RAMESH BUILDERS, MUMBAI V. ITO 12(1)(1), MUMBAI

ITA 1798/MUM/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2269 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 10-03-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 15-03-2012

Judgement Text

99 D IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.1797 /MUM/2012 ( / ASSESSMENT YEAR : 2007-08) RAMESH BUILDERS (INDIA), 9, DHIRAJ CHAMBERS, 9, HAZARIMAL SOMANI MARG, FORT,MUMBAI 400001. / V. INCOME TAX OFFICER,12(1)(2),AAYAKAR BHAVAN,M.K. ROAD, MUMBAI. ./ PAN : AAAFR4655E ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO.1798 /MUM/2012 ( / ASSESSMENT YEAR : 2007-08) RAMESH BUILDERS, 9, DHIRAJ CHAMBERS, 9, HAZARIMAL SOMANI MARG, FORT,MUMBAI 400001. / V. INCOME TAX OFFICER,12(1)(2),AAYAKAR BHAVAN,M.K. ROAD, MUMBAI. ./ PAN : AAAFR8880R ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY SHRI HARSH P. SHAH REVENUE BY : DR. MUKESH JAIN ,DR / DATE OF HEARING : 10-05-2016 / DATE OF PRONOUNCEMENT : 27-07-2016 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THESE TWO APPEALS, FILED BY TWO DIFFERENT ASSESSES ARE DISPOSED OF BY THIS COMMON ORDER, OF WHICH ITA NO. 1797/MUM/2012, IS DIRECTED AGAINST THE APPELLATE ORDER DATED 25 TH JANUARY, 2012 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 21 MUMBAI (HE REINAFTER CALLED THE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 2 CIT(A)), FOR THE ASSESSMENT YEAR 2007-08 IN THE CA SE OF THE ASSESSEE-RAMESH BUILDERS(INDIA) (PAN AAAFR4655E), THE APPELLATE PRO CEEDINGS BEFORE THE LEARNED CIT(A) ARISING FROM THE ASSESSMENT ORDERS D ATED 30 TH DECEMBER, 2009 PASSED BY THE LEARNED ASSESSING OFFICER (HEREINAFTE R CALLED THE AO) U/S 143(3) OF THE INCOME TAX ACT,1961 (HEREINAFTER CALL ED THE ACT), AND THE SECOND APPEAL BEING ITA NO. 1798/MUM/2012 IS DIRECT ED AGAINST THE APPELLATE ORDER DATED 2 ND JANUARY, 2012 IN THE CASE OF ASSESSEE-RAMESH BUILDERS(PAN AAAFR8880R), THE APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) ARISING FROM THE ASSESSMENT ORDERS DATED 30 TH DECEMBER, 2009 PASSED BY THE LEARNED ASSESSING OFFICER (HEREINAFTER CALLE D THE AO) U/S 143(3) OF THE INCOME TAX ACT,1961 (HEREINAFTER CALLED THE ACT). FIRST, WE SHALL TAKE UP ASSESSEE-M/S RAMESH BUILDER S(INDIA) APPEAL IN ITA NO. 1797/MUM/2012 FOR THE ASSESSMENT YEAR 2007- 08. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THE MEMO OF APPEAL FILED WITH THE INCOME TAX APPELLATE TRIBUNAL, MUMBA I (HEREINAFTER CALLED THE TRIBUNAL) READS AS UNDER:- 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HONOURABLE COMMISSIONER OF INCOME TAX (APPEALS) - 2 1, MUMBAI ERRED IN CONFIRMING THE ADDITIONAL OF RS. 4,521,956/- U/S. 45(4) OF THE INCOME TAX ACT, 1961 (THE ACT) WITHOUT APPRECIATING FACT THAT THE S AME IS NOT APPLICABLE IN THE CASE OF RETIREMENT OF THE PARTNER. 2) THE HONOURABLE COMMISSIONER OF INCOME TAX (APPEA LS) - 21, MUMBAI ERRED IN THE FACTS OF THE CASE AND IN LAW NOT A PPRECIATING THE FACT THAT ADOPTION OF FAIR MARKET VALUE BY THE ASSESSIN G OFFICER IN THE ASSESSMENT ORDER AT RS. 1,932.46 PER SQ. FT. IN RESPE CT OF UNIT TRANSFER TO RETIRING PARTNER WAS NOT CORRECT AND THE MARKET VALUE O F RS. 1,640/- PER SQ. FT. WAS FAIR AND REASONABLE. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A PARTNERSHIP FIRM DERIVING INCOME FROM BUSINESS AND IS ENGAGED IN THE BUSINESS OF BUILDER AND ITA 1797/MUM/2012 & ITA 1798/MUM/2012 3 DEVELOPERS OF PROPERTY. IT WAS OBSERVED BY THE A.O . THAT ONE OF THE PARTNERS RETIRED VIDE DEED OF RETIREMENT DATED 19 TH APRIL, 2006 AND HE WAS GIVEN/ALLOTTED SHOPS, FLATS ETC. ON THE BASIS OF BO OK VALUE TO THE EXTENT OF RS. 1,30,19,945/-. ON PERUSAL OF THE P&L ACCOUNT OF TH E ASSESSEE, IT WAS OBSERVED BY THE AO THAT THE ASSESSEE HAD SHOWN SALE CONSIDERATION OUT OF TRANSFER OF ABOVE SHOPS/FLATS TO THE RETIRING PARTN ER ONLY AT RS. 1,14,49,805/- AND THUS THERE IS A DIFFERENCE ON SALE COST AND BOO K VALUE AT RS. 15,70,140/-. THE ASSESSEE WAS SHOW CAUSED AS TO WHY THE SALE CON SIDERATION OF THESE FLATS WERE NOT OFFERED AS PER THE PREVAILING MARKET VALUE . AS PER THE SALE SUMMARY, IT WAS ALSO OBSERVED BY THE AO THAT THE ASSESSEE DI D NOT SHOW SALE CONSIDERATION OF UNIT NO 02 AND 09 IN THE PROJECT HERMES ATTRIUM AND THE SAME WAS ALSO NOT APPEARING IN THE CLOSING STOCK. THE ASSESSEE REPLIED THAT AS PER THE TERMS OF THE S AID RETIREMENT DEED, THE RETIRING PARTNER WAS GIVEN THE FOLLOWING UNITS IN T HE HERMES ATTRIUM PROJECT AT THE BOOK VALUE IN TERMS OF SETTLEMENT OF HIS ACC OUNT IN THE PARTNERSHIP FIRM I.E. THE ASSESSEE ON HIS RETIREMENT. THE DETAILS O F THE UNITS GIVEN ARE AS UNDER:- SR. NO. UNIT NO. BUILT UP AREA SQ. FT. BOOK VALUE RUPEES RATE PER SQ. FT. 1 02 1170 785070 671.00 2 09 1170 785070 671.00 3 511 1205 2328610 1932.46 4 512 1205 2328610 1932.46 5 601 790 1526641 1932.46 6 612 1205 2328610 1932.46 7 710 760 1468667 1932.46 8 711 760 1468667 1932.46 TOTAL 1,30,19,945 ITA 1797/MUM/2012 & ITA 1798/MUM/2012 4 THE ASSESSEE WAS ASKED TO SUBMIT THE SALES INSTANCE S IN THE PROJECT HERMES ATTRIUM IMMEDIATELY BEFORE OR AFTER THE TRANSFER O F UNITS TO THE RETIRING PARTNER ON 20-04-2006. THE ASSESSEE SUBMITTED THAT THERE WERE NO SALES INSTANCES IN THE FINANCIAL YEAR 2007, 2008 AND 2009 , HOWEVER, THERE WERE SALES OF UNITS IN THE PREVIOUS YEAR ENDING 31 ST MARCH, 2006 IN THE HERMES ATTRIUM PROJECT FOR WHICH THE DETAILED INFORMATION WERE SUBMITTED. FROM THE DETAILS SUBMITTED, IT WAS OBSERVED THAT THE CLOSEST SALE INSTANCE WAS IN RESPECT OF UNIT NO. 210 SOLD ON 1ST FEBRUARY, 2006 AND THE RATE PER SQ. FT. WAS AT RS. 1640/- PER SQUARE FEET. FROM THE PERUSA L OF THE STATEMENT, IT WAS OBSERVED THAT EXCEPT UNIT NO. 02 & 09, OTHER UNITS HAVE BEEN TRANSFERRED AT RS. 1932.46 PER SQ. FT. WHICH IS MUCH ABOVE THE PRE VAILING MARKET PRICE ON THE DATE OF RETIREMENT. IT WAS THE CONTENTION OF T HE ASSESSEE THAT THERE IS NO NEED TO SUBSTITUTE THE MARKET VALUE IN RESPECT OF U NITS MENTIONED AT S.NO. 3 TO 8 AS PER ABOVE STATEMENT AS RATE ADOPTED FOR TRA NSFER TO RETIRING PARTNER WAS RS.1932.46 PER SQUARE FEET , HOWEVER, IN RESPEC T OF UNIT NO 02 AND 09 AT S.NO. 1 & 2 THE MARKET VALUE MAY BE APPLIED AT RS. 1640/- PER SQ. FT. BASED ON SALE INSTANCE IN FEBRUARY 2006 BEING UNIT NO 210 AND THE MARKET VALUE OF UNIT NO. 02 & 09 WOULD BE AT RS. 38,37,600/- AS AGA INST THE BOOK VALUE OF RS. 15,70,140/- AND THE DIFFERENCE OF RS. 22,67,460/- M AY BE ADDED TO THE INCOME OF THE ASSESSEE WAS THE CONTENTION OF THE AS SESSEE WITHOUT PREJUDICE BASIS. THE A.O. CONSIDERED THE SUBMISSION OF THE AS SESSEE AND HELD THAT THE ASSESSEES CONTENTION TO ADOPT THE VALUE AT THE RAT E OF RS. 1640/- PER SQUARE FEET CANNOT BE ACCEPTED AS THE OTHER UNITS I.E. WIT H RESPECT TO UNIT AT S.NO. 3 TO 8 AS PER ABOVE STATEMENT HAD BEEN TRANSFERRED AT THE RATE OF RS. 1932.46 PER SQUARE FEET, HENCE, THE SALE VALUE OF OTHER UNI TS I.E. AT THE RATE OF RS. 1932.46 PER SQ. FT. HAS TO BE ADOPTED FOR THE UNIT AT S.NO. 1 & 2 ALSO AS THESE UNITS WERE ALSO TRANSFERRED TO THE RETIRED PARTNER. ACCORDINGLY, THE MARKET VALUE SHOWN AT S. NO. 1 & 2 OF UNIT NUMBER 02 AND 0 9 WOULD BE RS. 45,21,956/- AS AGAINST THE BOOK VALUE SHOWN AT RS. 15,70,140/- AND ALSO AGAINST THE VALUE REQUESTED BY THE ASSESSEE TO ADOP T AT RS. 38,37,600/- ITA 1797/MUM/2012 & ITA 1798/MUM/2012 5 OFFERED IN ITS SUBMISSIONS. SINCE THE ASSESSEE HA D SHOWN THE SALE CONSIDERATION IN THE P&L ACCOUNT AT RS. 1,14,49,805 /- WHICH WAS EXCLUDING THE VALUE OF UNIT AT SL NO. 1 & 2 I.E. UNIT NO. 2 & 9, THE A.O. CONSIDERED THE SALE VALUE WHICH WORKED OUT AT RS. 45,21,956/- AND THE SAME WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE KEEPING IN VIEW TH E PROVISIONS OF SECTION 45(4) OF THE ACT VIDE ASSESSMENT ORDERS DATED 30.12.2009 PASSED BY THE AO U/S 143(3) OF THE ACT . 4. AGGRIEVED BY THE ASSESSMENT ORDER DATED 30.12.20 09 PASSED BY THE A.O. U/S. 143(3) OF THE ACT, THE ASSESSEE FILED ITS FIRS T APPEAL BEFORE THE LEARNED CIT(A). 5. BEFORE THE LEARNED CIT(A), THE ASSESSEE SUBMITTE D THAT THE ASSESSEE FIRM HAD FIVE PARTNERS WHICH WERE FAMILY MEMBERS. O NE OF THE PARTNERS RETIRED FROM THE PARTNERSHIP AND REMAINING FOUR PARTNERS CO NTINUED THE BUSINESS WITH THEIR REVISED RATE OF PROFIT. IT WAS SUBMITTED THAT THE FAMILY MEMBERS WERE PARTNERS AND AS PER FAMILY ARRANGEMENT AND SET TLEMENT, SHRI MATHURADAS N. THAKKAR RETIRED FROM THE PARTNERSHIP FIRM TO AVOID LITIGATION AND TO BUY PEACE OF FAMILY. THE SHOPS AT UNIT NO. 2 AND 9 WERE GIVEN/ALLOTTED TO THE RETIRING PARTNER AT BOOK VALUE. THE A.O. WAS OF THE VIEW THAT THE FIRM SHOULD HAVE TRANSFERRED THE UNITS TO THE RETIRING P ARTNER AT THE MARKET RATE OF RS.1932.46 PER SQ. FT. TOTALING TO RS.45,21,956/- W HICH WAS ADDED TO THE INCOME OF THE ASSESSEE VIDE ASSESSMENT ORDERS DATED 30-12-2009 PASSED U/S. 143(3) OF THE ACT. THE ASSESSEE SUBMITTED THAT THE A.O. OUGHT TO HAVE ADDED RS.29,51,816/- IN PLACE OF RS. 45,21,962/- BEING TH E DIFFERENCE BETWEEN THE RS. 45,21,962/- MINUS THE BOOK VALUE OF RS. 15,70, 416/- . IT WAS ALSO SUBMITTED THAT THE A.O. SHOULD HAVE TAKEN RS. 1640/ - PER SQ. FT. AS FAIR AND REASONABLE RATE OF THE UNITS TRANSFERRED TO THE PAR TNER. THE ASSESSEE ALSO SUBMITTED THAT THAT THE UNITS WERE TRANSFERRED/ALLO TTED TO THE RETIRING PARTNER AS PER TERMS OF FAMILY SETTLEMENT AND ARRANGEMENT A ND PARTNER'S CAPITAL ITA 1797/MUM/2012 & ITA 1798/MUM/2012 6 ACCOUNT WAS ADJUSTED AND/OR SETTLED AND ACCORDINGLY THE PROVISIONS OF SECTION 45(4) OF THE ACT WERE NOT APPLICABLE. THE A SSESSEE RELIED ON THE DECISION OF ITAT CHENNAI BENCH IN THE CASE OF (2009 ) 30 DTR 75, TRIBUNAL DECISION REPORTED IN 126 ITD 131, DCIT V. G. K. ENT ERPRISES (2003) 79 TTJ (MAD) 82, KAY ARR ENTERPRISES (2006) 99 ITJ (CHENNA I), CIT V. KUNNAMKULAM MILL BOARD 257 ITR 544 (KERALA) AND OTHER DECISIONS AND SUBMITTED THAT IT WAS NOT A CASE OF DISSOLUTION OF FIRM BUT ONLY A RE CONSTITUTION OF FIRM ON ACCOUNT OF RETIREMENT OF ONE OF THE PARTNERS AND TH EREFORE, PROVISIONS OF SEC.45(4) WERE NOT APPLICABLE. THE LD. CIT(A) CONSIDERED THE SUBMISSIONS AND THE F ACTS OF THE CASE. THE LEARNED CIT(A) OBSERVED THAT DURING THE YEAR ONE OF PARTNERS HAD RETIRED FROM THE PARTNERSHIP FIRM. THE RETIRING PARTNER WAS GIVE N/ALLOTTED 8 UNITS IN THE PROJECT. THESE UNITS WERE TRANSFERRED TO THE PARTNE R AT THE BOOK VALUE. THE BOOK VALUE OF 6 UNITS TRANSFERRED TO PARTNER WAS AT THE RATE OF RS.1932.46 PER SQ. FT. WHEREAS THE BOOK VALUE OF OTHER 2 UNITS WAS AT THE RATE OF RS.671.00 PER SQ. FT. WHILE THE A.O. HELD THAT THE OTHER 2 UN ITS SHOULD HAVE ALSO BEEN TRANSFERRED TO THE RETIRING PARTNER AT THE RATE OF MARKET VALUE I.E. @ RS. 1932.46 PER SQ. FT. AND MADE ADDITION OF RS.45,21,9 56/- IN THE TOTAL SALES OF THE ASSESSEE AND CONSEQUENTLY TO THE INCOME OF THE ASSESSEE. THE LD. CIT(A) HELD THAT THE ASSESSEE HAS FAILED TO EXPLAIN AS TO HOW THE BOOK VALUE RATE OF RS.671/- PER SQ. FT. WAS THE CORRECT RATE FOR TRANS FERRING THE 2 UNITS TO THE RETIRING PARTNER. THE LEARNED CIT(A) OBSERVED THAT THE ASSESSEE ARGUED THAT THE RATES OF UNITS TRANSFERRED TO THE RETIRING PAR TNER SHOULD HAVE BEEN TAKEN AT RS. 1640/- PER SQ. FT. ON THE BASIS OF SALE INST ANCE OF UNIT SOLD ON 01.02.2006 @ RS.1640 PER SQ. FT , INSTEAD OF RS.193 2.46 PER SQ. FT. ADOPTED BY A.O.. THE LEARNED CIT(A) HELD THAT THE ASSESSEES A RGUMENT IS NOT ACCEPTABLE WHEREBY THE LEARNED CIT(A) UPHELD THE ACTION OF THE A.O. VIDE APPELLATE ORDERS DATED 25-01-2012 . THE LD. CIT(A) REFERRED TO THE S ECTION 45(4) OF THE ACT WHEREBY IT WAS STIPULATED THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF ITA 1797/MUM/2012 & ITA 1798/MUM/2012 7 A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL A SSET ON THE DISSOLUTION OF A FIRM SHALL BE CHARGEABLE TO TAX AS INCOME OF THE FI RM. IN THIS CASE ONLY ONE PARTNER RETIRED FROM THE PARTNERSHIP AND THE REMAIN ING PARTNERS CONTINUED TO BE THE PARTNERS OF THE FIRM WITH REVISED PROFIT RAT IO. AS PER DECISION RELIED UPON BY THE ASSESSEE, RETIREMENT OF A SINGLE PARTNE R DOES NOT AMOUNTS TO DISSOLUTION OF FIRM AND THEREFORE, PROVISIONS OF SE CTION 45(4) OF THE ACT WERE NOT APPLICABLE. THE ASSESSEES ARGUMENT OF FAMILY S ETTLEMENT/ARRANGEMENT IS ALSO REJECTED BY THE LD. CIT(A) SINCE IT WAS A CASE OF DISTRIBUTION OF ASSETS OF THE FIRM AND NOT DISTRIBUTION OF THE FAMILY CORPUS. THUS THE A.O.S ACTION WAS UPHELD BY THE LD. CIT(A) VIDE APPELLATE ORDERS DATE D 25-10-2012. WITH RESPECT TO THE CONTENTION OF THE ASSESSEE THAT THE BOOK VAL UE OF RS.15,70,140/- HAD ALREADY BEEN INCLUDED IN THE TOTAL SALES OF THE FIR M AND THEREFORE, THE A.O. SHOULD HAVE MADE ADDITION OF ONLY DIFFERENTIAL AMOU NT OF RS.29,51,816/-, THE LD. CIT(A) DIRECTED THE A.O. TO VERIFY THE ASSESSEE S CONTENTION AND THEN DECIDE THE SAME ON MERITS WHEREBY IF THE BOOK VALUE OF RS. 15,70,140/- IS FOUND TO BE CREDITED IN THE TOTAL SALES IN THE P&L ACCOUNT, THE ADDITION OF ONLY DIFFERENTIAL AMOUNT SHOULD ONLY BE MADE BY THE A.O. AND IF THE B OOK VALUE OF RS.15,70,140/- IS FOUND NOT CREDITED IN THE P&L ACC OUNT, THE ADDITION OF RS.45,21,956/- WILL BE SUSTAINED, VIDE LEARNED CIT( A) APPELLATE ORDERS DATED 25-01-2012. 6.AGGRIEVED BY THE APPELLATE ORDER DATED 25-01-201 2 OF THE LEARNED CIT(A), THE ASSESSEE FILED SECOND APPEAL BEFORE THE TRIBUNA L. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE WAS A RECONSTITUTION OF THE FIRM. ONE OF THE PARTNERS RE TIRED WHILE REST OF THE PARTNERS CONTINUED THE BUSINESS WITH THEIR REVISED RATE OF PROFIT SHARING RATIO. THERE WERE EIGHT UNITS IN THE BUILDING PROJECT HER MES ATTRIUM AND THESE UNITS WERE TRANSFERRED TO THE RETIRING PARTNER AT B OOK VALUE AT THE TIME OF RETIREMENT FROM THE PARTNERSHIP FIRM. THE LD. COUN SEL SUBMITTED THAT THE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 8 A.O. APPLIED PROVISIONS OF SECTION 45(4) OF THE ACT WHEREBY THE VALUE OF TWO UNITS BEING UNIT NO. 02 AND 09 TRANSFERRED WAS TAK EN AT THE BOOK VALUE OF RS. 671.00 PER SQ. FT. AT SR. NO. 1 & 2 AS PER CHAR T IN PRECEDING PARAS WHEREAS THE BOOK VALUE TAKEN FOR OTHER SIX UNITS TR ANSFERRED TO THE PARTNER WAS AT RS. 1932.46 PER SQ. FT. . IT WAS SUBMITTED T HAT IT IS CASE OF RETIREMENT OF ONE OF THE FAMILY MEMBERS. IT IS A CASE OF FAMILY A RRANGEMENT AND SETTLEMENT TO AVOID LITIGATION AND TO BUY PEACE IN THE FAMILY, HENCE, SECTION 45(4) OF THE ACT CANNOT BE APPLIED. THE PROPERTY SHOULD BE VALU ED AT BOOK VALUE. 8. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT THE ASSESSEE HAS ADOPTED RS. 1932.46 PER SQ. FT. WHICH IS THE MARKET VALUE FOR 6 UNITS TRANSFERRED TO THE PARTNER WHEREAS THE BOOK VALUE O F OTHER TWO UNITS WAS TAKEN AT THE RATE OF RS. 671.00 PER SQ. FT. WHICH W AS WITHOUT ANY BASIS. IT WAS SUBMITTED THAT THE AO RIGHTLY ADOPTED RATE OF RS.19 32.46 PER SQUARE FEET ALSO FOR TRANSFER OF TWO UNITS BEING UNIT NO 02 AND 09 A T S.NO 1 AND 2 IN THE CHART AS NO DISTINGUISHING FEATURES ARE BROUGHT ON RECORD BY THE ASSESSEE TO DISTINGUISH THE REASONS FOR ADOPTING LOWER VALUE. T HE LD DR ALSO SUBMITTED THAT RATE OF RS.1640 PER SQUARE FEET ALSO CANNOT BE ADOPTED AS THE SAID UNIT WAS SOLD PRIOR TO THE RELEVANT PREVIOUS YEAR. THE RE WAS A TRANSFER OF PROPERTY TO THE RETIRING PARTNER WHICH SHOULD BE TAXED AT FA IR MARKET VALUE AS PER MANDATE OF SECTION 45(4) OF THE ACT. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND ALS O PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE OBSERVED THAT THE ASS ESSEE IS PARTNERSHIP FIRM. ONE OF THE PARTNERS RETIRED FROM THE PARTNERSHIP FI RM AND THE SAID PARTNER WAS GIVEN 8 UNITS OF PROPERTY IN THE PROJECT HERME S ATTRIUM AT THE TIME OF RETIREMENT. PROVISIONS OF SECTION 45(4) OF THE ACT ARE CLEARLY APPLICABLE IN THIS CASE WHICH STIPULATES AS UNDER: E.CAPITAL GAINS ITA 1797/MUM/2012 & ITA 1798/MUM/2012 9 CAPITAL GAINS. 45.(1) **** (1A) **** (2)**** (2A)**** (3)**** (4) 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 COMP ANY 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 MARKET VALUE OF THE ASSET ON THE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER.] (5)**** (6)**** HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. A.N .NAIK ASSOCIATES (2004) 265 ITR 346(BOM ) HAS HELD AS UNDER: BOTH THESE APPEALS CAN BE DISPOSED OF BY A COMMON ORDER AS THE FACTS INVOLVED ARE THE SAME AND SIMILAR QUESTIONS OF LAW ARISE. THE RESPONDENTS HERETO WERE PARTIES TO A FAMILY SETTLEM ENT DATED JANUARY 30, 1997. PURSUANT TO THE SAID FAMILY SETTLEMENT, T HERE WAS A DEED OF RECONSTITUTION OF VARIOUS PARTNERSHIPS AS SET OUT U NDER THE FAMILY SETTLEMENT. FOR THE ASSESSMENT YEAR 1997-98, THE PA RTNERSHIPS WERE TAXED FOR CAPITAL GAINS UNDER SECTION 45(4) OF THE INCOME-TAX ACT, 1961. AN APPEAL WAS PREFERRED AGAINST THE SAID ORDER BY T HE ASSESSEE WHICH CAME TO BE DISMISSED BY THE APPELLATE AUTHORITY BY ORDER DATED JUNE 16, 2000. AN APPEAL WAS THEN PREFERRED TO THE INCOME-TA X APPELLATE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 10 TRIBUNAL, BY THE ASSESSEE. THE APPEAL WAS ALLOWED. THE INCOME-TAX APPELLATE TRIBUNAL HELD THAT THERE WAS NO DISSOLUTI ON BUT ONLY RECONSTITUTION. THE INCOME-TAX APPELLATE TRIBUNAL A LSO HELD THAT THE EXPRESSION 'OTHERWISE' HAD TO BE READ EJUSDEM GENER IS AND WOULD CONTEMPLATE SITUATIONS LIKE A DEEMED DISSOLUTION AN D CONSEQUENTLY HELD THAT TAX ON CAPITAL GAINS WAS NOT CHARGEABLE. ON TH E FACTS, IT WAS HELD THAT THE BUSINESS CONTINUED TO BE RUN AND THERE WAS NO DISSOLUTION OF THE FIRM AND CONSEQUENTLY SECTION 45(4) OF THE ACT WAS NOT ATTRACTED. 2. THE PRESENT APPEALS ARE PREFERRED BY THE REVENUE A ND VARIOUS QUESTIONS WERE FRAMED. AT THE TIME OF HEARING, HOWE VER, THE FOLLOWING QUESTIONS OF LAW HAVE BEEN FORMULATED FOR CONSIDERA TION WHICH ARE AS UNDER : '1. WHETHER THE DEED OF FAMILY SETTLEMENT DATED JAN UARY 30, 1997, AMOUNTS TO DISSOLUTION OF PARTNERSHIP FORMED BY AGR EEMENT AS CONTEMPLATED UNDER SECTION 40 OF THE INDIAN PARTNER SHIP ACT ? 2. WHETHER THE DISTRIBUTION OF ASSETS OF THE FIRM A MONGST THE RETIRING PARTNERS DATED JANUARY 30, 1997, AND THE D EED OF RECONSTITUTION DATED JANUARY 30, 1997, WOULD AMOUNT TO TRANSFER OF THE CAPITAL ASSETS WHICH IS IN THE NATURE OF CAP ITAL GAINS AND BUSINESS PROFITS CHARGEABLE TO TAX UNDER SECTION 45 (4) OF THE INCOME-TAX ACT ? 3. WHETHER THE WORD OTHERWISE, IN SECTION 45(4) T AKES INTO ITS SWEEP NOT ONLY CASES AKIN TO DISSOLUTION OF THE FIR M BUT ALSO CASES OF RECONSTITUTION OF FIRM ? 4. WHETHER THE DEED OF RECONSTITUTION OF PARTNERSHI P BY THE ASSESSEE-FIRM IS A DEVICE TO AVOID TAX ? 5. WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE INCOME- TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN LAW IN SETT ING ASIDE THE ASSESSMENT ORDER BY HOLDING THAT THERE IS NO DISSOL UTION ?' ITA 1797/MUM/2012 & ITA 1798/MUM/2012 11 3. BY THE MEMORANDUM OF FAMILY SETTLEMENT DATED JANUA RY 30, 1997, IT WAS AGREED BETWEEN THE PARTIES THERETO, THAT BUSINE SS OF SIX FIRMS AS SET OUT THEREIN WOULD BE DISTRIBUTED IN TERMS OF THE FA MILY SETTLEMENT AS THE PARTIES DESIRED THAT VARIOUS MATTERS CONCERNING THE BUSINESS AND ASSETS THERETO BE DIVIDED SEPARATELY AND PARTITIONED. THE DEED ALSO RECITED THAT RESORTING TO CIVIL SUITS WOULD DAMAGE THE FAMILY SI NCE THE ENTIRE BUSINESS IS A FAMILY BUSINESS, THE NUCLEUS HAVING BEEN INHER ITED. UNDER THE TERMS AND CONDITIONS OF THE SETTLEMENT, IT WAS SET OUT TH AT THE ASSETS WHICH ARE PROPOSED TO BE DIVIDED IN PARTITION UNDER THE SETTL EMENT ARE HELD BY THE AFORESAID FIRMS AND INDIVIDUAL PARTNERS. WITH REFER ENCE TO THE FIRMS, THE MANNER IN WHICH THE FIRMS WERE TO BE RECONSTITUTED 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 FRO M ANY OF THE FIRMS ALLOTTED TO PARTIES THERETO IN THE SCHEDULE ANNEXED SHALL BE TRANSFERRED OR ASSIGNED IRREVOCABLY AND POSSESSION MADE OVER AND A LL SUCH DOCUMENTS, DEEDS, DECLARATIONS, AFFIDAVITS, PETITIONS, LETTERS AND ALIKE AS ARE REASONABLY REQUIRED BY THE PARTY ENTITLED TO SUCH T RANSFER WOULD BE EFFECTED. IT IS BASED ON THIS DOCUMENT AND THE SUBS EQUENT DEEDS OF RETIREMENT OF PARTNERSHIP THAT THE ORDER OF ASSESSM ENT WAS MADE HOLDING THAT THE APPELLANTS ARE LIABLE FOR TAX ON CAPITAL G AINS. 4. THE RELEVANT PORTION OF SECTION 45, WITH WHICH WE ARE CONCERNED IS SUB-SECTION (4) WHICH READS AS UNDER : '(4) THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DIS SOLUTION OF A FIRM OR OTHER ASSOCIATION OF PERSONS OR BODY OF INDIVIDU ALS (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SH ALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCI ATION OR BODY, OF ITA 1797/MUM/2012 & ITA 1798/MUM/2012 12 THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND, FOR THE PURPOSES OF SECTION 48, THE FAIR MARKET VALUE O F THE ASSET ON THE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FUL L VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER.' SUB-SECTION (4) ALONE WITH SUB-SECTION (3) WERE INT RODUCED BY THE FINANCE ACT, 1987, WITH EFFECT FROM APRIL 1, 1988. FROM A R EADING OF THE ABOVE SUB-SECTION TO ATTRACT CAPITAL GAINS WHAT WOULD BE REQUIRED WOULD BE AS UNDER: '1. TRANSFER OF CAPITAL ASSET BY WAY OF DISTRIBUTIO N OF CAPITAL ASSETS: (A )ON ACCOUNT OF DISSOLUTION OF A FIRM; (B)OR OTHER ASSOCIATION OF PERSONS; (C )OR BODY OF INDIVIDUALS; (D)OR OTHERWISE; SHALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCIATION OR BODY OF PERSONS.' 5. ON BEHALF OF THE REVENUE, IT IS CONTENDED THAT THE DEED OF FAMILY SETTLEMENT DATED JANUARY 30, 1997, AMOUNTS TO DISSO LUTION OF THE PARTNERSHIP AND THE DISTRIBUTION OF ASSETS AMONGST THE PARTNERS, EVEN IF IT MAY BE, BY ENTRIES IN THE BOOKS, WOULD AMOUNT TO TR ANSFER OF CAPITAL ASSETS, TO WHICH THE PROVISIONS OF SECTION 45(4) WO ULD BE ATTRACTED. INDEPENDENTLY, IT IS CONTENDED THAT EVEN IF THERE B E NO DISSOLUTION THE EXPRESSION 'OTHERWISE' WOULD HAVE TO BE READ TO MEA N ANY TRANSFER OF ASSETS OF THE FIRMS IN FAVOUR OF ANY OF THE PARTNER S. IT IS ALSO CONTENDED THAT THE DEED OF RECONSTITUTION OF PARTNERSHIP BY T HE ASSESSEE-FIRM WAS MERELY A DEVICE TO AVOID TAX AND THE COURT SHOULD N OT ENCOURAGE THE SAME. IN THESE CIRCUMSTANCES, IT IS CONTENDED THAT THE ORDER IN APPEAL BE SET ASIDE AND THE REFERENCE ANSWERED IN FAVOUR OF T HE REVENUE. ON ITA 1797/MUM/2012 & ITA 1798/MUM/2012 13 BEHALF OF THE REVENUE, LEARNED COUNSEL FOR THE REVE NUE FROM THE DEED OF FAMILY SETTLEMENT DREW OUR ATTENTION TO VARIOUS TER MS WHEREIN APART FROM SOME OF THE ASSETS REMAINING WITH THE FIRM, ASSETS OF THE FIRM WERE ALLOTTED AS PART OF THE SETTLEMENT TO OTHER PARTNER S. RELIANCE IS PLACED ON VARIOUS JUDGMENTS WHICH WOULD BE ADVERTED TO IN THE COURSE OF THE DISCUSSION. 6. ON THE OTHER HAND, ON BEHALF OF THE ASSESSEE/RESPO NDENTS, IT IS CONTENDED THAT THERE WAS NO DISSOLUTION OF THE FIRM NOR DISCONTINUANCE OF BUSINESS AT ANY POINT OF TIME. THE REGISTRATION OF THE FIRM CONTINUES TO BE THE SAME. THE WRITTEN AGREEMENT WOULD SHOW THAT THE PARTNERSHIP CONTINUED WITHOUT DISSOLUTION. THE BUSINESS OF THE FIRM CONTINUED WITHOUT ANY CLOSING AND ASSETS OF THE FIRM REMAINED WITH TH E PARTNERS WITHOUT DISRUPTION. FAMILY SETTLEMENT IN LAW DOES NOT RESUL T IN TRANSFER OF ASSETS OR TRANSFER OF INTEREST IN PROPERTY. THE SCHEDULE O F ALLOCATION OF ASSETS CLEARLY STATES THAT A FIRM SHALL BE TAKEN OVER BY T HE PARTNERS NAMED THEREIN. EVEN OTHERWISE, THE FAMILY ARRANGEMENTS AR RIVED AT DID NOT SUGGEST THAT THERE SHOULD BE DISSOLUTION OF THE FIR M. RELIANCE HAS ALSO BEEN PLACED ON VARIOUS JUDGMENTS WHICH WILL BE ADVE RTED TO IN THE COURSE OF THE DISCUSSION. 7. WITH THE ABOVE, WE MAY NOW PROCEED TO ANSWER THE Q UESTIONS AS FORMULATED. SECTION 45 IS THE CHARGING SECTION. UND ER SECTION 45, THERE MUST BE A TRANSFER OF A CAPITAL ASSET BY WAY OF DIS TRIBUTION OF ASSETS IN THE FIRST INSTANCE. CAPITAL ASSET UNDER SECTION 2(1 4) OF THE INCOME-TAX ACT, 1961, HAS BEEN DEFINED TO MEAN PROPERTY OF ANY KIND HELD BY AN ASSESSEE. IN OTHER WORDS, THE PROPERTY TRANSFERRED MUST FALL WITHIN THE AMBIT OF CAPITAL ASSET. THE NEXT RELEVANT SECTION I S THE EXPRESSION 'TRANSFER' AS SET OUT IN SECTION 2(47) WHICH IN REL ATION TO A CAPITAL ASSET ITA 1797/MUM/2012 & ITA 1798/MUM/2012 14 INCLUDES THE SALE, EXCHANGE OR RELINQUISHMENT OF TH E ASSET OR THE EXTINGUISHMENT OF ANY RIGHTS THEREIN. WE NEED NOT R EFER FOR THE PRESENT DISCUSSION TO THE OTHER PART OF THE SAID DEFINITION . THEREFORE, TRANSFER WILL ALSO INCLUDE RELINQUISHMENT OF THE ASSET OR EXTINGU ISHMENT OF ANY RIGHTS THEREIN. 8. WE FIRST PROPOSE TO ANSWER THE ISSUE WHETHER THE D EED OF FAMILY SETTLEMENT DATED JANUARY 30, 1997, AMOUNTS TO DISSO LUTION OF THE PARTNER-SHIP FIRM BY AGREEMENT UNDER SECTION 40 OF THE INDIAN PARTNERSHIP ACT. THE REVENUE HAS FIRSTLY PLACED REL IANCE IN THE CASE OF ERICH F.D. MEHTA V. MINOO F.D. MEHTA AIR 1971 SC 1653. THERE THE APEX COURT HELD ON THE FACTS THEREIN THAT THE AGREE MENT THAT ONE OF THE PARTNERS WILL RETIRE AMOUNTS TO DISSOLUTION OF THE PARTNERSHIP. IN THAT CASE THERE WERE ONLY TWO PARTNERS. THE FACTS IN OUR CASE ARE DIFFERENT. IN MIR ABDUL KHALIQ V. ABDUL GAFFAR SHERIFF AIR 1985 SC 60 8, THE APEX COURT HELD ON THE FACTS THAT THE DOCUMENTS CLEARLY SHOWED THAT NOT ONLY THE NAMED PARTNER HAD RETIRED FROM THE PARTNERSHIP BUT, THE FIRM CONSISTING OF THREE PARTNERS WAS DISSOLVED ON THE DATE ON WHICH T HE PARTNER WAS INTIMATED. IN THAT CASE, ONE OF THE PERSONS HAD SEN T A LETTER TO THE BANK INTIMATING RETIREMENT OF NAMED PARTNER AND REQUESTI NG FOR CLOSING THE ACCOUNT OF THE FIRM AND OPENING A NEW ACCOUNT. IT W AS ON THOSE FACTS THAT IT WAS HELD THAT THERE WAS BOTH RETIREMENT AND DISS OLUTION OF THE PARTNERS. IN THE INSTANT CASE, THE DOCUMENTS WOULD CLEARLY SHOW THAT BEFORE THE CONTINUING PARTNERS RETIRED THERE WAS AN INDUCTION OF A NEW PARTNER IN THE MORNING OF THE SAID DAY AND THE OUTG OING PARTNERS RETIRED AT THE CLOSING OF BUSINESS HOURS ON THAT DAY. IN OT HER WORDS, THE PARTNERSHIP SUBSISTED BUT WITH TWO PARTNERS AND THE BUSINESS ALSO CONTINUED. THAT WOULD, THEREFORE, NOT AMOUNT TO DIS SOLUTION OF THE FIRM AND CLEARLY, THEREFORE, THE ORDER OF THE INCOME-TAX APPELLATE TRIBUNAL ITA 1797/MUM/2012 & ITA 1798/MUM/2012 15 CANNOT BE FAULTED. IT HAS RECORDED A FINDING THAT T HERE IS NO DISSOLUTION OF THE PARTNERSHIP AS CONTEMPLATED UNDER SECTION 40 OF THE INDIAN PARTNERSHIP ACT. 9. BEFORE ADDRESSING OURSELVES TO ISSUE NOS. 2 AND 3, WE MAY NOW CONSIDER WHETHER THE DEED OF RECONSTITUTION BY THE PARTIES OF THE ASSESEE- FIRM IS A DEVICE TO AVOID TAX. IT IS CONTENDED THAT IN FACT, IT IS THE FAMILY SETTLEMENT UNDER WHICH THE ASSETS HAVE BEEN TRANSFE RRED AND THE PURPORTED DEED OF RECONSTITUTION IS MERELY A DEVICE TO AVOID TAX AND IN THAT CONTEXT, RELIANCE IS PLACED ON A JUDGMENT OF T HE APEX COURT IN MCDOWELL & CO. LTD. V. CTO [1985] 154 ITR 148 1 . THE APEX COURT THEREIN HAD OBSERVED AS UNDER : '. . . WE MUST RECOGNIZE THAT THERE IS BEHIND TAXAT ION LAWS AS MUCH MORAL SANCTION AS BEHIND ANY OTHER WELFARE LEG ISLATION AND IT IS A PRETENCE TO SAY THAT AVOIDANCE OF TAXAT ION IS NOT UNETHICAL AND THAT IT STANDS ON NO LESS A MORAL PLA NE THAN HONEST PAYMENT OF TAXATION. IN OUR VIEW, THE PROPER WAY TO CONSTRUE A TAXING STATUTE, WHILE CONSIDERING A DEVI CE TO AVOID TAX, IS NOT TO ASK WHETHER THE PROVISIONS SHOULD BE CONSTRUED LITERALLY OR LIBERALLY, NOR WHETHER THE TRANSACTION IS NOT UNREAL AND NOT PROHIBITED BY THE STATUTE, BUT WHETHER THE TRANSACTION IS A DEVICE TO AVOID TAX, AND WHETHER T HE TRANSACTION IS SUCH THAT THE JUDICIAL PROCESS MAY A CCORD ITS APPROVAL TO IT. A HINT OF THIS APPROACH IS TO BE FO UND IN THE JUDGMENT OF DESAI, J. IN WOOD POLYMER LTD., IN RE A ND BENGAL HOTELS LTD., IN RE [1977] 47 COMP. CAS. 597 (GUJ.), WHERE THE LEARNED JUDGE REFUSED TO ACCORD SANCTION TO THE AMALGAMATION OF COMPANIES AS IT WOULD LEAD TO AVOID ANCE OF TAX. ITA 1797/MUM/2012 & ITA 1798/MUM/2012 16 IT IS NEITHER FAIR NOR DESIRABLE TO EXPECT THE LEGI SLATURE TO INTERVENE AND TAKE CARE OF EVERY DEVICE AND SCHEME TO AVOID TAXAT ION. IT IS UP TO THE COURT TO TAKE STOCK TO DETERMINE THE NATURE OF THE NEW AND SOPHISTICATED LEGAL DEVICES TO AVOID TAX AND CONSIDER WHETHER THE SITUATION CREATED BY THE DEVICES COULD BE RELATED TO THE EXISTING LEGISL ATION WITH THE AID OF EMERGING TECHNIQUES OF INTERPRETATION AS WAS DONE IN RAMSAY, BURMA OIL AND DAWSON, TO EXPOSE THE DEVICES FOR WHAT THEY REALLY ARE AND TO REFUSE TO GIVE JUDICIAL BENEDICTION.' (P. 160) 10. THIS ISSUE WAS AN ISSUE BEFORE THE INCOME-TAX APPE LLATE TRIBUNAL. THE INCOME-TAX APPELLATE TRIBUNAL HAS HELD THAT THE FIRM WAS IN EXISTENCE RIGHT FROM 1985 AND IT WAS NOT A DEVICE T O AVOID TAX. IT WAS NOTED THAT THERE WAS NO DENIAL THAT THERE WERE FAMI LY DISPUTES AMONGST THE PARTNERS AND THE GENESIS OF FAMILY ARRANGEMENT WAS NOT DISPUTED. THE ARRANGEMENT BY WAY OF DIVISION OF THE ASSETS AN D BUSINESS INTEREST WAS CLEARLY DEFINED AND WERE NOT AN ISOLATED TRANSA CTION IN RESPECT OF THE APPELLANT FIRMS. THE TRIBUNAL NOTED THAT FROM T HE MEMORANDUM OF FAMILY ARRANGEMENT, THERE WAS NO CONTEMPLATION OF D ISSOLUTION OF THE FIRM BUT RECONSTITUTION OF THE FIRM. THE SAVING OF TAX W AS ONLY A CONSEQUENCE OF A NORMAL EVENT. WE ARE IN AGREEMENT WITH THE VIE W TAKEN THAT THE FAMILY SETTLEMENT ONLY PROVIDES THE MANNER IN WHICH THE ASSETS OF THE FAMILY WOULD BE SEPARATED. THE SETTLEMENT ITSELF CO NTEMPLATED VARIOUS STEPS TO BE TAKEN FOR GIVING EFFECT TO THE FAMILY S ETTLEMENT. IN OUR OPINION, THEREFORE, THE FINDING BY THE INCOME-TAX APPELLATE TRIBUNAL THAT THE DEED OF RECONSTITUTION BY INDUCTING A PARTNER IN THE ASS ESSEE-FIRM WAS NOT A DEVICE TO AVOID TAX HAS TO BE UPHELD. 11. THAT LEADS US TO THE QUESTIONS FORMULATED UNDER NU MBERS, 2, 3 AND 5, WHICH WILL BE REQUIRED TO BE ANSWERED TOGETHER. LET US EXAMINE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 17 WHETHER A FAMILY SETTLEMENT AMOUNTS TO A TRANSFER. THE LAW ON THE SUBJECT IS NO LONGER RES INTEGRA. IN RAM CHARAN DAS V. GIRJA NANDINI DEVI AIR 1966 SC 323, THE APEX COURT NOTED THAT A C ONSIDERATION FOR A FAMILY SETTLEMENT IS THE EXPECTATION THAT SUCH A SE TTLEMENT WILL RESULT IN ESTABLISHING OR ENSURING AMITY AND GOODWILL AMONGST THE RELATIONS AND THAT A FAMILY SETTLEMENT DOES NOT AMOUNT TO A TRANS FER AS IN THE FAMILY ARRANGEMENT EACH PARTY TAKES A SHARE IN THE PROPERT Y BY VIRTUE OF THE INDEPENDENT TITLE WHICH IS ADMITTED TO THAT EXTENT BY THE OTHER PARTIES. EVERY PARTY WHO TAKES BENEFIT UNDER IT NEED NOT NEC ESSARILY BE SHOWN TO HAVE A SHARE IN THE PROPERTY. ALL THAT IS NECESSARY TO SHOW IS THAT THE PARTIES ARE RELATED TO EACH OTHER IN SOME WAY AND H AVE A POSSIBLE CLAIM TO THE PROPERTY OR A CLAIM OR EVEN A SEMBLANCE OF A CLAIM ON SOME OTHER GROUND AS SAY AFFECTION. 12. THE POSITION IN LAW IN RESPECT OF TRANSFER OF ASSE TS OF A SUBSISTING PARTNERSHIP TO A PARTNER AS HIS SHARE OR ON DISSOLU TION OF THE FIRM BEFORE ITS AMENDMENT NEEDS NOW TO BE CONSIDERED. LET US FI RST CONSIDER THE JUDGMENT OF THE APEX COURT IN MALABAR FISHERIES CO. V. CIT [1979] 120 ITR 49 1 . IN THAT CASE, THERE WAS A DISSOLUTION OF FIRM AND DISTRIBUTION OF ASSETS. THE ISSUE WAS WHETHER THE SAME AMOUNTS TO T RANSFER WITHIN THE MEANING OF SECTION 2(47) OF THE INCOME-TAX ACT, 196 1. THE APEX COURT CONSIDERED THE DEFINITION OF EXPRESSION 'TRANSFER' UNDER SECTION 2(47) AND NOTED THAT SECTION 2(47) GIVES AN ARTIFICIAL MEANIN G TO THE EXPRESSION 'TRANSFER' FOR IT NOT MERELY INCLUDES TRANSACTIONS OF 'SALE' AND 'EXCHANGE' IN ORDINARY PARLANCE BUT WOULD ALSO MEAN 'RELINQUIS HMENT' OR 'EXTINGUISHMENT OF RIGHTS' WHICH ARE ORDINARILY NOT INCLUDED IN THAT CONCEPT. IN THAT CONTEXT, THE APEX COURT POSED THE QUESTION WHETHER THE DISSOLUTION OF A FIRM EXTINGUISHES THE FIRMS RIGHT S IN THE ASSETS OF THE PARTNERSHIP SO AS TO CONSTITUTE A TRANSFER OF ASSET S UNDER SECTION 2(47). ITA 1797/MUM/2012 & ITA 1798/MUM/2012 18 AFTER CONSIDERING VARIOUS JUDGMENTS AND THE PROVISI ONS OF THE INDIAN PARTNERSHIP ACT, THE COURT OBSERVED THAT A PARTNERS HIP UNDER THE INDIAN PARTNERSHIP ACT IS NOT A DISTINCT ENTITY. IF THAT B E THE POSITION, THE APEX COURT NOTED IT WOULD BE DIFFICULT TO ACCEPT THE CON TENTION THAT UPON DISSOLUTION THE FIRMS RIGHTS IN THE PARTNERSHIP AS SETS ARE EXTINGUISHED. THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN THE PARTNERSHIP ASSETS BUT IT IS THE PARTNERS WHO OWN JOINTLY OR IN COMMON THE ASSETS OF THE PARTNERSHIP. THEREFORE, THE CONES-QUENCE OF THE DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TO THE PARTNERS WHICH FLOWS UPON DISSOLUTION AFTER DISCHARGE OF LIABILITIES IS NOTHING BUT A MUTUAL AD JUSTMENT OF RIGHTS BETWEEN THE PARTNERS AND THERE IS NO QUESTION OF AN Y EXTINGUISHMENT OF THE FIRMS RIGHTS IN THE PARTNERSHIP ASSETS AMOUNTI NG TO A TRANSFER OF ASSETS WITHIN THE MEANING OF SECTION 2(47) OF THE A CT. PROCEEDING FURTHER, THE COURT OBSERVED THAT EVERY DISSOLUTION MUST BE A NTERIOR TO THE ACTUAL DISTRIBUTION, DIVISION OR ALLOTMENT OF THE ASSETS T HAT TAKES PLACE AFTER MAKING UP ACCOUNTS AND DISCHARGING THE DEBTS AND LI ABILITIES DUE BY THE FIRM AND THEREUPON DISTRIBUTION, DIVISION OR ALLOTM ENT OF ASSETS TAKES PLACE. THE DISTRIBUTION TO THE PARTNERS IS NOT DONE BY THE DISSOLVED FIRM AND IN THAT SENSE THERE IS NO TRANSFER OF ASSETS BY THE ASSESSEE TO ANY PERSON. IN CIT V. B.C. SRINIVASA SETTY [1981] 128 I TR 294 1 , THE APEX COURT WAS CONSIDERING THE QUESTION WHETHER GOODWILL GENERATED IN A NEWLY COMMENCED BUSINESS CANNOT BE AN 'ASSET' WITHI N THE MEANING OF SECTION 45 OF THE INCOME-TAX ACT, 1961. CONSIDERING THE PROVISIONS OF SECTION 45(1) AS IT THEN STOOD AND THE DEFINITION O F 'CAPITAL ASSET' IN SECTION 2(14) THE COURT CAME TO THE CONCLUSION THAT GOODWILL GENERATED IN A NEWLY COMMENCED BUSINESS CANNOT BE DESCRIBED WITH IN THE TERMS OF SECTION 45 AND, THEREFORE, ITS TRANSFER IS NOT SUBJ ECT TO INCOME-TAX UNDER THE HEAD 'CAPITAL GAINS'. IN CIT V. R. LINGMALLU RA GHUKUMAR [2001] 247 ITR 801 (SC), IN RESPECT OF AN ORDER OF THE ANDHRA PRADESH HIGH COURT IN CIT V. L. RAGHU KUMAR [1983] 141 ITR 674 , THE APEX COURT ONCE AGAIN ITA 1797/MUM/2012 & ITA 1798/MUM/2012 19 REITERATED THAT THERE IS NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRED PARTNER TO THE CO NTINUING PARTNERS. RELIANCE FOR THAT WAS PLACED IN THE JUDGMENT OF CIT V. MOHANBHAI PAMABHAI [1973] 91 ITR 393 (GUJ.) WHICH HAD BEEN AFFIRMED BY THE APEX COURT AND THE JUDGMENT IN ADDL. CIT V. MOHANBHAI PA MABHAI [1987] 165 ITR 166 . THE GUJARAT HIGH COURT HAD TAKEN THE VIEW THAT W HEN A RETIRED PARTNER RECEIVES A SHARE OF AMOUNT CALCULATED ON TH E VALUE OF THE NET GOODWILL OF THE FIRM THERE WAS NO TRANSFER OF INTER EST OF THE PARTNER IN THE GOODWILL AND NO PART OF THE AMOUNT RECEIVED BY HIM WOULD BE ASSESSED AS CAPITAL GAIN UNDER SECTION 45 OF THE INCOME-TAX ACT, 1961. 13. IT MAY BE NOTED THAT ALL THESE JUDGMENTS WERE PREV IOUS TO THE AMENDMENT BROUGHT ABOUT BY THE ACT OF 1987 WHICH IN TRODUCED SUB- SECTIONS (3) AND (4) IN SECTION 45, WITH EFFECT FRO M APRIL 1, 1988. THOSE JUDGMENTS PROCEEDED ON THE FOOTING THAT A PARTNERSH IP FIRM IS NOT A DISTINCT LEGAL ENTITY AND THE PARTNERSHIP PROPERTY IN LAW BELONGS TO ALL THE PARTNERS CONSTITUTING THE FIRM, THOUGH THE PARTNERS HIP FIRM MAY POSSESS A PERSONALITY DISTINCT FROM THE PERSONS CONSTITUTING IT AND, THEREFORE, ON DISSOLUTION, AS THE FIRM HAS NO SEPARATE RIGHTS OF ITS OWN IN THE PARTNERSHIP ASSETS, THE CONSEQUENCE OF DISTRIBUTION , DIVISION OR ALLOTMENT OF ASSETS OF THE PARTNERS WHICH FLOWS UPON DISSOLUT ION AFTER DISCHARGE OF LIABILITIES IS NOTHING BUT A MUTUAL ADJUSTMENT OF R IGHTS BETWEEN THE PARTNERS AND THERE IS NO QUESTION OF ANY EXTINGUISH MENT OF THE FIRMS RIGHTS IN THE PARTNERSHIP ASSETS AMOUNTING TO A TRA NSFER OF ASSETS WITHIN THE MEANING OF SECTION 2(47) OF THE ACT. 14. PURSUANT TO THE INCLUSION OF SUB-SECTION (4) IN SE CTION 45, ON THE DISSOLUTION OF A PARTNERSHIP THE PROFITS OR GAINS A RISING FROM THE TRANSFER OF CAPITAL ASSET ARE CHARGEABLE TO TAX AS INCOME OF THE FIRM. IT IS ITA 1797/MUM/2012 & ITA 1798/MUM/2012 20 CONTENDED ON BEHALF OF THE ASSESSEE THAT EVEN AFTER INTRODUCTION OF SECTION 45(4), THE POSITION WILL BE THE SAME AS THE DEFINITION CLAUSE, I.E., NAMELY, SECTION 2(47), HAS NOT BEEN A MENDED. SECONDLY, IT IS CONTENDED THAT THE EXPRESSION 'OTHERWISE' MUST BE R EAD EJUSDEM GENERIS WITH THE EXPRESSION DISSOLUTION OF FIRM. SO CONSIDERED, THERE IS NO DISSOLUTION ON THE FACTS OF THE CASE. ON BEHALF OF THE REVENUE, IT WAS, HOWEVER, ARGUED THAT THE AMENDMENT WAS BROUGHT ABOU T TO REMOVE THE MISCHIEF OCCASIONED BY PARTIES AVOIDING TO PAY TAX, CONSIDERING THE LAW AS DECLARED AND TO PLUG THE LOOPHOLES. THE EXPRESSI ON OTHERWISE MUST BE READ TO INCLUDE TRANSFER OF CAPITAL ASSETS OF THE A SSESSEE-FIRM TO A PARTNER. AS THE SECTION IS A SELF-CONTAINED CODE, T HERE WAS NO NEED TO AMEND THE DEFINITION OF TRANSFER UNDER SECTION 2(47 ) OF THE ACT. THE POSITION THEREFORE, WILL HAVE TO BE EXAMINED IN THE CONTEXT OF THE LAW AS AMENDED AFTER 1988. BEFORE ELABORATING ON THE ISSUE WE MAY EXAMINE SOME JUDGMENTS RELIED UPON TO FIND OUT, WHETHER THE Y ARE OF ASSISTANCE IN ANSWERING THE ISSUE. 15. OUR ATTENTION WAS INVITED TO A JUDGMENT IN A.L.A. FIRM V. CIT [1991] 189 ITR 285 (SC). A PERUSAL OF THE SAID JUDGMENT WOULD CLEARLY SHOW THAT WHAT WAS AN ISSUE IN THAT C ASE IS REALLY NOT AN ISSUE IN THIS CASE. WHAT WAS REALLY AN ISSUE IN THA T CASE WAS THE VALUATION OF THE STOCK-IN-TRADE ON DISSOLUTION OF T HE FIRM. IN SAKTHI TRADING CO.V. CIT [2001] 250 ITR 871 2 (SC), THE ISSUE WAS WHETHER ON DISSOLUTION OR DEATH OF ONE PARTNER AND RECONSTITUT ION WITH THE REMAINING PARTNERS WITHOUT DISCONTINUANCE OF BUSINESS HOW THE VALUATION ON THE CLOSING STOCK SHOULD BE DONE. THIS JUDGMENT AGAIN I N OUR OPINION, ALSO DOES NOT ASSIST US IN CONSIDERATION OF THE ISSUE WH ICH IS BEFORE US. IN SUNIL SIDDHARTHBHAI/KARTIKEYA V. SARABHAI V. CIT [1985] 156 ITR 509 (SC), THE ISSUE WAS AS TO WHAT HAPPENS WHEN THE A SSESSEE BROUGHT ITA 1797/MUM/2012 & ITA 1798/MUM/2012 21 THE SHARES OF THE LIMITED COMPANIES INTO THE PARTNE RSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL AND WHETHER THERE WAS A TRANSFER OF A CAPITAL ASSET WITHIN THE MEANING OF SECTION 45 OF THE INCOM E-TAX ACT. IT WAS ANSWERED IN THE AFFIRMATIVE AS AND WHEN THE ASSESSE E TRANSFERRED HIS SHARES TO THE PARTNERSHIP FIRM HE RECEIVED NO CONSI DERATION WITHIN THE MEANING OF SECTION 48 OF THE INCOME-TAX ACT, 1961, NOR DID ANY PROFIT OR GAIN ACCRUE TO HIM FOR THE PURPOSE OF SECTION 45 OF THE ACT, BECAUSE THE CONSIDERATION RECEIVED BY THE ASSESSEE ON THE TRANS FER OF HIS SHARES TO THE PARTNERSHIP FIRM DOES NOT FALL WITHIN THE CONTE MPLATION OF SECTION 48 AND NO PROFIT OR GAIN CAN BE SAID TO ARISE FOR THE PURPOSES OF THE ACT. THE APEX COURT CONSIDERED TWO SITUATIONS, ONE WHEN A PE RSONAL ASSET IS BROUGHT BY A PARTNER INTO A PARTNERSHIP AS HIS CONT RIBUTION TO THE PARTNERSHIP CAPITAL AND THAT WHICH ARISES WHEN ON D ISSOLUTION OF THE FIRM OR ON RETIREMENT A SHARE IN THE PARTNERSHIP ASSETS PASSES TO THE PARTNER. THE COURT HELD THAT ON DISSOLUTION OR ON RETIREMENT WHAT THE PARTNER GETS IS A SHARED INTEREST IN ALL THE ASSETS OF THE FIRM WHICH IS REPLACED BY AN EXCLUSIVE INTEREST IN AN ASSET OF EQUAL VALUE. THIS JUDGMENT WAS IN RESPECT OF AN ASSESSMENT BEFORE THE AMENDMENT TO SE CTION 45. IN CIT V. VIJAYALAKSHMI METAL INDUSTRIES [2002] 256 ITR 540 (MAD.), THE REAL ISSUE BEFORE THE LEARNED SINGLE JUDGE WAS AS T O WHEN CAPITAL GAIN IS TO BE BROUGHT TO TAX. THE LEARNED JUDGE HELD THAT U NTIL SUCH TIME SUCH CAPITAL ASSET IS TRANSFERRED BY WAY OF DISTRIBUTION OF THE ASSETS ON THE DISSOLUTION OF THE FIRM NO OCCASION ARISES FOR BRIN GING TO TAX ANY CAPITAL GAIN ON A TRANSFER WHICH HAS NOT TAKEN PLACE. THE S ECTION ITSELF GIVES NO ROOM FOR DOUBT AS THE YEAR IN WHICH THE CAPITAL GAI N IS TO BE BROUGHT TO TAX IS THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE. THIS JUDGMENT WOULD AGAIN BE OF NO ASSISTANCE. IN CIT V. KUNNAMKULAM MILL BOARD [2002] 257 ITR 544 (KER.) THE ASSESSMENT WAS FOR THE YEAR 1989- 90. IN THAT CASE, THE REAL CONTROVERSY WAS WHETHER BY RETIREMENT OF A PARTNER OF THE FIRM THERE IS A TRANSFER OF THE ASSE TS OF THE FIRM IN FAVOUR OF ITA 1797/MUM/2012 & ITA 1798/MUM/2012 22 THE SURVIVING PARTNERS WITHIN THE MEANING OF SECTIO N 45(4) OF THE ACT. THE DIVISION BENCH OF THE KERALA HIGH COURT ANSWERED TH E SAME IN THE NEGATIVE BY HOLDING THAT THERE WAS NO TRANSFER OF A SSETS, BY HOLDING THAT AS LONG AS THERE IS NO CHANGE IN OWNERSHIP OF THE F IRM AND ITS PROPERTIES, THERE IS NO TRANSFER OF OWNERSHIP ON RECONSTITUTION OF THE FIRM. THIS IS THEREFORE, NOT A CASE, WHERE THE ASSETS WERE ALLOTT ED TO A RETIRING PARTNER. 16. RELIANCE HAS BEEN PLACED IN A JUDGMENT OF THE APEX COURT IN CGT V. N.S. GETTI CHETTIAR [1971] 82 ITR 599 TO UNDERSTAND THE EXPRESSION 'TRANSFER'. IT IS OBSERVED THEREIN THAT IN SPELLING OUT THE MEANING ONE MUST TAKE INTO CONSIDERATION THE SETTIN G IN WHICH THOSE TERMS ARE USED AND THE PURPOSE THAT THEY ARE INTEND ED TO SERVE. IF SO UNDERSTOOD, IT IS CLEAR THAT THE WORD 'DISPOSITION' , IN THE CONTEXT, MEANS GIVING AWAY OR GIVING UP BY A PERSON OF SOMETHING, WHICH WAS HIS OWN. ASSIGNMENT MEANS THE TRANSFER OF THE CLAIM, RIGHT O R PROPERTY TO ANOTHER. IN THAT CASE, THE COURT HELD THAT A PARTITION IN A HINDU UNDIVIDED FAMILY CAN BE CONSIDERED EITHER AS 'DISPOSITION' OR 'CONVE YANCE' OR 'ASSIGNMENT' OR 'SETTLEMENT' OR 'DELIVERY' OR 'PAYMENT' OR 'ALIE NATION'. IT IS NO DOUBT TRUE THAT ON BEHALF OF THE ASSESSEE, THEIR LEARNED COUNSEL HAS PLACED RELIANCE IN TRIBHUVANDAS G. PATEL V. CIT [1999] 236 ITR 515 (SC). FIRSTLY, IN THAT CASE, THE MATTER PERTAINS TO AN ASSESSMENT BEFORE THE AMENDMENT ACT CAME INTO FORCE IN 1988. THE ISSUE WAS IN RESPE CT OF THE RETIREMENT OF A PARTNER FROM A PARTNERSHIP. THE REAL ISSUE IN THA T CASE WAS WHETHER A PARTNER WHO HAS RETIRED AND HAD RECEIVED HIS SHARE OF THE ASSETS WOULD BE LIABLE TO BE TAXED UNDER SECTION 47. 17. WE MAY NOW CONSIDER THE JUDGMENT IN B.T. PATIL & SONS V. CGT [1997] 224 ITR 431 (KAR.). WE WILL ADVERT TO SOME FACTS. IN THAT CASE, THE ISSUE BEFORE THE DIVISION BENCH OF T HE KARNATAKA HIGH ITA 1797/MUM/2012 & ITA 1798/MUM/2012 23 COURT WAS, CHARGING OF GIFT-TAX. IN THAT CASE THERE WAS A FIRM WITH FIVE PARTNERS WHICH OWNED SEVERAL ASSETS IN THE FORM OF MACHINERY. CERTAIN DEBITS WERE MADE TO THE RESPECTIVE ACCOUNTS IN JULY , 1977, STATED TO BE THE VALUE OF CERTAIN MACHINERY DISTRIBUTED BY THE F IRM TO THE PARTNERS. SOME MACHINERY WAS GIVEN TO THE PARTNERS INDIVIDUAL LY AND ONE MACHINE WAS GIVEN TO ALL THE FIVE PARTNERS TO BE HELD BY TH EM JOINTLY AS CO-OWNERS. AS A RESULT, THE FIRM CEASED TO BE THE OWNER OF THE SAID MACHINERY AND THE FIVE PARTNERS BECAME THE OWNERS OF THE MACHINER Y SO DISTRIBUTED EITHER INDIVIDUALLY OR AS CO-OWNERS. THE FIVE PARTN ERS SHORTLY THEREAFTER FORMED ANOTHER PARTNERSHIP AND CONTRIBUTED THE MACH INERY WHICH WAS DISTRIBUTED TO THEM BY THE ASSESSEE-FIRM TO THE NEW FIRM BY DOING VALUATION. THE NEW FIRM THEREAFTER SOLD THE MACHINE RY FOR A PRICE. THE GIFT-TAX OFFICER TREATED THE DIFFERENCE AT THE PRIC E AT WHICH THE MACHINERY WAS DISTRIBUTED BY THE ASSESSEE-FIRM TO ITS PARTNER S AS DEEMED GIFT AND SUBJECTED THE SAME TO GIFT-TAX. THE ISSUE WAS WHETH ER DISTRIBUTION OF MACHINERY WAS A TRANSFER IN THE NATURE OF SALE, FOR A CONSIDERATION. THE DIVISION BENCH OF THE KARNATAKA HIGH COURT CONSIDER ED THE EXPRESSION OF 'TRANSFER' UNDER SECTION 2(XXIV) OF THE GIFT-TAX AC T, WHICH DEFINES 'TRANSFER OF PROPERTY' AS ANY DISPOSITION, CONVEYANCE, ASSIGN MENT, SETTLEMENT, DELIVERY OR OTHER ALIENATION OF PROPERTY. THE DIVIS ION BENCH NOTED THAT THE ACT WAS SELF-CONTAINED AND THE DEFINITION OF 'PROPE RTY' IS TO ROPE IN ARTIFICIAL DEVICES WHICH MAY INCLUDE MERE AGREEMENT S OR ARRANGEMENTS, INTENDED TO CONFER GIFTS, WHICH MAY NOT HOWEVER, FA LL UNDER THE NORMAL MEANING OF 'TRANSFER' AS GIFTS AND THE DEFINITION O F 'GIFT' IN SECTION 2(XII) TO INCLUDE MANY TRANSACTIONS WHICH COULD NOT ORDINARIL Y BE DESCRIBED AS TRANSFERS OF PROPERTY AND HAS A WIDER IMPORT THAN T HE MEANING GIVEN TO 'GIFT' IN SECTION 122 OF THE TRANSFER OF PROPERTY A CT. THE COURT AFTER CONSIDERING VARIOUS JUDGMENTS, HELD THAT THE DECISI ONS WHICH HOLD THAT THERE IS NO TRANSFER OF PROPERTY WHEN THERE IS A DI STRIBUTION OF ASSETS ON DISSOLUTION OR WHEN AN ASSET IS ALLOTTED TO A PARTN ER ON HIS RETIREMENT ITA 1797/MUM/2012 & ITA 1798/MUM/2012 24 FROM THE FIRM, WILL BE INAPPLICABLE WHERE AN ASSET IS BROUGHT IN BY THE PARTNER INTO THE PARTNERSHIP. THE COURT THEN OBSERV ED THAT IT FOLLOWS THERE FROM THAT THEY WILL BE INAPPLICABLE, EVEN IN A CONV ERSE SITUATION WHERE A FIRM DISTRIBUTES OR GIVES ITS ASSETS TO ITS PARTNER BY DEBITING THE VALUE THEREOF TO THE RESPECTIVE PARTNERS ACCOUNT, WITHOU T THERE BEING EITHER DISSOLUTION OR RETIREMENT. THE COURT NOTED THAT WHI LE DEALING WITH THE VALUE OF INTEREST OF EACH PARTNER QUA AN ASSET CANN OT BE ISOLATED OR CARVED OUT FROM THE VALUE OF THE PARTNERS INTEREST IN THE TOTALITY OF THE PARTNERSHIP ASSETS, ONCE IT IS ALLOTTED, IT BECOMES THE INDIVIDUAL PROPERTY OF THE PARTNER. THE COURT THEN PROCEEDED TO HOLD TH AT, THUS, THE SHARED INTEREST BECOMES THE EXCLUSIVE INTEREST OF A PARTNE R. WHEN AN ASSET OF THE FIRM IS ALLOTTED TO A PARTNER DURING THE SUBSISTENC E/CONTINUATION OF THE PARTNERSHIP FIRM (AS CONTRASTED FROM AN ALLOTMENT O N DISSOLUTION OF THE FIRM OR RETIREMENT OF THE PARTNER), THE SHARED INTE REST OF ALL THE PARTNERS IN THE SAID ASSET, IS REPLACED BY THE EXCLUSIVE INTERE ST OF THE ALLOTTEE, FOR CONSIDERATION. TO THAT EXTENT, THERE IS AN EXTINGUI SHMENT OF THE INTERESTS OF THE OTHER PARTNERS OF THE FIRM, IN THE PARTNERSH IP ASSET IN QUESTION AND ENLARGEMENT OF THE LIMITED INTEREST OF THE ALLOTTEE INTO A FULL EXCLUSIVE RIGHT IN THE ASSET. WHEN THE ASSET IS A PARTNERSHIP ASSET , A PARTNER CANNOT CLAIM OR EXERCISE ANY SPECIFIC SHARE OR RIGHT OVER SUCH ASSET TO THE EXTENT OF HIS SHARE IN THE BUSINESS OF THE PARTNERSHIP (AS A CO-OWNER CAN DO IN RESPECT OF A CO-OWNERSHIP PROPERTY), AS HIS RIGHT D URING THE SUBSISTENCE OF THE PARTNERSHIP IS ONLY TO GET HIS SHARE OF PROFITS . BUT, ON ALLOTMENT OF THE ASSET BY THE FIRM TO THE PARTNER, SUCH PARTNER BECO MES ENTITLED TO EXERCISE OVER THE ASSET, ALL RIGHTS OF AN ABSOLUTE OWNER. TH E COURT THEN PROCEEDED TO OBSERVE WHAT WAS A MERE INTEREST ON ALLOTMENT BY THE FIRM, ENLARGES INTO AN ABSOLUTE RIGHT, TITLE AND INTEREST. THE EXT INGUISHMENT OF THE COMMON INTEREST OF THE PARTNERS OF THE FIRM AND CRE ATION OF ABSOLUTE OWNERSHIP OF THE PARTNER TO WHOM IT IS ALLOTTED. SU CH A TRANSACTION IS, THEREFORE, A TRANSFER OF PROPERTY AS DEFINED IN THE GIFT-TAX ACT. WE MAY ITA 1797/MUM/2012 & ITA 1798/MUM/2012 25 NOTE THAT THE PARTNERSHIP WAS SUBSISTING AND AN ASS ET OF THE PARTNERSHIP WAS MADE THE ABSOLUTE OWNERSHIP OF ONE OF THE SUBSI STING PARTNERS. 18. THIS JUDGMENT CAME UP FOR CONSIDERATION BEFORE THE APEX COURT IN B.T. PATIL & SONS V. CGT [2001] 247 ITR 588 UPHOLDING THE JUDGMENT OF THE KARNATAKA HIGH COURT. THE APEX COURT OBSERVED A S UNDER : 'IN OUR VIEW, WHEN THERE IS A DISSOLUTION OF A PART NERSHIP OR A PARTNER RETIRES AND OBTAINS IN LIEU OF HIS INTEREST IN THE FIRM, AN ASSET OF THE FIRM, NO TRANSFER IS INVOLVED. BUT THE POSITION IS VERY DIFFERENT WHEN, DURING THE SUBSISTENCE OF A PARTNER SHIP, AN ASSET OF THE PARTNERSHIP BECOMES THE ASSET OF ONLY ONE OF THE PARTNERS THEREOF; THERE IS, IN SUCH A CASE, A TRANSFER OF TH AT ASSET BY THE PARTNERSHIP TO THE INDIVIDUAL PARTNERS....' (P. 591 ) THE RATIO OF THE JUDGMENT AS CAN BE CULLED OUT IS T HAT WHEN A SUBSISTING PARTNER RECEIVES FROM THE FIRM AN ASSET THEN THERE IS A TRANSFER OF THAT ASSET FROM THE PARTNERSHIP TO THE INDIVIDUAL PARTNE R. IN OTHER WORDS UNDER THE WEALTH-TAX ACT WHEN AN ASSET OF THE PARTNERSHIP BECOMES THE ASSET OF ONE OF THE PARTNERS IT AMOUNTS TO A TRANSFER. 19. BEFORE PROCEEDING TO FURTHER EXAMINE THE MATTER, W E MAY CONSIDER THE JUDGMENT IN N. BAGAVATHY AMMAL V. CIT [2003] 259 ITR 678 (SC). THE APEX COURT THEREIN TOOK THE VIEW THAT IN CONSTR UING THE PROVISIONS OF SECTION 46(2) OF THE INCOME-TAX ACT, 1961, THE DEFI NITION OF 'CAPITAL ASSET' IN SECTION 2(14) HAD NO RELEVANCE. IN THAT CASE, NO DOUBT WHAT WAS IN ISSUE WAS SECTION 46(2) AND WHAT THE APEX COURT WAS CONSIDERING THERE WAS THE DISTINCTION BETWEEN 'TRANSFER OF ASSETS' AN D THE DISTRIBUTION OF THE ASSETS OF THE COMPANY UNDER LIQUIDATION. THE CO URT ALSO OBSERVED THAT SECTION 46(2) IS IN TERMS AN INDEPENDENT CHARG ING SECTION AND ALSO PROVIDES FOR A DISTINCT METHOD OF CALCULATING CAPIT AL GAINS. ITA 1797/MUM/2012 & ITA 1798/MUM/2012 26 20. WITH THE ABOVE, WE MAY NOW PROCEED TO ANSWER THE I SSUE. ON RETIREMENT OF A PARTNER OR PARTNERS FROM AN EXISTIN G FIRM, AND WHO RECEIVES ASSETS FROM THE FIRM, THE LAW BEFORE 1988 WOULD REALLY BE OF NO SUPPORT, AS BY SECTION 45(4) WHAT WAS OTHERWISE NOT TAXABLE HAS BEEN MADE TAXABLE. SECTION 45(4) SEEMS TO HAVE BEEN INTR ODUCED WITH A VIEW TO OVERCOME THE JUDGMENT OF THE APEX COURT IN MALAB AR FISHERIES CO.S CASE (SUPRA) AND OTHER JUDGMENTS WHICH TOOK A VIEW THAT THE FIRM ON ITS OWN HAS NO RIGHT BUT IT IS THE PARTNERS WHO OWN JOINTLY OR IN COMMON THE ASSET AND THEREBY REMEDY THE MISCHIEF OC CASIONED. DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION NOW I S SUBJECT TO CAPITAL GAINS TAX UNLESS IT DOES NOT FALL WITHIN THE DEFINI TION OF TRANSFER UNDER SECTION 2(47). WHAT WOULD BE THE EFFECT OF PARTNERS OF A SUBSISTING PARTNERSHIP DISTRIBUTING ASSETS TO PARTNERS WHO RET IRE FROM THE PARTNERSHIP. DOES THE ASSET OF THE PARTNERSHIP, ON BEING ALLOTTED TO THE RETIRED PARTNER/PARTNERS FALL WITHIN THE EXPRESSION 'OTHERWISE'. AS NOTED EARLIER ON BEHALF OF THE ASSESSEE IT HAS BEEN CONTE NDED THAT THE EXPRESSION 'OTHERWISE' WOULD HAVE TO BE READ 'EJUSD EM GENERIS' WITH 'DISSOLUTION OF PARTNERSHIP OR BODY OF INDIVIDUALS' AND FOR THAT PURPOSE RELIANCE WAS PLACED ON A JUDGMENT OF THE DIVISION B ENCH IN CIT V. TRUSTEES OF ABDULCADAR EBRAHIM TRUST[1975 ] 100 ITR 85 (BOM.). SECTION 45 IS A CHARGING SECTION. THE PURPOSE AND O BJECT OF THE ACT OF 1987 WAS TO CHARGE TAX ARISING ON DISTRIBUTION OF C APITAL ASSETS OF FIRMS WHICH OTHERWISE WAS NOT SUBJECT TO TAXATION. IF THE LANGUAGE OF SUB- SECTION (4) IS CONSTRUED TO MEAN THAT THE EXPRESSIO N 'OTHERWISE' HAS TO PARTAKE OF THE NATURE OF DISSOLUTION OR DEEMED DISS OLUTION, THEN THE VERY OBJECT OF THE AMENDMENT COULD BE DEFEATED BY THE PA RTNERS, BY DISTRIBUTING THE ASSETS TO SOME PARTNERS WHO MAY RE TIRE. THE FIRM THEN WOULD NOT BE LIABLE TO BE TAXED THUS DEFEATING THE VERY PURPOSE OF THE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 27 AMENDMENT ACT. PRIOR TO THE FINANCE ACT, 1987, IN T HE CASE OF A PARTNERSHIP IT WAS HELD THAT THE ASSETS ARE OF THE PARTNERS AND NOT OF THE PARTNERSHIP. THEREFORE, IF ON RETIREMENT A PARTNER RECEIVED HIS SHARE OF THE ASSETS, MAY BE IN THE FORM OF A SINGLE ASSET, IT WA S HELD THAT THERE WAS NO TRANSFER AND SIMILARLY ON DISSOLUTION OF THE PAR TNERSHIP. ANOTHER DEVICE RESORTED TO BY AN ASSESSEE WAS TO CONVERT AN ASSET HELD INDEPENDENTLY AS AN ASSET OF THE FIRM IN WHICH THE INDIVIDUAL WAS A PARTNER. THE DECISION OF THE SUPREME COURT IN KARTI KEYA V. SARABHAIS CASE (SUPRA) TOOK A VIEW THAT THIS WOULD NOT AMOUNT TO TRANSFER AND, THEREFORE, FELL OUTSIDE THE SCOPE OF THE CAPITAL GAIN. THE RATIONALE BEING THAT THE CONSIDERATION FOR THE TRAN SFER OF THE PERSONAL ASSET WAS INDETERMINATE, BEING THE RIGHT WHICH AROS E OR ACCRUED TO THE PARTNER DURING THE SUBSISTENCE OF THE PARTNERSHIP T O GET HIS SHARE OF PROFIT FROM TIME TO TIME AND ON DISSOLUTION OF THE PARTNER SHIP TO GET THE VALUE OF HIS SHARE FROM THE NET PARTNERSHIP ASSET. PARLIAMEN T WITH THE AVOWED OBJECT OF BLOCKING THIS ESCAPE ROUTE FOR AVOIDING C APITAL GAINS TAX BY THE FINANCE ACT, 1987, HAS INTRODUCED SUB-SECTION (3) T O SECTION 45. THE EFFECT OF THIS WAS THAT THE PROFITS AND GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A PARTNER TO A FIRM ARE CHARGEABLE AS THE PARTNERS INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER T OOK PLACE. ON A CONVERSION OF THE PARTNERSHIP ASSETS INTO INDIVIDUA L ASSETS ON DISSOLUTION OR OTHERWISE ALSO FORMED PART OF THE SAME SCHEME OF TAX AVOIDANCE. TO PLUG IN THIS LOOPHOLE THE FINANCE ACT, 1987, BROUGH T ON THE STATUTE BOOK A NEW SUB-SECTION (4) IN SECTION 45 OF THE ACT. THE E FFECT IS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASS ET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRMS INCOME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND FOR THE PURPOSES OF COMPUTATION OF CAPITAL GAINS, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER WOULD BE DEEMED TO BE THE FULL VAL UE OF THE CONSIDERATION RECEIVED OR ACCRUED AS A RESULT OF THE TRANSFER. TH EREFORE, IF THE OBJECT OF ITA 1797/MUM/2012 & ITA 1798/MUM/2012 28 THE ACT IS SEEN AND THE MISCHIEF IT SEEKS TO AVOID, IT WOULD BE CLEAR THAT THE INTENTION OF PARLIAMENT WAS TO BRING INTO THE T AX NET TRANSACTIONS WHEREBY ASSETS WERE BROUGHT INTO A FIRM OR TAKEN OU T OF THE FIRM. 21. THE EXPRESSION 'OTHERWISE' IN OUR OPINION, HAS NOT TO BE READ EJUSDEM GENERIS WITH THE EXPRESSION, 'DISSOLUT ION OF A FIRM OR BODY OR ASSOCIATION OF PERSONS'. THE EXPRESSION 'OTHERWI SE' 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 E VEN WHEN A FIRM IS IN EXISTENCE AND THERE IS A TRANSFER OF CAPITAL ASSETS IT COMES WITHIN THE EXPRESSION 'OTHERWISE' AS THE OBJECT OF THE AMENDIN G ACT WAS TO REMOVE THE LOOPHOLE WHICH EXISTED WHEREBY CAPITAL GAIN TAX WAS NOT CHARGEABLE. IN OUR OPINION, THEREFORE, WHEN THE ASSET OF THE PA RTNERSHIP IS TRANSFERRED TO A RETIRING PARTNER THE PARTNERSHIP WHICH IS ASSE SSABLE TO TAX CEASES TO HAVE A RIGHT OR ITS RIGHT IN THE PROPERTY STANDS EX TINGUISHED IN FAVOUR OF THE PARTNER TO WHOM IT IS TRANSFERRED. IF SO READ, IT WILL FURTHER THE OBJECT AND THE PURPOSE AND INTENT OF THE AMENDMENT OF SECT ION 45. ONCE, THAT BE THE CASE, WE WILL HAVE TO HOLD THAT 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 B USINESS PROFITS WHICH IS CHARGEABLE TO TAX UNDER SECTION 45(4) OF THE INCOME -TAX ACT. WE WILL, THEREFORE, HAVE TO ANSWER 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, TRAN SFERRING ASSETS IN FAVOUR OF A RETIRING PARTNER. 22. THE ONLY OTHER CONTENTION ADVANCED IS THAT SECTION 2(47) HAS NOT BEEN AMENDED AND CONSEQUENTLY EVEN IF SECTION 45(4) HAS BEEN BROUGHT IN BY THE AMENDMENT YET THERE IS NO TRANSFER. IN OUR OPIN ION, THAT WOULD NOT BE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 29 THE CORRECT POSITION. FIRSTLY, THE DEFINITION OF TR ANSFER ITSELF IS INCLUSIVE. BEFORE THE INTRODUCTION OF SUB-SECTION (4), THERE W AS CLAUSE (II) OF SECTION 47 WHICH READ AS UNDER : '(II) ANY DISTRIBUTION OF CAPITAL ASSETS ON THE DIS SOLUTION OF A FIRM, BODY OF INDIVIDUALS OR OTHER ASSOCIATION OF PERSONS .' 23. CONSIDERING THIS CLAUSE AS EARLIER CONTAINED IN SE CTION 47, IT MEANT THAT THE DISTRIBUTION OF CAPITAL ASSETS ON THE DISS OLUTION OF A FIRM, ETC., WERE NOT REGARDED AS 'TRANSFER'. THE FINANCE ACT, 1 987, WITH EFFECT FROM APRIL 1, 1988, OMITTED THIS CLAUSE, THE EFFECT OF W HICH IS THAT DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM WOUL D HENCEFORTH BE REGARDED AS 'TRANSFER'. THEREFORE, INSTEAD OF AMEND ING SECTION 2(47), THE AMENDMENT WAS CARRIED OUT BY THE FINANCE ACT, 1987, BY OMITTING SECTION 47(II), THE RESULT OF WHICH IS THAT DISTRIB UTION OF CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM WOULD BE REGARDED AS 'TRA NSFER'. THEREFORE, THE CONTENTION THAT IT WOULD NOT AMOUNT TO A TRANSFER H AS TO BE REJECTED. IT IS NOW CLEAR THAT WHEN THE ASSET IS TRANSFERRED TO A P ARTNER, THAT FALLS WITHIN THE EXPRESSION 'OTHERWISE' AND THE RIGHTS OF THE OTHER PARTNERS IN THAT ASSET OF THE PARTNERSHIP ARE EXTINGUISHED. THA T WAS ALSO THE POSITION EARLIER BUT CONSIDERING THAT ON RETIREMENT THE PART NER ONLY GOT HIS SHARE, IT WAS HELD THAT THERE WAS NO EXTINGUISHMENT OF RIGHT. CONSIDERING THE AMENDMENT, THERE IS CLEARLY A TRANSFER AND IF, THER E BE A TRANSFER, IT WOULD BE SUBJECT TO CAPITAL GAINS TAX. 24. CONSIDERING THE ANSWERS TO QUESTION NOS. 2 AND 3, THE ORDERS OF THE INCOME-TAX APPELLATE TRIBUNAL ALLOWING THE ASSESSEE S APPEAL MUST BE SET ASIDE AND THE ORDER OF ASSESSMENT HAS TO BE RES TORED. QUESTION NO. 5 HAS TO BE ANSWERED ACCORDINGLY. ITA 1797/MUM/2012 & ITA 1798/MUM/2012 30 25. BOTH THE APPEALS ARE ACCORDINGLY ALLOWED. IN THE C IRCUMSTANCES OF THE CASE EACH PARTY TO BEAR THEIR OWN COSTS. WE HAVE OBSERVED THAT THE ISSUE WITH RESPECT TO TAX ABILITY OF THE AMOUNT RECEIVED BY THE PARTNER ON RETIREMENT FROM THE PARTNERSHIP FIRM FOR EXTINGUISHMENT OF HIS RIGHTS IN THE PARTNERSHIP FIRM IN FAVOUR OF THE CONTINUING PARTNERS HAS BEEN DECIDED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. SHR I RAJNISH MANIKLAL BHANDARI, IT APPEAL NO. 2058 OF 2012, VIDE JUDGMENT DATED 9TH MA RCH, 2013 AND IN THE CASE OF CIT V. MR. RIYAZ A. SHEIKH IN I.T. APPEAL NO. 1969 OF 2011 VIDE JUDGMENT DATED 26TH FEBRUARY, 2013, WHEREBY THE HON'BLE BOMBAY HIG H COURT HAS HELD THAT THE SAID AMOUNT RECEIVED BY PARTNER ON RETIREMENT FROM THE PARTNERSHIP FIRM IS NOT TAXABLE IN THE HANDS OF THE PARTNER. THE HON'BLE BO MBAY HIGH COURT IN THE CASE OF RIYAZ A SHEIKH REPORTED IN (2014) 41 TAXMANN.COM 45 5(BOM.) HELD AS UNDER : '2. WE FIND THAT BY THE IMPUGNED ORDER, THE TRIBUNA L WHILE HOLDING THAT AMOUNTS RECEIVED BY A PARTNER ON HIS RETIREMENT FRO M PARTNERSHIP FIRM ARE EXEMPT FROM CAPITAL GAINS TAX RELIED UPON THE DECIS ION OF THIS COURT IN THE MATTER OF PRASHANT S. JOSHI V. ITO [2010] 324 ITR 154/189 TAXMAN 1 (BOM). COUNSEL FOR THE REVENUE IS UNABLE TO POINT OUT AS T O HOW THE DECISION IN THE MATTER OF PRASHANT S. JOSHI (SUPRA) INTER ALIA HOLD ING THAT NO CAPITAL GAINS ARE PAYABLE BY AN ERSTWHILE PARTNER ON AMOUNTS RECEIVED ON RETIREMENT WOULD NOT BE APPLICABLE TO THE PRESENT CASE. THE ONLY SUBMISS ION ON BEHALF OF THE REVENUE IS THAT THERE WAS AN EARLIER DECISION OF THIS COURT IN THE MATTER OF N.A. MODI V. CIT [1986] 162 ITR 420/24 TAXMAN 219 (BOM.) AND IT HAS NOT BEEN CONSIDERED IN THE DECISION RENDERED IN THE MATTER OF PRASHANT S. JOHSI (SUPRA). 3. IN THE IMPUGNED ORDER, THE TRIBUNAL DOES REFER T O THE THIS COURT IN THE MATTER OF N.A. MODI (SUPRA) AND STATES THAT IT FOLLOWS THE DECISION OF THIS COURT IN THE MATTER OF CIT V. TRIBHUVANDAS G. PATEL [1978] 115 ITR 95 (BOM.) AND THE SAME HAS BEEN REVERSED BY THE APEX COURT IN TRIBHUVANDAS G. PATEL V. CIT [1999] ITA 1797/MUM/2012 & ITA 1798/MUM/2012 31 236 ITR 515. THIS COURT IN THE MATTER OF PRASHANT S . JOSHI (SUPRA) HAS ALSO REFERRED TO THE DECISION OF TRIBUVANDAS G. PATEL (S UPRA) RENDERED BY THIS COURT AND ITS REVERSAL BY THE APEX COURT. MOREOVER, THE D ECISION OF THIS COURT IN THE CASE OF PRASHANT S. JOSHI (SUPRA) PLACED RELIANCE U PON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT V. R. LINGAMALLU RAJKUMAR [2001] 247 ITR 801/[2002] 124 TAXMAN 127 WHEREIN IT HAS BEEN HELD THAT AMOUNTS RECEIVED ON RETIREMENT BY A PARTNER IS NOT SUBJECT TO CAPITA L GAINS TAX. IN THE ABOVE CIRCUMSTANCES, WE SEE NO REASON TO ENTERTAIN THE PR OPOSED QUESTION OF LAW.' THE ISSUE OF TAXABILITY OF AMOUNT RECEIVED BY THE P ARTNER ON RETIREMENT FROM THE PARTNERSHIP FIRM FOR EXTINGUISHMENT OF HIS RIGHTS I N THE PARTNERSHIP FIRM IN FAVOUR OF THE CONTINUING PARTNERS WAS ALSO DISCUSSED BY THE H ON'BLE BOMBAY HIGH COURT IN THE CASE OF PRASHANT S JOSHI V. ITO REPORTED IN (2010) 324 ITR 154(BOM.) AFTER CONSIDERING THE OMISSION OF SECTION 47(II) FROM THE STATUTE W.E.F 01-04-1988 AS REPRODUCED HERE-UNDER: '12. THE ONLY REASON THAT HAS BEEN RECORDED BY THE ASSESSING OFFICER IS THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) BY HIS ORDER D ATED 17-9-2008, IN THE CASE OF THE PARTNERSHIP FIRM FOR ASSESSMENT YEAR 20 05-06 ALLOWED A CLAIM FOR TREATING THE PAYMENT OF RS. 1 CRORE TO THE TWO RETI RING PARTNERS AS REVENUE EXPENDITURE. SINCE THE ASSESSEE CLAIMED THE PAYMENT TO BE EXEMPT BY TREATING IT AS A CAPITAL RECEIPT, IT IS STATED THAT THERE WA S REASON TO BELIEVE THAT THE RECEIPTS UNDER THE DEED OF RETIREMENT HAD ESCAPED A SSESSMENT WITHIN THE MEANING OF SECTION 147. 13. DURING THE SUBSISTENCE OF A PARTNERSHIP, A PART NER DOES NOT POSSESS AN INTEREST IN SPECIE IN ANY PARTICULAR ASSET OF THE P ARTNERSHIP. DURING THE SUBSISTENCE OF A PARTNERSHIP, A PARTNER HAS A RIGHT TO OBTAIN A SHARE IN PROFITS. ON A DISSOLUTION OF A PARTNERSHIP OR UPON RETIREMEN T, A PARTNER IS ENTITLED TO A VALUATION OF HIS SHARE IN THE NET ASSETS OF THE PAR TNERSHIP WHICH REMAIN AFTER ITA 1797/MUM/2012 & ITA 1798/MUM/2012 32 MEETING THE DEBTS AND LIABILITIES. AN AMOUNT PAID T O A PARTNER UPON RETIREMENT, AFTER TAKING ACCOUNTS AND UPON DEDUCTION OF LIABILI TIES DOES NOT INVOLVE AN ELEMENT OF TRANSFER WITHIN THE MEANING OF SECTION 2 (47). CHIEF JUSTICE P.N. BHAGWATI (AS THE LEARNED JUDGE THEN WAS) SPEAKING F OR A DIVISION BENCH OF THE GUJARAT HIGH COURT IN CIT V. MOHANBHAI PAMABHAI [1973] 91 ITR 393 DEALT WITH THE ISSUE IN THE FOLLOWING OBSERVATIONS:-- '...WHEN, THEREFORE, A PARTNER RETIRES FROM A PARTN ERSHIP AND THE AMOUNT OF HIS SHARE IN THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNTS ON THE FOO TING OF NOTIONAL SALE OF THE PARTNERSHIP ASSETS AND GIVEN TO HIM, WHAT HE RECEIV ES IS HIS SHARE IN THE PARTNERSHIP AND NOT ANY CONSIDERATION FOR TRANSFER OF HIS INTEREST IN THE PARTNERSHIP TO THE CONTINUING PARTNERS. HIS SHARE I N THE PARTNERSHIP IS WORKED OUT BY TAKING ACCOUNTS IN THE MANNER PRESCRIBED BY THE RELEVANT PROVISIONS OF THE PARTNERSHIP LAW AND IT IS THIS AND THIS ONLY, N AMELY, 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 PARTNERS : VIDE ALSO THE RECENT D ECISION OF THE SUPREME COURT IN CIT V. BANKEY LAL VAIDYA . IT IS TRUE THAT SECTION 2 (47 ) DEFINES 'TRANSFER' IN RELATION TO A CAPITAL ASSET AND THIS DEFINITION GIV ES AN ARTIFICIALLY EXTENDED MEANING TO THE TERM 'TRANSFER' BY INCLUDING WITHIN ITS SCOPE AND AMBIT TWO KINDS OF TRANSACTIONS WHICH WOULD NOT ORDINARILY CO NSTITUTE 'TRANSFER' IN THE ACCEPTED CONNOTATION OF THAT WORD, NAMELY, RELINQUI SHMENT OF THE CAPITAL ASSET AND EXTINGUISHMENT OF ANY RIGHTS IN IT. BUT EVEN IN THIS ARTIFICIALLY EXTENDED SENSE, THERE IS NO TRANSFER OF INTEREST IN THE PART NERSHIP ASSETS INVOLVED WHEN A PARTNER RETIRES FROM THE PARTNERSHIP.' THE GUJARAT HIGH COURT HELD THAT THERE IS, IN SUCH A SITUATION, NO TRANSFER OF INTEREST IN THE ASSETS OF THE PARTNERSHIP WITHIN TH E MEANING OF SECTION 2(47). WHEN A PARTNER RETIRES FROM A PARTNERSHIP, WHAT THE PARTNER RECEIVES IS HIS ITA 1797/MUM/2012 & ITA 1798/MUM/2012 33 SHARE IN THE PARTNERSHIP WHICH IS WORKED OUT BY TAK ING ACCOUNTS AND THIS DOES NOT AMOUNT TO A CONSIDERATION FOR THE TRANSFER OF H IS INTEREST TO THE CONTINUING PARTNERS. THE RATIONALE FOR THIS IS EXPLAINED AS FO LLOWS IN THE JUDGMENT OF THE GUJARAT HIGH COURT :-- '...WHAT THE RETIRING PARTNER IS ENTITLED TO GET IS NOT MERELY A SHARE IN THE PARTNERSHIP ASSETS; HE HAS ALSO TO BEAR HIS SHARE O F THE DEBTS AND LIABILITIES AND IT IS ONLY HIS SHARE IN THE NET PAR TNERSHIP ASSETS AFTER SATISFYING THE DEBTS AND LIABILITIES THAT HE IS ENT ITLED TO GET ON RETIREMENT. THE DEBTS AND LIABILITIES HAVE TO BE DEDUCTED FROM THE VALUE OF THE PARTNERSHIP ASSETS AND IT IS ONLY IN THE SURPLUS TH AT THE RETIRING PARTNER IS ENTITLED TO CLAIM A SHARE. IT IS, THEREFORE, NOT PO SSIBLE 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 P ARTICULAR AMOUNT REPRESENTS CONSIDERATION RECEIVED BY THE RETIRING P ARTNER FOR EXTINGUISHMENT OF HIS INTEREST IN A PARTICULAR ASSE T.' 14. THE APPEAL AGAINST THE JUDGMENT OF THE GUJARAT HIGH COURT WAS DISMISSED BY A BENCH OF THREE LEARNED JUDGES OF THE SUPREME C OURT IN ADDL. CIT V. MOHANBHAI PAMABHAI [1987] 165 ITR 166 . THE SUPREME COURT RELIED UPON ITS JUDGMENT IN SUNIL SIDDHARTHBHAI V.CIT [1985] 156 ITR 509. THE SUPREME COURT REITERATED T HE SAME PRINCIPLE BY RELYING UPON THE JUDGMENT IN ADDANKI NARAYANAPPA V. BHASKARA KRISHNAPPA AIR 1966 SC 1300. THE SUPREME COURT HELD THAT WHAT IS ENVISAGED ON THE RETIREMENT OF A PARTNER IS MERELY HIS RIGHT TO REALISE HIS INTEREST AND TO RECEIVE ITS VALUE. WHAT IS REALISED IS THE INTEREST WHICH THE PARTNER ENJOYS IN THE ASSETS DURING THE SUBSISTENCE OF THE PARTNERSHIP BY VIRTUE OF HIS STATUS AS A PARTNER AND IN TERMS OF THE PART NERSHIP AGREEMENT. CONSEQUENTLY, WHAT THE PARTNER GETS UPON DISSOLUTIO N OR UPON RETIREMENT IS THE REALISATION OF A PRE-EXISTING RIGHT OR INTEREST. TH E SUPREME COURT HELD THAT THERE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 34 WAS NOTHING STRANGE IN THE LAW THAT A RIGHT OR INTE REST SHOULD EXIST IN PRAESENTI BUT ITS REALISATION OR EXERCISE SHOULD BE POSTPONED . THE SUPREME COURT INTER ALIA CITED WITH APPROVAL THE JUDGMENT OF THE GUJARA T HIGH COURT IN MOHANBHAI PAMABHAI'S CASE (SUPRA) AND HELD THAT THERE IS NO T RANSFER UPON THE RETIREMENT OF A PARTNER UPON THE DISTRIBUTION OF HIS SHARE IN THE NET ASSETS OF THE FIRM. IN CIT V. R. LINGMALLU RAGHUKUMAR [2001] 247 ITR 801 , THE SUPREME COURT HELD, WHILE AFFIRMING THE PRINCIPLE LAID DOWN IN MOHANBHA I PAMABHAI THAT WHEN A PARTNER RETIRES FROM A PARTNERSHIP AND THE AMOUNT O F HIS SHARE IN THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES A ND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNTS, THERE IS NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRED PARTNER TO THE CONTINUING PAR TNERS. 15. AT THIS STAGE, IT MAY BE NOTED THAT IN CIT V. TRIBHUVANDAS G. PATEL [1978] 115 ITR 95 (BOM.), WHICH WAS DECIDED BY A DIVISION BENCH OF THIS COURT, UNDER A DEED OF PARTNERSHIP, THE ASSESSEE RETIRED FROM TH E PARTNERSHIP FIRM AND WAS INTER ALIA PAID AN AMOUNT OF RS. 4,77,941 AS HIS SH ARE IN THE REMAINING ASSETS OF THE FIRM. THE DIVISION BENCH OF THIS COURT HAD H ELD THAT THE TRANSACTION WOULD HAVE TO BE REGARDED AS AMOUNTING TO A TRANSFE R WITHIN THE MEANING OF SECTION 2(47) INASMUCH AS THE ASSESSEE HAD ASSIGNED, RELEASED AND RELINQUISHED HIS SHARE IN THE PARTNERSHIP AND ITS A SSETS IN FAVOUR OF THE CONTINUING PARTNERS. THIS PART OF THE JUDGMENT WAS REVERSED IN APPEAL BY THE SUPREME COURT IN TRIBHUVANDAS G. PATEL V. CIT [1999] 236 ITR 515. FOLLOWING THE JUDGMENT OF THE SUPREME COURT INSUNIL SIDDHARTH BHAI'S CASE (SUPRA), THE SUPREME COURT HELD THAT EVEN WHEN A PARTNER RETIRES AND SOME AMOUNT IS PAID TO HIM TOWARDS HIS SHARE IN THE ASSETS, IT SHOULD B E TREATED AS FALLING UNDER CLAUSE (II) OF SECTION 47 . THEREFORE, THE QUESTION WAS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. SECTION 47(II) WHICH HELD THE FIELD AT THE MATERIAL TIME PROVIDED THAT NOTHING CONTAINED IN SECTION 45 WAS APPLICABLE TO CERTAIN TRANSACTIONS SPECIFIED THEREIN AND ONE OF T HE TRANSACTIONS SPECIFIED IN CLAUSE (II) WAS DISTRIBUTION OF THE CAPITAL ASSETS ON A DISSOLUTION OF A ITA 1797/MUM/2012 & ITA 1798/MUM/2012 35 FIRM. SECTION 47(II) WAS SUBSEQUENTLY OMITTED BY THE FINANCE ACT OF 1987 WITH EFFECT FROM 1-4-1988. SIMULTANEOUSLY, SUB-SECTION ( 4) OF SECTION 45 CAME TO BE INSERTED BY THE SAME FINANCE ACT . SUB-SECTION (4) OF SECTION 45 PROVIDES THAT PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAP ITAL 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 AS THE INC OME OF THE FIRM, ASSOCIATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSF ER TAKES PLACE. THE FAIR MARKET VALUE OF THE ASSETS ON THE DATE OF SUCH TRAN SFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACC RUING AS A RESULT OF THE TRANSFER FOR THE PURPOSE OF SECTION 48 . EX FACIE SUB-SECTION (4) OF SECTION 45 DEALS WITH A SITUATION WHERE THERE IS A TRANSFER OF A CAPITAL AS SET BY WAY OF A DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM OR OTHE RWISE. EVIDENTLY, ON THE ADMITTED POSITION BEFORE THE COURT, THERE IS NO TRA NSFER OF A CAPITAL ASSET BY WAY OF A DISTRIBUTION OF THE CAPITAL ASSETS, ON A D ISSOLUTION OF THE FIRM OR OTHERWISE IN THE FACTS OF THIS CASE. WHAT IS TO BE NOTED IS THAT EVEN IN A SITUATION WHERE SUB-SECTION (4) OF SECTION 45 APPLIES, PROFITS OR GAINS ARISING FROM THE TRANSFER ARE CHARGEABLE TO TAX AS INCOME O F THE FIRM.' THUS, FROM THE ABOVE IT IS CLEAR THAT AS PER SECTIO N 45(4) OF THE ACT PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM OR OTHER ASSOCIATION OF P ERSON OR BODY OF INDIVIDUALS(NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHER WISE , SHALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCIATION OR BODY , OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND FOR THE PURPOSE OF SE CTION 48 OF THE ACT , THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH TRAN SFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER . THE ASSESSEE HAS TRANSFERRED 8 UNITS TO THE RETIRING PA RTNER FOR WHICH BOOK VALUE WAS ADOPTED, WHEREBY BOOK VALUE OF 6 UNITS TRANSFERRED TO THE PARTNER WAS @ RS. 1932.46 PER SQ. FT. AND THE BOOK VALUE OF 2 UNITS W AS @ RS. 671.00 PER SQ. FT. . NO ITA 1797/MUM/2012 & ITA 1798/MUM/2012 36 REASONS OR JUSTIFICATION WAS BROUGHT ON RECORD BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT OR APPELLATE PROCEEDINGS BEFORE THE AUTH ORITIES BELOW AS WELL AS BEFORE US FOR THE REASON FOR ADOPTING THE DIFFERENT BOOK V ALUE BETWEEN UNIT NO. 02 AND 09 AT S.NO 1 AND 2 OF THE CHART AND THE OTHER SIX UNIT S SO TRANSFERRED TO THE RETIRING PARTNER ALBEIT THE SAID UNITS WERE SITUATED IN THE SAME BUILDING PROJECT HERMES ATTRIUM . SINCE NO EXPLANATION WHATSOEVER HAS BE EN SUBMITTED TO DISTINGUISH AND JUSTIFY THE ADOPTION OF TWO DIFFERENTIAL RATES WITH IN THE SAME BUILDING PROJECT HERMES ATTRIUM , WE ARE OF THE CONSIDERED VIEW T HAT THE SAME VALUE HAS TO BE APPLIED FOR UNIT NO. 02 AND 09 AT S. NO. 1 & 2 OF T HE UNITS IN THE CHART WHICH WERE SITUATED IN THE SAME BUILDING PROJECT HERMES ATTRI UM , WHICH WERE ADOPTED FOR THE OTHER SIX UNITS TRANSFERRED IN THE SAME BUILDING PR OJECT HERMES ATTRIUM TO THE RETIRING PARTNER. WE DO NOT FIND ANY MERIT IN THE CONTENTIONS OF THE ASSESSEE IN THE ABSENCE OF COGENT REASONS AND JUSTIFICATIONS TO DIS TINGUISH THE UNITS TO ADOPT DIFFERENTIAL RATES . THUS THE BOOK VALUE OF RS. 19 32.46 PER SQ. FT. WHICH WAS ADOPTED AND ACCEPTED BY THE ASSESSEE AS FAIR MARKET VALUE OF SIX UNITS IS FULLY JUSTIFIABLE AND THE ACTION OF THE A.O. IS JUSTIFIED AND RIGHTLY CONFIRMED BY THE LD. CIT(A).THE VALUE OF RS.1640 PER SQUARE FEET AS PER SALE INSTANCE OF UNIT NO. 210 IN THE BUILDING PROJECT HERMES ATTRIUM IN FEBRUARY 2006 CAN ALSO BE NOT ADOPTED AS THE ASSESSEE HAS NOT BROUGHT ANY SIMILARITY OF THE SAID UNIT NO 210 IN PROJECT HERMES ATTRIUM SOLD IN FEBRUARY 2006 WITH THE UN IT NO 02 AND 09 AT S.NO. 1 AND 2 OF THE CHART AS WELL WHEN THE FAIR MARKET VALUE O N THE TRANSFER OF UNIT ON 20-04- 2006 ARE AVAILABLE AS FOR THE SIX UNITS NAMELY 511, 512,601 ,612, 710 AND 711 AND NO DISTINGUISHING FEATURES HAVE BEEN BROUGHT WITH R ESPECT TO UNIT NO 02 AND 09 VIS- -VIS OTHER SIX UNITS TRANSFERRED TO RETIRING PARTN ER ALTHOUGH ALL THE UNITS TRANSFERRED ARE SITUATED IN THE SAME BUILDING, THEN THERE IS NO NEED TO ADOPT ANY OTHER SEPERATE VALUE FOR UNIT NO 02 AND 09 IN THE B UILDING PROJECT HERMES ATTRIUM . THE PRIMARY ONUS WAS ON THE ASSESSEE TO DISTINGUISH AND JUSTIFY THE ADOPTION OF ANY OTHER RATE APART FROM RS.1932.46 PER SQUARE FEET BY BRINGING ON RECORD THE DISTINGUISHABLE FEATURES IN THE UNITS LOCATED IN TH E SAME BUILDING TO JUSTIFY THE ADOPTION OF LOWER RATE OF RS.671 PER SQUARE FEET FO R UNIT NO 02 AND 09 VIS--VIS OTHER ITA 1797/MUM/2012 & ITA 1798/MUM/2012 37 SIX UNITS SO TRANSFERRED WHICH IS LOWER THAN RS.193 2.46 PER SQUARE FEET BEING BOOK VALUE WHICH IS AGREED BY THE ASSESSEE FOR SIX UNITS 511,512,601,612,710 AND 711 IN THE SAME BUILDING COMPLEX TO BE ADOPTED FOR TRANSFE R OF THE UNITS TO THE RETIRING PARTNERS. WE ORDER ACCORDINGLY. 10. IN THE RESULT THE ASSESSEE APPEAL IN ITA NO 179 7/MUM/2012 FOR THE ASSESSMENT YEAR 2007-08 IS DISMISSED. NOW WE SHALL TAKE UP ASSESSEE-RAMESH BUILDERS APPEA L IN ITA NO. 1798/MUM/2012 FOR THE ASSESSMENT YEAR 2007-08. 11. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE I N THE MEMO OF APPEAL FILED WITH THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI (HER EINAFTER CALLED THE TRIBUNAL) READS AS UNDER:- 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE HONOURABLE COMMISSIONER OF INCOME TAX (APP EALS) - 21, MUMBAI IS NOT JUSTIFIED AND ERRED IN HOLDING THAT P AYMENT OF COMPENSATION OF RS. 24,035,000/- WAS NEITHER ALLOWA BLE U/S 24 OF THE INCOME TAX ACT, 1961 (THE ACT) NOR U/S 37(1) OF THE ACT. 2) THE HONOURABLE COMMISSIONER OF INCOME TAX (APPEA LS) DID NOT APPRECIATE THE FACT THAT THE SAID AMOUNT OF RS. 24,035,000/- WAS PAID BY WAY OF COMPENSATION FOR RELEASE OF RIGH TS IN THE PREMISES AND FOR THE TERMINATION OF LEASE AGREEMENT WITH VIEW TO DERIVE ECONOMIC BENEFITS TO THE APPELLANT AND WAS I NCURRED KEEPING IN MIND THE COMMERCIAL EXPEDIENCY AND FROM THE PERSPECTIVE OF THE PRUDENT BUSINESSMEN AND ACCORDIN GLY THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF INTERES T AND THEREFORE ALLOWABLE U/S 37(1) OF THE ACT. 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HONOURABLE COMMISSIONER OF INCOME TAX (APP EALS) - 21, MUMBAI ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 432,000/- OUT OF INTEREST EXPENSES ON THE GROUND THAT SUCH EX PENSES WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE APPELLANT. ITA 1797/MUM/2012 & ITA 1798/MUM/2012 38 4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HONOURABLE COMMISSIONER OF INCOME TAX (APP EALS) - 21, MUMBAI ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 60,000/- OUT OF PROFESSIONAL FEES. 5) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HONOURABLE COMMISSIONER OF INCOME TAX (APP EALS) - 21, MUMBAI ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 16862/-OUT OF REPAIRS AND MAINTENANCE EXPENSES. 12. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A BUILDER AND DEVELOPER OF PROPERTY AND HAS UNDERTAKEN PROJECT AT PUNE. IT WAS OBSERVED BY THE AO FROM THE P&L ACCOUNT THAT THE ASSESSEE HAS D EBITED AN AMOUNT OF RS. 2,40,35,000/- UNDER THE HEAD COMPENSATION FOR RELEA SE OF RIGHTS IN PREMISES. THE A.O. OBSERVED THAT THE ASSESSEE FIRM HAS GIVEN COMPENSATION OF RS. 2,40,35,000/- TO M/S. PYRAMID RETAIL & MERCHANDISIN G PVT. LTD.(HEREINAFTER CALLED THE PYRAMID) REGARDING TERMINATION OF TH E LEASE AGREEMENT WHICH WAS ENTERED INTO W.E.F. 1ST APRIL, 2001 TILL MARCH 2011 WITH RESPECT TO THE PREMISES HERMES PLAZZO SITUATED AT 1978, CONVENT STREET, CAMP, PUNE- 411001. THE CONTENTION OF THE ASSESSEE WAS NOT ACC EPTABLE TO THE A.O. DUE TO THE REASONS THAT RENTAL INCOME RECEIVED BY THE ASSE SSEE FROM THE PYRAMID HAS BEEN SHOWN AS INCOME FROM HOUSE PROPERTY AND THE ASSESSEE HAD AVAILED DEDUCTION U/S 24 OF THE ACT, HENCE, THE SAID COMPEN SATION EXPENSES DO NOT FALL WITHIN THE PURVIEW OF SECTION 24 OF THE ACT , AND ALSO THAT THE SAID EXPENSES HAVE NOT BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND HENCE NOT ELIGIBLE FOR DEDUCTION U/S 3 7(1) OF THE ACT. WHEN THE ASSESSEE WAS CONFRONTED AS TO HOW THE COMPENSATION OF RS.2,40,35,000/- PAID BY THE ASSESSEE FIRM TO THE PYRAMID FOR TERMIN ATION OF THE LEASE AGREEMENT BE ALLOWED UNDER THE PROVISIONS OF THE AC T, IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE HAD RECEIVED ADDITIONAL INTEREST FREE DEPOSIT OF RS. 70 LACS FOR A PERIOD OF 12 YEARS FROM THE DATE OF C OMMENCEMENT OF AGREEMENT DATED 10 TH JANUARY, 2007 WITH M/S PANTALOON RETAILS INDIA ITA 1797/MUM/2012 & ITA 1798/MUM/2012 39 LIMITED(HEREINAFTER CALLED THE PANTALOON) WHEREB Y TOTAL INTEREST FREE DEPOSIT OF RS. 120 LACS WAS RECEIVED UNDER THE NEW AGREEMEN T WITH THE PANTALOON, AND THE DEPOSIT OF RS. 50 LACS WHICH WAS RECEIVED FROM OLD LICENSEE , THE PYRAMID WAS TO BE REFUNDED BY 31 ST MARCH, 2011 AND IN SHORT THE ASSESSEE FIRM RECEIVED ADDITIONAL INTEREST FREE DEPOSIT OF R S. 70 LACS FROM THE PANTALOON FOR A LONGER PERIOD OF TIME. THE SAID NEW AGREEMEN T WITH THE PANTALOON WAS ALSO FOR A LONGER PERIOD OF TIME THAT IS 9 YEARS AN D FURTHER PROVISION FOR RENEWAL OF AGREEMENT FOR ADDITIONAL THREE YEARS AGG REGATING TO 12 YEARS. UNDER THE SAID AGREEMENT WITH PANTALOON, THE CONSID ERATION I.E. THE BUSINESS CONDUCTING FEES WAS GUARANTEED @ 2% OF NET SALE PRO CEEDS OF PANTALOON AND WITH A PROVISION OF INCREASE IN THE MINIMUM GUARANT EED CONDUCTING FEES BY 20% OVER THE IMMEDIATELY PRECEDING MINIMUM GUARANTE ED CONDUCTING FEES PAYABLE AT THE END OF EVERY BLOCK OF 3 YEARS FROM T HE COMMENCEMENT DATE. THUS, CONSIDERING THE AFORESAID FACTORS THE ASSESS EE FIRM DECIDED TO TERMINATE THE EXISTING LEAVE AND LICENSE AGREEMENT WITH THE PYRAMID BY PAYING THE COMPENSATION OF RS. 2,40,35,000/- FOR TH EIR EXIT FROM THE ASSESSEES PREMISES TO ENABLE THE ASSESSEE TO USE T HE PREMISES FOR A BETTER AND MORE PROFITABLE PURPOSES. THUS , THE EXPENSES W ERE INCURRED KEEPING IN VIEW THE COMMERCIAL EXPEDIENCY AND FROM THE PERSPEC TIVE OF A PRUDENT BUSINESSMAN AND HENCE IT WAS CONTENDED BY THE ASSES SEE THAT THE SAME IS ALLOWABLE U/S 37(1) OF THE ACT. THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECISIONS:- (I) JUGAL KISHORE BALDEV SAHAI V. CIT (1967) 63 ITR 228. (II) SRI VENKATA SATYANARAYANA RICE MILL CONTRACTOR S CO. V. CIT (1977) 223 ITR 101. (III) CIT V. WALCHAND & CO. (P) LTD. (1967) 65 ITR 381 (IV) SASSON J. DAVID & CO. (P) LTD. V. CIT (1979) 1 18 ITR 261 (V) CIT V. BIRLA COTTON SPG. & WVG.MILLS (1972) 82 ITR 166 (VI)S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1 ITA 1797/MUM/2012 & ITA 1798/MUM/2012 40 THE A.O. WENT THROUGH THE SUBMISSION OF THE ASSESSE E AND DISTINGUISHED THE CASE LAWS RELIED UPON BY THE ASSESSEE BY OBSERVING AS UNDER:- I) IN THE CASE OF JUGAL KISHORE BALDEV SAHAI V. CI T (1967) 63 ITR 228, THE ISSUE INVOLVED WAS THAT HUF HAD PAID R EMUNERATION TO ITS KARTA AND QUESTION WAS THAT WHETHER IT IS AL LOWABLE OR NOT? II) IN THE CASE OF SRI VENKATA SATYANARAYANA RICE MILL CONTRACTORS CO. V. CIT (1977) 223 ITR 101, THE ISSU E INVOLVED WAS THAT WHETHER PAYMENT MADE BY THE ASSESSEE TO A FUND WHICH WAS CONSTITUTED TO PROMOTE PUBLIC WELFARE AND CONTRIBUT ION TO WHICH WAS VOLUNTARY, BUT WAS NEVERTHELESS REQUIRED FROM T HE ASSESSEE AT THE TIME THE ASSESSEE SOUGHT A PERMIT FOR THE MO VEMENT OF HIS GOODS FROM THE STATE WOULD CONSTITUTE EXPENDITURE I NCIDENTAL TO THE CARRYING ON OF THE BUSINESS OF THE ASSESSEE. III) IN THE CASE OF CIT V. WALCHAND & CO. (P) LTD. (1967) 65 ITR 381. THE FACTS OF THE CASE WERE THAT THE ASSESSEE C OMPANY HAD INCREASED REMUNERATION OF ITS DIRECTORS AND EXECUTI VE OFFICERS. THE AO DISALLOWED THE INCREASE IN THE REMUNERATION OF T HE DIRECTORS AND THE EXECUTIVE OFFICERS ON THE GROUND THAT EXPEN DITURE WAS NOT LAID OUT WHOLLY & EXCLUSIVELY FOR THE PURPOSE O F THE BUSINESS OF THE ASSESSEE COMPANY. IV) IN THE CASE OF SASSON J. DAVID & CO. (P) LTD. C IT (1979) 118 ITR 261 THE ISSUE INVOLVED REGARDING DEDUCTIBILITY OF EXPENSES U/S 37(1) EVEN THOUGH THERE WAS NO COMPELLING NECES SITY TO INCUR SUCH EXPENDITURE. V) IN THE CASE OF CIT V. BIRLA COTTON SPG. & WVG. M ILLS (1972) 82 ITR 166 THE ISSUE WAS DECIDED THAT EXPENDITURE W HICH IS INCURRED IN OPPOSING COERCIVE GOVERNMENTAL ACTION W ITH THE OBJECT OF SAVING TAXATION AND SAFEGUARDING BUSINESS IS DED UCTIBLE. VI) IN THE CASE OF S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1 THE ISSUE DECIDED WAS THAT IF THE HOLDING COMPANY ADVAN CES BORROWED MONEY TO THE SUBSIDIARY AND THE SAME IS US ED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD ITA 1797/MUM/2012 & ITA 1798/MUM/2012 41 ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. THE A.O. OBSERVED THAT THE ASSESSEES CONTENTIONS C ANNOT BE ACCEPTED AS THESE EXPENDITURE ARE NON-RECURRING IN-NATURE. THE A.O. RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SW ADESHI COTTON MILLS CO. LTD. V. CIT, (1967) 63 ITR 65(SC) WHEREIN IT WAS HE LD THAT COMPENSATION PAYABLE FOR BREACH OF CONTRACT WAS CAPITAL EXPENDIT URE. THE AO HELD THAT THE ASSESSEE IS A FIRM ENGAGED IN THE BUSINESS OF BUILD ER AND DEVELOPERS. THE EXPENSES INCURRED BY THE ASSESSEE FIRM REGARDING TH E SAID PAYMENT OF THE COMPENSATION IS NOT PERTAINING TO THE ASSESSEE'S SA ID REAL ESTATE BUSINESS. THE COMPENSATION HAS BEEN GIVEN IN RESPECT OF THE P ROPERTY FROM WHICH THE ASSESSEE FIRM IS DERIVING INCOME WHICH IS IN THE NA TURE OF INCOME FROM HOUSE PROPERTY. HENCE, THE SAME IS NOT ALLOWABLE EXPENSES AS IT IS NOT IN CONNECTION WITH THE BUSINESS CARRIED ON BY THE ASSESSEE. FURTH ER, IT WAS OBSERVED THAT THE COMPENSATION EXPENSES OF RS. 2,40,35,000/- DOES NOT FALL UNDER THE PURVIEW OF SECTION 24 OF THE ACT. RELIANCE WAS PLA CED BY THE AO ON THE DECISION IN THE CASE OF CIT V. H.G. GUPTA & SONS (1 984) 149 ITR 253 (DELHI) WHEREIN IT WAS HELD THAT DEDUCTION NOT SPECIFICALLY PROVIDED FOR ARE NOT ADMISSIBLE. THE A.O. OBSERVED THAT AS PER THE AGRE EMENT BETWEEN THE ASSESSEE FIRM AND THE PYRAMID , THERE IS NO CLAUSE FOR COMPENSATION IN THE EVENT OF TERMINATION OF THE AGREEMENT BY THE ASSESS EE. THUS, THE COMPULSION AND THE GENUINENESS OF THE ASSESSEE FIRM REGARDING PAYMENT OF COMPENSATION TO THE PYRAMID WERE NOT FOUND SATISFACTORY AND ACCO RDINGLY THE SAME WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE BY THE AO VIDE ASSESSMENT ORDERS DATED 30-12-2009 PASSED U/S 143(3 ) OF THE ACT. 13. INTEREST ON LOAN AND ADVANCES:- ON PERUSAL OF T HE BALANCE SHEET OF THE ASSESSEE, IT WAS OBSERVED BY THE AO THAT THE ASSESS EE HAS TAKEN NEW SECURED LOAN DURING THE YEAR TO THE TUNE OF RS.13,99,33,597 /- FROM THE HDFC BANK. ITA 1797/MUM/2012 & ITA 1798/MUM/2012 42 THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF SE CURED LOAN AS SHOWN IN THE BALANCE SHEET AND UTILIZATION OF THE SAID LOAN FUND THEREOF. IN RESPONSE, TO THE SAME, THE ASSESSEE SUBMITTED THAT THE UTILIZATION O F THE SAID BANK LOAN FUND CANNOT BE ASCERTAINED AND THEREBY NO DETAILS WERE F URNISHED IN THIS RESPECT. THE ASSESSEE HAS TAKEN LOAN FROM THE HDFC BANK DURI NG THE YEAR TOTALING TO RS. 13,99,33,597/- AND HAS PAID INTEREST OF RS. 20 ,21,919/- TO THE BANK ON THE SAID LOAN AMOUNT. SINCE NO DETAIL WAS FURNISHED IN RESPECT OF UTILIZATION OF THE FUNDS, IT WAS OBSERVED FROM THE BALANCE SHEET T HAT DURING THE YEAR THE ASSESSEE FIRM HAS ADVANCED A LOAN OF RS. 3 CRORES T O M/S MODI MILK & AGRO PRODUCT PVT. LTD. HOWEVER, NO DETAILS WERE FILED RE GARDING THE DATE ON WHICH SUCH LOANS WERE GIVEN AND ALSO ASSESSEE HAS NOT SHO WN ANY INTEREST INCOME ON LOAN/ADVANCE GRANTED TO M/S MODI MILK & AGRO PRO DUCT PVT. LTD. ACCORDINGLY, INTEREST ON THE ADVANCES OF RS. 3,00,0 0,000/- IS CHARGED PROPORTIONATELY WHICH WORKS OUT TO BE RS.4,32,000/- AND THE SAME WAS ADDED TO THE INCOME OF THE ASSESSEE BY THE AO VIDE ASSESS MENT ORDERS DATED 30-12- 2009 PASSED U/S 143(3) OF THE ACT. 14. ARCHITECT AND LEGAL EXPENSES:- THE A.O. OBSERVE D THAT THE ASSESSEE HAD MADE A PAYMENT OF RS. 60,000/- TOWARDS CONSULTATION CHARGES FOR LEGAL WORKS OF LUNKAD AMAZON & LUNKAD HERMES AND ABOVE PAYMENT DOES NOT RELATE TO ASSESSEE FIRMS BUSINESS AND HAS BEEN PAID FOR JOIN T VENTURE PROJECT AND THE SAME WAS DISALLOWED AND ADDED TO THE TOTAL INCOME O F THE ASSESSEE BY THE AO VIDE ASSESSMENT ORDERS DATED 30-12-2009 PASSED U/S 143(3) OF THE ACT. 15. REPAIR AND MAINTENANCE CHARGES: IT WAS OBSERVED BY THE A.O. THAT THE ASSESSEE FIRM HAS DEBITED AN AMOUNT OF RS. 1,68,626 /- UNDER THE HEAD REPAIRS AND MAINTENANCE CHARGES FOR WHICH SELF GENE RATED VOUCHERS WERE PRODUCED AND SOME OF THE EXPENSES WERE INCURRED IN CASH. 10% OF THE EXPENDITURE I.E. RS. 16,862/- WERE DISALLOWED AND A DDED TO TOTAL INCOME OF ITA 1797/MUM/2012 & ITA 1798/MUM/2012 43 THE ASSESSEE BY THE AO VIDE ASSESSMENT ORDERS DATED 30-12-2009 PASSED U/S 143(3) OF THE ACT. 16. AGGRIEVED BY THE ASSESSMENT ORDERS DATED 30-12- 2009 PASSED BY THE AO U/S 143(3) OF THE ACT , THE ASSESSEE FILED ITS F IRST APPEAL BEFORE THE LEARNED CIT(A) . DURING THE APPELLATE PROCEEDINGS BEFORE TH E LEARNED CIT(A), THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A PARTNERSH IP FIRM CARRYING ON THE BUSINESS OF BUILDERS AND DEVELOPERS OF IMMOVABLE PR OPERTIES OR TO EXPLOIT THE IMMOVABLE PROPERTIES ON COMMERCIAL BASIS. THE ASSES SEE EXPLAINED THAT IT HAD ENTERED INTO A BUSINESS CONDUCTING AGREEMENT DA TED 12.03.2001 WITH THE PYRAMID IN RESPECT OF BUILDING PREMISES AT PUNE . THE PYRAMID HAD PAID AN INTEREST FREE DEPOSIT OF RS.50 LACS TO THE ASSES SEE AND AS PER THE SAID AGREEMENT THE AMOUNT OF RS. 76 LACS WAS PAYABLE PER ANNUM TOWARDS THE BUSINESS CONDUCTING CHARGES WHICH WAS TO BE INCREAS ED ON A YEAR TO YEAR BASIS. THE AGREEMENT WAS FROM 1.04.2001 TO 31.03.20 11 FOR A PERIOD OF 10 YEARS AND THE SAID PYRAMID WAS OPERATING A SHOPPING MALL AT THAT PREMISES AND FOR THAT PURPOSE PYRAMID MADE NECESSARY CORRECT IONS, ALTERATIONS, RENOVATIONS AND REPAIRS ON THE SAID PREMISES FOR CO NDUCTING AND OPERATING THE SHOPPING OUTLETS IN THE SHOPPING MALL. IN THE RELEVANT PREVIOUS YEAR 2006-07, THE ASSESSEE GOT A BETTER OFFER FROM PANT ALOON FOR CONDUCTING ITS RETAIL SHOPPING MALL AT THE ASSESSEES SAID PREMISE S. THE SAID PANTALOON AGREED TO GIVE INTEREST FREE DEPOSIT OF RS.1,20,00, 000/-. THE TERM OF AGREEMENT WAS FOR 9 YEARS WITH RENEWAL PERIOD OF 3 YEARS. THE MINIMUM BUSINESS CONDUCTING CHARGES RECEIVABLE FROM THE PAN TALOON WAS DECIDED AT THE RATE OF 2% OF NET SALES ON MONTHLY BASIS WITH T HE PROVISIONS FOR INCREASE BY 20% AT THE END OF EVERY BLOCK OF 3 YEARS. SINCE THE PROPOSAL RECEIVED FROM THE PANTALOON WAS COMMERCIALLY MORE LUCRATIVE AND P ROFITABLE FOR THE ASSESSEE, IT WAS DECIDED BY THE ASSESSEE TO ENTER I NTO AN AGREEMENT WITH PANTALOON WITH REVISED TERMS AND CONDITIONS. FOR TH IS PURPOSE, IT WAS NECESSARY TO TERMINATE THE EXISTING BUSINESS CONDUC TING AGREEMENT WITH THE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 44 EXISTING TENANT THE PYRAMID TO GET VACANT POSSESSIO N OF THE SAID PREMISES BACK FROM THE PYRAMID AND TO ENABLE THE ASSESSEE TO ENTER INTO A FRESH BUSINESS CONDUCTING AGREEMENT WITH M/S PANTALOON. A CCORDINGLY, A SUPPLEMENTARY AGREEMENT DATED 12.12.2006 WAS ENTERE D INTO BETWEEN THE ASSESSEE FIRM AND THE PYRAMID AND THE BUSINESS COND UCTING AGREEMENT FOR THE REMAINING PERIOD WAS TERMINATED WITH EFFECT FR OM 8 TH DECEMBER, 2006. FOR EARLY TERMINATING THE AFORE-SAID AGREEMENT PRIO R TO ITS CONTRACTUAL MATURITY , THE ASSESSEE FIRM AGREED TO GIVE A LUMP SUM COMPENSATION OF RS.2,40,00,000/- TO THE PYRAMID ON ACCOUNT OF RELEA SING THEIR RIGHT UNDER THE AGREEMENT AND ALSO ON ACCOUNT OF EXPENSES INCURRED BY THE PYRAMID FROM TIME TO TIME ON ACCOUNT OF ALTERATION, MODIFICATION S, RENOVATION AND EXTRA WORK CARRIED OUT BY THEM IN THE SAID PREMISES. THUS BY ENTERING INTO A FRESH AGREEMENT WITH THE PANTALOON, THE ASSESSEE RECEIVED ADDITIONAL INTEREST FREE DEPOSITS OF RS.70 LACS FOR A PERIOD OF 12 YEARS. TH E BUSINESS CONDUCTING AGREEMENT WAS ALSO FOR A LONGER PERIOD OF TIME I.E. 9 YEARS WITH FURTHER PROVISION FOR RENEWAL OF AGREEMENT FOR 3 MORE YEARS . UNDER THE FRESH BUSINESS CONDUCTING AGREEMENT WITH THE PANTALOON, THE BUSINE SS CONDUCTING FEES WAS GUARANTEED @ 2% OF NET SALE PROCEEDS OF PANTALOON W ITH A PROVISION OF INCREASE AND KEEPING IN VIEW THE COMMERCIAL INTERES T OF THE ASSESSEE , IT WAS DECIDED TO TERMINATE BUSINESS CONDUCTING AGREEMENT WITH THE PYRAMID EVEN BY PAYING A COMPENSATION OF RS.2,40,00,000/- TO TER MINATE THE BUSINESS CONDUCTING AGREEMENT AND TO GET BACK THE VACANT POS SESSION OF THE PREMISES. THUS, THE PAYMENT OF COMPENSATION WAS MADE BY THE A SSESSEE CONSIDERING THE COMMERCIAL EXPEDIENCY WHEN SEEING FROM THE PERS PECTIVE OF BUSINESS OF THE ASSESSEE FIRM AS IT WAS IN BUSINESS INTEREST OF THE ASSESSEE TO TERMINATE THE AGREEMENT AND GET BACK VACANT POSSESSION FROM P YRAMID. THEREFORE, THE COMPENSATION EXPENDITURE WAS ALLOWABLE U/S 37(1) OF THE ACT. THE ASSESSEE FURTHER EXPLAINED THAT THE COMPENSATION OF RS.2,40, 00,000/- WAS NOT CLAIMED AGAINST THE INCOME FROM HOUSE PROPERTY BUT AFTER TE RMINATION OF LEASE AGREEMENT WITH THE PYRAMID, THIS AMOUNT WAS PAID FO R GETTING VACANT ITA 1797/MUM/2012 & ITA 1798/MUM/2012 45 POSSESSION OF THE PREMISES FOR GIVING THE SAME FOR A LONGER PERIOD AND FOR EARNING MORE LEASE RENT. THE ASSESSEE IN SUPPORT RE LIED ON THE FOLLOWING DECISIONS:- (I) CIT V. M/ S. AUTO DISTRIBUTORS LTD. (1994) 210 ITR 222 CALCUTTA (HC) (II) CIT V. S.R. RAMKRISHNAN (1969) 74 ITR 761 (MADRAS) (III) CIT V. R.G.S. INDUSTRIES (1990) 183 ITR 31 GAUHATI (1990) 51 TAXMAN 467 (GAUHATI) (IV) CIT V. S.A. BUILDERS 288 ITR 1 (SC) (V) CIT V. MOTOR INDUSTRIES CO. LTD. (1997) 223 ITR 112 (KERALA H.C.) (VI) CIT V. PIONEER ENGINEERING SYNDICATE (1989) 175 ITR 93 (MADRAS). THE ASSESSEE SUBMITTED THAT SINCE THE COMPENSATION WAS TREATED AS REVENUE RECEIPTS IN THE HANDS OF RECIPIENT , THE SAME SHOUL D BE TREATED AS REVENUE EXPENSES IN THE HANDS OF THE ASSESSEE. THE LEARNED CIT(A) CONSIDERED THE CONTENTIONS OF T HE ASSESSEE WHEREBY IT WAS OBSERVED THAT THE ASSESSEE WAS ENGAGED IN THE BUSIN ESS OF BUILDERS & DEVELOPERS OF THE PROPERTY. THE ASSESSEE WAS ALSO O WNING PROPERTIES ON WHICH RENTAL INCOME WAS RECEIVED. THE ASSESSEE WAS OWNING PUNE PREMISES AND VIDE AGREEMENT DATED 12 TH MARCH, 2001, THE PUNE PREMISES WAS GIVEN ON LEAVE & LICENSE BASIS TO THE PYRAMID , FROM WHICH THE ASSES SEE DERIVED INCOME FROM HOUSE PROPERTY OF RS.59,86,464/- WHICH IS OFFERED FOR TAXATION BY THE ASSESSEE UNDER THE HEAD INCOME FROM HOUSE PROPERTY , WHEREAS ALL OTHER RECEIPTS WERE SHOWN AS INCOME UNDER THE HEAD INCOM E FROM BUSINESS OR ITA 1797/MUM/2012 & ITA 1798/MUM/2012 46 PROFESSION. THE PYRAMID RENOVATED THE PREMISES BY INCURRING VARIOUS EXPENDITURE FOR THE PURPOSE OF RUNNING A SHOPPING M ALL CENTRE THEREON. DURING THE YEAR, THE ASSEESSEE GOT A BETTER OFFER F ROM THE PANTALOON TO TAKE THIS PUNE PROPERTY ON LEAVE & LICENSE BASIS FOR RUN NING THEIR MALL WHEREBY M/S PANTALOON OFFERED MORE RENTAL INCOME BESIDES IN TEREST FREE DEPOSIT OF RS.1.20 CRORES. THE ASSESSEE ENTERED INTO AN AGREEM ENT WITH THE PYRAMID FOR GETTING THIS PROPERTY VACATED FROM THEM AND FOR THI S PURPOSE, THE ASSESSEE PAID COMPENSATION OF RS.2,40,35,000/ - TO THE PYRAM ID FOR VACATING THE PREMISES. THE ASSESSEE WAS DERIVING RENTAL INCOME A ND THE SAME WAS BEING OFFERED TO TAX AS INCOME UNDER THE HEAD INCOME FRO M HOUSE PROPERTY. THIS PAYMENT OF COMPENSATION OF RS.2,40,35,000/- WAS PER TAINING TO THIS PUNE PROPERTY ITSELF AND AS PER THE PROVISIONS OF SECTIO N 23 & 24 OF THE ACT THE DEDUCTIONS ALLOWABLE AGAINST THE INCOME UNDER THE H EAD INCOME FROM HOUSE PROPERTY ARE MUNICIPAL TAXES IF PAID DURING THE YE AR, 30% DEDUCTION OF ANNUAL VALUE AND INTEREST EXPENDITURE IF THE PROPER TY WAS ACQUIRED WITH THE HELP OF BORROWED FUNDS. THE LEARNED CIT(A) HELD THA T U/S 23 & 24 OF THE ACT, NO OTHER DEDUCTION IS ALLOWABLE UNDER THE HEAD INC OME FROM HOUSE PROPERTY. THUS, THE LEARNED CIT(A) HELD THAT NO DEDUCTION OF THIS EXPENDITURE OF RS.2,40,35,000/- WAS ALLOWABLE UNDER THE HEAD INCO ME FROM HOUSE PROPERTY. THIS PAYMENT OF COMPENSATION OF RS.2,40,35,000/- WA S NOT MADE BY THE ASSESSEE FOR EARNING THE EXISTING RENTAL INCOME BUT WAS PAID FOR EARNING EXTRA RENTAL INCOME. IN THIS CASE THIS PAYMENT OF COMPENS ATION WAS MADE BY THE ASSESSEE FOR ACQUIRING A NEW/EXTRA SOURCE OF INCOME . AS SUCH PAYMENT OF COMPENSATION WAS CAPITAL EXPENDITURE IN NATURE WHIC H WAS NOT A RECURRING EXPENDITURE BUT THE ASSESSEE DERIVED A BENEFIT OF E NDURING NATURE, THEREFORE THIS EXPENDITURE WAS NOT A REVENUE EXPENDITURE BUT WAS CAPITAL IN NATURE. HENCE, IT WAS HELD THAT WHETHER THIS IS REVENUE OR CAPITAL EXPENDITURE, THIS EXPENDITURE WAS NOT AT ALL ALLOWABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IT WAS FURTHER HELD BY LEARNED CIT(A) TH AT THIS EXPENDITURE OF PAYMENT OF COMPENSATION OF RS.2,40,35,000/- MADE BY THE ASSESSEE COULD ITA 1797/MUM/2012 & ITA 1798/MUM/2012 47 NOT BE ALLOWED UNDER THE HEAD BUSINESS INCOME AS TH E PAYMENTS WAS NOT MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSI NESS. IT WAS HELD BY THE LEARNED CIT(A) THAT THIS EXPENDITURE COULD NOT BE H ELD AS CAPITAL EXPENDITURE PERTAINING TO THE EXISTING BUSINESS INCOME/RECEIPTS . THE JUDICIAL PRECEDENTS RELIED UPON BY THE ASSESSEE ARE NOT RELEVANT AND HE NCE THIS GROUND WAS DISMISSED BY THE LD. CIT(A) BY HOLDING THAT THIS EX PENDITURE WAS NEITHER ALLOWABLE U/S 23/24 OF THE ACT NOR ALLOWABLE U/S 37 (1) OF THE ACT VIDE LEARNED CIT(A) APPELLATE ORDERS DATED 02-01-2012. 17. WITH REGARD TO THE ISSUE OF INTEREST ON LOAN AN D ADVANCES, THE ASSESSEE CONTENDED BEFORE THE LD. CIT(A) THAT IT HAD RECEIVE D LOAN, SOME OF WHICH WAS INTEREST BEARING AND SOME OF WHICH WAS INTEREST FRE E. THE ASSESSEE HAS ALSO RECEIVED INTEREST FREE DEPOSIT FROM THE PARTY AND H AD CAPITAL BALANCE OF PARTNERS WHICH WAS UTILIZED IN THE BUSINESS. UNDER THE CIRCUMSTANCES, THE ASSESSEE HAD UTILIZED THE MIXED FUNDS AND THEREFORE , IT WAS NOT POSSIBLE FOR THE ASSESSEE TO SUBMIT THE EXACT NEXUS OF UTILIZATI ON OF LOAN AMOUNT AVAILED FROM HDFC BANK LTD. THE ASSESSEE RELIED ON THE DECI SION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES AND POWERS LTD. 313 ITR 340(BOM. HC), AND SUBMITTED THAT IF TWO TYPES OF FU NDS ARE AVAILABLE I.E. INTEREST BEARING AND INTEREST FREE FUNDS THEN PRESU MPTION WOULD ARISE THAT INTEREST FREE FUNDS HAD BEEN GENERATED FOR MAKING I NVESTMENT. THE LD. CIT(A) CONSIDERED THE SUBMISSION OF THE ASSESSEE AND OBSER VED THAT THE ASSESSEE HAD OBTAINED INTEREST BEARING LOAN OF RS.13.99 CROR E FROM HDFC BANK. THE ASSESSEE HAD ADVANCED INTEREST FREE LOAN OF RS.3 CR ORES TO M/S MODI MILK & AGRO PRODUCT PVT. LTD. THE LD. CIT (A) OBSERVED FRO M THE BALANCE SHEET SCHEDULE G THAT OPENING BALANCE OR LOANS AND ADVAN CES GIVEN WAS AT RS.3.35 CRORE WHEREAS CLOSING BALANCE WAS RS.6.L6 C RORES. THE ASSESSEE HAS NOT FURNISHED ALL THE DETAILS OF DATE AND PURPOSE O F ADVANCING INTEREST FREE LOAN OF RS. 300 LACS TO M/S. MODI MILK & AGRO PRODU CT PVT. LTD. DURING THE ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS. HOWEV ER FROM THE OPENING AND ITA 1797/MUM/2012 & ITA 1798/MUM/2012 48 CLOSING BALANCE OF LOAN AND ADVANCES GIVEN, IT APPE ARS THAT THE INTEREST FREE LOAN OF RS. 3 CRORES WAS ADVANCED BY THE ASSESSEE D URING THE YEAR ITSELF AND THE AO HAS CORRECTLY HELD THAT THE INTEREST BEARING LOANS OBTAINED WAS UTILIZED FOR NON BUSINESS PURPOSE OF ADVANCING INTEREST FREE LOANS. THE ASSESSEE HAS NOT EXPLAINED ANY COMMERCIAL EXPEDIENCY FOR ADVANCI NG INTEREST FREE LOANS OF RS. 300 LACS TO THE SAID PARTY M/S MODI MILK & AGRO PRODUCT PVT. LTD. UNDER THESE CIRCUMSTANCES, THE AO WAS JUSTIFIED IN HOLDIN G THAT THE PROPORTIONATE INTEREST EXPENDITURE OF RS. 4,32,000/- WAS NOT INCU RRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND AS SUC H THE LEARNED CIT(A) DISMISSED THE GROUND RAISED BY THE ASSESSEE VIDE A PPELLATE ORDERS OF THE LEARNED CIT(A) DATED 02-01-2012 . 18. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE OF RS. 60,000/- PAID TO THE ADVOCATE. BEFORE THE LEARNED CIT(A) THE ASSESSE E DID NOT SUBMIT ANY EXPLANATION, HENCE, A.O.S ACTION WAS CONFIRMED BY THE LEARNED CIT(A) VIDE APPELLATE ORDERS DATED 02-01-2012 . 19. SIMILARLY, IN THE NEXT GROUND THE ASSESSEE CHAL LENGED THE DISALLOWANCE OF RS. 16,862/- @10% BEING INCURRED OUT OF REPAIRS AND MAINTENANCE EXPENSES OF RS.1,68,626/-. NO ARGUMENT WAS ADVANCE D BY THE ASSESSEE DURING APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT (A) AND HENCE THE A.O.S ACTION WAS CONFIRMED BY THE LEARNED CIT(A). 20. AGGRIEVED BY THE APPELLATE ORDERS DATED 02-01-2 012 OF THE LEARNED CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUN AL. 21. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE COMPENSATION OF RS. 2,40,35,000/- WAS PAID TO M/S PYRAMID RETAIL & MERCHANDISING PVT. LTD. FOR CANCELLATION OF AGREEMENT WITH A VIEW TO GENERATE MORE INCOME FROM FRESH AGREEMENT OF LEAVE AND LICENSE WITH PANTALOON . INCOME EARNED FROM ITA 1797/MUM/2012 & ITA 1798/MUM/2012 49 PYRAMID WAS ASSESSED UNDER THE HEAD INCOME FROM HOU SE PROPERTY. THE A.O. HAS NOT ALLOWED DEDUCTION U/S 37(1) OF THE ACT NOR IT WAS ALLOWED DEDUCTIONS UNDER THE HEADS INCOME FROM HOUSE PROPERTY. THE LD . COUNSEL ARGUED THAT THE PAYMENT OF RS. 2,40,35,000/- SHOULD BE ALLOWED AS DEDUCTION AS IT WAS PAID FOR GENERATING MORE INCOME TO THE ASSESSEE BY WAY OF HIGHER LICENSE FEE AS WELL AS HIGHER INTEREST FREE DEPOSIT OF RS.120 L ACS FROM PANTALOON INSTEAD OF RS.50 LACS RECEIVED FROM PYRAMID. 22. THE LD. D.R. SUBMITTED THAT THERE IS A CANCELLA TION OF AGREEMENT WITH M/S PYRAMID RETAIL & MERCHANDISING PVT. LTD. AND TH IS PAYMENT OF RS.2,40,35,000/- FOR PAYMENT OF COMPENSATION/DAMAGE S FOR BREACH OF CONTRACT AS WELL TO COVER THE COST OF PYRAMID IS NO T ALLOWABLE AS DEDUCTION FROM INCOME FROM HOUSE PROPERTY NOR IS IT ALLOWABLE AS DEDUCTION U/S 37(1) OF THE ACT. THE LEARNED DR RELIED UPON THE ORDERS OF T HE AUTHORITIES BELOW. 23. WE HAVE CONSIDERED THE CONTENTIONS OF BOTH THE PARTIES AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE CASE LAWS CITED BY THE PARTY. WE HAVE OBSERVED THAT THE ASSESSEE IS THE O WNER OF THE PROPERTY HERMES PLAZZO SITUATED AT CONVENT STREET, CAMP, P UNE WHICH HAS BEEN GIVEN ON LEAVE AND LICENSE BASIS TO M/S PYRAMID RET AIL & MERCHANDISING PVT. LTD. W.E.F. 1ST APRIL, 2001 FOR A PERIOD OF 10 YEAR S. THE ASSESSEE HAD RECEIVED INTEREST FREE DEPOSIT OF RS. 50 LACS FROM M/S PYRAM ID RETAIL & MERCHANDISING PVT. LTD.. THE INCOME FROM THE LEAVE AND LICENSE AG REEMENT WITH PYRAMID HAS BEEN ASSESSED TO TAX UNDER THE HEAD INCOME FROM HO USE PROPERTY. THE ASSESSEE HAS NOW GOT A BETTER OFFER FROM M/S PANTAL OON WHO HAD AGREED TO PAY INTEREST FREE DEPOSIT OF RS. 1,20,00,000/- AND THE MINIMUM BUSINESS CONDUCTING CHARGES FROM M/S PANTALOON WAS AGREED @ 2% OF NET SALES ON MONTHLY BASIS WITH A PROVISION FOR INCREASE BY 20% AT THE END OF EVERY BLOCK OF THREE YEARS. THE ASSESSEE WANTED TO TERMINATE T HE AGREEMENT WITH SAID M/S PYRAMID RETAIL & MERCHANDISING PVT. LTD. PRIOR TO ITS COMPLETION TO GET ITA 1797/MUM/2012 & ITA 1798/MUM/2012 50 EARLY VACATION OF PREMISES SO THAT THE PREMISES CAN BE GIVEN ON LEAVE AND LICENSE BASIS TO PANTALOON WHO HAVE NOW OFFERED BET TER TERMS , THE SAID PYRAMID HAD INCURRED EXPENSES FROM TIME TO TIME ON ACCOUNT OF ALTERATION, RENOVATION, MODIFICATION AND EXTRA WORK TO BUILD TH E SHOPPING OUTLET IN THE SHOPPING MALL GIVEN TO THEM ON LEAVE AND LICENSE BA SIS BY THE ASSESSEE AND THE SAID PYRAMID WANTED TO BE COMPENSATED BY WAY OF DAMAGES/REIMBURSEMENTS FOR THE AFORE-STATED COSTS INCURRED FOR ALTERATIONS, MODIFICATION, RENOVATIONS AND EXTRA WORK TO BUILD T HE SHOPPING OUTLETS IN SHOPPING MALLS AS WELL DAMAGES FOR BREACH OF CONTRA CT BY WAY OF EARLY TERMINATION OF LEAVE AND LICENSE AGREEMENT BY THE A SSESSEE WITH PYRAMID WHICH LED TO LOSS OF SOURCE OF REVENUE FOR PYRAMID. SINCE IT WAS A PRE- MATURED TERMINATION OF AGREEMENT WITH M/S PYRAMID R ETAIL & MERCHANDISING PVT. LTD., A CONSOLIDATED COMPENSATION OF RS. 2,40, 35,000/- WAS AGREED TO BE PAID BY THE ASSESSEE TO THE SAID PYRAMID. IN OUR C ONSIDERED VIEW, THE ASSESSEE HAS MADE PAYMENT TO M/S PYRAMID RETAIL & M ERCHANDISING PVT. LTD. FOR PRE-MATURE TERMINATION OF CONTRACT TO COVER DAM AGES/REIMBURSEMENTS FOR VARIOUS COSTS INCURRED BY THE SAID M/S PYRAMID RETA IL & MERCHANDISING PVT. LTD. ON ACCOUNT OF ALTERATION, MODIFICATION, RENOVA TION AND EXTRA WORK TO BUILD THE SHOPPING OUTLETS IN THE MALL AS WELL DAMAGES FO R BREACH OF CONTRACT I.E. EARLY TERMINATION OF LEAVE AND LICENSE AGREEMENT LE ADING TO LOSS OF SOURCE OF REVENUE FOR THE SAID PYRAMID. WE HAVE CAREFULLY GON E THROUGH THE PROVISIONS OF THE ACT. IN OUR CONSIDERED VIEW, THIS PAYMENT IS NOT ALLOWABLE UNDER THE PROVISIONS OF SECTION 23 AND 24 OF THE ACT GOVERNIN G INCOME FROM HOUSE PROPERTY NOR THE SAME IS ALLOWABLE AS BUSINESS EXPE NDITURE OR BUSINESS LOSS UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION . IN OUR CONSIDERED VIEW, THIS PAYMENT HAS BEEN MADE BY THE ASSESSEE TO GET T HE PREMISES VACATED EARLY BY MAKING PAYMENT FOR DAMAGES FOR BREACH OF C ONTRACT DUE TO EARLY TERMINATION OF LEAVE AND LICENSE AGREEMENT LEADING TO LOSS OF SOURCE OF INCOME AS WELL AS TO COMPENSATE PYRAMID FOR THE COST INCUR RED TOWARDS ALTERATION, MODIFICATION, RENOVATION AND EXTRA WORK TO BUILD TH E LICENSED PREMISES FIT AS ITA 1797/MUM/2012 & ITA 1798/MUM/2012 51 SHOPPING OUTLET IN THE SHOPPING MALL, WHICH COSTS I NCURRED BY PYRAMID WERE PRIMARILY ON CAPITAL FIELD AND ALSO IN OUR CONSIDER ED VIEW THE AFORE-STATED PAYMENT OF RS.2,40,35,000/- MADE BY THE ASSESSEE TO PYRAMID IS ON CAPITAL FIELD . INCOME TAX ACT,1961 IS A CODE IN ITSELF AND ALLOWABILITY OF DEDUCTIONS FROM THE INCOME COMPUTED UNDER THE PROVISIONS OF TH E ACT HAS TO FALL WITHIN THE FOUR CORNERS OF THE PROVISIONS OF THE ACT . WE HAVE OBSERVED THAT INCOME EARNED FROM LEAVE AND LICENSE AGREEMENT WITH PYRAMI D IS CHARGED TO TAX UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND THI S PAYMENT OF RS.2,40,35,000/- MADE BY THE ASSESSEE TO PYRAMID FO R PRE-MATURE TERMINATION OF CONTRACT TO COVER DAMAGES/REIMBURSEM ENTS FOR VARIOUS COSTS INCURRED BY THE SAID M/S PYRAMID RETAIL & MERCHANDI SING PVT. LTD. ON ACCOUNT OF ALTERATION, MODIFICATION, RENOVATION AND EXTRA WORK TO BUILD THE SHOPPING OUTLETS IN THE MALL AS WELL DAMAGES FOR BR EACH OF CONTRACT I.E. EARLY TERMINATION OF LEAVE AND LICENSE AGREEMENT LEADING TO LOSS OF SOURCE OF REVENUE FOR THE SAID PYRAMID IS NOT CONNECTED WITH EARNING OF RENTAL INCOME NOR THIS PAYMENT IS ALLOWABLE AS DEDUCTION FROM IN COME FROM HOUSE PROPERTY AS CHAPTER IV-C WHICH GOVERNS COMPUTATION OF INCOM E FROM HOUSE PROPERTY VIDE SECTION 22 TO 27 OF THE ACT DOES NOT PROVIDE FOR THE DEDUCTION OF THE SUCH PAYMENTS. SIMILARLY, THE ASSESSEE IS NOT INTO THE BUSINESS OF LETTING OF PREMISES AND THE SAID PAYMENT IS NOT INCURRED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS CARRIED ON BY THE ASSESSEE AS IS STIPULATED U/S 37(1) OF THE ACT AND HENCE THE SAME CANNOT BE ALLOWED AS BUS INESS LOSS OR BUSINESS EXPENDITURE AS THE SAID PAYMENT HAS NO NEXUS OR CON NECTIVITY WITH THE BUSINESS CARRIED ON BY THE ASSESSEE. HENCE WE HOLD THAT THIS PAYMENT OF RS.2,40,35,000/- MADE BY THE ASSESSEE TO PYRAMID FO R PRE-MATURE TERMINATION OF CONTRACT TO COVER DAMAGES/REIMBURSEM ENTS FOR VARIOUS COSTS INCURRED BY THE SAID M/S PYRAMID RETAIL & MERCHANDI SING PVT. LTD. ON ACCOUNT OF ALTERATION, MODIFICATION, RENOVATION AND EXTRA WORK TO BUILD THE SHOPPING OUTLETS IN THE MALL AS WELL DAMAGES FOR BR EACH OF CONTRACT I.E. EARLY TERMINATION OF LEAVE AND LICENSE AGREEMENT LEADING TO LOSS OF SOURCE OF ITA 1797/MUM/2012 & ITA 1798/MUM/2012 52 REVENUE FOR THE SAID PYRAMID IS CAPITAL IN NATURE A ND IS NOT CONNECTED WITH THE BUSINESS OF THE ASSESSEE NOR THE SAME CAN BE AL LOWED AS DEDUCTION WHILE COMPUTING INCOME FROM HOUSE PROPERTY AND THE SAME C ANNOT BE ALLOWED AS DEDUCTION UNDER THE PROVISIONS OF THE ACT, HENCE, T HIS GROUND OF APPEAL FILED BY THE ASSESSEE IS DISMISSED. WE ORDER ACCORDINGLY. 24. IN THE NEXT GROUND, THE ASSESSEE CHALLENGED THE DISALLOWANCE OF RS. 4,32,000/- OUT OF INTEREST EXPENSES WHICH HAS BEEN COMPUTED PROPORTIONATELY ON THE INTEREST-FREE ADVANCES OF RS. 300 LACS GIVEN TO M/S MODI MILK & AGRO PRODUCT PVT. LTD. WHICH WAS STATED TO BE OUT OF BOR ROWED FUNDS OF RS.13.99 CRORES RECEIVED FROM HDFC BANK LIMITED. WE FIND TH AT THE ASSESSEE HAS BORROWED NEW SECURED INTEREST BEARING LOAN OF RS. 1 3.99 CRORES FROM HDFC BANK. THE ASSESSEE HAD ADVANCED AN INTEREST FREE L OAN OF RS. 3 CRORES TO M/S MODI MILK & AGRO PRODUCT PVT. LTD. WHEREBY THE A.O. HAS WORKED OUT PROPORTIONATE INTEREST OF RS. 4,32,000/- ON SUCH IN TEREST FREE LOAN DEPOSIT OF RS. 3 CRORES WHICH WAS ADDED TO THE INCOME OF THE A SSESSEE. THE ASSESSEE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COUR T IN THE CASE OF RELIANCE UTILITIES AND POWERS LTD.(2009) 313 ITR 340(BOM.). IT IS THE SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT NO DISALLOWANCE CAN B E MADE AS THERE IS A MIXED FUND WHICH HAS BEEN UTILIZED FOR THE PURPOSE OF LOAN OF RS.300 LACS TO M/S MODI MILK & AGRO PRODUCT PVT. LTD. 25. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT THE ASSESSEE HAS NOT SUBMITTED ANY DETAILS OF THE LOAN OF RS. 300 LACS G RANTED TO MODI MILK & AGRO PRODUCT PVT. LTD. AND THE AUTHORITIES BELOW ARE RIG HT IN COMPUTING THE PROPORTIONATE DISALLOWANCE OF INTEREST OF RS. 4,32, 000/-.THE LEARNED DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW. 26. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND AL SO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE OBSERVED THAT THE ASS ESSEE HAS RECEIVED SECURED ITA 1797/MUM/2012 & ITA 1798/MUM/2012 53 LOAN OF RS. 13.99 CRORES FROM HDFC BANK. THE ASSES SEE HAS ALSO GRANTED INTEREST FREE LOAN OF RS. 3 CRORES TO M/S MODI MILK & AGRO PRODUCT PVT. LTD. OUT OF WHICH PROPORTIONATE INTEREST OF RS. 4,32,000 /- WAS DISALLOWED AS THE ASSESSEE GRANTED INTEREST FREE LOANS AND ADVANCES O N THE ALLEGATION THAT THE SAID LOAN WAS GRANTED OUT OF INTEREST BEARING BORRO WED FUNDS. IT IS THE SAY OF THE ASSESSEE THAT THERE IS A MIXED POOL OF FUNDS W HICH HAS BEEN UTILIZED FOR THE PURPOSE OF LOAN OF RS. 300 LACS TO M/S MODI MIL K & AGRO PRODUCT PVT. LTD . THE RELIANCE WAS PLACED BY THE ASSESSEE ON THE JUDG MENTS OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWERS LTD. (SUPRA) AND HDFC BANK LIMITED V. CIT [2016] 67 TAXMANN.COM 42 (BOMBAY) WHEREIN IT WAS HELD THAT IF BOTH BORROWED FUNDS AND INTERES T FREE FUNDS WERE AVAILABLE, THEN PRESUMPTION WILL ARISE THAT INTEREST FREE FUND S ARE UTILIZED BY THE ASSESSEE FOR GRANTING INTEREST FREE LOANS AND ADVAN CES. THUS, IN OUR CONSIDERED VIEW, QUANTUM OF AVAILABILITY OF BOTH IN TEREST FREE FUNDS AS WELL AS NONINTEREST FREE FUNDS WERE TO BE SEEN VIS--VIS G RANT OF INTEREST FREE LOANS AND ADVANCES TO ARRIVE AT PRESUMPTION OF UTILIZATIO N OF INTEREST FREE FUNDS FOR GRANT OF INTEREST FREE LOANS AND ADVANCES. THE AS SESSEE IS DIRECTED TO PRODUCE NECESSARY EVIDENCE BEFORE THE A.O. TO DEMON STRATE THAT MIXED FUNDS I.E INTEREST BEARING FUNDS AS WELL INTEREST FREE FU NDS WERE AVAILABLE WITH THE ASSESSEE AND THE ASSESSEE IS ENTITLED FOR THE PRESU MPTION OF UTILIZATION OF INTEREST FREE FUNDS FOR GRANT OF INTEREST FREE LOAN S AND ADVANCES. THE A.O. IS DIRECTED TO DECIDE THE ISSUE IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE U TILITIES AND POWERS LTD. (SUPRA) AND HDFC BANK LIMITED(SUPRA). THUS, THIS IS SUE IS SET ASIDE TO THE FILE OF THE AO FOR DE-NOVO DETERMINATION OF THE ISS UE ON MERITS IN ACCORDANCE WITH RATIO OF LAW LAID DOWN BY HONBLE BOMBAY HIGH COURT IN AFORE-STATED CASE OF RELIANCE UTILITIES AND POWERS LTD. (SUPRA) AND HDFC BANK LIMITED(SUPRA). WE ORDER ACCORDINGLY. ITA 1797/MUM/2012 & ITA 1798/MUM/2012 54 27. WITH RESPECT TO THE DISALLOWANCE OF RS. 60,000/ - ON ACCOUNT OF PAYMENT MADE TO THE ADVOCATE FOR SOME OTHER PROJECTS BEING UNDERTAKEN NOT BY THE ASSESSEE BUT BY THE JOINT VENTURE , IT WAS SUBMITTE D BY THE LD. COUNSEL THAT THESE FEES WERE PAID FOR LEGAL WORKS OF LUNKAD AMAZ ON & LUNKAD HERMES. THE LEARNED DR RELIED ON THE ORDERS OF THE AUTHORIT IES BELOW. THE PAYMENT OF RS. 60,000/- WERE PAID FOR JOINT VENTURE PROJECT WH ICH DOES NOT RELATE TO THE ASSESSEE FIRM, THUS IN OUR CONSIDERED VIEW , THESE EXPENSES OF RS. 60,000/- CANNOT BE ALLOWED AS DEDUCTION FOR THE PURPOSE OF C OMPUTATION OF BUSINESS AS CONDITIONS LAID DOWN U/S 37(1) OF THE ACT ARE NOT F ULFILLED AS THE EXPENSES ARE NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE S OF THE BUSINESS OF THE ASSESSEE. WE ORDER ACCORDINGLY 28. DURING THE YEAR THE ASSESSEE HAS DEBITED AN AMO UNT OF RS. 1,68,626/- ON ACCOUNT OF REPAIRS AND MAINTENANCE EXPENSES WHER EBY THE AUTHORITIES BELOW HAVE DISALLOWED 10% OF THE ABOVE EXPENSES I.E . RS.16,826/- ON THE GROUND THAT THE ASSESSEE HAS PRODUCED SELF GENERATE D VOUCHERS AND THE PAYMENT HAS BEEN MADE IN CASH. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DISALLOWANCE HAS BEEN MADE ON ADHOC BASIS. BOOKS OF ACCOUNT HAVE NOT BEEN REJECTED BY THE A.O. 29. THE LD. D.R. RELIED UPON THE ORDERS OF THE AUTH ORITIES BELOW. 30. IN OUR CONSIDERED VIEW SUCH AD-HOC DISALLOWANCE OF EXPENSES CANNOT BE SUSTAINED MORE-SO NO DEFECTS HAVE BEEN POINTED BY T HE REVENUE AND BOOKS OF THE ACCOUNTS ARE ALSO NOT REJECTED THERE IS NO ALLE GATION THAT THESE EXPENSES WERE NOT INCURRED OR WERE WRONGLY CLAIMED BY THE AS SESSEE. IT IS ALSO NOT BROUGHT ON RECORD THAT THESE EXPENSES WERE NOT INCU RRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE ASS ESSEE. UNDER THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THIS ADDITIO NS OF RS.16,826/- CANNOT BE SUSTAINED AND WE ORDER DELETION OF THE SAID ADDI TION OF RS.16,826/- TO THE ITA 1797/MUM/2012 & ITA 1798/MUM/2012 55 INCOME OF THE ASSESSEE ON ACCOUNT OF REPAIRS AND M AINTENANCE EXPENSES . WE ORDER ACCORDINGLY. 31. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE -RAMESH BUILDERS(INDIA) IN ITA N0. 1797/MUM/2012 FOR THE ASSESSMENT YEAR 2007- 08 IS DISMISSED AND THE APPEAL OF THE ASSESSEE- RAMESH BUILDERS IN ITA NO. 1798/MUM/2012 FOR THE ASSESSMENT YEAR 2007-08 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JULY , 2016. # $% &' 27-07-2016 ( ) SD/- SD/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 27-07-2016 .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI D BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI