Smt. Savitri Kadur, Bangalore V. Deputy Commissioner of Income-Tax, Bangalore

ITA 1700/BANG/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 7348 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 25-04-2019
• Assessment Year: 2008-2009
• Appeal Filed On: 26-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Reason to believe
• Section: 2(14); 54

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.1700/BANG/2016 ASSESSMENT YEAR : 2008-09 SAVITRI KADUR, 4 TH FLOOR, CHITRAPUR BHAVAN, 8 TH MAIN, 15 TH CROSS, MALLESHWARAM, BENGALURU-560 055. PAN ABYPK 8686R. VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-9(1), BENGALURU. APPELANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, C.A RESPONDENT BY : DR. PRADEEP KUMAR, ADDL. CIT(DR) DATE OF HEARING : 25.04.2019 DATE OF PRONOUNCEMENT : 03.05.2019 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE BY THE ASSESSEE AGAINS T ORDER DATED 4/8/2016 OF CIT, BENGALURU-2, BENGALURU RELATING TO ASST. YEAR 2008-09. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS AS TO WHETHER THE REVENUE AUTHORITIES WERE JUSTIFIED IN TREATING SUM OF RS.11,61,800/- AS CAPITAL GAINS CHARGEABLE TO TAX WHICH SUM WAS RECEIVED BY T HE ASSESEE ON HIS RETIREMENT FROM A PARTNERSHIP FIRM BY NAME M/S PSI HYDRAULICS. 3. THE FACTS AND CIRCUMSTANCES UNDER WHICH AFORESA ID ISSUE ARISES FOR CONSIDERATION ARE THAT THE ASSESSEE AND ONE D.VENKA TESH FORMED A PARTNERSHI BY A DEED OF PARTNERSHIP DATED 1.4.2004. MISS.SUVIDHA V ENKATESH, D/O.D.VENKATESH ITA NO.1700/BANG/2016 PAGE 2 OF 23 WAS INDUCTED AS PARTNER IN THE FIRM W.E.F. 1.4.2007 . ON 8.6.2007 AN MOU WAS SIGNED BY THE THREE PARTNERS AND IT WAS AGREED THAT THE ASSESSEE WOULD RETIRE FROM THE FIRM W.E.F. 1.4.2007 AND A SUM OF RS.339.50 LAK HS WOULD BE PAID TO THE ASSESSEE. ON 9.6.2007 DEED OF RETIREMENT WAS SIGNE D. THE ASSESSEE GAVE UP ALL HER RIGHTS AS PARTNER OF THE FIRM AND ITS ASSETS NO R WAS THE ASSESSEE LIABLE TO PAY ANY OF ITS LIABILITIES. THE CAPITAL ACCOUNT OF THE ASSESSEE AS ON 1.4.2006 SHOWED AN OPENING BALANCE OF RS.1,64,14,044. PROFIT FOR THE YEAR OF RS.46,20,591 WAS CREDITED TO HIS ACCOUNT. SIMILARLY ON REVALUATION OF THE LAND AND BUILDING ON 15.1.2007, A SUM OF RS.53,26,462 AND RS.9,24,650 RE SPECTIVELY WAS CREDITED TO HER ACCOUNT. ANOTHER SUM OF RS.18,12,528 WAS ALSO CRED ITED AS INTEREST ON CAPITAL IN HER CAPITAL ACCOUNT. AFTER REDUCING THE PARTNERS D RAWING AND OTHER PAYMENTS MADE THE BALANCE TO THE CREDIT OF ASSESSEES CAPITAL ACC OUNT WAS RS.2,77,88,200/-. THE DIFFERENCE BETWEEN THE SUM OF RS.3,39,50,000 AND TH E SUM OF RS.2,77,88,200 VIZ., A SUM OF RS.61,61,800 WAS TAXED AS CAPITAL GAIN BY THE AO. THE ASSESSEE HAD INVESTED A SUM OF RS.50 LACS IN SPECIFIED BONDS AND THEREFORE THE AO ALLOWED DEDUCTION UPTO RS.50 LACS AND BROUGHT TO TAX RS.11, 61,800/- AS LONG TERM CAPITAL GAIN. THE AO WAS OF THE VIEW THAT SUM OF RS.61,61 ,800/- WAS LIABLE TO BE TAXED AS CAPITAL GAIN FOR THE FOLLOWING REASONS:- THE AMOUNT RECEIVED FROM THE ERSTWHILE FIRM IS NOT HING BUT GOODWILL WHICH ATTRACTS LIABILITY OF CAPITAL GAINS U/S 45.AMOUNT PAID TO THE RETIRING PARTNER TOWARDS GOODWILL WOULD REPRESENT AMOUNT PAID FOR HER GIVING UP OF HER RIGHT IN EXIST ING GOODWILL OF THE FIRM AND THE EXISTING GOODWILL IS, BY AND LARGE SELF GENERATED. FURTHER, THE ASSESSEE HAS ALSO EXTINGUISHED HER RIG HT TO CLAIM ANY SHARE IN THE FIXED ASSETS OF THE PARTNERSHIP FIRM. THE OVERALL EFFECT OF THE CONSENT TERMS(MOU) IS THAT, THEY PROVIDE FOR THE RETIREMENT OF THE ASSESSEE FROM THE PARTNERSHIP BY WAY OF COMP ENSATION. THERE IS, IN THE CONSENT TERMS (MOU) A CLAUSE PROVI DING FOR THE ASSIGNMENT OF THE ASSESSEES' SHARE IN THE PARTNERSH IP TO THE CONTINUING PARTNERS. THUS, THERE WAS A TRANSFER BY THE ASSESSEE WITHIN THE MEANING OF SECTION 2(47) AND THE LIABILI TY TO CAPITAL GAINS EXISTS. WHEN THE PARTNERSHIP FIRM PAID LUMP-S UM AMOUNT TO THE RETIRING PARTNER, IT IS PAID IN CONSIDERATION O F HER RETIREMENT IN ITA NO.1700/BANG/2016 PAGE 3 OF 23 THE PARTNERSHIP AND ASSIGNMENT OF HER INTEREST TO O THER PARTNERS, THE TRANSACTION WOULD AMOUNT TO TRANSFER U/S 2(47) OF THE IT ACT. REFERRING TO THE MOU, IT WAS HELD THAT THERE WAS A TRANSFER AND HENCE LIABLE TO TAX UNDER THE PROVISIONS OF SEC 45 OF THE IT ACT. THE JUDICIAL PRONOUNCEMENTS STATED ABOVE WOULD SUPPORT THE TAXABILITY OF GOODWILL UNDER THE PROVISIONS OF SEC 45 OF THE I T ACT. HOWEVER, THE ASSESSEE HAD ALSO INVESTED RS.50,00,00 0/- IN RURAL ELECTRIFICATION CORPORATION LTD UNDER THE PRO VISIONS OF SEC 54 EC AS AN ABUNDANT CAUTION FOR CLAIMING EXEMPTION U/S 54EC. AFTER CONSIDERING THE INVESTMENT OF RS. 50,00,000/- THE CAPITAL GAINS IS WORKED OUT AS UNDER. (61,61,800/- (-) 5000 000/- = 11,61,800/-) 4. ACCORDINGLY THE AO BROUGHT TO TAX A SUM OF RS.11 ,61,800/- AS CHARGEABLE CAPITAL GAINS. 5. AGGRIEVED BY THE AFORESAID ORDER OF THE AO, ASSE SSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ACIT VS. MOHAN BHAI PAMABHAI 165 ITR 166 FOR THE PROPOSITION THAT THE AMOUNT RECEIVED BY A PARTNER ON HIS RETIREMENT FROM A FIRM IS HIS SHARE IN THE PARTNERSHIP FIRM A ND NOT FOR CONSIDERATION IN TRANSFER OF HIS INTERS IN THE PARTNERSHIP TO THE OT HER PARTNERS. THERE WAS NO TRANSFER OF INTEREST IN ASSETS OF THE PARTNERSHIP FIRM IN T ERMS OF THE DEFINITION OF THE TERM TRANSFER U/S 2(47) OF THE ACT. THEREFORE THERE WAS NO CAPITAL GAIN THAT COULD BE BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE. B EFORE CIT(A) ASSESEE ALSO GAVE A BREAKUP OF HIS PAYMENTS MADE TO THE ASSESEE WHICH W AS AS FOLLOWS:- I) AMOUNT OUTSTANDING IN HER CAPITAL ACCOUNT AS ON 31.3.2007 RS.2,77,88,20 0/- II) GOOD WILL PAID DURING AY 2008-09 RS. 21,64,80 0/- GOOD WILL PAID DURING AY 2009-10 RS. 39,97,00 0/- - RS. 61,61,800/- ---------------------- RS.3,39,50,000/- ----------------------- ITA NO.1700/BANG/2016 PAGE 4 OF 23 5. IT CAN BE SEEN FROM THE AFORESAID SUBMISSION OF THE ASSESSEE THAT THE DIFFERENCE BETWEEN THE SUM PAYABLE TO THE ASSESSEE ON RETIREMENT AND THE SUM SHOWN AS CREDIT IN THE CAPITAL ACCOUNT OF THE ASSES SEE VIZ. A SUM OF RS.61,61,800/- IS BEING CLAIMED BY THE ASSESSEE TO BE GOODWILL. N EITHER IN THE MOU OR IN THE DEED OF RECONSTITUTION THERE IS A REFERENCE TO GOOD WILL. ONLY A SUM OF RS.38,38,200/- HAS BEEN SHOWN AS GOODWILL IN THE BO OKS OF THE ASSESSEE AND ALSO IN THE CAPITAL ACCOUNT OF THE ASSESSEE. THE ASSESS EE ALSO PLACED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. DYNAMIC ENTERPRISES, 359 ITR 83 (KAR). THE CIT(A) HOWEVER PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS. A.N NAIK ASSOCIATES, 265 ITR 246 (BOM) WHEREIN THE HONBLE B OMBAY HIGH COURT TOOK THE VIEW THAT U/S 45(4) OF THE ACT THERE WOULD BE CHARG E TO THE CAPITAL GAINS TAX WHEN THE ASSETS OF THE PARTNERSHIP IS TRANSFERRED ON A R ETIRING PARTNER AND IT IS NOT NECESSARY THAT THERE SHOULD BE DISTRIBUTION OF ASSE TS OF THE FIRM ONLY ON DISSOLUTION OF THE FIRM. FOLLOWING THE RATIO LAID DOWN, THE AF ORESAID DECISION THE LD CIT(A) TOOK THE VIEW THAT THE ACTION OF THE AO IN BRINGING TO TAX CAPITAL GAINS ON RETIREMENT OF THE ASSESEE FROM THE PARTNERSHIP FIRM WAS CORRECT. 6. AGGRIEVED BY THE AFORESAID ORDER OF THE CIT(A), THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE RIVAL SUBMISSION. THE LEARNE D DR AS WELL AS THE LEARNED COUNSEL FOR THE ASSESSEE PRIMARILY PLACED RELIANCE ON SEVERAL DECIDED CASES. WE SHALL DEAL WITH THOSE CASES AT THE APPROPRIATE JUNC TURE. 8. TO APPRECIATE THE RIVAL CONTENTIONS WE HAVE TO REFER TO CERTAIN PROVISIONS OF THE INCOME-TAX ACT, 1961. SECTION 45(1) OF THE ACT BRIN GS TO TAX ANY CAPITAL GAIN THAT ACCRUES OR ARISES ON TRANSFER OF A CAPITAL ASSET. T HE CAPITAL GAIN IS CHARGED TO TAX IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TAKES PLACE . SECTION 2(47) DEFINES WHAT IS TRANSFER AND IT READS AS FOLLOWS : ITA NO.1700/BANG/2016 PAGE 5 OF 23 (47) 'TRANSFER', IN RELATION TO A CAPITAL ASSET, IN CLUDES, ( I ) THE SALE, EXCHANGE OR RELINQUISHMENT OF THE ASSET; OR ( II ) THE EXTINGUISHMENT OF ANY RIGHTS THEREIN; OR ( III ) THE COMPULSORY ACQUISITION THEREOF UNDER ANY LAW; O R ( IV ) IN A CASE WHERE THE ASSET IS CONVERTED BY THE OWNER THEREOF INTO, OR IS TREATED BY HIM AS, STOCK-IN- TRADE OF A BUSINESS CARRIED ON BY HIM, SUCH CONVERSION OR TREATMENT; ( V ) ANY TRANSACT ION INVOLVING THE ALLOWING OF THE POSSESSION OF ANY IMMOVABLE PROPERTY TO BE TAKEN OR RETAINED IN PART PERFORMANCE OF A CONTRACT OF THE NATURE REFERRED TO IN SECTION 53A O F THE TRANSFER OF PROPERTY ACT, 1882 (4 OF 1882); OR ( VI ) ANY TRANSACTION (WHETHER BY WAY OF BECOMING A MEMBER OF OR ACQUIRING SHARES IN, A CO- OPERATIVE SOCIETY, COMPANY OR OTHER ASSOCIATION OF PERSONS OR BY WAY OF ANY AGREEMENT OR ANY ARRANGEMENT OR IN ANY OTHER MANNER WHATSOEVER) WHICH HAS THE EFFECT OF TRANSFERRING, O R ENABLING THE ENJOYMENT OF, ANY IMMOVABLE PROPERTY. EXPLANATION. FOR THE PURPOSES OF SUB-CLAUSES ( V ) AND ( VI ), 'IMMOVABLE PROPERTY' SHALL HAVE THE SAME MEANING AS IN CLAUSE ( D ) OF SECTION 269UA; 9. CAPITAL ASSET HAS BEEN DEFINED IN SECTION 2(14) OF THE ACT, AS MEANING 'PROPERTY' OF ANY KIND HELD BY THE ASSESSEE, WHETHE R OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION. THE ABOVE EXHAUSTIVE DEFINI TION IS SUBJECT TO THE FOLLOWING EXCLUSIONS LIKE STOCK-IN-TRADE, CONSUMABLE STORES O R RAW MATERIAL HELD FOR THE PURPOSE OF BUSINESS OR PROFESSION, PERSONAL EFFECTS AGRICULTURAL LAND IN INDIA, CERTAIN GOLD BONDS, SPECIAL BEARER BONDS AND GOLD D EPOSIT BONDS. 10. THE SHARE OR INTEREST OF A PARTNER IN THE PART NERSHIP AND ITS ASSETS WOULD BE PROPERTY AND, THEREFORE, A CAPITAL ASSET WITHIN THE MEANING OF THE AFORESAID DEFINITION. TO THIS EXTENT, THERE CAN BE NO DOUBT. 11. THE QUESTION IS AS TO WHETHER IT CAN BE SAID T HAT THERE WAS A TRANSFER OF CAPITAL ASSET BY THE RETIRING PARTNER IN FAVOUR OF THE FIRM AND ITS CONTINUING PARTNERS SO AS TO ATTRACT A CHARGE UNDER SECTION 45 OF THE ACT. ITA NO.1700/BANG/2016 PAGE 6 OF 23 12. A LOOK AT HOW FORMATION AND DISSOLUTION OF PAR TNERSHIP WAS USED AS A DEVICE TO EVADE TAX ON CAPITAL GAINS TO CONVERT AN ASSET HELD INDIVIDUALLY INTO AN ASSET OF THE FIRM IN WHICH THE INDIVIDUAL IS A PARTNER AND CONVE RSION OF CAPITAL ASSETS INTO INDIVIDUAL ASSETS ON DISSOLUTION OR OTHERWISE, IS N ECESSARY. PARTNERSHIP AS A FORM OF CARRYING ON BUSINESS EVOLVED SO THAT TWO OR MORE PE RSONS CAN TO JOIN TOGETHER BY POOLING RESOURCES IN THE FORM OF CAPITAL AND EXPERT ISE. 1. CONVERSION OF INDIVIDUAL ASSETS INTO ASSET OF PART NERSHIP: 13. ONE OF THE DEVICES USED BY ASSESSEE TO EVADE T AX ON CAPITAL GAIN WAS TO CONVERT AN ASSET HELD INDIVIDUALLY INTO ASSET OF TH E FIRM IN WHICH THE INDIVIDUAL AS A PARTNER. A PARTNER CAN BRING ASSET OWNED BY HIM AS HIS CAPITAL CONTRIBUTION. THE INTENTION TO TREAT OWN PROPERTY AS PROPERTY OF THE FIRM CAN BE INFERRED EVEN BY BOOK ENTRIES IN THE FIRM. NO DOCUMENT REGISTERED OR OTHE RWISE IS REQUIRED FOR DOING SO. SUCH INTRODUCTION OF CAPITAL ASSET AS CAPITAL CONTR IBUTION BY A PARTNER UP TO 1-4- 1988 DID NOT RESULT IN INCIDENCE OF CAPITAL GAIN. I T WAS SO HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF SUNIL SIDHARTHBHAI V. CIT [1985] 156 ITR 509 . THE HON'BLE SUPREME COURT HELD THAT UNDER THE INCOME-TA X ACT, 1961, WHERE A PARTNER OF A FIRM MAKES OVER CAPITAL ASSETS WHICH ARE HELD BY HIM TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPITAL, THERE IS A TRANSFER O F A CAPITAL ASSET WITHIN THE TERMS OF SECTION 45 OF THE ACT, BECAUSE AN EXCLUSIVE INTERES T OF THE PARTNER IN PERSONAL ASSETS IS REDUCED, ON THEIR ENTRY INTO THE FIRM, INTO A SH ARE INTEREST. ON SUCH INTRODUCTION OF CAPITAL THE PARTNER'S CAPITAL ACCOUNT IS CREDITE D WITH THE MARKET VALUE OF THE PROPERTY. SUCH ENTRY DOES NOT REPRESENT THE TRUE VA LUE OF CONSIDERATION. IT IS A NOTIONAL VALUE ONLY, INTENDED TO BE TAKEN INTO ACCO UNT AT THE TIME OF DETERMINING THE VALUE OF THE PARTNER'S SHARE IN THE NET PARTNER SHIP ASSETS ON THE DATE OF DISSOLUTION OR ON HIS RETIREMENT, A SHARE WHICH WIL L DEPEND UPON DEDUCTION OF THE LIABILITIES AND PRIOR CHARGES EXISTING ON THE DATE OF DISSOLUTION OR RETIREMENT. IT IS NOT POSSIBLE TO PREDICATE BEFORE HAND WHAT WILL BE THE POSITION IN TERMS OF ITA NO.1700/BANG/2016 PAGE 7 OF 23 MONETARY VALUE OF A PARTNER'S SHARE ON THAT DATE. A T THAT TIME WHEN THE PARTNER TRANSFERS HIS PERSONAL ASSET TO THE PARTNERSHIP FIR M, THERE CAN BE NO RECKONING OF THE LIABILITIES AND LOSSES WHICH THE FIRM MAY SUFFER IN THE YEARS TO COME. ALL THAT LIES WITHIN THE WOMB OF THE FUTURE. IT IS IMPOSSIBLE TO CONCEIVE OF EVALUATING THE CONSIDERATION ACQUIRED BY THE PARTNER WHEN HE BRING S HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM WHEN NEITHER CAN THE DATE OF DISSO LUTION OR RETIREMENT BE ENVISAGED NOR CAN THERE BE ANY ASCERTAINMENT OF LIA BILITIES AND PRIOR CHARGES WHICH MAY NOT HAVE EVEN ARISEN YET. THEREFORE, THE CONSID ERATION WHICH A PARTNER ACQUIRES ON MAKING OVER HIS PERSONAL ASSET TO THE F IRM AS HIS CONTRIBUTION TO ITS CAPITAL CANNOT FALL WITHIN THE TERMS OF SECTION 48 OF THE ACT. AND AS THAT PROVISION IS FUNDAMENTAL TO THE COMPUTATION MACHINERY INCORPO RATED IN THE SCHEME RELATING TO THE DETERMINATION OF THE CHARGE PROVIDED IN SECT ION 45, SUCH A CASE MUST BE REGARDED AS FALLING OUTSIDE THE SCOPE OF CAPITAL GA INS TAXATION ALTOGETHER. PARLIAMENT WITH THE AVOWED OBJECT OF BLOCKING THIS ESCAPE ROUTE FOR AVOIDING CAPITAL GAINS TAX BY THE FINANCE ACT, 1987, INTRODU CED SUB-SECTION (3) TO SECTION 45 WITH EFFECT FROM 1-4-1988. THE EFFECT OF THIS WAS T HAT THE PROFITS AND GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A PARTNER T O A FIRM ARE CHARGEABLE AS THE PARTNER'S INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND THE AMOUNT RECORDED IN THE BOOKS OF ACCOUNT OF THE FIRM , SHALL BE DEEMED TO BE THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RE SULT OF TRANSFER OF THE CAPITAL ASSET. 14. IT IS IMPORTANT TO NOTE THAT THE INCIDENCE OF TAX IS ON THE PARTNER BRINING IN CAPITAL BECAUSE HE CONVERTS OR TRANSFERS HIS INVIDU AL ASSET INTO ASSET OF THE FIRM OR TO THE FIRM. 2. DISTRIBUTION OF ASSSETS ON DISSOLUTION 15. IN THE CASE OF DISSOLUTION WHERE PARTNERS ARE ALLOTTED CAPITAL ASSETS OF THE FIRM, IT WAS HELD THAT THERE WAS NO TRANSFER. IN MALABAR FISHERIES V. CIT [1979] 120 ITR 49 (SC) , THE HON'BLE SUPREME COURT HAS EXPLAINED THE NATUR E OF DISTRIBUTION OF ITA NO.1700/BANG/2016 PAGE 8 OF 23 ASSETS OF A PARTNERSHIP ON DISSOLUTION AMONGST ITS PARTNERS AND AS TO WHETHER SUCH DISTRIBUTION OF ASSETS WOULD CONSTITUTE TRANSFER WI THIN THE MEANING OF SECTION 2(47) OF THE INCOME-TAX ACT AS FOLLOWS : 'A PARTNERSHIP FIRM UNDER THE INDIAN PARTNERSHIP AC T, 1932 IS NOT A DISTINCT LEGAL ENTITY APART FROM THE PARTNERS CONSTITUTING I T AND EQUALLY IN LAW THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN THE PA RTNERSHIP ASSETS AND WHEN ONE TALKS OF THE FIRM'S PROPERTY OR FIRM'S ASSETS A LL THAT IS MEANT IS PROPERTY OR ASSETS IN WHICH ALL PARTNERS HAVE A JOINT OR COMMON INTEREST. IF THAT BE THE POSITION IT IS DIFFICULT TO ACCEPT THE CONTENTION T HAT UPON DISSOLUTION THE FIRM'S RIGHTS IN THE PARTNERSHIP ASSETS ARE EXTINGUISHED. THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN THE PARTNERSHIP ASSET S BUT IT IS THE PARTNERS WHO OWN JOINTLY BY OR IN COMMON THE ASSETS OF THE PARTN ERSHIP AND, THEREFORE, THE CONSEQUENCE OF THE DISTRIBUTION, DIVISION OR ALLOTM ENT OF ASSETS TO THE PARTNERS WHICH FLOWS UPON DISSOLUTION AFTER DISCHARGE OF LIA BILITIES IS NOTHING BUT A MUTUAL ADJUSTMENT OF RIGHTS BETWEEN THE PARTNERS AN D THERE IS NO QUESTION OF ANY EXTINGUISHMENT OF THE FIRM'S RIGHTS IN THE PART NERSHIP ASSETS AMOUNTING TO A TRANSFER OF ASSETS WITHIN THE MEANING OF SECTION 2(47) OF THE ACT. FURTHER, IT IS NECESSARY THAT THE SALE OR TRANSFER OF ASSETS MU ST BE BY THE ASSESSEE TO A PERSON. NOW EVERY DISSOLUTION MUST IN POINT OF TIME BE ANTERIOR TO THE ACTUAL DISTRIBUTION, DIVISION OR ALLOTMENT OF THE ASSETS T HAT TAKES PLACE AFTER MAKING UP ACCOUNTS AND DISCHARGING THE DEBTS AND LIABILITI ES DUE BY THE FIRM. UPON DISSOLUTION THE FIRM CEASES TO EXIST, THEN FOLLOWS THE MAKING UP OF ACCOUNTS, THEN THE DISCHARGE OF DEBTS AND LIABILITIES AND THE REUPON DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TAKES PLACE INTER SE BETWEEN THE ERSTWHILE PARTNERS BY WAY OF MUTUAL ADJUSTMENT OF RIGHTS BETWEEN THEM. TH E DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TO THE ERSTWHILE PARTNERS, I S NOT DONE BY THE DISSOLVED FIRM. IN THIS SENSE THERE IS NO TRANSFER OF ASSETS BY THE ASSESSEE (DISSOLVED FIRM) TO ANY PERSON.' 16. TO PLUG THIS LOOPHOLE THE FINANCE ACT, 1987, B ROUGHT ON THE STATUTE BOOK A NEW SUB-SECTION (4) IN SECTION 45 OF THE ACT, WITH EFFECT FROM 1-4-1988, WHICH READS AS FOLLOWS: 'THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION O F A FIRM OR OTHER ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGEABLE TO TAX A S THE INCOME OF THE FIRM, ASSOCIATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND, FOR THE PURPOSES OF SECTION 48, THE FAIR MARKE T VALUE OF THE ASSET ON THE ITA NO.1700/BANG/2016 PAGE 9 OF 23 DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FUL L VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER.' 17. BEFORE THE INTRODUCTION OF SUB-SECTION (4) TO SECTION 45, THERE WAS CLAUSE ( II ) OF SECTION 47 WHICH READ AS UNDER: TRANSACTIONS NOT REGARDED AS TRANSFER. 47. NOTHING CONTAINED IN SECTION 45 SHALL APPLY TO THE FOLLOWING TRANSFERS: ' ( II ) ANY DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLU TION OF A FIRM, BODY OF INDIVIDUALS OR OTHER ASSOCIATION OF PERSONS;' 18. CLAUSE ( II ) OMITTED BY THE FINANCE ACT, 1987, W.E.F. 1-4-1988 . PRIOR TO OMISSION OF SEC.47(II) OF THE ACT, DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF A FIRM, BODY OF INDIVIDUALS OR OTHER ASSOCIATION OF P ERSONS, WOULD BE REGARDED AS TRANSFER OF A CAPITAL ASSET BUT BY VIRTUE OF PROVIS IONS OF SEC.47(II) OF THE ACT, THERE WAS NO CHARGE TO TAX OF THE CAPITAL GAIN ON SUCH TR ANSFER. 19. IT IS IMPORTANT TO NOTE THAT HERE THE INCIDENC E OF TAX IS ON THE PARTNERSHIP FIRM BECAUSE IT IS THE FIRMS ASSET WHICH IS GETTING CONV ERTED INTO ASSET OF THE TRANSFEREE. 3. THE FIRM CONTINUES AND THERE IS RECONSTITUTION WHER EBY A PARTNER RETIRES AND THE RETIRING PARTNER IS ALLOTTED CAPITA L ASSET OF THE FIRM FOR RELINQUISHING ALL HIS RIGHTS, INTEREST IN THE PARTN ERSHIP FIRM AS PARTNER. 20. THE ABOVE TWO CIRCUMSTANCES COVER ONLY BRINGIN G IN INDIVIDUAL ASSETS AS ASSET OF THE FIRM AND THE FIRM DISTRIBUTING ITS CAPITAL A SSETS ON DISTRIBUTION. THE THIRD CASE WOULD BE WHERE THE FIRM CONTINUES AND THERE IS RECONSTITUTION WHEREBY A PARTNER RETIRES AND THE RETIRING PARTNER IS ALLOTTE D CAPITAL ASSET OF THE FIRM FOR RELINQUISHING ALL HIS RIGHTS, INTEREST IN THE PARTN ERSHIP FIRM AS PARTNER. IN SUCH A SCENARIO ALSO THERE IS A DISTRIBUTION OF CAPITAL AS SET BY THE FIRM TO THE PARTNER OTHERWISE THAN ON DISSOLUTION AND SUCH CASES ARE CO VERED BY THE RULING OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. A. N.NAIK ASSOCIATES (2004) ITA NO.1700/BANG/2016 PAGE 10 OF 23 136 TAXMAN 107 (BOM). THE FACTS OF THE CASE BEFORE THE HONBLE BOMBAY HIGH COURT WAS THAT BY THE MEMORANDUM OF FAMILY SETTLEME NT, DATED 30-1-1997, IT WAS AGREED BETWEEN THE PARTIES THERETO, THAT THE BUSINE SS OF SIX FIRMS AS SET OUT THEREIN WOULD BE DISTRIBUTED IN TERMS OF THE FAMILY SETTLEM ENT AS THE PARTIES DESIRED THAT VARIOUS MATTERS CONCERNING THE BUSINESS AND ASSETS THERETO BE DIVIDED SEPARATELY AND PARTITIONED. UNDER THE TERMS AND CONDITIONS OF THE SETTLEMENT, IT WAS SET OUT THAT THE ASSETS WHICH WERE PROPOSED TO BE DIVIDED I N PARTITION UNDER THE SETTLEMENT WERE HELD BY THE AFORESAID FIRMS AND INDIVIDUAL PAR TNERS. WITH REFERENCE TO THE FIRMS, THE MANNER IN WHICH THE FIRMS WERE TO BE REC ONSTITUTED BY RETIREMENT AND ADMISSION OF NEW PARTNERS WAS ALSO SET OUT. IT ALSO PROVIDED THAT SUCH OF THOSE ASSETS OR LIABILITIES BELONGING TO OR DUE FROM ANY OF THE FIRMS ALLOTTED TO PARTIES THERETO IN THE SCHEDULE, WOULD BE TRANSFERRED OR AS SIGNED IRREVOCABLY AND POSSESSION MADE OVER AND ALL SUCH DOCUMENTS, DEEDS, DECLARATIONS, AFFIDAVITS, PETITIONS, LETTERS AND ALIKE AS WERE REASONABLY REQ UIRED BY THE PARTY ENTITLED TO SUCH TRANSFER WOULD BE EFFECTED. PURSUANT TO THE SAID FA MILY SETTLEMENT, THERE WAS A DEED OF RECONSTITUTION OF VARIOUS PARTNERSHIPS AS SET OU T UNDER THE FAMILY SETTLEMENT. FOR THE RELEVANT ASSESSMENT YEAR 1997-98, THE ASSESSING OFFICER TAXED THE PARTNERSHIPS FOR CAPITAL GAINS UNDER SECTION 45(4). ON APPEAL, T HE APPELLATE AUTHORITY UPHELD THE IMPUGNED ORDER. ON SECOND APPEAL, THE TRIBUNAL HELD THAT THERE WAS NO DISSOLUTION BUT ONLY RECONSTITUTION. IT ALSO HELD THAT THE EXPR ESSION OTHERWISE IN SECTION 45(4) HAS TO BE READ EJUSDEM GENERIS AND WOULD CONTEMPLAT E SITUATIONS LIKE A DEEMED DISSOLUTION. IT, ACCORDINGLY, HELD THAT THE BUSINES S CONTINUED TO BE RUN AND THERE WAS NO DISSOLUTION OF THE FIRM AND, CONSEQUENTLY, S ECTION 45(4) WAS NOT ATTRACTED. ON FURTHER APPEAL BY THE REVENUE, THE HONBLE BOMBA Y HIGH COURT HELD THAT THE EXPRESSION OTHERWISE USED IN SEC.45(4) OF THE ACT , HAS NOT TO BE READ EJUSDEM GENERIS WITH THE EXPRESSION DISSOLUTION OF A FIRM OR BODY OF INDIVIDUALS OR ASSOCIATION OF PERSONS. THE EXPRESSION OTHERWISE HAS TO BE READ WITH THE WORDS 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 ITA NO.1700/BANG/2016 PAGE 11 OF 23 CAPITAL ASSETS, IT COMES WITHIN THE EXPRESSION OTH ERWISE AS THE OBJECT OF THE AMENDING ACT WAS TO REMOVE THE LOOPHOLE WHICH EXIST ED WHEREBY CAPITAL GAIN TAX WAS NOT CHARGEABLE. THEREFORE, WHEN THE ASSET OF TH E PARTNERSHIP IS TRANSFERRED TO A RETIRING PARTNER, THE PARTNERSHIP WHICH IS ASSESSAB LE TO TAX CEASES TO HAVE A RIGHT OR ITS RIGHT IN THE PROPERTY STANDS EXTINGUISHED IN FA VOUR OF THE PARTNER TO WHOM IT IS TRANSFERRED. IF SO READ, IT WILL FURTHER THE OBJECT AND PURPOSE AND INTENT OF THE AMENDMENT OF SECTION 45. ONCE THAT BE THE CASE, THE TRANSFER OF ASSETS OF THE PARTNERSHIP TO THE RETIRING PARTNERS WOULD AMOUNT T O THE TRANSFER OF THE CAPITAL ASSETS IN THE NATURE OF CAPITAL GAINS AND BUSINESS PROFITS WHICH ARE CHARGEABLE TO TAX UNDER SECTION 45(4). THEREFORE, THE WORD OTHERWISE TAKES INTO ITS SWEE P NOT ONLY CASES OF DISSOLUTION BUT ALSO CASES OF SUBSIST ING PARTNERS OF A PARTNERSHIP, TRANSFERRING ASSETS IN FAVOUR OF A RETIRING PARTNER . EVEN IN THIS SITUATION IT IS ONLY THE FIRM THAT IS LIABLE TO TAX AND NOT THE TRA NSFEREE. 4. THE FIRM CONTINUES AND THERE IS RECONSTITUTION WHER EBY A PARTNER RETIRES AND THE RETIRING PARTNER IS PAID ; (A) ON THE BASIS OF AMOUNT LYING IN HIS/HER CAPITAL ACCOUNT (B) ON THE BASIS OF AMOUNT LYING IN HIS/ HER CAPITA L ACCOUNT + AMOUNT OVER AND ABOVE THE SUM LYING IN HIS/HER CAPI TAL ACCOUNT. (C) OR A LUMP SUM CONSIDERATION WITH NO REFERENCE T O THE AMOUNT LYING IN HIS/HER CAPITAL ACCOUNT. IN CONSIDERATION FOR RELINQUISHING ALL HIS RIGHTS, INTEREST IN THE PARTNERSHIP FIRM AS PARTNER. 21. THE SITUATION INVOLVED IN THE PRESENT APPEAL, IS A CASE WHERE THE ASSESSEE WAS PAID SUMS OVER AND ABOVE THE SUM STANDING TO THE CR EDIT OF HIS CAPITAL ACCOUNT I.E., SITUATION (B) REFERRED TO ABOVE. AS FAR AS SITUATI ON (A) IS CONCERNED, THERE CANNOT BE ANY DISPUTE THAT THERE CAN BE NO INCIDENCE OF TAX A ND THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MOHANA BAI PAMABAI (SUPRA) WOULD CONTINUE TO APPLY. ITA NO.1700/BANG/2016 PAGE 12 OF 23 22. AS FAR AS SITUATION (B) & (C) ARE CONCERNED, T HIS SITUATION HAS BEEN SUBJECT MATTER OF CONSIDERATION IN SEVERAL CASES AND THERE IS CONFLICT OF OPINION AMONGST COURTS ON WHETHER THERE WOULD BE INCIDENCE OF TAX O R NOT. WE ALSO MAKE IT CLEAR THAT THE FACT THAT THERE WAS REVALUATION OF THE ASS ETS OF THE FIRM AND RESULTANTLY THE CAPITAL ACCOUNT OF THE FIRM STOOD ENHANCED IS ALSO NOT RELEVANT. WHAT IS THE CREDIT IN THE CAPITAL ACCOUNT OF THE PARTNER ALONE HAS TO BE SEEN. SO LONG AS THERE IS NO PROHIBITION ON REVALUATION OF ASSETS OF THE FIRM AN D THERE ARE NO TAX INCIDENCE ON REVALUATION OF ASSETS OF THE FIRM, THE CREDIT TO TH E PARTNERS CAPITAL ACCOUNT ON REVALUATION CANNOT BE LOOKED AT ADVERSELY. 23. CAPITAL ASSET HAS BEEN DEFINED IN SECTION 2(14 ) OF THE ACT, AS MEANING 'PROPERTY' OF ANY KIND HELD BY THE ASSESSEE, WHETHE R OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION. THE ABOVE EXHAUSTIVE DEFINI TION IS SUBJECT TO THE FOLLOWING EXCLUSIONS LIKE STOCK-IN-TRADE, CONSUMABLE STORES O R RAW MATERIAL HELD FOR THE PURPOSE OF BUSINESS OR PROFESSION, PERSONAL EFFECTS AGRICULTURAL LAND IN INDIA, CERTAIN GOLD BONDS, SPECIAL BEARER BONDS AND GOLD D EPOSIT BONDS. THE SHARE OR INTEREST OF A PARTNER IN THE PARTNERSHIP AND ITS AS SETS WOULD BE PROPERTY AND, THEREFORE, A CAPITAL ASSET WITHIN THE MEANING OF TH E AFORESAID DEFINITION. THE NEXT QUESTION IS AS TO WHETHER IT CAN BE SAID THAT THERE WAS A TRANSFER OF CAPITAL ASSET BY THE RETIRING PARTNER IN FAVOUR OF THE FIRM AND ITS CONTINUING PARTNERS SO AS TO ATTRACT A CHARGE UNDER SECTION 45 OF THE ACT. 24. THE HON'BLE BOMBAY HIGH COURT HAD AN OCCASION TO DEAL WITH IDENTICAL CASE AS THAT OF THE ASSESSEE IN THE PRESENT CASE WHICH W AS A CASE OF SITUATION (B) REFERRED TO EARLIER IN TRIBHUVANDAS G.PATEL VS. CIT 115 ITR 95(BOM). IN THE CASE OF TRIBHUVANDAS G. PATEL (SUPRA), THE ASSESSEE WAS A P ARTNER IN THE FIRM OF KEW. THE ASSESSEE HAD SERVED ON THE OTHER TWO PARTNERS A NOT ICE OF DISSOLUTION OF THE FIRM WITH EFFECT FROM 31-12-1960, WHICH WAS NOT ACCEPTED BY THE OTHER PARTNERS. THE ASSESSEE, THEREFORE, FILED A SUIT FOR DISSOLUTION A ND ACCOUNTS, BUT, ULTIMATELY, THE ITA NO.1700/BANG/2016 PAGE 13 OF 23 DISPUTES BETWEEN THE PARTIES WERE AMICABLY SETTLED OUT OF COURT AND UNDER A DEED DATED JANUARY 19, 1962, THE ASSESSEE RETIRED FROM T HE FIRM WITH EFFECT FROM 31-8- 1961, AND THE REMAINING PARTNERS CONTINUED TO CARRY ON THE BUSINESS OF THE FIRM. ON THE OCCASION OF SUCH RETIREMENT, THE ASSESSEE WAS P AID: (1) 1 LAKH AS HIS SHARE OF PROFITS OF THE FIRM FOR THE BROKEN PERIOD ENDED 31- 8-1961, (2) RS. 50,000 AS HIS SHARE OF THE VALUE OF THE GOODWILL, AND (3) RS. 4,7 7,941 AS HIS SHARE IN THE REMAINING ASSETS OF THE FIRM. THE ISSUE WITH REGAR D TO TAXABILITY OF THE SUM OF RS. 4,77,941 OR ANY PART THEREOF TO CAPITAL GAINS TAX A ROSE FOR CONSIDERATION BEFORE THE HONBLE COURT. THE HON'BLE COURT TOOK UP FOR CONSID ERATION AS TO WHAT IS THE REAL NATURE OF THE TRANSACTION WHEN A PARTNER RETIRES FR OM THE PARTNERSHIP. DOES THE TRANSACTION AMOUNT TO ANY RELINQUISHMENT OF HIS SHA RE OR INTEREST IN THE PARTNERSHIP IN FAVOUR OF THE CONTINUING PARTNERS, OR DOES IT ST AND ON THE SAME FOOTING AS AN ADJUSTMENT OF HIS RIGHTS THAT RESULTS UPON DISSOLUT ION OF THE PARTNERSHIP. ON BEHALF OF THE ASSESSEE IT WAS CONTENDED THAT RETIREMENT OF A PARTNER AND QUANTIFICATION OF HIS SHARE AND PAYMENT THEREOF TO HIM STANDS ON THE SAME FOOTING AS ADJUSTMENT OF RIGHTS THAT RESULTS UPON DISSOLUTION OF A FIRM AND, THEREFORE, SINCE THERE WAS NO TRANSFER OF ANY CAPITAL ASSET IN THE INSTANT CASE, THE SUM OF RS. 4,77,941 OR ANY PART THEREOF WAS NOT LIABLE TO BE CHARGED UNDER THE HEAD 'CAPITAL GAINS'. THIS WAS NOT ACCEPTED BY HON'BLE BOMBAY HIGH COURT AND THEY HELD THAT A CLEAR DISTINCTION EXISTS BETWEEN RETIREMENT OF A PARTNER FROM A FIRM AND DISSOLUTION OF THE FIRM. IN THE CASE OF RETIREMENT OF A PARTNER FROM THE FIRM I T IS ONLY THAT PARTNER WHO GOES OUT OF THE FIRM AND THE REMAINING PARTNERS CONTINUE TO CARRY ON THE BUSINESS OF THE PARTNERSHIP AS A FIRM, WHILE IN THE CASE OF DISSOLU TION OF THE FIRM AS SUCH NO MORE EXISTS AND THE DISSOLUTION IS BETWEEN ALL THE PARTN ERS OF THE FIRM. THEREAFTER THE HON'BLE COURT HELD THAT WHERE ACCOUNTS ARE TAKEN AN D THE PARTNER IS PAID THE AMOUNT STANDING TO THE CREDIT OF HIS CAPITAL ACCOUN T THERE WOULD BE NOT TRANSFER. IF, ON THE OTHER HAND, THE PARTNER IS PAID A LUMP SUM C ONSIDERATION FOR TRANSFERRING OR RELEASING HIS INTEREST IN THE PARTNERSHIP ASSETS TO THE CONTINUING PARTNERS THEN THERE WOULD BE AN ELEMENT OF TRANSFER. THE HONBLE COURT HELD THAT WHAT ONE HAS TO SEE ITA NO.1700/BANG/2016 PAGE 14 OF 23 IS WHETHER THE TERMS OF THE DEED OF RETIREMENT CONS TITUTES RELEASE OF ANY ASSETS OF THE FIRM IN FAVOUR OF THE CONTINUING PARTNERS. HAV ING REGARD TO THE PARTICULAR MODE EMPLOYED BY THE ASSESSEE AND THE CONTINUING PARTNER S TO EFFECT AND BRING ABOUT RETIREMENT OF THE ASSESSEE FROM THE PARTNERSHIP, TH E COURT HELD THAT THE TRANSACTION WILL HAVE TO BE REGARDED AS AMOUNTING TO 'TRANSFER' WITHIN THE MEANING OF SECTION 2(47) OF THE INCOME-TAX ACT, INASMUCH AS THE ASSESS EE COULD BE SAID TO HAVE ASSIGNED, RELEASED AND RELINQUISHED HIS INTEREST AN D SHARE IN PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS AND THE TRANSACTION CANNOT BE REGARDED AS AMOUNTING TO ANY DISTRIBUTION OF CAPITAL ASSETS UPON DISSOLUTION OF A FIRM. THE ABOVE DECISION WAS FOLLOWED BY THE HON'BLE BOMBAY H IGH COURT IN THE OTHER TWO CASES OF N.A. MODI VS. CIT 162 ITR 420(BOM) AND CIT VS. H.R. ASLOT 115 ITR 255(BOM) . 25. AS AGAINST THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF TRIBHUVANDAS (SUPRA) THE ASSESSEE PREFERRED APPEAL BEFORE THE HONBLE SUPREME COURT AND THE HONBLE SUPREME COURT IN THE CASE OF THIRUBHUVANDAS G.PATEL VS. CIT 236 ITR 515 (SC) FRAMED THREE QUESTIONS OF LAW FOR CONSIDERATION AND THE FOLLOWING TWO QUESTIONS (QUESTION NO.2 & 3) WHICH ARE RELEVANT FOR THE PRESENT CASE WERE DECIDED AS FOLLOWS: 2. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE SUM OF RS. 50,000 RECEIVED BY THE ASSESSEE AS HIS S HARE OF THE VALUE OF THE GOODWILL OR ANY PART THEREOF WAS LIABLE TO T AX AS CAPITAL GAIN? 3. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE SUM OF RS. 4,77,941 OR ANY PART THEREOF WAS LIABLE TO TAX AS CAPITAL GAIN BY REASON OF SECTION 47(II) OF THE ACT?' SO FAR AS QUESTION NO. 2 IS CONCERNED, IT HAS ALREA DY BEEN ANSWERED IN FAVOUR OF THE ASSESSEE. IN VIEW OF THE DECISION OF THIS COURT IN CIT V. B.C. SRINIVASA SETTY [1981] 128 ITR 294 THE SAID QUESTIO N MUST BE HELD TO HAVE BEEN RIGHTLY ANSWERED IN FAVOUR OF THE ASSESSEE. SO FAR AS QUESTION NO. 3 IS CONCERNED THE ASSESSEE INVOKED CLAUSE (II ) OF SECTION 47 TO CONTEND THAT THE SAID SUM OF RS. 4,47 ,941 DOES NOT REPRESENT A CAPITAL GAIN. MR. SHARMA, LEARNED COUNSEL FOR THE A PPELLANT-ASSESSEE, HAS ITA NO.1700/BANG/2016 PAGE 15 OF 23 BROUGHT TO OUR NOTICE THE DECISION OF THIS COURT IN CIT ( ADDL.)V. MOHANBAI PAMABHAI [1987] 165 ITR 166 WHERE IT HAS BEEN HELD, FOLLOWING THE DECISION IN SUNIL SIDDHARTHBHAI V. CIT [1985] 156 I TR 509 (SC), THAT EVEN WHERE A PARTNER RETIRES AND SOME AMOUNT IS PAID TO HIM TOWARDS HIS SHARE IN THE ASSETS, IT SHOULD BE TREATED AS FALLING UNDER C LAUSE (II) OF SECTION 47. THEREFORE, FOLLOWING THIS DECISION, THIS QUESTION H AS TO BE AND IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 26. THE DECISION IN THE CASE OF TRIBHUVANDAS G.PAT EL (SUPRA) IS A CASE WHERE THE DEED OF RECONSTITUTION SPECIFICALLY REFERRED TO REL EASE OF RIGHTS OF THE OUTGOING PARTNERS IN THE ASSETS OF THE PARTNERSHIP AND FURTH ER THE FACT THAT A SPECIFIED SUM OVER AND ABOVE THE SUM STANDING TO THE CREDIT OF TH E PARTNERS CAPITAL ACCOUNT WAS PAID TO THE RETIRING PARTNER, WHICH EXCESS SUM WAS ATTRIBUTED TO THE RETIRING PARTNER GIVING UP HIS RIGHTS OVER THE PROPERTIES OF THE FIR M. IT IS ONLY BECAUSE OF THE PROVISIONS OF SEC.47(II) OF THE ACT THAT THE HONBL E COURT HELD THAT THERE WAS NO INCIDENCE OF TAX ON CAPITAL GAIN ON THE TRANSACTION . 27. THE DECISION WILL THEREFORE HAVE TO BE VIEWED AS NOT APPLICABLE TO CASES AFTER THE AMENDMENT TO THE LAW W.E.F. 1-4-1989 WHEREBY SE C.47(II) OF THE ACT WAS DELETED AND SIMULTANEOUSLY SEC.45(3) & 45(4) WERE I NTRODUCED. 28. THEREFORE THE QUESTION WHETHER THERE WILL BE I NCIDENCE OF TAX ON CAPITAL GAIN ON RETIREMENT OF A PARTNER FROM THE PARTNERSHIP FIR M WOULD DEPEND ON THE UPON MODE IN WHICH RETIREMENT IS EFFECTED AS LAID DOWN B Y THE HON'BLE BOMBAY HIGH COURT IN THE CASES OF TRIBHUVANDAS G. PATEL (SUPRA) AND N.A. MODI'S CASE (SUPRA). THEREFORE THE DECISION OF THE ITAT MUMBAI IN THE CA SE OF SUDHAKAR M.SHETTY VS. ACIT 130 ITD 197 (MUMBAI) FOLLOWING THE DECISION OF THE PUNE BENCH OF THE ITAT IN THE CASE OF SHEVANTIBHAI C. MEHTA V. ITO (2004) 83 TTJ 542(PUNE) HOLDING THAT QUESTION OF TAXABILITY OF AN AMOUNT R ECEIVED BY A PARTNER ON RETIREMENT FROM FIRM WOULD DEPEND UPON MODE IN W HICH RETIREMENT IS EFFECTED, HOLDS GOOD. THEREFORE TAXABILITY IN SUCH SITUATION WOULD DEPEN D ON SEVERAL FACTORS LIKE THE INTENTION AS IS EVIDENCED BY THE VARIOUS C LAUSES OF THE INSTRUMENT EVINCING ITA NO.1700/BANG/2016 PAGE 16 OF 23 RETIREMENT OR DISSOLUTION, THE MANNER IN WHICH THE ACCOUNTS HAVE BEEN SETTLED AND WHETHER THE SAME INCLUDES ANY AMOUNT IN EXCESS OF T HE SHARE OF THE PARTNER ON THE REVALUATION OF ASSETS AND OTHER RELEVANT FACTORS WH ICH WILL THROW LIGHT ON THE ENTIRE SCHEME OF RETIREMENT/RECONSTITUTION. 