The ACIT, Circle-1(1)., Visakhapatnam V. Sri KV Ram Prasad,

ITA 144/VIZ/2006

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7143 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 3 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-02-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2002-2003
• Appeal Filed On: 24-03-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G S S GOPINATH
• Assessee Lawyers: C V S MURTHY
• Keywords: Capital asset; Capital Gains
• Section: 54EC

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH: VISAKHAPATNAM BEFORE: SRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SRI B.R. BASKARAN, ACCOUNTANT MEMBER I.T.A. NO.142/VIZAG/2006 ASSESSMENT YEAR : 2002-03 ACIT, CIRCLE-1(1) VISAKHAPATNAM VS. K.S.N. PRASAD, VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO.AATPP 2587N I.T.A. NO.143/VIZAG/2006 ASSESSMENT YEAR : 2002-03 ACIT, CIRCLE-1(1) VISAKHAPATNAM VS. K. SARADA VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO.ACCPS 8989A I.T.A. NO.144/VIZAG/2006 ASSESSMENT YEAR : 2002-03 ACIT, CIRCLE-1(1) VISAKHAPATNAM VS. K.V. RAM PRASAD VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO.AATPP 2588D APPELLANT BY : SHRI G.S.S. GOPINATH, DR RESPONDENT BY : SHRI C.V.S. MURTHY, CA 2 O R D E R PER B..R. BASKARAN, ACCOUNTANT MEMBER : 1. THESE THREE APPEALS, FILED AT THE INSTANCE O F THE REVENUE, ARE DIRECTED AGAINST THE ORDER PASSED BY LD CIT(A-1), VISAKHAPAT NAM IN THE HANDS OF EACH OF THE ASSESSEES AND THEY RELATE TO THE ASSESSMENT YEA R 2002-03. SINCE THE ISSUES AGITATED IN THESE THREE APPEALS ARE IDENTICAL AND I NTER CONNECTED, THEY ARE DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF C ONVENIENCE. 2. THE CONCISE GROUNDS OF APPEAL RAISED BY THE REVENUE IN THE CASE OF K.S.N. PRASAD READ AS UNDER: A. THE ORDER OF THE CIT (APPEALS) IS ERRONEOUS BOTH IN LAW AND FACTS. B. THE LEARNED CIT(APPEALS) ERRED IN DELETING THE C APITAL GAINS ON TRANSFER OF LAND AND BUILDING AND OTHER ASSETS OF M/S JYOTHI SYNDICATE, VISAKHAPATNAM BY THE OLD PARTNERS. CONSEQUENTLY TH E QUANTUM UNDER DISPUTE IS RS.9,83,968/-. C. THE LEARNED CIT(APPEALS) OUGHT TO HAVE OBSERVED THAT THE OLD PARTNERS RETIREMENT WAS IN THE CIRCUMSTANCES MENTIONED IN TH E ASSESSMENT ORDER IS NOTHING BUT SALE. D. THE LEARNED CIT(APPEALS) SHOULD HAVE OBSERVED TH AT THE ASSESSEE USED COLOURABLE DEVICES/DUBIOUS METHODS TO AVOID PA YMENT OF CAPITAL GAINS. E. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME O F APPEAL HEARING. THE QUANTUM UNDER DISPUTE IN THE CASE OF SMT. K.SAR ADA IS RS.10,32,376/- AND IN THE CASE OF SRI K.V.RAMPRASAD IS RS.24,01,258/-. 3. THE FACTS RELATING TO THE ISSUE ARE STATED I N BRIEF. THESE THREE ASSESSEES HEREIN, WERE PARTNERS OF A PARTNERSHIP FIRM NAMED M /S JYOTHI SYNDICATE, WHICH IS ENGAGED IN THE BUSINESS OF RUNNING A CINEMA THEATRE . (A) THE FIRM WAS INITIALLY CONSTITUTED IN THE YEAR 1983-84 BY SHRI K.PURNACHANDRA RAO, SHRI KSN PRASAD AND SHRI KVR PR ASAD. (SHRI KSN PRASAD AND SHRI KVR PRASAD ARE SONS OF SHRI K.P URNACHANDRA RAO.) 3 (B) SHRI K.PURNACHANDRA RAO EXPIRED ON 30.7.2001 AN D IN HIS PLACE HIS WIFE SMT. SARADA DEVI WAS ADMITTED AS A PARTNER. THE BA LANCE STANDING IN THE CAPITAL AND CURRENT ACCOUNTS OF LATE SRI K.PURN ACHANDRA RAO WAS ALLOCATED BETWEEN SMT. SARADA DEVI, SHRI KSN PRASAD AND SHRI KVR PRASAD IN CERTAIN PERCENTAGE AS PER THE RECITALS IN THE WILL OF LATE SRI K.PURNACHANDRA RAO. (C) ON 01.04.2001, I.E. BEFORE THE EXPIRY OF SHRI K .PURNACHANDRA RAO AND ON THE FIRST DAY OF THE FINANCIAL YEAR, THE VALUE O F LAND AND BUILDING WAS REVISED UPWARDS, APPARENTLY TO MATCH WITH THE PREVA ILING MARKET RATES AND THE SAID INCREASE AMOUNTING TO RS.3,27,09,698/- WAS CREDITED TO THE CAPITAL ACCOUNTS OF THE THREE PARTNERS THROUGH A JO URNAL ENTRY. THE VALUE OF BUILDING WAS INCREASED FROM RS.1.04 LAKHS TO RS. 15.00 LAKHS. THE VALUE OF LAND WAS INCREASED FROM RS.36.86 LAKHS TO RS.350.00 LAKHS. (D) ON 16.10.2001, THREE NEW PARTNERS VIZ., SRI D. RAMA NAIDU, SRI D. SURESH BABU AND SRI D. VENKATESH WERE ADMITTED INTO THE PARTNERSHIP FIRM, WHO CONTRIBUTED RS.1.00 CRORE EACH AS THEIR C APITAL IN THE PARTNERSHIP FIRM. ON THEIR ADMISSION, THE NUMBER O F PARTNERS OF THE FIRM INCREASED TO SIX. (E) ON 03.12.2001, THE OLD PARTNERS VIZ, SMT. SARAD A DEVI,. SRI KSN PRASAD AND SRI KVR PRASAD RETIRED FROM THE PARTNERSHIP FIR M. THEY ALSO WITHDREW THEIR RESPECTIVE CAPITAL AS DETAILED BELOW : NAME CAPITAL AMOUNT WITHDRAWN. 1. SRI KSN PRASAD RS.1,30,60,360/- 2. SRI KVR PRASAD RS.1,43,84,042/- 3. SMT. K.SARADA DEVI RS.47,00,000/- 3.1 IT IS INTERESTING TO NOTE THAT ALL THE THRE E ASSESSEES HAVE INVESTED FOLLOWING AMOUNTS IN THE BONDS ISSUED BY M/S RURAL ELECTRIFIC ATION CORPORATION LTD, WHICH 4 IS ELIGIBLE FOR DEDUCTION U/S 54EC OF THE ACT AGAIN ST THE INCOME FROM LONG TERM CAPITAL GAIN. NAME AMOUNT INVESTED. 1. SRI KSN PRASAD RS.1,30,00,000/- 2. SRI KVR PRASAD RS.1,30,00,000/- 3. SMT. K.SARADA DEVI RS.40,00,000/- IT MAY BE NOTED THAT THE INVESTMENT IN THESE TYPES OF BONDS IS NORMALLY MADE IN ORDER TO AVOID TAX ON CAPITAL GAINS. 3.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS IN THE HANDS OF THE ASSESSEES HEREIN, THE AO ANALYSED THE FACTUAL BACK GROUND NARRATED ABOVE AND CAME TO THE CONCLUSION THAT THE TRANSACTION INVOLVE D IN THE FORM ARRANGEMENT STATED EARLIER IS ONLY A MODE ADOPTED TO EFFECT TRA NSFER OF IMMOVABLE PROPERTIES FROM THE ORIGINAL OWNERS BELONGING TO THE K.P. RAO FAMILY TO THE NEW OWNERS, BEING THE FAMILY MEMBERS OF SRI RAMA NAIDU FAMILY. ACCORDINGLY THE AO FELT THAT THE PROVISIONS OF SECTION 45 OF THE ACT WOULD APPLY . THE ASSESSING OFFICER NOTICED THAT THESE THREE ASSESSEES MADE A SURPLUS OF ABOUT THREE CRORES THROUGH THESE TRANSACTION IN VIEW OF APPRECIATION IN THE VALUE OF LAND AND BUILDING. THE AO, ACCORDINGLY CONCLUDED THAT THE RECONSTITUTION OF PA RTNERSHIP DEED IS ONLY A DEVICE TO AVOID PAYMENT OF TAX ON THE CAPITAL GAINS. IN T HIS REGARD, THE AO PLACED HIS RELIANCE ON THE DECISION OF HONBLE SUPREME COURT I N THE CASE OF MCDOWELL AND CO. LTD. V CTO (1985)(154 ITR 148). IN VIEW OF THE ABOVE, THE AO COMPUTED SHORT TERM CAPITAL GAIN ON THE BUILDING AND LONG TE RM CAPITAL GAIN ON THE LAND AND APPORTIONED THEM IN THE RATIO OF CAPITAL AMOUNT REC EIVED BY THEM. AGAINST THE LONG TERM CAPITAL GAIN, THE AO ALLOWED DEDUCTION U/ S 54EC OF THE ACT IN THE HANDS OF THE EACH OF THE ASSESSEES TO THE EXTENT OF AMOUN T INVESTED IN THE BONDS OF M/S RURAL ELECTRIFICATION CORPORATION LTD. 3.3 THE LD CIT(A) VIEWED THESE TRANSACTIONS AS A CASE OF RETIREMENT OF THE PARTNERS. ACCORDINGLY THE LD CIT(A), BY PLACING RE LIANCE ON THE DECISION OF THE JURISDICTIONAL AP HIGH COURT IN THE CASE OF CIT V L .RAGHUKUMAR (141 ITR 674) AND CIT V S.SESHAGIRI RAO (213 ITR 304) AND ALSO TH E DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V P.H.PATEL (171 I TR 128), HELD THAT NO 5 ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS IS INVOLVED IN FAVOUR OF THE CONTINUING PARTNERS, WHEN A PARTNER RETIRES FROM A PARTNERSHIP FIRM TAKING HIS SHARE OF PARTNERSHIP INTEREST. THE LD CIT(A) ALSO, BY ADVERTING THE PROVISIONS OF THE INDIAN PARTNERSHIP ACT, HAS OBSERVED THAT THE P ARTNERS, IN CASE OF A SUBSISTING FIRM, HAVE NO RIGHT TO TRANSFER ANY PROPERTY BELONG ING TO THE FIRM SINCE THEY ARE NOT THE OWNERS OF SUCH PROPERTIES. AGGRIEVED BY TH E ORDER OF LD CIT(A), THE REVENUE IS IN APPEAL BEFORE US IN ALL THE THREE CAS ES. 4. WE HAVE HEARD THE PARTIES AND CAREFULLY PERU SED THE RECORD. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE LAND AND B UILDING BELONGING TO THE FIRM WAS REVALUED IN ORDER TO BRING THE VALUE OF THE SAME TO THE LEVEL OF THEN PREVAILING MARKET RATES. IT IS ALSO A FACT THAT THE PARTNERSH IP FIRM ORIGINALLY CONSISTED OF THE FAMILY MEMBERS OF SHRI K.PURNACHANDRA RAO (HEREINAF TER OLD PARTNERS) UP TO 16.10.2001. ON THAT DATE THREE NEW PARTNERS VIZ., SRI RAMANAIDU AND OTHERS WERE ADMITTED AS PARTNERS (HEREINAFTER NEW PARTNER S). SUBSEQUENTLY ON 03-12- 2001, THE OLD PARTNERS RETIRED FROM THE FIRM ALLOWI NG THE NEW PARTNERS TO CONTINUE THE FIRM. THUS, IF WE LIFT THE VEIL OF THE PROCESS OF ADMISSION OF NEW PARTNERS AND THE RETIREMENT OF OLD PARTNERS, APPARENTLY, THE OLD PARTNERS HAVE TRANSFERRED THE ASSETS OF THE PARTNERSHIP FIRM TO THE NEW PARTNERS, BY KEEPING THE IDENTITY OF THE FIRM IN TACT. 4.1 THERE IN ALSO NO DISPUTE WITH REGARD TO THE FACT THAT THE OLD PARTNERS HAVE REALIZED THE CAPITAL GAIN INVOLVED IN THE TRANSFER OF LAND AND BUILDING. THE AO HAS TAKEN THE WHOLE ARRANGEMENT OF RECONSTITUTION OF TH E PARTNERSHIP FIRM, I.E. ADMISSION OF THE NEW PARTNERS AND THE RETIREMENT OF OLD PARTNERS, AS A DEVICE TO AVOID TAX ON THE CAPITAL GAIN. WE FIND MERIT IN TH E CASE OF THE ASSESSING OFFICER, IF AS STATED EARLIER, THE VEIL OF THE ARRANGEMENT IS R EMOVED. IN THAT CASE, THE ARRANGEMENT CANNOT BE TAKEN AS A MERE CASE OF RETIR EMENT OF PARTNERS AS CONCLUDED BY LD CIT(A). THE FIRM ORIGINALLY CONSIS TED OF CERTAIN FAMILY MEMBERS FORMING A GROUP AND THE AFTER THEIR RETIREMENT THE FIRM WAS CONTINUED BY ANOTHER GROUP, WHO ARE IN NO WAY CONNECTED TO THE ERSTWHILE PARTNERS. THUS, BY THE PROCESS OF ADMISSION OF NEW PARTNERS AND RETIREMENT OF OLD PARTNERS, ENTIRE ASSETS BELONGING TO THE FIRM WAS TRANSFERRED BY THE FIRM CONSISTING OF OLD PARTNERS 6 (HEREINAFTER OLD FIRM) AND TO A FIRM CONSISTING O F NEW PARTNERS (HEREINAFTER NEW FIRM.). IT IS ALSO PERTINENT TO NOTE THAT THE OL D PARTNERS WERE OBLIVIOUS OF THE FACT OF CAPITAL GAIN TAX, WHICH HAS PROMPTED THEM TO INV EST IN THE BONDS OF M/S RURAL ELECTRIFICATION CORPORATION WHICH IS ELIGIBLE FOR D EDUCTION U/S 54EC OF THE ACT AGAINST THE LONG TERM CAPITAL GAINS. 4.2. THE ASSESSING OFFICER HAS, HOWEVER, PROCEE DED TO LEVY TAX ON THE HANDS OF THE PARTNER ON THEIR SHARE OF CAPITAL GAINS. ON A PLAIN READING OF SECTION 45(4), WE NOTICE THAT THE PROFITS OR GAINS ARISING ON TRAN SFER OF CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF A FIRM OR OTHERWISE SHALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM . HENCE UNDER THE PROVISIONS OF SECTION 45(4), ONLY THE FIRM IS EXIGIBLE FOR TAX O N THE GAINS ARISING ON TRANSFER OF THE CAPITAL ASSETS. IN THIS CASE, THE ASSETS HAVE BEEN TRANSFERRED BY THE OLD FIRM TO THE NEW FIRM AND THE TAX, IF ANY, IS LEVIEBLE ON LY IN THE HANDS OF THE OLD FIRM ONLY. AS STATED EARLIER, THE VEIL OF THE ENTIRE AR RANGEMENT IS LIFTED, IT GIVES RISE TO TWO FIRMS VIZ., OLD FIRM CONSISTING OF FAMILY MEMBE RS OF K.PURNACHANDRA RAO AND THE NEW FIRM CONSISTING OF NEW PARTNERS. HENCE, TH E TAX, IF ANY, SHOULD HAVE BEEN LEVIED IN THE HANDS OF THE OLD FIRM ONLY. IN VIEW OF THE ABOVE, IN OUR OPINION, THE ACTION OF THE ASSESSING OFFICER IN LEVYING TAX IN THE HANDS OF THE INDIVIDUAL PARTNERS IS NOT IN ACCORDANCE WITH THE LAW. IN VI EW OF THE FOREGOING, THOUGH WE DO NOT AGREE WITH THE LD CIT(A) ON THE REASONING GI VEN BY HIM FOR GRANTING RELIEF TO THESE ASSESSEES, YET, FOR THE REASONS STATED SU PRA, WE ARE OF THE VIEW THAT THE CAPITAL GAINS TAX IS NOT LEVIEBLE IN THE HANDS OF T HESE ASSESSEES. 5. IN THE RESULT, THESE THREE APPEALS FILED BY THE REVENUE ARE DISMISSED. PRONOUNCED ACCORDINGLY ON 02/02/2010. SD/- SD/- (SUNIL KUMAR YADAV) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER VISAKHAPATNAM DATE : 02 ND FEBRUARY, 2010 7 A COPY OF THIS ORDER IS FORWARDED TO : 01 THE ACIT, CIRCLE-1, RANGE-1, VISAKHAPATNAM 02 SHRI K.S.N. PRASAD,. D.NO.2-99, GITAM COLLEGE RO AD, YENDADA, VISAKHAPATNAM 03 SMT. K. SARADA, D.NO.2-99, GITAM COLLEGE ROAD, Y ENDADA, VISAKHAPATNAM 04 SRI K.V. RAM PRASAD, D.NO.2-99, GITAM COLLEGE RO AD, YENDADA, VISAKHAPATNAM 05 THE CIT-1, VISAKHAPATAM 06 THE CIT(A)-I, VISAKHAPATNAM 07 DR, ITAT, VISAKHAPATNAM 08 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY ITAT, VISAKHAPATNAM BENCH