. 53,20,00,000 cost of share in partnership firm of Rs. 9,70,52,500) representing the alleged capital gain arising on sum received by the assessee as partner on retirement from the partnership firm though the same is exempt under section 10(2A) of the Act. Rs. 14,78,38,655
Ground No. 2.1. That the learned Commissioner (Appeals) while upholding the inclusion, has failed to appreciate that no capital gain arose to the partner on retirement from the partnership firm and hence addition so made and sustained is invalid and therefore, unsustainable Linked to ground
Ground No. 2.2. That the learned Commissioner (Appeals) has failed to appreciate that there is no estoppel against statute and mere declaration in the capital gain could not be a ground to sustain any addition. Linked to ground no .2
Ground No. 2.3. That while upholding the addition, the learned Commissioner (Appeals) has failed to appreciate the evidence placed on record alongwith judicial pronouncements to submit that addition made and sustained is not in accordance with law. Linked to ground no.2
Prayer It is therefore, prayed that it be held that sum received on account of retirement from the partnership firm was not assessable as income and therefore ought to have been excluded while computing income of the appellant company. Apart from the above, it be also held that enhancement of income by disallowing the loss claimed on purchase and sale of shares is also illegal, both on merits and even otherwise beyond the scope of powers of the learned Commissioner (Appeals) under section 251 of the Act. It is thus prayed that appeal of the appellant may kindly be allowed as such.
  1. The learned Counsel for the assessee strongly opposed the order of the Commissioner (Appeals). He submitted that provisions of section 45(4) do not apply to partner and applies to a firm. He submitted that learned Commissioner (Appeals) incorrectly came to the conclusion that the amount of Rs. 43,49,47,500 represent the capital gain arising on sum received by the assessee as partner on retirement from the partnership firm, though the same is exempt under section 10(2A) of the Income Tax Act. He submitted that no capital gain arose to the partner on retirement from the partnership firm and hence addition so made by the assessing officer which has been sustained by the Commissioner (Appeals) is invalid.
  2. Referring to the following decisions he submitted that sum received on retirement from partnership firm which is outstanding as capital balance to the credit of account of partners account is not taxable :–
  3. Prashant S. Joshi v. ITO (2010)324 ITR 154 (Bom) : 2010 TaxPub(DT) 1561 (Bom-HC) 
  4. Chalasani Venkatesara Rao v. ITO (2013) 349 ITR 423 (AP) : 2013 TaxPub(DT) 0131 (AP-HC)
  5. CIT v. Dynamic Enterprises (2014) 359 ITR 83 (Kar) : 2014 TaxPub(DT) 2363 (Karn-HC)
  6. CIT v. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) : 1973 TaxPub(DT) 0093 (Guj-HC) 

He also relied on various decisions of the coordinate benches of the Tribunal on this proposition.