29. IN THE CASE OF SUDHAKAR M.SHETTY (SUPRA), THE ITAT CAME TO THE CONCLUSION AFTER TAKING INTO CONSIDERATION THE SEQUENCE OF EVE NTS IN THAT CASE (PARAGRAPH-40 OF THE SAID ORDER) WHICH LEAD TO ULTIMATELY THE PARTNE R RETIRING FROM THE FIRM. A PARTNERSHIP FIRM IN THAT CASE CAME INTO EXISTENCE O N 1.8.2005 BETWEEN THE ASSESSEE AND ANOTHER AS PARTNERS. ON 16.9.2005 ANOTHER PART NER JOINED THE PARTNERSHIP. ON 23.9.2005 THE FIRM PURCHASED A PROPERTY FOR A CONSI DERATION OF RS.6.5 CRORES WITH 81 TENANTS THEREIN TO BE VACATED BY THE FIRM. ON 2 6.9.2005 TWO MORE PARTNERS WERE INDUCTED INTO THE PARTNERSHIP FIRM. ON 8.3.2006 A SANCTION WAS OBTAINED FOR SETTING UP A 5 STAR HOTEL OVER THE PROPERTY PURCHASED BY TH E FIRM. THEREAFTER ON 26.3.2006 ONE PARTNER RETIRED FROM THE FIRM. PRIOR TO SUCH R ETIREMENT A REVALUATION OF THE ASSETS OF THE FIRM WHICH WAS THE LAND THAT WAS PURC HASED BY THE FIRM TOOK PLACE. THERE WAS SURPLUS OF RS.154,39,90,000/- ON REVALUAT ION. THIS WAS CREDITED IN THE PROFIT-SHARING RATIO OF THE PARTNERS IN THEIR RESPE CTIVE CAPITAL ACCOUNT. THEREAFTER ON 22.5.2006, THE ASSESSEE RETIRED FROM THE PARTNER SHIP FIRM. THE AMOUNT STANDING TO THE CREDIT OF THE ASSESSEES CAPITAL ACCOUNT WAS RS.4.45 CRORES ON WHICH INTEREST OF RS.26,85,963 WAS PAID AND PROFIT ON REVALUATION OF LAND AT RS.30,87,98,087/- WAS ALSO CREDITED. THUS A SUM OF RS.35,59,84,050 W AS STANDING TO THE CREDIT OF THE ASSESSEES CAPITAL ACCOUNT AS ON 31.3.2006. AS PER THE DEED OF RETIREMENT THE ASSESSEE WAS PAID THE SUM STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT AND HE GAVE UP ALL HIS RIGHTS AS PARTNERS AND ALSO OVER THE PRO PERTY THAT THE FIRM HAD PURCHASED. ALL THESE FACTORS WERE CUMULATIVELY CONSIDERED AS N OTHING BUT AN ACT BY WHICH THE ASSESSEE GAVE UP HIS RIGHTS OVER THE PROPERTY OF TH E FIRM AND THEREFORE THE SUM OF RS.30,87,98,087/- (GAIN ON VALUATION OF THE PROPERT Y OF THE FIRM) WAS CONSTRUED AS A CAPITAL GAIN FOR GIVING UP RIGHTS OVER THE PROPER TY OF THE FIRM LIABLE TO TAX ON ITA NO.1700/BANG/2016 PAGE 17 OF 23 CAPITAL GAIN. IN SUCH A SCENARIO ONE HAS TO CONSTR UE THE ACT OF GIVING UP OR RELINQUISHING RIGHTS AS PARTNER AS TRANSFER OF CAPI TAL ASSET AND THE CAPITAL GAIN WILL BE THE SUM PAID OVER AND ABOVE THE SUM STANDING TO THE CREDIT IN THE CAPITAL ACCOUNT. 30. IT CAN BE SEEN FROM THE FACTS OF THE CASE OF S UDHAKAR M.SHETTY (SUPRA), THE REVALUATION OF THE ASSETS TOOK PLACE IN AY 2006-07. THE ASSESSEE SUDHAKAR M.SHETTY RETIRED IN AY 2007-08 AND WHAT WAS TAXED W AS VIRTUALLY THE SUM CREDIT TO HIS CAPITAL ACCOUNT CONSEQUENT TO REVALUATION OF AS SETS THAT TOOK PLACE IN AY 2006- 07. AS WE HAVE ALREADY OBSERVED IT SHOULD NOT BE T AKEN THAT THE REVENUE HAS TAXED THE GAIN ON REVALUATION OF ASSETS. ALL CUMULATIVE FACTORS WILL HAVE TO BE SEEN TO COME TO A CONCLUSION REGARDING THE REAL NATURE OF G AIN BEFORE CONCLUDING THAT THERE WAS IN FACT CAPITAL GAIN ON RELINQUISHMENT OF RIGHT AS PARTNER IN THE FIRM. 31. KEEPING IN MIND THE LEGAL POSITION AS SET OUT IN THE EARLIER PARAGRAPHS, LET US EXAMINE THE FACTS OF THE PRESENT CASE. THE FACTS O F THE CASE ARE ALMOST IDENTICAL TO THE FACTS IN THE CASE OF SUDHAKAR M.SHETTY (SUPRA). THE ASSESSEE AND D.VENKATESH FORMED A PARTNERSHI BY A DEED OF PARTNERSHIP DATED 1.4.2004. MISS.SUVIDHA VENKATESH, D/O.D.VENKATESH WAS INDUCTED AS PARTNER IN THE FIRM W.E.F. 1.4.2007. ON 8.6.2007 AN MOU WAS SIGNED BY THE THREE PARTNERS AND IT WAS AGREED THAT THE ASSESSEE WOULD RETIRE FROM THE FIRM W.E.F. 1.4.2007 AND A SUM OF RS.339.50 LAKHS WOULD BE PAID TO THE ASSESSEE. ON 9.6.2007 DEED OF RETIREMENT WAS SIGNED. THE ASSESSEE GAVE UP ALL HER RIGHTS AS PARTNER OF THE F IRM AND ITS ASSETS NOR WAS THE ASSESSEE LIABLE TO PAY ANY OF ITS LIABILITIES. THE CAPITAL ACCOUNT OF THE ASSESSEE AS ON 1.4.2006 SHOWED AN OPENING BALANCE OF RS.1,64,14 ,044. PROFIT FOR THE YEAR OF RS.46,20,591 WAS CREDITED TO HIS ACCOUNT. SIMILARL Y ON REVALUATION OF THE LAND AND BUILDING ON 15.1.2007, A SUM OF RS.53,26,462 AND RS .9,24,650 RESPECTIVELY WAS CREDITED TO HER ACCOUNT. ANOTHER SUM OF RS.18,12,5 28 WAS ALSO CREDITED AS INTEREST ON CAPITAL IN HER CAPITAL ACCOUNT. AFTER REDUCING T HE PARTNERS DRAWING AND OTHER ITA NO.1700/BANG/2016 PAGE 18 OF 23 PAYMENTS MADE THE BALANCE TO THE CREDIT OF ASSESSEE S CAPITAL ACCOUNT AS ON 31.3.2007 WAS RS.2,77,88,200/-. ON 9.6.2007 THE ASS ESSEES WAS PAID RS.38,38,200 TOWARDS GOODWILL AND ANOTHER SUM OF RS .2,39,00,000/- BEING PART OF THE CONSIDERATION OF RS.339.50 LACS PAYABLE ON RETI REMENT. THE DIFFERENCE BETWEEN THE SUM OF RS.3,39,50,000 AND THE SUM OF RS.2,77,88 ,200 VIZ., A SUM OF RS.61,61,800 WAS TAXED AS CAPITAL GAIN BY THE AO. OUT OF THE ABOVE, RS.38,38,200 WAS GOODWILL. THEREFORE TO THE EXTENT OF RS.2,77,8 8,200 BEING CLOSING BALANCE AS ON 31.3.2007 IN THE CAPITAL ACCOUNT AND RS.38,38,20 0/- BEING GOODWILL, WAS THE SUM PAYABLE AS PER THE CAPITAL ACCOUNT OF THE ASSES SEE. THE CLAIM OF THE ASSESSEE THAT THE ENTIRE SUM OF RS.61,61,800 IS GOO DWILL IS NOT SUBSTANTITATED BY ENTRIES IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AN D THE BOOK ENTRIES ARE ONLY FOR RS.38,38,200/- RECORDED IN THE ASSESSEES CAPITAL A CCOUNT AS WELL AS GOODWILL ACCOUNT. THE CAPITAL GAIN THEREFORE WOULD BE RS.339 .50 LACS MINUS RS.2,77,88,200 + 38,38,200 = RS.23,23,600/-. THE ASSESSEE HAD INVE STED A SUM OF RS.50 LACS IN SPECIFIED BONDS AND THEREFORE THE AO ALLOWED DEDUCT ION UPTO RS.50 LACS. THEREFORE THERE WOULD NO CAPITAL GAIN WHICH IS CHAR GEABLE TO TAX. 32. WITH REGARD TO CASE LAWS CITED ON BEHALF OF TH E ASSESSEE, THEY ARE AS FOLLOWS: 1 MALABAR FISHERIES CO. VS. CIT [1979] 120 ITR 49 (SC) 93-101 2 ACIT VS. MOHANBHAI PAMABHAI [1987] 165 ITR 166 (SC) 102 3 ACIT VS. MOHANBHAI PAMABHAI [1973] 91 ITR 393 (GUJ) 103-111 4 CIT V LEGAL REPRESENTATIVES OF N PALINIAPPA GOUNDER [1983] 143 ITR 343 (MADRAS) 112-115 5 CIT VS. P.H PATEL [1988] 171 ITR 128 (ANDHRA PRADESH) 116 -121 ITA NO.1700/BANG/2016 PAGE 19 OF 23 6 CIT V MADAN LAL BHARGAVA [1980] 122 ITR 545 (ALLAHABAD) 122-125 7 ACIT VS. SRI MAHINDERPAL BHASIN [1979] 117 ITR 26 (ALLA HABAD) 126-129 8 CIT VS. KRISHNAMOORTHY [1998] 229 ITR 559 (MADRAS) 13 0-132 9 CIT VS. L RAGHU KUMAR [1982] 141 ITR 674 (ANDHRA PRADESH) 133-136 10 CIT VS. LINGMALLU RAGHUKUMAR [2001] 247 ITR 801 (SC) 137-138 11 TRIBHUVANDAS G PATEL VS. CIT [1999] 236 ITR 515 (SC) 1 39-141 12 CIT VS. P.N PANJAWANI [2012] 356 ITR 676 (KARNATAKA) 14 2-152 13 CIT VS. G SESHAGIRI RAO [1992] 65 TAXMAN 409 (ANDRA PRADE SH 153-155 14 ACIT VS. UNITY CARE & HEALTH SERVICES [2006] 103 ITD 53 (BANGALORE) 156-162 15 ITO VS. PRABHURAJ B APPA [2006] 6 SOT 415 (BANGA LORE) 163- 165 16 CIT VS. DYNAMIC ENTERPRISES [2013] 359 ITR 83 (K ARNATAKA) 166- 176 17 ACIT VS. P SIVAKUMAR [2014] 43 TAXMANN.COM 211 ( CHENNAI TRIB) 177- 181 18 PRASHANT S JOSHI AND DATTARAM SHRIDHAR BHOSALE V S. ITO AND UOI [2010] 230 CTR 232 (BOMBAY) 182- 188 19 CIT VS. J.P DEVADHAR AND M.S SANKLECHA [2014] 22 1 TAXMANN 118 189- ITA NO.1700/BANG/2016 PAGE 20 OF 23 (BOMBAY) 190 20 SHARADHA TERRY PRODUCTS LTD. VS. ACIT [2016] 68 TAXMANN.COM 282 (CHENNAI TRIB.) 191- 220 21 CIT VS. A.N NAIK ASSOCIATES [2004] 136 TAXMAN 10 7 (BOMBAY) 221- 229 22 SMT. GIRIJA REDDY VS. ITO [2012] 23 TAXMANN.COM 95 (HYD.) 230- 245 IN ADDITION TO THE ABOVE CASES THE LEARNED COUNSEL FOR THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF THE THIRD MEMBER CASE O F ITAT MUMBAI BENCH IN THE CASE OF M/S.D.S.CONSTRUCTION VS. ITO ITA NO.3526 & 2527/MUM/2018 DATED 10.1.2019, AND THE DECISION OF ITAT MUMBAI IN THE C ASE OF JAMES P.DSILVA VS. DCIT (2019) 103 TAXMANN.COM 167(MUM). 33. CASES AT SL.NO.1 TO 11 & 13 ARE CASES PRIOR TO THE AMENDMENT OF THE LAW W.E.F 1-4-1989 AND SOME OF THESE CASES HAVE ALREADY BEEN DISCUSSED AND WE HAVE HELD THAT CASES AFTER 1.4.1989 HAVE TO BE DECIDED ON DIF FERENT PARAMETERS. AS FAR AS CASE LAW AT SL.NO.12 IN THE CASE OF P.N.PANJAWANI (SUPRA ) IS CONCERNED IT WAS A CASE OF INDUCTION OF PARTNERS AND THEREFORE NOT RELEVANT TO THE PRESENT CASE. CASE AT SL.NO.14 IN THE CASE OF UNITY CARE & HEALTH SERVICE S (SUPRA) IS A CASE OF CONVERSION OF FIRM INTO A COMPANY WHICH ARE GOVERNE D BY SPECIFIC PROVISIONS AND THEREFORE NOT RELEVANT TO THE PRESENT CASE. CASE A T SL.NO.15 IN THE CASE OF PRABHURAJ B.APPA (SUPRA) IS A CASE OF RECEIPT OF CONSIDERATIO N ON ACCOUNT OF GOODWILL AND THEREFORE TO THAT EXTENT THIS ASPECT HAS BEEN DISCU SSED AND HELD IN FAVOUR OF THE ITA NO.1700/BANG/2016 PAGE 21 OF 23 ASSESSEE IN THE EARLIER PARAGRAPHS. CASE LAW AT SL .NO.16 & 21 IN THE CASE OF DHINAIC ENTERPRISES (SUPRA) AND A.N.NAIK ASSOCIATES (SUPRA) ARE CASES IN WHICH THE FIRM WAS THE ASSESSEE. THE PRESENT APPEAL IS F ROM THE PERSPECTIVE OF THE RETIRING PARTNER. HENCE, THESE DECISIONS DO NOT HE LD THE PLEA OF THE ASSESSEE. DECISION AT SL.NO.18 IN THE CASE OF PRASHANT S.JOSH I (SUPRA) IS A CASE OF NOTICE U/S.148 OF THE ACT AND IT WAS HELD THAT THERE WAS N O REASON TO BELIEVE TO INITIATE PROCEEDINGS U/S.147 OF THE ACT. INCIDENTALLY THE B ELIEF OF CHARGEABLE CAPITAL GAIN ESCAPING ASSESSMENT WAS HELD TO BE UNSUSTAINABLE. DECISION AT S.NO.19 IN THE CASE OF RIYAZ A.SHEIKH (SUPRA) FOLLOWS THE DECISION IN T HE CASE OF TRIBBHUVANDAS G.PATEL (SUPRA) WHICH RELATES TO THE LAW PRIOR TO A MENDMENT W.E.F 1.4.1989. THE DECISION AT SL.NO.20 IN THE CASE OF SHARADH TERRY P RODUCTS LTD. (SUPRA) IS A CASE OF SETTLEMENT OF ACCOUNTS AS PER THE CREDIT BALANCE IN THE CAPITAL ACCOUNT AND HENCE THERE WAS NO GAIN. THE DECISION AT SL.NO.22 IN THE CASE OF SMT.GIRIJA REDDY (SUPRA) IS A CASE OF LUMP SUM CONSIDERATION PAID ON RETIREMENT AND IT WAS HELD THAT THERE WAS AN INCIDENCE OF CAPITAL GAIN LIABLE TO TA X. AS FAR AS SL.NO.17 IN THE CASE OF P.SIVAKUMAR (SUPRA) IS CONCERNED, THE FINDING OF FACT IS THE PAYMENT WHICH WAS SOUGHT TO BE TAXED U/S.28(VA) WAS AMOUNT PAID TO RE TIRING PARTNER AS HIS SHARE IN THE WORTH AND VALUE OF THE BUSINESS AKIN TO GOODWILL. THEREFORE THIS CASE IS ALSO DISTINGUISHABLE. THE DECISION IN THE CASE OF M/S.D .S.CORPORATION IS AGAIN A CASE WHERE THE TAX INCIDENCE WAS EXAMINED FROM THE ANGLE OF THE FIRM AND NOT THE RETIRING PARTNER, WHICH IS THE POSITION IN THE PRES ENT CASE. LASTLY, THE DECISION IN THE CASE OF JAMES P.DSILVA (SUPRA) IS A CASE WHERE THE ASSESSEE RECEIVED SHARE OF CAPITAL ALONG WITH ACCRUED PROFIT, GOODWILL AND BRO KERAGE/COMMISSION. THIS IS NOT THE FACT SITUATION IN THE PRESENT CASE. 34. FOR THE REASONS GIVEN ABOVE, WE UPHOLD THE ACT ION OF THE REVENUE AUTHORITIES IN TAXING THE EXCESS PAID OVER AND ABOVE THE SUM STAND ING TO THE CREDIT OF THE CAPITAL ACCOUNT OF THE ASSESSEE AS CAPITAL GAIN. HOWEVER, THE COMPUTATION OF THE CAPITAL GAIN HAS BEEN MODIFIED BY US BY TREATING VALUE OF G OODWILL ALSO AS PART OF THE CREDIT ITA NO.1700/BANG/2016 PAGE 22 OF 23 IN THE PARTNERS CAPITAL ACCOUNT. CONSEQUENTLY, THE CAPITAL GAIN IN QUESTION WAS LESS THAN RS.50 LACS AND SINCE THE ASSESSEE HAS BEEN ALL OWED EXEMPTION U/S.54EC TO THE EXTENT OF RS.50 LACS, NO CAPITAL GAIN IS EXIGIB LE TO TAX IN THE PRESENT CASE. 35. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED TO THE EXTENT INDICATED ABOVE. ORDER PRONOUNCED IN COURT ON 3 RD MAY, 2019 . SD/- SD/- (JASON P BOAZ) ( N.V. VASUDEVA N) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, 3RD MAY, 2019 . / VMS / COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE. ITA NO.1700/BANG/2016 PAGE 23 OF 23 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR.P.S .. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SEC TION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. ..