ACIT, Madurai V. P.Sivakumar (HUF), Sivakasi

ITA 1584/CHNY/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5402 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 07-01-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 22-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P B SEKARAN I RS
• Assessee Lawyers: G BASKAR
• Keywords: Capital asset; Business income; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENTAND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO. 1584(MDS)/2013 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II, MADURAI. V. SHRI P. SIVAKUMAR (HUF), NO.45, CHAIRMAN A SHANMUGANADAR ROAD, SIVAKASI 626 123. PAN : AADHP 4675 F (APPELLANT) (RESPONDENT) ITA NO. 1585(MDS)/2013 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II, MADURAI. V. SMT. S. KALPANA (INDL.), NO.588, SIVAKASI-VIRUDHUNAGAR ROAD, THIRUTHANGAL 626 130. PAN : ABFPK 2533 E (APPELLANT) (RESPONDENT) ITA NO. 1586(MDS)/2013 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II, MADURAI. V. SMT. S. KANCHANA (INDL.), NO.103, SOUTH CAR STREET, SIVAKASI. PAN : ABFPK 2567 E (APPELLANT) (RESPONDENT) 2 I.T.A. NOS. 1584 TO 1590/MDS/13 ITA NO. 1587(MDS)/2013 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II, MADURAI. V. SHRI P. SURESH (HUF), NO.588, SIVAKASI-VIRUDHUNAGAR ROAD, THIRUTHANGAL 626 130. PAN : AADHP 2538 K (APPELLANT) (RESPONDENT) ITA NO. 1588(MDS)/2013 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II, MADURAI. V. SMT. S. DEVIGA (INDL.), NO.46, CHAIRMAN A SHANMUGANADAR ROAD, SIVAKASI 626 123. PAN : ADSPD 4316 K (APPELLANT) (RESPONDENT) ITA NO. 1589(MDS)/2013 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II, MADURAI. V. SHRI P. SIVASHANMUGAM (INDL.), NO.103, SOUTH CAR STREET, SIVAKASI. PAN : AHKPS 3086 K (APPELLANT) (RESPONDENT) 3 I.T.A. NOS. 1584 TO 1590/MDS/13 AND ITA NO. 1590(MDS)/2013 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II, MADURAI. V. SHRI P. SIVASHANMUGAM (HUF), NO.103, SOUTH CAR STREET, SIVAKASI. PAN : AADHP 9432 L (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P.B. SEKARAN, IRS, CIT RESPONDENTS BY : SHRI G. BASKAR, ADVOCATE DATE OF HEARING : 7 TH JANUARY, 2014 DATE OF PRONOUNCEMENT : 7 TH JANUARY, 2014 O R D E R PER BENCH : THIS IS A BUNCH OF SEVEN APPEALS. ALL THESE APPE ALS ARE FILED BY THE REVENUE. THE COMMON ASSESSMENT YEAR IS 2008 -09. THE RESPONDENT-ASSESSEES BELONG TO SAME FAMILY AND SAME BUSINESS GROUP. THE ASSESSEES ARE HUFS AND INDIVIDUALS. TH E GROUP TO WHICH ALL THESE ASSESSEES BELONG, CARRIES ON BUSINE SS MAINLY IN FIREWORKS UNDER THE NAME SRI KALEESWARI FIRE WORKS . BY AND LARGE, SRI KALEESWARI IS THE NAME OF THE BUSINESS GROUP. IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER APP EAL, THE RESPONDENT-ASSESSEES HAVE RETIRED FROM THE FIRM RES ULTING IN THE RE- 4 I.T.A. NOS. 1584 TO 1590/MDS/13 CONSTITUTION OF THE FIRMS. THE RETIREMENT OF THE A SSESSEES DID NOT STOP THE PARTNERSHIP BUSINESS. ALL THE FIRMS CONTI NUED TO CARRY ON THE BUSINESS. AT THE TIME OF RETIREMENT, THE RESPO NDENT-ASSESSEES WERE PAID AMOUNTS IN ADDITION TO THE AMOUNTS LYING IN THEIR CAPITAL ACCOUNTS. WHILE COMPLETING THE ASSESSMENTS, THE AS SESSING OFFICER INVOKED SECTION 28(VA) OF INCOME-TAX ACT, 1 961 AND HELD THAT THE AMOUNT RECEIVED IN EXCESS OF THE CAPITAL A CCOUNT SHOULD BE TREATED AS THEIR BUSINESS INCOME, AS WHILE RETIRING FROM THE FIRM, THEY HAVE AGREED NOT TO CARRY ON ANY ACTIVITY IN RE LATION TO ANY BUSINESS. THE ADDITIONAL AMOUNT WAS THUS BROUGHT T O TAX IN THE RESPECTIVE HANDS OF THE RESPONDENT-ASSESSEES. 2. THE ISSUE WAS TAKEN UP IN FIRST APPEAL BEFORE TH E COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSI ONER OF INCOME TAX (APPEALS) HELD THAT THIS IS IN THE NATUR E OF A FAMILY ARRANGEMENT AND THEREFORE, THERE CANNOT BE ANY LEVY OF TAX ON AMOUNTS PAID TO THE OUTGOING PARTNERS. THE COMMISS IONER OF INCOME TAX (APPEALS) RELIED ON THE DECISION OF HON BLE HIGH COURT OF MADRAS RENDERED IN THE CASE OF COMMISSIONER OF I NCOME TAX V. KAY ARR ENTERPRISES & OTHERS (299 ITR 348). HE ACC ORDINGLY ALLOWED THE APPEAL AND HELD THAT THE ADDITIONAL AMO UNTS ARE NOT TAXABLE IN THE HANDS OF THE RESPONDENT-ASSESSEES. 5 I.T.A. NOS. 1584 TO 1590/MDS/13 3. THE REVENUE IS AGGRIEVED AND THEREFORE, THE SECO ND APPEALS BEFORE THE TRIBUNAL. THE COMMON GROUND RAI SED BY THE REVENUE IN ALL THESE APPEALS IS THAT THE COMMISSION ER OF INCOME TAX (APPEALS) HAS ERRED IN DELETING THE ADDITION MA DE BY THE ASSESSING AUTHORITY TOWARDS BUSINESS INCOME UNDER S ECTION 28(VA) TREATING AS A FAMILY SETTLEMENT, WHEREAS, THE AMOUN TS RECEIVED BY THE ASSESSEES WERE IN FACT BUSINESS INCOME. IT IS A CASE OF THE REVENUE THAT THE ADDITIONAL PAYMENTS RECEIVED BY TH E RESPONDENT- ASSESSEES, WHO RETIRED AS PARTNERS, WERE OVER AND A BOVE THE VALUE OF THE ASSETS OF THE COMPANIES AND FIRMS AND THEREF ORE, SUCH ADDITIONAL AMOUNTS SHOULD BE HELD TO BE TAXABLE AS BUSINESS INCOME IN THEIR HANDS. 4. WE CONSIDERED THIS ISSUE IN A VERY DETAILED MANN ER. IT WOULD NOT BE PROPER TO HOLD THAT THIS IS A FAMILY SETTLEM ENT AS HELD BY THE COMMISSIONER OF INCOME TAX (APPEALS). THEREFORE, W E FIND THAT THE DECISION OF THE HONBLE MADRAS HIGH COURT RENDERED IN THE CASE OF COMMISSIONER OF INCOME TAX V. KAY ARR ENTERPRISES & OTHERS (299 ITR 348) MAY NOT HAVE DIRECT APPLICATION TO THE CAS E. 5. BUT, STILL WE HAVE TO SEE THAT THE AMOUNTS RECEI VED BY THE RESPONDENT-ASSESSEES IN THE PRESENT CASE, OVER AND ABOVE THE 6 I.T.A. NOS. 1584 TO 1590/MDS/13 BALANCE LYING IN THEIR CAPITAL ACCOUNTS, ARE NOT RE VENUE RECEIPTS. THEY ARE CAPITAL IN NATURE. WHEN SUCH AMOUNTS RECE IVED BY A RETIRING PARTNER IS CAPITAL IN NATURE, COURTS HAVE CONSISTENTLY HELD THAT SUCH AMOUNTS CANNOT BE BROUGHT TO TAX. 6. THE HONBLE SUPREME COURT IN THE CASE OF ADDITIO NAL COMMISSIONER OF INCOME TAX V. MOHANBHAI PAMABHAI (1 65 ITR 166) HAS CLEARLY DECLARED THE LAW BY STATING THAT T HE AMOUNT RECEIVED BY A PARTNER ON HIS RETIREMENT IN RESPECT OF HIS SHARE IN PARTNERSHIP, INCLUDING GOODWILL, DOES NOT INVOLVE T RANSFER GIVING RISE TO CAPITAL GAINS. THE HONBLE HIGH COURT OF GUJARA T IN THE CASE OF COMMISSIONER OF INCOME TAX V. ANANT NARHAR NIMKAR ( HUF) (224 ITR 221) HAS HELD THAT RECEIPT OF ANY SUM BY A PART NER ON HIS RETIREMENT FROM THE FIRM AS VALUE OF HIS SHARE IN T HE ASSETS OF THE FIRM, DOES NOT INVOLVE ANY TRANSFER OF HIS CAPITAL ASSET RESULTING IN ACCRUAL OR RECEIPT OF INCOME CHARGEABLE TO TAX AS C APITAL GAIN IN THE HANDS OF RECIPIENT PARTNER. THE HONBLE HIGH COURT OF GUJARAT HAS TAKEN THE SAME VIEW IN ANOTHER CASE COMMISSIONER OF INCOME TAX V. SHREYAS CHINUBHAI (237 ITR 358), WHERE, AGAIN TH E COURT HAS HELD THAT AMOUNT RECEIVED ON RETIREMENT FROM PARTNE RSHIP FIRM IS NOT LIABLE FOR CAPITAL GAINS TAXATION. THE FULL BENCH OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF COMMISSIONER OF I NCOME TAX & 7 I.T.A. NOS. 1584 TO 1590/MDS/13 ANOTHER V. DYNAMIC ENTERPRISES [263(CTR)(KAR)(FB) 1 38] HAS HELD THAT WHERE A RETIRING PARTNER IS ONLY TAKING MONEY TOWARDS THE VALUE OF HIS SHARE, THERE IS NO CASE OF TRANSFER OF AMOUN TS AND LEVY OF CAPITAL GAINS TAXATION. 7. IN THE PRESENT CASE, ALL THE RESPONDENT-ASSESSEE S WERE PAID IN CASH IN THEIR CAPACITY AS RETIRING PARTNERS. WH AT THEY HAVE RECEIVED IN ADDITION TO THE SETTLEMENT OF THEIR CAP ITAL ACCOUNTS IS THEIR SHARE IN THE VALUE OF THE BUSINESS. THE SHAR E IN THE VALUE OF THE BUSINESS IS A CAPITAL ASSET WHICH MAY ALSO INCL UDE GOODWILL AND AS SUCH, SUCH RECEIPTS ARE CAPITAL RECEIPTS IN THEI R HANDS. IN THE LIGHT OF THE ABOVE JUDICIAL PRONOUNCEMENTS, SUCH CA PITAL RECEIPTS ARE NOT LIABLE FOR CAPITAL GAINS TAXATION. 8. NOW THE QUESTION TO BE CONSIDERED IS WHETHER THE ASSESSING OFFICER IS JUSTIFIED IN INVOKING SECTION 28(VA) SO AS TO TREAT THIS ADDITIONAL PAYMENT AS BUSINESS INCOME. THE REVEN UE IS RELYING ON CLAUSE (VA) WHICH READS .. NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS. IT IS THE VIEW OF THE R EVENUE THAT THE AMOUNTS RECEIVED BY THE RESPONDENT-ASSESSEES WERE F OR THE PURPOSE OF NOT CARRYING OUT ANY ACTIVITY IN RELATIO N TO ANY BUSINESS. 8 I.T.A. NOS. 1584 TO 1590/MDS/13 9. BUT, WE DO NOT FIND ANY FORCE IN THIS PROPOSITIO N. THERE IS NO AGREEMENT ENTERED INTO BETWEEN THE RESPONDENT-ASSES SEES WITH THE BUSINESS STATING THAT THEY WILL NOT BE CARRYING ON ANY BUSINESS ACTIVITY. THERE IS NO AGREEMENT WHATSOEVER INCLUDI NG IN THE NATURE OF NON-COMPETITION. HERE, IN THE PRESENT CASE, THE RESPONDENT- ASSESSEES HAVE RECEIVED THE AMOUNT NOT BECAUSE OF A NY PARTICULAR AGREEMENT, BUT BECAUSE OF THEIR RETIREMENT FROM THE BUSINESS. THE RETIREMENT DEEDS EXECUTED BY THE PARTIES ARE NOT IN THE NATURE OF ANY AGREEMENT RESTRAINING THE PARTIES FROM CARRYING ON BUSINESS ACTIVITIES. THEREFORE, SECTION 28(VA) IS NOT APPLI CABLE TO THE CASE OF PARTNERS RETIRING FROM THE BUSINESS. THAT CLAUSE I S MORE APPLICABLE TO SITUATIONS LIKE NON-COMPETITION AGREEMENT, ETC. 10. THERE IS NO ELEMENT OF PROFIT IN SUCH ADDITIONA L PAYMENTS TO THE RESPONDENT-ASSESSEES. THIS IS BECAUSE THE PROF IT TILL THE DATE OF RETIREMENT HAS BEEN WORKED OUT BY THE FIRMS AND THE SHARES OF THE RETIRING PARTNERS HAVE ALREADY BEEN CREDITED TO THE IR CAPITAL ACCOUNTS. THE CAPITAL ACCOUNTS OF THE RETIRING PAR TNERS REFLECTED THE CAPITAL CONTRIBUTIONS MADE BY THEM, ALONG WITH THEI R PROFIT SHARES. WHEN THE CAPITAL ACCOUNTS ARE SETTLED BY PAYING THE AMOUNTS TO RETIRING PARTNERS, THE SHARE OF THE PROFITS ALSO HA VE BEEN CREDITED. SETTLEMENT OF THE CAPITAL ACCOUNTS TAKES CARE OF SU CH THINGS. 9 I.T.A. NOS. 1584 TO 1590/MDS/13 MOREOVER, EVEN IF THERE IS AN ELEMENT OF PROFIT, FO R THE SAKE OF ARGUMENT, SUCH PROFITS ARE NOT TAXABLE IN THE HANDS OF THE PARTNERS BY VIRTUE OF PROVISIONS OF SECTION 10(2A) OF INCOME -TAX ACT, 1961. 11. THEREFORE, THE CHARACTER OF ADDITIONAL AMOUNTS PAID TO THE RETIRING PARTNERS REPRESENT THE SHARE OF THE RETIRI NG PARTNERS IN THE WORTH AND VALUE OF THE BUSINESS IN WHICH THEY WERE PARTNERS. THE WORTH AND VALUE INCLUDED THE STANDING OF THE BUSINE SS, THE GOODWILL AND SO MANY OTHER INTANGIBLE VIRTUES. SO, WHAT IS PAID TO THE RETIRING PARTNERS IS THEIR RIGHTFUL SHARES IN THAT WORTH AND VALUE OF THE FIRMS AND PLAINLY SPEAKING, THERE IS NO SUCH ADDITIONAL P AYMENTS AS ALLEGED BY THE REVENUE TOWARDS PROFITS. WHAT IS PA ID TO THE RETIRING PARTNERS ARE THOSE AMOUNTS DUE TO THEM. THE ONLY T HING IS THAT THEIR SHARES IN WORTH AND VALUE OF BUSINESS HAVE BEEN SEP ARATELY COMPUTED. 12. THEREFORE, WE FIND THAT THE ADDITIONAL PAYMENTS MADE TO THE RETIRING PARTNERS WERE NOT IN THE NATURE OF ANY PRO FIT OR INCOME WITHIN THE MEANING OF SECTION 28(VA). 13. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT THE ADDITIONAL AMOUNTS PAID TO THE RESPONDENT-ASSESSEES ARE NON- TAXABLE CAPITAL RECEIPTS AND IN THAT WAY, THE COMMI SSIONER OF 10 I.T.A. NOS. 1584 TO 1590/MDS/13 INCOME TAX (APPEALS) IS RIGHT IN HOLDING THAT THE A MOUNTS ARE NOT TAXABLE. HE IS, THEREFORE, JUSTIFIED IN DELETING T HE ADDITIONS MADE BY THE ASSESSING AUTHORITY. 14. IN RESULT, THESE APPEALS FILED BY THE REVENUE A RE DISMISSED. ORDERS PRONOUNCED IN THE OPEN COURT AT THE TIME O F HEARING ON TUESDAY, THE 7 TH OF JANUARY, 2014 AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) (DR. O.K. NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED, THE 7 TH JANUARY, 2014. KRI. COPY TO: 1. APPELLANT 2. RESPONDENT S 3. CIT, CENTR AL-II, CHENNAI 4. CIT(A), TI RUCHIRAPPALLI 5. DR 6. GF.