ITO 25 (1)(4), MUMBAI V. NEW KAMLESH JEWEL;LERS, MUMBAI

ITA 3650/MUM/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2578 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 26-03-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 06-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Bonafide belief; Difference of opinion
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.3650/M/2011 ASSESSMENT YEAR: 2003-04 INCOME TAX OFFICER 25(1)(4), ROOM NO.308, 3 RD FLOOR, BLDG. C-10, PRATYAKSHAKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI 400 051 VS. M/S. NEW KAMLESH JEWELLERS, B/16, KENT GARDEN, FACTORY LANE, NEAR M.K. HIGH SCHOOL, OPP JAMBLI GALLI, OPP L.T. ROAD, BORIVALI (W), MUMBAI 400 092 PAN: AACFN 9125B (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI VIPUL JOSHI, A.R. REVENUE BY : SHRI MALLIKARJUN UTTURE, D. R. DATE OF HEARING : 07.07.2016 DATE OF PRONOUNCEMENT : 13.07.2016 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE REVE NUE AGAINST THE ORDER DATED 18.02.2011 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS THE CIT(A)] RELEVANT TO ASSESSMENT Y EAR 2003-04. 2. THE REVENUE IS AGGRIEVED BY THE ACTION OF THE LD . CIT(A) IN DELETING THE PENALTY LEVIED BY THE ASSESSING OFFICER (HEREIN AFTER REFERRED TO AS THE AO) ON THE ASSESSEE UNDER SECTION 271(1)(C) OF THE INCO ME TAX ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURE AND TRADING IN GOLD AND SILVER ARTICLES. THE ASSESSEE FILED ITS RETURN OF INCOME ON 1-12-03 DECLARING THE TOTAL INCOME OF RS.47,533/- WHICH WAS ACCEPTED U/S 143(1). SUBSEQUE NTLY, THE A.O. ITA NO.3650/M/2011 M/S. NEW KAMLESH JEWELLERS 2 REOPENED THE ASSESSMENT AND COMPLETED THE ASSESSMEN T U/S 143(3) R.W.S. 147 ON 28-12-07 DETERMINING THE TOTAL INCOME AT RS.79,2 0,740/-. THE ASSESSEE FIRM WAS FORMED WITH FIVE PARTNERS( IN CLUDING ONE MINOR) ON 1- 4-01 TO CARRY ON BUSINESS AT BORIVALI, MUMBAI AND R AJKOT. TWO PARTNERS NAMELY MR. CHIMANLAL J MINAWALA AND SHRI KAMLESH C MINAWALA RETIRED FROM THE FIRM WITH EFFECT FROM 31-8-02 AND MRS. ASH A V. MINAWALA WAS ADMITTED TO THE BENEFITS OF PARTNERSHIP FIRM WITH E FFECT FROM 1-9-2002. THE RETIRING PARTNERS CAPITAL ACCOUNT IN THE ASSESSEE FIRM WAS SETTLED BY PASSING APPROPRIATE ENTRIES AND DISTRIBUTING CERTAIN ASSETS & LIABILITIES. DURING THE COURSE OF RE-ASSESSMENT PROCEEDINGS, THE A.O. FOUND THAT THE ASSESSEE CREATED GOODWILL OF RS.68,79,284/- IN THE BOOKS OF ACCOUNT AND CREDITED THE SAME TO THE RESPECTIVE PARTNERS IN THEIR PROFIT SHARING RAT IO. HE FOUND THAT THE ENTIRE SUM CREDITED TO THE PARTNERS CAPITAL ACCOUNT DID NO T SUFFER ANY TAX. THE A.O. FURTHER FOUND THAT THE ASSESSEE TRANSFERRED THE CLO SING STOCK OF THE FIRM AT COST AND NOT AT MARKET PRICE WHICH WAS HIGHER AS COMPARE D TO THE COST PRICE. THE AO, TAXED THE ENTIRE VALUE OF GOODWILL OF RS.68,79, 284/- AS STCG U/S 45(4) BY RELYING ON THE DECISION OF THE HON'BLE MUMBAI HI GH COURT IN THE CASE OF M/S. AN. NAIK ASSOCIATES (265 ITR 346). 4. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE ASSESSEE CONTENDED THAT THERE WAS NO DISSOLUTION OF FIRM AND THEREBY SEC 45 (4) WAS NOT APPLICABLE. IT WAS FURTHER CONTENDED THAT ASSESSEE TRANSFERRED VAR IOUS ASSETS AND LIABILITIES INCLUDING THE STOCK IN TRADE AND IF THE VALUE OF ST OCK IN TRADE IS EXCLUDED FROM THE NET ASSETS TRANSFERRED, THE BALANCE WAS NEGATIV E AND, THEREFORE, EVEN IF CASE OF RETIREMENT OF PARTNER IS COVERED U/S 45(4), THER E WAS NO LIABILITY U/S SECTION 45(4) IN ITS CASE. THE ASSESSEE ALTERNATIVELY CONTE NDED THAT IN ANY CASE STCG SHOULD BE ONLY RS.34,39,642/- AND NOT RS.68,79,284/ -. THE CIT(A) DID NOT ACCEPT THE CONTENTION THAT THERE WAS NO LIABILITY F OR TAXING STCG U/S 45(4) BUT ACCEPTED THE ALTERNATIVE CONTENTION THAT THE STCG W AS ONLY RS.34,39,642/-. ITA NO.3650/M/2011 M/S. NEW KAMLESH JEWELLERS 3 5. DURING THE COURSE OF PENALTY PROCEEDINGS, THE AS SESSEE CONTENDED THAT THERE WAS ONLY RECONSTITUTION OF THE FIRM DURING TH E YEAR AND NOT DISSOLUTION AND THAT THERE WAS DIVERGENCE OF OPINION BETWEEN IT AT JABALPUR & HONBLE MUMBAI HIGH COURT AS TO WHETHER TRANSFER OF ASSETS AT THE TIME OF RETIREMENT WOULD ATTRACT CAPITAL GAINS U/S 45(4). IT WAS FURTH ER CONTENDED THAT THE ASSESSEE FIRM HAD DISCLOSED ALL THE PRIMARY FACTS INCLUDING THE DETAILS OF PARTNERS WHO RETIRED AND THE NEW PARTNER ADMITTED DURING THE YEA R AND THE PARTICULARS OF ASSETS (INCLUDING GOODWILL CREATED) & LIABILITIES T RANSFERRED TO SETTLE THE RETIRING PARTNERS ACCOUNTS AND THE CLAIM OF THE ASS ESSEE THAT THERE WAS NO LIABILITY TO CAPITAL GAIN U/S 45(4) AND ITS CASE WA S SUPPORTED BY THE DECISION OF JABALPUR BENCH IN THE CASE OF ACIT VS THERMOFLICS INDIA LTD. (60 ITD 554). IT WAS ALSO CONTENDED THAT WHEN TWO INTERPRETATIONS WERE POSSIBLE, MERELY BECAUSE THE VIEW NOT FAVOURABLE TO THE ASSESSEE WAS ACCEPTED IN QUANTUM PROCEEDINGS, PENALTY CANNOT BE IMPOSED. IT WAS ALSO CONTENDED THAT EVEN IF IT IS PRESUMED THAT CASES OF RETIREMENT ARE ALSO COVER ED U/S 45(4), IN ORDER TO BE CHARGED TO CAPITAL GAINS, THE ASSET TRANSFERRED MUS T BE A CAPITAL ASSET AS DEFINED U/S 2(14). FURTHER IT WAS CONTENDED THAT ST OCK IN TRADE WAS SPECIFICALLY EXCLUDED FROM THE DEFINITION OF CAPITAL ASSET U/S 2 (14)(I). IT WAS CONTENDED THAT THE ASSESSEE DID NOT HIDE ANY FACTS BEFORE THE A.O. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND MERELY BECAUSE THERE WAS DIFFERENCE OF OPINION REGARDING THE LIABILITY TO CAPITAL GAIN, CONCEALMEN T PENALTY COULD NOT BE LEVIED, THE ASSESSEE RELIED ON VARIOUS DECISIONS ALSO. HOWE VER, THE A.O, DID NOT ACCEPT THE REPLY OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HIMSELF CONTENDED BEFORE THE LD. CIT(A) THAT THE STCG ARISI NG OUT OF DISTRIBUTION OF CAPITAL ASSETS SHOULD BE RESTRICTED TO RS.34,39,642 /-. HE HELD THAT THE DIFFERENCE OF OPINION WAS REGARDING THE QUANTUM OF STCG AND NOT THE LIABILITY ITSELF. HE FURTHER HELD THAT THE VERY FACT THAT THE ASSESSEE ADMITTED BEFORE THE LD. CIT(A) THAT THE STCG SHOULD BE TAXED AT RS.34,3 9,642/- SHOWED THAT THE ASSESSEE DID NOT MAKE PROPER AND TRUE DISCLOSURE IN THE RETURN OF INCOME. HE HELD THAT THE ADMISSION BEFORE THE LD. CIT(A) PROVE ED THE PRESENCE OF MENS- ITA NO.3650/M/2011 M/S. NEW KAMLESH JEWELLERS 4 REA AND THE ASSESSEE ACTED DELIBERATELY IN DEFIANCE OF LAW AND WAS GUILTY OF CONTUMACIOUS CONDUCT AND, THEREFORE, IMPOSED PENALT Y. HE FURTHER HELD THAT VARIOUS DECISIONS RELIED BY THE ASSESSEE WERE DISTI NGUISHABLE ON FACTS AND BY VIRTUE OF EXPLANATION 1 TO SECTION 271(1)(C), THE A SSESSEE WAS LIABLE FOR CONCEALMENT PENALTY AND ACCORDINGLY IMPOSED PENALTY OF RS.12,46,600 AT THE RATE OF 100% TAX TO BE EVADED BEING THE MINIMUM PEN ALTY. 6. THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE DELETED THE PENALTY OBSERVING AS UNDER: 6. I HAVE CONSIDERED THE SUBMISSIONS OF THE REPRESE NTATIVE AND THE STAND TAKEN BY THE A.O. IT IS SEEN FROM THE RETURN OF INCOME AND STATEMENT ENCLOSED THAT THE APPELLANT HAD CORRECTLY DISCLOSED ALL THE MATERIAL FACTS NECESSARY FOR COMPLETION OF ASSESSME NT. BELOW THE FIXED ASSET SCHEDULE, THE APPELLANT LEFT NOTE NO.1 AS BEL OW: 'ALL THE ASSETS OF RAJKOT HAS BEEN TAKEN OVER BY THE RETIRING PARTNERS MR CHIMANLAL J MINAWALA & KAMLESH C MINAWALA.' THE APPELLANT ALSO FILED REVISED AGREEMENT COVERING RETIREMENT AND ADMISSION OF PART NERS. THIS MEANS THAT THE APPELLANT HAD DISCLOSED THE MATERIAL FACTS AND ONLY DID NOT OFFER CAPITAL GAIN U/S 45 (4) ON THE BONAFIDE BELIEF THAT THERE W AS NO LIABILITY TO CAPITAL GAIN AS THERE WAS ONLY RETIREMENT AND FU RTHER THAT THERE WAS NO TRANSFER OF CAPITAL ASSET AS DEFINED U/S 2(14). THE A .O. IN THE IMPUGNED ORDER HAS HEAVILY RELIED ON THE CONTEN TION OF THE APPELLANT BEFORE THE CIT(A) THAT ONLY R S. 34,39,642/- WAS LIABLE TO CAPITAL GAINS. THE A.O. CONVENIENTLY IGNORED AND OVERLOOKED THE FACT THAT T HE ABOVE ADMISSION WAS ONLY ALTERNATIVELY SUBMISSION W ITHOUT PREJUDICE TO THE CLAIM OF THE APPELLANT THAT THERE WAS NO LIABILITY TO CAPITAL GAIN. MERELY BASED ON THE ALTERNATIVE CLAIM OF THE APPELLANT, THE AO WOULD NOT BE JUSTIFIED IN IMPOSING PENALTY STATING THAT THE ADMISSION BEFORE THE CIT(A) AMOUNTS TO ADMISSION OF HIS GUILT AND THE APPELLANT ACTED DELIBERATELY IN DEFIA NCE OF LAW AND IS GUILT OF CONTUMACIOUS CONDUCT. THE ABOVE OBSERVATION OF THE A O IN THE IMPUGNED ORDER IS TOTALLY UNACCEPTABLE. THE APPELLANT CONTENDED BE FORE THE CIT(A) THAT THERE WAS NO LIABILITY TO CAPITAL GAIN AS THERE WAS NO DISSOLUTION AND FURTHER THERE WAS NO TRANSFER OF CAPITAL ASSETS BUT THE SOME WAS NOT ACCEPTED. IN THE ALTERNATIVE, THE APPELLANT CONTEND ED BEFORE THE CIT(A) THAT THE AMOUNT OF CAPITAL GAIN SHOULD BE RESTRICTE D TO RS. 34,39,643/- WHICH CAN NEVER TAKEN BE THAT THE APPEL LANT ADMITTED ITS GUILT IT IS SEEN FROM THE ORDER OF THE MUMBAI BENCH OF THE TRIB UNAL DATED 7-1-01 THAT THE ISSUES OF TRANSFER OF CAPITAL ASSET WAS DISCUSSED. THE APPELLANT CONTENDED THAT THE STOCK- IN- TRADE TRANSFERRED TO THE RETIRING PA RTNERS IS NOT CAPITAL ASSET, AND THEREFORE, NEEDS TO BE EXCLUDED WHILE DETERMINING L IABILITY U/S 45(4). THIS CONTENTION WAS REJECTED BY THE TRIBUNAL WITH THE FO LLOWING OBSERVATIONS: THE CAPITAL ASSET TRANSFERRED ON RETIREMENT OF A P ARTNER FROM THE FIRM IS ITA NO.3650/M/2011 M/S. NEW KAMLESH JEWELLERS 5 THE RIGHT AS A PARTNER. THE FIRM SETTLES SUCH RIGH T BY GIVING AWAY ASSETS OF THE FIRM WHICH INCLUDES ITS STOCK-IN-TRADE. THE ST OCK-IN-TRADE IN THAT EVENT LOOSES ITS CHARACTER AS STOCK IN TRADE AND BECOMES A CAPITAL ASSET WHICH IS USED AS A MODE OF SETTLEMENT OF THE CLAIM OF THE RE TIRING PARTNER BY GIVING IT AT A VALUE TO THE RETIRING PARTNER. FOR THE REA SONS STATED ABOVE, WE REJECT THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE TO THE EFFECT THAT VALUE OF STOCK-IN-TRADE HAS TO BE EXCLUDED WHI LE DETERMINING CAPITAL GAIN BECAUSE WHAT IS TRANSFERRED ON RETIREMENT OF A PARTNER FROM THE FIRM IS THE SHARE OR INTEREST OF A PARTNER IN THE PARTNE RSHIP AND IS ASSETS AND NOT THE INDIVIDUAL ITEMS OF PROPERTIES OF THE FIRM WHIC H IS ALLOTTED ON RETIREMENT TO THE RETIRING PARTNER. FOR THE AFORES AID REASONS, WE CONFIRM THE ORDER OF CIT(A) AND DISMISS GROUND NO.1(A)(D) R AISED BY THE ASSESSEE. FROM THE ABOVE OBSERVATION, IT IS SEEN THAT THOUGH THE HON'BLE ITAT HAS UPHELD THE CIT(A)'S ORDER, THE REASONING GIVEN ARE ENTIRELY DI FFERENT FROM THE REASONS GIVEN BY THE CIT(A). THUS FROM THE ABOVE, IT IS SEEN THAT THE APPELLANT DISCLOSED ALL THE FACTS BEFORE THE A.O. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AN D MERELY BECAUSE THE APPELLANT DID NOT ADMIT THE CAPITAL GAINS U/S 45(4) , NO CONCEALMENT PENALTY CAN BE IMPOSED. I ACCEPT THE PLEA OF THE REPRESENTATIVE TH AT ITS BONA FIDE BELIEF WAS SUPPORTED BY THE HON'BLE JABALPUR DECISION WHICH WA S EXISTING AT THE TIME OF FILING OF RETURN OF INCOME AND FURTHER THAT IF THE VALUE O F STOCK- IN- TRADE TRANSFERRED TO THE RETIRING PARTNERS WAS EXCLUDED FROM THE NET ASS ETS TRANSFERRED TO RETIRING PARTNERS, THE APPELLANT DID NOT TRANSFER ANY CAPITA L ASSET AS DEFINED U/S 2(14),AND , THEREFORE, THERE WAS JUSTIFICATION FOR NOT ADMITTIN G THE CAPITAL GAINS. THE ASSESSEE CANNOT BE EXPECTED TO COMPUTE THE TOTAL INCOME AS W OULD BE FINALLY DETERMINED THE AO, BUT THE STATUTORY OBLIGATION OF THE APPELLA NT IS DISCHARGED IF THE FACTS RELATING TO THE COMPUTATION ARE TRULY AND CORRECTLY SUBMITTED BEFORE THE A.O. IN WHICH CASE CONCEALMENT PENALTY CANNOT BE IMPOSED. A S RIGHTLY CONTENDED BY THE REPRESENTATIVE, THE A.O. DID NOT POINT OUT ANY FACT WHICH WAS WITHHELD BY THE APPELLANT FROM THE KNOWLEDGE OF THE AO OR ANY FACTS WHICH WERE MISREPRESENTED BEFORE HIM, IN THE ABSENCE OF WHICH NO PENALTY CAN BE LEVIED FOR CONCEALMENT OF INCOME. IN VIEW OF THE ABOVE, I DIRECT THE AO TO C ANCEL THE PENALTY OF RS.12,46,600/-. 7. BEING AGGRIEVED BY THE ABOVE ORDER OF THE LD. CI T(A), THE REVENUE HAS COME IN APPEAL BEFORE US. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND HAVE ALS O GONE THROUGH THE RECORDS. THE LD. A.R. OF THE ASSESSEE, BEFORE US, H AS SUBMITTED THAT THE ASSESSEE NEITHER HAD FILED ANY INACCURATE PARTICULA RS OF INCOME NOR HAD CONCEALED ITS INCOME. THE ASSESSEE WAS UNDER BONAF IDE BELIEF THAT THERE WAS NO LIABILITY TO CAPITAL GAINS TAX. THE ASSESSEE HA D FORMED THIS VIEW IN THE LIGHT ITA NO.3650/M/2011 M/S. NEW KAMLESH JEWELLERS 6 OF THE DECISION OF THE JABALPUR BENCH OF THE TRIBUN AL IN THE CASE OF ACIT VS. THERMOFLICS INDIA LTD. (SUPRA). HE HAS FURTHER SU BMITTED THAT THE ASSESSEE WAS OF THE VIEW THAT EVEN IF SECTION 45(4) WAS APPL ICABLE TO DISTRIBUTION OF CAPITAL ASSETS ON RETIREMENT, THE VALUE OF STOCK IN TRADE WAS TO BE EXCLUDED FROM THE VALUE OF NET ASSETS TRANSFERRED TO THE RET IRING PARTNERS. HE HAS FURTHER SUBMITTED THAT IF SO DONE, THE RESULT WOULD BE A NE GATIVE BALANCE AND UNDER SUCH CIRCUMSTANCES THE ASSESSEE WAS UNDER THE BONAF IDE BELIEF THAT THERE WAS NO LIABILITY FOR CAPITAL GAINS TAX UNDER SECTION 45 (4). THERE WAS NO INTENTION OF THE ASSESSEE TO EVADE TAX. THAT FULL PARTICULAR S WERE DISCLOSED. THE ASSESSEE HAD NOT DECLARED CAPITAL GAINS UNDER BONAFIDE BELIE F THAT IT WAS NOT LIABLE TO PAY ANY TAX ON THIS INCOME. AFTER CONSIDERING THE ABOVE SUBMISSIONS OF THE ASSESSEE AND GOING THROUGH THE ORDER OF THE LD. CIT (A), WE FIND THAT THE LD. CIT(A) HAS COMMITTED NO MISTAKE WHILE DELETING THE PENALTY LEVIED BY THE AO UNDER SECTION 271(1)(C) OF THE ACT UPON THE ASSESSE E. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) AND THE SA ME IS THEREFORE UPHELD. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS THER EFORE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13.07.2016. SD/- SD/- (R.C. SHARMA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 13.07.2016. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ ITA NO.3650/M/2011 M/S. NEW KAMLESH JEWELLERS 7 BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.