KANTILAL K.SHAH, MUMBAI V. ITO WD 22(1)-3, MUMBAI

ITA 3372/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6270 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 14-04-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 22-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARIGOVIND SINGH
• Keywords: Capital asset

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A : MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA. NO.3372/MUM/2009 ASSESSMENT YEAR 2006-2007 SHRI KANTILAL K. SHAH MUMBAI 057 PAN AVTPS0073K VS. THE I.T.O. WARD 22 91)-3 MUMBAI. (APPELLANT) (RESPONDENT) FOR APPELLANT : SHRI K. GOPAL FOR RESPONDENT : SHRI HARI GOVIND SINGH ORDER PER D. MANMOHAN, V.P. 1. THIS APPEAL IS DIRECTED AGAINST THE ORDER DATED 1-4-2009 PASSED BY THE CIT (A)-XXII, MUMBAI AND IT PERTAINS TO THE ASSESSMENT YEAR 2006-2007. 2. THE FACTS CONCERNING THE ONLY GROUND IN DISPUTE ARE STATED IN BRIEF. ASSESSEE WAS A PARTNER IN THE FIRM RUN IN THE NAME AND STYLE OF M/S. ATLANTA AGENCY. THE PARTNERSHIP F IRM CONSISTED OF TWO PARTNERS AND SET-UP ITS ACTIVITY VIDE DEED OF P ARTNERSHIP DATED 1/10/1985. BY DEED OF DISSOLUTION DATED 31-3-2006 T HE ASSESSEE RETIRED FROM THE PARTNERSHIP FIRM AND THE OTHER PAR TNER CONTINUED TO CARRY ON THE BUSINESS OF PHARMACEUTICAL DISTRIBUTIO N UNDER THE NAME AND STYLE OF M/S. ATLANTA AGENCY. APART FROM RECEIV ING A CONSIDERATION OF RS. 3 LAKHS TOWARDS HIS SHARE OF THE VALUE OF SH OP PREMISES, ASSESSEE CLAIMED TO HAVE RECEIVED A SUM OF RS. 5 LA KHS TOWARDS HIS SHARE OF GOODWILL. IN THE NOTE, ANNEXED TO THE RETU RN OF INCOME, IT WAS CONTENDED THAT THE AMOUNT RECEIVED ON DISSOLUTION O F A FIRM BY A PARTNER IS NOT CHARGEABLE TO TAX AND RELIED UPON TH E DECISION OF HONBLE SUPREME COURT IN THE CASE OF TRIBHUVANDAS G . PATEL VS. CIT 236 ITR 515. 2 3. ASSESSING OFFICER OBSERVED THAT ASSESSEE IS A 5 0% PARTNER IN THE PARTNERSHIP FIRM SINCE PAST 20 YEARS AND THE OTHER PARTNER CONTINUED IN THE BUSINESS UPON RETIREMENT OF ASSESS EE AND HENCE ASSESSEE DERIVED A SUM OF RS. 5 LAKHS FOR EFFECTING TRANSFER OF HIS PARTNERSHIP SHARE BY WITHDRAWING HIMSELF FROM THE F IRM. THUS THE AMOUNT RECEIVED BY HIM, IN THE FORM OF GOODWILL, IS ASSESSABLE TO TAX. DESPITE REFERENCE TO CASE LAW AND SUBMISSION OF CAS E IN DETAIL, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE AMOUNT W AS RECEIVED ON TRANSFER OF GOODWILL WHICH FALLS WITHIN THE MEAN ING OF SECTION 2 (47) OF THE ACT AND IT AMOUNTS TO DISTRIBUTION OF CAPITA L ASSETS UPON DISSOLUTION OF A FIRM. HE THEREFORE, BROUGHT TO TAX A SUM OF RS. 5 LAKHS AS SHORT TERM CAPITAL GAINS. 4. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) AND REITERATED HIS CONTENTION. IT MAY BE NOTICED TH AT UNDER THE PARTNERSHIP ACT, A FIRM SHALL NECESSARILY HAVE TO C ONSIST OF MINIMUM TWO PARTNERS AND IN THE ABSENCE OF RETIREMENT/RELIN QUISHING RIGHTS OF ONE PARTNER, THE OTHER PARTNER MAY CONTINUE THE BUS INESS BUT CERTAINLY THE FIRM CEASES TO EXIST AND THUS IT AMOU NTS TO DISSOLUTION OF THE PARTNERSHIP FIRM, WHEREAS THE ASSESSING OFFICER AS WELL AS THE CIT (A) HAVING MENTIONED THAT THERE WAS DISSOLUTION OF THE PARTNERSHIP FIRM THEY PROCEEDED TO TAX THE IMPUGNED SUM ON THE GROUND THAT IT WAS TRANSFER OF HIS SHARE, IN THE CAPITAL OF THE FI RM, TO THE CONTINUING PARTNER ON HIS RETIREMENT. SINCE THE LEARNED CIT (A ) UPHELD THE ORDER OF THE ASSESSING OFFICER, ASSESSEE IS IN APPEAL BEF ORE US. 5. WE HAVE HEARD THE LEARNED COUNSEL, APPEARING ON BEHALF OF THE ASSESSEE AS WELL AS THE LEARNED DR IN THIS R EGARD AND CAREFULLY PERUSED THE RECORD. 6. LEARNED DR HAS PLACED MUCH EMPHASIS ON SECTION 45 (4) OF THE ACT WHEREAS THE COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT EVEN IF SECTION 45 (4) COMES INTO PI CTURE IT WOULD HAVE AN IMPACT ON THE ASSESSMENT OF THE PARTNERSHIP FIRM IN THE EVENT OF 3 TREATING IT AS AMOUNTING TO DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF FIRM OR OTHERWISE. IT WAS EMPHATICALLY CONTENDED THAT THERE IS NO QUESTION OF BRINGING THE IMPUGNED AMOUNT TO TAX IN THE HANDS OF THE ASSESSEE IN THE EVENT OF TREATING IT AS A DISSOLUTI ON. PER CONTRA IF IT IS TREATED AS A RETIREMENT, AMOUNT RECEIVED TOWARDS SE TTLEMENT OF GOODWILL, BASED ON THREE YEARS AVERAGE PROFIT, IS O N CAPITAL ACCOUNT AND SUCH AMOUNT IS NOT ASSESSABLE TO TAX UNDER THE REVENUE HEAD. 7. IN OUR CONSIDERED OPINION THE TAX AUTHORITIES D ID NOT APPRECIATE THE FACTS IN THE CORRECT PERSPECTIVE. WH EN THERE ARE TWO PARTNERS AND IF ONE PARTNER SEEKS TO RELEASE HIS IN TEREST IN FAVOUR OF CONTINUING PARTNER, IT WOULD AMOUNT TO A VIRTUAL DI SSOLUTION IN WHICH EVENT, EVEN UNDER SECTION 45 (4) OF THE ACT, PROFIT S AND GAINS ARISING FROM THE TRANSFER ARE CHARGEABLE TO TAX AS INCOME O F THE FIRM AND, IN THE HANDS OF THE INDIVIDUALS IT IS EXEMPT FROM TAX. ON A PLAIN READING OF THE DISSOLUTION DEED, WE ARE OF THE VIEW THAT IT IS A CASE OF DISSOLUTION OF THE PARTNERSHIP FIRM UPON RETIREMENT OF ONE PARTNER IN WHICH EVENT ANY AMOUNT RECEIVED BY THE PARTNER IS N OT ASSESSABLE TO TAX IN HIS STATUS AS INDIVIDUAL. UNDER THESE CIRC UMSTANCES, WE SET ASIDE THE ORDERS OF THE TAX AUTHORITIES AND DELETE THE ADDITION MADE BY THE ASSESSING OFFICER. 8. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS THE 24 TH DAY OF NOVEMBER, 2010. SD/- (T.R. SOOD) ACCOUNTANT MEMBER SD/- (D. MANMOHAN) VICE PRESIDENT DATED 24 TH NOVEMBER, 2010 VBP/- 4 COPY TO : 1. SHRI KANTILAL K. SHAH, M/S. S. SHAH & ASSOCIATES, G -5, SNOW- WHITE SOC., AZAD ROAD, VILE PARLE (E), MUMBAI 400 057. 2. THE I.T.O., WARD 22 (1)-3, MUMBAI. 3. CIT (APPEALS)-XXII, MUMBAI. 4. CIT-22, MUMBAI. 5. DR A BENCH 6. GUARD FILE. BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI