ACIT, Jaipur V. JITENDRA AGARWAL, Jaipur

ITA 144/JPR/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74816 (ITAT-JAIPUR)
• Duration Of Justice: 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 06-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D C SHARMA
• Assessee Lawyers: MRIDUL GOYAL
• Keywords: Capital asset; Business income; Search and seizure; Earning of tax free income; Additional evidence; Avoidance of tax
• Section: 147; 148; 10

Judgement Text

IN THE INCOMETAX APPELLATE TRIBUNAL JAIPUR BENCH: JAIPUR (BEFORE SHRI H.M. MARATHA, JUDICIAL MEMBER AND SHRI N.K. SAINI, ACCOUNTANT MEMBER) I.T.A. NO. 144/JP/2013 ASSTT. YEAR- 2007-08 THE ASSTT. COMMISSIONER OF SHRI JITENDRA AGRAWAL, INCOME TAX, CENTRAL CIRCLE-2 VS. RIDHI SIDHI C ORPORATION, JAIPUR. S-4, OM SRI TOWER, LAL KOTHI, JAIPUR. PAN NO. AAMPA9913A (APPELLANT) (RESPONDENT) DEPARTMENT BY :- SHRI D.C. SHARMA, D.R. ASSESSEE BY :- SHRI MRIDUL GOYAL & VIJAY GOYAL. DATE OF HEARING : 30/01/2014 DATE OF PRONOUNCEMENT : 31/01/2014 O R D E R PER: N.K. SAINI, A.M. THIS IS AN APPEAL BY THE DEPARTMENT AGAINST THE ORD ER DATED 27/11/2012 OF THE LD. CIT(A)(CENTRAL), JAIPUR. FOLLOWING GROUNDS HAS BEEN RAISED. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A), CENTRAL, JAIPUR HAS ERRED IN LAW AND ON FACTS IN DE LETING THE ADDITION OF RS. 1,74,82,647/- MADE BY THE A.O. BY DISALLOWIN G THE ASSESSEES CLAIM OF EXEMPTION U/S 10(2A). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A), CENTRAL, JAIPUR HAS ERRED IN LAW AND ON FACTS IN D ELETING THE ADDITION OF RS. 1,74,82,647/- CLAIMED AS EXEMPTED I NCOME U/S 10(2A) BY THE ASSESSEE, DESPITE THE FACT THAT U/S 1 0(2A) OF THE IT ACT ONLY SHARE IN THE TOTAL INCOME OF THE FIRM SE PARATELY ASSESSED IS EXEMPT WHILE IN THIS CASE PROFIT OF THE FIRM COR RESPONDING TO THE AMOUNT CREDITED IN ASSESSEES ACCOUNT IS NOT PART O F TOTAL INCOME ITA 144/JP/2013 2 OF THE FIRM SUBJECTED TO THE TAX AND THE AMOUNT CRE DITED IN THE ACCOUNTS OF PARTNERS IS CLAIMED AS REVALUATION EXPE NSES IN THE FIRM. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN LAW AND ON FACT IN FOLLOWING THE DECIS ION OF THE LD. ITAT IN THE CASE OF THE PARALLEL CASE OF THE OTHER PARTNER SHRI PAWAN LASHKARI FOR A.Y. 2007-08 [ITA NO. 808/JP/201 1 DATED 06/01/2012] EVEN THOUGH THE ITAT HAS NOT FOLLOWED T HE DECISION IN THE CASE OF SUDHAKAR M. SHETTY [130 ITD 197 MUMBAI] WHICH WAS SQUARELY APPLICABLE ON THE FACTS OF THE PRESENT CAS E AND THE SO CALLED DIFFERENCES STATED BY THE ITAT ARE MERELY OF NOMENC LATURE WHICH DO NOT CHANGE THE IMPORT OF THE SAID DECISION. 4. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, ON THE F ACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS, IN NOT GIVING DIRECTIONS TO SUBJECT THE CORR ESPONDING PROFIT IN THE HANDS OF THE PARTNER U/S 10(2A) OF THE I.T. ACT , 1961. 5. THE APPELLANT CRAVES THE RIGHT TO AMEND ALTER OR ADD TO ANY OF THE GROUNDS OF APPEAL GIVEN ABOVE. 2. THE ONLY GRIEVANCE OF THE DEPARTMENT IN THIS AP PEAL RELATES TO THE DELETION OF ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUN T OF CAPITAL ACCOUNT BALANCE RECEIVED BY THE ASSESSEE ON RETIREMENT FROM THE FIR M M/S KRISHNA VILLA APARTMENT, WHICH WAS CLAIMED AS EXEMPT BY THE ASSES SEE U/S 10(2A) OF THE I.T. ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 3. THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSE SSEE FILED ORIGINAL RETURN OF INCOME ON 31/3/2008 DECLARING AN INCOME OF RS. 2,15 ,600/- U/S 139(1) OF THE ACT. THE ASSESSING OFFICER OBSERVED THAT THE ASSESS EE HAD RECEIVED AN AMOUNT OF RS. 1.74 CRORES FROM M/S KRISHNA VILLA APARTMENT . HOWEVER, THE SAID AMOUNT WAS NOT REFLECTED IN THE RETURN OF INCOME FILED, TH EREFORE, THE PROCEEDINGS U/S 147 OF THE ACT WAS INITIATED BY ISSUING A NOTICE U/ S 148 OF THE ACT AFTER RECORDING ITA 144/JP/2013 3 THE REASONS FOR THE REOPENING. IN RESPONSE TO THE S AID NOTICE, THE ASSESSEE STATED THAT THE RETURN OF INCOME FILED BY HIM U/S 139(1) O F THE ACT ON 31/3/2008 SHOULD BE TREATED AS A RETURN FILED IN RESPONSE TO NOTICE U/S 148 OF THE ACT. THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT P ROCEEDINGS, OBSERVED THAT THE ASSESSEE ENTERED INTO A PARTNERSHIP WITH SHRI P AWAN LASHKARY AND CONSTITUTED A FIRM STYLED AS M/S KRISHNA VILLA APAR TMENT ON 15/7/2006. THE BUSINESS OF THE SAID FIRM WAS TO PURCHASE AND SALE OF LAND. HE FURTHER OBSERVED THAT THE SAID FIRM PURCHASED LAND AT SIROLI WORTH R S. 1.5 CRORES ON 24/7/2006 AND AFTER CONVERSION AND REGISTRATION COST, THE COST WA S ARRIVED AT RS. 2,18,50,290/-. SUBSEQUENTLY, THE FIRM ENTERED INTO A DEVELOPMENT A GREEMENT WITH M/S GOLD BUILDER & DEVELOPERS TO BUILD MULTI-STORIED RESIDE NTIAL/COMMERCIAL UNIT AND THE ORIGINAL PARTNERS OF THE SAID FIRM I.E. SHRI JITEND RA AGARWAL THE ASSESSEE AND SHRI PAWAN LASHKARY AND INCOMING PARTNERS OF M/S GOLD DR EAMS BUILDERS AND DEVELOPERS ENTERED INTO A TAKEOVER AGREEMENT ON 18/ 1/2007 WHEREBY THE LAND AT SIROLI WAS REVALUED AT RS. 9,17,80,000/- AND AFTER DEDUCTING EXPENSES, THE PROFIT OF RS. 6,99,30,590/- WAS CREDITED IN THE ACCOUNTS O F THE EXISTING PARTNERS AND THE ASSESSEES SHARE WAS AT RS. 1,74,82,647/-. THEREAFT ER, THE ASSESSEE RETIRED ON 10/2/2007 AND SHRI PAWAN LASHKARY RETIRED ON 19/3/2 007. THE ASSESSEE DECLARED RS. 1,74,82,647/- IN HIS RETURN OF INCOME AS EXEMPT ED INCOME BEING PROFIT FROM THE PARTNERSHIP FIRM. THE ASSESSING OFFICER DID NOT ALLOW THE CLAIM OF THE ASSESSEE U/S 10 (2A) OF THE ACT BY OBSERVING IN PA RA 18 OF THE ASSESSMENT ORDER DATED 23/12/2011 AS UNDER:- ITA 144/JP/2013 4 THUS BY CRAFTING A CAREFULLY WORDED COLOURABLE DEV ICE WITH ACTIVE COLLUSION AND CONNIVANCE WITH THE OPPOSITE PART AND THE TAX PRACTITIONERS, THE ASSESSEE HAS CLAIMED EXEMPTION IN HIS COMPUTATI ON OF INCOME THAT THE RECEIPT OF RS. 1.74 CRORES IN HIS EXEMPT INCOME AS PROFIT FROM FIRM KRISHNA VILLA APARTMENTS. AS IT IS SEEN THAT SUCH AN AMOUNT HAS BEEN TAKEN AS EXPENSE IN THE HANDS OF THE FIRM, THE SAME CANNOT BE GRANTED U/S 10(2A). BY VIRTUE OF LIFTING THE VEIL/UNRAVELING A COLOURABLE DEVICE BEHIND WHICH THE ASSESSEE IS TAKING REFUGE, I HOLD THAT TH E AMOUNT OF RS. 1,74,82,647/- IS TO BE ADDED BACK TO THE TOTAL INCO ME OF THE ASSESSEE. THE EXEMPTION CLAIMED BY THE ASSESSEE AS PROFIT FROM FI RM KRISHNA VILLA APARTMENT IS THEREFORE DENIED/DISALLOWED. 4. BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED THAT THE ISSUE WAS COVERED BY THE DECISIO N OF THE ITAT, JAIPUR BENCH IN THE CASE OF PARTNER OF THE ASSESSEE SHRI PAWAN L ASHKARY. THE LD. CIT(A) REPRODUCED THE DECISION OF THE ITAT, JAIPUR BENCH I N THE CASE OF SHRI PAWAN LASHKARY IN ITA NO. 808/JP/2011 ORDER DATED 06/01/2 012 (WRONGLY MENTIONED AS 17/11/2011) AT PAGES 5 TO 15 OF THE IMPUGNED ORD ER. FOR THE COST OF REPETITION, THE SAME IS NOT REPRODUCED HEREUNDER. 5. THE LD. CIT(A) AFTER CONSIDERING THE SIMILARITY IN THE FACTS OF THE ASSESSEES CASE VIS A VIS HIS PARTNER SHRI PAWAN LA SHKARY, DELETED THE IMPUGNED ADDITION BY FOLLOWING THE AFORESAID DECISION OF THE ITAT JAIPUR BENCH. THE RELEVANT FINDINGS HAS BEEN GIVEN IN PARA 5.4 OF THE IMPUGNED ORDER, WHICH IS REPRODUCED VERBATIM AS UNDER:- ITA 144/JP/2013 5 THERE IS ALSO NO DISPUTE EVEN ON THE FACT THAT BOTH THESE PERSONS CLAIMED SUCH AMOUNT AS EXEMPT U/S 10(2A) OF IT ACT BUT THE A.O. TAXED SUCH AMOUNT AS INCOME OF BOTH THE PARTNERS. IT IS NOTED THAT ON TH E SAME TRANSACTIONS/ADDITIONS IN THE CASE OF ANOTHER PARTNER NAMELY SHRI. PAWAN L ASHKARY WHERE ADDITION OF RS. 52447943/- WAS MADE, THE WORTHY CIT(A) CONFIRME D SUCH ADDITION BUT THE HON'BLE JURISDICTIONAL ITAT WHILE DECIDING THE APPE AL OF THE APPELLANT IN ITA NO. 808/JP/2011 VIDE ORDER DATED 17/11/2011 DELETED SUCH ADDITION. THE RELEVANT PART OF THE DECISION OF HON'BLE ITAT IS SU MMARIZED IN THE SUBMISSION OF THE APPELLANT AS MENTIONED AT PAGE NO. 5 TO 15 OF T HIS ORDER. THE DECISION OF JURISDICTIONAL ITAT IS ON THE SAME ISSUE AND IN THE CASE OF PARTNER OF THE SAME FIRM. THEREFORE, SUCH DECISION OF THE ITAT IS OF TH E BINDING NATURE. RELIANCE IS PLACED ON THE DECISION OF HON'BLE M.P. HIGH COURT I N THE CASE OF AGARWAL WARE HOUSING AND LEASING LTD. VS. CIT, 257 ITR 235 WHERE IN IT HAS BEEN LAID DOWN THAT DECISION OF JURISDICTIONAL ITAT IS BINDING ON THE LOWER REVENUE AUTHORITIES. RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE ITAT SUCH ADDITION OF RS. 17482647/- IN THE CASE OF APPELLANT CANNOT BE CONFI RMED, THEREFORE, THE ADDITION IS DELETED. NOW THE DEPARTMENT IS IN APPEAL. 6. THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OUT SET STATED THAT THIS ISSUE IS SQUARELY COVERED VIDE ORDER DATED 06/1/2012 IN THE CASE OF THE PARTNER OF THE ASSESSEE NAMELY SHRI PAWAN LASHKARY IN ITA NO. 808/ JP/2011 FOR THE A.Y. 2007-08. COPY OF THE SAID ORDER IS FURNISHED, WHICH IS PLACED AT PAGE NO. 202 TO 247 OF THE ASSESSEES PAPER BOOK. 7. IN HIS RIVAL SUBMISSIONS, THE LD. D.R. ALTHOUGH, SUPPORTED THE ORDER OF THE ASSESSING OFFICER BUT COULD NOT CONTROVERT THE AFOR ESAID CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE. ITA 144/JP/2013 6 8. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PA RTIES AND THE MATERIAL AVAILABLE ON THE RECORD, IT IS NOTICED THAT AN IDEN TICAL ISSUE HAVING SIMILAR FACTS HAS ALREADY BEEN ADJUDICATED IN THE CASE OF SHRI PA WAN LASHKARY VS. THE DCIT, JAIPUR IN ITA NO. 808/JP/2011. IT IS RELEVANT TO PO INT OUT THAT SHRI PAWAN LASHKARY WAS THE PARTNER OF THE ASSESSEE AND ALSO C LAIMED EXEMPTION U/S 10(2A) OF THE ACT, IN SIMILAR CIRCUMSTANCES. WE THINK IT A PPROPRIATE TO REPRODUCE THE RELEVANT FINDINGS GIVEN IN THE AFORESAID REFERRED T O ORDER DATED 06/1/2012 PASSED IN ITA NO. 808/JP/2011 AS UNDER:- 2.17 WE HAVE HEARD BOTH THE PARTIES. THE COPY OF P ARTNERSHIP DEED DATED 15-07-2006 IN WHICH THE ASSESSEE AND SHRI JITENDRA AGARWAL WERE PARTNERS IS AVAILABLE AT PAGES 31 TO 33 OF THE PAPE R BOOK. THE PARTNERSHIP WAS A PARTNERSHIP AT WILL. AS PER CLAUS E 13 OF THE PARTNERSHIP DEED , IT WAS PROVIDED THAT THE PARTNER S IF DEEM PROPER AND IN THEIR INTEREST MAY ADMIT ANY OTHER PERSON O R PERSONS AS PARTNERS ON THE TERMS AND CONDITIONS AS MAY BE MUTU ALLY AGREED AMONG THEMSELVES.. THE BANK ACCOUNT WAS TO BE OPERA TED EITHER SINGLY OR JOINTLY BY THE PARTNERS. THE NET PROFIT O R LOSS AFTER DEDUCTION OF ALL EXPENSES AND OUTGOING SHALL BE DI VIDED BETWEEN THE PARTNERS IN PROPORTION TO THEIR SHARING RATIO I .E. 75% AND 25% IN FAVOUR OF THE ASSESSEE AND SHRI JITENDRA AGARWAL RESPECTIVELY. THE COPY OF PARTNERSHIP DEED AS ON 19-01-2007 IS AV AILABLE AT PAGES 34 TO 40 OF THE PAPER BOOK. IN THIS DEEDS, IT IS MENTIONED THE FIRM IS HAVING A LAND MEASURING 33986.97 SQ. YARD I N STOCK IN TRADE AND ENTERED INTO AN AGREEMENT FOR CONSTRUCTING THE BUILDING OF MULTISTORIED RESIDENTIAL / COMMERCIAL UNITS WITH M/ S.GOLD DREAM BUILDERS AND DEVELOPER AS ON 30-09-2006. IT IS MENT IONED THAT ITA 144/JP/2013 7 CONTINUING PARTNERS I.E. ASSESSEE AND THE SHRI JITE NDRA AGARWAL WERE MAINLY ENGAGED IN THEIR OWN BUSINESS OBLIGATIO N, OFFERED THE MERGING THE FIRMS I.E. M/S.GOLD DREAM BUILDERS AND DEVELOPER IN THE BUSINESS OF THE FIRM OF M/S.KRISHNA VILLA APART MENT AS A GOING CONCERN AND OFFERED THE PARTNERS OF THE MERGING FI RM TO BECOME THE PARTNERS OF THE FIRM IN VIEW OF THE CONSIDERATION OF THE EXPERTISE OF THE MERGING FIRM IN DEVELOPING A MULTISTORIED BUILD ING FOR MARKETING OF TURNKEY / HUGE PROJECT AND ITS FINANCI AL POSITION. THE PARTNERS OF THE MERGING FIRM GAVE THEIR CONSENT FOR THE SAME AND INCOMING PARTNERS HAVE ENTERED INTO A TAKE OVER AGR EEMENT ON 18- 01-2007. AS PER AGREEMENT OF TAKEOVER, STOCK IN TRA DE OF THE FIRM WAS REVALUED AT ITS CURRENT MARKET VALUE AND DIFFER ENCE IN BOOK VALUE AND REVALUED VALUE WAS TO BE TRANSFERRED TO T HE CAPITAL ACCOUNT OF THE CONTUNING PARTNERS I.E. ASSESSEE AND SHRI JITENDRA AGARWAL. IN VIEW OF SUCH TAKE OVER AGREEMENT, THE N EW PARTNERS WERE ADMITTED.. 2.18 WE HAD ALREADY MENTIONED THAT THE CLAUSE 13 OF THE PARTNERSHIP DEED DATED 15-07-2007 PROVIDED THE PARTNERS TO ADM IT OTHER PARTNERS ON THE TERMS AND CONDITIONS AS MAY BE MUTU ALLY AGREED UPON. THUS THE TERMS AND CONDITIONS WAS THAT STOCK IN TRADE WILL BE REVALUED AND THE MERGING FIRM WILL PROVIDE ITS EXPE RTISE AND FINANCIAL POSITION AND THEY WERE TO HAVE BENEFIT O F DEVELOPMENT AGREEMENT. THE DEVELOPMENT AGREEMENT WAS TO BUILD A HOUSING COMPLEX/ COMMERCIAL COMPLEX BUILDING IN WHICH BOTH THE FIRMS WOULD HAVE RIGHT TO SOME EXTENT. IN ABSENCE OF ANY DETAILS OF SHARING OF THE BUILT UP AREA BETWEEN TWO FIRMS, WE ARE UNABLE TO COMMENT FURTHER. BUT IT IS CLEAR THAT MERGING FIRM WILL GET THE BENEFIT OF THE PROJECT. THE SHARE OF PROFIT TO THE ERSTWHILE PARTNERS ITA 144/JP/2013 8 WAS TO THE EXTENT OF 50% IN THE FIRM CONSTITUTED ON 19-01-2007. AS PER CLAUSE 12OF THE PARTNERSHIP DEED, IT IS MENTION ED THAT NO PARTNER SHALL MORTGAGE OR CHARGE HIS SHARE INTO PAR TNERSHIP OR ANY PART THEREOF OR MAKE ANY PERSON A PARTNER WITH HIM WITHOUT WRITTEN PREVIOUS CONSENT OF OTHER PARTNERS. THE THREE PARTN ERS OF M/S.GOLD DREAM BUILDERS AND DEVELOPER WERE CONSIDERED AS WOR KING PARTNERS IN THE PARTNERSHIP DEED DATED 19-01-207 A ND SUCH PARTNERS WERE TO BE ALLOWED REMUNERATION IN THE RAT IO AS MUTUALLY DECIDED. THESE PARTNERS WERE REQUIRED TO DEVOTE T HEIR TIME AND ATTENTION TO THE CONDUCT OF THE AFFAIRS / DAY TODAY WORKING OF THE FIRM. 2.19 THUS THE FIRM M/S.KRISHNA VILLA APARTMENT GOT BENEFIT OF THE SERVICES OF THREE PARTNERS OF ERSTWHILE M/S.GOLD DR EAM BUILDERS AND DEVELOPER. CLAUSE 16 OF THE PARTNERSHIP DEED ST ATED THAT ANY PERSON CAN INCLUDE IN THE FIRM AS NEW PARTNER ONLY AFTER THE CLEAR AND MUTUAL CONSENT OF ALL THE PARTNERS. IT WAS FUR THER PROVIDED THAT ANY EXISTING PARTNER CAN ALSO BUY THE SHARE/INTERES T OF ANY OTHER PARTNER. IF THE PARTNERS WANTS TO RETIRE FROM THE F IRM THEN HE HAS TO GIVE CLEAR NOTICE TO OTHER REMAINING PARTNERS AND T HE RETIRING PARTNER WILL NOT CLAIM ANY SHARE IN GOOD WILL OF TH E FIRM. IT WAS FURTHER PROVIDED THAT NO PARTNER CAN SUBSTITUTE HIM SELF WITH ANY OTHER PERSON IN THE BUSINESS OF THE FIRM EXCEPT HIS LEGAL HEIRS. 2.20 WHEN SHRI JITENDRA AGARWAL RETIRED FROM THE FI RM THEN ANOTHER PARTNERSHIP DEED WAS EXECUTED ON 10-02-2007 AND IT IS AVAILABLE AT PAGES 41 TO 48 OF THE PAPER BOOK. IN THIS DEED, IT IS CLEARLY MENTIONED THAT SHRI JITENDRA AGARWAL DUE TO HIS OTH ER BUSINESS OBLIGATIONS GAVE NOTICE TO OTHER PARTNERS OF HIS FI RM TO RETIRE FROM THE FIRM W.E.F. 10-02-2007. THE CLAUSES IN THIS PAR TNERSHIP DEED ARE ITA 144/JP/2013 9 SIMILAR TO THE CLAUSES IN PARTNERSHIP DEED DATED 19 -01-2007. IN THE PARTNERSHIP DEED DATED 10-01-2007, SHRI JITENDRA AG ARWAL WAS HAVING A PROFIT SHARING RATIO OF 12.5%. THE SHARES OF OTHER PARTNERS WERE AS UNDER:- 1. ASSESSEE 37.5% 2. SHRI SHANKAR M JETHANI 25% 3. SHRI ARUN BANSAL 8.03% 4. SHRI MERAJ UN NABI KHAN 8.94% 5. SHRI NAVED SAIDI 8.03% 2.21 IN THE PARTNERSHIP DEED EXECUTED N 10-02-2007, THE PROFIT SHARING RATIO WAS AS UNDER:- 1. ASSESSEE 40% 2. SHRI SHANKAR M JETHANI 30% 3. SHRI ARUN BANSAL 10% 4. SHRI MERAJ UN NABI KHAN 10% 5. SHRI NAVED SAIDI 10% FROM THE ABOVE, IT IS CLEAR THAT PROFIT SHARING RAT IO OF 12.5% OF SHRI JITENDRA AGARWAL WAS NOT TRANSFERRED TO THE FOUR PA RTNERS OF ERSTWHILE M/S.GOLD DREAM BUILDERS AND DEVELOPER IN CASE THE INTENTION WAS TO TRANSFER THE LAND TO THE FOUR PERS ONS OF THE ERSTWHILE M/S.GOLD DREAM BUILDERS AND DEVELOPER THE N SHARE OF THE ERSTWHILE PARTNERS OF M/S.GOLD DREAM BUILDERS A ND DEVELOPER SHOULD HAVE BEEN INCREASED BY THE SHARE OF SHRI JIT ENDRA AGARWAL. THE SHARE OF THE ASSESSEE ALSO STOOD INCREASED FROM 37.5% TO 40%. THIS FACT INDICATE THAT THE TRANSACTION OF FORMING FRESH DEED IS GENUINE AND NOT SHAM. 2.22 THE ASSESSEE ALSO RETIRED FROM THE FIRM ON 19- 03-2007 AND FRESH PARTNERSHIP DEED WAS EXECUTED AND I.E. AVAILABLE A T PAGES 49 TO 53 OF THE PAPER BOOK.. IN THIS DEED, IT IS MENTIONED T HAT THE ASSESSEE DUE TO HIS NON-AVAILABILITY FOR THE BUSINESS OF THE FIRM HAS GIVEN ITA 144/JP/2013 10 NOTICE TO THE CONTINUING PARTNERS OF HIS DESIRE TO RETIRE FROM PARTNERSHIP DEED W.E.F 18-03-2007. THIS WAS ACCEPT ED BY THE CONTINUING PARTNERS. IN THE PARTNERSHIP DEED DATED 19-03-2007, THE CLAUSES IN RESPECT OF RETIREMENT OF THE PARTNERS, THE ASSIGNMENT OF RIGHT OF THE PARTNERS AND ADMISSION OF NEW PARTNERS ARE THE SAME AS IN THE EARLIER PARTNERSHIP DEED. 2.23 IN THE DOCUMENTARY EVIDENCES FILED BEFORE THE LOWER AUTHORITIES, IT IS CLEARLY MENTIONED THAT BOTH THE PARTNERS HAVE R ETIRED ON ACCOUNT OF THEIR OTHER COMMITMENT RELATING TO THEIR OWN BU SINESS. IT IS NOT THE CONTENTION OF THE REVENUE THAT SUCH FACTS MENTI ONED IN THE PARTNERSHIP DEED ARE FACADE. SHAM MEANS WHICH IS GO OD IN APPEARANCE BUT FALSE IN FCTS. THE WORD SHAM ALSO MEANS THAT THE ACT DONE BY DOCUMENT EXECUTED BY HE PARTIES TO THE SHAM WHICH ARE INTENDED BY THEM , TO GIVE TO THIRD PARTIES OR TO T HE COURT, THE APPEARANCE OF CREATING BETWEEN THE PARTIES LEGAL RI GHTS AND OBLIGATIONS DIFFERENT FROM THE ACTUAL LEGAL RIGHTS AND OBLIGATIONS (IF ANY) WHICH THE PARTIES INTENDED TO CREATE. THE ONUS IS ON THE PARTY WHICH WANTS TO PLEAD THAT THE TRANSACTION IS SHAM. THE CLAUSES IN THE PARTNERSHIP DEED AND ARGUMENTS OF THE LD. AR IN DICATE THAT THE MERGER OF THE FIRM WAS NOT SHAM TRANSACTION. THE TH REE PARTNERS OF THE MERGED FIRM I.E. M/S.GOLD DREAM BUILDERS AND DEVELOPER WERE REQUIRED TO LOOK AFTER THE DAY TO DAY AFFAIRS AND THEY WERE ENTITLED TO REMUNERATION. THE FIRM M/S.GOLD DREAM B UILDERS AND DEVELOPER WAS HAVING EXPERTISE IN BUILDING THE PRO JECT AND MARKETING IT. 2.24 THE FIRM M/S.KRISHNA VILLA APARTMENT ENTERED I NTO AN AGREEMENT FOR DEVELOPING THE LAND AND THIS SHOWS THAT M/S.KRI SHNA VILLA APARTMENT WAS NOT HAVING REQUISITE FUNDS. BOTH THE FIRMS WERE ITA 144/JP/2013 11 HAVING THEIR OWN RIGHTS IN THE DEVELOPMENT AGREEMEN T AND BY MERGER OF TWO FIRMS SUCH RIGHTS BELONG TO RECONSTIT UTED FIRM M/S.KRISHNA VILLA APARTMENT FIRM. 2.25 THE LD. CIT(A) HAS RELIED UPON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF MC DOWEL (SUPRA). THE HON'BLE APEX C OURT IN THE CASE OF UNION OF INDIA VS. AZAD BACHAO ANDOLAN 26 3 ITR 706 HAD AN OCCASION TO CONSIDER THE LAW LAID DOWN IN THE CA SE OF MC DOWELL COMPANY LTD. (SUPRA). THE HON'BLE APEX COURT IN THE CASE OF UNION OF INDIA VS. AZAD BACHAO ANDOLAN (SUPRA) OBS ERVED AS UNDER:- WE MAY ALSO REFER TO THE JUDGMENT OF THE GUJARAT HIGH COURT IN BANYAN AND BERRY V. COMMISSIONER OF INCOME-TAX [199 6] 222 ITR 831 AT 850 WHERE REFERRING TO MCDOWELL'S CASE [1985 ] 154 ITR 148 (SC), THE COURT OBSERVED :- 'THE COURT NOWHERE SAID THAT EVERY ACTION OR INACTI ON ON THE PART OF THE TAXPAYER WHICH RESULTS IN REDUCTION OF TAX LIAB ILITY TO WHICH HE MAY BE SUBJECTED IN FUTURE, IS TO BE VIEWED WITH SU SPICION AND BE TREATED AS A DEVICE FOR AVOIDANCE OF TAX IRRESPECTI VE OF LEGITIMACY OR GENUINENESS OF THE ACT ; AN INFERENCE WHICH UNFO RTUNATELY, IN OUR OPINION, THE TRIBUNAL APPARENTLY APPEARS TO HAVE DR AWN FROM THE ENUNCIATION MADE IN MCDOWELL'S CASE [1958] 154 ITR 148 (SC). THE RATIO OF ANY DECISION HAS TO BE UNDERSTOOD IN T HE CONTEXT IT HAS BEEN MADE. THE FACTS AND CIRCUMSTANCES WHICH LEAD T O MCDOWELL'S DECISION LEAVE US IN NO DOUBT THAT THE PRINCIPLE EN UNCIATED IN THE ABOVE CASE HAS NOT AFFECTED THE FREEDOM OF THE CITI ZEN TO ACT IN A MANNER ACCORDING TO HIS REQUIREMENTS, HIS WISHES IN THE MANNER OF DOING ANY TRADE, ACTIVITY OR PLANNING HIS AFFAIRS W ITH CIRCUMSPECTION, WITHIN THE FRAMEWORK OF LAW, UNLESS THE SAME FALL ITA 144/JP/2013 12 IN THE CATEGORY OF COLOURABLE DEVICE WHICH MAY PROP ERLY BE CALLED A DEVICE OR A DUBIOUS METHOD OR A SUBTERFUGE CLOTHE D WITH APPARENT DIGNITY.' THIS ACCORDS WITH OUR OWN VIEW OF THE MATT ER. IN CWT V. ARVIND NAROTTAM [1988] 173 ITR 479 (SC), A CASE UNDER THE WEALTH-TAX ACT, THREE TRUST DEEDS FOR THE BENEF IT OF THE ASSESSEE, HIS WIFE AND CHILDREN IN IDENTICAL TERMS WERE PREPA RED UNDER SECTION 21(2) OF THE WEALTH-TAX ACT. THE REVENUE PL ACED RELIANCE ON MCDOWELL'S CASE [1985] 154 ITR 148 (SC). BOTH TH E LEARNED JUDGES OF THE BENCH OF THIS COURT GAVE SEPARATE OPI NIONS. CHIEF JUSTICE PATHAK, IN HIS OPINION SAID (AT PAGE 486) : 'RELIANCE WAS ALSO PLACED BY LEARNED COUNSEL FOR THE REVENUE ON MCDOWELL AND CO. LTD. V. CTO [1985] 154 ITR 148 (SC ). THAT DECISION CANNOT ADVANCE THE CASE OF THE REVENUE BEC AUSE THE LANGUAGE OF THE DEEDS OF SETTLEMENT IS PLAIN AND AD MITS OF NO AMBIGUITY.' JUSTICE S. MUKHARJI SAID, AFTER NOTICING MCDOWELL'S [1985] 154 ITR 148 (SC) CASE (AT PAGE 487) : 'WHERE THE TRUE EFFECT ON THE CONSTRUCTION OF THE D EEDS IS CLEAR, AS IN THIS CASE, THE APPEAL TO DISCOURAGE TAX AVOIDANC E IS NOT A RELEVANT CONSIDERATION. BUT SINCE IT WAS MADE, IT H AS TO BE NOTED AND REJECTED.' IN MATHURAM AGRAWAL V. STATE OF MADHYA PRADESH [199 9] 8 SCC 667 AT PARA. 12 ANOTHER CONSTITUTION BENCH HAD OCCA SION TO CONSIDER THE ISSUE. THE BENCH OBSERVED (PAGE 673) : ITA 144/JP/2013 13 WE ARE UNABLE TO AGREE WITH THE SUBMISSION THAT AN ACT WHICH IS OTHERWISE VALID IN LAW CAN BE TREATED AS NON EST ME RELY ON THE BASIS OF SOME UNDERLYING MOTIVE SUPPOSEDLY RESULTING IN S OME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INTERESTS, A S PERCEIVED BY THE RESPONDENTS HENCE TAX PLANNING WITHIN FOUR CORNERS OF LAW IS PERMISSIBLE. 2.26 IN THE INSTANT CASE, WE HAVE NOTICED THAT THE LAND IS STOCK IN TRADE OF THE FIRM. THE HON'BLE APEX COURT IN THE CASE OF SHA KTING TRADING CO. VS. CIT, 250 ITR 871 HELD THAT WHEN THERE IS NO CESSATION OF BUSINESS THEN THE CLOSING STOCK HAD TO BE VALUED AT COST OR MARKET PRICE WHICHEVER WAS LOWER. IT IS AN ESTABLISHED RUL E OF COMMERCIAL PRACTICE AND ACCOUNTANCY THAT WHERE THERE IS NO DIS CONTINUATION OF BUSINESS THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. THE HON'BLE APEX COURT IN THE C ASE OF IN THE CHAINLSUKH SAMPAT RAM , 34 ITR 481 HAD AN OCCASION TO CONSIDER THE IMPORTANCE OF ADOPTING THE CLOSING STOCK IN THE TRADING ACCOUNT. THE CLOSING STOCK SHOWN ON THE CREDIT SIDE OF THE T RADING ACCOUNT IS TO BALANCE THE COST OF PURCHASES AS REMAINED AT THE END OF THE YEAR AND DEBITED IN THE PURCHASES ACCOUNT. IN CASE THE M ARKET PRICE IS LESS THAN THE COST PRICE THEN ANTICIPATED LOSS CAN BE TAKEN INTO ACCOUNT BUT ANTICIPATED PROFIT IN SHAPE OF APPRECIA TED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT AS NO PRUDENT TRADER WILL CARE TO SHOW THE INCREASE IN THE PROFIT BEFORE ACTUAL REALIZATION. 2.27 BEFORE US, THE LD. AR HAS REFERRED TO ASSESSME NT ORDER OF THE FIRM FOR THE ASSESSMENT YEAR 2008-09. THE AO WHILE MAKIN G ASSESSMENT FOR THE ASSESSMENT YEAR 2008-09 IN THE CASE OF THE FIRM HAS NOT ALLOWED DEDUCTION ON ACCOUNT OF REVALUATION RELATI NG TO PART OF THE ITA 144/JP/2013 14 ELAND WHICH HAS BEEN SOLD. THUS THE AO IN THE CASE OF THE FIRM HAS TAXED THE PROFIT ON THE BASIS OF THE COST PRICE OF THE LAND AND THEREFORE, THE ANTICIPATED PROFIT ON ACCOUNT OF RE VALUATION HAS NOT ACCRUED TO THE PARTNERS TO BE ASSESSED. 2.28 THE HON'BLE APEX COURT IN THE CASE OF ALA FIRM VS. CIT, 189 ITR 285 HAS REFERRED TO THE DECISION OF IN THE CASE OF N. MUHAMMAD USSAIN SAHIB AND ANOTHER VS. S.N. ADBUL GAFOOR SAHI B AND OTHERS, AIR (37) 1950 758 AT PAGE 306 AND MENTIONED THAT VA LUATION OF THE ASSETS DURNG THE SUBSISTENCE OF THE PARTNER IS AN I MMATERIAL AND CAN BE EVEN NOTIONAL. IN THE CASE OF S.N. ABDUL GAF OOR SAHIB (SUPRA), THE HON'BLE APEX COURT OBSERVED THE ASSE T AT BOOK VALUE CONTINUES TO BELONG TO THE FIRM OF WHATEVER FLUCTUA TIONS THERE MAY BE IN THE VALUE OF THAT ASSET, THE BENEFIT OR THE L OSS OF IT COULD ACCRUE TO THE FIRM 2.29 THE LD. DR HAS REFERRED TO THE ORDER OF THE MU MBAI BENCH IN THE CASE OF SUDHAKAR M SHETTY (SUPRA). IN THAT CASE, ON E OF THE PARTY THREW HIS ASSETS INTO THE FIRM AND FORMED THE PARTN ERSHIP. SUCH THROWING OF ASSETS INTO THE FIRM IS TRANSFER U/S 45 (3) OF THE ACT . IN THAT CASE, THE CAPITAL ASSETS WERE REVALUED. THE I TAT MUMBAI HAS OBSERVED THAT THERE IS DIVERGENCE OF VIEW ON THE QU ESTION AS TO WHETHER THERE IS ANY TRANSFER AT ALL BY THE FIRM IN FAVOUR OF THE RETIRING PARTNER OR BY THE RETIRING PARTNER IN FAVO UR OF THE ASSESSEE AND ITS CONTINUING PARTNER. THE MUMBAI TRIBUNAL IN THAT CASE OBSERVED THAT IF INSTEAD OF QUANTIFYING HIS SHARE B Y TAKING ACCOUNTS ON FOTTINGS OF NOTIONAL SALE, PARTIES AGREES TO PAY A LUMPSUM IN CONSIDERATION OF RETIRING PARTNER ASSIGNING OR RELI NQUISHING HIS SHARE OR RIGHT IN PARTNERSHIP AND ITS ASSETS IN FAV OUR OF CONTINUING PARTNERS, TRANSACTION WOULD AMOUNT TO A TRANSFER WI THIN MEANING OF ITA 144/JP/2013 15 SECTION 2(47) OF THE ACT. SECTION 2(47) REFERS TO T RANSFER OF CAPITAL ASSETS. IT IS NOT APPLICABLE TO THE TRANSFER OF S TOCK IN TRADE EITHER BY SALE OR OTHERWISE AS THAT IS TAXABLE UNDER THE H EAD BUSINESS INCOME . IN THE CASE BEFORE THE MUMBAI TRIBUNAL, T HERE WAS A LUMPSUM PAYMENT. 2.30 ON SIMILAR FACTS, ITAT JODHPUR BENCH IN THE CA SE OF ITO VS. SHRI HANUMAN DAS SIPANI (HUF) (ITA NO. 247/JU/2008 DATED 22-03- 2011 DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. I T WILL BE USEFUL TO REPRODUCE THE PARA 6 FROM THAT ORDER. 6. WE HAVE HERD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THOROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE A SSESSEE IS A RETIRED PARTNER. THE REVALUATION TOOK PLACED IN THE BOOKS OF ACCOUNT OF THE FIRM, AS A RESULT OF WHICH HE FIXED ASSETS I.E. LAND AND BUILDING VALUE BEING INFLATED AND THE PARTNERS CAPI TAL ACCOUNTS WERE CREDITED IN THEIR RESPECTIVE PROFIT SHARE RATI O. ACCORDINGLY, THE ASSESSEE BEING THE PARTNERS I THE FIRM, HIS CAPITAL ACCOUNT WAS CREDITED WORTH RS. 8,03,400/-. ACCORDING TO THE LD. CIT(A) , SECTION 45(4) HAS NO APPLICATION TO THE ASSESSEE'S CASE AND SAME VIEW AS EXPRESSED BY THE TRIBUNAL IN THE CASE OF ACIT VS. SMT. SHANTY DEVI SIPANI (ITA NO.399/JU/07 DATED 19-02-2008), (SUPRA) , THAT ANYTHING DONE BY THE FIRM AND ANY ENTRY MADE IN THE BOOKS CANNOT BE TAXED IN THE HANDS OF THE PARTNER. SINCE PARTNER S ARE CONSISTENT ENTITIES AND SEPARATE FROM THE FIRM, ANY INCOME OF THE FIRM CANNOT BE TAXED, PER SE, IN THE HANDS OF THE PARTNER. THE REVALUATION ENTRY IN THE BOOKS OF ACCOUNTS OF THE FIRM IS NOTIONAL AN D UNILATERAL ACT. AS PER THE PROVISIONS OF SECTION 10(2)(A), THE PART NERS SHARE IN THE TOTAL INCOME OF THE FIRM IS EXEMPT. THEREFORE, THE PROVISIONS OF SECTION 45(4) RELATE TO THE CASE OF PARTNERSHIP FIR M ONLY AND NOT ITA 144/JP/2013 16 THAT OF ITS PARTNERS. ANY AMOUNT CREDITED IN THE CA PITAL ACCOUNT OF A RETIRED PARTNER UPON REVALUATION OF ASSETS OF FIRM IS NOT TAXABLE AS A CAPITAL GAIN AS THERE IS NO TRANSFER. IN THE CASE O F CIT VS. R LINGMALLU (RAGHUKMAR 247 ITR 801) (SC), IT WAS HELD THAT THERE WAS NO ELEMENT OF TRANSFER OF INTEREST IN PARTNERSH IP ASSETS BY THE RETIRED PARTNER TO THE CONTINUING PARTNERS AND THE AMOUNT RECEIVED BY HIM WAS NOT ASSESSABLE TO CAPITAL GAINS. IN VIEW OF THE ABOVE FACTS AND THE DECISION OF THE HON'BLE SUPREME COUR T IN THE CASE OF R LUNGMALLU RAGHUKUMAR (SUPRA), WE FIND NO INFIRMIT Y IN THE ORDER PASSED BY THE LD. CIT(A). THIS GROUND OF APPEAL RAI SED BY THE REVENUE IS DISMISSED. 2.31 THE PARTNERS SHARE IN THE PARTNERSHIP IS A BU NDLE OR RIGHTS. AS PER THE CLASSICAL ENGLISH PARTNERSHIP LAW CITED BY LIND AY, ABD ADOPTED BY INDIAN COURTS IN NARAYANAPA VS. BHASKARA KRISHNA PA (AIR 1966 SC 1300) AND DEWAS CINE CORPORATION 68 ITR 24 0 (SC), A PARTNERS MONETARY RIGHTS ARE TWO FOLDS. FIRSTLY , DURING HIS TENURE AS PARTNER, WHEREAS HE HAS NO SPECIFIC RIGHT IN ANY INDIVIDUAL ASSET OF THE PARTNERSHIP , HIS RIGHT IS ONLY TO RECEIVE H IS SHARE OF PROFIT. SECONDLY, ON DISSOLUTION OR RETIREMENT, HE HAS A RI GHT TO A SHARE IN THE NET ESTATE OF THE FIRM (I.E. ASSETS MINUS LIABI LITIES AND WINDING UP EXPENSES VALUED ON THE BASIS OF A NOTIONAL SALE ) AS ON THE DATE OF THE RETIREMENT OR DISSOLUTION. THIS BUNDLE OF RI GHT CONSTITUTES THE SHARE OF THE PARTNER. SO WHEN A PARTNER RETIRES, THE ACCOUNTS OF THE FIRM WAS MADE UP VALUING THE ASSETS ON BASIS OF A NOTIONAL SALE, THE LIABILITIES AND NOTIONAL WINDING UP EXPEN SES ARE DEDUCTED AND THE AMOUNT DUE TO THE RETIRING PARTNER TOWARDS HIS SHARE , AS WORKED OUT BY THIS ARITHMETIC, IS DETERMINED AS PAY ABLE TO HIM. ON RETIREMENT, THE RETIRING PARTNERS TAKES AWAY HIS MO NEY AND THE ITA 144/JP/2013 17 SHARE OF THE CONTINUING PARTNERS REMAINED INTACT. T HERE IS NO TRANSFER OF ANY PROPERTY FROM THE RETIRING PARTNERS TO THE CONTINUING PARTNERS. OF COURSE, IF AN ASSESSEE ASSIGNS HIS SHA RE TO THE PARTNER AS PROFIT AS PER SECTION 29 OF THE PARTNERSHIP ACT , THEN IT WILL CONSTITUTE THE TRANSFER. IN THE PARTNERSHIP DEED, I T WAS CLEARLY MENTIONED THAT CONTINUING PARTNER CAN BUY OR SALE T HE SHARE OF THE RETIRED PARTNER. HERE , IT IS NOT THE CASE WHERE TH E SHARE HAS BEEN PURCHASED BY ANY ONE PARTNER OR ALL THE PARTNERS . THE PARTNER HAS RETIRED AS PER RELEVANT PROVISIONS OF PARNTERSHP AC T. MOREOVER, IN THE CASE BEFORE BOMBAY TRIBUNAL, THE ISSUE WAS THAT RETIRING PARTNER WAS PAID A LUMSUM. THE RETIRING PARTNR CAN HAVE A RIGHT TO ASSIGN HIS SHARE. HERE IT CANNOT BE A CASE OF TRANS FER. THE HON'BLE APEX COURT IN THE CASE OF SUNIL SIDHARTHA VS. CIT, 156 ITR 509 HELD THAT INTRODUCTION OF CAPITAL ASSET BY THE PART RNER IS A TRANSFER BUT THE CONSIDERATION AS REFLECTED IN THE BOOKS CAN NOT BE CONSIDERED AS A CONSIDERATION FOR THE PURPOSE OF CA PITAL ACCOUNT. THE HON'BLE APEX COURT IN THE CASE OF SUNIL SIDDHAR THBHAI, 156 ITR 509 HELD THAT INTRODUCTION OF CAPITAL ASSET BY THE PARTNER IS TRANSFER BUT THE CONSIDERATION AS REFLECTED IN THE BOOKS CANNOT BE CONSIDERED AS A CONSIDERATION FOR THE PURPOSE OF CA PITAL GAIN. THE HON'BLE APEX COURT AT PAGE 522 HAS OBSERVED AS UNDE R:- WHAT IS THE PROFIT OR GAINS WHICH CAN BE SAID TO ACCRUE OR ARISE TO THE ASSESSEE WHEN LIE MAKES OVER HIS PERSONAL ASSE T TO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITA L ? THE CONSIDERATION, AS WE HAVE OBSERVED, IS THE RIGHT O F A PARTNER DURING THE SUBSISTENCE OF THE PARTNERSHIP TO GET H IS SHARE OF PROFITS FROM TIME TO TIME AND AFTER THE DISSOLUTION OF THE PARTNERSHIP OR WITH HIS RETIREMENT FROM THE PARTNERSHIP, TO RECEIV E THE VALUE OF THE ITA 144/JP/2013 18 SHARE IN THE NET PARTNERSHIP ASSETS AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES. WHEN HIS PERSONAL ASSET MERGES INTO THE CAPITAL OF THE PARTN ERSHIP FIRM, A CORRESPONDING CREDIT ENTRY IS MADE IN THE PARTNER'S CAPITAL ACCOUNT IN THE BOOKS OF THE PARTNERSHIP FIRM, BUT THAT ENT RY IS MADE MERELY FOR THE PURPOSE OF ADJUSTING THE RIGHTS OF THE PAR TNERS INTER SE WHEN THE PARTNERSHIP IS DISSOLVED OR THE PARTNER RETIRES . IT EVIDENCES NO DEBT DUE BY THE FIRM TO THE PARTNER. INDEED, THE C APITAL REPRESENTED BY THE NOTIONAL ENTRY TO THE CREDIT OF THE PARTNER 'S ACCOUNT MAY BE COMPLETELY WIPED OUT BY LOSSES WHICH MAY BE SUBSEQ UENTLY INCURRED BY THE FIRM, EVEN IN THE VERY ACCOUNTING YEAR IN WHICH THE CAPITAL ACCOUNT IS CREDITED. HAVING REGARD TO THE N ATURE AND QUALITY OF THE CONSIDERATION WHICH THE PARTNER MAY BE SAID TO ACQUIRE ON INTRODUCING HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, IT CANNOT BE SAID THAT ANY INCOME OR GAIN ARISES OR ACCRUES TO THE ASSESSEE IN THE TRUE COMME RCIAL SENSE WHICH A BUSINESSMAN WOULD UNDERSTAND AS REAL INCOM E OR GAIN. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE O F CIT VS. MARUDHAR HOTEL (P) LTD. 269 ITR 310 HAD AN OCCASION TO CONSIDER THE ABOVE DECISION OF HON'BLE APEX COURT AND HELD T HAT THERE IS ONLY NOTIONAL CONSIDERATION. THE HON'BLE JURISDICTI ONAL HIGH COURT OBSERVED AS UNDER:- IT IS ONLY WHERE A TRANSFER OF PROPERTY IS FOR I NADEQUATE CONSIDERATION,THAT THE QUESTION OF FINDING THE MAR KET PRICE CAN ARISE. AS NOTICED ABOVE WHEN AN ASSET IS BROUGHT I NTO PARTNERSHIP THE CONTRIBUTOR PARTNER ACQUIRES IN CONSIDERATION THE RIGHT TO OBTAIN HIS SHARE IN THE PROFITS FROM TIME TO TIME A ND ALSO THE RIGHT TO SHARE IN THE NET ASSETS OF THE FIRM ON ITS DISSO LUTION OR ON HIS ITA 144/JP/2013 19 RETIREMENT IN ACCORDANCE WITH THE PROVISIONS OF THE PARTNERSHIP ACT AND THE TERMS OF THE PARTNERSHIP AGREEMENT. ALL TH ESE RIGHTS FRUCTIFY IN FUTURE. THE CREDIT TO HIS CAPITAL ACCO UNT IS ONLY A NOTIONAL VALUE AND NOT THE VALUE OF CONSIDERATION A S THE SAME IS INCAPABLE OF DETERMINATION. HENCE, WHEN PARTNERSHIP WAS RECONSTITUTED BY THE AD MITTING THE PARTNERS OF M/S.GOLD DREAM BUILDERS AND DEVELOPER T HEN THE CONSIDERATION WAS NOT CONSIDERED FOR GIVING DIFFERE NCE BETWEEN THE MARKET VALUE OF THE LAND AND THE COST PRICE AS CONS IDERATION TO THE EXISTING PARTNERS. 2.32 THE AO IN HIS ORDER HAS NOT TAXED RS. 5,24,47, 943/- AS INCOME UNDER THE HEAD CAPITAL GAIN. SECTION 45(3) AND SECT ION 45(4) WERE INTRODUCED TO PLUG THE LOOPHOLES OF AVOIDING TAX BY THROWING THE CAPITAL ASSETS IN THE FIRM AND THEREAFTER TRANSFERR ING THE SAME TO OTHER PARTNER THROUGH DISSOLUTION OF THE FIRM. THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. GURUN ATH TALKIES 328 ITR 59 HAD AN OCCASION TO CONSIDER THE CASE IN WHICH THE FACTS WERE SIMILAR TO THE FACTS IN THE INSTANT CASE. THE ONLY DIFFERENCE WAS IN THAT CASE THAT THE ASSET WAS NOT STOCK IN TRADE. AS A RESULT OF SERIES OF TRANSACTIONS OF RECONSTITUTION OF THE FI RM TWICE, THE HON'BLE KARNATAKA HIGH COURT HELD THAT THE SECTION 45(4) WILL BE APPLICABLE AND THE DIFFERENCE WAS TO BE TAXED IN TH E HANDS OF THE FIRM. HERE THE SAME AO WHILE PASSING THE ASSESSMENT ORDER IN THE CASE OF THE FIRM HAS TAKEN THE BOOK VALUE BEFORE RE VALUATION FOR TAXING THE PROFIT ARISING FROM PART OF THE SALE OF LAND IN SUBSEQUENT ASSESSMENT YEAR. 2.33 THE ITAT CHENNAI BENCH IN THE CASE OF ACIT V S. GOYAL DRESSES, 126 ITD 131 HELD THAT DISTRIBUTION OF CAPITAL ASSET ON DISSOLUTION OF ITA 144/JP/2013 20 A FIRM OR OTHERWISE CANNOT BE EXTRAPOLATED TO BRIN G RETIREMENT OF ONE PARTNER INTO AMBIT OF THIS SECTION. IN THE INST ANT CASE, THERE HAS BEEN NO DISSOLUTION OF THE FIRM. THE PARTNERSHIP D EED THAT FIRM WILL CONTINUE AND CANNOT BE DISSOLVED DUE TO RETIREMENT OF ONE OF THE PARTNER. PARTNER CAN RETIRE AS PARTNERSHIP IS AT WI LL. THERE IS A RETIREMENT OF ONE OF THE PARTNER. THE HON'BLE MADR AS HIGH COURT IN THE CASE OF SIDDHARTH MEDIA HOLDINGS PVT. LTD. V. DCIT 260 ITR 286 HAD AN OCCASION TO CONSIDER THE CLAIM OF TH E ASSESSEE OF CAPITAL LOSS ON THE GROUND THAT THE ASSESSEE HAS SU FFERED LOSSES IN THE FIRM FOR SEVERAL YEARS PRIOR TO THE RETIREMENT . IN THIS CAE, THE ASSESSEE WAS PAID THE BALANCE IN HIS CAPITAL ACCOUN T ON SETTLEMENT OF ACCOUNTS AND IT CANNOT BE SAID THE LOSSES WAS ON ACCOUNT OF ANY TRANSFER OF CAPITAL. IN THE INSTANT CASE ALSO, THE RETIRING PARTNERS WERE GIVEN THEIR SHARE. HENCE, THERE CANNOT BE ANY INCREASE IN PROFIT OR INCOME. 2.34 THE HON'BLE APEX COURT IN THE CASE OF TRIBHUVA NDAS G. PATEL VS. CIT , 236 ITR 515 HAD AN OCCASION TO CONSIDER THE C ASE IN WHICH ONE OF THE PARTNER RETIRED FROM THE FIRM AND RECEIV ED SHARE OF HIS PROFIT AND ALSO SHARE FROM GOODWILL OF THE FIRM AND SHARE IN THE ASSET OF THE FIRM. THE HON'BLE APEX COURT HELD THAT THE SAME IS NOT ASSESSABLE AS CAPITAL GAIN . IT IS TRUE THAT AT TH AT RELEVANT TIME THAT THE PROVISIONS OF SECTION 45(3) AND 45(4) WERE NOT APPLICABLE IN THE STATUTE BOOK BUT STILL THE DECISION WILL BE APPLICA BLE BECAUSE THE PROVISIONS OF SECTION 45(4) WILL MAKE THE AMOUNT IN CLUDIBLE IN THE HANDS OF THE FIRM AS CAPITAL GAIN. IN THE INSTANT C ASE, THE AO IS TAXING IT AS BUSINESS PROFIT. ANOTHER INTERESTING F EATURE IN THIS CASE IS THAT THE LAND WAS PURCHASED BY THE FIRM IN WHICH THE ASSESSEE WAS HAVING 75% SHARE. THE FIRM MADE INVESTMENT AND GOT THE ITA 144/JP/2013 21 APPROVAL FOR CONSTRUCTING THE FLATS FOR HOUSING SOC IETY. THE RIGHT TO HAVE A LICENSE OF GREEN HOUSING SOCIETY PATTA IS A VALUABLE RIGHT WITH THE FIRM M/S.KRISHNA VILLA APARTMENT AND SUCH RIGHT STILL REMAINED WITH THE FIRM EVEN AFTER RETIREMENT OF THE FIRM.THE FIRM IN WHICH THE ASSESSEE WAS PARTNERS ENTERED INTO A DEVE LOPMENT AGREEMENT. NORMALLY IN THE CASE OF DEVELOPMENT AGRE EMENT, THE LAND OWNER AS WELL AS THE DEVELOPER SHARE THE CONST RUCTED AREA AND THE INVESTMENT IN THE CONSTRUCTED AREA IS TO BE MAD E BY THE DEVELOPER. THE LAND OWNER POOLS HIS LAND WHILE THE DEVELOPERS POOLS THE FUND AND EXPERTISE. IN THE INSTANT CASE, THE DEVELOPER FIRM STOOD MERGED INTO THE FIRM IN WHICH THE ASSESSEE WA S PARTNER. THUS THE RIGHTS WHICH WERE HELD BY THE DEVELOPER FIRM WE RE ALSO AVAILABLE TO THE FIRM IN WHICH THE ASSESSEE WAS A P ARTNER. IT IS NOT A SIMPLE CASE WHERE PARTNERS OF THE DEVELOPER FIRM WE RE ENTERED INTO THE FIRM IN WHICH THE ASSESSEE WAS A PARTNER. AS WE HAD ALREADY NOTICED THAT THE STOCK IN HAND WAS THERE, THEREFORE , THERE WAS NO CASE OF BUSINSS PROFIT IN THE HANDS OF THE FIRM. TH E AO HIMSELF HAS NOT TAXED SUCH BUSINESS PROFIT IN THE HANDS OF THE FIRM. IT IS TRUE THAT IN THE CASE OF RETIREMENT OF ONE OF THE PARTNER FRO M THE FIRM DUE TO RECONSTITUTION OF THE FIRM, IT IS BEING HELD BY THE HON'BLE HIGH COURT THAT CAPITAL GAIN IS LIABLE IN THE HANDS OF T HE FIRM. HOWEVER, SOME OF THE HON'BLE HIGH COURTS HAVE HELD OTHERWISE . IN THE FOLLOWING DECISIONS, THE HON'BLE APEX COURT HELD TH AT IN CASE TWO VIEWS ARE POSSIBLE THEN THE VIEW FAVOURABLE TO THE ASSESSEE IS TO BE ADOPTED. 1. CIT VS. . VEGETABLE PRODUCTS LIMITED. , 88 IT R 192, (SC) 2. BAJAJ TEMPO LIMITED. VS. CIT, 196 ITR 188 (SC) 3. KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. VS. CIT, 259 ITR 51 (SC) ITA 144/JP/2013 22 2.35 BEFORE US, THE LD. DR STATED THAT IN CASE THE AMOUNT ON REVALUATION TO THE EXTENT OF AMOUNT CREDITED IN THE ACCOUNT OF AN ASSESSEE IS NOT BEING CONFIRMED THEN THE SAME SHOULD BE DIRECTED TO BE CONSIDERED IN THE HANDS OF FIRM U/S 45(4)OF INCOME TAX ACT. TH E REVALUATION IS OF STOCK AND NOT OF CAPITAL ASSET OR INVESTMENT. TH E AO WHILE MAKING ASSESSMENT IN THE HANDS OF THE FIRM HAS NOT GIVEN CREDIT FOR REVALUATION WHICH MEANS THAT THE REVENUE IS OF THE OPINION THAT THE INCREASE IN REVALUATION OF STOCK WILL NOT BE CONSID ERED WHILE MAKING ASSESSMENT OF THE FIRM MEANING THEREBY THAT THE FIRM WILL EARN PROFIT ON THE BASIS OF VALUE OF STOCK BEFORE R EVALUATION. HENCE THE INTEREST OF REVENUE STANDS PROTECTED. 2.36 WE HAVE CONSIDERED THE ADDITIONAL EVIDENCES FL ED BY THE DEPARTMENT AND THE ADDITIONAL EVIDENCES FILED BY TH E LD. AR AS REJOINDER AGAINST THE ADDITIONAL EVIDENCES FILED. ACCORDING TO US, THESE ADDITIONAL EVIDENCES HAVE NO RELEVANCE FOR DE CIDING THE ISSUE BEFORE US. MOREOVER, THE ADDITIONAL EVIDENCES FILED BY THE DEPARTMENT IS NOT SUBSTANTIATED THAT THE ENTRY IN THE LETTER IS IN THE HANDWRITING OF SHRI ARUN LASHKARY AND THAT TOO AT T HE TIME OF FILING OF APPLICATION. WE THEREFORE, IGNORE THESE ADDITION AL EVIDENCES FOR DECIDING THE ISSUE AS NOT RELEVANT. 2.37 THE REVENUE HAS RELIED UPON THE STATEMENT OF T HE ASSESSEE RECORDED DURING THE COURSE OF SEARCH IN WHICH THE ASSESSEE S URRENDERED THE AMOUNT ON ACCOUNT OF REVALUATION OF LAND AS UNDISC LOSED INCOME. KELKAR PANEL STUDIED THE PROBLEM OF CONFESSIONS AND SURRENDERS DURING ITS STUDIES AND DELIBERATIONS IN PARA 3.27 A ND THE SAME IS REPRODUCED AS UNDER:- ITA 144/JP/2013 23 A CROSS SECTION OF PEOPLE CUTTING ACROSS 4TRADE A ND INDUSTRY COMPLAINED OF A HIGH HANDED BEHAVIOUR OF RAIDING PA RTIES PARTICULARLY WHILE RECORDING A STATEMENT. IT WAS PO INTED OUT THAT OVERENTHUSIASTIC AIDING PARTIES WOULD OFTEN COERCE A SURRENDER. AS A RESULT ALL FOLLOW UP INVESTIGATIONS ARE DISTRA CTED AND GENERALLY BROUGHT TO A STAND STILL. SINCE THE SURRENDER IS NO T BACKED BY ADEQUATE EVIDENCE, THE TAX EVADER INVARIABLY RETRAC TS FROM THE STATEMENT OF SURRENDER BY WHICH TIME IT IS TOO LATE FOR THE DEPARTMENT TO RESUME INVESTIGATIONS. SIMILARLY, WHE RE ADEQUATE EVIDENCE IS INDEED FOUND, A SURRENDER IS NOT NECESS ARY TO ESTABLISH TAX EVASION. THEREFORE, THE TASK FORCE RECOMMENDS T HAT THE CBDT MUST ISSUE IMMEDIATE INSTRUCTIONS TO THE EFFECT THA T NO RAIDING PARTY SHOULD OBTAIN ANY SURRENDER WHATSOEVER. WHERE A TAX PAYABLE DESIRES TO VOLUNTARILY MAKE A DISCLOSURE, HE SHOULD BE ADVISED TO MAKE SO AFTER THE SEARCH. AS A RESULT, THE TAXPAYE R WILL NOT BE ABLE TO ALLEGE COERCION AND SUCCESSFULLY DISTRACT INVEST IGATIONS. ALL CASES WHERE SURRENDER IS OBTAINED DURING THE COURSE OF TH E SEARCH IN VIOLATION OF THE INSTRUCTIONS OF THE CBDT, THE LEAD ER OF THE RAIDING PARTY SHOULD BE SUBJECTED TO VIGILANCE ENQUIRY. FU RTHER THE TASK FORCE ALSO RECOMMENDS THAT STATEMENTS RECORDED DURI NG THE SEARCH SHOULD BE VIDEO RECORDED. THIS WILL INDEED ADD TO T HE CONFIDENCE OF THE TAXPAYER IN THE IMPARTIALITY OF THE SYSTEM. 2.38 THE FINANCE MINISTER IN THE BUDGET SPEECH FOR THE YEAR 2003 STATED THAT NO CONFESSION SHALL BE OBTAINED DURING SEARCH AND SEIZURE OPERATION. THE INSTRUCTIONS WERE FOLLOWED BY CBDT B Y ISSUE OF A CIRCULAR ON THE LINES DESIRED BY THE FINANCE MINIST ER. THERE CAN BE AN ESTOPPEL ON THE ISSUE OF THE FACTS BUT THERE CAN NOT BE ESTOPPEL ON THE PRINCIPLE OF LAW. IT IS NOT THE CASE OF THE REV ENUE THAT THE ITA 144/JP/2013 24 ASSESSEE WAS NOT DISCLOSING THE AMOUNT RECEIVED AS A RESULT OF RETIREMENT FROM THE FIRM. THE ASSESSEE OBTAINED THE LEGAL ADVICE AND WAS OF THE OPINION THAT SUCH REVALUATION IS CAP ITAL RECEIPT WHICH IS NOT LIABLE TO TAX. HENCE, WE FEEL THAT INC OME CANNOT BE ADDED SIMPLY ON THE BASIS OF SURRENDER. THE STATEME NT RECORDED U/S 132(4) CAN BE REBUTTED BY THE ASSESSEE AND THE CAS E OF THE ASSESSEE IS THAT THE AMOUNT IS NOT LIABLE TO TAX. 2.39 AFTER CONSIDERING VARIOUS CASE LAWS RELIED UPO N BY BOTH THE PARTIES, WE FEEL THAT THE ISSUE IS TO BE DECIDED IN FAVOUR O F THE ASSESSEE BECAUSE IF TWO CONSTRUCTIONS ARE TO POSSIBLE THEN O NE HAS TO ADOPT THE CONSTRUCTION WHICH IS FAVOURABLE TO THE ASSESSE E. WE HAD ALSO NOTICED THE DISTINGUISHING FEATURES IN THIS CASE A ND IT IS NOT A SIMPLE CASE IN WHICH OTHER PARTNERS JOINED THE FIR M. THIS IS A CASE WHERE ANOTHER FIRM HAS BEEN TAKEN OVER BY THE FIRM IN WHICH THE ASSESSEE WAS A PARTNER. BOTH THE FIRMS WERE HAVING INTANGIBLE RIGHTS ARISING FROM DEVELOPMENT AGREEMENT AND RIGHT OF CONSTRUCTING A HOUSING / COMMERCIAL COMPLEX AND NON E OF THE FIRM VALUED SUCH RIGHTS IN THE FORM OF MONETARY CONSIDE RATION. SUCH RIGHTS REMAINED WITH THE FIRM EVEN AFTER RETIREMENT OF THE ASSESSEE. WE THEREFORE, HOLD THAT THE LD. CIT(A) WAS NOT JUST IFIED IN CONFIRMING THE ADDITION OF RS. 5,24,47,943/-. 9. SINCE THE FACTS OF THE PRESENT CASE ARE IDENTICA L TO THE FACTS INVOLVED IN THE CASE OF SHRI PAWAN LASHKARY, JAIPUR VS. DCIT, JAIPU R IN ITA NO. 808/JP/2011 (SUPRA), SO RESPECTFULLY FOLLOWING THE SAID ORDER, WE DO NOT SEE ANY MERIT IN THIS APPEAL OF THE DEPARTMENT. ITA 144/JP/2013 25 10. IN THE RESULT, APPEAL OF THE DEPARTMENT IS DISM ISSED. (ORDER PRONOUNCED IN THE OPEN COURT ON 31/01/2014) SD/- SD/- (HARI OM MARATHA) (N.K. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR, DATED : 31/01/2014 * RANJAN COPY FORWARDED TO :- 1. APPELLANT THE ACIT, CENTRAL CIRCLE-2, JAIPUR. 2. RESPONDENT- SHRI JITENDRA AGRAWAL, JAIPUR. 3. THE CIT (A) 4. THE CIT 5. THE D/R GUARD FILE (I.T.A. NO. 144/JP/2013) BY ORDER, AR ITAT JAIPUR.