  1. Referring to the following decisions he submitted that sum standing to the credit in the current account or capital account of the retiring partner cannot be “deemed” as transfer of interest in the assets of partnership firm under section 2 (47) of the Act and as such there is no liability under the head “capital gain” in the hands of the retiring partner under section 45 of the Act :–
  2. CIT v. Dewas Cine Corpn. (1968) 68 ITR 240 (SC) : 1968 TaxPub(DT) 0304 (SC) 
  3. CIT v. Bankey Lal Vaidya (1971) 79 ITR 594 (SC) : 1971 TaxPub(DT) 0316 (SC) 
  4. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) : 1987 TaxPub(DT) 1259 (SC) 
  5. Tribhuvan G. Patel v. CIT (1999) 236 ITR 515 (SC) : 1999 TaxPub(DT) 0044 (SC)
  6. Prashant S. Joshi v. ITO (2010) 324 ITR 154 (Bom) : 2010 TaxPub(DT) 1561 (Bom-HC)
  7. Chalasani Venkatsara Rao v. ITO (2013) 349 ITR 423 (A) : 2013 TaxPub(DT) 0131 (AP-HC)
  8. CIT v. L. Raghu Kumar (1983) 141 ITR 674 (AP) : 1983 TaxPub(DT) 0891 (AP-HC)
  9. CIT v. P. H. Patel (1988) 171 ITR 128 (AP) : 1988 TaxPub(DT) 0526 (AP-HC)
  10. CIT v. G. Seshagiri Rao (1995) 213 ITR 304 (AP) : 1995 TaxPub(DT) 0128 (AP-HC)
  11. Bankey Lal Vaidya v. CIT (1965) 55 ITR 400 (All) : 1965 TaxPub(DT) 0075 (All-HC) 
  12. CIT v. Kunamkulam Mill Board (2002) 257 ITR 544 (Ker) : 2002 TaxPub(DT) 1305 (Ker-HC)
  13. Referring to the following decisions he submitted that there is no estoppel against statue and mere declaration of capital gain in the return cannot be a ground to make addition on account of short term capital gain :–
  14. CIT v. Mahalaxmi Sugar Mills Co. Ltd. (1986) 160 ITR 920 (SC) : 1986 TaxPub(DT) 1659 (SC) 
  15. CIT v. Bharat General Reinsurance Ltd. Co. (1971) 81 ITR 303 (Del) : 1971 TaxPub(DT) 0294 (Del-HC) 
  16. Vijay Gupta v. CIT (2016) 386 ITR 643 (Del) :2016 TaxPub(DT) 1654 (Del-HC) 
  17. DIT (E) v. Ahay G. Piramal Foundation (2014) 52 taxmann.com 226 (Del) : 2014 TaxPub(DT) 3769 (Del-HC) 
  18. CIT, Vidarbha and Marathwada v. Smt. Archana R. Dhanwatay (1982) 136 ITR 355 (Bom) : 1982 TaxPub(DT) 0354 (Bom-HC)
  19. Nirmala L. Mehta v. A. Balasubramaniam (2004) 269 ITR 1 (Bom) : 2004 TaxPub(DT) 1624 (Bom-HC) 
  20. Referring to the following decisions he submitted that reconstitution of firm does not result into invocation of section 45(4) :–
  21. CIT v. P.N. Panjawani (2012) 356 ITR 676 (Karnataka) :2012 TaxPub(DT) 2412 (Karn-HC) 
  22. DCIT v. G.K. Enterprises (2003) 79 TTJ 82 (Mad) : 2003 TaxPub(DT) 0151 (Mad-Trib) 
  23. Referring to the following decisions he submitted that taxability of sum received by firm is neither a determinative and nor a conclusive consideration to determine the taxability of the sum received by partner from firm :–
  24. Roshan Di Hatti v. CIT (1977) 107 ITR 938 (SC) : 1977 TaxPub(DT) 0842 (SC)
  25. State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) : 1986 TaxPub(DT) 1187 (SC)
  26. Income Tax Officer v. Ch. Atchaiah (1996) 218 ITR 239 (SC) : 1996 TaxPub(DT) 0726 (SC)
  27. Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC) : 1997 TaxPub(DT) 1198 (SC) 
  28. Referring to the decision of Hon’ble Karnataka High Court in the case ofCIT v. Dynamic Enterprises he submitted that the Hon’ble High Court in the said decision has held that where retiring partner took cash towards value of his share in partnership firm and there was no distribution of capital assets among partners, there was no transfer of capital asset and, therefore, no profits or gains is chargeable to tax under section 45(4).
  29. So far as the grounds of appeal No. 1 to 1.4 are concerned wherein the Commissioner (Appeals) has directed the assessing officer to enhance the income by Rs. 13,04,50,800, he submitted that the Commissioner (Appeals) has no power to enhance the assessment for income from a new source since the assessing officer in the instant case has not considered this aspect and there is not a whisper in the order regarding loss incurred on purchase and sale of shares. Therefore, the learned Commissioner (Appeals) has no power to add a new source of income and thereby enhance the income of the assessee. So far as the merit of the case is concerned he submitted that full details were given and merely because the transactions were entered into by two sister concerns, the same cannot be a valid ground for treating the same as collusive and thereby making the addition.
  30. Referring to the following decisions he submitted that the Commissioner (Appeals) has no power to enhance the assessment for income from new source :–
  31. CIT v. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC)1962 TaxPub(DT) 0283 (SC)
  32. CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) : 1967 TaxPub(DT) 0347 (SC)
  33. Shapoorji Pallonji Mistry (1958) 34 ITR 342 (Bom) : 1958 TaxPub(DT) 0142 (Bom-HC) 
  34. CIT vs Union Tyres (1999) 240 ITR 556 (Delhi) : 1999 TaxPub(DT) 1435 (Del-HC)
  35. CIT v. Sardari Lai & Co. (2001) 251 ITR 864 (Delhi) : 2001 TaxPub(DT) 1617 (Del-HC)
  36. CIT v. Changanlal Kailas & Co. (1984) 19 Taxman 536 (Mad) : 1984 TaxPub(DT) 0485 (Mad-HC) 
  37. CIT v. Associated Garments Makers (1992) 197 ITR 350 (Rajasthan) : 1992 TaxPub(DT) 1199 (Raj-HC)
  38. CIT v. National Co. Ltd. (1993) 199 ITR 445 (Calcutta) : 1993 TaxPub(DT) 0101 (Cal-HC)
  39. CIT v. BP Sherafuddin (2017) 399 ITR 524 (Kerela) : 2017 TaxPub(DT) 4686 (Ker-HC)
  40. Referring to the following decisions he submitted that transactions entered into by two sister concerns cannot be a valid ground for addition :–
  41. ITA No. 596/Kol/2011, M/s. Pluto Finance (P) Ltd.
  42. [ITA No. 1840/Mum/2005]  :2011 TaxPub(DT) 1579 (Mum Trib), Shri Jayesh P. Choksi v. ACIT
  43. Zaheer Mauritius v. DIT (IT) (2014) 270 CTR 244 (Del) : 2014 TaxPub(DT) 2909 (Del-HC)
  44. [ITA No. 729/Del/2011] : 2014 TaxPub(DT) 2909 (Del-HC), M/s. Consolidated Finvest & Holding Ltd. v. Asstt. CIT
  45. The learned DR on the other hand strongly relied on the order of the Commissioner (Appeals) and submitted that there was non compliance by the assessee before the assessing officer during the original assessment proceedings for which order was passed under section 144/153A on 21-12-2009. Similarly when the matter was set aside by the CIT under section 264 of the Income Tax Act with a direction to the assessing officer to frame the assessment afresh, even then also there was total non compliance. She submitted that the learned Commissioner (Appeals) has given valid reasons for bringing to tax the amount received by the assessee on account of relinquishment of its rights in the partnership firm. Similarly there are certain intra group transactions on account of purchase and sale of shares for which no details were filed either before the assessing officer or before the Commissioner (Appeals). The assessee also failed to furnish any evidence that the share transactions were genuine. The basis of share pricing was also not provided. The learned Commissioner (Appeals) passed the order after calling for three remand reports from the assessing officer. Accordingly the learned Commissioner (Appeals), whose powers are conterminous with that of the powers of the assessing officer, issued an enhancement notice and after considering the submissions filed by the assessee held that the loss on account of transaction between group entities of shares of group entities is a collusive transaction which has been done only to offset the income on sale of shares in the partnership firm of M/s. Trishul Industries and therefore, is not an allowable deduction. She accordingly submitted that since the order of the Commissioner (Appeals) is in accordance with law on both the issues, therefore, the same should be upheld.
  46. We have considered the rival arguments made by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessing officer in the instant case brought to tax an amount of Rs. 79,71,38,532 being short-term capital gain on account of transfer of shares in the partnership firm M/s. Trishul Industries by the assessee company to M/s. Vatika Limited. The argument of the assessee that no capital gain arises on sum received by a partner on retirement from the partnership firm was not accepted by the assessing officer on the ground that assessee has applied an unsuccessful technique to transfer his capital gain into its account from partnership firm without giving any tax. According to the assessing officer the partnership share in a firm is a capital asset within the meaning of section 2(14) and their transfer is transfer of capital asset within the meaning of section 2(47) of the Income Tax Act, 1961. We find although the learned Commissioner (Appeals) restricted the addition to Rs. 43,49,47,500, however in-principle he upheld the action of the assessing officer that capital gain arises to the partner on the sum received on retirement from the partnership firm. A chronological sequence of events that led to the retirement from the partnership firm is given by the assessing officer in his remand report dated 20-8-2018, copy of which is placed by the learned DR in the paper book and which is under :–

“As per Partnership Deed of M/s. Trishul Industries dated 4-3-1985

On 4-3-1985 a partnership firm, named and styled as Trishul Industries had been formed by the following four partners :–

(i) Shri Ravi Shanker

(ii) Shri Subhash Chandra Babbar

(iii) Shri Satish Chandra Babbar

(iv) Shri R.L. Kukreja

and the firm acquired land measuring 11.28 acres for a cost of Rs. 11,41,895.

As per Partnership Deed of M/s. Trishul Industries dated 15-6-2005

An amount of Rs. 19.2 Crores in the firm Trishul Industries contributed by the following mentioned parties with an agreement :–

(i) M/s. MDLR Builders (P) Ltd.

(ii) M/s. MDLR Estates (P) Ltd.

(iii) Shri Gopal Kumar Goyal

Therefore as per partnership deed of M/s. Trishul Industries dated 25-10-2006 the all above mentioned parties became partners of the firm M/s. Trishul Industries and the status of all partners with Profit and Loss percentage was as under: As per Partnership Deed of M/s. Trishul Industries dated 27-11-2006 Out of seven existing partner first four partners were retired and new profit and loss sharing ratio was as under :–

(i) Shri R. L. Kukreja (First Partner) Profit/loss sharing ratio 1%
(ii) Shri Subhash Chandra Babbar (Second Partner) Profit/loss sharing ratio 1%
(iii) Shri Ravi Shanker (Third Partner) Profit/loss sharing ratio 1%
(iv) Shri Satish Chandra Babbar (Fourth Partner) Profit/loss sharing ratio 1%
(v) M/s. MDLR Estates (P) Ltd. (Fifth Partner) Profit/loss sharing ratio 45%
(vi) M/s. MDLR Builders (P) Ltd. (Sixth Partner) Profit/loss sharing ratio 45%
(vii) Shri Gopal Kumar Goyal (Seventh Partner) Profit/loss sharing ratio 6%

As per Partnership Deed of M/s. Trishul Industries dated 27-11-2006

Out of seven existing partner first four partners were retired and new profit and loss sharing ratio was as under :–

(i) Shri R.L. Kukreja (First Partner) (Retired)
(ii) Shri Subhash Chandra Babbar (Second Partner) (Retired)
(iii) Shri Ravi Shanker (Third Partner) (Retired)
(iv) Shri Satish Chandra Babbar (Fourth Partner) (Retired)
(v) M/s. MDLR Estates (P) Ltd. (Fifth Partner) (47.5%)
(vi) M/s. MDLR Builders (P) Ltd. (Sixth Partner) (47.5%)
(vii) Shri Gopal Kumar Goyal (Seventh Partner) (5%)

As per Partnership Deed of M/s. Trishul Industries dated 22-11-2007

Out of three existing partner two new partners were entered and new profit and loss sharing ratio was as under :–

(i) M/s. MDLR Estates (P) Ltd. (First Party) Profit/Loss sharing ratio 5%
(ii) M/s. MDLR Builders (P) Ltd. (First Party) Profit/Loss sharing ratio 5%
(iii) Shri Gopal Kumar Goyal (First Party) Profit/Loss sharing ratio 5%
(iv) M/s. Vatika Limited (second Party) Profit/Loss sharing ratio 84%
(v) Shri Anil Bhalla (second party) Profit/Loss sharing ratio 1%

As per partnership Deed of M/s. Trishul Industries dated 28-11-2007

Out of five existing partner first three partners were retired and new profit and loss sharing ratio was as under :–

(i) M/s. MDLR Estates (P) Ltd. (First Party) Retired
(ii) M/s. MDLR Builders (P) Ltd. (First party) Retired
(iii) Shri Gopal Kumar Goyal (First Party) Retired
(iv) M/s. Vatika Limited (Second party) Profit/loss sharing ratio 99%
(v) Shri Anil Bhalla (second party) Profit/loss sharing ratio 1%
  1. Therefore, the question that arises for our consideration is as to whether the amount received by the assessee M/s. MDLR Builders Private Limited on account of its retirement from the partnership firm will attract capital gain tax.

26.1 We find an identical issue had come up for consideration before the Hon’ble Bombay High Court in the case of Prashant S. Joshi v. ITO (supra). We find in the said case under a deed of dissolution, the petitioner assessee received a sum of Rs. 50 lacs on retirement from the partnership firm which were claimed as capital receipt and not offered to tax. The revenue initiated the proceedings under section 147 to bring to tax the above amount. In the writ petition filed by the assessee, the Hon’ble High Court held as under :–

  1. During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On a dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does not involve an element of transfer within the meaning of section 2(47), Chief Justice P.N. Bhagwati (as the learned Judge then was) speaking for a Division Bench of the Gujarat High Court inCIT v. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) : 1973 TaxPub(DT) 0093 (Guj-HC)dealt with the issue in the following observations :–

“…….When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners: vide also the recent decision of the Supreme Court in CIT v. Bankey Lal Vaidya. It is true that section 2(47) defines “transfer” in relation to a capital asset and this definition gives an artificially extended meaning to the term “transfer” by including within its scope and ambit two kinds of transactions which would not ordinarily constitute “transfer” in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partnership.”

The Gujarat High Court held that there is, in such a situation, no transfer of interest in the assets of the partnership within the meaning of section 2(47). When a partner retires from a partnership, what the partner receives is his hare in the partnership which is worked out by taking accounts and this does not amount to a consideration for the transfer of his interest to the continuing partners. The rationale for this is explained as follows in the judgment of the Gujarat High Court :–

“…….What the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only in the surplus that the retiring partner is entitled to claim a share. It is, therefore, not possible to predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular asset.”

  1. The appeal against the judgment of the Gujarat High Court was dismissed by a Bench of three learned Judges of the Supreme Court inAddl. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) : 1987 TaxPub(DT) 1259 (SC). The Supreme Court relied upon its judgment inSunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC) : 1985 TaxPub(DT) 1358 (SC). The Supreme Court reiterated the same principle by relying upon the judgment in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. The Supreme Court held that what is envisaged on the retirement of a partner is merely his right to realise his interest and to receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership by virtue of his status as a partner and in terms of the partnership agreement. Consequently, what the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. The Supreme Court held that there was nothing strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. The Supreme Court inter alia cited with approval the judgment of the Gujarat High Court in Mohanbhai Pamabhai’s case (supra) and held that there is no transfer upon the retirement of a partner upon the distribution of his share in the net assets of the firm. In CIT v. R. Lingmallu Raghukumar (2001) 247 ITR 801 (SC) : 2001 TaxPub(DT) 0035 (SC), the Supreme Court held, while affirming the principle laid down in Mohanbhai Pamabhai that when a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners.
  2. At this stage, it may be noted that inCIT v. Tribhuvandas G. Patel (1978) 115 ITR 95 (Bom.) : 1978 TaxPub(DT) 0639 (Bom-HC), which was decided by a Division Bench of this Court, under a deed of partnership, the assessee retired from the partnership firm and wasinter alia paid an amount of Rs. 4,77,941 as his share in the remaining assets of the firm. The Division Bench of this Court had held that the transaction would have to be regarded as amounting to a transfer within the meaning of section 2(47) inasmuch as the assessee had assigned, released and relinquished his share in the partnership and its assets in favour of the continuing partners. This part of the judgment was reversed in appeal by the Supreme Court in Tribhuvandas G. Patel v. CIT (1999) 236 ITR 515 (SC) : 1999 TaxPub(DT) 0044 (SC). Following the judgment of the Supreme Court in Sunil Siddharthbhai’s case (supra), the Supreme Court held that even when a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (it) of section 47. Therefore, the question was answered in favour of the assessee and against the revenue. Section 47(ii) which held the field at the material time provided that nothing contained in section 45 was applicable to certain transactions specified therein and one of the transactions specified in clause (ii) was distribution of the capital assets on a dissolution of a firm. Section 47(ii) was subsequently omitted by the Finance Act of 1987 with effect from 1-4-1988. Simultaneously, sub-section (4) of section 45 came to be inserted by the same Finance Act. Sub-section (4) of section 45 provides that 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. The fair market value of the assets 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 for the purpose of section 48. Ex facie sub-section (4) of section 45 deals with a situation where there is a transfer of a capital asset by way of a distribution of capital assets on the dissolution of a firm or otherwise. Evidently, on the admitted position before the Court, there is no transfer of a capital asset by way of a distribution of the capital assets, on a dissolution of the firm or otherwise in the facts of this case. What is to be b noted is that even in a situation where sub-section (4) of section 45 applies, profits or gains arising from the transfer are chargeable to tax as income of the firm.

26.2 We find, the Hon’ble AP High Court in the case of Chalasani Venkateswara Rao v. ITO (supra) held that amount received by a partner in full and final settlement of its shares on dissolution of the firm does not result in transfer. The relevant observation of the Hon’ble High Court reads as under :–

  1. InBankey Lai Vaidya(supra), the Supreme Court held that a partner in a firm (carrying on business of manufacturing and selling pharmaceutical products and literature relating thereto) whose assets (which included good will, machinery, furniture, medicines, library and copy right) were valued at Rs. 2,50,000, was paid towards his half share, on the dissolution of the firm, a sum of Rs. 1,25,000 in lieu of his share, the arrangement between the partners of the firm amounted to a distribution of the assets of the firm on dissolution. It held that there was no sale or exchange of the respondent’s share in the capital assets to the other partner. The Supreme Court of India further held as follows :–

“In the course of dissolution the assets of a firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying the money value equivalent thereof. This is a recognized method of making up the accounts of a dissolved firm. In that case the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm. The respondent received the money value of his share in the assets of the firm : he did not agree to sell, exchange or transfer his share in the assets of the firm. Payment of the amount agreed to be paid to the respondent under the arrangement of his share was therefore not in consequence of any sale, exchange or transfer of assets.”

The Supreme Court upheld the contention of the assessee that no part of the amount of Rs. 1,25,000 received by the assessee represented capital gains and relied on Dewas Cine Corporation (supra) referred to above. It held that adjustment of the rights of the partners in a dissolved firm by allotment of its assets is not a transfer for a price. The facts of the instant case are identical with the facts of the case in Bankey Lai Vaidya (supra).

  1. InL. Raghu Kumar(supra), a Division Bench of the Andhra Pradesh High Court followed the judgment of the Gujarat High Court in CIT v. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj.) : 1973 TaxPub(DT) 0093 (Guj-HC) and held that no transfer is involved when a retiring partner receives at the time of retirement from the firm, his share in the partnership assets either in cash or any other asset. It further held that for the purpose of section 45 of the Income Tax Act, no distinction can be drawn between an amount received by the partner on the dissolution of the firm and that received on his retirement, since both of them stand on the same footing.
  2. InPH. Patel(supra), a Division Bench of the AP High Court noticed that the judgment in Mohanbhai Pamabhai (supra) was approved by the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) : 1987 TaxPub(DT) 1259 (SC) and following the judgment in L. Raghukumar (supra) held that when a partner retires from a partnership firm taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved.
  3. In the light of the above decisions, which are binding on us, we hold that the ITAT was not correct in confirming the orders passed by the Commissioner (Appeals) and the respondent. When the appellant was paid Rs. 15.00 lakhs by Y. Kalyana Sundaram in full and final settlement towards his 50% share on the dissolution of the firm, mere was no “transfer” as understood in law and consequently there cannot be tax on alleged capital gain. The appellant was correct in law in contending that the amount he received from Y. Kalyana Sundaram is towards the full and final settlement of his share and such adjustment of his right is not a “transfer” in the eye of law. It is a recognized method of making up the accounts of the dissolved firm and the receipt of money by him is nothing but a receipt of his share in the distributed asset of the firm. The appellant received the money value of his share in the assets of the firm. He did not agree to sell, exchange or transfer his share in the assets of the firm. Payment of the amount agreed to be paid to the appellant under the compromise was not in consequence of any share, exchange or transfer of assets to Y. Kalyana Sundaram. Moreover, as rightly contended by the assessee, up to the assessment year 1987-88, section 47(ii) of the Income Tax Act, 1961 excluded these transactions. From assessment year 1988-89, in the case of dissolution of a firm, only the firm is taxable on capital gains on dissolution under section 45(4) of the Income Tax Act, 1961 and not the partner. Section 45(4) states as follows :–

Section 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 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 the consideration received or accruing as a result of the transfer.”

Thus it is clear that the legislature, even though it was aware of the above decisions, did not choose to amend the law by making the partner liable when it amended the Income Tax Act, 1961 by introducing clause (4) to section 45 by the Finance Act, 1987 with effect from 1-4-1988 and made only the firm liable. Therefore the contention of the assessee has to be accepted and that of the Revenue is liable to be rejected.

  1. We find the learned Commissioner (Appeals) has relied on the decision of Hon’ble Karnataka High Court in the case ofGurunath Talkies (supra) and the decision of Hon’ble Bombay High Court in the case of A.N. Naik Associates (supra). We find both these decisions were rendered in the context of section 45 (4) of the Income Tax Act. 1961 and were the subject matter of consideration before the full bench of the Hon’ble Karnataka High Court in the case of CIT v. Dynamic Enterprises (supra). We find due to conflicting decisions of the same High Court, the following substantial questions of law were framed with the following observations :–

“A division bench of this court felt that there is a conflict between the proposition of law laid down in the case of CIT v. Mangalore Ganesh Beedi works (2004) 265 ITR 658 : 136 Taxman 42 (Kar.) : 2004 TaxPub(DT) 0355 (Karn-HC) and in the case of CIT v. Gurunath Talkies (2010) 328 ITR 59 (Kar) : (2010) 189 Taxman 171 (Kar.) : 2010 TaxPub(DT) 0580 (Karn-HC) in order to resolve the said conflict, passed an order on 27-8-2013 directing the matter to be listed before the Bench.

Substantial question of law

The substantial question of law referred for our consideration are as under :–

“When a retiring partners 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; Or

Whether the retiring partner would be liable to pay for the capital gains?” “

  1. We find the Hon’ble High Court decided the issue in favour of the assessee holding that when a retiring partner takes only money towards the value of his share and when there is no distribution of capital asset/assets going to the partners, there is no transfer of capital asset and consequently no profits or gains is chargeable under section 45(4) of the Income Tax Act, 1961. The relevant observation of the Hon’ble High Court from para 23 onwards reads ad under :–

“23. Sub-section (4) of section 45 deals with a distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals or otherwise. If in the course of such distribution of capital asset there is a transfer of a capital asset by the firm in favour of a person and it results in profits or gains to the firm, the said profits or gains shall be chargeable to tax as income of the firm and again for computing such come, section 48 is attracted. In other words, in the process of a dissolution of a firm, if a capital asset is transferred to a partner which results in profits or gains, then that, income is chargeable at the hands of the firm under this provision. In order to attract sub-section (4) of section 45, the condition precedent is —

(1) There should be a distribution of capital assets of a firm;

(2) Such distribution should result in transfer of a capital asset by firm in favour of the partner; and

(3) On account of the transfer there should be a profit or gain derived by the firm.

(4) Such distribution should be on dissolution of the firm or otherwise.

  1. Therefore, in order to attract section 45(4) of the Act, the capital asset of the firm should be transferred in our of a partner, resulting in 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 gains arising from such transfer is liable to tax under section 45(4) of the Act.
  2. In the instant case, the partnership firm had purchased the property under a registered sale deed in the name of firm. The property did-not stand in the name of any individual partners. No individual partners brought that ital asset as capital contribution into the firm. Five partners brought/in cash by way of capital when the firm’ reconstituted on 28-4-1993. Nearly a year thereafter on 1-4-1994 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 remaining five partners. There no dissolution of the firm, or at any rate there was no distribution of capital asset on 1-4-1994 when three partners retired from the partnership firm. What was given to the retiring partners-is cash representing the value of retirement share in the partnership. No capital asset was transferred on the date of retirement under the deed of retirement deed dated 1-4-1994. 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 which did not accrue to them would not arise.
  3. 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 1-4-1994 took money and left the property to the incoming partners. It is a device adopted by these partners in order to evade payment of profits or gains. As rightly held by Court inGuninaths Talkies’case (supra) it is taxable. This argument proceeds on the premise that the immovable property belongs to the erstwhile partners and that after the 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.
  4. InGurunath Talkies’case (supra), the Division Bench of this Court followed the judgment of the Bombay High Court in the case CIT v. A.N. Naik Associates (2004) 265 ITR 346 (Bom.) : 2004 TaxPub(DT) 0785 (Bom-HC). In A.N. Naik Associates’ case (supra), 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 partitioned. 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 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 assessees are liable for tax on capital gains.
  5. 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 “distinguished in favour of the partner to whom it is transferred. If so read, it will further the object and the purpose and intent of the amendment of section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would 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 other words, its right to the property should stand extinguished and the retiring partners acquires absolute title to the property.
  6. 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 inGurunath Talkies’case (supra) did not appreciate this distinguishing factor and by wrong application of the law laid down by the Bombay High Court held the assessee that case is also liable to pay capital gains tax under section 45(4). Therefore, the said judgment does not lay the correct law.
  7. We would like to add that several other aspects of section 45(4) was addressed in the course of the arguments by both sides which are not relevant to adjudicate the present issue, as in the present case there is no distribution of assets and hence, one of the condition precedent for invoking section 45(4) does not exist and hence Section 45(4) is not attracted to the facts of this case.

ANSWER

  1. The reference is answered as under :–

“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?”

  1. In so far as the substantial question of law “whether the retiring partner would be liable to pay capital gain” is concerned, the said question does not arise for consideration in the appeal as the only question which arose for consideration was, whether the firm is liable to pay capital gain tax. Therefore, the said question of law is not answered.
  2. For the aforesaid reasons, we pass the following :–

(i) The substantial question of law is answered in favour of the assessee and against the revenue.

(ii) Consequently, the appeal stands dismissed.

(iii) No costs.

Therefore, the decisions relied on by learned Commissioner (Appeals) are distinguishable and not applicable to the facts of the present case.

  1. The various other decisions relied on by learned Counsel for the assessee also support his case to the proposition that amount paid to partner on retirement does not involve an element of transfer within the meaning of section 2(47).
  2. Respectively following the above decisions cited (supra) we hold that the assessee is not liable to any capital gain tax on account of the sum received by it as a partner on retirement from the partnership firm. The order of the Commissioner (Appeals) on this issue is accordingly set aside and the assessing officer is directed to delete the addition of Rs. 43,49,47,500 sustained by the Commissioner (Appeals).
  3. The grounds of appeal No. 2 to 2.3 are accordingly allowed.
  4. So far as the ground No. 1 to 1.4 are concerned the same relate to the order of the Commissioner (Appeals) in making a disallowance of Rs. 13,04,50,800 representing the loss incurred on purchase and sale of shares. It is an admitted fact that there is no such discussion by the assessing officer in the body of the assessment order. Only while processing the appeal, certain discrepancies were found in the income computation for which the learned Commissioner (Appeals) issued an enhancement notice. After considering the various arguments advanced by the assessee learned Commissioner (Appeals) held that the loss on account of transaction between group entities of shares of group entities is a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm of M/s. Trishul Industries and therefore, is not an allowable loss. It is the submission of the learned Counsel for the assessee that the learned Commissioner (Appeals) has no power to enhance the assessment by bringing in income from new source. For the above proposition, the learned counsel for the assessee relied on various decisions. However, it is a matter of record that the original assessments as well as assessment subsequent to the order passed by the learned CIT under section 264 areex parte assessments and the assessee at no point of time had given any details before the assessing officer so as to enable him to pass the order as per law. Since the assessments were framed under section 144 of the Income Tax Act and since the discrepancies were found in the income computation during the appeal hearing, therefore, the Commissioner (Appeals) in our opinion, has absolute power to issue enhancement notice to the assessee in the instant case. Therefore, the various decisions relied by the learned Counsel for the assessee that Commissioner (Appeals) has no power to enhance assessment by bringing a new sources of income is not tenable under the facts and circumstances of the case. It is the settled proposition of law that the powers of Commissioner (Appeals) are conterminous with that of the powers of the assessing officer. Therefore, we hold that the enhancement notice issued by Commissioner (Appeals) in the instant case is justified. However, we find from the order of the Commissioner (Appeals) that while enhancing the income he has given a finding that no corroborative evidences were filed by the assessee to substantiate that the loss is genuine. Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore this issue to the file of the assessing officer with a direction to give an opportunity to the assessee to substantiate with evidence to his satisfaction regarding the genuineness of the loss of Rs. 13,04,95,600 on account of purchase and sale of shares of group companies. Needless to say the assessing officer shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds of appeal No. 1 to 1.4 are accordingly allowed for statistical purpose.
  5. In the result, the appeal filed by the assessee is allowed for statistical purpose.

ITA No. 8215/Del/2018 (MDLR Estate Private Limited)

The assessee raised following grounds of appeal :–

Grounds of Appeal Tax Effect
Ground No. 1. That the learned Commissioner (Appeals) has erred both in law and on facts in making a disallowance of Rs. 13,04,94,600 representing the loss incurred on purchase and sale of shares Rs. 4,43,55,115
Ground No. 1.1. That the learned Commissioner (Appeals) while making the aforesaid disallowance has acted in excess of jurisdiction and therefore, the same is beyond the scope and powers vested in the learned Commissioner (Appeals) under section 251 (l)(a) of the Act. Linked to ground no. 1
Ground No. 1.2. That no valid show cause notice was given by the learned Commissioner (Appeals) before making the impugned disallowance and hence the same on this ground alone is without jurisdiction and contrary to the provisions contained in section 251(2) of the Act. Linked to ground no. 1
Ground No. 1.3. That even otherwise, the learned Commissioner (Appeals) has failed to appreciate the documentary evidence furnished in support of the loss incurred by the assessee company and therefore, genuine business loss incurred by the assessee ought to have been allowed as such. Linked to ground no. 1
Ground No. 1.4. That the finding of the learned Commissioner (Appeals) that the aforesaid loss is of transaction between group entities of shares of group entities and it is clearly a collusive transaction that has been done only to offset the income on sale of shares in the partnership firm of M/s. Trishul Industries and thus is not allowable loss and the purported loss so claimed is clearly inadmissible transaction to artificially evade lawful tax obligations and it is not genuine loss as there is no corroborative evidence in this regard, is factually incorrect, contrary to evidence on record, legally misconceived and wholly untenable in law and hence unsustainable. Linked to ground no. 1
Ground No. 2. That furthermore, the learned Commissioner (Appeals) has erred both in law and on facts in upholding the inclusion of Rs. 43,49,47,500 (sales consideration of Rs. 53,20,00,000 cost of share in partnership firm of Rs. 9,70,52,500) representing the alleged capital gain arising on sum received by the assessee as partner on retirement from the partnership firm though the same is exempt under section 10(2A) of the Act. Rs. 14,78,38,655
Ground No. 2.1. That the learned Commissioner (Appeals) while upholding the inclusion, has failed to appreciate that no capital gain arose to the on retirement from the partnership firm and hence addition so made and sustained is invalid and therefore, unsustainable. Linked to ground no. 2
Ground No. 2.2. That the learned Commissioner (Appeals) has failed to appreciate that there is no estoppel against statute and mere declaration in the capital gain could not be a ground to sustain any addition. Linked to ground no. 2
Ground No. 2.3. That while upholding the addition, the learned Commissioner (Appeals) has failed to appreciate the evidence placed on record alongwith judicial pronouncements to submit that addition made and sustained is not in accordance with law. Linked to ground no. 2
Prayer It is therefore, prayed that it be held that sum received on account of retirement from the partnership firm was not assessable as income and therefore ought to have been excluded while computing income of the appellant company. Apart from the above, it be also held that enhancement of income by disallowing the loss claimed on purchase and sale of shares is also illegal, both on merits and even otherwise beyond the scope of powers of the learned Commissioner (Appeals) under section 251 of the Act. It is thus prayed that appeal of the appellant may kindly be allowed as such.
  1. After hearing both the sides. We find the above grounds are identical to grounds of appeal inITA No. 8214/Del/2015. We have already decided the issue and grounds raised by the assessee have been partly allowed as indicated therein. Following similar reasoning the ground No. 2 to 2.3 are allowed and ground of appeal No. 1 to 1.4 are allowed for statistical purpose.
  2. In the result, both the appeals filed by the respective assessees are partly allowed for statistical purpose.

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