RAHAS INVESTMENT P.LTD, MUMBAI V. DCIT 10(1), MUMBAI

ITA 2752/MUM/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6817 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-06-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 04-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 22-04-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Capital receipt
• Section: 115JB; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI RAM LAL NEGI, JM ./ I.T.A. NO. 2752/MUM/2014 ( / ASSESSMENT YEAR: 2010 - 11 ) RAHAS INVESTMEN T PRIVATE LIMITED 159, CST ROAD, KALINA, SANTACRUZ (EAST), MUMBAI - 400 098 / VS. DY. CIT 10(1) AAYKAR BHAVAN, M. K. ROAD, MUMBAI - 400 020 ./ ./ PAN/GIR NO. AAACR 3202 L ( ASSESSEE ) : ( RE VENUE ) & ./ I.T.A. NO. 3366/MUM/2014 ( / ASSESSMENT YEAR: 2010 - 11 ) DY. CIT 10(1) AAYKAR BHAVAN, M. K. ROAD, MUMBAI - 400 020 / VS. RAHAS INVESTMENT PRIVATE LIMITED 159, CST ROAD, KALINA, SANTACRUZ (EAST), MUMBAI - 400 098 ./ ./ PAN/GIR NO. AAACR 3202 L ( RE VENUE ) : ( ASSESSEE ) ASSESSEE B Y : SHRI RAJAN VORA RE VENUE BY : SHRI RAM TIWARI / DATE OF HEARING : 14.03.2018 / DATE OF PRONOUNCEMENT : 01.06 .2018 / O R D E R PER S HAMIM YAH YA, A. M.: T HESE ARE CROSS APPEALS BY THE R EVENUE AND ASSESSEE EMANATING OUT OF THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS) - 21, MUMBAI DATED 28.02.2014 AND PERTAIN TO ASSESSMENT YEAR 2010 - 11. 2 ITA NO. 2752 & 3366/MUM/2014 RAHAS INVESTMENT PRIVATE LIMITED 2. T HE GROUNDS OF APPEAL RAISED IN R EVENUES APPEAL RE AD AS UNDER : 1.1 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW , THE LD.CIT(A) ERRED IN DELETING OF RS.6,72,30,150/ - ASSESSED AS CAPITA L GAIN. 1.2 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN L AW, THE CIT(A) ERRED IN HOLDING TH AT THE DECISION OF THE HON'BLE ITAT IN THE CASE OF SUDHAKAR SHETTY (130 ITD 197(MUM) AND THEREBY TREATING THE AMOUNT OF RS.10,48,51,708/ - AS CAPITAL RECEIPT NOT CHARGEABLE TO TAX U/S.45. 2.1 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW , THE LD . CIT(A) ERRED IN ALLOWING THE DEDUCTION OF RS.10,45,51,708/ - WHILE COMPUTATION OF B OO K PROFIT U/S.115JB. 3. T HE GROUNDS OF APPEAL RAISED IN ASSESSEE'S APPEAL READS AS UNDER : EXEMPTION UNDER SECTION 10(2A) (1) THE LEARNED COMMISSIONER (APPEALS ) ERRED IN CONFIRMING THE DISALLOWANCE OF THE EXEMPTION UNDER SECTION 10(2A) OF THE INCOME - TAX ACT IN RESPECT OF AN AMOUNT OF RS. 10,48,51. 708 AS CLAIMED BY THE APPELLANT. CAPITAL GAINS (2) THE LEARNED COMMISSIONER (APPEALS) ERRED IN HOLDING THAT CA PITAL GAINS HAS TO BE LEVIED ON THE AMOUNT OF RS. 10,48,51,708 RECEIVED FROM THE PARTNERSHIP FIRM PRANIK LANDMARK ASSOCIATES. COMPUTATION OF BOOK PROFITS UNDER SECTION H5JB (3) IN COMPUTING THE BOOK PROFIT UNDER SECTION 115JB, THE LEARNED COMMISSIONE R (APPEALS) ERRED IN NOT SPECIFICALLY DIRECTING THE ASSESSING OFFICER TO ALLOW DEDUCTION UNDER CLAUSE (II) OF EXPLANATION 1 TO SECTION 115JB IN RESPECT OF THE AMOUNT OF RS. 10 , 48 , 51,708 CLAIMED EXEMPT BY THE APPELLANT UNDER SECTION 10(2A). 4. BR IEF FACTS O F THE CASE ARE AS UNDER : T HE ASSESSEE IS A P RIVATE L IMITED C OMPANY ENGAGED IN INVESTMENT AND FINANCING ACTIVITIES. DURING THE COURSE OF ASSESSMENT THE ASSESSING OFFICER LEARNED FROM THE N OTES TO THE ACCOUNT THAT DURING THE YEAR UNDER CONSIDERATION THE ASSE SSEE COMPANY HAS CREDITED THE AMOUNT OF RS. 10,48,51,708 / - BEING SHARE OF SURPLUS ON THE REVALUATION OF ASSETS OF A FIRM FROM WHICH IT HAD RETIRED EARLIE R, AS PROFIT FROM PARTNERSHIP FI RM IN ITS PROFIT AND LOSS ACCOUNT AND THE SAME WAS CLAIMED AS EXEMPT U /S . 10 (2A) OF THE I NCOME T AX A CT. 3 ITA NO. 2752 & 3366/MUM/2014 RAHAS INVESTMENT PRIVATE LIMITED 5. IN EXPLANATION OF THE AFORESAID CLAIM , THE ASSESSEE EXPLAINED THAT IT WAS EARLIER A PARTNER IN PARTNERSHIP FIRM M/S. P RANIK LANDMARK A SSOCIATES (PLA) . IT HAD RETIRED FROM THE SAID F I RM WITH EFFECT FROM 01.04.2009. T HE ASSE SSEE COMPANY HAD RECEIVED FROM THE PARTNERSHIP F I RM THE SUMS OUTSTANDING UPON RETIREMENT WITH THE FIRM AS REFLECTED BY THE ASSESSEE COMPANYS ACCOUNT. THE ASSESSEE COMPANY ALSO RECEI VED AN AMOUNT OF RS.10,48,51, 708 / - OVER AND ABOVE THE AMOUNT OUT STANDING T O THE CREDIT OF ITS CAPITAL AND CURRENT ACCOUNT IN THE FIRM AS ON THE DATE OF RETIREMENT AS PER ASSESSES COMPANY S BOOK . I N EXPLANATION OF THE SOURCE OF THIS RECEIPT , THE ASSESSEE GAVE EXPLANATION T HAT IN THE SAID FIRM THERE WAS A REVALUATION AS WELL AS TH E DE VALUATION OF PROPERTY IN THE PAST. THAT ASSESSEE COMPANY HAD NOT ACCOUNTED FOR THE INCREASE IN THE VALUE OF PROPERTY IN ITS CAPITAL ACCOUNT IN THE SAID FIRM AS RE SULTING FROM THE REVALUATION. HENCE , WHEN THE ASSESS E E RECEIVED THE SUM OF RS.10,48,51,708 / - , IT CLAIMED TO BE IN RELATION TO THE AFORESAID REVALUATION IN THE PAST (IN 2007 - 08) WHICH THE ASSESS E E COMPANY HAD NOT ACCOUNTED FOR . HE NCE , THE ASSESSEE PASSED A N ENTRY IN ITS BOOKS OF ACCOUNT DURING THE YEAR ON 06.11.2009 . B Y WAY OF THIS ENTRY , THE AS SE SSEE COMPANY DEBITED THE SAID FI RM BY RS.10,48,51,708/ - AND CREDITED REVALUATION RESERVE BY RS.10,48,51,708/ - . N OW THE EXPLANATION OF THE ASSESSEE IS THAT SINCE THE SAID AMOUNT WAS RECEIVED PURSUANT TO REVALUATION FROM THE PARTNERSHIP FIRM , THE SAID AMOU NT HAS ITS ORIGIN IN THE REVALUATION RESERVE CREATED BY THE SAID FIRM IN EARLIER YEARS BUT NOT ACCOUNTED FOR BY THE ASSESSEE COMPANY. HENCE THE ASSESSEES CLAIM IN THIS REGARD WAS THAT SINCE IT HAD RECEIVED THE AMOUNT FROM PARTNERSHIP FIRM , THE RECEIPT WAS EXEMPT U /S. 10(2A) OF THE ACT. THE ASSESSING OFFICER HAS REJECTED THIS EXPLANATION OF THE ASSESSEE BY CONCLUDING AS UNDER : 4 ITA NO. 2752 & 3366/MUM/2014 RAHAS INVESTMENT PRIVATE LIMITED 1 9. IN THE INSTANT CASE, THE ASSESSEE RETIRED FROM THE PARTNERSHIP FIRM AND WAS PAID THE SUM STANDING TO THE CREDIT OF ITS CAPITAL AN D CURRENT ACCOUNT. THE EXCESS AMOUNT PAID TO THE ASSESSEE ON ACCOUNT OF REVALUATION RESERVE WAS OF RS.10,48,51,708 / - . THUS, IT WAS A CASE WHERE INSTEAD OF QUANTIFYING THE ASSESSEE'S SHARE BY TAKING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE, PARTIES HAD AGR EED TO PAY A LUMP SUM IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING ITS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS. THUS, THE RETIRING PARTNER WAS PAID SOMETHING OVER AND ABOVE THE SUM STANDI NG TO THE CREDIT OF ITS CAPITAL ACCOUNT AND, THEREFORE, THIS IS THE CASE WHERE THE CAPITAL GAIN TAX LIABILITY IS ATTRACTED IN THE HANDS OF ASSESSEE. 20. IN THE CASE OF THE ASSESSEE THE CLAUSES IN THE RETIREMENT DEED MORE PARTICULARLY CLAUSE 1 & 2, DID CO NVEY INTEREST IN IMMOVABLE PROPERTY AND FURTHER REFERRED TO THE FACT THAT THE ASSESSEE WOULD NOT HAVE ANY INTEREST OVER THE ASSETS OF THE FIRM. THUS, IT WAS A CASE OF LUMP SUM PAYMENT IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS. THE MANNER OF RETIREMENT IN THE CASE OF THE ASSESSEE WAS SUCH THAT IT COULD BE REGARDED AS ASSIGNING OR RELINQUISHING BY THE RETIRING PARTNER OF HIS SHARE OR RIGHT IN TH E/PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS. 6. U P ON THE A SSESSEE'S APPEAL IN THIS REGARD , THE LD. COMMISSIONER OF INCOME TAX (APPEALS) AFFIRMED THE ACTION OF THE ASSESSING OFFICER IN DENYING THE CLAIM OF EXEMPTION U /S. 10(2A) BY HOLD ING AS UNDER : 4.3 I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE. THE APPELLANT HAD CLAIMED NET VALUE OF REVALUATION OF RS. 10,48,51,708/ - AS EXEMPT INCOME U/S. 10(2A) AND ALSO THERE WAS SOME OTHER INCOME FROM OTHER FIRMS. TOTAL AMOUNT CLAI MED FOR EXEMPTION WAS RS. 10,489,57,598/ - . SEC. 10 (2A) READS AS UNDER: 'S. 10(2A) IN THE CASE OF A PERSON BEING A PARTNER OF A FIRM WHICH IS SEPARATELY ASSESSED AS SUCH, HIS SHARE IN THE TOTAL INCOME OF THE FIRM; EXPLANATION - FOR THE PURPOSES OF THIS CLAUSE , THE SHARE OF A PARTNER IN THE TOTAL INCOME OF A FIRM SEPARATELY ASSESSED AS SUCH SHALL, NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER LAW, BE AN AMOUNT WHICH BEARS TO THE TOTAL INCOME OF THE FIRM THE SAME PROPORTION AS THE AMOUNT OF HIS SHARE IN THE PR OFITS OF THE FIRM IN ACCORDANCE WITH THE PARTNERSHIP DEED BEARS TO SUCH PROFITS;' ON CAREFUL READING OF SEC. 10(2A) IT IS CLEAR THAT THE FIRM IS EXEMPT FROM TAX IF FIRM RECEIVES ANY SHARE IN THE TOTAL INCOME OF THE FIRM. THE APPELLANT M/S.RAHAS INVESTMENT P. LTD. HAD NOT RECEIVED ANY INCOME FROM THE TOTAL INCOME OF THE FIRM AND THE AMOUNT WHICH APPELLANT HAD CLAIMED WAS ONLY REVALUATION RESERVE. THE 5 ITA NO. 2752 & 3366/MUM/2014 RAHAS INVESTMENT PRIVATE LIMITED REVALUATION RESERVE DOES NOT COME UNDER THE PURVIEW OF SEC. 10 (2A). HENCE, A.O. WAS FULLY JUSTIFIED IN DISALLO WING THIS AMOUNT FROM EXEMPTION U/S. 10(2A) AS IT IS NOT A PART OF TOTAL INCOME. NOW WE HAVE TO EXAMINE WHETHER REVALUATION AMOUNT CAN BE CONSIDERED AS INCOME TAXABLE UNDER I. T. ACT. 7. THEREAFTER , THE LD. COMMISSIONER OF INCOME TAX (APPEALS) GRANTED RE LIEF TO THE ASSESSEE BY HOLDING THAT THE AMOUNT WAS RECEIVED BY THE ASSESSEE COMPANY FROM THE PARTNERSHIP FIRM ON ACCOUNT OF ITS DUES UPON RETIREMENT OF THE FIRM. HE HELD THAT THE ACCOUNTING ENT RY DONE BY THE ASSESS EE IN THIS REGARD DID NOT AMOUNT TO PROFI T IN THE HANDS OF THE ASSESSEE . H E ALSO HELD THAT THE RE VALUATION IS NOT TAXABLE UNDER I NCOME T AX A CT . I N THIS REGARD , THE LD. COMMISSIONER OF INCOME TAX (APPEALS) PLACED RELIANCE UPON SEVERAL CASE LAWS THAT ENTRIES IN BOOKS OF ACCOUNTS ARE NOT DETERMINATI VE OF THE TAX LIABILITY AND THAT REVALUATION OF PROPERTY CANNOT GIVE RISE TO PROFITS . HE CONCLUDED THAT JUST AN ACCOUNTING ENTRY WILL NOT BE CONSIDERED AS PROFIT AND LOSS , BUT WHAT IS TAXABLE IN THE I NCOME TAX LAW IS IMPORTANT. HE FURTHER HELD THAT IT IS C LEAR THAT REVALUATION IS IN THE NATURE OF CAPITAL RECEIPT , H ENCE, INCOME TAX CANNOT BE LEVIED ON THAT R EV ALUATION AMOUNT . H ENCE , IT IS NOT TAXABLE UNDER THE I. T. ACT . 8. AGAINST THE ABOVE ORDER , THE ASSESSEE AND THE R EVENUE ARE IN CROSS APPEAL BEFORE US . 9. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT IN THIS CASE THE ASSESSEE IS A COMPANY. EARLIER IT WAS PARTNER IN THE FIRM PRANIK LANDMARK ASSOCIATES . I T HAD RETIRED FROM THE FIRM WITH EFFECT FROM 01.04.2009 B Y WAY OF A RETIREMENT DEED. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY RECEIVED A SUM OF RS.10,48,51,708/ - OVER AND ABOVE WHAT WAS DUE TO IT FROM THE PARTNERSHIP FIRM UPON 6 ITA NO. 2752 & 3366/MUM/2014 RAHAS INVESTMENT PRIVATE LIMITED RETIREMENT AS REFLECTED BY THE ASSESSEE COMPANYS ACCOUNTS . THE ASSESSEE DURING THIS YEAR O N 06.11.2009 HAS PASSED AN ENTRY CLAIMING THAT IT WAS DUE TO THE EARSTWHILE PARTNERSHIP FIRM UPON THE FIRM S RE VALUATION OF ASSETS IN THE PAST WHICH THE ASSESSEE COMPANY HAD NOT TAKEN CREDIT IN ITS CAPITAL ACCOUNT WITH THE FIRM. THE ASSESSEE COMPANY HAD CR EDITED THIS TO REVALUATION RESERVE DURING THE YEAR . WE FIND THAT THE R EVALUATION RESERVE IS CREATED WHEN THE ASSET OF THE COMPANY/FIRM ARE VALUED DURING THE YEAR. IT IS CLEAR THAT THERE WAS NO REVALUATION OF ANY ASSET OF THE COMPANY. HENCE BY NO STRETCH OF IMAGINATION , ASSESSEE CAN MAKE ANY CREDIT E NTRY TO THE REVALUATION RESERVE, DURING THE YEAR, AND THAT ALSO FOR OTHER ASSESSEES ASSETS. 10. AS REGARDS THE CLAIM OF THE ASSESSEE THAT THE SUM RECEIVED WAS EXEMPT U /S .10(2A) , A READING OF THE SAID SECTION MA KES IT CLEAR THAT THE SAID SECTION MAKES THE PROFIT OF A FIRM ASSESSED AS SUCH EXEMPT IN THE HANDS OF ITS PARTNERS. IN THE PRESENT CASE , THE ASSESSEE COMPANY WAS NOT AT ALL PARTNER IN THE SAID FIRM. IT HAD RETIRED FROM THE FIRM WITH EFFECT FROM 01.04.2009 . HENCE , THE AMOUNT RECEIVED BY A RETIRED PARTNER FROM ITS EARSTWHILE PARTNERSHIP FIRM CANNOT AT ALL BE CLAIMED TO BE EXEMPT U /S .10(2A) . H ENCE , WE ARE OF THE CONSIDERED OPINION THAT THE ACTION OF THE ASSESSING OFFICER IS QUITE CORRECT IN HOLDING THAT ASSESS EE IS NOT ELIGIBLE FOR EXEMPTION U /S.10(2A). 11. N OW WE COME TO THE CLAIM THAT THE SUM RECEIVED WAS EXEMPT AS CAPITAL RECEIPT. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS HELD THE SUM TO BE CAPITAL RECEIPT BY HOLDING THAT IT WAS RECEIVED ON ACCOUNT O F ERSTWHILE PARTNERSHIP FIRM FROM W H ICH THE ASSESSEE HAD RETIRED. THE FACTS OF THE CASE CLEARLY INDICATE THAT THE ASSESSEE HAD RETIRE D 7 ITA NO. 2752 & 3366/MUM/2014 RAHAS INVESTMENT PRIVATE LIMITED FROM THE PARTNERSHIP FIRM AND THE RETIREMENT DEED WAS DULY EXECUTED. THERE WAS NO MENTION OF ANY REMAINING CLAIM OF THE A SSESSEE IN THE ASSETS OF THE FIRM OR REVALUATION RESERVE. HENCE , THE ASSESSEE HAD RELINQUISHED ITS RIGHT INTO THE PROPERTIES OF THE PARTNERSHIP FIRM IN LIEU OF OUTSTANDING AS ON THAT DATE OF RETIREMENT. AS IT IS EVIDENT , THE SAID REVALUATION IS CLAIMED TO HAVE TAKEN PLACE IN THE YEAR PRIOR TO THE YEAR UNDER CONSIDERATION IN 2007 - 08. THE ASSESSEE COMPANY HAD NOT TAKEN CREDIT OF THAT REVALUATION RESERVE IN I TS ACCOUNTS OF THAT PERIOD. ON QUERY FROM THE BENCH IN THIS REGARD , THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT ASSESSEE COMPANY HAD TAKEN A CONSCIOUS DECISION NOT TO ACCOUNT FOR THE REVALUATION RESERVE CREDIT. CONSIDERED IN THIS PERSPECTIVE WHEN THE ASSESSEE COMPANY HAD NOT ACCOUNTED FOR THE REVALUATION RESERVE IN THE PAST WHEN IT HAD ACCRUED AND CO NSCIOUSLY LEFT IT IN THE HANDS OF THE FIRM, IT CANNOT CLAIM THAT THE RECEIPT IN THE PRESENT YEAR RELATES TO THE ABOVE SAID REVALUATION DESPITE THE FACT THAT ASSESSEE HAD RETIRED DULY RELINQUISHING ITS RIGHTS AND PROPERTIES IN THE SAID FIRM. HENCE , IN OUR C ONSIDERED OPINION , THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS CLEARLY ERRED IN HOLDING THAT THIS SUM HAS BEEN RECEIVED UPON RETIREMENT FROM THE FIRM AND IT IS A CAPITAL RECEIPT. 12. ACCORDINGLY, WE UPHOLD THE ORDER OF THE ASSESSING OFFICER AND THE L D. COMMISSIONER OF INCOME TAX (APPEALS) D E NYING THE ASSESSEE S CLAIM OF DEDUCTION U/S. 10(2A). WE ALSO SET ASIDE THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) THAT THE AMOUNT RECEIVED IS A CAPITAL GAIN. HENCE, THIS ISSUE IS DECIDED IN FAVOUR OF THE REVENUE. THE OTHER G ROUNDS RAISED ARE CONSEQUENTIAL. HENCE, WE ALSO SET ASIDE THE ORDER 8 ITA NO. 2752 & 3366/MUM/2014 RAHAS INVESTMENT PRIVATE LIMITED OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) WHICH GRANTED DEDUCTION OF THE AMOUNT IN COMPUTATION OF BOOK PROFIT. AS WE HA VE ALREADY HELD IT IS NEITHER A CAPITA L RECEIPT NOR IT HAS ANYTHING TO DO WITH REVALUATION O F ASSETS OF THE ASSESSEE COMPANY. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS DISMISSED THE REVENUES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 01.06.2018 SD/ - SD/ - ( R AM LAL NEGI ) (S HAMIM YAHYA) / J UDICIAL MEMBER / A CCOUNTANT MEMBER MUMBAI ; DATED : 01.06.2018 . . ./ ROSHANI , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F I LE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBA I