The ITO, Ward-4(4), Baroda V. Vision Finstock Limited, Baroda

ITA 1641/AHD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1178 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-07-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 10-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 30-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R I PATEL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Capital asset; Earning of tax free income; Question of law; Fair market value; Valuation report; Capital receipt
• Section: 143(3); 14A; 263

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD .., , !' BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER 1. ./ I.T.A. NO.1359/AHD/2012 2. ./ I.T.A. NO.1641/AHD/2012 ( / ASSESSMENT YEARS : 2008-09 & 2009-10 RESPECTIVELY) 1. VISION FINSTOCK LTD. 402, R.K. CENTRE 4 TH FLOOR FATEHGUNJ MAIN ROAD BAORDA-390 011 2. THE ITO, CIRCLE-4(4) BARODA / VS. 1. THE ACIT CIRCLE-4, BARODA 2. VISION FINSTOCK LTD., MUMBAI $ ./ ./ PAN/GIR NO. : AAACV 5994 P ( $' / APPELLANT ) .. ( ()$' / RESPONDENT ) ASSESSEE BY : SHRI S.N. SOPARKAR, AR RE VENUE BY : SHRI R.I. PATEL CIT-DR *+ / DATE OF HEARING 10/06/2016 ,-.+ / DATE OF PRONOUNCEMENT 07/07/2016 / O R D E R PER SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER : THESE TWO APPEALS, ONE BY THE ASSESSEE AND ANOTHE R BY THE REVENUE, ARE DIRECTED AGAINST THE SEPARATE ORDERS O F THE COMMISSIONER OF ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 2 - INCOME TAX(APPEALS)-III, BARODA DATED 18/04/2012 & 31/5/2012 FOR THE ASSESSMENT YEARS 2008-09 & 2009-10 RESPECTIVELY . 2. FIRST, WE TAKE UP ASSESSEES APPEAL IN ITA NO.13 59/AHD/2012 FOR AY 2008-09. 2.1. THE RELEVANT FACTS AS CULLED OUT FROM THE MATE RIALS ON RECORD ARE AS UNDER:- 2.2. ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF INVESTMENTS IN PARTNERSHIP FIRMS, INVESTING IN SHA RES AND SECURITIES. ASSESSEE FILED ITS RETURN OF INCOME FOR AY 2008-09 ON 29/09/2008 DECLARING TOTAL LOSS OF RS.1,45,31,828/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER ASSESSMENT WAS FRAMED U/S.1 43(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT' ) VIDE ORDER DATED 10/12/2010 AND TOTAL LOSS WAS DETERMINED AT RS.43,0 5,381/-. AGGRIEVED BY THE ORDER OF ASSESSING OFFICER (AO), ASSESSEE CA RRIED THE MATTER BEFORE THE LD.CIT(A), WHO VIDE ORDER DATED 18/04/20 12 (IN APPEAL NO.CAB/III-145/10-11) GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEA L AND HAS RAISED THE FOLLOWING GROUNDS: THE APPELLANT SUBMITS THE FOLLOWING GROUNDS, WHICH ARE WITHOUT PREJUDICE TO ONE ANOTHER. ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 3 - 1. THE ORDERS OF THE LOWER AUTHORITIES ARE ARBITRARY, NOT BASED ON PROPER EVIDENCES, WITHOUT PROPER REASONS, INVALID A ND ALSO BAD IN LAW. 2. (A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN U PHOLDING THE AOS CALCULATION OF DISALLOWANCE U/S.14A AMOUNTING TO RS.1,02,82,049/-. (B) THE LEARNED CIT(APPEALS), BY APPLYING NARROW I NTERPRETATION, ERRED IN NOT EXCLUDING THE AMOUNT REPRESENTED BY BO OK ENTRY FROM AVERAGE VALUE OF INVESTMENT AND AVERAGE OF TOTAL ASSETS WHILE COMPUTING THE AMOUNT OF DISALLOWANCE. (C) WITHOUT PREJUDICE TO THE ABOVE THE LEARNED CIT(APPEALS) OUGHT TO HVE TAKEN NET IN VESTMENT I.E. AFTER DEDUCTING CREDIT BALANCE IN ONE PARTNERS HIP FIRM AGAINST THE DEBIT BALANCE IN OTHER PARTNERSHIP FIRM S, WHILE CONSIDERING THE VALUE OF INVESTMENTS FOR THE PURPOS E OF APPLYING RULE 8D. 2.3. BEFORE US, AT THE OUTSET, LD.AR SUBMITTED THAT THE SOLE CONTROVERSY IN THE APPEAL IS WITH RESPECT TO DISALLOWANCE U/S.14A OF THE ACT. 2.4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A O NOTICED THAT ASSESSEE HAD EXEMPT INCOME FROM SHARE OF PROFIT OF RS.55,604/- AND ASSESSEE HAD ALSO CLAIMED INTEREST OF RS.1,45,52,63 2/- ON ITS BORROWINGS. THE ASSESSEE WAS SHOW-CAUSED TO SHOW AS TO WHY PROV ISIONS OF SECTION 14A R.W.S. RULE 8D OF I.T.RULES, 1962 NOT BE INVOKE D FOR DISALLOWING EXPENSES U/S.14A IN VIEW OF THE FACT THAT ASSESSEE HAD EXEMPT INCOME ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 4 - AND HAD ALSO PAID INTEREST TO WHICH ASSESSEE INTER-ALIA SUBMITTED THAT THE SHARE OF PROFIT WAS IN THE NATURE OF BUSINESS INCOM E AND THOUGH THE SAME WAS EXEMPT IN THE HANDS OF PARTNERS BUT WAS TAXABLE IN THE HANDS OF THE FIRM AND, THEREFORE, IT WAS NOT CORRECT TO CONCLUDE THE SHARE INCOME IN THE HANDS OF PARTNERS WAS ALTOGETHER TAX-FREE AND IN S UCH A SITUATION, NO DISALLOWANCE U/S.14A OF THE ACT WAS ATTRACTED. THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE AO AS HE W AS OF THE VIEW THAT PROVISIONS OF SECTION 14A OF THE ACT ARE APPLICABLE IN THE CASE AS ASSESSEE HAS EARNED EXEMPT INCOME. HE THEREAFTER, FOLLOWING THE METHOD PRESCRIBED UNDER RULE 8D OF IT RULES, WORKED OUT T HE TOTAL DISALLOWANCE U/S.14A AT RS.1,02,82,049/-. AGGRIEVED BY THE ORDE R OF AO, ASSESSEE CARRIED THE MATTER BEFORE THE LD.CIT(A), WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER:- 5.4 I HAVE CONSIDERED THE FACTS OF THE CAS E AS ALSO THE OBSERVATION OF THE AO. IN THIS CASE, REVALUATION OF ASSETS HAS BEEN MADE BY THE FIRM OF ITS ASSETS. THE APPELLANT IS A PAR TNER IN THIS FIRM AND NO REVALUATION OF ASSETS OF THE PARTNER HAS BEEN MADE BY IT. THE SUB- SECTION (3) OF RULE 8D APPLIES TO THE COMPUTATION O F DISALLOWANCE U/S 14A IN CASE OF A PERSON IN WHOSE OWN CASE REVALUATI ON OF ASSETS HAVE BEEN MADE AND NOT IN CASE OF SOME OTHER PERSON. B ESIDES THIS, EVEN IF THE APPELLANT'S CONTENTIONS ARE ACCEPTED, THEN AS P ER THE PROVISIONS OF SUB-SECTION (3) OF RULE 8D, ONLY THE TOTAL ASSETS A RE TO BE DECREASED ON ACCOUNT OF EXCLUDING THE INCREASE ON ACCOUNT OF REV ALUATION OF ASSETS BUT THE TOTAL INVESTMENTS OF THE APPELLANT IN THE F IRM WOULD NOT BE DECREASED ON ACCOUNT OF THE FACT THAT THERE IS NO S UCH PROVISION IN RULE 8D. THIS WILL GIVE RISE TO AN ABSURD SITUATION WHER E THE TOTAL INVESTMENTS WOULD BE MORE THAN THE TOTAL ASSETS D ESPITE THE ABSENCE ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 5 - OF ANY LIABILITY. UNDER SUCH CIRCUMSTANCES, T HE APPELLANT'S CONTENTIONS ARE NOT ACCEPTABLE AND IT IS HELD THAT THE A.O. HAS RIGHTLY COMPUTED THE DEDUCTION UNDER RULE 8D AS THE PROVISI ONS OF SUB-SECTION (3) OF RULE 8D ARE NOT APPLICABLE TO THE APPELLANT. AS A RESULT, THIS GROUND OF APPEAL IS DISMISSED. 2.5. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 2.6. BEFORE US, LD.AR REITERATED THE SUBMISSIONS MA DE BEFORE THE AO AND LD.CIT(A) FOR DELETING THE ENTIRE ADDITION OF E XPENSES U/S.14A OF THE ACT. AS AN ALTERNATE PLEA, LD.AR SUBMITTED THAT T HE ASSESSEE HAS EARNED TAX-FREE INCOME IN THE FORM OF SHARE OF PROFIT FROM PARTNERSHIP-FIRM OF ONLY RS.55,604/-, WHEREAS THE DISALLOWANCE U/S.14 A HAS BEEN WORKED OUT AT RS.1,02,82,049/- AND THUS THE DISALLOWANCE O F EXPENSES IS FAR MORE THAN THE EXEMPT INCOME. HE THEREFORE SUBMITTED THA T THE DISALLOWANCE U/S.14A OF THE ACT CANNOT BE MORE THAN THE EXEMPT I NCOME AND FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF HONBLE C HANDIGARH BENCH B CHANDIGARH IN THE CASE OF ACIT VS. M/S.PUNJAB STATE COOP & MARKETING FED.LTD. IN ITA NOS.548/AHD/2011 & 579/AHD/2011 FOR AY 2007-08, ORDER DATED 30/09/2011. HE ALSO RELIED ON THE JUDG EMENT OF HONBLE HIGH COURT OF DELHI IN THE CASE OF JOINT INVESTMENT S (P.) LTD. VS. CIT REPORTED AT [2015] 372 ITR 694 (DELHI). HE THEREFO RE SUBMITTED THAT THE DISALLOWANCE U/S.14A BE RESTRICTED TO THE EXEMPT IN COME. LD.CIT-DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF AO AND L D.CIT(A). ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 6 - 3. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO DI SALLOWANCE U/S.14A OF THE ACT. IN THE PRESENT CASE, IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS EARNED EXEMPT INCOME OF RS.55,604/- AND THE DISALLO WANCE U/S.14A R.W.S.RULE 8D HAS BEEN WORKED OUT AT RS.1,02,82,04 9/- AND THUS THE DISALLOWANCE U/S.14A OF THE ACT WHICH HAS BEEN WORK ED OUT IS MUCH MORE THAN THE EXEMPT INCOME EARNED BY THE ASSESSEE IN THE FORM OF DIVIDEND. WE FIND THAT IN THE CASE OF JOINT INVEST MENTS (P.) LTD. VS. CIT(SUPRA), THE HONBLE DELHI HIGH COURT WHILE CON SIDERING DISALLOWANCE U/S.14A AND WHEN THE DISALLOWANCE WORK ED OUT WAS MORE THAN THE EXEMPT INCOME HAS OBSERVED AS UNDER:- 9. .THE THIRD, AND IN THE OPINION OF THIS COURT , IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS THAT WHEREA S THE ENTIRE TAX EXEMPT INCOME IS RS. 48,90,000, THE DISALLOWANCE UL TIMATELY DIRECTED WORKS OUT TO NEARLY 110 PER CENT OF THAT SUM, I.E., RS. 52,56,197/-. BY NO STRETCH OF IMAGINATION CAN S. 14A OR R. 8D BE INTER PRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOW ED. THE WINDOW FOR DISALLOWANCE IS INDICATED IN S. 14A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE 'INCURRED BY THE ASSESSEE I N RELATION TO THE TAX EXEMPT INCOME'. THIS PROPORTION OR PORTION OF THE T AX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPP ENED IN THIS CASE. 3.1. BEFORE US, REVENUE HAS NOT POINTED OUT ANY CON TRARY BINDING DECISION IN ITS SUPPORT. IN VIEW OF THE AFORESAID FACTS AND FOLLOWING THE ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 7 - DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS (P.) LTD. VS. CIT(SUPRA), WE DIRECT THAT THE DISALL OWANCE U/S.14A IN THE PRESENT CASE BE RESTRICTED TO RS.55,604/-, BEING TH E EXEMPT INCOME EARNED BY THE ASSESSEE. THUS, THIS GROUND OF ASSESSEE IS ALLOWED. 4. IN THE RESULT, ASSESSEES APPEAL IN ITA NO.1359/ AHD/2012 FOR AY 2008-09 IS ALLOWED. 5. NOW WE TAKE UP REVENUES APPEAL IN 1641/AHD/2012 FOR AY 2009-10. 5. 1. FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER: 5.2. ASSESSEE WAS A PARTNER IN TWO PARTNERSHIP FIR MS NAMELY FINE DEVELOPERS WITH CAPITAL CONTRIBUTION RATIO OF THE A SSESSEE BEING 20% AND IN MAHUL CONSTRUCTION CORPORATION WITH CAPITAL CONT RIBUTION RATIO OF ASSESSEE BEING 20% VIDE PARTNERSHIP DEED DATED 25 TH NOV 2005 AND 3 RD JANUARY 2006 RESPECTIVELY. FINE DEVELOPERS PURCHAS ED A PROPERTY SITUATED AT KASAIWADA, KURLA (EAST), MUMBAI AND MAH UL CONSTRUCTION COMPANY PURCHASED A PROPERTY AT MAHUL FOR THE PURPO SE OF DEVELOPMENT OF COMMERCIAL/HOUSING PROJECT. VIDE DEED OF ADMISSI ON DATED 6 TH JULY 2007, ONE MORE PARTNER, NAMELY HOUSING DEVELOPMENT AND INFRASTRUCTURE LTD (HDIL) WAS ADMITTED AS INCOMING PARTNER IN BOTH THE FIRMS. ASSESSEE RETIRED FROM BOTH THE FIRMS W. E.F. 27.5.2008. ON ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 8 - PURSING THE BALANCE SHEET OF THE ASSESSEE, ASSESSIN G OFFICER (AO) NOTICED THAT THERE WAS INCREASE OF RS 58,43,56,036/ - IN THE RESERVES AND SURPLUS ACCOUNT IN SPITE OF THE FACT THAT THE ASSES SEE HAD NOT CARRIED OUT ANY BUSINESS ACTIVITY DURING THE YEAR. THE ASSESSEE WAS THEREFORE ASKED TO EXPLAIN THE INCREASE IN THE RESERVES AND SURPLUS TO WHICH ASSESSEE INTER ALIA SUBMITTED THAT THE FIRMS IN WHICH THE ASSESSEE WAS A PARTNER HAD REVALUED THE LAND AT ITS FAIR MARKET VALUE WITH THE OBJECTIVE OF ARRANGING FINANCE ON THE SECURITY OF THE SAID PROPERTY. ON RE VALUATION OF THE ASSETS BY THE RESPECTIVE FIRMS, NECESSARY ENTRIES WERE PAS SED IN THEIR BOOKS AND TO MATCH THE ENTRIES OF THE FIRM. ASSESSEE ALSO PAS SED CORRESPONDING ENTRIES IN ITS BOOKS OF ACCOUNT BY CREDITING THE RE SERVES AND SURPLUS ACCOUNT. IT WAS THEREFORE SUBMITTED BY THE BY PASSI NG THE ENTRIES, NO INCOME HAS ACCRUED TO THE ASSESSEE, NO BENEFIT WAS BESTOWED ON THE ASSESSEE AND FURTHER IT WAS CAPITAL IN NATURE. IT W AS FURTHER SUBMITTED THAT ON RETIREMENT OF THE ASSESSEE FROM THE PARTNERSHIP, ASSESSEE GOT FROM THE FIRM WHAT BELONGED TO IT AND THAT INCREASE IN RESER VES AND SURPLUS ACCOUNT WAS ON THAT ACCOUNT. THE SUBMISSIONS OF THE ASSESSE E WAS NOT FOUND ACCEPTABLE TO THE AO AS HE WAS OF THE VIEW THAT ON RETIREMENT ASSESSEE HAD RELINQUISHED ITS RIGHTS IN THE PROPERTY IN FAVO UR OF THE CONTINUING PARTNERS AND ASSESSEES ACCOUNT WAS SETTLED. HE AL SO NOTICED THAT THE TWO FIRMS IN WHICH THE ASSESSEE WAS PARTNER AND FROM WH ICH ASSESSEE SUBSEQUENTLY RETIRED, DID NOT CARRY OUT ANY DEVELOP MENT WORK TILL THE DATE OF REVALUATION OF THE PROPERTY. AO ALSO NOTICED THA T AGAINST THE ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 9 - INVESTMENT OF RS12,50,01,841 IN M/S FINE DEVELOPERS AND RS. 1,50,10,000/- IN MAHUL CONSTRUCTION CORPORATION, A FTER REVALUATION OF THE PROPERTIES, ASSESSEE ACTUALLY RECEIVED RS 45,81 ,16,036 FROM FINE DEVELOPERS AND RS 12,62,40,000/- FROM MAHUL CONSTRU CTION CORPORATION AND THAT THE ASSESSEE HAD AGAINST THE ACTUAL AGGREG ATE INVESTMENT OF RS.14,00,11,841/- HAD RECEIVED RS.58,43,56,036/- IN AGGREGATE WHICH WAS IN EXCESS OF ITS INVESTMENT AND THE SUBMISSION OF THE ASSESSEE OF HAVING NOT BESTOWED ANY BENEFIT TO THE PARTNER WAS ALSO NOT CORRECT. HE WAS OF THE VIEW THAT THE WHOLE TRANSACTION NAMELY D IFFERENT ENTITIES JOINING TOGETHER TO FORM A FIRM, ACQUIRING A PROPER TY, REVALUING THE PROPERTY AT MARKET RATE, DISTRIBUTION OF REVALUATIO N GAINS AMONGST THE PARTNERS AND THE SUBSEQUENT RETIREMENT OF THE PARTN ER FROM THE FIRM WAS A PLOY TO AVOID TAX AS THE PURPOSE OF FORMATION OF TH E FIRM WAS TO PURCHASE AND SALE OF PROPERTY THROUGH A DEVISE TO EVADE TAX. HE WAS OF THE VIEW THAT THE INTENTION OF THE LEGISLATURE WAS TO LEVY T AX ON THE FIRM ON PROFITS OR GAINS ARISING FROM TRANSFER OF A CAPITAL ASSET B Y WAY OF DISTRIBUTION OF ASSETS ON DISSOLUTION OF THE FIRM, ON THE PRESUMPTI ON THAT SUCH DISTRIBUTION TAKES PLACE ONLY ON DISSOLUTION OF A F IRM. IN THE PRESENT CASE HE WAS OF THE VIEW THAT THERE WAS SUBSTANTIAL GAIN TO THE PARTNER BY WAY OF DISTRIBUTION OF ITS SHARE OF REVALUATION OF ASSE TS WITHOUT THE FIRM BEING DISSOLVED AND THAT NEITHER THE FIRM NOR PARTNER OF THE FIRM HAS PAID ANY TAX ON SUCH GAINS AND THAT IT WAS NEVER THE INTENTI ON OF THE LEGISLATURE NOT TO TAX EVEN IF THERE IS A GAIN IN THE HANDS OF PARTNER WITHOUT THE FIRM ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 10 - BEING DISSOLVED. HE WAS THUS OF THE VIEW THAT THE G AINS WERE LIABLE FOR TAX U/S 45 OF THE ACT AND ACCORDINGLY HELD THAT AGGREGA TE AMOUNT OF RS 58,43,56,036/- (RS 45,81,16,036/- PLUS RS 12,62,40, 000/-) RECEIVED FROM THE FIRMS ON ASSESSEES RETIREMENT TO BE TAXABLE AS SHORT TERM CAPITAL GAINS AND ACCORDINGLY ADDED TO THE INCOME. AGGRIEV ED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE CIT(A) WHO V IDE ORDER DATED CAB/III-202/11-12 DECIDED THE ISSUE IN FAVOUR OF AS SESSEE BY HOLDING AS UNDER: 9.1 I HAVE CONSIDERED THE APPELLANTS SUBMISSIO NS AND THE ASSESSMENT ORDER. THE AO HAS MADE ADDITIONS IN THIS CASE ON THE BASIS OF FOLLOWING REASONS: A) THE ASSESSEE HAS INVESTED RS.12,50,01, 841/- IN M/S, FINE DEVELOPERS AND RS. 1,50,10,000/- IN M/S. MAHUL CONSTRUCTION CORPORATI ON, WHEREAS AFTER THE REVALUATION OF THE PROPERTY, THE ASSESSEE HAS ACTUA LLY RECEIVED BACK RS.45,81,16,036/- FROM M/S. FINE DEVELOPERS AND RS . 2,62,40,000/- FROM M/S. MAHUL CONSTRUCTION CORPORATION IN EXCESS OF ITS INVESTMEN T AND THEN RETIRED FROM THE FIRM. THEREFORE, ASSESSEE IS NOT CORRECT IN STATING THAT 'IT IS ONLY A BOOK ENTRY AND DOES NOT BESTOW ANY BENEFIT TO IT', RATHER IT IS NOTHING BUT SHAM TRANSACTION TO EVADE TAX. B) THOUGH THE PROPERTY WAS PURCHASED IN THE NAME OF THE FIRM, THERE WAS NEVER ANY INTENTION TO CARRY OUT BUSINESS ACTIVITY, NO SUBSTA NTIAL OR REAL BUSINESS WAS CARRIED OUT BY THE FIRM TILL RETIREMENT, RATHER THE PURPOSE OF FORMATION OF A FIRM WAS ONLY TO PURCHASE & SALE OF THE PROPERTY THROUGH A DEVICE TO EVADE TAX. HAD THE PROPERTY PURCHASED WERE DISPOSED OFF BY THE FIRM, BEFORE THE RETIREMENT BY SOME PARTNERS INCLUDING THE ASSESSEE, THE FIRM WOULD HAVE PAID ST AMP DUTY FOR THE CONVEYANCE .DEED TO THE STATE GOVERNMENT AND INCOME TAX ON THE PROFIT, (SINCE AS PER THE VALUER'S REPORT BASED ON WHICH REVALUATION WAS DONE THE PROP ERTY WAS REVALUED SUBSTANTIALLY HIGH AS PER PREVAILING MARKET RATE). C) THE WHOLE TRANSACTION I.E. DIFFERENT ENTITY JOIN ING TOGETHER TO FORM A FIRM, ACQUIRING A PROPERTY, REVALUED AS PER PREVAILING MARKET RATE, GAIN IN REVALUATION DISTRIBUTED ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 11 - AMONG PARTNERS AND SUBSEQUENT RETIREMENT FROM THE F IRM, IS ONLY A PLOY TO AVOID TAX ON THE TRANSACTION MADE BY THE ASSESSEE COMPANY. D) THE ASSESSEE IS VERY MUCH AWARE OF THE FACT THAT UNLESS AND UNTIL THE FIRM IS DISSOLVED THE AMOUNT OF DISTRIBUTION OR ANY BENEFIT S FROM THE FIRM, CANNOT BE TAXED IN THE HANDS OF THE FIRM. THE INTENTION OF THE LEGISLA TURE BY INTRODUCTION OF SUBSECTION 4 OF SECTION 45 WAS TO LEVY TAX ON THE FIRM ON PROFIT S OR GAINS ARISING FROM TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF ASSETS ON D ISSOLUTION OF THE FIRM, ON THE PRESUMPTION THAT SUCH DISTRIBUTION TAKES PLACE ONLY ON DISSOLUTION OF A FIRM, E) IN THIS CASE THERE IS SUBSTANTIAL GAIN TO THE P ARTNER BY WAY OF DISTRIBUTION OF ITS N REVALUATION OF ASSETS WITHOUT THE FIRM BEING DISSOL VED AND NEITHER THE FIRM NOR THE PARTNER I.E. ASSESSEE HAS PAID TAX ON SUCH GAIN. IT WAS NEVER THE INTENTION OF THE LEGISLATURE NOT TO TAX, EVEN IF, THERE IS A GAIN IN THE HANDS OF PARTNER WITHOUT THE FIRM BEING DISSOLVED. F) THE ASSESSEE HAS RELINQUISHED ALL ITS RIGHTS ON THE PROPERTY ON THE FIRM VIDE THE DEED OF RETIREMENT DATED 27.05.2008. THE ASSESSEE H AS ALSO RECEIVED ADDITIONAL AMOUNT OF RS. 58,43,56,036/-. THEREFORE, THE COMPAN Y HAS EARNED INCOME SINCE THE ASSESSEE HAS RELINQUISHED ALL ITS RIGHTS OVER THE P ROPERTY/ASSETS OF THE FIRM TO THE EXTENT OF ITS SHARE/EQUITY / CAPITAL CONTRIBUTION I N THE FIRM W.E.F. 27.05.2008, VIDE THE DEED OF RETIREMENT DATED 27.05.2008. SIMILARLY, IT CAN ALSO BE SAID THAT THERE IS EXTINGUISHMENT OF ASSESSEE'S RIGHTS OVER THE ASSETS OF THE FIRM W.E.F. 27.05.2008. FINALLY, AS PER CLAUSE (VI) OF SECTION 2(47), IF TH ERE IS AN EFFECT OF TRANSFERRING OR ENABLING ENJOYMENT OF ANY IMMOVABLE PROPERTY BY WAY OF AGREEMENT OR ARRANGEMENT OR ANY OTHER MANNER WHATSOEVER, THEN IT FALLS UNDER THE DEFINITION OF 'TRANSFER'. IN THIS CASE, IT IS DISCUSSED AND ESTABLISHED THAT, TH ERE WAS AN ARRANGEMENT TO TRANSFER THE PROPERTIES TO HDIL. AS DISCUSSED IN EARLIER PAR AS SPECIFICALLY PARA-10, HDIL WAS HAVING FULL CONTROL OVER THE PROPERTIES AND DUE TO THE RETIREMENT VIDE AGREEMENT DATED 27.05.2008, IT HAS THE EFFECT OF TRANSFERRING OR ENABLING THE ENJOYMENT OF BOTH THE PROPERTIES OF THE FIRMS TO HDIL ONLY. THEREFORE , IN VIEW OF THE ABOVE THE WHOLE TRANSACTION FALLS WITHIN THE DEFINITION OF A 'TRANS FER'. G) THE ASSESSEE HAS ADOPTED A COLORABLE DEVICE TO E VADE TAX WHICH IS NOT ALLOWABLE AS HELD BY HON'BLE SUPREME COURT IN THE CASE MCDOWE LL 154 ITR 148. THEREFORE, THE TOTAL RECEIPTS OF RS. 58,43,56,036/- (RS.45,81,16,0 36/- FROM M/S. FINE DEVELOPERS & RS.12,62,40,000/- FROM M/S. MAHUL CONSTRUCTION CORP ORATION) IN EXCESS OF ITS CAPITAL INVESTMENT IS HELD AS INCOME UNDER THE HEAD CAPITAL GAIN AND TAXABLE AS SHORT TERM CAPITAL GAIN. ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 12 - 9.2 THE REASONS GIVEN BY THE AO FOR MAKING THIS ADD ITION IS REQUIRED TO BE EXAMINED IN THE LIGHT OF THE SUBMISSIONS MADE BY THE APPELLA NT'S AR AS ALSO THE JUDICIAL DECISIONS RELIED UPON BY HIM. THE FIRST POINT IS TO BE CONSIDERED IS AS TO WHETHER THE AMOUNT RECEIVED FROM THE FIRM BY THE APPELLANT ON I TS RETIREMENT CAN BE TAXED AS INCOME IN ITS HANDS OR NOT. FROM THE DETAILS IN THE ASSESSMENT ORDER AS WELL SUBMITTED BY THE APPELLANT, IT IS SEEN THAT ON THE DATE OF RE TIREMENT OF THE APPELLANT, THE BALANCE SHEET OF THE FIRM HAS BEEN DRAWN AND FOR THIS PURPO SE THE ASSETS OF THE FIRM IN THE FORM OF LANDS HAVE BEEN REVALUED ON NOTIONAL SALE B ASIS. THE BASIS OF REVALUATION IN THIS MANNER HAS ALSO BEEN REPRODUCED ON PAGE 27 OF THE ASSESSMENT ORDER. FROM THIS THE LIABILITIES HAVE BEEN DEDUCTED AND THEN THE SHA RE OF THE APPELLANT IN THE NET PARTNERSHIP ASSET HAS BEEN DETERMINED. THE APPELLAN T HAS RECEIVED THIS AMOUNT REPRESENTING HIS SHARE IN THE NET ASSETS OF THE FIR M ON RETIREMENT. 9.3 THE ASSESSING OFFICER HAS HELD THAT THE APPELL ANT HAS RELINQUISHED ALL ITS RIGHTS ON THE PROPERTIES IN FAVOUR OF HDIL VIDE THE DEED O F RETIREMENT DATED 27.05.2008 AND HENCE IT HAD EARNED INCOME WHICH IS ASSESSABLE AS C APITAL GAIN IN ITS HANDS. SIMILARLY IT CAN ALSO SAID THAT THERE IS EXTINGUISHMENT OF TH E APPELLANT'S RIGHTS OVER THE FIRM' PROPERTY WITH EFFECT FROM 27.05.2008. FINALLY AS PE R CLAUSE (VI) OF SECTION 2(47), ALSO IT FALLS UNDER THE DEFINITION OF TRANSFER AS IN THI S CASE, IT IS ESTABLISHED THAT THERE WAS AN ARRANGEMENT TO TRANSFER THE PROPERTIES TO HDIL. 9.4 IN THIS RESPECT THE APPELLANT HAS RELIED UPO N SEVERAL DECISIONS OF THE JURISDICTIONAL HIGH COURT AND THE SUPREME COURT TO SHOW THAT THE AMOUNT RECEIVED BY THE APPELLANT ON ITS RETIREMENT FROM THE FIRM AR E NOT TAXABLE AS INCOME IN ITS HANDS. THE FIRST DECISION RELIED UPON IS IN THE CAS E OF MOHANBHAI PAMABHAI 91 ITR 393 (GUJ.) WHICH WAS SUBSEQUENTLY APPROVED BY HON'B LE SUPREME COURT. THE JURISDICTIONAL HIGH COURT HAS HELD AS FOLLOWS IN TH IS DECISION: INTEREST OF A PARTNER IN THE PARTNERSHIP IS NOT INTEREST IN ANY SPECIFIC ITEM OF THE PARTNERSHIP PROPERTY, IT IS A RIGHT TO OBTAIN HIS S HARE OF PROFITS FROM TIME TO TIME DURING THE SUBSISTENCE OF THE PARTNERSHIP AND ON DI SSOLUTION OF THE PARTNERSHIP OR HIS RETIREMENT FROM THE PARTNERSHIP, TO GET THE VALUE O F HIS SHARE IN THE NET PARTNERSHIP ASSETS WHICH REMAIN AFTER SATISFYING THE DEBTS AND LIABILITIES OF THE PARTNERSHIP. WHEN, THEREFORE, A PARTNER RETIRES FROM A PARTNERSH IP AND AMOUNT OF HIS SHARE IN NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITI ES AND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNTS ON FOOTING OF NOTIONAL SALE OF P ARTNERSHIP ASSETS AND GIVEN TO HIM, WHAT HE RECEIVES IS HIS SHARE IN PARTNERSHIP A ND NOT ANY CONSIDERATION FOR TRANSFER OF HIS INTEREST IN PARTNERSHIP TO CONTINUI NG PARTNERS. HIS SHARE IN THE PARTNERSHIP IS WORKED OUT BY TAKING ACCOUNTS IN THE MANNER PRESCRIBED BY THE ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 13 - RELEVANT PROVISIONS OF THE PARTNERSHIP LAW AND IT I S 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 T HE PARTNERSHIP ASSETS BY THE RETIRING PARTNER TO THE CONTINUING PARTNERS. IT IS TRUE SECT ION 2(47) DEFINES 'TRANSFER' IN RELATION TO A CAPITAL ASSET AND THIS GIVES AN ARTIF ICIALLY 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 A CCEPTED CONNOTATION OF THAT WORD, NAMELY, RELINQUISHMENT OF THE CAPITAL ASSET AND EXT INGUISHMENT OF ANY RIGHTS IN IT. BUT, EVEN IN THIS ARTIFICIALLY EXTENDED SENSE, THER E IS NO TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS INVOLVED WHEN A PARTNER RETIRES FROM THE PARTNERSHIP. THEREFORE IT WAS HELD THAT, EVEN IF GOODWILL BE ASSUMED TO BE CA PITAL ASSET WITHIN THE CHARGING PROVISION ENACTED IN SECTION 45, THERE WAS, IN THE INSTANT CASE, NO TRANSFER OF INTEREST OF ANY ASSESSEE IN THE GOODWILL WITHIN THE MEANING OF SECTION 2(47) WHEN THE ASSESSEE RETIRED FROM THE FIRM. EACH ASSESSEE, UNDOUBTEDLY, RECEIVED CERTAIN AMOUNT ON RETIREMENT, BUT THIS AMOUNT REPRESENTED HIS SHARE I N THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES AND IT W AS RECEIVED IN SATISFACTION OF HIS SHARE IN THE PARTNERSHIP; EACH OF THEM REALISED HIS SHARE IN THE PARTNERSHIP WHEN THE AMOUNT COMING TO HIS SHARE WAS PAID OVER TO HIM. IF THERE WAS NO TRANSFER OF INTEREST OF ANY OF THE ASSESSEES IN THE GOODWILL WITHIN THE MEANING OF SECTION 2(47), THE CONCLUSION MUST INEVITABLY FOLLOW THAT NO PART OF T HE AMOUNT RECEIVED BY ANY ASSESSEE IN RESPECT OF HIS SHARE IN THE VALUE OF THE GOODWIL L COULD BE REGARDED AS CAPITAL GAIN CHARGEABLE TO TAX, FOR UNDER THE CHARGING PROVISION ENACTED IN SECTION 45, PROFIT OR GAIN IS CHARGEABLE TO TAX AS CAPITAL GAINS ONLY IF IT IS PROFIT OR GAIN ARISING FROM THE 'TRANSFER' OF A CAPITAL ASSET. THE TRANSFER OF A CAPITAL ASSET, IN ORDER TO ATTRAC T THE CAPITAL GAINS TAX, MUST BE A TRANSFER AS A RESULT OF WHICH CONSIDERATION IS RECE IVED BY THE ASSESSEE OR ACCRUES TO THE ASSESSEE. IF THERE IS NO CONSIDERATION RECEIVED OR ACCRUING TO THE ASSESSEE AS A RESULT OF THE TRANSFER, THE MACHINERY SECTION ENACT ED IN SECTION 48 WOULD BE WHOLLY INAPPLICABLE AND IT WOULD NOT BE POSSIBLE TO COMPUT E PROFITS OR GAINS ARISING FROM THE TRANSFER OF THE CAPITAL ASSET. THE TRANSACTION IN O RDER TO ATTRACT THE CHARGE OF TAX AS CAPITAL GAINS MUST, CLEARLY BE SUCH THAT CONSIDERAT ION IS RECEIVED BY THE ASSESSEE OR ACCRUES TO THE ASSESSEE AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. WHERE TRANSFER CONSISTS IN EXTINGUISHMENT OF A RIGHT IN THE CAPITA L ASSET, THERE MUST BE AN ELEMENT OF CONSIDERATION FOR SUCH EXTINGUISHMENT, FOR THEN ONL Y IT WOULD BE A TRANSFER EXIGIBLE TO CAPITAL GAINS TAX. WHAT THE RETIRING PARTNER IS ENT ITLED TO GET IS NOT MERELY A SHARE IN THE PARTNERSHIP ASSETS; HE HAS ALSO TO BEAR HIS SHA RE OF THE DEBTS AND LIABILITIES AND IT IS ONLY HIS SHARE IN THE NET PARTNERSHIP ASSETS AFT ER SATISFYING THE DEBTS AND LIABILITIES THAT HE IS ENTITLED TO GET ON RETIREMENT. THE DEBTS AND LIABILITIES HAVE TO BE DEDUCTED ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 14 - 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, THEREF ORE, NOT POSSIBLE TO PREDICATE THAT A PARTICULAR AMOUNT IS RECEIVED BY THE RETIRING PARTN ER IN RESPECT OF HIS SHARE IN A PARTICULAR PARTNERSHIP ASSET OR THAT A PARTICULAR A MOUNT REPRESENTS CONSIDERATION RECEIVED BY THE RETIRING PARTNER FOR EXTINGUISHMENT OF HIS INTEREST IN A PARTICULAR PARTNERSHIP ASSET. THEREFORE, IT COULD BE SAID THAT WHEN THE ASSESSEES RETIRED FROM THE FIRM, THERE WAS NO TRANSFER OF INTEREST OF ANY OF THE ASSESSEES IN THE GOODWILL OF THE FIRM AND NO PART OF THE AMOUNT RECEIVED BY ANY OF T HE ASSESSEES WAS ASSESSABLE TO CAPITAL GAINS TAX UNDER SECTION 45.' 9.5 ABOVE MENTIONED DECISION OF THE HON'BLE GUJARAT HIGH COURT HAS BEEN APPROVED IN BY THE HON'BLE SUPREME COURT VIDE ITS DECISION R EPORTED IN 165 ITR 166(SC). BUT THE BOMBAY HIGH COURT IN ITS DECISION IN THE CASE O F N A MODY[1986] 24 TAXMAN 219 (BOM) HAS DISTINGUISHED THE DECISION IN THE CAS E OF MOHANBHAI PAMABHAI (SUPRA) BY OBSERVING THAT : '21. FOR THAT MATTER, WE MAY NOTE THAT IN MOHANBHAI PAMABHAI'S CASE (SUPRA) THERE WAS A DOCUMENT IN THE FORM OF MINUTES UNDER WHICH T HE PARTNER RETIRED, BUT IT CONTAINED NO ASSIGNMENT OF HIS INTEREST TO THE CONT INUING PARTNERS: 22. AT THIS STAGE WE MAY NOTE THE JUDGMENT OF THIS COURT IN CIT V. H.R. ASLOT [1978] 115 ITR 255, THE FACTS OF WHICH HAVE MUCH AFFINITY TO THOSE BEFORE US. THERE WAS A PARTNERSHIP DEED WHICH CONTAINED AN ARBITRATION CLA USE. DISPUTES HAVING ARISEN, THEY WERE REFERRED TO AN ARBITRATOR. HE MADE AN AWARD. I TS SUBSTANCE WAS THAT TWO PARTNERS WERE TO STAND RETIRED AS AND FROM A PARTIC ULAR DATE AND THE BUSINESS WAS TO BE CARRIED ON BY THE CONTINUING PARTNERS WHO WERE T O PAY TO THE RETIRING PARTNERS A QUANTIFIED AMOUNT IN SATISFACTION OF THEIR RESPECTI VE SHARES AND INTEREST IN THE PARTNERSHIP AND ITS ASSETS. THE AWARD STATED THAT T HE PARTNERSHIP 'STANDS DISSOLVED BY MUTUAL CONSENT SO FAR AS CONCERNS THE SAID H AND N. ,. (HEREINAFTER REFERRED TO AS THE RETIRING PARTNERS) WHO RETIRES FROM THE SAID FIRM . ..' THE AWARD ALSO STATED THAT 'THE SAID BUSINESS SHALL... BE CARRIED ON ... BY THE REM AINING PARTNERS...(HEREINAFTER REFERRED TO AS THE CONTINUING PARTNERS)'. AS REQUIR ED BY THE AWARD, A DOCUMENT WAS EXECUTED WHERE UNDER THE RETIRING PARTNERS ASSIGNED AND RELEASED TO THE CONTINUING PARTNERS THEIR SHARE AND INTEREST IN THE PARTNERSHI P. THE QUESTION, THIS COURT NOTED, WHICH FELL FOR CONSIDERATION WAS WHETHER WHAT WAS B ROUGHT ABOUT BY THE AWARD READ WITH THE AGREEMENT WAS A DISSOLUTION OF THE PARTNER SHIP OR A MERE RETIREMENT OF THE TWO PARTNERS, PERMITTING THE REMAINING PARTNERS TO CONTINUE THE BUSINESS OF THE FIRM. THE REAL LEGAL EFFECT OF THE AWARD READ WITH THE AG REEMENT WOULD NOT BE CONTROLLED BY ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 15 - HOW THE TRANSACTIONS HAD BEEN DESCRIBED BY THE ARBI TRATOR OR BY THE PARTIES AND, THEREFORE, THE USE BY THE ARBITRATOR OF THE WORD 'D ISSOLUTION' WAS NOT CONCLUSIVE. THE OVERALL EFFECT OF THE AWARD AND THE AGREEMENT CLEAR LY WAS THAT THE TWO OUTGOING PARTNERS WERE TO BE PAID A CERTAIN SUM AND THEY WE RE TO EXECUTE THE NECESSARY DOCUMENTS REQUIRED TO ASSIGN AND RELEASE IN FAVOUR OF THE CONTINUING PARTNERS THEIR RESPECTIVE SHARE AND INTEREST IN THE PARTNERSHIP. T HE JUDGMENT IN TRIBHUVANDAS G. PATEL'S CASE (SUPRA) WAS A DECISION OF A CO-ORDINAT E BENCH AND WAS BINDING. THE TESTS LAID DOWN THEREIN WERE SATISFIED. ACCORDINGLY, THER E WAS A CLEAR LIABILITY IN RESPECT OF CAPITAL GAINS ATTRACTED ON THE FOOTING THAT THE TRA NSACTION WAS NOT ONE OF DISSOLUTION OF PARTNERSHIP BUT OF A RETIRING PARTNER ASSIGNING IN FAVOUR OF THE CONTINUING PARTNERS HIS RIGHTS AND INTEREST IN THE PARTNERSHIP ASSETS. 23. WE HAVE, IN THE INSTANT CASE, HELD THAT THE OVERALL EFFECT OF THE CONSENT TERMS IS THAT THEY PROVIDE FOR THE RETIREMENT OF THE ASSESSE S FROM THE PARTNERSHIP. THERE IS IN THE CONSENT TERMS A CLAUSE PROVIDING FOR THE ASSIGN MENT OF THE ASSESSES'S SHARE IN THE PARTNERSHIP AND ITS ASSETS TO THE CONTINUING PARTNE RS. THE FACTS ARE, THEREFORE, SIMILAR TO THE FACTS IN TRIBHUVANDAS G. PATEL'S CASE (SUPRA ) AND, FOR THAT MATTER, IN H.R. ASLOT'S CASE (SUPRA) . FOLLOWING THOSE JUDGMENTS, A S WE MUST, WE HOLD THAT THERE WAS A TRANSFER BY THE ASSESSEE WITHIN THE MEANING OF SE CTION 2(47), AND THAT LIABILITY TO CAPITAL GAINS EXISTS. THE FIRST QUESTION MUST, THER EFORE, BE ANSWERED IN THE NEGATIVE AND IN FAVOUR OF THE REVENUE.' 9.6 DURING THE COURSE OF THE APPELLATE PROCEEDINGS, THE AR WAS ASKED TO EXPLAIN AS HOW THE ISSUE IN THE PRESENT CASE IS NOT COVERED BY THE DECISION IN THE CASE OF N A MODY (SUPRA). THE DECISION OF MUMBAI ITAT IN THE CA SE OF SUDHAKAR SHETTY, [2011] 130 ITD 197 (MUM.) WAS ALSO DISCUSSED WITH HIM. THE AR HAS MADE FOLLOWING SUBMISSIONS IN THIS REGARD: '1) DURING THE COURSE OF THE HEARING ON 17-05-2012 THE DECISION IN THE CASE OF SUDHAKAR M. SHETTY V. ASSISTANT COMMISSIONER OF INC OME-TAX , CENTRAL CIRCLE-13, MUMBAI [2011] 130 ITD 197 (MUM.) WAS DISCUSSED AT LENGTH. IN THE SAID DECISION IT IS HELD THAT ON RETIREMENT OF A PARTNER FROM THE FIRM THE AMOUNT RECEIVED BY HIM AS LUMPSUM CONSIDERATION IS LIABLE TO TAX IN THE HANDS OF THE RETIRING PRTNER. IN THE FOLLOWING PARAS THE SAID DECISION OF THE H'BLE MUMBAI ITAT IS DISCUSSED. 2) IN PARA 20 OF THE SAID DECISION THE H'BLE ITAT H AS HELD THAT THE SHARE OR INTEREST OF A PARTNER IN PARTNERSHIP AND ITS ASSETS IS A PROPERTY AND THEREFORE IT IS A CAPITAL ASSET. ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 16 - 3) PARA 31 OF THE SAID DECISION READS AS UNDER: - ( EMPHASIS SUPPLIED) '31. IN THE CASE OF RETIREMENT OF A PARTNER THERE COULD BE TWO SITUATIONS. IN THE FIRST SITUATION THERE CAN BE A RETIREMENT OF A PARTNER FROM THE FI RM AND THE FIRM MIGHT CONTINUE ITS EXISTENCE AND THE RETIRING PARTNER MIGHT BE GIVEN ASSETS IN LIEU OF AMOUNTS PAYABLE TO HIM ON RETIREM ENT. THIS COULD BE DONE EITHER ON THE BASIS OF SETTLING AMOUNTS STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT OR ON A LUMP SUM BASIS. THERE COULD BE A SECOND SITUATION WHERE THE RETIRING PARTNER IS PAID CONSIDERATION IN CASH AND HE GIVES UP HIS RIGHTS AS PARTNER INCLUDING HIS RIGHTS OVER THE ASSETS OF THE PARTNERSHIP. THIS AGAIN CAN BE DONE EITHER ON THE BASIS OF SETTLING AMOUNTS STA NDING TO THE CREDIT OF HIS CAPITAL ACCOUNT OR ON A LUMP SUM BASIS.' 4) THUS THE H'BLE ITAT HAS DIVIDED THE SITUATION IN TO TWO PARTS. IN THE FIRST SITUATION ASSET IS GIVEN TO THE PARTNER ON RETIREME NT. IN THE SECOND SITUATION CASH IS GIVEN ON RETIREMENT. AGAIN IN BOTH THE SITU ATIONS THERE CAN BE TWO SITUATIONS. ACCOUNT OF THE RETIRING PARTNER CAN BE SETTLED BY GIVING THE AMOUNT AS PER THE CAPITAL BALANCE IN THE BOOKS OR CAN BE G IVEN ON LUMPSUM BASIS. 5) IN THE CASE OF THE PRESENT ASSESSEE CASH IS GIVE N TO THE RETIRING PARTNER. ON THIS ASPECT THE H'BLE ITAT OBSERVED IN PARA 34 AS U NDER:- (EMPHASIS SUPPLIED) '34. THE SECOND SITUATION WITH WHICH, WE ARE CONCER NED IN THIS APPEAL IS A CASE WHERE THE RETIRING PARTNER IS PAID CONSIDERATI ON IN CASH AND HE GIVES UP HIS RIGHTS AS PARTNER INCLUDING HIS RIGHTS OVER THE ASSETS OF THE PARTNERSHIP. THERE IS DIVERGENCE OF VIEW ON THE QUESTION AS TO W HETHER THERE IS ANY TRANSFER AT ALL IN SUCH SITUATION BY THE FIRM IN FAVOUR OF T HE RETIRING PARTNER OR BY THE RETIRING PARTNER IN FAVOUR OF THE FIRM AND ITS CONT INUING PARTNERS.' 6) THUS BEFORE DISCUSSING CASE LAWS ON THE ISSUE TH E H'BLE ITAT AGREES THAT THERE ARE DIVERGENT VIEWS ON THIS SUBJECT. IN SUBSE QUENT PARAS VARIOUS DECISIONS ARE DISCUSSED IN THE DECISION. IN PARA 35 , THE H'BLE ITAT REFERRED TO THE DECISION IN THE CASE OF CIT V. MOHANBHAI PAMABH AI [1973] 91 ITR 393 (GUJ.) '35. IN CIT V. MOHANBHAI PAMABHAI [1973] 91 ITR 393 (GUJ.) THE QUESTION BEFORE THE HON'BLE GUJARAT HIGH COURT WAS AS TO WHE THER ON RETIREMENT OF A ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 17 - PARTNER FROM A FIRM WHETHER THERE IS RELINQUISHMENT OF INTEREST IN PARTNERSHIP ASSETS AMOUNTING TO A TRANSFER. THE HON'BLE GUJARAT HIGH COURT HELD: 'THE INTEREST OF A PARTNER IN A PARTNERSHIP IS NOT AN INTEREST IN ANY SPECIFIC ITEM OF THE PARTNERSHIP PROPERTY. IT IS A RIGHT TO OBTAIN H IS SHARE OF PROFITS FROM TIME TO TIME DURING THE SUBSISTENCE OF THE PARTNERSHIP AND ON D ISSOLUTION OF THE PARTNERSHIP OR ON HIS RETIREMENT FROM THE PARTNERSHIP TO GET THE VALU E OF HIS SHARE IN THE NET PARTNERSHIP ASSETS WHICH REMAIN AFTER SATISFYING THE DEBTS AND LIABILITIES OF THE PARTNERSHIP. WHEN THEREFORE A PARTNER RETIRES FROM A PARTNERSHIP AND THE AMOUNT OF HIS SHARE IN THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES A ND 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 AN D 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 IN THE RELEVANT PROVISIONS OF THE PARTNERSHIP LAW AND IT I S THIS, NAMELY, HIS SHARE IN THE PARTNERSHIP WHICH HE RECEIVES IN TERMS OF MONEY. TH ERE IS IN THIS TRANSACTION NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRING PARTNER TO THE CONTINUING PARTNER. THE TRANSFER OF A CAPITAL ASSET IN ORDER TO ATTRACT CAPITAL GAINS TAX MUST BE ONE AS A RESULT OF WHICH CONSIDERATION IS RECEIVED BY T HE ASSESSEE OR ACCRUES TO THE ASSESSEE. WHEN A PARTNER RETIRES FROM A PARTNERSHIP WHAT HE RECEIVES IS HIS SHARE IN THE PARTNERSHIP WHICH IS WORKED OUT AND REALIZED AN D DOES NOT REPRESENT CONSIDERATION RECEIVED BY HIM AS A RESULT OF THE EX TINGUISHMENT OF HIS INTEREST IN PARTNERSHIP ASSETS. HENCE, WHEN AN ASSESSEE RETIRES FROM A FIRM AND REC EIVES AN AMOUNT IN RESPECT OF HIS SHARE IN THE PARTNERSHIP THERE IS NO TRANSFER OF IN TEREST OF THE ASSESSEE IN THE GOODWILL OF THE FIRM AND NO PART OF THE AMOUNT RECEIVED BY H IM WOULD BE ASSESSABLE TO CAPITAL GAINS TAX UNDER SECTION 45.' 7) IN PARA 36, H'BLE ITAT ALSO REFERRED TO THE DECI SIONS OF OTHER COURTS WHEREIN ALSO IT IS HELD THAT ON RETIREMENT THE AMOUNT RECEIVED B Y THE PARTNER IS NOT TAXABLE IN THE HANDS OF THE RETIRING PARTNER. THIS READS AS UNDER: - (EMPHASIS SUPPLIED) '36. THE HON'BLE COURT HELD THAT THE EXTENDED DEFIN ITION OF THE TERM 'TRANSFER' UNDER SECTION 2(47) OF THE ACT, BY WHICH RELINQUISHMENT A ND EXTINGUISHMENT OF ANY RIGHT IN A CAPITAL ASSET IS CONSIDERED AS TRANSFER WOULD ALSO NOT APPLY WHEN A PARTNER RETIRES FROM THE PARTNERSHIP AND THERE WOULD BE NO TRANSFER OF INTEREST IN THE PARTNERSHIP ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 18 - ASSETS. THE HON'BLE SUPREME COURT CONFIRMED THE DEC ISION OF THE HON'BLE GUIARAT HIGH COURT IN MOHANBHAI PAMABHAI'S CASE ( SUPRA ). SIMILAR VIEW WAS ALSO EXPRESSED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. R. LINGMALLU RAGHUKUMAR [2001] 247 ITR 801 FOLLOWING ITS DECISIO N IN THE CASE OF MOHANBHAI PAMABHAI ( SUPRA ). IN CIT V. KUNNAMKULAM MILL BOAR D [2002] 257 ITR 544 (KER.). THE HON'BLE KERALA HIGH COURT ALSO EXPRESSED THE VI EW THAT WHERE THERE IS REVALUATION OF ASSETS OF THE FIRM ON RECONSTITUTION OF A FIRM CONSEQUENT TO RETIREMENT OF SOME OF THE PARTNERS, IT CANNOT BE SAID THAT THE RE WAS ANY TRANSFER OF ANY RIGHT IN IMMOVABLE PROPERTY IN FAVOUR OF CONTINUING PARTNERS AND THEREFORE THERE CAN BE NO CAPITAL GAIN WHICH CAN BE BROUGHT TO TAX.' 8) IN THE SUBSEQUENT PARAS THE H'BLE MUMBAI ITAT DI SCUSSED THE DECISIONS OF ITS JURISDICTIONAL HIGH COURT IN THE CASES OF N.A. MODI , H.R. ASLOT, TRIBHUVANDAS G. PATEL ETC. IN PARA 38 IT HAS SUMMARISED THE CONCLUS ION ON THE ISSUE AS UNDER:- (EMPHASIS SUPPLIED) '38. THUS THE QUESTION WHETHER A TRANSACTION WOULD AMOUNT TO AN ASSIGNMENT OR RELEASE OF INTEREST BY THE CONTINUING PARTNER IN FAVOUR OF THE CONTINUING PARTNERS OR NOT WOULD DEPEND UPON WHAT PARTICULAR M ODE OF RETIREMENT IS EMPLOYED AND AS INDICATED EARLIER, IF INSTEAD OF QUANTIFYING HIS SHARE BY TAKING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE, PARTIES AGREE TO PAY A LU MP SUM IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHA RE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS, TH E TRANSACTION WOULD AMOUNT TO A TRANSFER WITHIN THE MEANING OF SECTION 2(47) OF THE ACT.' 9) IN PARA 41 OF THE SAID DECISION THE H'BLE ITAT H AS GIVEN ITS FINDING ON THE FACTS OF THE CASE AS UNDER:- '41 THUS IT WAS A CASE WHERE INSTEAD OF QUANTIFY ING THE ASSESSE'S SHARE BY TAKING ACCOUNT ON THE FOOTING OF NOTIONAL SALE, PAR TIES AGREED TO PAY A LUMP SUM IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR THE CONTIN UING PARTNERS, ' 10), IN PARA 45, THE H'BLE ITAT OBSERVED AS UNDER:- '45 THEREAFTER THE HON'BLE COURT HELD THAT WHERE AC COUNTS ARE TAKEN AND THE PARTNER IS PAID THE AMOUNT STANDING TO THE CREDIT OF HIS CA PITAL ACCOUNT THERE WOULD BE NO TRANSFER. IF, ON THE OTHER HAND, THE PARTNER IS PAI D A LUMP SUM CONSIDERATION FOR ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 19 - TRANSFERRING OR RELEASING HIS INTEREST IN THE PARTN ERSHIP ASSETS TO THE CONTINUING PARTNERS THEN THERE WOULD BE AN ELEMENT OF TRANSFER . THIS ASPECT WE HAVE ALREADY EXAMINED IN THE EARLIER PARAGRAPHS. WHAT WE HAVE TO SEE NOW IS WHETHER THE TERMS OF THE DEED OF RETIREMENT CONSTITUTES RELEASE OF ANY A SSETS OF THE FIRM IN FAVOUR OF THE CONTINUING PARTNERS.' 11) THE DECISION ON THE FACTS OF THE CASE OF SHRI S UDHAKAR SHETTY IS ARRIVED AT AS UNDER:- -(PARA 49 OF THE DECISION) (EMPHASISED SUPP LIED) 49. IN THE CASE OF THE ASSESSEE THE CLAUSES IN THE RETIREMENT DEED DO CONVEY INTEREST IN IMMOVABLE PROPERTY AND FURTHER REFERS TO THE FAC T THAT THE ASSESSEE WILL NOT HAVE ANY INTEREST OVER THE ASSETS OF THE FIRM. THUS IT W AS A CASE OF LUMP SUM PAYMENT IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CON TINUING PARTNERS. WE ARE OF THE VIEW THAT THE MANNER OF RETIREMENT IN THE CASE OF THE AS SESSEE IS SUCH THAT IT CAN BE REGARDED AS ASSIGNING OR RELINQUISHING BY THE RETIR ING PARTNER OF HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CON TINUING PARTNERS. WE ARE THEREFORE OF THE VIEW THAT THE ASSESSEE SATISFIES THE PARAMET ERS LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASES REFERRED TO ABOVE AND THEREFORE THERE WAS A TRANSFE R OF INTEREST OF THE RETIRING PARTNER OVER THE ASSETS OF THE PARTNERSHIP ON RETIREMENT. THEREFORE THERE WAS LIABILITY TO TAX ON ACCOUNT OF CAPITAL GAIN.' 12) THUS THE SAID DECISION IS ON THE INTERPRETATION OF THE MANNER OF RETIREMENT AND THE H'BLE ITAT DECIDED THAT IT WAS A CASE OF LUMP SUM PAYMENT AND HENCE LIABLE TO CAPITAL GAIN IN THE HANDS OF THE RETIRING PARTNER. AFTER STATING IN PARA THAT THERE ARE DIVERGENT VIEWS, THE H'BLE ITAT FOLLOWED THE JURISD ICTIONAL COURT'S DECISION. AT THE SAME TIME IT HAS NOT STATED THAT THE DECISION OF TH E GUJARAT HIGH COURT IN THE CASE OF MOHANBHAI PAMABHAI IS NOT A GOOD LAW. 13) AS AGAINST THE ABOVE DECISION THE FACTS IN THE CASE OF THE APPELLANT ARE THAT NOTIONAL SALE WAS CONSIDERED BY TAKING VALUATION OF THE ASSETS. (VALUATION REPORTS DATED 5-4-2008 PB PAGES 219-228). THE AMOUNT WAS ACCORDINGLY CREDITED TO THE ACCOUNT OF THE RESPECTIVE PARTNERS. RELEVANT CLAUSE NO. 3 IN THE PARTNERSHIP DEED DEALING WITH THE VALUATION IS AS UNDER:- (PB 107-10 8. 129-130) 'THE ACCOUNT OF THE RETIRING PARTNERS HAVE BEEN AMI CABLY SETTLED. FOR SETTLING THE ACCOUNTS OF THE RETIRING PARTNERS, THE ASSETS OF TH E PARTNERSHIP HAVE BEEN REVALUED AT A VALUE AS MUTUALLY AGREED BETWEEN THE RETIRING PAR TNERS AND THE CONTINUING ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 20 - PARTNERS. AFTER GIVING EFFECT OF THE REVALUATION OF THE ASSETS, THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT AT 1 ST APRIL, 2008 HAVE BEEN PREPARED. THE COPY OF THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF THE FIRM FOR T HE YEAR ENDED 31 ST MARCH 2008, AND FOR THE PERIOD ENDED 30 TH APRIL 2008 IS ANNEXED HERETO AND MARKED ANNEXURE 'A'. IN TOKEN OF THE ACCEPTANCE OF THE SAID BALANCE SHEET AND PROFIT AND LOSS ACCOUNT, THE RETIRING PARTNERS AND THE CONTINUING P ARTNERS HAVE PUT THEIR SIGNATURES TO THE SAID BALANCE SHEET AND PROFIT & LOSS ACCOUNT .' THUS, WHAT IS PAID TO THE RETIRING PARTNER WAS THE EXACT AMOUNT TO THEIR CREDIT. THIS IS NOT THE CASE OF LUMP SUM PAYMENT TO THE RETIRING PA RTNER. IN VIEW OF THIS UNCONTROVERTED FACT THE DECISION IN THE CASE OF SHR I SUDHAKAR SHETTY IS NOT APPLICABLE TO THIS CASE AS IN THAT CASE THE PAYMENT WAS HELD A S LUMP SUM PAYMENT TO THE RETIRING PARTNER. 14) DISCUSSION WAS ALSO MADE ON THE DECISION IN THE CASE OF N.A. MODY V. CIT RI986) 162 ITR 420 (BOM). IN THAT CASE THE OVERALL EFFECT OF THE CONSENT TER MS AGREED UPON WAS THAT THEY PROVIDE FOR THE RETIREMENT OF THE ASS ESSEE FROM THE PARTNERSHIP. THERE IS IN THE CONSENT TERMS CLAUSE 15 PROVIDING FOR THE AS SIGNMENT OF THE ASSESSEE'S SHARE IN THE PARTNERSHIP TO THE CONTINUING PARTNER. THE CLAU SE READS AS UNDER:- '15.ORDER THAT THE DECREE DO OPERATE AS ASSIGNMENT OF- THE SHARE, RIGHT, TITLE INTEREST CLAIM AND DEMAND OF THE DEFENDANT IN FOE FIRM LITTL E & CO. AND ALL ITS ASSETS INCLUDING GOODWILL AND OUTSTANDINGS BUT EXCLUDING T HE PREMISES AND THE DEFENDANT'S SHARE IN PROFIT FROM 1 ST APRIL, 1961 TO 30 TH SEPTEMBER, 1961 IN FAVOUR OF THE PLAINTIFFS IN PROPORTION TO THEIR RESPECTIVE SHARES AND INTEREST IN THE PARTNERSHIP OF LITTLE & CO. AND THAT SAVE AS HEREIN PROVIDED THE DEFENDANT DO H AVE NO CLAIM OR DEMAND OF ANY NATURE WHATSOEVER AGAINST THE PARTNERSHIP FIRM OF L ITTLE & CO. OR ANY OF ITS PARTNERS'. THUS, THERE WAS A TRANSFER BY THE ASSESSEE WITHIN T HE MEANING OF S. 2(47) AND LIABILITY TO CAPITAL GAINS TAX EXISTS. THE COURT HELD THAT LU MP SUM CONSIDERATION RECEIVED FOR ASSIGNMENT OF HIS SHARE IN A FIRM BY PARTNER ON HIS RETIREMENT IS LIABLE FOR CAPITAL GAINS TAX AS THERE IS TRANSFER WITHIN THE MEANING O F S. 2(47). IN THE SAID DECISION REFERENCE WAS MADE OF THE DECI SION IN THE CASE OF MOHANBHAI PAMABHAI(SUPRA). IN PARA 21 IT IS OBSERVED BY THE H 'BLE HIGH COURT THAT 'FOR THAT MATTER, WE MAY NOT THAT IN MOHANBHAI PAMABHAI'S CAS E (SUPRA) THERE WAS A DOCUMENT IN THE FORM OF MINUTES UNDER WHICH THE PAR TNER RETIRED, BUT IT CONTAINED NO ASSIGNMENT OF HIS INTEREST TO THE CONTINUING PARTNE RS.' ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 21 - THE ABOVE OBSERVATION SUPPORTS THE CASE OF THE ASSE SEE AS IN THE CASE OF THE APPELLANT, THE RETIREMENT DEED DOES NOT REFER TO AN Y ASSIGNMENT BY THE RETIRING PARTNER IN FAVOUR OF THE CONTINUING PARTNERS. MOREO VER, THE PAYMENT WAS MADE AFTER WORKING OUT VALUATION ON THE BASIS OF NOTIONAL SALE AND IT WAS NOT A LUMP SUM PAYMENT TO THE RETIRING PARTNER. IN VIEW OF THE ABOVE THE FACTS OF THE CASE OF N.A. MODY (SUPRA) IS DIFFERENT FROM THE FACTS OF THE CASE OF THE APPELLANT. HENCE THE SAID DECISION CANNOT BE APPLIED TO THIS CASE. 16) REFERENCE IS INVITED TO THE DECISION OF THE JUR ISDICTIONAL HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. ANANT NARHAR NIMKAR (HUF) T1997) 224 ITR 221 (GUJ). IT WAS ALSO DEALING WITH THE AMOUNT RECEIVED BY TH E RETIRING PARTNER. PARAS RELEVANT TO THE FACTS OF THIS CASE O F THE APPELLANT ARE REPRODUCED AS UNDER:- 'IT IS ALSO SETTLED WHAT A PARTNER GETS AT THE TIME OF HIS RETIREMENT IS NOT THROUGH TRANSFER OF AN ASSET FOR THE CONSIDERATION. WHAT RE ALLY HE GETS AT THE END OF THE RELATIONSHIP WITH THE FIRM IS THE VALUE OF THE INTE REST HE ALREADY HAD IN THE FIRM WHICH HE WAS ENJOYING JOINTLY AND WHICH GROWS OR DIMINISH ES WITH THE GROWTH OR FALL IN THE PROSPERITY OF THE PARTNERSHIP FIRM. HE DOES NOT GET ANY NEW RIGHT AT THE TIME OF DISSOLUTION OR HIS RETIREMENT.' 'THUS, IT IS APPARENT THAT COURT IN SUNIL SIDDHARTH BHAI'S CASE (SUPRA), REITERATED THE VIEW TAKEN IN MALABAR FISHERIES' CASE (SUPRA) THAT THE DISTRIBUTION OF THE ASSET ON THE DISSOLUTION DOES NOT AMOUNT TO A TRANSFER TO THE ER STWHILE PARTNERS. IF THERE IS NO TRANSFER OF ASSETS TO THE PARTNER CONCERNED, THE QU ESTION OF ARISING OF A CAPITAL GAIN ON TRANSFER OF A CAPITAL * ASSETS WOULD NOT ARISE.' 'THE AFORESAID DECISIONS STATE THE POSITION OF LAW CLEARLY THAT WHAT THE PARTNER GETS AT THE TIME OF DISSOLUTION OR UPON RETIREMENT IS REALI SATION OF HIS OWN PRE-EXISTENCE OF RIGHT OR INTEREST IN THE FIRM AND NO TRANSFER OF PR OPERTY IN HIS FAVOUR WHICH IS NOT ALREADY (SIC) HIS, TAKES PLACE. IF THAT IS SO, IT CANNOT AMOUNT TO TRANSFER OF PAR TNER'S INTEREST ON GETTING VALUE OF HIS SHARE ON RETIREMEN T. OBVIOUSLY, REALISATION OF ONE'S OWN INTEREST IN MONEY VALUE AFTER EVALUATING THE VA LUE OF EXISTING INTEREST IN THE FIRM CANNOT IN ANY TERMS BE CONSIDERED AS TRANSFER UNLES S A LEGAL FICTION EXISTS TO THAT FOR THAT PURPOSE AND IN THE ABSENCE OF ANY TRANSFER, TH ERE CANNOT BE ANY QUESTION OF ARISING OF ANY CAPITAL GAINS FOR TAXABLE PURPOSE. ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 22 - RELYING ON THE DECISION IN THE CASE OF SUNIL SIDDHA RTHBHAI VS. CIT (SUPRA), THE SUPREME COURT IN ADDL. CIT VS. MOHANBHAI PAMABHAI ( 1987) 165 ITR 166 (SC) : TC 20R.865 AFFIRMED THE DECISION OF THIS COURT IN MOHA NBHAI PAMABHAI'S CASE REFERRED TO ABOVE. THIS COURT HAD ALSO OCCASION TO CONSIDER THE ISSUE WHETHER ON RETIREMENT OF A PARTNER ANY RECEIPT IN LIEU OF HIS SHARE IN PARTN ERSHIP ASSETS AMOUNTS TO SALE, IN THE CASE OF CIT VS. DILIP ENGINEERING WORKS (1981) 21 C TR (GUJ) 213 : (1981) 129 ITR 688 (GUJ), JUSTICE S.B. MAJMUDAR, AS HE THEN WAS, N EGATIVED THE CONTENTION OF THE DEPARTMENT AND OBSERVED THAT WHERE A RETIRING PARTN ER RECEIVES A SHARE IN THE PARTNERSHIP, ANY CASH OR ANY OTHER ASSET, IT CANNOT BE SAID THAT ANY ASSET IS TRANSFERRED OR SOLD TO HIM. AS HELD IN CIT VS. BALW ANTRAI VITHALDAS SHAH (1992) 104 CTR (GUJ) 10 : (1992) 196 ITR 379 (GUJ) : TC 20R.87 6 TO WHICH ONE OF US (HON'BLE R.K. ABICHANDANI, J.), WAS PARTY, HELD THAT THE AMO UNT RECEIVED BY THE ASSESSEE ON HIS RETIREMENT FROM THE FIRM WAS NOT ASSESSABLE AND CAN NOT BE EXIGIBLE TO CAPITAL GAINS TAX EITHER UNDER S. 45 OR UNDER S. 28(IV) OF THE AC T, 1961, AFTER REFERRING TO DECISION OF THIS COURT IN ADDL. CIT VS. MOHANBHAI PAMABHAI'S CA SE AS AFFIRMED BY THE SUPREME COURT IN (1987) 165 ITR 166 (SC) : TC 20R.865. IT MUST, THEREFORE, BE HELD THAT RECEIPT OF ANY SUM BY A PARTNER ON HIS RETIREMENT FROM THE FIRM OR ON DISSOLUTION OF THE FIRM AS VALUE OF HIS SHARE IN THE ASSETS OF THE FIRM, DOES NOT INVOLVE ANY TRANSFER OF CAPITAL ASSET RESULTING IN ACCRUAL OR RECEIPT OF INCOME CHARGEABLE TO TAX AS CAPITAL GAIN IN THE HAN DS OF RECIPIENT PARTNER , AND THE TRIBUNAL WAS JUSTIFIED IN NOT TREATING THE AMOUNT O F RS.1,88,950 TAXABLE AS CAPITAL GAIN.' 17) SIMILAR ISSUE HAD ARISEN IN THE CASE OF SMT. D URDANA KHATOON VS. DEPUTY COMMISSIONER OF INCOME TAX F2005) 93 TTJ (HY D) 753 : (2005) 93 ITD 15 (HYD). H'BLE HYDERABAD ITAT HELD THAT WHEN A PARTNER RECE IVES HIS OR HER SHARE IN THE ASSETS OF THE PARTNERSHIP OR EVEN SOME THING IN EXCESS OF SUCH SHARE, EITHER ON RETIREMENT OR ON DISSOLUTION OF THE FIRM, THE SAME IS NOT EXIGIBLE TO TAX AS CAPITAL GAIN UNDER S. 45 R/W S. 2(47) AS THERE IS N O TRANSFER. IN THAT CASE ASSETS OF THE PARTNERSHIP WERE REVALUED AND L/3RD OF THIS VALUE ( HIS SHARE IN PROFIT) WAS GIVEN TO THE RETIRING PARTNER. THE H'BLE ITAT FOLLOWED THE D ECISIONS OF THE JURISDICTIONAL HIGH COURT IN THE CASES OF VS. L RAGHU KUMAR (1982) 31 C TR (AP) 192 : (1983) 141 ITR 674 (AP) AND CIT VS. G. SESHAGIRI RAO (1995) 129 CT R (AP) 148 : (1995) 213 ITR 304 (AP). IT HELD THAT '20. AS WE HAVE FOLLOWED THE DECISION OF THE JURISD ICTIONAL HIGH COURT AND THE SUPREME COURT, WE NEED NOT DEAL WITH THE JUDGMENT O F THE DELHI AND BOMBAY HIGH ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 23 - COURT RELIED UPON BY THE REVENUE. THUS, WE RESPECTF ULLY FOLLOW THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT WHICH IS UPHELD BY THE SU PREME COURT AND HOLD THAT THE AMOUNT IN QUESTION CANNOT BE BROUGHT TO TAX AS CAPI TAL GAIN UNDER S. 45 R/W S. 2(47) OF THE IT ACT AS THERE IS NO TRANSFER.' 18) IN VIEW OF THE ABOVE THE JURISDICTIONAL DECISIO NS NEED TO BE FOLLOWED. IN THE CASE OF COMMISSIONER OF INCOME-TAX V. MOHANBHAI PAMABHAI [1973] 91 ITR 393 (GUJ.) THE H'BLE GUJARAT HIGH COURT HELD THAT WHEN A PARTN ER RETIRES FROM A PARTNERSHIP AND AMOUNT OF HIS SHARE IN NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNTS ON FOOTING OF NOTIONAL SALE OF PARTNERSHIP ASSETS AND GIVEN TO HIM, WHAT HE RECEIVES IS HIS SH ARE IN PARTNERSHIP AND NOT ANY CONSIDERATION FOR TRANSFER OF HIS INTEREST IN PARTN ERSHIP TO CONTINUING PARTNERS AND THE SAME IS NOT CHARGEABLE AS CAPITAL GAIN. THIS DECISI ON WAS AFFIRMED BY THE H'BLE SUPREME COURT IN 165 ITR 166. 19) THE DECISION OF THE GUJARAT HIGH COURT IN MOHAN BHAI PAMABHAI WAS ALSO FOLLOWED BY THE H'BLE GUJARAT HIGH COURT IN THE CAS E OF CIT V. SHREYAS CHINUBHAI (1999) 237 ITR 358. OUT OF THREE QUESTIONS FRAMED B Y THE H'BLE HIGH COURT TWO ARE AS UNDER:- '1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN LAW IN COMING TO THE CONCLUSION ( THAT THE AMOUNT OF RS.1,25,092 RECEIVED BY THE ASSESSEE ON RETIREMENT FROM THE PARTNERSHIP FIRM OF ARUN CORPORATION (ESTATE DIVISION) WAS NOT LIABLE TO TAX UNDER SECTION 28(IV ) OF THE ACT ? 2. WHETHER,ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN LAW IN COMING TO THE CONCLUSION THAT THE SUM OF RS.1,25,092 RECEIVED BY THE ASSESSEE ON RETIREMENT FROM THE PARTNERSHIP FIRM OF ARUN CORPORATION (ESTATE DIVISION) WAS NOT LIABLE TO TAX UNDER SECTION 45 OF THE ACT? IN PARA 3 IT IS HELD THAT'IN VIEW OF THE SETTLED LEGAL POSITION, WE HOLD THAT THE TRIBUNAL WAS RIGHT IN CONCLUDING THAT THE AMOUNT IN QUESTION RECEIVED BY THE ASSESSEE ON RETIREMENT FROM THE FIRM WAS NOT LIABLE TO TAX U NDER SECTION 28(/V) AND THE QUESTION NO.L IS ANSWERED IN THE AFFIRMATIVE AGAINS T THE REVENUE. IN PARA 45 IT HELD THAT ' IN VIEW OF THIS SETTLED LEGAL POSITION, WE ARE OF THE OPINION THAT THE TRIBUNAL WAS RIGHT IN CONCLUDING T HAT THE SAID AMOUNT WAS NOT LIABLE TO CAPITAL GAIN TAX AND QUESTION NO. 2 IS, ACCORDIN GLY, ANSWERED IN THE AFFIRMATIVE AGAINST THE REVENUE.' ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 24 - 20) THUS IN VIEW OF THE DECISION OF THE JURISDICTIO N COURTS ON SIMILAR FACTS AND CONSIDERING THAT FACTS IN THE CASE OF OTHER DECISIO NS CITED BY THE DEPARTMENT ARE NOT ON SIMILAR FACTS AND ALSO THAT THE AMOUNT RECEIVED BY THE APPELLANT WAS AFTER VALUING THE INTEREST IN THE FIRM ON NOTIONAL SALE BASIS (PI . REFER PAGE 27 OF THE ASSESSMENT ORDER) THE ADDITION MADE BY THE LEARNED AO NEEDS TO BE DELETED.' 9.7 IT IS OBSERVED FROM THE SUBMISSIONS MADE BY THE AR THAT SINCE IN THE PRESENT CASE, THE APPELLANT'S SHARES IN THE FIRMS HAVE BEEN DETER MINED BY QUANTIFYING ITS SHARE BY TAKING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE AND NO PAYMENT OF LUMP SUM AMOUNT IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING ITS SHARE OR RIGHT IN THE PARTNERSHIP FIRM'S ASSETS IN FAVOUR OF THE CONT INUING PARTNERS HAS BEEN MADE, HENCE THE DECISIONS IN THE CASE OF N. A. MODY(SUPRA ) AND SUDHAKAR SHETTY (SUPRA) ARE NOT APPLICABLE IN THIS CASE. I AGREE WITH THESE CON TENTIONS. IN THE PRESENT CASE, THE MODE OF DETERMINING THE SHARES OF APPELLANT AT THE TIME OF ITS RETIREMENT IS EXACTLY THE SAME AS WAS IN THE CASE OF MOHANBHAI PAMABHAI (SUPR A). MOREOVER, IN THE CASE OF MOHANBHAI PAMABHAI (SUPRA), THE TERMS AND CONDITION S OF THE RETIREMENT DEED PROVIDED THAT FOUR PARTNERS ARE RETIRING AFTER TAK ING SHARE IN THE PARTNERSHIP FIRM AND BALANCE 7 PARTNERS HAVE TAKEN OVER THE PARTNERS HIP BUSINESS AS A GOING CONCERN TOGETHER WITH ALL THE ASSETS, GOODWILL AND OTHER RI GHTS AND CLAIMS AND DEMANDS AND LIABILITIES, EXCEPT THE TAX LIABILITIES OF THE FIRM AND HAVE TAKEN OVER THE POSSESSION OF THE ENTIRE PROPERTIES OF THE FIRM AS A GOING CONCER N. LASTLY THE DEED ALSO PROVIDED THAT THE AMOUNT DETERMINED IN THE DEED TO BE PAID T O RETIRING PARTNERS WAS IN LIEU OF ALL THEIR RIGHTS, INTEREST AND SHARE IN THE PARTNER SHIP FIRM AND EACH OF THEM VOLUNTARILY GIVES UP HIS RIGHT, TITLE AND INTEREST IN THE PARTNERSHIP FIRM. THUS THE DEED OF RETIREMENT AND MODE OF COMPUTATION OF AMOUNT TO BE PAID TO RETIRING PARTNERS ARE SIMILAR IN THE CURRENT CASE AS WELL IN THE DECISION IN THE CASE OF MOHANBHAI PAMABHAI. 9.7.1 MOREOVER, THE DECISION IN THE CASE OF N. A. M ODY INVOLVED ARBITRATION AFTER WHICH AN AWARD WAS MADE TO THE RETIRING PARTNER. AS RELIED UPON BY THE APPELLANT, HON'BLE GUJARAT HIGH COURT IN A SIMILAR CASE INVOLV ING PAYMENT TO THE RETIRING PARTNER AS AN AWARD AFTER ARBITRATION, IN ITS DECIS ION IN THE CASE OF ANANAT NARHAR NIMKAR (HUF) (SUPRA), HAS HELD THAT THE AMOUNT RECE IVED BY THE RETIRING PARTNER CANNOT BE TAXED IN ITS HANDS. THUS IN VIEW OF THESE BINDING JUDICIAL DECISIONS OF THE JURISDICTIONAL HIGH COURT, IT IS HELD THAT THE AMOU NTS RECEIVED BY THE APPELLANT ON ITS RETIREMENTS FROM THESE FIRMS ARE NOT TAXABLE IN ITS HANDS. ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 25 - 10. THIS BRINGS US TO THE SECOND ISSUE AS TO WHETHE R THE AMOUNTS RECEIVED BY THE APPELLANT ON RETIREMENTS CAN BE TAXED IN ITS HANDS ON THE BASIS OF DECISION IN THE CASES OF SUNIL SIDHARTHBHAI AND DILIP HATE (SUPRA) AS HELD BY THE AO. THE AO HAS FIRST QUOTED EXCERPTS FROM THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SUNIL SIDHARTHBHAI (SUPRA) AND ON THE BASIS OF IT, HAS HE LD THAT THE FIRMS IN THE PRESENT CASE ARE NOT GENUINE FIRMS, BUT HAVE BEEN FORMED WITH TH E INTENTION OF ADOPTING A COLOURABLE DEVICE IN ORDER TO EVADE TAXES. HENCE IT BECOMES ESSENTIAL TO FIRST EXAMINE AS TO WHETHER THE FIRMS IN THE PRESENT CASE CAN BE HELD TO BE BOGUS FIRMS. THE FACTS RELATING TO THE FORMATION OF THESE FIRMS AS DISCUSS ED IN THE ASSESSMENT ORDER AND ALSO SUBMITTED BY THE APPELLANT ARE AS FOLLOWS: A) M/S FINE DEVELOPERS: I) THE FIRM M/S FINE DEVELOPERS WAS CONSTITUTED ON 25.11.2005 WITH THE APPELLANT ALONG WITH 3 OTHER PERSONS PARTNERS. THIS FIRM PURC HASED A PROPERTY SITUATED AT KASAIWADA ,KURLA (EAST) AT A COST OF RS. 29,50,00,0 00 DURING THE FY 2005-06. THE APPELLANT'S SHARE IN THE PROFIT AND LOSS WAS 20%. I N THE SUBSEQUENT YEARS, SOME MORE EXPENSES WERE INCURRED RELATING TO THE ACQUIRING OF THE SAID PROPERTY AND AS ON 31.3.2008, THE COST WAS SHOWN AS RS. 39,27,19,546 . II) BY ANOTHER DEED DATED 06/07/2007 A NEW ENTITY M /S HOUSING DEVELOPMENT AND INFRASTRUCTURE LTD (HDIL) INDUCTED AS PARTNER OF TH E FIRM AND THE SHAREHOLDING WAS RECONSTITUTED. BUT THE APPELLANT'S SHARE IN THE PRO FIT OF THE FIRM REMAINED 20%, WHICH WAS ALSO THE ORIGINAL SHARE IN THE PROFIT OF THE FI RM BEFORE ITS RECONSTITUTION. V) AFTER ITS CONSTITUTION, THE FIRM HA S MADE FOLLOWING EXPENDITURE TILL 01/04/2008: ADDITIONAL COSTS STAMP DUTY / REGISTRATION 29,50,000/- FY 07-08 COMPENSATION TO WORKERS 6,09,13,708/- FY 06-07 AND 07-08 INT. ON PARTNERS' CAPITAL 2,74,01,621/- FY 05-06 AND 06-07 ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 26 - INTEREST ON LOANS 1,98,77,246/- FY 06-07 AND 07-08 MISCELLANEOUS EXPENSES 7,61,771/- FY 05-06 06-07 AND 07-08 B) M/S MAHUL CONSTRUCTION CORPORATION: I) THIS FIRM WAS CONSTITUTED ON 9.11.2005 WI TH 3 PARTNERS. THE APPELLANT WAS NOT AN ORIGINAL PARTNER OF THIS FIRM. II) THIS FIRM PURCHASED A PROPERTY SITUATED A T LU GADKARI ROAD, MAHUL, MUMBAI ON 23.11.2007 FOR A CONSIDERATION OF RS. 4,67,00,00 0. III) THE APPELLANT ALONG WITH 2 OTHE R PERSONS WERE ADMITTED TO THIS PARTNERSHIP ON 3.1.2006, WITH EFFECT FROM 01/01/200 6. THE APPELLANT SHARE IN THE PROFIT AND LOSS ACCOUNT WAS TO BE 20%. IV) THIS FIRM WAS AGAIN RECONSTITUTED ON 6.7.2007 B Y THE INDUCTION OF M/S HOUSING DEVELOPMENT AND INFRASTRUCTURE LTD (HDIL) AS A PART NER. THE SHARE OF THE APPELLANT IN THE RECONSTITUTED FIRM REMAINED AT 20% AS EARLIE R. 10.1 THUS, IT IS SEEN THAT THE APPELLANT BECAME PAR TNER IN M/S. FINE DEVELOPER ON 25 TH NOVEMBER 2005 WITH A SHARE OF PROFIT AND LOSS OF 20 %. THIS FIRM MADE PAYMENTS FOR PURCHASE OF THE PROPERTY AND ALSO MADE PAYMENTS TO WORKERS AS COMPENSATION DURING THE PERIOD 25.11.2007 TO 06.07.2007 AFTER WHICH HDI L WAS INDUCTED AS PARTNER. EVEN AFTER THIS, THE APPELLANT'S SHARE IN THE PROFIT AND LOSS OF THE FIRM REMAINED UNCHANGED. THUS THE ORIGINAL FIRM CONTINUED FOR ABOUT 19 MONTH S BEFORE HDIL WAS INDUCTED AS A PARTNER. MOREOVER, IT WAS THE FIRM WHICH PURCHASED THE PROPERTY AND MADE PAYMENTS FOR COMPENSATION TO WORKERS ETC. THUS, IT WAS THE F IRM AND NOT THE APPELLANT WHO WAS ALL ALONG OWNER OF THE ASSETS OF THE FIRM AND THE A PPELLANT WAS HAVING ONLY ITS INTEREST IN THESE ASSETS AS A PARTNER. THUS THE CONSTITUTION OF THIS FIRM CANNOT BE HELD TO BE A SHAM TRANSACTION. 