DCIT 24(1), MUMBAI V. VAIBHAV INDUSTRIES, MUMBAI

ITA 3052/MUM/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3296 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 24-02-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 02-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Cost of acquisition
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ' F ' BENCH, MUMBAI BEFORE SHRI JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN , JUDICIAL MEMBER ITA NO. 3052 /MUM/201 4 (ASSESSMENT YEAR: 20 10 - 11 ) DCIT, CIRCLE 24 (1) VS. M/S. VAIBHAV INDUSTRIES C - 13, PRATYAKSH KAR BHAVAN BANDRA (E), MUMBAI 400051 103, TULSI NIWAS, PUSHTIKAR CO - OPERATIVE SOCIETY JOGESHWARI (W) MUMBAI 400012 PAN - AADFV5521A APPELLANT RESPONDENT APPELLANT BY: SHRI JAVED AKHTAR RESPONDENT BY: NONE DATE OF HEARING: 24 .02 .2016 DATE OF PRONOUNCEMENT: 16 .0 3 .2016 O R D E R PER JASON P. BOAZ, A.M . THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A) - 34 , MUM BAI DATED 28 . 02 .201 4 FOR A.Y. 20 10 - 11 . 2 . THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER: - 2.1 THE ASSESSEE FIRM, ENGAGED IN THE MANUFACTURE AND PROCESSING OF BHAGAR AND BY - PRODUCT KONDA (USED AS CATTLE FODDER), FILED ITS RETURN OF INCOME FOR A.Y. 2010 - 11 ON 25.09.2010 DECLARING INCOME OF ` 39,12,761/ - . THE CASE WAS TAKEN UP FOR SCRUTINY. IN THE COUR SE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (AO) OBSERVED THAT THE ASSESSEE FIRM CONSTITUTED BY DEED OF PARTNERSHIP ON 01.01.2001 UNDERWENT A 50% CHANGE IN CONSTITUTION VIDE DEED OF RETIREMENT - CUM - ADMISSION DATED 01.09.2008 WHEREBY TWO PARTNERS HOL DING 50% OF THE SHARE OF PROFIT, I.E. (I) SMT. VIJAYA TILOKCHAND TALERA AND (II) SHRI MANISH TILOKCHAND TALERA RETIRED FROM THE FIRM AND WERE REPLACED BY SHRI ASHISH ASHOK SAKHALA AND SMT. SHWETA PRITISH SAKHALA WITH EACH HOLDING 25% OF THE PROFITS AND LOS S IN THE FIRM. IN VIEW OF THIS CHANGE IN CONSTITUTION, THE ASSESSEE FIRM, IN ACCORDANCE WITH THE ITA NO. 3052 / MUM /2014 M/S. VAIBHAV INDUSTRIES 2 REGULATIONS OF MIDC, SINCE IT HELD LEASEHOLD RIGHTS IN A FACTORY SITUATED AT H - 32, MIDC, AMBAD, NASHIK, INTIMATED MIDC THIS CHANGE IN CONSTITUTION AND DRAFTED AND FURNISHED A NEW DEED OF ASSIGNMENT DATED 17.12.2009. THE ASSESSEE PAID STAMP DUTY OF ` 3,77,830/ - FOR THE LIMITED PURPOSE OF REGISTERING THE CHANGE IN CONSTITUTION OF THE FIRM AND THE NAME OF THE ASSESSEE FIRM, ITS BUSINESS ACTIVITY, PLACE OF OPERATIONS REMAINED THE SAME AND THE LEAS EHOLD RIGHTS IN THE SAID PROPERTY CONTINUED TO BE VESTED WITH THE ASSESSEE FIRM ITSELF. 2.2 THE AO, HOWEVER, DID NOT ACCEPT THE ASSESSEES AVERMENTS THAT , IN THE ABOVE FACTUAL MATRIX, THERE WAS NO TRANSFER OF PROPERTY AS PER THE PROVISIONS OF SECTION 2(47) OF THE ACT. THE AO DID NOT ACCEPT THE EXPLANATIONS PUT FORTH BY THE ASSESSEE AS HE WAS OF THE VIEW THAT THE PROVISIONS OF SECTION 45(4) OF THE ACT WERE APPLICABLE IN VIEW OF THE FOLLOWING REASONS: - (I) THERE WAS A CHANGE OF 50% IN THE CONSTITUTION OF THE ASSESSEE FIRM BY DEED OF ASSIGNMENT DATED 17.12.2009. (II) THAT THERE IS A TRANSFER OF CAPITAL ASSETS, I.E. TRANSFER FOR LEASEHOLD RIGHTS BY THE FIRM TO ITS RETIRING PARTNERS. (III) THERE IS A TRANSFER OF CAPITAL ASSET IN THE CA SE ON HAND AS IT FALLS WITHIN THE AMBIT OF THE EXPRESSION OTHERWISE IN SECTION 45(4) OF THE ACT, AS THE FIRM CEASES TO HAVE A RIGHT OR ITS RIGHT IN THE PROPERTY STANDS EXTINGUISHED AND IN FAVOUR OF THE PARTNER TO WHOM IT IS TRANSFERRED. IN THAT VIEW OF T HE MATTER, THE AO MADE AN ADDITION OF ` 37,78,250/ - UNDER SECTION 45(4) OF THE ACT AND ACCORDINGLY COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT VIDE ORDER DATED 26.12.2002, WHEREIN THE INCOME OF THE ASSESSEE WAS DETERMINED AT ` 76,91,011/ - . 3 . ON APPEAL, THE LEARNED CIT(A) HELD THAT THE PROVI SIONS OF SECTION 45(4) OF THE ACT ARE NOT APPLICABLE FOR A.Y. 2010 - 11, THE YEAR UNDER CONSIDERATION, AS THERE WAS NO RETIREMENT OF ANY PARTNER DURING THIS PERIOD. REGARDING THE ASSESSMENT/ADDITION OF ` 37,80,250/ - UNDER SECTION 45(4) OF THE ACT, ON ACCOUNT OF TRANSFER OF LEASEHOLD RIGHTS BY THE ASSESSEE FIRM TO THE RETIRING PARTNERS, OBSERVING THAT THE LEASEHOLD RIGHTS IN THIS SAID PROPERTY CONTINUED TO BE VESTED WITH THE ASSESSEE FIRM EVEN AFTER CHANGE IN ITS CONSTITUTION AND THAT NO CONSIDERATION OF ANY KIND OR IN ANY FORM WAS GIVEN OR CREDITED TO THE ACCOUNTS OF THE RETIRING PARTNERS EXCEPT FOR THE OUTSTANDING CAPITAL BALANCE ITA NO. 3052 / MUM /2014 M/S. VAIBHAV INDUSTRIES 3 STANDING TO THE CREDIT OF RETIRING PARTNERS, THE LEARNED CIT(A) DELETED THE A DDITION OF ` 37,80,250/ - UNDER SECTION 45(4) OF THE ACT HOLDING THAT AS PER THE PROVISIONS OF SECTION 45(4) OF THE ACT, THE INDEXED COST OF ACQUISITION OF CAPITAL ASSET SHOULD BE DEDUCTED FROM THE FULL VALUE OF CONSIDERATION COMPUTED UNDER SECTION 48 OF THE ACT FOR DETERMINING THE INCOME CHARGEABLE TO THE HEAD INCOME FROM CAPITAL GAINS. IN THIS MANNER, THE LEARNED CIT(A) ALLOWED THE ASSESSEES APPEAL VIDE THE IMPUGNED ORDER DATED 28.02.2014. 4 . THIS APPEAL WAS FIXED FOR HEARING ON FIVE OCCASIONS AND ON ALL TH E SCHEDULED DATES, NONE WAS PRESENT ON BEHALF OF THE ASSESSEE. IT APPEARS THAT EVEN THE NOTICES FOR HEARING SENT BY RPAD ON THREE OCCASIONS HAVE RETURNED BACK UNSERVED FROM THE ASSESSEES GIVEN ADDRESS. IN THESE CIRCUMSTANCES, WE PROCEED TO DISPOSE OFF THI S APPEAL WITH THE ASSISTANCE OF THE LEARNED D.R. FOR REVENUE AND THE MATERIAL ON RECORD. 5 . AGGRIEVED BY THE ORDER OF THE CIT(A) - 34 DATED 28.01.2014 FOR A.Y. 2010 - 11, THE ASSESSEE HAD PREFERRED THIS APPEAL RAISING THE FOLLOWING GROUNDS: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CLT(A) ERRED IN DELETING THE ADDITION OF RS. 37,78,250/ - MADE BY THE AC ON ACCOUNT OF 50% CHANGE IN CONSTITUTION OF THE PARTNERSHIP FIRM BY APPLYING PROVISIONS U/S. 45(4) OF THE ACT, IGN ORING THE FACTS THAT THE DEED OF ASSIGNMENT WAS REGISTERED ON 1711212009 AND THE VALUE ADOPTED BY THE AUTHORITY WAS RS. 75,56,000/ - . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE ASSESSEE'S APPEAL IG NORING THE FACTS THAT THE CHANGE IN CONSTITUTION FOR FIRM WAS CONSIDERED AS RELINQUISHMENT OF RIGHTS BY ONE PARTNER IN FAVOUR OF ANOTHER AND SUCH RELINQUISHMENT WAS CONSIDERED AS TRANSFER OF CAPITAL ASSET AS INTERPRETED IN THE CASE OF CIT V/S. A.N. NAIK AS SOCIATES (2004)136 TAXMAN 107 (BOM). THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) BE SET ASIDE AND MATTER BE DECIDED ACCORDING TO LAW. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD NEW GROUND WHICH MAY BE NECESSARY. 5.1 THE LEARNED D .R. FOR REVENUE PLACED STRONG RELIANCE ON THE FINDINGS IN THE ORDER OF THE AO AND PRAYED THAT THE IMPUGNED ORDER OF THE LEARNED CIT(A) BE SET ASIDE. ITA NO. 3052 / MUM /2014 M/S. VAIBHAV INDUSTRIES 4 5.2.1 WE HAVE HEARD THE LEARNED D.R. FOR REVENUE AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECOR D. THE FINDINGS OF THE LEARNED CIT(A), ON THE ISSUE BEFORE US IN THIS APPEAL, AT PARAS 6 AND 6.1 OF THE IMPUGNED ORDER IS AS UNDER: - 6. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT AND THE IMPUGNED ASSESSMENT ORDER ON THIS ISSUE. IT IS FOUND THAT THE APPELLANT FIRM WAS FORMED ON 01/01/2001 WITH FOR PARTNERS WITH 25% SHARE EACH IN THE PROFITS AND LOSSES OF THE FIRM. ON 01/09/2008, TWO PARTNERS RETIRED AND TWO NEW PARTNERS WERE ADMITTED IN THE APPELLANT FIRM WITH 25% S HARE EACH IN THE PROFITS AND LOSSES OF THE FIRM. THE APPELLANT FIRM HAD ACQUIRED LEASEHOLD RIGHTS IN RESPECT OF A MTDC LAND IN AMBAD, NASHIK UNDER DEED OF ASSIGNMENT DATED 27/03/2001. AS PER THE RULES AND REGULATIONS OF THE MIDC, THE APPELLANT FIRM DRAFTED A NEW DEED OF ASSIGNMENT ON 17/12/2009 IN RESPECT OF CHANGE IN CONSTITUTION OF THE FIRM AND PAID STAMP DUTY ON THE SAME. THE AUTHORISED REPRESENTATIVE OF THE APPELLANT HAS ARGUED THAT THE PARTNERS OF THE FIRM RETIRED ON 01/09/2008 I.E. DURING THE YEAR END ED 31.03.2009 I.E. A.Y. 2009 - 10 AND SO THE QUESTION OF APPLICABILITY OF PROVISIONS OF SECTION 45(4) FOR AY. 2010 - 11 DOES NOT ARISE AT ALL AND ASSESSMENT ORDER IS BAD IN LAW. THE CONTENTION OF THE APPELLANT IS CORRECT. THE PROVISIONS OF SECTION 45(4) ARE NO T APPLICABLE FOR A.Y. 2010 - 11 AS THERE IS NO RETIREMENT OF ANY PARTNER DURING THIS PERIOD. 6.1. REGARDING ADDITION OF RS. 37,78,250 MADE U/S 45(4) OF THE I.T. ACT ON ACCOUNT OF TRANSFER OF LEASE RIGHTS BY THE APPELLANT FIRM TO ITS RETIRING PARTNERS, APPEL LANT FIRM HAS ARGUED THAT THERE WAS NO TRANSFER OF ANY CAPITAL ASSET FROM THE FIRM TO ITS RETIRING PARTNERS AS THE CAPITAL ASSET I.E; LEASEHOLD RIGHTS WERE STILL WITH THE APPELLANT FIRM EVEN AFTER THE CHANGE IN CONSTITUTION OF FIRM AND THE FIRM TRANSFERRED . . THE OUTSTANDING CAPITAL BALANCE STANDING TO THE CREDIT OF RETIRING PARTNERS TO THEIR UNSECURED LOAN ACCOUNTS ON RETIREMENT. NO CONSIDERATION OF ANY KIND OR IN ANY FORM WAS GIVEN OR CREDITED TO THE ACCOUNTS OF RETIRING PARTNERS. THE APPELLANT HAD RELIED ON THE FOLLOWING DECISIONS, WHICH SUPPORT THE CASE OF THE APPELLANT: - (A) DECISION OF HON'BLE MUMBAI INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF ITO VS FINE DEVELOPERS (55 SOT 122) WHEREIN IT WAS HELD THAT PROVISIONS OF 45(4) OF THE INCOME TAX ACT CANNOT BE INVOKED UNLESS THERE IS DISTRIBUTION OF ANY CAPITAL ASSET BY THE, FIRM. . B) RECENT CASE OF CIT VS M/S DYNAMIC ENTERPRISES (ORDER PASSED ON 16/09/2013 - I.T.A. NO. 1414/2006), WH EREIN THE HON'BLE KARNATAKA, HIGH COURT HAS STATED THAT 'WHEN A RETIRING PARTNER TAKES ONLY MONEY TOWARDS THE VALUE OF HIS SHARE AND WHEN THERE IS NO DISTRIBUTION OF CAPITAL ASSET/ASSETS AMONG THE PARTNERS THERE IS NO TRANSFER OF A CAPITAL ASSET AND CONSEQ UENTLY NO PROFITS OR GAINS IS PAYABLE UNDER SECTION 45(4) OF THE INCOME TAX ACT'. THE CONTENTION OF THE APPELLANT IS CORRECT AS THERE IS NO CONSIDERATION PAID TO. THE RETIRING PARTNERS AND THE ASSETS OF THE FIRM ARE CONTINUED WITH THE FIRM. SO THE PROVISIO NS OF SECTION 45(4) DO NOT OPERATE. ITA NO. 3052 / MUM /2014 M/S. VAIBHAV INDUSTRIES 5 I AGREE WITH THE FOLLOWING CONTENTIONS OF THE AUTHORISED REPRESENTATIVE OF THE APPELLANT: A) THE PROVISIONS OF SECTION 45(4) OF THE I.T. ACT, 1961 ARE NOT APPLICABLE AS THERE IS NO RETIREMENT OF PARTNERS DURING THE YEAR ENDED 31.03.2010 I.E. A.Y. 2010 - 11. B) THERE IS NO TRANSFER OF LEASEHOLD RIGHTS BY THE FIRM TO ITS RETIRING PARTNERS AS THEY CONTINUE WITH THE FIRM. THE DOCUMENTS IN SUPPORT OF THAT ARE FILED. NO COMPENSATION IS PAID TO THE RETIRING PARTNERS. COPY OF THE BALANCE WAS FILED. NO PARTNER HAD ANY INDIVIDUAL LEASE RIGHTS IN THE LAND. EVEN AFTER THE CHANGE IN CONSTITUTION THE LEASE RIGHTS ARE STILL WITH THE APPELLANT FIRM I.E. VAIBHAV INDUSTRIES. VALUE OF LEASE RIGHTS CONTINUE THE SAME AS ON 01.04.2008 AND 01 .04.2009. C) THE CONTENTION OF THE ASSESSEE IS CORRECT THAT THE INCOME TAXABLE UNDER THE PROVISIONS OF SECTION 45(4) SHOULD BE TAXABLE UNDER THE HEAD INCOME FROM CAPITAL GAINS' AND INDEXED COST OF ACQUISITION OF CAPITAL ASSET SHOULD BE DEDUCTED FROM THE FULL VALUE OF CONSIDERATION COMPUTED U/S 48 FOR DETERMINING INCOME, CHARGEABLE UNDER THE HEAD 'INCOME FROM CAPITAL GAINS' AND CANNOT BE TAXABLE UNDER THE 'PROFITS AND GAINS OF BUSINESS'. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION OF RS. 37,78,250 MADE U/S. 45(4). THE GROUNDS TAKEN ARE ALLOWED. 5.2.2 BEFORE US, EXCEPT FOR RAISING THE GROUNDS (SUPRA), REVENUE HAS NOT BEEN ABLE TO BRING ON RECORD ANY MATERIAL TO FACTUALLY OR LE GALLY CONTROVERT THE FINDINGS OF THE LEARNED CIT(A) (SUPRA). IN THE LEGAL AND FACTUAL MATRIX OF THE CASE, WE CONCUR WITH THE FINDINGS OF THE LEARNED CIT(A), IN DELETING THE ADDITION OF ` 37,78,250/ - MADE BY THE AO UNDER SECTION 45(4) OF THE ACT, BY HOLDING THAT : - (I) THE PROVISIONS OF SECTION 45(4) OF THE ACT ARE NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION, I.E. A.Y. 2010 - 11 AS THERE IS NO RETIREMENT OF ANY PARTNER DURING THIS PERIOD. (II) THERE IS NO TRANSFER OF LEASEHOLD RIGHTS IN THE SAID PROPERTY BY THE ASSESSEE FIRM TO THE RETIRING PARTNERS; WHICH CONTINUE TO STAY VESTED IN THE ASSESSEE FIRM EVEN AFTER THE CHANGE IN THE CONSTITUTION OF THE ASSESSEE FIRM. (III) AS PER THE PROVISIONS OF SECTION 45(4) OF THE ACT THE INCOME IS NOT TO BE TAXABLE UNDER THE HEAD BUSINESS INCOME BUT RATHER THE INCOME SHOULD BE EXIGIBLE TO TAX UNDER THE HEAD INCOME FROM CAPITAL GAINS AND THE INDEXED COST OF ACQUISITION OF THE CAPITAL ASSET SHOULD BE DEDUCTED FROM THE FULL VALUE OF CONSIDERATION COMPUTED UNDER SECTION 4 8 OF THE ACT. ITA NO. 3052 / MUM /2014 M/S. VAIBHAV INDUSTRIES 6 5.2.3 IN THE LIGHT OF THE FACTUAL AND LEGAL MATRIX OF THE CASE ON HAND, AS DISCUSSED ABOVE, WE FIND THAT NO INTERFERENCE IS CALLED FOR THE IMPUGNED ORDER OF THE LEARNED CIT(A), IN RESPECT OF THE ISSUE BEFORE US AND CONSEQUENTLY UPHOLD THE SAM E. THE GROUNDS RAISED AT S. NOS. 1 & 2 BY THE REVENUE (SUPRA) ARE DISMISSED. 6 . IN THE RESULT, THE REVENUES APPEAL FOR A.Y. 20 10 - 11 IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH MARCH, 2016 . SD/ - SD/ - ( SANDEEP GOSAIN ) ( JASON P. BOAZ ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 16 TH MARCH, 2016 COPY TO: 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE CIT(A) 34 , MUMBAI 4 . THE CIT 24 MUMBAI 5 . THE DR, F BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.