Sachin Bhausaheb Nikam, Pune V. Deputy Commissioner of Income-tax,

ITA 1288/PUN/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1055 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 09-08-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 16-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Keywords: Capital asset; Cost of acquisition
• Section: 143(3)

Judgement Text

] ]] ] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , !', $ % BEFORE SHRI VIKAS AWASTHY, JM AND SHRI PRADIP KUMAR KEDIA, AM ITA NO.1288/PN/2014 ASSESSMENT YEAR : 2007-08 SHRI SACHIN BHAUSAHEB NIKAM, PUNEET APARTMENTS, 304 NARAYAN PETH, PUNE 411 030. PAN : AAJPN5516D . APPELLANT VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(2), PUNE. . RESPONDENT / APPELLANT BY : SHRI KISHOR PHADKE / RESPONDENT BY : SHRI P. L. KUREEL / DATE OF HEARING : 09.08.2016 / DATE OF PRONOUNCEMENT: 26.08.2016 & / ORDER PER PRADIP KUMAR KEDIA, AM : THE CAPTIONED APPEAL FILED BY THE ASSESSEE IS AGAIN ST THE ORDER OF CIT(A)-I, PUNE DATED 28.12.2013 RELATING TO ASSESSM ENT YEAR 2007-08 PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (I N SHORT THE ACT). 2. IN THIS APPEAL, THE ASSESSEE HAS FILED MODIFIED GROUNDS OF APPEAL, WHICH READ AS UNDER :- 1. THE LEARNED CIT (A)-I, PUNE ERRED IN LAW AND ON FACTS IN HOLDING THAT THE AMOUNT OF RS. 1,49,35,424/- RECEIVED BY THE APPELL ANT UPON RETIREMENT FROM THE FIRM M/S. TUSHAR PROPERTIES IS TAXABLE AS LONG TERM CAPI TAL GAIN AS THERE WAS A TRANSFER U/S 2(47) OF THE ITA, 1961. 2. ALTERNATIVELY AND WITHOUT PREJUDICE TO GROUND NO . 1; THE LEARNED CIT(A)-I, PUNE ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT THE AMOUNT OF RS. 1,90,25,000/- RECEIVED BY THE APPELLANT UPON RETIRE MENT FROM THE PARTNERSHIP 2 ITA NO.1288/PN/2014 FIRM IS NOT TAXABLE AT ALL, BEING A TRANSACTION IN CAPITAL FIELD & NOT COVERED U/S 45(4) OF THE ITA, 1961. 3. THE LEARNED CIT(A)-I, PUNE ERRED IN LAW AND ON F ACTS IN MAKING A WRONG DISTINCTION OF THE FACTS OF THE CASE WITH VARIOUS B INDING DECISIONS. HE FURTHER ERRED IN NOT PROVIDING ANY OPPORTUNITY TO THE APPEL LANT TO SUBMIT HIS 'SAY' ON THE SAID ISSUE OF INCORRECT DISTINCTIONS DRAWN. 4. ALTERNATIVELY AND WITHOUT PREJUDICE TO GROUND NO . 1 & 2, THE LEARNED CIT (A)-I, PUNE ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE LEARNED AO IN NOT ALLOWING INDEXED COST OF ACQUISITION OF RS. 54, 81,548/-, ON AMOUNT STANDING TO THE CREDIT OF THE PARTNER'S CAPITAL ACCOUNT. 5. THE APPELLANT CRAVES TO ADD / MODIFY / ALTER / D ELETE ALL / ANY OF THE GROUNDS OF APPEAL. 3. BRIEFLY STATED, THE ASSESSEE IS ENGAGED IN ERECT ION AND SUPPLY OF PARTS OF SUGAR INDUSTRIES. THE RETURN OF INCOME FILED BY TH E ASSESSEE WAS SUBJECTED TO SCRUTINY PROCEEDINGS. IN THE COURSE SCRUTINY PROCE EDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS INTER-ALIA DECLARED LONG TERM CAPITAL GAINS AMOUNTING TO RS.1,35,43,452/- ON RELINQUISHMENT OF RIGHT ON RETIREMENT FROM PARTNERSHIP FIRM NAMELY M/S TUSHAR PROPERTIES, PUNE IN TERMS OF DEED OF MODIFICATION (DEED), RETIREMENT AND INTRODUCTION OF PARTNER DATED 05 TH OCTOBER, 2006. AS PER THE AFORESAID DEED, THE ASSE SSEE HAS RELINQUISHED HIS RIGHT, TITLE AND INTEREST IN PARTNERSHIP AND ALL OT HER PARTNERSHIP PROPERTIES, IN CONSIDERATION OF CREDIT BALANCE REMAINING TO HIS AC COUNT AS ON 05.10.2006 AND AN ADDITION AMOUNT AS MUTUALLY AGREED UPON BY THE P ARTIES TO THE DEED TO THE TUNE OF RS.1,49,35,424/-. AGAINST THE RECEIPT OF T HE ADDITIONAL SUM OF RS.1,49,35,424/- IN ADDITION TO THE ASSESSEES OWN CAPITAL OF RS.40,89,576/- TOWARDS RELEASE OF RIGHTS IN PROPERTY OF THE FIRM, THE ASSESSEE CLAIMED DEDUCTION FOR INDEXED COST OF ACQUISITION COMPUTED AT RS.54,81,548/-. THE BENEFIT OF INDEXATION CLAIM ON THE CAPITAL INVESTME NT IN THE PARTNERSHIP FIRM WORKED OUT AT RS.13,91,972/- WAS NOT ACCEPTED BY TH E ASSESSING OFFICER ON THE GROUND THAT CAPITAL INTRODUCED IN THE FIRM IS NOT I N THE NATURE OF COST OF ACQUISITION FOR RIGHTS IN PROPERTY OF FIRM. THE AS SESSEE HAS TRANSFERRED HIS RIGHTS TO THE PROFIT ARISING FROM THE FIRM AFTER TH E DATE OF RETIREMENT. THE ASSESSING OFFICER OBSERVED THAT AS PER THE DEED PRO PERTY WAS VESTED IN THE FIRM AND CONTINUED TO BE AN ASSET BELONGING TO THE FIRM. AS PER THE ASSESSING 3 ITA NO.1288/PN/2014 OFFICER, THERE IS NO DISTRIBUTION OF ASSETS ON RE-C ONSTITUTION OF THE FIRM. THE ASSESSEE HAS ACQUIRED RIGHTS IN THE PARTNERSHIP FIR M IN THE YEAR 2001 AND ON HIS RETIREMENT AN AMOUNT OF RS.1,49,35,424/- OVER AND A BOVE HIS CAPITAL BALANCE OF RS.40,89,576/- ON THESE FACTS. THE ASSESSING OFFIC ER HELD THAT ENTIRE SURPLUS AMOUNT OF RS.1,49,35,424/- OVER AND ABOVE THE CAPIT AL BALANCE IS TAXABLE UNDER SECTION 45 OF THE ACT WITHOUT INDEXATION. THE ASSE SSING OFFICER OBSERVED THAT MODE OF COMPUTATION OF CAPITAL GAIN IS GIVEN IN SEC TION 48 AND SINCE THE COST OF ACQUISITION OF THE RIGHTS IN THE PARTNERSHIP FIRM I S NIL, THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER OF THE RIGHTS IN THE PARTNERSHIP FIRM I.E. RS.1,49,35,424/- IS THE INCOM E CHARGEABLE UNDER THE HEAD CAPITAL GAINS AS AGAINST RS.1,35,43,452/- DECLARE D BY THE ASSESSEE IN THE RETURN OF INCOME. HE ACCORDINGLY DENIED THE BENEFI T OF INDEXATION CLAIMED TO THE TUNE OF RS.13,91,972/- WHILE DETERMINING THE AS SESSED INCOME OF THE ASSESSEE. 4. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A). 5. BEFORE THE CIT(A), THE ASSESSEE RAISED THE GRIEV ANCE IN RELATION TO ISSUE OF TAXATION OF LONG TERM CAPITAL GAIN ON RELINQUISH MENT OF ASSESSEES RIGHTS IN PARTNERSHIP FIRM. BEFORE THE CIT(A), THE ASSESSEE REFERRED TO THE IMPUGNED DEED DATED 05.10.2006 AND TOOK A STAND THAT THE WHO LE OF THE AMOUNT RECEIVED RS.1,90,25,000/- IS NOT TAXABLE IN THE HANDS OF THE ASSESSEE AT ALL IN DEPARTURE TO ITS CLAIM OF INDEXATION BENEFIT ALONE AT THE ASSESS MENT STAGE. IT WAS MADE OUT BEFORE THE CIT(A) THAT AMOUNT OF RS.1,35,43,452/-OF FERED FOR TAXATION WHILE FILING THE RETURN OF INCOME WAS UNDER THE ERRONEOUS IMPRESSION OF LAW. IT WAS SUBMITTED THAT ALTHOUGH THE ASSESSEE CONSIDERED THE IMPUGNED TRANSACTION OF RECEIPT FROM PARTNERSHIP FIRM TOWARDS RELINQUISHMEN T OF RIGHTS AS LEADING TO TAXABLE CAPITAL GAIN WHILE FILING THE RETURN OF INC OME, THE AFORESAID RECEIPT FALLS OUTSIDE THE SCOPE OF CAPITAL GAIN TAXATION AND THER EFORE CANNOT BE TAXED UNDER LAW. FOR THE PROPOSITION THAT MERELY BECAUSE THE A SSESSEE HAS WRONGFULLY OFFERED CERTAIN RECEIPTS AS TAXABLE INCOME, THE REV ENUE CANNOT TAX THE SAME 4 ITA NO.1288/PN/2014 UNLESS AND OTHERWISE IT IS TAXABLE IN LAW. THE ASS ESSEE REFERRED TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PRUTHVI BROKERS & SHAREHOLDERS PVT. LTD., (2012) 349 ITR 336 (BOM.) T O ENABLE THE CIT(A) TO ADMIT THE LEGAL PLEA OF NON-TAXABILITY OF ENTIRE SU RPLUS RECEIVED AND GRANT APPROPRIATE RELIEF. IN VIEW OF THE JUDICIAL DICTA, IT WAS CONTENDED THAT THE ASSESSEE IS ENTITLED TO RAISE THE CLAIM BEFORE THE APPELLATE AUTHORITY AS THE RELEVANT FACTS ARE ALREADY ON RECORD. 6. ON THE MERITS OF THE CLAIM, THE ASSESSEE REFERRE D TO SECTION 45(4) OF THE ACT AND CONTENDED THAT CAPITAL GAIN TAX LIABILITY R ESTS ON THE PARTNERSHIP AND NOT ON THE PARTNERS PER SE. THE ASSESSEE ALSO CONTENDED THAT ANY SUM RECEIVED O N RETIREMENT FROM A FIRM IS CAPITAL RIGHTS IN THE HAN DS OF THE OUTGOING PARTNERS. THE OTHER CONTENTION OF THE ASSESSEE BEFORE THE CIT (A) WAS THAT THE COST OF ACQUISITION OF RIGHTS IN THE FIRM IS NOT ASCERTAINA BLE AND HENCE CANNOT BE CONSIDERED AS NIL AS DONE BY THE ASSESSING OFFICER. SINCE THE COST OF INTEREST ON FIRM IS NOT ASCERTAINABLE, THE ASSESSEE IS NOT C HARGEABLE TO CAPITAL GAIN TAX AT ALL. THE CIT(A), HOWEVER, WAS NOT IMPRESSED BY THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE. THE CIT(A), IN CONCLUSIO N, DID NOT FIND MERITS IN THE CLAIM OF THE ASSESSEE THAT THE SURPLUS RECEIPTS FROM PARTNERSHIP FIRM IS EXEMPT FROM TAX. 7. AGAINST THE SAID ACTION OF THE CIT(A), THE ASSES SEE IS IN SECOND APPEAL BEFORE THE TRIBUNAL. 8. THE LD. AUTHORIZED REPRESENTATIVE (AR) FOR THE A SSESSEE SHRI KISHOR PHADKE AT THE OUTSET REITERATED THAT THE ASSESSEE H AS RECEIVED AN ADDITIONAL SUM OF RS.1,49,35,424/- IN ADDITION TO HIS CAPITAL FROM THE PARTNERSHIP FIRM AT THE TIME OF RETIREMENT ON 05 TH OCTOBER, 2006. THE ASSESSEE HAS INITIALLY WRONGLY OFFERED THE AFORESAID INCOME TO TAXATION AT THE TIM E OF FILING THE RETURN OF INCOME FOR CLAIMING DEDUCTION TOWARDS INDEXATION OF COST OF ACQUISITION THEREON. HOWEVER, BEFORE THE CIT(A) IT WAS POINTED OUT ON BEHALF OF THE ASSESSEE THAT THE AFORESAID ADDITIONAL SUM IS NOT E XIGIBLE TO TAX AT ALL. BEFORE 5 ITA NO.1288/PN/2014 US, IN ORDER TO SUPPORT HIS CLAIM ABOUT NON-TAXABIL ITY OF THE AFORESAID ADDITIONAL SUM UNDER HEAD CAPITAL GAINS, THE LD. AR RELIED U PON THE DECISION IN THE CASE OF (I) ITO VS. SHRI RAJNISH M. BHANDARI IN ITA NO.4 69/PN/2011, ORDER DATED 17.07.2012; (II) ACIT VS. N. PRASAD, EXECUTIVE CHAI RMAN, (2014) 43 TAXMANN.COM 253 (HYDERABAD TRIB.) AND (III) SMT. HEMLATA S. SHETTY VS. ACIT IN ITA NO.1514/MUM/2010, ORDER DATED 01.12.201 5. HE ALSO ADVERTED OUR ATTENTION TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF MR. RIYAZ A. SHAIKH VS. ITO IN ITA NO.352/PN/2006, ORDER DATED 29.10.2010, WHEREIN IT WAS EARLIER HELD THAT AMOUNT RECEIVED BY THE ASSESSEE ON RETIREMENT FROM THE PARTNERSHIP FIRM IS NOT TAXABLE UNDER THE HEAD CAPITAL GAINS. HE ACCORDINGLY SUBMITTED THAT DECISION OF THE CIT(A) I N HOLDING THE AFORESAID SURPLUS AS TAXABLE SUFFERS FROM AN ERROR OF LAW WHI CH REQUIRES TO BE REVERSED. 9. THE LD. DEPARTMENTAL REPRESENTATIVE (DR), ON THE OTHER HAND, RELIED UPON THE ORDER OF THE CIT(A) AND SUBMITTED IN FURTH ERANCE THAT THE ASSESSEE WAS HAVING A RIGHT AND INTEREST IN THE PARTNERSHIP FIRM WHICH RIGHT HAS BEEN RELINQUISHED AND THEREFORE THERE IS A TRANSFER OF CAPITAL ASSET WITHIN THE MEANING OF SECTION 2(47) OF THE ACT WHICH REQUIRES TO BE TAXED UNDER SECTION 45 OF THE ACT. THE LD. DR CONTENDED THAT THE AMOUN T RECEIVED BY THE ASSESSEE DOES NOT MERELY REPRESENT CREDIT BALANCE LYING IN H IS CAPITAL ACCOUNT WITH THE PARTNERSHIP FIRM. THE AMOUNT RECEIVED OVER AND ABO VE CREDIT BALANCE IS AN ADDITIONAL REVENUE WHICH CANNOT ESCAPE TAXATION UND ER THE PROVISIONS OF LAW. THE LD. DR SUBMITTED THAT SECTION 45(4) HAS NO APPL ICATION IN THE FACTS OF THE CASE SINCE THERE IS NO DISTRIBUTION OF THE CAPITAL ASSETS AMONG THE PARTNERS AT THE TIME OF DISSOLUTION OR OTHERWISE. IT IS A MERE REC EIPT OF SURPLUS OVER AND ABOVE THE CREDIT BALANCE OF CAPITAL TOWARDS RELINQUISHMEN T OF ITS INTEREST IN THE CAPITAL ASSET IN FAVOUR OF THE INCOMING PARTNER. HE ACCORD INGLY SUBMITTED THAT NO INTERFERENCE WITH THE ORDER OF THE CIT(A) IS CALLED FOR. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND ORDERS OF THE AUTHORITIES BELOW. IN THE INSTANT CASE, AS NOTED A BOVE, THE ASSESSEE AS A RETIRING PARTNER HAS RECEIVED CERTAIN AMOUNT OVER AND ABOVE THE CAPITAL BALANCE TOWARDS 6 ITA NO.1288/PN/2014 HIS SHARE IN THE PARTNERSHIP FIRM. THE PARTNERSHIP FIRM HAS CONTINUED TO EXIST AFTER THE RETIREMENT OF THE ASSESSEE PARTNER. THE REVENUE HAS TREATED THE ADDITIONAL AMOUNT SO RECEIVED FROM THE PARTNERSHIP FIRM AS LONG TERM CAPITAL GAIN AND SOUGHT TO TAX THE SAME. HOWEVER, WE FIND THAT CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MR. RIYAZ A. SHAIKH (SU PRA) HAS HELD AMOUNT RECEIVED BY A PARTNER ON RETIREMENT CANNOT BE TAXED AS LONG TERM CAPITAL GAIN ON TRANSFER OF GOODWILL. THE TRIBUNAL REVERSED THE ORDER OF THE REVENUE ON THE GROUND THAT WHEN A PARTNER RETIRES FROM THE FIRM AN D RECEIVES SHARE OF AMOUNT CALCULATED ON THE VALUE OF PARTNERSHIP ASSET INCLUD ING GOODWILL OF THE FIRM, THERE IS NO TRANSFER OF INTEREST OF THE PARTNER IN THE GOODWILL AND NO PART OF THE AMOUNT RECEIVED IS EXIGIBLE AS CAPITAL GAIN UNDER S ECTION 45 OF THE ACT. IT WAS ALSO OBSERVED IN THE ITAT DECISION THAT THE DECISIO N OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TRIBHUVANDAS G. PATEL, 115 ITR 95 FOLLOWED IN N. A. MODY VS. CIT, 162 ITR 420 HAS BEEN REVERSED BY T HE HONBLE SUPREME COURT IN THE CASE OF TRIBHUVANDAS G. PATEL VS. CIT, 236 ITR 515 AND THAT THIS LEGAL POSITION HAS BEEN NOTED IN THE CASE OF PRASHA NT S. JOSHI VS. ITO, 324 ITR 154 (BOM.). WE NOTICE AT THIS STAGE THAT THE DECIS ION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MR. RIYAZ A. SHAIKH (SUPRA) HAS BEEN EXAMINED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MR. RIYAZ A. SHEIKH IN INCOME TAX APPEAL NO.1969 OF 2011, ORDER DATED 26 TH FEBRUARY, 2013. ON APPEAL BY THE DEPARTMENT, THE HONBLE BOM BAY HIGH COURT NOTED THAT THE TRIBUNAL HAS CORRECTLY REFERRED TO THE FAC TS THAT IN N. A. MODY (SUPRA) FOLLOWED BY THE TRIBUNAL IN CIT VS. TRIBHUVANDAS G. PATEL, 115 ITR 95 AND THAT SAME HAS BEEN REVERSED BY THE APEX COURT IN TR IBHUVANDAS G. PATEL VS. CIT, 236 ITR 151. THE HONBLE BOMBAY HIGH COURT FU RTHER NOTED THAT THE DECISION RENDERED IN THE CASE OF PRASHANT S. JOSHI (SUPRA) HAS ALSO REFERRED TO THE DECISION OF TRIBHUVANDAS G. PATEL (SUPRA) RENDE RED BY THIS COURT AND ITS REVERSAL BY THE APEX COURT. THE HONBLE BOMBAY HIG H COURT FURTHER NOTED THAT THE DECISION OF THIS COURT IN PRASHANT S. JOSH I (SUPRA) PLACED RELIANCE UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF CIT VS. R. LINGMALLU RAGHUKUMAR, 247 ITR 801 (SC) WHEREIN IT HAS BEEN HE LD THAT AMOUNTS RECEIVED ON RETIREMENT BY A PARTNER IS NOT SUBJECT TO A CAPITAL GAIN TAX. 7 ITA NO.1288/PN/2014 11. IN VIEW OF THE DIRECT DECISION OF THE HONBLE J URISDICTIONAL HIGH COURT ON THE ISSUE IN THE SIMILAR FACT-SITUATION, THE ACT ION OF THE REVENUE IS DIRECTLY AT ODDS WITH THE DECISION OF THE HONBLE BOMBAY HIGH C OURT. HENCE, WE FIND CONSIDERABLE MERIT IN THE PLEA RAISED ON BEHALF OF THE ASSESSEE. ACCORDINGLY, THE RELIEF SOUGHT BY THE ASSESSEE DESERVES TO BE AC CEPTED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED ON THIS 26 TH DAY OF AUGUST, 2016. SD/- SD/- ( VIKAS AWASTHY ) ( PRADIP KUMAR KEDIA ) / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER PUNE ; DATED : 26 TH AUGUST, 2016. & ' () *+( / COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-I, PUNE; 4) THE CIT-I, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. &, / BY ORDER , ' # //TRUE COPY// $ %& # '( / SR. PRIVATE SECRETARY ) '* , / ITAT, PUNE