10.2 SO FAR AS MAHUL CONSTRUCTION CORPORATION IS C ONCERNED, THIS FIRM WAS CONSTITUTED ON 09.11.2005 AND PURCHASED THE PROPERT Y ON 23.11.2005. ONLY AFTER THIS THE APPELLANT BECAME A PARTNER ON 03.01.2006 W.E.F. 01.01.2006 WITH SHARE IN P & L A/C OF 20%. HDIL WAS INDUCTED AS A PARTNER ON 06.07 .2007 BUT AT THAT TIME TOO, THE APPELLANT'S SHARE REMAINED AT 20%. THUS AGAIN THE C ONSTITUTION OF THIS FIRM CANNOT BE ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 27 - HELD TO BE A SHAM TRANSACTION. ALSO, THE PROPERTY O F THIS FIRM WAS NEVER THE INDIVIDUAL PROPERTY OF THE APPELLANT. IN FACT THE APPELLANT WA S NOT EVEN A PARTNER WHEN THE PROPERTY IN QUESTION WAS PURCHASED BY THIS FIRM. 10.3 THUS THESE ARE NOT THE CASES WHERE THE APPELLA NT HAD ACQUIRED A PROPERTY 1ST. AND THEN TRANSFERRED IT TO A PARTNERSHIP FIRM, AND AFTER THAT HAS IMMEDIATELY RETIRED FROM THE PARTNERSHIP FIRM AND RECEIVED CERTAIN AMOU NTS IN RESPECT OF THE ASSET CONTRIBUTED BY IT TO THE FIRM. UNDER SUCH CIRCUMSTA NCES, THE FACTS OF THE DECISION IN THE CASE OF MR DILIP HATE (SUPRA) BECOME TOTALLY DI FFERENT AND INAPPLICABLE TO THE FACTS OF THE CURRENT CASE. IN THE CASE OF DILIP HAT E (SUPRA), THE ASSESSEE HAD ACQUIRED THE DEVELOPMENT AGREEMENT IN HIS INDIVIDUAL NAME A ND THEN HAD ENTERED IN A PARTNERSHIP AND CONTRIBUTED HIS RIGHT IN THE PROPER TY IN THE FORM OF DEVELOPMENT AGREEMENT AS CAPITAL. AFTER THIS WITHIN A SHORT SPA N OF 11 DAYS, HE HAD RETIRED FROM THE FIRM BY TAKING HIS CAPITAL AND ALSO SOME OTHER PAYMENTS. EVEN THE STAMP PAPER FOR EXECUTING THE RETIREMENT DEED WAS PURCHASED ON THE SAME DAY AS THE DATE OF FORMATION OF THE FIRM. UNDER THESE PECULIAR CIRCUMS TANCES, THE ITAT HELD THAT CONSTITUTION OF THE FIRM AND RETIREMENT OF THE ASSE SSEE WERE SHAM TRANSACTION AND IT WAS A CASE OF SALE OF DEVELOPMENT RIGHT BY THE ASSE SSEE TO FOUR PERSONS IN THE GARB OF SUCH COLOURABLE TRANSACTIONS. BUT IN THE PRESENT CA SE, FACTS SHOW THAT THESE FIRMS ARE GENUINELY CONSTITUTED FIRMS AND THEIR CONSTITUTION AND RECONSTITUTION CANNOT BE TERMED AS A COLOURABLE DEVISE IN ORDER TO EVADE TAXES IN T HE HANDS OF THE PARTNERS. BOTH THE PROPERTIES HAVE BEEN PURCHASED BY THESE FIRMS DIREC TLY AND NOT BY THE APPELLANT AND IN CASE OF FINE DEVELOPERS, THE FIRM HAS ALSO SPENT SUBSTANTIAL AMOUNT ON PAYMENT OF COMPENSATION TO THE WORKERS. 10.4 NOW COMING TO THE RELIANCE PLACED BY THE AO ON THE COMMENTS OF THE HON'BLE SUPREME COURT IN THE CASE OF SUNIL SIDHARTHBHAI (SU PRA), IT IS PERTINENT TO NOTE THAT AFTER THIS DECISION, SECTION 45 OF THE IT. ACT, 196 1 WAS AMENDED BY FINANCE ACT, 1987 W.E.F. FROM 01.04.1988 VIDE WHICH SUB-SECTION 3 AND SUB-SECTION 4 WERE INSERTED. THE INTENTION BEHIND SUCH AMENDMENT HAS BEEN EXPLAINED BY CBDT VIDE CIRCULAR NO. 495 DATED 22.09.1987. THE RELEVANT PARTS OF THIS CIRCUL AR ARE REPRODUCED BELOW: 'CAPITAL GAINS ON TRANSFER OF FIRMS' ASSETS TO PART NERS AND VICE VERSA AND BY WAY OF COMPULSORY ACQUISITION 24.1 ONE OF THE DEVICES USED BY ASSESSEES TO EVADE TAX ON CAPITAL GAINS IS TO CONVERT AN ASSET HELD INDIVIDUALLY INTO AN ASSET OF THE FIR M IN WHICH THE INDIVIDUAL IS A PARTNER. THE DECISION OF THE SUPREME COURT IN KARTI KEYA V. SARABHAI V. CIT[1985] 156 ITR 509 HAS SET AT REST THE CONTROVERSY AS TO W HETHER SUCH A CONVERSION AMOUNTS ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 28 - TO TRANSFER. THE COURT HELD THAT SUCH CONVERSION FE LL OUTSIDE THE SCOPE OF CAPITAL GAIN TAXATION, THE RATIONALE ADVANCED BY THE COURT IS, T HAT THE CONSIDERATION FOR THE TRANSFER THE PERSONAL ASSET IS INDETERMINATE, BEING THE RIGHT WHICH ARISES OR ACCRUES TO THE PARTNER DURING THE SUBSISTENCE OF THE PARTNE RSHIP TO GET HIS OF THE PROFITS FROM TIME TO TIME AND ON DISSOLUTION OF THE PARTNERSHIP TO GET THE VALUE OF HIS SHARE FROM THE NET PARTNERSHIP ASSETS. FINANCE ACT, 1987 24.2 WITH A VIEW TO BLOCKING THIS ESCAPE ROUTE FOR AVOID ING CAPITAL GAINS TAX, THE FINANCE ACT, 1987 HAS INSERTED NEW SUB-SECTION (3) IN SECTION 45. THE EFFECT OF THIS AMENDMENT IS THAT PROFITS AND GAINS ARISING FROM TH E TRANSFER OF A CAPITAL ASSET BY A PARTNER TO A FIRM SHALL BE CHARGEABLE AS THE PARTNE R'S INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE. FOR PURPOSES OF COMP UTING THE CAPITAL GAINS, THE VALUE OF THE ASSET RECORDED IN THE BOOKS OF THE FIRM ON T HE DATE OF THE TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUED AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. 24.3 CONVERSION OF PARTNERSHIP ASSETS INTO INDIVIDUAL A SSETS ON DISSOLUTION OR OTHERWISE ALSO FORMS PART OF THE SAME SCHEME OF TAX AVOIDANCE. ACCORDINGLY, THE FINANCE ACT, 1987 HAS INSERTED NEW SUB-SECTION (4) IN SECTION 45 OF THE INCOME-TAX ACT, 1961. THE EFFECT IS THAT PROFITS AND GAINS ARI SING FROM THE TRANSFER OF A CAPITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHE RWISE SHALL BE CHARGEABLE AS THE FIRM'S INCOME IN THE PREVIOUS YEAR IN WHICH THE TRA NSFER TOOK PLACE AND FOR THE PURPOSES OF COMPUTATION OF CAPITAL GAINS THE FAIR M ARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUED AS A RESULT OF THE TRANSFER. FINANCE ACT, 1987 24.4 AS A CONSEQUENTIAL MEASURE, CLAUSE (II) OF SEC TION 47 HAS BEEN OMITTED AND SUB- CLAUSE (B) OF CLAUSE (HI) OF SECTION 49(1) HAS BEEN AMENDED.' 10.5 THUS THESE AMENDMENTS COVERED THE SCHEMES OF T AX AVOIDANCE IN BOTH CIRCUMSTANCES I.E. CONVERSATION OF ASSET HELD INDIV IDUALLY INTO AN ASSET OF FIRM AND CONVERSION OF PARTNERSHIP ASSETS INTO INDIVIDUAL AS SETS ON DISSOLUTION OR OTHERWISE. IN THE PRESENT CASE, FIRST TYPE OF SCHEME IS NOT INVOL VED, BUT THE SECOND TYPE IS INVOLVED. IF THE ALLEGATIONS OF A COLOURABLE DEVICE IS TO BE LEVELLED IN THIS CASE, THEN IT HAS TO BE LEVELLED IN THE HANDS OF THE FIRM ON ACCOUNT OF THE FACT THAT THE FIRM'S PROPERTY HAS ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 29 - BEEN TRANSFERRED TO THE HANDS OF SOME PARTNERS BY PAYING THE REMAINING PARTNERS THE VALUE OF THEIR INTEREST IN THE FIRM'S ASSETS. IN FACT THE AO HAS ALSO OBSERVED IN THE ASSESSMENT ORDER AS REPRODUCED ABOVE THAT HAD THE PROPERTY PURCHASED WERE DISPOSED OFF BY THE FIRM, BEFORE THE RETIREMENT BY SOME PARTNERS INCLUDING THE ASSESSEE, THE FIRM WOUL D HAVE PAID STAMP DUTY FOR THE CONVEYANCE DEED TO THE STATE GOVERNMENT AND INCOME TAX ON THE PROFIT, (SINCE AS PER THE VALUER'S REPORT BASED ON WHICH REVALUATION WAS DONE THE PROPERTY WAS REVALUED SUBSTANTIALLY HIGH AS PER PREVAILING MARKET RATE). THUS THE TAX LIABILITY ON ACCOUNT OF TRANSFER OF THE PROPERTIES OF THESE FIRMS TO HDIL C AN ARISE IN THE HANDS OF THE FIRMS' ONLY AND NOT IN THE HANDS OF THE PARTNERS. 10.6 FURTHER, THE AO HAS STATED IN HIS ORDER THAT U NLESS AND UNTIL THE FIRM IS DISSOLVED, THE AMOUNT OF DISTRIBUTION OF ANY BENEFI TS FROM THE FIRM CANNOT BE TAXED IN THE HANDS OF THE FIRM. BUT THIS IS A LEGALLY INCORR ECT STATEMENT. THE EXPRESSION 'OTHERWISE' IN THE SUB-SECTION 4 OF SECTION 45 WAS LEGALLY ANALYZED BY HON'BLE BOMBAY HIGH COURT IN ITS DECISION IN THE CASE OF A. N. NAIK ASSOCIATES (136 TAXMAN 107) (2004) WHEREIN THE COURT HELD THAT THE EXPRESS ION 'OTHERWISE' IN SECTION 45 (4) OF THE ACT HAS TO BE READ WITH THE WORDS 'TRANSFER OF CAPITAL ASSETS' BY WAY OF DISTRIBUTION OF CAPITAL ASSETS. THE RELEVANT PORTIO N OF JUDGMENT OF THE COURT IS REPRODUCED BELOW: ''THE EXPRESSION 'OTHERWISE' IN OUR OPINION, HAS NO T TO BE READ EHYSDEN GENERIS WITH THE EXPRESSION 'DISSOLUTION OF A FIRM OR BODY OR AS SOCIATION OF PERSONS'. THE EXPRESSION 'OTHERWISE' HAS TO BE READ WITH THE WORD S 'TRANSFER OF CAPITAL ASSETS' BY WAY OF DISTRIBUTION OF CAPITAL ASSETS. IF SO READ, IT BECOMES CLEAR THAT EVEN WHEN A FIRM IS IN EXISTENCE AND THERE IS A TRANSFER OF CAP ITAL ASSETS IT COMES WITHIN THE EXPRESSION 'OTHERWISE ' AS THE OBJECT OF THE AMENDI NG ACT WAS TO REMOVE THE LOOPHOLE WHICH EXISTED WHEREBY CAPITAL GAIN TAX WAS NOT CHAR GEABLE. IN OUR OPINION, THEREFORE, WHEN THE ASSET OF THE PARTNERSHIP IS TRANSFERRED TO A RETIRING PARTNER THE PARTNERSHIP WHICH IS ASSESSABLE TO TAX CEASES TO HAVE A RIGHT O R ITS RIGHT IN THE PROPERTY STANDS EXTINGUISHED IN FAVOUR OF THE PARTNER TO WHOM IT IS TRANSFERRED. IF SO READ, IT WILL FURTHER THE OBJECT AND THE PURPOSE AND INTENT OF AS SETS IN THE NATURE OF CAPITAL GAINS AND BUSINESS PROFITS WHICH IS CHARGEABLE TO TAX UND ER SECTION 45(4) OF THE INCOME-TAX ACT. WE WILL, THEREFORE, HAVE TO QUESTION NO. 3 BY HOLDING THAT 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'. ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 30 - 10.6.1 THIS DECISION OF THE BOMBAY HIGH COURT HAS B EEN FOLLOWED BY HON'BLE KARNATAKA HIGH COURT IN ITS DECISION IN THE CASE OF CIT VS GURUNATH TALKIES, 189 TAXMAN 171 (KAR). THE FACTS OF THIS DECISION ARE ID ENTICAL TO THE PRESENT CASE. IN THIS CASE, ONE OF QUESTION OF LAW WAS AS FOLLOWS: '1. WHETHER THE COLOURABLE DEVICE ADOPTED BY THE AS SESSEE IN ADMITTING TWO NEW PARTNERS, NAMELY, SRI VENKATARAMIAH AND SMT, SUJATH A VENKATARAMIAH AND PERMITTING ALL THE OLD PARTNERS TO RETIRE FROM THE FIRM BY RECEIVING A CONSIDERATION AMOUNT OF RS. 16,55,647/- FROM THE OLD PARTNERS WOU LD AMOUNT TO A TRANSFER ATTRACTING THE CAPITAL GAINS PROVISION AS PER THE I NCOME TAX ACT?' 10.6.1.1 THE HON. KARNATAKA HIGH COURT HAS OB SERVED THAT - '......ON THE INTRODUCTION OF SUB-SECTION (3) AND (4) BY THE FINANCE ACT, 1987, CLAUSE (II) OF SECTION 47 HAS BEEN EXPRESSLY OMITTED REMO VING THE PROTECTIVE UMBRELLA. THE LEGISLATIVE INTENT IS QUITE CLEAR AND IN OUR OPINIO N, THIS IS GOOD ENOUGH TO TAKE CASE OF ANY SITUATION WHERE IN EFFECT THERE IS TRANSFER OF CAPITAL ASSET BY ANY MODE AND TO ENSURE THE GAIN BEING TAXED, THE SECTION HAS BEEN AMENDED AND THIS IS THE VIEW TAKEN BY THE BOMBAY HIGH COURT...' WHILE DECIDING THE AFORESAID CASE OF GURUNATH TALKI ES, HON. KARNATAKA HIGH COURT HAS AGREED WITH THE VIEW EXPRESSED BY HON. BOMBAY H IGH COURT IN THE CASE OF CIT VS. A.N. NAIK (265 ITR 346) (BOM) BY STATING THAT - '.....AS INDICATED EARLIER, WE ARE IN RESPECTFUL AG REEMENT WITH THE VIEW EXPRESSED BY THE BOMBAY HIGH COURT IN A.N. NAIK'S CASE. WE ARE O F THE VIEW THAT IN THE PRESENT CASE, THE ASSESSING OFFICER HAS RIGHTLY INDICATED T HAT THE SERIES OF TRANSACTION SUCH AS RECONSTITUTION OF FIRM TWICE; ONCE IN JULY, 1994 AN D ANOTHER IN DECEMBER, 1994 AND ENTIRE ASSETS RETAINED IN THE HANDS OF THE NEWLY AD DED TWO PARTNERS, RESULT IN TRANSFER OF ASSETS OF THE FIRM IN THE SENSE THAT THE ASSETS OF THE FIRM AS HAD BEEN HELD BY THE ERSTWHILE PARTNERS ARE TRANSFERRED TO THE NEWLY A DDED TWO PARTNERS THOUGH ALL ALONG THE ASSETS ALL ALONG THE ASSETS OF THE FIRM CONTINU ED IN THE HANDS OF THE FIRM.'. 10.6.2 IN THE PRESENT CASE, THE ASSETS OF THE FIRM HAVE BEEN REVALUED AND THE LIABILITIES HAVE BEEN DEDUCTED FROM THESE. THE PARTNERS' SHARES IN SUCH NET AMOUNT HAVE BEEN CREDITED TO THEIR CAPITAL ACCOUNT. AFTER THIS, SOME PARTNER'S HAVE RETIRED FROM THE FIRMS AFTER TAKING THE AMOUNT IN THEIR CAPITAL ACCO UNTS AND OTHERS HAVE CONTINUED AS PARTNERS. HON'BLE SUPREME COURT HAS, IN ITS DECISIO N IN THE CASE OF BANKEY LAL VAIDYA, 79. ITR 554 (SC), HELD THAT WHERE A LARGE M AJORITY OF THE ASSETS ARE ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 31 - INCAPABLE OF PHYSICAL DIVISION, AND THE PARTNERS AG REED THAT THE ASSETS BE TAKEN OVER BY 'D' AT A VALUATION, AND THE RESPONDENT BE PAID H IS SHARE OF VALUE IN MONEY, THEN SUCH AN AGREEMENT AMOUNTED TO DISTRIBUTION OF THE A SSETS OF THE FIRM ON DISSOLUTION. THIS DECISION HAS BEEN RELIED UPON BY HON'BLE MUMBA I BENCH OF ITAT IN ITS DECISION IN THE CASE OF VIJAY TALKIES, 16 SOT 370 (MUMBAI). FACTS OF THE PRESENT CASE ARE ALSO IDENTICAL TO THESE DECISIONS AS AFTER THE REVALUATI ON OF THE ASSETS ON NOTIONAL SALE BASIS, SOME PARTNERS HAVE TAKEN CASH AND RETIRED FR OM THE FIRM AND BALANCE PARTNERS HAVE CONTINUED TO HOLD THE ASSETS IN THE FIRM. HENC E THE 'PROFITS AND GAINS' ARISING FROM THE TRANSFER OF THE CAPITAL ASSETS BY WAY OF D ISTRIBUTION OF CAPITAL ASSET ON RETIREMENT OF THE APPELLANT AND OTHER PARTNERS FROM THE FIRMS IN ABOVE DISCUSSED MANNER ARE TAXABLE AS CAPITAL GAIN IN THE HANDS OF THESE FIRMS AS PER THE PROVISIONS OF SUB-SECTION (4) OF SECTION 45 OF THE IT. ACT, 1961 AND NO INCOME IS TAXABLE IN THE HANDS OF THE PARTNERS ON THIS ACCOUNT. 10.6.3 IT IS TO BE NOTED THAT HERE THAT THE AO OF M /S. FINE DEVELOPERS ,ITO 25(3)(4), MUMBAI HAS PASSED THE ASSESSMENT ORDER UNDER SECTIO N 143(3) FOR THE ASSESSMENT YEAR 2009-10 ON 15.12.2011. IN THIS ORDER, THE ITO HAS TAXED THE PROFITS AND GAINS ARISING ON ACCOUNT OF DISTRIBUTION OF CAPITAL ASSET IN THE HANDS OF THE FIRM. FOR THIS, HE HAS PLACED RELIANCE ON THE DECISIONS IN THE CASE OF P.N. NAIK (SUPRA) AND GURUNATH TALKIES (SUPRA) AND HAS HELD AS FOLLOWS:- '14.3.3. THE ABOVE MENTIONED CASE OF GURUNATH TALKI ES IS SQUARELY APPLICABLE IN THE CASE OF THE ASSESSEE FIRM FOR FOLLOWING REASONS: (I) IT IS STATED IN THE PREVIOUS SECTIONS OF T HIS ORDER THAT ULTIMATELY OF THE INTEREST IN THE FIRM WAS TRANSFERRED TO M/S. HDIL WITH BALANCE 10% WITH M/S. SAPPHIRE LAND DEVELOPMENT (P) LTD. IT IS ALSO ESTABLISHED IN PR EVIOUS SECTIONS THAT BOTH CONCERNS ARE EFFECTIVELY CONTROLLED AND RUN BY THE SAME SET OF PEOPLE. SO, IN EFFECT, 100% CONTROL OVER M/S. FINE DEVELOPERS IS LYING WITH ONL Y ONE DECISION MAKER. (II) IF ULTIMATE PURPOSE OF CONTROL OVER THE USAGE OF LAND IS KEPT IN MIND, THERE WAS NO NEED TO RETIRE M/S. SAPPHIRE LAND DEVELOPMENT (P) L TD. FROM FINE DEVELOPERS AS THIS ENTITY WAS EFFECTIVELY CONTROLLED BY HDIL OR ITS GR OUP CONCERNS/PERSONS. (III) AT THE START, THE LAND WAS WITH M/S. FINE DEV ELOPERS WITH ITS FOUR PARTNERS - M/S. SURAKSHA DEVELOPERS (P) LTD. M/S. VISION FINSTOCK ( P) LTD. M/S. NISHA CAPITAL SERVICES (P) LTD. M/S. SAPPHIRE LAND DEVELOPMENT (P ) LTD. HOWEVER, AT THE END THE LAND WAS EFFECTIVELY WITH M/S. HDIL ALTHOUGH ALL AL ONG THE FIRM - M/S. FINE DEVELOPERS - CONTINUED AND SUBSISTED. ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 32 - (IV) THE WHOLE TRANSACTION CAN BE EQUATED WITH FOLLOWING TRANSACTIONS: A FIRM WITH PARTNERS I) SURAKSHA DEVELOPER (P) A FIRM WITH LTD. (10%) PARTNERS II) VISION FINSTOCK (P) LTD. TRANSFERRED OF I) HDIL (90%)& (20%) KURLA LAND II) SAPHPHIRE LAND DEVELOPMENT (P) (III) NISHA CAPITAL SERVICES (P) LTD. LTD.(10% (10% (IV) SAPPHIRE LAND HAD ABOVE ILLUSTRATED TRANSACTION TAKEN PLACE, THE ASSESSEE WOULD HAVE TO PAY CAPITAL GAIN TAX ON THE TRANSACTION OF THE 'KURLA LAND'. IN ORDER TO AVOID THE PAYMENT OF LEGALLY DUE TAX, THE WHOLE SHAM ARRANGEMENT WAS MAD E BY THE ASSESSEE-FIRM WITH THE HELP OF ITS OLD AND NEW PARTNERS, SO IT IS HELD THA T PROVISIONS OF SECTION 45(4) OF THE ACT READ WITH SECTION 2(47) OF THE ACT IS ATTRACTED IN THE CASE OF THE ASSESSEE.' 11. FROM THESE DISCUSSIONS IT IS CLEAR THAT EVEN IF A SHAM TRANSACTION IS TO BE ALLEGED, IT CAN BE ALLEGED IN THE HANDS OF THE FIRM S AND NOT IN THE HANDS OF THE PARTNERS. IT WERE THE FIRMS WHICH WERE OWNING THE P ROPERTIES ALL ALONG AND HENCE THE PROFITS AND GAINS RESULTING ON ACCOUNT OF THE TRANS ACTIONS DISCUSSED ABOVE CAN BE TAXED IN THEIR HANDS ONLY AND NOT IN THE HANDS OF T HE PARTNERS. ACCORDINGLY THE OTHER FACTS DISCUSSED BY THE AO RELATING TO THESE TRANSAC TIONS LIKE, REPRESENTATIONS MADE BY HDIL BEFORE AUTHORITIES IN RELATION TO THESE LANDS, THE CONTROL OF HDIL AND THE REMAINING PARTNER OF M/S FINE DEVELOPERS AFTER THE RETIREMENT OF APPELLANT FROM THIS FIRM, NAMELY M/S SAPPHIRE LAND DEVELOPERS PVT LTD, BEING IN THE SAME HANDS ETC ARE RELEVANT FOR THE PURPOSES OF ASSESSMENT OF THESE FI RMS AND NOT FOR THE ASSESSMENT OF THE APPELLANT. 12. HENCE ON THE BASIS OF ABOVE DISCUSSIONS, IT IS HELD THAT NO PART OF AMOUNT RECEIVED BY THE APPELLANT ON ITS RETIREMENT FROM THE F IRMS IS TAXABLE IN ITS HANDS AS SHORT TERM CAPITAL GAIN AND ACCORDINGLY, THESE GROUNDS OF APPE AL ARE ALLOWED AND THE ADDITIONS MADE BY THE AO ARE DIRECTED TO BE DELETED. ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 33 - 6. AGGRIEVED BY THE ORDER OF CIT(A) REVENUE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT NO PART OF AMOUNT RECEIVED BY THE ASSESSEE ON ITS RETIREMENT FROM THE FIRMS IS TAXABLE IN ITS HANDS AS SHORT TERM CAPITAL GAIN WIT HOUT CONSIDERING THE FACT THAT THE ASSESSEE HAS ADOPTED A COLOURABLE DEVICE TO EVADE TAX WHICH IS NOT ALLOWABLE AS HELD BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MC DOWELL REPORTED IN 154 ITR 148. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER. 6.1 BEFORE US, LD DR TOOK US THROUGH THE VARIOUS OBSERVATIONS OF AO AND SUPPORTED THE ORDER OF AO. LD AR ON THE OTHER H AND REITERATED THE SUBMISSIONS MADE BEFORE AO AND CIT(A) AND FURTHER S UBMITTED THAT IN THE CASE OF TWO OTHER PARTNERS OF THE FIRM NAMELY, NISHA CAPITAL SERVICES PVT. LTD. AND SURAKSHA DEVELOPERS P. LTD., WHEREIN ON IDENTICAL FACTS, THE ASSESSEES HAD CONSIDERED THE AMOUNTS AS CAPITAL REC EIPTS AND THE AOS OF THOSE RESPECTIVE ASSESSEES HAD ALSO ACCEPTED IT. T HEREAFTER, CIT IN THE REVISIONARY PROCEEDINGS U/S 263 HELD THAT THE ACTIO N OF THE AO IN ACCEPTING THE CONTENTION OF THE ASSESSEE THAT THE R ECEIPTS ON ACCOUNT OF REVALUATION WAS NOT LIABLE TO TAX WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. AGAINST THE ORDER OF CIT, MATTER WAS CARRIED BEFORE TRIBUNAL. TRIBUNAL VIDE ORDER DATED 18.12.20 14 (ITA NO 5381 & ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 34 - 5382/MUM/2013) AND AFTER CONSIDERING THE VARIOUS DE CISIONS CITED ON THE ISSUE OF TAXABILITY OF THE RECEIPTS AS BEING NON TA XABLE HELD THAT THE VIEW TAKEN BY THE AO IN THOSE CASES WAS A LOGICAL AND PR OPER VIEW IN VIEW OF THE VARIOUS DECISIONS OF SUPREME COURT AND HIGH COU RTS AND HAD THEREAFTER SET ASIDE THE ORDER OF CIT. HE ALSO PLAC ED ON RECORD THE COPY OF THE AFORESAID DECISION. HE THUS SUPPORTED THE ORDER OF CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPE CT TO TAXABILITY OF THE AMOUNT RECEIVED BY THE ASSESSEE AS PARTNER OF THE F IRM, ITS SHARE ON THE REVALUATION OF THE ASSETS OF THE FIRM IN WHICH IT W AS A PARTNER. WE FIND THAT LD CIT(A) BY A WELL REASONED AND SPEAKING ORDE R AND AFTER REFERRING TO VARIOUS DECISIONS OF SUPREME COURT AND HIGH COUR TS HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE WE ALSO FIND THAT IN CASE OF THE OTHER PARTNERS, WHEREIN AGAINST THE ORDER PASSED BY CIT U /S 263 WHEREIN HE HAD HELD THAT ACT OF THE AO OF THOSE RESPECTIVE ASSESSE ES OF CONSIDERING THE AMOUNTS RECEIVED BY THEM ON REVALUATION OF ASSETS O F THE FIRM TO BE CAPITAL RECEIPT, TO BE AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. THE COORDINATE BENCH OF TRIBUNAL HAD HELD THAT ORDER OF AO TO BE A PROPER AND LOGICAL IN VIEW OF VARIOUS DECISION S OF APEX COURT AND HIGH COURTS. BEFORE US, REVENUE HAS NOT PLACED ANY MATERIAL ON RECORD TO CONTROVERT THE FINDINGS OF LD.CIT(A). IN VIEW OF THE AFORESAID FACTS AND IN THE ABSENCE OF ANY CONTRARY BINDING DECISION PLA CED BY REVENUE, WE ITA NO. 1359/AHD/2012 (BY ASSESSEE) AND ITA NO.1641/AHD/12 (BY REVENUE) VISION FINSTOCK LTD. VS. ACIT/ITO VS. ASST.YEARS 2008-09 & 2009-10 RESPECTIVELY - 35 - ARE OF THE VIEW THAT NO INTERFERENCE TO THE ORDER O F CIT(A) IS CALLED FOR. THUS THE GROUND OF REVENUE IS DISMISSED. 8. IN THE RESULT, THE APPEAL OF REVENUE IS DISMI SSED. 9. IN THE COMBINED RESULT THE APPEAL OF THE ASSE SSEE IS ALLOWED, WHEREAS REVENUES APPEAL IS DISMISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 07 /0 7 /2016 SD/- SD/- .. () () ( R.P. TOLANI) ( ANIL CHATURVEDI ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 07/ 07 /2016 2..,.../ T.C. NAIR, SR. PS !'#$%$' / COPY OF THE ORDER FORWARDED TO : 1. $' / THE APPELLANT 2. ()$' / THE RESPONDENT. 3. 345 6 / CONCERNED CIT 4. 6 ( ) / THE CIT(A)-III, BARODA 5. 789(45 , 45. , 3 / DR, ITAT, AHMEDABAD 6. 9;<* / GUARD FILE. / BY ORDER, )7( //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD