ITO 25(3)(4), MUMBAI V. FINE DEVELOPERS, MUMBAI

ITA 5038/MUM/2012

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0010 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 18-11-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 07-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S PADMAJA
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Gift; Business income; Transfer pricing; Principle of natural justice; Additional evidence; Question of law; Fair market value; Valuation report; Competent authority
• Section: 43CA; 143(3); 50C; 2(14); 69

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH , JM ITA NO. 5038 / MUM/20 12 ( ASSESSMENT YEAR : 2009 - 10 ) ITO 25(3)(4) C - 10, R.NO.307, PRATYAKSHKAR BHAVAN BANDRA KURLA COMPLEX BANDRA (E) MUMBAI 400 051 VS. M/S. FINE DEVELOPERS DHEERAJ APARTMENT, P.O.DIAS COMPOUND, NATWAR NAGAR JOGESHWARI (E) MUMBAI 400 067 PAN/GIR NO. AABFF4545J APPELLANT ) .. RESPONDENT ) REVENUE BY MS. S.PADMAJA ASSESSEE BY DR.K.SHIVARAM SHRI JI GNESH P. SHAH & SHRI RAHUL HAKANI DATE OF HEARING 2 3/02 /201 8 DATE OF PRONOUNCEME NT 28 / 02 /201 8 / O R D E R PER R.C.SHARMA (A.M) : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) - 35, MUMBAI DATED 30/05/2012 FOR A.Y.2009 - 10 IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE IT ACT, 1961. 2. GROUNDS OF REVENUE READS AS UNDER: - 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DECIDING THE ISSUE OF NATURAL JUSTICE IN FAVOUR OF THE ASSESSEE. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CONCLUDING THAT THE PURCHASE OF KURLA LAND IS STOCK IN TRADE, WHEREAS THE SAME OUGHT TO HAVE BEEN TREATED AS CAPITAL ASSET. ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 2 3 (I) ON THE FAC TS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CONCLUDING THAT THE PROVISIONS OF THE SECTION 45(4) ARE NOT APPLICABLE. 3(II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN NOT TAKING INTO CONSIDERATION THE VALUE OF KURLA LAND AS PER ASSESSEE'S VALUATION REPORT FOR THE PURPOSES OF COMPUTATION OF CAPITAL GAINS U/S 48 RWS 45(4). 3 (III) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IGNORED THE FACT THAT REC ONSTITUTION OF THE FIRM TOOK PLACE IN FY 2008 - 09 AND THE SURRENDER OF RIGHTS BY THE RETIRING PARTNERS RESULTED IN PAYMENT TO THE RETIRING PARTNERS; THIS BEING DISTRIBUTION OF ASSETS TO THE RETIRING PARTNERS OUGHT TO HAVE BEEN HELD AS TAXABLE U/S 45(4). 3 (IV) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT APPRECIATING THAT RETIREMENT OF PARTNERS AND ENHANCEMENT OF PROFIT SHARING RATIO OF HDIL TO 90% ACTUALLY RESULTED IN DISSOLUTION OF THE FIRM AND THEREFORE AMOUNT S PAID TO RETIRING PARTNERS OUGHT TO HAVE BEEN TAXED U/S 45(4) 4) WITHOUT PREJUDICE TO THE ABOVE GROUNDS OF APPEAL AGITATED BY THE REVENUE, IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED, WHILE DELETING THE ADDIT ION U/S 45(4), IN NOT UPHOLDING THE TRANSACTION OF TRANSFER OF KURLA LAND TO SRA AS BUSINESS INCOME, WHEN THE ASSESSEE FIRM ITSELF HAS DECLARED INCOME UNDER THE HEAD BUSINESS AND PROFESSION. 5) THE APPELLANT PRAYS THAT THE ORDER OF THE LD CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6) THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND 3. REVISED GROUND TAKEN BY THE DEPARTMENT READS AS UNDER: - 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DECIDING THE ISSUE OF NATURAL JUSTICE IN FAVOUR OF THE ASSESSEE. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CONCLUDING THAT THE PURCHAS E OF KURLA LAND IS STOCK IN TRADE, WHEREAS THE SAME OUGHT TO HAVE BEEN TREATED AS CAPITAL ASSET. ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 3 3 (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CONCLUDING THAT THE PROVISIONS OF THE SECTION 45(4) ARE NOT APPLIC ABLE. 3(II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN NOT TAKING INTO CONSIDERATION THE VALUE OF KURLA LAND AS PER ASSESSEE'S VALUATION REPORT FOR THE PURPOSES OF COMPUTATION OF CAPITAL GAINS U/S 48 RWS 45(4 ). 3 (III) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IGNORED THE FACT THAT RECONSTITUTION OF THE FIRM TOOK PLACE IN FY 2008 - 09 AND THE SURRENDER OF RIGHTS BY THE RETIRING PARTNERS RESULTED IN PAYMENT TO THE RETIRING PART NERS; THIS BEING DISTRIBUTION OF ASSETS TO THE RETIRING PARTNERS OUGHT TO HAVE BEEN HELD AS TAXABLE U/S 45(4). 3 (IV) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT APPRECIATING THAT RETIREMENT OF PARTNERS AND EN HANCEMENT OF PROFIT SHARING RATIO OF HDIL TO 90% ACTUALLY RESULTED IN DISSOLUTION OF THE FIRM AND THEREFORE AMOUNTS PAID TO RETIRING PARTNERS OUGHT TO HAVE BEEN TAXED U/S 45(4). 4) WITHOUT PREJUDICE TO THE ABOVE GROUNDS OF APPEAL AGITATED BY THE RE VENUE, IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED, WHILE DELETING THE ADDITION U/S 45(4), IN NOT UPHOLDING THE TRANSACTION OF TRANSFER OF KURLA LAND TO SRA AS BUSINESS INCOME, WHEN THE ASSESSEE FIRM ITSELF HAS DECLAR ED INCOME UNDER THE HEAD BUSINESS AND PROFESSION. 5) THE APPELLANT PRAYS THAT THE ORDER OF THE LD CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 4. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACT S IN BRIEF ARE THAT THE ASSESSEE FIRM IS A BUILDER AND DEVELOPER OF LAND AND BUILDINGS WHICH WAS CONSTITUTED VIDE ORIGINAL PARTNERSHIP DEED DATED 25 . 11.20 05, WITH THE FOLLOWING PARTNERS. ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 4 SR. NO. NAME OF THE PARTNER % OF PROFIT / LOSS RATIO 1. SAPPHI RE LAND DEVELOPERS 60 - VISION FINSTOCK PVT, LTD. 20 3, NISHA CAPITAL SERVICES PVT. LTD. 10 4. SURAKSHA DEVELOPERS PVL. LTD, . 10 4. THE FIRM, FINE DEVELOPERS, VIDE AGREEMENT DATED 28.11.2005 PURCHASED LAND LOCATED AT KURLA FROM M/S. BHANDA RY METALLURGICAL CORPORATION LIMITED FOR RS. 28 CRORES ['KURLA LAND'], WHICH IS THE STOCK IN TRADE OF THE ASSESSEE FIRM AND SHOWN AS SUCH IN THE ANNUAL ACCOUNTS OF THE ASSESSEE FIRM FROM A.Y. 2006 - 0 7 AND A.Y. 2007 - 08. 5. THEREAFTER, DURING THE PREVIOUS Y EA R RELEVANT TO A.Y. 2008 - 09, VIDE PARTNERSHIP DEED DATED 06.07.2007, M/S. HOUSING DEVELOPMENT AND INFRASTRUCTURE LIMITED [HDIL] WAS ADMITTED AS NEW PARTNER TO SUPPLEMENT THE FINANCIAL RESOURCE AND FOR AUGMENTING THE WORK FORCE FOR DIVERSE COMMERCIAL CONSIDE RATION. THE RESULTING PROFIT/LOSS RATIO AMONGST THE PARTNERS WAS AS UNDER SR. NO. NAME OF THE PARTNER % OF PROF IT/ LOSS RATIO 1. SAPPHIRE LAND DEVELOPE R 10 2. VISION FINSTOCK PVT. LTD. 20 3. NISHA CAPITAL SERVICES PVT. LTD. 10 4. SURAKSHA DEVELOPERS PVT. LTD. 10 5. HDIL 50 ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 5 6. MEANWHILE, HDIL VIDE AGREEMENT DATED 15.10.2007 WITH MUMBAI INTERNATIONAL AIRPORT LIMITED [MIAL] WAS AWARDED THE SLUM REHABILITATION PROJECT [SRP] PERTAINING TO THE MODERNIZATION AND UP - GRADATION OF THE CHATRAP ATI SHIVAJI INTERNATIONAL AIRPORT [CSIL]. 7. THE BOOK VALUE OF THE SAID STOCK IN TRADE STOOD AT RS.39,27,19,547 AS ON 31.03.2008. 8. ON THE BASIS OF THE ABOVE TWO EVENTS, THE ASSESSEE HAS BEEN SUBJECT ED TO ADDITION RS.186,72,80,452/ - UNDER SECTION 45(4) OF THE ACT IN THE ASSESSMENT YEAR 2008 - 09 INTER ALIA ON THE FOOTING THERE HAS BEEN A PURPORTED DISTRIBUTION OF THE KURLA LAND BY THE FIRM TO THE PARTNERS OF THE A SSESSEE AS A RESULT REVALUATION OF THE KUR L A LAND IN CONSEQUENCE OF ADMISSION OF PARTNER (HDIL) . THE ASSESSEE FIRM PREFERRED AN APPEAL AGAINST THE SAID ADDITION WHICH WAS DELETED BY THE CIT(A) - 35 VIDE HIS ORDER DATED 28.03.2011. THE REVENUE HAS CHALLENGED TH E SAID ORDER BEFORE THE TRIBUNAL . 9. IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2009 - 10, CERTAIN PARTNERS OF THE . FIRM I.E. M/S SURAKSHA DEVELOPERS PRIVATE LIMITED, M/S. VISION FINSTOCK PRIVATE LIMITED AND M/S. NISHA CAPITAL SERVICES PRIVATE LIMITED EXPRESSED THEIR DESIRE TO RETIRE FROM THE FIRM. AS A CONSEQUENCE THEREOF, PURPOSE OF SETTLEMENT OF ACC OUNTS OF THE RETIRING PARTNERS, THE SAID PIECE OF LAND WAS REVALUED AS ON 01.04.2008 AT RS. 268,37,42,000/ - BASED ON VALUATION REPORT FROM M/S. VINOD GANDHI & ASSOCIATES. 10. ON 27.05.2008, THERE WAS A RECONSTITUTION OF THE ASSESSEE FIRM BY THE DINT OF WHI CH, THE AFOREMENTIONED PARTNERS RETIRED FROM THE ASSESSEE FIRM ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 6 AND THEIR ACCOUNTS WERE SETTLED IN ACCORDANCE WITH REVALUED CREDIT BALANCES LYING IN RESPECTIVE CAPITAL ACCOUNTS. THE REVALUED AMOUNT WAS THEN WRITTEN BACK TO ITS ORIGINAL BOOK VALUE IMMEDIATEL Y DURING THE YEAR UNDER CONSIDERATION. THE CONTINUING PARTNERS OF THE RECONSTITUTED FIRM, HAD THE PROFIT/LOSS SHARING RATIO OF - SR. NO. NAME OF THE PARTNER % OF PROFIT/ LOSS RATIO 1. SAPPHIRE LAND DEVELOPERS 10 2 - HDIL 90 11. FOR A.Y. 2009 - 10 , THE ASSESSEE FILED RETURN OF INCOME DECLARING INCOME RS.4,14,049/ - WHICH WAS INITIALLY PROCESSED UNDER SECTION 143(1), BUT SUBJECTED TO SCRUTINY UNDER SECTION 143(2) READ WITH SECTION 143(3) OF ME INCOME TAX ACT, 1961 [ACT]. 12. VIDE DEED OF CONVE YANCE DATED 03. 11.2008 BETWEEN M/S. FINE DEVELOPERS, M/S. BHANDARY METALLURGICA CORPORATION LTD., M/S. HOUSING DEVELOPMENT & INFRASTRUCTURE LTD. (HDIL) AND SLUM REHABILITATION AUTHORITY (SRA), THE ASSESSEE FIRM CONVEYED THE SAID KURLA LAND TO SRA FOR SLUM REHABI LITATION PURPOSE. IN LIEU OF THE SAID PIECE OF LAND, THE ASSESSEE FIRM WAS GRANTED LAND TDR AND LAND FSI BY SRA. THE AFORESAID KIND CONSIDERATION WAS SOLD TO THE FOLLOWING PARTIES : (A.) SALE OF TDR : SR. NO. NAME OF THE PARTY DATE OF SALE AMOUNT (RS.) 1, MAAN SHUBH DEEP CREATIONS 09.03.2009 46,17,756 ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 7 2, SADGURU & KRISHNA DEVELOPERS 10.03.2009 1,27,00,000 3. AJAY C. MEHTA AND AKSHAY J. DOSHI 08.03.2009 4,09,03,200 4. AJAY C. MEHTA AND AKSHAY J. DOSHI 19.03.2009 10,18,62,772 TOTAL 1 6,00,83,728 (B.) SALE OF FSI : SR. NO. NAME OF THE PARTY DATE OF SALE AMOUNT (RS.) 1. HDIL I 31.03.2009 30,65,39,043 13. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE AO INTER ALIA CALLED UPON THE ASSESSEE TO FURNISH THE NE CESSARY DETAILS TO JUSTIFY ITS RETURNED TOTAL INCOME. ACCORDING TO THE ASSESSING OFFICER [AO], SECTION' 45(4) STOOD ATTRACTED ON THE ACCOU NT OF THE RECONSTITUTION OF THE ASSESSE AND HENCE VIDE LETTERS DATED 15.11.2011 AND 12.12.2011 SOUGHT AN EXPLANATION F ROM THE ASSESSEE AS TO WHY SECTION 45(4) SHOULD NOT BE APPLIED AND CAPITAL GAINS ACCORDINGLY ASSESSED. AS PER THE AO, THE AR OF THE ASSESSEE DID NOT MAKE TIMELY COMPLIANCE OF THE SAID SHOW - CAUSE NOTICE. WHEREAS THE AR INSISTS THAT AN ORAL ADJOURNMENT TILL 19.12.2011 WAS GRANTED BY THE JOINT CIT - 25(3), WHEREBY THE ASSESSEE VIDE LETTER DATED 19.12.2011 PROPOSED TO SUBMIT THE REQUISITE AND ESSENTIAL INFORMATION AND DETAILS AS DESIRED BY THE AO AND EXPOUND ON FACTS AND LAW AS TO HOW THE PROPOSED ADDITION IS UN TENABLE AND UNSUSTAINABLE. 14. HOWEVER, WITHOUT CONSIDERING THE AFORESAID PROPOSED SUBMISSION, THE AO PASSED THE ASSESSMENT ORDER ON 15.12.2011. THE AO RELIED ON THE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 8 DECISION IN CASE OF CIT VS. A. N . NAIK ASSOCIATES [2004] 265 ITR 346 (BOM) TO CONCLUDE THA T PROVISIONS OF 45(4) ARE APPLICABLE NOT ONLY IN CASE OF DISSOLUTION BUT ALSO TO THE CASES OF SUBSISTING PARTNERSHIP TRANSFERRING THE ASSETS IN FAVOUR OF RETIRING PARTNERS. THE TERM 'OTHERWISE' IN SEC, 45(4) READ WITH 'TRANSFER OF CAPITAL ASSETS' BY WAY OF DISTRIBUTION OF CAPITAL ASSETS INCLUDES THE TRANSACTIONS RELATING TO 'RETIREMENT'. THE AO ALSO RELIED UPON THE DECISION IN THE CASE OF CIT VS. GURUNATH TALKIES [2009] 189 TAXMAIM 171 (KAR.). IN A NUTSHELL, HE CONCLUDED THAT AS A RESULT OF RETIREMENT CUM A DMISSION ON 06.07.2007 AND 27.05.2008 THERE WAS DISTRIBUTION OF RIGHTS OF ERSTWHILE PARTNERS AMONGST THE RETIRING PARTNERS, SUBSISTING PARTNERS AND THE NEW PARTNERS. ACCORDINGLY, HE ASSESSED RS.206,19,20,209/ - AS CAPITAL GAINS BEING PARTIAL SURPLUS ON REVA LUATION AND TREATING THE BALANCE RS.15,51,99,020/ - TOWARDS BUSINESS PROFITS AS NOT BEING AN ARMS LENGTH TRANSACTION. 15. BY THE IMPUGNED ORDER, CIT(A) DELETED THE ADDITION AFTER OBSERVING AS UNDER: - 1.I HAVE CONSIDERED THE FACTUAL AND LEGAL SUBMISSIONS OF THE LD.AR VIS - - VIS THE CONTENTIONS PUT FORTH BY THE AO. THE MAIN ISSUE PERTAINING TO A PPLICABILITY OF SEC. 45(4) NEEDS TO BE EVALUATED AND SCRUTINIZED WITH A STRINGENT INTERPRETATION OF LAW COUPLED WITH A DISPASSIONATE AND OBJECTIVE APPRECIATION OF FACTS. THE PROVISIONS OF SEC. 45(4) WITH SUPPLIED EMPHASIS IS AS UNDER - '45(4; - THE 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 PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY OR A CO - OPERATIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGEABLE TO TAX AS THE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 9 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 M ARKET 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 THE TRANSFER.' THE ENFORCEABILITY OF SEC. 45(4) HINGES ON THE FOLLOWING PRE - REQUISITE CONDITIONS I. THERE MUST BE A 'TRANSFER' BY THE PARTNERSHIP FIRM VIA 'DISTRIBUTION'; II. THE SAID TRANSFER MUST BE OF 'CAPITAL ASSET' AND NOT OF ANY OTHER K IND OF ASSET; AND III. THE TRANSFER IS AT THE TIME OF 'DISSOLUTION' OR CERT AIN ANALOGOUS EVENTS HAVING SIMILAR IMPLICATION. IF THE AFORESAID CONDITIONS ARE SATISFIED, THE TAX IMPACT BY INVOCATION OF SEC. 45(4) WOULD BE I. PROFIT OR GAINS FROM SUCH DEEMED TRANSFER WOULD BE CHARGEABLE AS THE INCOME OF THE FIRM; II. INC OME WILL BE CHARGED TO CAPITAL GAINS TAX IN THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE; AND III. IRRE SPECTIVE OF ACTUAL SALE CONSIDERATION, THE 'FAIR MARKET VALUE' OF THE ASSET ON THE DATE OF SUCH TRANSFER WILL BE TAKEN AS FULL VALUE OF CONSI DERATION RECEIVED FOR THE PURPOSE OF COMPUTING CAPITAL GAINS. 2. ANSWERING THE FOLLOWING SET OF QUESTIONS WOULD AID IN DETERMINING THE APPLICABILITY OF PROVISIONS OF SEC. 45(4) TO THE INSTANT CASE OF RETIREMENT OF THREE PARTNERS - I. WHETHER THERE IS A NY 'DISSOLUTION' OF THE FIRM OR ANY SIMILAR EVENT HAVING IMPLICATION OF DISSOLUTION, AS ENVISAGED U/S. 45(4)? II. WHETHER REVALUATION OF ASSET ALONE CAN RESULT IN PROFIT & GAINS IN THE HANDS OF THE FIRM ? III. WHETHER THE SAID PROPERTY IS A 'CAP ITAL ASSET' WITHIN THE MEANING SEC. 2(14) ? IV. WHETHER THERE IS A 'TRANSFER' BY THE FIRM, AS CONCEIVED WITHIN THE MEANING OF SEC. 2(47)? V. AS ADJUDICATED BY SEVERAL LEGAL PRECEDENTS, IS IT THE RETIRING PARTNERS WHO HAVE TRANSFERRED THEIR RIGHT S IN THE PROPERTY TO THE CONTINUING PARTNERS OR IS IT THE FIRM WHO IS TO BE HELD FOR DISTRIBUTING THE CAPITAL ASSETS TO THE RETIRING PARTNERS AS WELL AS THE CONTINUING PARTNERS? VI. DOES MERE CREDIT OF ENTRIES ON NOTIONAL BASIS IN THE PARTNER'S CAPIT AL A/C. ON REVALUATION, IN ABSENCE OF ANY ADDITIONAL TANGIBLE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 10 ACCRUAL OF ASSETS OR MONEY TO THE FIRM, BE RECKONED AS 'DISTRIBUTION' AS CONTEMPLATED U/S. 45(4)? VII. WHO ARE THE REAL AND ULTIMATE BENEFICIARIES OF REVALUATION AND RECONSTITUTION OF THE F IRM, IS IT THE CONTINUING PARTNERS WHO JUST HAVE CREDIT OF ENTRIES ON NOTIONAL BASIS, IN THEIR CAPITAL A/C AFTER REVALUATION OF ASSET OR THE RETIRING PARTNERS WHO ARE IN ACTUAL RECEIPT OF MONETARY CONSIDERATION AT THE TIME OF THEIR RETIREMENT ? 3. A BARE PERUSAL OF THE CHRONOLOGICAL EVENTS OF ADMISSION AND RETIREMENT REVEAL THAT AS ON 25.11.2005 THERE WERE 4 PARTNERS IN THE FIRM (HEREIN AFTER CALLED ORIGINAL PARTNERS). ON 06.07.2007 (RELEVANT TO A.Y. 2008 - 09),HDI L WAS ADMITTED AS A NEW PARTNER TO SUPPLEME NT THE FINANCIAL RESOURCES REQUIRED FOR DIVERSE COMMERCIAL CONSIDERATION. HDIL INTRODUCED RS. 60 CRORES AS ITS CAPITAL CONTRIBUTION. (1). ON 27.05.2008 THERE WAS A RECONSTITUTION OF FIRM WHEREIN 3 OF THE ORIGINAL PARTNERS, SURAKSH A DEVELOPERS PRIVATE LIMITED, VISION FINSTOCK PRIVATE LIMITED AND NISHA CAPITAL SERVICES PRIVATE LIMITED RETIRED THE FIRM CONTINUED WITH 2 PARTNERS INCLUDING 1 ORIGINAL PARTNER (SAPPHIRE LAND DEVELOPMENT PVT. LTD.) AND 1 NEW PARTNER (HDIL). THUS AT NO POIN T IN TIME, THERE WAS ANY DISSOLUTION OF THE FIRM EITHER AT THE TIME OF ADMISSION OF HDIL ON 06.07.2007 OR AT THE RETIREMENT OF 3 PARTNERS ON 27.05.2008. AN EXAMINATION OF THE TERMS OF RETIREMENT DEED DATED 27.05.2008, THROWS LIGHT ON WHETHER THERE WAS AN INTENT OR OTHERWISE FOR LIQUIDATION AND DISTRIBUTION OF ASSETS OF THE FIRM. THE RELEVANT CLAUSES ARE AS UNDER - (2). IN PURSUANCE OF THE SAID AGREEMENT IN THIS BEHALF, THE RETIRING PARTNERS DOTH RETIRE FROM THE SAID PARTNERSHIP AND SHALL CEASE TO HAVE ANY INTEREST IN ANY OF BUSINESS AND ASSETS OF THE SAID FIRM W.E.F, THE DOSING OF BUSINESS HOURS ON 27 TH MAY, 2008, AND RETIRING PARTNERS DOTH HEREBY COVENANT THAT THE CONTINUING PARTNERS SHALL FOREVER, BE ENTITLED TO AND SHARE, RIGHT, TITLE AND INTEREST OF TH E RETIRING PARTNERS IN THE SAID BUSINESS OF ERSTWHILE PARTNERSHIP FIRM T OGETHER WITH THE BENEFITS OF ALL CONTRACTS, LICENSES, AGREEMENTS, RIGHTS, SANCTIONS, PERMISSIONS, PREMISES, STOCK - IN - TRADE, MONIES, CREDITS, AND EFFECTS BELONGING THERETO. (3).THE AC COUNTS OF THE RETIRING PARTNERS HAVE BEEN AMICABLY SETTLED. FOR SETTLING THE ACCOUNTS OF RETIRING PARTNERS, THE ASSETS OF THE PARTNERSHIP HAVE BEEN REVALUED ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 11 AT A VALUE AS MUTUALLY AGREED BETWEEN THE RETIRING PARTNERS AND THE CONTINUING PARTNERS. AFTER GIVI NG EFFECT OF THE REVALUATION OF THE ASSETS, THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT AS AT 1 ST APRIL 2008 HAVE BEEN PREPARED. THE COPY OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT OF THE FIRM FOR THE YEAR ENDED 31 $T MARCH 2008 AND FOR THE PERIOD ENDED 30 TH APRIL 2008 IS ANNEXED HERETO AND MARKED ANNEXURE 'A'. IN TOKEN OF ACCEPTANCE OF THE SAID BALANCE SHEET AND PROFIT & LOSS ACCOUNT, THE RETIRING PARTNERS AND THE CONTINUING PARTNERS HAVE PUT THEIR SIGNATURES TO THE SAID BALANCE SHEET AND PROFIT & LOSS ACCOUNT (4)THE RETIRING PARTNER DOTH RETIRE FROM THE SAID PARTNERSHIP AND CEASE TO HAVE ANY INTEREST IN ANY OF THE BUSINESS AND ASSETS OF THE SAID FIRM AND THE CONTINUING PARTNERS SHALL FOREVER, IN THE MANNER AND IN PROPORTION TO HEREINAFTER PROVIDED TO B E ENTITLED TO THE SHARE, RIGHT, TITLE AND INTEREST OF THE RETIRING PARTNER IN THE SAID BUSINESS OF THE ERSTWHILE PARTNERSHIP FIRM, TOGETHER WITH THE BENEFIT OF ALL PREMISES AND STOCK - IN - TRADE, MONEYS, CREDITS AND EFFECTS BELONGING THERETO INCLUDING THE PRO PERTY SITUATE, LYING AND BEING IN THE VILLAGE KURLA, GRE ATER MUMBAI AND IN THE REGISTRATION SUB - DISTRICT OF BANDRA, MUMBAI SUBURBAN BEING CT5 NO. 21, 20, 161, 161/1 TO 33, 159, 159/1 TO 36, 13/3, 13/4, 13/148, 13/1, 13/2, 13/16, IN AGGREGATE ADMEASURING ABOUT 30,844.88 EQUIVALENT TO 25,790 SQUARE METERS, ACQUIRED UNDER DEVELOPMENT AGREEMENT DATED 09.07.2007, REGISTERED WITH THE SUB - REGISTRAR OF ASSURANCES AT KURLA, UNDER SURVEY NO. 5380/2007 AND MORE PARTICULARLY DESCRIBED IN THE SCHEDULE HEREUNDER WRITTEN, AND THE CONTINUING PARTNERS WILL BE SOLELY ENTITLED WITH TO THE SAID BUSINESS T OGETHER WITH THE ASSETS, LIABILITIES TOGETHER WITH THE BENEFIT OF ALL PREMISES AND STOCK - IN - TRADE, MONEYS, CREDITS AND EFFECTS INCLUDING THE SAID PROPERTY BELONGING TO THE PARTNERSHIP FIRM M/S. FINE DEVELOPERS. (5) IN CONSIDERATION OF THE PREMISES HEREIN STATED, THE RETIRING PARTNER DOTH HEREBY RELEASE THE CONTINUING PARTNERS AND THE CONTINUING PARTNERS DO AND EACH OF TH EM DOTH HEREBY RELEASE THE RETIRING PARTNER OF AND FROM ALL COVENANTS, AGREEMENTS, MATTERS OR THINGS, ENTERED INTO BETWEEN THEM PRIOR HERETO AND ALL ACTIONS, CLAIMS, AND DEMANDS WHATSOEVER IN CONNECTION WITH OR ARISING OUT OF SAID DEED OF ADMISSION - CUM - PAR TNERSHIP OF PARTNERS DATED 06 TH JULY, 2007 UNDER WHICH THE RETIRING PARTNER AND THE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 12 CONTINUING PARTNERS WERE CARRYING ON BUSINESS UNTIL THE RETIREMENT OF THE RETIRING PARTNER FROM THE SAID PARTNERSHIP FIRM. (6) IN PURSUANCE OF THE SAID RETIREMENT IN TH IS BEHALF THE RETIRING PARTNERS DOTH HEREBY RETIRE FROM THE SAID PARTNERSHIP FIRM OF M/S. FINE DEVELOPERS W.E.F. THE CLOSING OF BUSINESS HOURS ON 27 TH MAY, 2008 AND THE RETIRING PARTNER DO AND EACH OF THEM DOTH HEREBY COVENANT THAT THE SAID CONTINUING PART NERS WILL REMAIN PARTNERS IN THE SAID BUSINESS AND CONTINUE THE SAID PARTNERSHIP BUSINESS IN THE PARTNERSHIP BETWEEN THE CONTINUING PARTNERS OR ANY OTHER PERSON/S UPON THE TERMS AND CONDITIONS AGREED BETWEEN THEM FROM TIME TO TIME WITH EFFECT FROM THE CLOS ING OF THE BUSINESS HOURS 27 TH MAY, 2008, AND THEY THE RETIRING PARTNERS HAVE SEIZED TO HAVE ANY RIGHT, TITLE AND INTEREST OF ANY NATURE WHATSOEVER IN THE SAID PARTNERSHIP BUSINESS AND THE ASSETS THEREOF. (8) THE RETIRING PARTNERS DOTH HEREBY CONFIRM THAT ON AND FROM THE CLOSE OF BUSINESS HOURS ON 27 TH MAY, 2008, THEY SHALL HAVE NO SHARE, RIGHT, TITLE AND/OR INTEREST OF ANY NATURE WHATSOEVER IN THE SAID PARTNERSHIP FIRM M/S. FINE DEVELOPERS AND/OR IN THE ASSETS, WHETHER TANGIBLE OR INTANGIBLE AND WHETHER M OVABLE OR IMMOVABLE, BELONGING TO PARTNERSHIP FIRM AND/OR AGAINST THE CONTINUING PARTNERS AND SAME SHALL BELONG TO THE CONTINUING PARTNERS SUBJECT TO PAYMENT OF ALL OUTGOINGS IN RESPECT OF THE SAID SEVERAL PREMISES. (9) THE RETIRING PARTNERS DO AND EACH O F THEM DOTH AND ALSO THE CONTINUING PARTNERS DO AND EACH OF THEM DOTH HEREBY DECLARE THAT NONE OF THEM HAVE AT ANY TIME BORROWED MONEY OR INCURRED ANY DEBT OR GUARANTEED ANY LIABILITIES OR ON ACCOUNT OF OR ON BEHALF OF THE PARTNERSHIP WHICH IS NOT DISCLOSE D IN WRITING TO THE OTHER PARTNERS AND IF ANY TIME HEREAFTER ANY LIABILITY, NOT SO DISCLOSED OR COME TO LIGHT OR BE REVALUED, THE PARTNER/S WHO MAY HAVE INCURRED SUCH LIABILITY SHALL ON HIS/HER OWN PAY AND DISCHARGE THE SAME AND THEY HAVE TO KEEP INDEMNIFI ED THE OTHER OR OTHERS OF THEM AGAINST ALL ACTIONS, SUITS, PROCEEDINGS AND COSTS, CHARGES AND EXPENSES IN RESPECT OF ANY LIABILITIES, NOT SO DISCLOSED TO THE OTHER.' ON AN ANALYSIS OF THE AFORESAID CLAUSES, IT IS CLEAR THAT THE RETIRING PARTNERS MERELY RE TIRED FROM THE PARTNERSHIP FIRM WITHOUT ANY DISTRIBUTION OF ASSETS OF THE FIRM AMONGST THE ORIGINAL AND NEW ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 13 INCOMING PARTNER. SINCE THE RECONSTITUTED FIRM CONSISTS OF 1 OLD PARTNER AND 1 NEW PARTNER, IT IS NOT A CASE WHERE FIRM WITH ERSTWHILE PARTNERS WA S TAKEN OVER BY NEW PARTNERS ONLY. FOR THE SOLE AND LIMITED PURPOSE OF SETTLEMENT OF ACCOUNTS OF THE RETIRING PARTNERS, THE SURPLUS ON REVALUATION OF WAS NOTIONALLY CREDITED TO THE PARTNER'S CAPITA! A/C. OF ALL THE PARTNERS. AFTER SUCH MUTUAL ADJUSTMENT O F RIGHTS AMONGST ALL THE PARTNERS, THE RETIRING PARTNERS WERE ONLY PAID THE SUM STANDING TO THE CREDIT OF THEIR CAPITAL A/C ON 27.05.2008. IT CANNOT BE INFERRED THAT BY CREDITING THE SURPLUS ON REVALUATION TO CAPITAL A/C OF 2 CONTINUING PARTNERS AND ALLOWI NG THE 3 RETIRING PARTNERS TO TAKE EQUIVALENT CASH SUBSEQUENTLY AMOUNTED TO DISTRIBUTION OF RIGHTS BY THE CONTINUING PARTNERS TO THE RETIRING PARTNERS. A PARTNERSHIP FIRM CONSTITUTED OF ITS PARTNERS IS GOVERNED BY THE PROVISIONS OF PARTNERSHIP ACT. THE PA RTNERSHIP FIRM IS NOT A LEGAL ENTITY AND PROPERTY OF THE PARTNERSHIP VESTS IN ITS PARTNERS INASMUCH AS ALL THE PARTNERS HAVE AN INTEREST IN THE PARTNERSHIP PROPERTY. THE PROVISIONS OF THE PARTNERSHIP ACT CLEARLY PROVIDE THAT A PROPERTY WHICH IS BROUGHT IN BY THE PARTNERS ON THE FORMATION OF PARTNERSHIP OR ACQUIRED IN THE COURSE OF BUSINESS OF PARTNERSHIP, BECOMES THE PROPERTY OF THE FIRM. THE PARTNERS OF A PARTNERSHIP FIRM ARE ENTITLED TO A SHARE IN THE PROFITS OF THE BUSINESS TO THE EXTENT OF THEIR SHARE R ATIO. DURING THE SUBSISTENCE OF PARTNERSHIP NO P ARTNER HAS ANY ASSIGNED RIGHT OR SHARE IN THE PARTNERSHIP PROPERTY. DURING THE CONTINUANCE OF THE PARTNERSHIP THE PARTNERS HAVE ONLY A RIGHT IN THE PROFITS OF THE PARTNERSHIP AND NO PARTNER CAN DEAL WITH ANY PORTION OF THE PARTNERSHIP PROPERTY AS HIS DWH DURING THE CONTINUANCE OF THE PARTNERSHIP FIRM. IN A PARTNERSHIP AMONGST PARTNERS, EACH AND EVERY PARTNER OF THE FIRM HAS AN INTEREST IN EACH AND EVERY PROPERTY OF THE PARTNERSHIP FIRM. TILL THE ACCOUNTS ARE SETTLED AND THE RESIDUE/SURPLUS IS NOT DISTRIBUTED AMONGST THE PARTNERS, NO PARTNER CAN CLAIM ANY SHARE IN SUCH ASSETS OF THE PARTNERSHIP FIRM. EACH PARTNER IS ENTITLED TO ITS SHARE OF PROFITS IN THE PARTNERSHIP FIRM BUT THE ENTITLEMENT OF RIGHT IN THE ASS ETS/PROPERTY OF THE PARTNERSHIP FIRM ARISES ONLY ON DISSOLUTION. WHILE THE FIRM IS SUBSISTING, THERE CANNOT BE ANY TRANSFER OF RIGHTS IN THE ASSETS OF THE FIRM BY ANY OR ALL PARTNERS AMONGST THEMSELVES BECAUSE DURING SUBSISTENCE OF PARTNERSHIP, THE FIRM AN D PARTNERS DO NOT EXIST SEPARATELY. THERE CAN BE NO TRANSFER TO ONESELF. THIS COULD ONLY HAPPEN WHEN THERE IS DISSOLUTION OF THE FIRM. REVALUATION OF ASSETS BY PARTNERSHIP FIRM DOES NOT ATTRACT CAPITAL GAINS. THE REVALUATION OF ASSETS OF PARTNERSHIP AND T HE CREDIT OF REVALUED AMOUNT TO THE CAPITAL ACCOUNT OF PARTNERS IN THEIR RESPECTIVE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 14 SHARE RATIO DOES NOT ENTAIL ANY TRANSFER AS DEFINED UNDER SECTION 2(47) OF THE INCOME - TAX ACT. THE INTRODUCTION OF NEW PARTNERS TO A PARTNERSHIP FIRM OWNING IMMOVABLE ASSET S AND CONSEQUENT REDUCTION IN THE SHARE RATIO OF PRESENT PARTNERS DOES NOT ENTAIL ANY RELINQUISHMENT OF THEIR RIGHTS IN THE PARTNERSHIP PROPERTY. ON INTRODUCTION OF NEW PARTNERS, THERE IS REALIGNMENT OF SHARE RATIO INTER SE BETWEEN THE PARTNERS ONLY TO THE EXTENT OF SHARING THE PROFITS OR LOSSES, IF ANY OF THE PARTNERSHIP BUSINESS. BASED ON THE ABOVE CONTENTION, IN THE CASE OF ITO VS. SMT. PARU D. DAVE [2008] 110 ITD 410 (MUM), THE JURISDICTIONAL ITAT MUMBAI HELD AS UNDER 'WHEN ANY NEW PARTNER IS INTRO DUCED INTO AN EXISTING PARTNERSHIP FIRM, THE PROFIT SHARING RATIOS UNDERGO A CHANGE, WHICH DOES NOT AMOUNT TO TRANSF ER AS DEFINED UNDER SECTION 2(7) J OF THE ACT, AS THERE IS NO CHANGE IN THE OWNERSHIP OF ASSETS BY THE PARTNERSHIP FIRM. AS DURING THE SUBSIS TENCE OF THE PARTNERSHIP FIRM, THE PARTNERS HAVE NO DEFINED SHARE IN THE ASSETS OF THE PARTNERSHIP AND THUS ON REALIGNMENT OF PROFIT SHARING RATIO, ON INTRODUCTION OF NEW PARTNERS, THERE IS NO RELINQUISHMENT OF ANY NON - EXISTENT SHARE IN THE PARTNERSHIP ASS ETS AS THE ASSET REMAINED WITH THE FIRM. SUCH AN ARRANGEMENT IS NOT COVERED BY THE PROVISIONS OF SECTION 45(4) OF THE ACT, WHICH COVERS THE CASE OF DISSOLUTION OF PARTNERSHIP FIRM. ACCORDINGLY, NO CAPITAL GAINS ARISES ON SUCH RELINQUISHMENT OF SHARE RATIO IN THE PARTNERSHIP FIRM. ' IT CANNOT BE CONTENDED THAT DURING THE CONTINUATION OF THE PARTNERSHIP, THE P ARTNERS HAVE A SEPARATE RIGHTS O VER THE ASSETS OF THE FIRM IN ADDITION TO INTEREST IN SHARE OF PROFITS BECAUSE OF THE FACT THAT THE VALUE OF THE INTERE ST OF EACH PARTNER QUA AN ASSET CANNOT BE ISOLATED OR CARVED OUT FROM THE VALUE OF PARTNER'S INTEREST IN THE TOTALITY OF THE PARTNERSHIP ASSETS. WHEN AN ASSET OF THE FIRM IS ALLOTTED TO A PARTNER ON DISSOLUTION OR RETIREMENT OF THE FIRM, THE SHARED INTERES T OF ALL THE PARTNERS IN THE SAID ASSET, IS REPLACED BY THE EXCLUSIVE INTEREST OF THE ALLOTEE PARTNER FOR A CONSIDERATION. THUS, THERE IS AN EXTINGUISHMENT OF THE 'COMMON INTEREST' OF ALL THE PARTNERS OF THE FIRM IN THAT PARTICULAR ASSET AND A RESULTANT CR EATION OF 'ABSOLUTE OWNERSHIP' OF PARTNER TO WHOM IT IS ALLOTTED. SUCH A TRANSACTION WOULD QUALIFY AS A 'TRANSFER' OF CAPITAL ASSET WITHIN THE MEANING OF SEC. 2(47). IN THE INSTANT CASE, IN ABSENCE OF A TRANSFER OF PARTNERSHIP ASSET (BEING THE KURLA LAND) BY THE APPELLATE FIRM TO THE RETIRING PARTNERS, SUCH THAT THE SHARED INTEREST OF ALL THE PARTNERS IN THE SAID ASSET IS REPLACED BY THE EXCLUSIVE INTEREST OF THE ALLOTTEE PARTNERS, FOR A CONSIDERATION, IT CANNOT BE HELD THAT THERE WAS A DISTRIBUTION OF R IGHTS BY CONTINUING PARTNERS IN FAVOR OF RETIRING PARTNERS. IN FACT, AFTER ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 15 REVALUATION OF ASSET, THERE IS NO CHANGE OF OWNERSHIP AS NO INTEREST OF PARTNERS IN THE ALLEGED CAPITAL ASSET IS TRANSFERRED TO THE RETIRING PARTNERS ON THE DATE OF RETIREMENT, BUT REMAINED IN THE BOOKS OF THE FIRM AS ON 27.05.2008, WHICH WAS SUBSEQUENTLY TRANSFERRED TO A THIRD PARTY BEING SRA VIDE DEED OF CONVEYANCE DATED 03.11.2008. ON THE CONTRARY TO THE AO'S CONTENTION, IT IS NOT THE FIRM WHICH HAS TRANSFERRED ITS RIGHTS, BUT I T IS THE RETIRING PARTNERS WHO VIDE EXTINGUISHMENT OF THEIR SHARED RIGHTS IN FAVOR OF THE CONTINUING PARTNERS WHO ARE LIABLE TO CAPITA! GAINS TAX. SEC. 2(47) OF THE ACT WHILE DEFINING THE 'TRANSFER' WITH REGARDS TO CAPITAL ASSET, COVERS UNDER ITS PURVIEW, THE 'EXTINGUISHMENT OF RIGHTS'. THE CASE OF THE AO FAILS BECAUSE ON ONE HAND HE SAYS IT IS THE ERSTWHILE PARTNERS OF THE FIRM WHO HAVE DISTRIBUTED THEIR RIGHTS TO THEMSELVES AS WELL AS NEW PARTNERS BUT PROCEEDS TO TAX THE FIRM FOR CAPITAL GAIN WHICH AS PER HIS OWN FINDINGS SEEMS TO BE A TRANSFEREE AND NOT THE TRANSFEROR. 4. UNDER THE INCOME - TAX ACT, ONLY THE REAL INCOME CAB BE TAXED WHICH HAS ACCRUED TO THE ASSESSEE, AS HELD BY VARIOUS DECISIONS IN THE CASE OF 158 ITR 102 (SC), 204 ITR 1 (BOM), 225 ITR 746 (SC), 208 ITR 930 (BOM), 216 ITR (BOM) ETC. IT IS A WELL SETTLED PRINCIPLE THAT THERE CAN BE NO INCOME JUST DUE TO REVALUATION OF CAPITAL ASSET UNLESS THE CAPITAL ASSET IS ACTUALLY TRANSFERRED ALSO. THIS PRINCIPLE HAS BEEN UPHELD IN CASE OF CIT V. HIND CO NSTRUCTION LIMITED (1972) 83 ITR 211 (SC); SANJEEV WOLTEN MILLS V. CIT (2005) 279 ITR 434 (SC); CIT V. HAZARIMAL SURANA (2002) 262 ITR 573 (RAJ). REVALUATION OF ASSETS BEFORE CONVERSION OF FIRM INTO COMPANY IS NOT A CASE OF DISSOLUTION OF FIRM NOR TRANSFER OF ASSETS OF FIRM AS HELD IN ITO V, GULUBDAS PRINTERS [2010] 4 ITR 264 (AHD.)(TRIB.) WHENEVER ANY ASSET IS REVALUED THEN AS PER ACCOUNTING NORMS THE CORRESPONDING NOTIONAL SURPLUS DUE TO REVALUATION IS REQUIRED TO BE CREDITED TO REVALUATION RESERVE A/C IN CASE OF COMPANIES OR CREDITED TO CAPITAL A/ C OF PARTNERS IN CASE OF FIRM. THIS IS ONLY NOTIONAL OR BOOK ENTRY WHICH IS NOT REPRESENTED BY ANY ADDITIONAL TANGIBLE ASSET OR INCOME EITHER IN SPECIE OR IN TERMS OF EQUIVALENT MONEY. THUS THE ACT OF REVALUATI ON OF LAND AND CREDITING THE EXCESS IN CAPITAL A/C OF ALL THE PARTNERS IS ONLY A NOTIONAL BOOK ENTRY WITHOUT ANY ACTUAL ACCRETION IN CASH OR OTHER TANGIBLE ASSETS IN THE HANDS OF THE APPELLANT FIRM. ONCE IT IS ESTABLISHED THAT THERE IS NO - PROFIT OR GAIN AC CRUED TO FIRM 'ON REVALUATION RESULTING IN REAL INCOME, THERE CAN ALSO BE N O DISTRIBUTION OF SUCH PROFITS AND GAINS. IN THE DECISIONS REPORTED IN 239 ITR 505(SC), 82 ITR 363(SC), 116 ITR I(SC), 46 ITR 550(BOM), 117 ITDL (AHD) (SB), 83 ITR 899(SC), 87 ITR 5 42(SC), 245 ITR 421(SC) IT HAS BEEN HELD THAT BOOK ENTRIES ARE NOT CONCLUSIVE TO DECIDE THE NATURE OF TRANSACTION / INCOME. HENCE MAKING OF BOOK ENTRIES OF CREDITING NOTIONAL AND INTANGIBLE PROFIT IN ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 16 THE CAPITAL A/C. OF THE PARTNERS ON REVALUATION OF ASSET IS ONLY AN NO EXTINGUISHMENT OF FIRM'S RIGHTS IN THE PARTNERSHIP ASSETS. THIS CAN BE BETTER UNDERSTOOD BY TAKING A HYPOTHETICAL EXAMPLE THAT IN A CASE WHERE SURPLUS DUE TO REVALUATION IS CREDITED TO PARTNER'S CAPITAL A/C. BUT NONE OF THE PARTNERS RETIRE DURING THAT YEAR, THEN IT CANNOT BE SAID THAT THERE IS DISTRIBUTION OF CAPITAL ASSETS U/ S 45(4) BY THE FIRM BECAUSE THERE IS NO TRANSFER BY DISTRIBUTION ON A/C OF NOTIONAL OR INTANGIBLE PROFIT ON MERE REVALUATION TO CONTINUING PARTNE R S. IN THE SAME SITUAT ION, WHERE NO PARTNER RETIRES BUT SOME PARTNERS WITHDRAWS THE SUM LYING TO CREDIT IN HIS CAPITAL A/C, THEN ALSO IT CANNOT BE SAID THAT THERE IS ANY DISTRIBUTION OF ANY CAPITAL ASSET TO PARTNERS BECAUSE IT IS A CASE OF MERE WITHDRAWAL FROM CAPITA! A/C. THER EBY INCREASING THE LIABILITY OF PARTNER TO FIRM & OTHER PARTNERS. FINALLY, IN THE SAME SITUATION, IF ONE OF THE PARTNERS RETIRES AND ALSO WITHDRAWS THE SUM LYING TO CREDIT IN HIS CAPITAL A/ C, THEN ALSO THERE IS NO DISTRIBUTION OF CAPITAL ASSET BY FIRM TO PARTNER BECAUSE IT IS NOT THE RETIREMENT ALONE WHICH TRIGGERS THE PROVISIONS OF SEC. 45(4); RATHER IT IS THE TRANSFER BV WAY OF DISTRIBUTION OF CAPITAL ASSET BY THE THE FIRM COUPLED WITH RETIREMENT OR DISSOLUTION, WHICH TRIGGERS THE PROVISION OF SEC. 45(4) . IF THE REVALUATION TAKES PLACE IN EARLIER YEAR AND THE RETIREMENT OF A PARTNER TAKES PLACE IN SUBSEQUENT YEAR SAY AFTER 5 YEARS AND THE FIRM CONTINUES WITH REMAINING PARTNERS AND THERE IS NO DISTRIBUTION OF ASSETS, THEN CAN SEC. 45(4) BE INVOKED IN THE Y EAR OF REVALUATION OR SUBSEQUENT YEAR OF RETIREMENT? THE ANSWER WOULD BE NO FOR BOTH YEARS BECAUSE IT IS THE 'TRANSFER' WHICH INVOKES SEC. 45(4) AND THAT TOO IN THE YEAR OF TRANSFER. HENCE THE REVALUATION OR RETIREMENT ALONE DOES NOT TRIGGER THE PROVISIONS OF 45(4) AND IT HAS TO HE COUPLED WITH DISTRIBUTION OF CAPITAL ASSET ALSO. IF THE RETIREMENT ALONE COULD TRIGGER THE PROVISIONS OF 45(4) THEN IN CASE OF APPELLANT THERE WILL BE INCIDENCE OF 45(4) ON EACH OCCASION WHEN A PARTNER RETIRES EVEN IN SUBSEQUENT YEARS THOUGH THERE MAY NOT BE ANY REVALUATION OR DISTRIBUTION IN THOSE YEARS. THIS WILL RESULT IN ABSURD CONSEQUENCES AND HENCE SUCH INTERPRETATION HAS TO BE DISCARDED. HENCE IF THERE IS NO TRANSFER BV WAY OF DISTRIBUTION OF ASSET AS ALREADY EXPLAINED AB OVE THEN THE MERE FACT THAT THE RETIRING PARTNERS HAVE WITHDRAWN THE SUM LYING TO CREDIT IN THEIR A/C. WILL NOT BRING THE CASE WITHIN THE SWEEP OF SEC. 45(4). FURTHER, ONE OF THE CONDITIONS FOR APPLICATION OF 45(4) IS THAT THERE SHOULD BE DISTRIBUTION OF CAPITAL ASSET EITHER ON 'DISSOLUTION' OF THE FIRM OR 'OTHERWISE'. THE EXPRESSION 'OTHERWISE' USED IN SECTION 45(4) HAS BEEN EXPLAINED ON THE PRINCIPLES OF 'ESJUDEM GENERIS' IN THE CASE OF A N NAIK 265 ITR 346 (BOM), WHEREIN THE COURT HAS OBSERVED THAT THE EXPRESSION OTHERWISE HAS TO BE READ WITH THE WORDS 'TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS' AND NOT WITH THE WORDS 'DISSOLUTION', THUS THE BOMBAY HIGH COURT DECISION REINFORCES THE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 17 CONCLUSION THAT THE TRANSFER OF THE CAPITAL ASSET IS THE 'ESSENC E' FOR BRINGING ANY EVENT WITHIN THE SWEEP OF SEC. 45(4) WHICH HAS TO BE AT THE TIME OF DISSOLUTION OR EVEN OTHER SIMILAR EVENT SUCH AS RETIREMENT. UNTIL SUCH TIME THE SHARED RIGHTS OF PARTNERS BECOMES THE EXCLUSIVE RIGHT OF ANY RETIRING PARTNER, NO OCCASI ON ARISES FOR BRINGING TO TAX ANY CAPITAL GAIN U/S. 45(4), AS ALSO HELD IN CIT VS. VIJAYALAKSHMI METAL INDUSTRIES (20O2) 256 ITR 54O (MAD). THERE IS NO EXTINGUISHMENT OF ANY RIGHT IN ANY ASSET OF THE FIRM BY THE CONTINUING PARTNERS IN FAVOR OF THE RETIRING PARTNERS AND HENCE THERE IS NO TRANSFER OF ANY KIND WITHIN THE MEANING OF SECTION 2(47) BY THE FIRM TO THE RETIRING OR CONTINUING PARTNERS. THE JURISDICTIONAL HIGH COURT IN CASE OF A N NAIK (SUPRA) HAS AFTER CONSIDERING THE MADRAS HIGH COURT DECISION IN THE CASE OF VIJAYLAKSHMI METAL INDUSTRIES (SUPRA) HAS OBSERVED IN PARA 20 OF ITS ORDER THAT - 'THE SECTION ITSELF GIVES NO ROOM FOR DOUBT AS THE YEAR IN WHICH THE CAPITAL GAIN IS TO BE BROUGHT TO TAX IS THE 'PREVIOUS YEAR' IN WHICH THE SAID 'TRANSFER' TAK ES PLACE.' THE BOMBAY HIGH COURT IN PARD 8 OF THE SAME DECISION FURTHER OBSERVED AS UNDER 'WITH THE ABOVE, WE MAY NOW PROCEED TO ANSWER THE QUESTIONS AS FORMULATED. SEC. 45 IS THE CHARGING SECTION. UNDER SEC. 45, THERE MUST BE A TRANSFER OF A CAPITAL A SSET BY WAY OF DISTRIBUTION OF ASSETS IN THE FIRST INSTANCE. CAPITAL ASSET UNDER SEC. 2(14) OF THE IT 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 CAPIT A L ASSET...' THE HIGH COURT, IN THE CASE BEFORE A N NAIK (SUPRA) IN PARA 23 HAS FURTHER OBSERVED AS UNDER: - '23. WE MAY NOW CONSIDER THE JUDGMENT IN B. T. PATIL& SONS VS. CGT (1996) 134 CTR (KAR) 77; (1997) 224 ITR 431 (KAR). WE WILL ADVERT TO SOME FACTS . IN THAT CASE, THE ISSUE BEFORE THE DIVISION BENCH OF THE KARNATAKA HIGH 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 ACC OUNTS IN JULY, 1977, STATED TO BE THE VALUE OF CERTAIN MACHINERY DISTRIBUTED BY THE FIRM TO THE PARTNERS. SOME MACHINERY WAS GIVEN TO THE PARTNERS INDIVIDUALLY AND ONE MACHINE WAS GIVEN TO ALL THE FIVE PARTNERS TO BE HELD BY THEM 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 MACHINERY SO DISTRIBUTED EITHER INDIVIDUALLY ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 18 OR AS CO - OWNERS. THE FIVE PARTNERS SHORTLY THEREAFTER FORMED ANOTHER PARTNERSHIP AND CONTRIBUTED THE MACHINERY WHICH WAS DISTRIBUTED TO THEM BY THE ASSESSEE FIRM TO THE NEW FIRM BY DOING VALUATION. THE NEW FIRM THEREAFTER SOLD THE MACHINERY FOR A PRICE. THE GTO TREATED THE DIFFERENCE AT THE PRICE AT WHICH THE MACHINERY WAS DISTRIBUTED BY THE ASSESSEE - FIRM TO ITS PARTNERS AS DEEMED GIFT AND SUBJECTED THE SARRE TO GIFT - TAX. THE ISSUE WAS WHETHER DISTRIBUTION OF MACHINERY WAS A TRANSFER IN THE NATURE OF SALE, FOR A CONSIDERATION. THE DIVISION BENCH OF THE KARNATAKA HIGH COURT CONSIDERED THE EXPRESSION OF 'TRA NSFER' UNDER S. 2(XXIV) OF THE GT ACT, WHICH DEFINES 'TRANSFER OF PROPERTY' AS ANY DISPOSITION, CONVEYANCE, ASSIGNMENT, SETTLEMENT, DELIVERY OR OTHER ALIENATION OF PROPERTY. THE DIVISION BENCH NOTED THAT THE ACT WAS SELF - CONTAINED AND THE DEFINITION OF 'PR OPERTY' IS TO ROPE IN ARTIFICIAL DEVICES WHICH MAY INCLUDE MERE AGREEMENTS OR ARRANGEMENTS, INTENDED TO CONFER GIFTS, WHICH MAY NOT HOWEVER, FALL UNDER THE NORMAL MEANING OF 'TRANSFER' AS GIFTS AND THE DEFINITION OF 'GIFT' IN S. 2(XII) TO INCLUDE MANY TRAN SACTIONS WHICH COULD NOT ORDINARILY BE DESCRIBED AS TRANSFERS OF PROPERTY AND HAS A WIDER IMPORT THAN THE MEANING GIVEN TO 'GIFT' IN S. 122 OF THE TRANSFER OF PROPERTY ACT. THE COURT AFTER CONSIDERING VARIOUS JUDGMENTS, HELD THAT THE DECISIONS WHICH HOLD T HAT THERE IS NO TRANSFER OF PROPERTY WHEN THERE IS A DISTRIBUTION OF ASSETS ON DISSOLUTION OR WHEN AN ASSET IS ALLOTTED TO A PARTNER ON HIS RETIREMENT FROM THE FIRM, WILL BE INAPPLICABLE WHERE AN ASSET IS BROUGHT IN \ BY THE PARTNER INTO THE PARTNERSHIP. THE COURT THEN OBSERVED THAT IT FOLLOWS THERE FROM THAT THEY WILL BE INAPPLICABLE, EVEN IN A CONVERSE SITUATION WHERE A FIRM DISTRIBUTES OR GIVES ITS ASSETS TO ITS PARTNER BY DEBITING THE VALUE THEREOF TO THE RESPECTIVE PARTNER'S ACCOUNT, WITHOUT THERE BEING EITHER DISSOLUTION OR RETIREMENT. THE COURT NOTED THAT WHILE DEALING WITH THE VALUE OF INTEREST OF EACH PARTNER QUA AN ASSET CANNOT BE ISOLATED OR CARVED OUT FROM THE VALUE OF THE PARTNER'S INTEREST TILL THE TOTALITY OF THE PARTNERSHIP ASSETS, ONCE I T IS ALLOTTED, IT BECOMES THE INDIVIDUAL PROPERTY OF THE PARTNER, THE COURT THEN PROCEEDED TO HOLD THAT, THUS, THE SHARED INTEREST BECOMES THE EXCLUSIVE INTEREST OF A PARTNER. WHEN AN ASSET OF THE FIRM IS ALLOTTED TO A PARTNER DURING THE SUBSISTENCE/ CONTI NUATION OF THE PARTNERSHIP FIRM (AS CONTRASTED FROM, AN ALLOTMENT ON DISSOLUTION OF THE FIRM OR RETIREMENT OF THE PARTNER), THE SHARED INTEREST OF ALL THE PARTNERS IN THE SAID ASSET, IS REPLACED BY THE EXCLUSIVE INTEREST OF THE ALLOTTEE, FOR CONSIDERATION. TO THAT EXTENT, THERE IS AN EXTINGUISHMENT OF THE INTERESTS OF THE OTHER PARTNERS OF THE FIRM, IN THE PARTNERSHIP 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 PARTN ERSHIP 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 DURING THE SUBSISTENCE OF THE PARTNERSHIP IS ONLY TO GET HIS SHARE OF PROFITS. BUT, ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 19 ON ALLOTMENT OF THE ASSET BY THE FIRM TO THE PARTNER, SUCH PARTNER BECOMES ENTITLED TO EXERCISE OVER THE ASSET, ALL RIGHTS OF AN ABSOLUTE OWNER. THE COURT THEN PROCEEDED TO OBSERVE WHAT WAS A MERE I NTEREST ON ALLOTMENT BY THE FIRM, ENLARGES INTO AN ABSOLUTE RIGHT, TITLE AND INTEREST. THE EXTINGUISHMENT OF THE COMMON INTEREST OF THE PARTNERS OF THE FIRM AND CREATION OF ABSOLUTE OWNERSHIP OF THE PARTNER TO WHOM IT IS ALLOTTED. SUCH A TRANSACTIONS THERE FORE A TRANSFER OF PROPERTY AS DEFINED IN THE GT ACT, WE MAY NOTE THAT THE PARTNERSHIP WAS SUBSISTING AND AN ASSET OF THE PARTNERSHIP WAS MADE THE ABSOLUTE OWNERSHIP OF ONE OF THE SUBSISTING PARTNERS. THIS JUDGMENT CAME UP FOR CONSIDERATION BEFORE THE APEX COURT IN B. T. PAT/7 & SONS VS. CGT (2000) 163 CTR (SC) 363 [2001] 247 ITR 588 (SC) UPHOLDING THE JUDGMENT OF THE KARNATAKA HIGH COURT. THE APEX COURT OBSERVED AS UNDER : 'IN OUR VIEW, WHEN THERE IS A DISSOLUTION OF A PARTNERSHIP 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 POSIT/ON IS DIFFERENT WHEN, DURING THE SUBSISTENCE OF A PARTNERSHIP, AN ASSET OF THE PARTNERSHIP BECOMES OF ONLY ONE OF THE PARTNERS THEREOF; THERE IS, I N SUCH CASE, A TRANSFER OF THAT ASSET BY THE PARTNERSHIP TO THE INDIVIDUAL PARTNERS. ' THE RATIO OF THE JUDGMENT AS CAN BE CULLED OUT IS THAT WHEN A SUBSISTING PARTNER RECEIVES FROM THE FIRM AN ASSET THEN THERE IS A TRANSFER OF THAT ASSET F ROM THE PARTNERSHIP TO THE INDIVIDUAL PARTNER. IN OTHER WORDS UNDER THE WT (SIC) ACT WHEN AN ASSET OF THE PARTNERSHIP BECOMES THE ASSET OF ONE OF THE PARTNERS IT AMOUNTS TO A TRANSFER', (EMPHASIS SUPPLIED). THUS IT IS CLEAR THAT EVEN THE JURISDICTIONAL HI GH COURT IN CASE OF A N NAIK RELYING UPON THE DECISION OF APEX COURT IN THE CASE OF B. T. PATIL & SONS (SUPRA) HAS ITSELF TREATED THE ALLOCATION OF ASSETS OF THE FIRM TO THE RETIRING PARTNER AS THE CLINCHING FACTOR FOR INVOCATION OF SECTION 45(4). THIS INT ER ALIA MEANS THAT TRANSFER OR ALLOCATION OF EXCLUSIVE INTEREST OF RETIRING PARTNER IN A CAPITAL ASSET IS A MUST FOR INVOKING PROVISIONS OF SEC. 45(4). IN THE CASE OF A. N. NAIK (SUPRA) THE COURT HELD THAT PROVISIONS OF SEC. 45(4) WAS APPLICABLE BECAUSE IN THAT CASE THE SAID OUTGOING PARTNER WAS ALSO GIVEN THE ASSETS OF THE FIRM ON HIS RETIREMENT. IT WAS IN THIS CONTEXT IT WAS HELD BY THE BOMBAY HIGH COURT THAT EVEN THOUGH THERE WAS NO DISSOLUTION BUT THERE WAS DISTRIBUTION OF ASSETS WHICH WOULD FALL WITHIN THE SWEEP OF 45(4), IN CASE OF THE APPELLANT ALSO NEITHER THERE IS ANY DISSOLUTION NOR IS THERE ANY OTHER EVENT TAKING PLACE, WHICH HAS AN EFFECT OF ALLOCATION OF EXCLUSIVE INTEREST IN ANY CAPITAL ASSET TO THE RETIRING PARTNER AND HENCE THE CONDITIONS OF 45(4) ARE NOT FULFILLED AS PER THE RATIO OF APEX COURT IN B T PATIL & SON (SUPRA) AND BOMBAY HIGH COURT IN A N NAIK (SUPRA). THIS IS FURTHER BORNE OUT FROM THE BOMBAY HIGH COURT'S ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 20 ORDER WHILE DISTINGUISHING KUNNAMKULAM MILL BOARD 257 ITP. 544 (KER). IN TH AT CASE, THE REAL CONTROVERSY WAS WHETHER BY RETIREMENT OF A PARTNER OF THE FIRM THERE IS A TRANSFER OF THE ASSETS OF THE FIRM IN FAVOR OF THE SURVIVING PARTNERS WITHIN THE MEANING OF S, 45(4) OF THE ACT. THE DIVISION BENCH OF THE KERALA HIGH COURT ANSWERE D THE SAME IN THE NEGATIVE BY HOLDING THAT THERE WAS NO TRANSFER OF ASSETS, BY HO/DING THAT AS LONG AS THERE IS NO CHANGE IN OWNERSHIP OF THE FIRM AND ITS PROPERTIES, THERE IS NO TRANSFER OF OWNERSHIP ON RECONSTITUTION OF THE FIRM. THIS IS, THEREFORE, NOT A CASE, WHERE THE ASSETS WERE ALLOTTED TO A RETIRING (EMPHASIS SUPPLIED) THUS IT IS CLEAR THAT IN PRINCIPLE, THE RATIO OF KERALA HIGH COURT THAT UNLESS AND UNTIL THERE IS CHANGE IN OWNERSHIP OF THE CONCERNED PROPERTY THERE IS NO DISTRIBUTION A S CONTEMPLATED IN SECTION 45(4), WAS IMPLIEDLY CONCURRED BY JURISDICTIONAL HIGH COURT ALSO IN CASE OF A N NAIK, THOUGH THE JURISDICTIONAL HIGH COURT TOOK A DIFFERENT VIEW ON FACTS OF THAT CASE AS THERE WAS ALLOCATION OF ASSET ALSO TO THE PARTNER ON RETIREM ENT, WHICH WAS NOT THERE IN CASE BEFORE THE KERALA HIGH COURT. IN THE CASE OF APPELLANT ALSO IT IS NOT CASE WHERE ANY ASSET HAS BEEN ALLOTTED TO THE RETIRING PARTNERS, JUST LIKE IN THE CASE WHICH WAS BEFORE KERALA HIGH COURT. 5.THE DECISION RELIED BY AO I N CASE OF GURUNATH TALKIES 328 ITR 59 (KAR) IS DISTINGUISHABLE. IN THAT CASE ALL THE OLD PARTNERS RETIRED FROM THE FIRM ON INTRODUCTION OF TWO NEW PARTNERS AND ONLY THE NEW PARTNERS CONTINUED THE BUSINESS OF THE FIRM AND IT WAS IN THIS CONTEXT IT WAS HELD THAT THERE WAS TRANSFER OF CAPITAL ASSET U/S 2(47) ATTRACTING SECTION 45(4). THUS IT WAS A CASE OF SUCCESSION OF FIRM BY ENTIRELY NEW SET OF PARTNERS WHICH RESULTED IN TRANSFER OF CAPITAL ASSET BY FIRM HAVING ERSTWHILE PARTNERS TO THE FIRM WITH SAME NAME W ITH ALL NEW PARTNERS AND HENCE THE COURT HELD THAT THERE WAS TRANSFER OF ASSETS AS HELD BY FIRM COMPRISING ERSTWHILE RETIRED PARTNERS TO THE FIRM COMPRISING ALL NEW PARTNERS. IN THE CASE OF APPELLANT IT IS NOT THE CASE BECAUSE OUT OF 4 EXISTING PARTNERS ON 25.11.2005, 1 NEW AND 1 OLD PARTNER CONTINUED POST RECONSTITUTION OF 27.05.2008. THE LD AR HAS ALSO PLACED ON RECORD THE ITAT MUMBAI A BENCH DECISION IN CASE OF A R ASHER AND 3 OTHERS IN ITA NO 5256/MUM/2009 DATED 11.02.2011 WHEREIN ALSO THERE WAS SIMILAR REVALUATION OF ASSET WHICH WAS CREDITED TO CAPITAL A/ C OF PARTNERS IN THEIR PROFIT SHARING RATIO AND ON RETIREMENT THE PARTNERS CARRIED AWAY THE BALANCES LYING IN THE CAPITAL A/C INCLUDING THE AMOUNTS ACCREDITED ON REVALUATION AND THE FIRM CONTINUED THE BUSINESS WITH NEWLY ADMITTED PARTNERS. THE ITAT IN THE SAID CASE HELD THAT NO CAPITAL GAIN WAS ATTRACTED IN HANDS OF FIRM U/S 45(4). THE CASE OF THE APPELLANT IS NOT ONLY SIMILAR BUT ON A BETTER FOOTING BECAUSE IN THE CASE OF APPELLANT THERE IS ONLY ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 21 RECONS TITUTION OF FIRM AS ONLY 3 OF 5 ORIGINAL PARTNERS EXISTING PRIOR TO REVALUATION RETIRED ON 27.05.2008 AND THE APPELLANT FIRM CONTINUED WITH 1 OLD PARTNER 1 NEWLY INDUCTED PARTNER WHEREAS IN THE CASE OF A R ASHER &. OTHERS (SUPRA), IT WAS A CASE OF SUCCESSI ON AS ALL THE PARTNERS HAVE RETIRED AND FIRM WAS CONTINUED BY ALL NEWLY INDUCTED PARTNERS ON THE SAME DAY. 6. THE AO HAS TAXED THE AMOUNT CREDITED IN CAPITAL A/C OF RETIRING AS WELL AS CONTINUING PARTNERS WITHIN THE REALM OF 45(4). SO FAR AS THE AMOUNTS C REDITED TO CAPITA! A/C OF THE CONTINUING PARTNERS ARE CONCERNED, AS ALREADY DISCUSSED, THE CONTINUING PARTNERS INDIVIDUALLY HAVE NO SPECIFIC AND COALESCED RIGHT, TITLE AND INTEREST IN THE IMMOVABLE PROPERTIES OF THE FIRM AND HENCE UPON REVALUATION OF A SSET OF THE FIRM THERE IS ONLY M UTUAL ADJUSTMENT OF RIGHTS IN THE FIRM AND IT CANNOT BE SAID THAT THERE IS INCREASE IN RIGHTS OF CONTINUING PARTNERS IN THE ASSET OF THE FIRM BECAUSE IT IS THE FIRM ONLY WHICH CONTINUES TO BE THE OWNER OF THE PROPERTY IN QUESTIO N EVEN AFTER REVALUATION AND HENCE THERE CAN BE NO QUESTION OF ANY TRANSFER OR DISTRIBUTION TO CONTINUING PARTNERS. AS THE COMMON SAYING GOES THAT ONE CANNOT HAVE THE CAKE AND EAT IT TOO; ON THE SAME LOGIC IT CANNOT BE SAID THAT THE FIRM EARNED PROFITS ON TRANSFER OR DISTRIBUTION OF AN CAPITAL ASSET TO CONTINUING PARTNERS THOUGH THE PARTNERSHIP FIRM HAS TRANSFERRED THE SAID ASSET TO A THIRD PARTY. EVEN OTHERWISE, IF THE CONTINUING PARTNERS WHOSE CAPITAL A/C HAS BEEN CREDITED WANTED TO WITHDRAW THE CREDIT BA LANCES WITHOUT RETIRING, IT CAN BE ONFY OUT OF THE CASH FUNDS OF FIRM WHICH CAN BE OUT OF LOANS OR OTHER SOURCES BUT NOT OUT THE REVALUATION SURPLUS AS THE REVALUATION SURPLUS IS NOT REPRESENTED BY ANY ACTUAL TANGIBLE CASH. IF SUCH WITHDRAWALS ARE MADE OUT OF FUNDS BORROWED BY FIRM, THEN IT WILL RESULT IN INCREASE OF THE LOAN LIABILITY OF THE FIRM WHICH IN TURN SHALL INCREASE THE LIABILITY OF THE CONTINUING PARTNERS ARE OBLIGED TO REPAY BY VIRTUE OF THEIR JOINT AND SEVERAL LIABILITIES. THUS THE CONTINUING P ARTNERS ARE NOT AT ALL BENEFITTED, EVEN IF THEY WERE TO WITHDRAW THE SUMS CREDITED IN CAPITAL A/C ON REVA L UATION OF ASSET AND THEREFORE THERE CANNOT BE ANY CASE OF DISTRIBUTION OF ANY ASSET BY WAY OF CREDIT ENTRIES ALSO IN HANDS OF CONTINUING PARTNERS. HEN CE THE PROVISIONS OF SEC. 45(4) CANNOT BE MADE APPLICABLE TO THE AMOUNTS CREDITED TO THE CAPITAL A/ C OF CONTINUING PARTNERS BY ANY STRETCH OF INTERPRETATION. 7. SO FAR AS AMOUNT CREDITED TO CAPITAL A/C OF RETIRING PARTNERS IS CONCERNED, NOTWITHSTANDING TH E FACT THAT THERE IS NO DISTRIBUTION BY FIRM TO RETIRING PARTNERS, THE TRANSFEROR AND TRANSFEREE ARE LIKE TWO SIDES OF THE SAME COIN. THE CAPITAL GAIN IS CHARGEABLE ONLY ON THE TRANSFEROR AND NOT ON THE TRANSFEREE. IN THIS CASE, THE TRANSFEROR IS THE PARTN ERS WHO ON THEIR RETIREMENT ASSIGN THEIR RIGHTS IN THE ASSETS OF THE FIRM AND IN LIEU THE FIRM PAYS THE RETIRING PARTNERS THE MONEY LYING IN THEIR CAPITA! A/C, MEANING THEREBY THAT THE FIRM BECOMES THE TRANSFEREE IN THIS TRANSACTION. HENCE, IT IS THE FIRM AND ITS CONTINUING ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 22 PARTNERS WHO HAVE ACQUIRED THE RIGHTS OF THE RETIRING PARTNERS IN THE ASSETS OF THE FIRM BY PAYING THEM LUMP SUM AMOUNT ON THEIR RETIREMENT. SO I T CANNOT BE SAID THAT THE FIRM IS TRANSFERRING ANY RIGHT IN CAPITAL ASSET TO THE RETIRING PA RTNER, RATHER IT IS THE RETIRING PARTNER WHO IS TRANSFERRING THE RIGHTS IN CAPITAL ASSETS IN FAVOUR OF CONTINUING PARTNERS. THE ITAT MUMBAI IN CASE OF SUDHAKAR SHETTY HAS HELD THAT SUCH TRANSACTION AMOUNTED TO 'TRANSFER' WITHIN THE MEANING OF SECTION 2(47) OF THE INCOME - TAX ACT, INASMUCH AS THE PARTNER I.E. SUDHAKAR SHETTY COULD BE SAID TO HAVE ASSIGNED, RELEASED AND RELINQUISHED HIS INTEREST AND SHARE IN PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS TO ASSIGNMENT AND ACCORDINGLY CONFIRMED THE CAPITAL GAINS ASSESSED IN HARDS OF THE RETIRING PARTNER SHRI SUDHAKAR SHETTY IN RESPECT OF THE AMOUNT RECEIVED BY HIM FROM THE FIRM OVER AND ABOVE HIS CAPITAL CONTRIBUTION. 8. IN FACT, ITAT MUMBAI WHILE CONSIDERING THE TAXABILITY OF AMO UN TS RECEIVED BY PARTNER SUDHAKAR SHETTY DID GO INTO QUESTION WHETHER THE TRANSACTION WAS TAXABLE IN HANDS OF FIRM OR THE PARTNER, WHICH IS EVIDENT FROM PARA 34 OF ITAT ORDER IN CASE OF SUDHAKAR SHETTY WHICH READS AS UNDER: 'THE SECOND SITUATION WITH WHICH, WE ARE CONC ERNED IN THIS APPEAL IS A CASE WHERE THE RETIRING PARTNER IS PAID CONSIDERATION IN CASH AND HE GIVES UP HIS RIGHTS AS PARTNER INCLUDING HIS RIGHTS OVER THE ASSETS OF THE PARTNERSHIP. THERE IS DIVERGENCE OF VIEW ON THE QUESTION, AS TO WHETHER THERE IS ANY T RANSFER AT ALL IN SUCH SITUATION BY THE FIRM IN FAVOR OF THE RETIRING PARTNER OR BY THE RETIRING PARTNER IN FAVOR OF THE FIRM AND ITS CONTINUING PARTNERS, '(EMPHASIS SUPPLIED) AND AFTER CONSIDERING THE RATIO OF THE JURISDICTIONAL HIGH COURT IN CASE TRIBHU VANDAS G PATET 115 ITR 95 (BOM), H R ASLOT 115 ITR 255 (BOM), N.A. MODY 162 ITR 420 (BOM) AND OTHER DECISIONS AS QUOTED IN ORDER OF ITAT ABOVE, THE ITAT HELD THAT THE TRANSACTION WAS TAXABLE IN HANDS OF RETIRING PARTNER FOR ASSIGNMENT OF HIS RIGHTS IN FAVO R OF FIRM AND ITS CONTINUING PARTNERS, SINCE THE SAME EVENT CANNOT RESULT INTO TRANSFER BY RETIRING PARTNERS AS WELL AS BV FIRM, THE ITAT BY HOLDING THE TRANSACTION TO BE TRANSFER FROM RETIRING PARTNER TO FIRM IMPLIEDLY HELD THAT THE TRANSACTIONS NOT TO BE TAXABLE IN HANDS OF FIRM. 9. THE PURPOSE OF 45(4) \ S TO BRING SUCH TRANSACTIONS WHICH HAVE AN EFFECT OF TRANSFER OF CAPITAL ASSEI WITHOUT THE ASSET BEING ACTUALLY TRANSFERRED. THE PURPOSE IS TO TAX THE ACTUAL BENEFICIARY OF SUCH TRANSACTIONS. IN THE PRES ENT CASE, THE FIRM OR THE CONTINUING PARTNERS ARE NOT THE BENEFICIARIES AS NO NEW TANGIBLE INCOME OR ASSET HAS ARISEN TO THEM; RATHER THE FIRM AND CONTINUING PARTNERS HAVE PURCHASED THE SHARE OF RETIRING PARTNER BY PAYING CASH. IT IS THE RETIRING PARTNERS WHO HAVE BEEN BENEFITTED BY RECEIVING MUCH MORE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 23 THAN ACTUAL CAPITAL CONTRIBUTED BY THEM ON ACCOUNT OF REVALUATION. THUS THERE CAN BE NO CASE OF TAX AVOIDANCE BY COLORABLE DEVICE BY THE FIRM ON THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE. 10.THE FA CT THAT THE IMPUGNED LAND HAS BEEN TREATED CONSISTENTLY AS STOCK IN - TRADE AND NOT AS CAPITAL ASSET BY THE APPELLANT WHICH IS ALSO EVIDENT FROM THE DISCUSSION IN THE AFORESAID GROUNDS, IS YET ANOTHER IMPORTANT INDEPENDENT FACTOR WHICH GOES IN FAVOR OF THE APPELLANT FIRM WHILE CONSIDERING THE APPLICATION OF SEC. 45(4). 11.THE ALTERNATE ARGUMENT PRESENTED BY THE AR BY APPLYING SEC. 45(4) AND ITS CONSEQUENT NULLIFYING RAMIFICATIONS ARE QUITE VALID, FORCEFUL AND CONVINCING. BUT I HAVE ADJUDICAT ED THE MATTER PURELY ON THE INVOCATION OF SEC. 45(4) OR OTHERWISE AND THEREBY 1 ABSTAIN FROM PASSING A JUDGMENT ON THIS ALTERNATE CONTENTION. 12.KEEPING IN VIEW OF THE ABOVE FACTUAL ANALYSIS AS WELL AS RELYING UPON THE VARIOUS LEGAL PRECEDENTS, PRONOUNCEM ENTS, JUDGMENTS AND ORDERS AND IN THE ABSENCE OF THE FUNDAMENTAL REQUISITE OF THE IMPUGNED PROPERTY BEING A CAPITAL ASSET, I AM OF THE CONSIDERED OPINION THAT THERE IS NO DISTRIBUTION OF CAPITAL ASSET AS ENVISAGED U/S. 45(4). HENCE ON THE FACTS AND CIRCUMS TANCES OF THE APPELLANT'S CASE, NO INCOME IS CHARGEABLE U/S. 45(4) IN THE HANDS OF THE FIRM AND THEREFORE THE ENTIRE ADDITION OF RS.206,19,20,209/ - IS DIRECTED TO BE DELETED. 4.4 GROUND NO. 5 IN RESPECT OF YEAR OF TAXABILITY AND DOUBLE ASSESSMENT OF THE SAME TRANSA CTION. 4.4.1. APPELLANT'S CONTENTION : THE APPELLANT FIRM HAS ALREADY BEEN SUBJECTED TO ADDITION RS. 186,72,80,452/ - UNDER SEC. 45(4) OF THE ACT IN THE ASSESSMENT YEAR 2008 - 09 INTER ALIA ON THE SAME FOOTING THAT THERE HAS BEEN A ALLEGED DI STRIBUTION OF THE KURLA LAND BY THE FIRM TO THE PARTNERS OF THE APPELLANT FIRM AS A RESULT REVALUATION OF THE KURLA LAND IN CONSEQUENCE OF RETIREMENT AND ADMISSION OF PARTNERS AS PROJECTED IN THE ASSESSMENT ORDER. THE EXCERPTS OF THE IMPUGNED ASSESSMENT O RDER FOR THE ASSESSMENT YEAR 2008 - 09, WHEREIN THE AO HAS EMPHATICALLY CONCLUDED BY ERRONEOUSLY INVOKING PROVISIONS OF SEC.45(4) R.W.S. 2(47), THAT THE SAID KURLA LAND IS TRANSFERRED BY THE APPELLANT FIRM, ARE AS UNDER - PARA LL(B), PAGE 6 - 'FURTHER, THE CONDUCT OF HDIL IN ENTERING INTO MEMORANDUM OF ASSOCIATION (MOU) WITH MUMBAI INTERNATIONAL PVT. LTD. (MIAL) FOR SLUM REHABILITATION, CLEARLY SHOWS THAT THE PROPERTIES OF THE FIRM HAVE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 24 ALREADY BEEN TRANSFERRED TO HDIL AND, THEREFORE HDIL HAS A/READY ACQUIRE D ALL THE RIGHTS TO DEAL WITH THE PROPERTY.' PARA 11.4, PAGE 8 - '... FACTUALLY 100%OF THE SHARE OF THE ONLY PROPERTY OF THE FIRM HAS BEEN TRANSFERRED TO HDIL IN THE FINANCIAL YEAR 2007 - 08 PERTAINING TO ASSESSMENT YEAR 2008 - 09, ITSELF. ' PARA 13, PAGE 11 '... IT IS HELD THAT PROVISIONS OF 45(4) R.W.S. 2(47) ARE ATTRACTED IN THIS CASE AS FACT THERE IS TRANSFER OF ASSETS OF FIRM BEING LAND SITUATED AT KURLA AT TWO POINTS OF TIME. FIRSTLY, 50% OF THE LAND WAS TRANSFERRED TO HDIL ON 06. 07.2007 WHEN HDIL INTRODUCED AS NEW PARTNER IN FIRM AND 50% SHARE OF PROFIT WAS TRANSFERRED TO HDIL AND THE BALANCE 50% TRANSFER TOOK PLACE ON 15.10.2007 WHEN HDIL SIGNED MOU WITH MIAL FROM SLUM T REHABILITATION AT KURLA LAND ON ITS OWN NAME. THOUGH THE AS SESSEE'S RE CORDS SHOW THAT HDIL BECAME THE PARTNER OF 90% INTEREST OF THE FIRM, ON 27.05.2008, THE EFFECTIVE TRANSFER OF THE ENTIRE INTEREST OF THE FIRM ALONG WITH THE LAND HAD ALREADY TAKEN PLACE DURING THE FINANCIAL YEAR 2007 - 08, BEFORE THE HDIL ENTERED INTO MOU WITH MIAL ON 15.1O.20O7.' AGAINST THE IMPUGNED ASSESSMENT ORDER FOR AY 2008 - 09, THE APPELLANT FIRM FILED AN APPEAL BEFORE THE CIT (APPEALS) - 35, WHO IN TURN DELETED THE SAID ADDITION, VIDE HIS APPELLATE ORDER DATED 28.03.2011, HOWEVER, TH E DEPA RTMENT HAS MAINTAINED THAT THE APPELLANT FIRM IS BOUND TO BE TAX ABLE U/S. 45(4) R.W.S. 2(47) AND THEREBY PREFERRED AN APPEAL BEFORE THE ITAT , MUMBAI. THE RELEVANT EXTRACT OF GROUNDS OF APPEAL FROM THE FORM NO. 36 FILED BY THE REVENUE IS AS UNDER 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE ID. CIT(A) ERRED IN DIRECTING THE A.O. TO DELETE THE ENTIRE ADDITION OF CAPITAL GAIN U/S. 45(4) OF THE INCOME TAX ACT 1961, WITHOUT APPRECIATING THE FACT THAT HDIL WAS PERMITTED AS PARTNER IN THE PARTNERSHIP FIRM WITH 50% SHARE OF PROFIT, BY THIS ARRANGEMENTS' 50% OF THE INTEREST OF THE EXISTING PARTNERS HAVE BEEN TRANSFERRED IN THE FAVOR OF INCOMING PARTNER W.E.F. 06 - 07 - 2007 RESULTING IN TRANSFER OF ASSETS WITHIN THE MEANING OF SECTION 45(4) R.W. S. 2(47) OF THE INCOME TAX ACT, 1961.' MOREOVER, THE SAME TRANSACTIONS CONSTITUTING RETIREMENT AND ADMISSION OF THE RESPECTIVE PARTNERS HAS ONCE AGAIN BEEN DOUBLY TAXED RS. 206,10,20,209/ - UNDER SECTION 45'4) OF THE ACT IN THE ASSESSMENT YEAR 2009 - 10 VIDE ORDER DATED 15.12.2011 ON THE ALLEGED SECOND DISTRIBUTION OF THE KURLA LAND BY THE APPELLANT FIRM TO THE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 25 CONCERNED PARTNERS. IN ADDITION, THE APPELLANT FIRM IS BROUGHT TO TAX PRO TANTO RS, 15,51,99,120/ - AS BUSINESS INCOME FOR SO CALLED SALE OF LAND TO HD IL. IF IN THE OPINION OF THE AO, THE APPELLANT FIRM ALREADY DISTRIBUTED THE KURLA LAND TO THE PARTNERS IN ASSESSMENT YEAR 2008 - 09 INVOKING SECTION 45(4) COUPLED WITH THE FACT THAT, ACCORDING TO AO, THE LAND IS ALREADY TRANSFERRED BY HDIL TO MIAL VIDE AGRE EMENT DATED 15.10.2007, THEN THE MOOT QUESTION IS HOW CAN THE KURLA LA ND BE TRANSFERRED AGAIN FOR THE N TH NUMBER OF TIME TO THE PARTNERS BY THE APPELLANT FIRM IN THE ASSESSMENT YEAR 2009 - 10 APPLYING SECTION 45(4). A PERSON CAN CONVEY THE LAND IF ONLY HE IS THE OWNER AND NOT OTHERWISE, THEN HOW CAN ONE EVEN IN A WORST SCENARIO CONTEMPLATE THE TRIGGERING OF SEC. 45(4) IN BOTH ASSESSMENT YEARS 2008 - 09 OR 2009 - 10. IT WELL ESTABLISHED LAW THAT AN ASSESSEE CANNOT BE CHARGED TO TAX ON THE SAME TRANSACTIONS TWICE OVER. IN THE PREMISES, THE OVERLAPPING OF THE ADDITIONS UNDER SECTIONS 45(4) AND SECTION 28 TO THE EXTENT OF RS. 186,72,80,452/ - PLUS RS.15,51,99,120/ - AGGREGATING RS. 202,24,79,572/ - RESPECTIVELY ON AN IDENTICAL AND THAT VERY TAXABLE EVENT IS, ABSOLUTELY AND TOTALLY UNTENABLE AND UNSUSTAINABLE IN LAW RESULTING IN THE TRANSGRESSION AND GROSS CONTRAVENTION OF THE PRINCIPLE OF DOUBLE TAXATION, IT DOES NOT HE IN THE MOUTH OF THE REVENUE TO SUBJECT THE SAME TRANSACTION TO TAX TWICE OVER. FURTHERMORE, IT IS LEA RNT THAT ON THE SAME TRANSACTION FOR THE SAME A.Y. 2009 - 10, DEMAND HAS ALSO BEEN RAISED ON THE RETIRING PARTNERS I.E. VISION FINSTOCK PVT. LTD., NISHA CAPITAL SERVICES PVT. LTD. AND SURAKSHA DEVELOPERS PVT. LTD. BY THEIR RESPECTIVE ASSESSING OFFICERS. EVEN ON THIS COUNT, THE SUBSTANTIAL QUESTION OF LAW PERTAINING TO DOUBLE TAXATION ARISES, AS TO HOW THE SAME INCOME CAN BE TAXED IN HANDS OF MORE THAN ONE ASSESSEE AND HENCE THE AFOREMENTIONED SUM CANNOT BE ONCE MORE BE EXPOSED TO TAX AND OUGHT TO BE EXCLUDED FROM CHARGEABILITY. 16. WE ALSO FOUND THAT SIMILAR ISSUE WAS DECIDED BY THE TR IBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PROCEEDING ASSESSMENT YEAR 2008 - 09. THE PRECISE OBSERVATION OF THE TRIBUNAL WAS AS UNDER: - 5. WE HAVE HEARD THE RIVAL SUBMISSIO NS AND PERUSED THE MATTER PLACED BEFORE US BY THE REPRESENTATIVES OF BOTH SIDES. BEFORE DECIDING THE ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 26 ISSUE, IT WILL BE USEFUL TO SUMMARISE THE BASIC FACTS AND CHRONOLOGY OF THE CASE: I) ORIGINAL PARTNERSHIP (DT. 25 - 11 - 2005) CONSISTED OF 4 PARTNERS. II) ON 06 - 07 - 2007,HDIL BECAME A NEW PARTNER WITH 50% PROFIT SHARING RATIO. III) ASSESSEE - FIRM AND MIAL ENTERED IN TO MOU ON 15.10.2007. IV) ON 0 - 04 - 2008 PLOT OF LAND WAS REVALUED. V) DEED OF RETIREMENT WAS SIGNED ON 27.05.2008 AND ON THAT DATE OUT OF THE FIVE, TH REE PARTNERS RETIRED. 5.1. AO HAS MADE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE - FIRM ON THE BASIS THAT ON ADMISSION OF THE NEW PARTNER I.E. HDIL, EXISTING PARTNERS HAD TRANSFERRED 50% TO THEIR INTEREST TO IT AND THUS THERE WAS RE - DISTRIBUTION OF THE AS SETS OF THE FIRM. AS PER THE AO ON 27 - 05 - 2008, WHEN INTEREST OF THREE PARTNERS WERE TRANSFERRED TO HDIL, THERE WAS AGAIN RE - DISTRIBUTION OF ASSETS OF ASSESSEE - FIRM. IN OUR OPINION VIEW TAKEN BY THE AO IS NOT BASED ON SOUND LEGAL FOOTINGS. FAA, AFTER CONSID ERING THE FACTS OF THE CASE AND LEGAL PROVISIONS, HAS HELD THAT THERE WAS NO DISTRIBUTION OF ASSETS IN THE CASE UNDER CONSIDERATION. A BARE PERUSAL OF DEED OF ADMISSION (DTD. 06. 07. 2007) AND RETIREMENT DEED (DTD.27.05.2008) PROVE THAT ON BOTH THE OCCASIO NS THERE WAS NO DISTRIBUTION OF ASSETS OF THE ASSESSEE - FIRM. ON 06.07.2007 HDIL WAS ADMITTED AS A NEW PARTNER IN OUR HUMBLE OPINION ADMISSION OF A NEW PARTNER TO THE EXISTING PARTNERSHIP - FIRM DOES NOT RESULT IN DISTRIBUTION OF ASSETS. SIMILARLY, ON 27TH MA Y, 2008; WHEN THREE PARTNERS RETIRED AND REMAINING TWO PARTNERS CONTINUED THE BUSINESS OF THE FIRM; THERE WAS NO REDISTRIBUTION OF ASSETS OF THE FIRM. AFTER GOING THROUGH THE ABOVE RETIREMENT DEED WE ARE OF THE OPINION THAT IT IS NOT A CASE WHERE FIRM WAS TAKEN OVER BY THE NEW PARTNER AND THUS PROVISIONS OF SECTION 45(4) OF THE ACT CAN BE INVOKED. AS PER THE SETTLED PRINCIPLES OF LAW OF PARTNERSHIP, DURING THE CONTINUATION OF THE PARTNERSHIP, PARTNERS DO NOT HAVE SEPARATE RIGHT OVER THE ASSETS OF THE FIRM IN ADDITION TO INTEREST IN SHARE OF PROFITS. THE BASIS OF THE SAID PROPOSITION IS THAT VALUE OF THE INTEREST OF THE EACH PARTNER WITH REFERENCE TO THE ASSETS OF THE FIRM CANNOT BE ISOLATED AND CARRIED OU T FROM THE VALUE OF THE PARTNERS' INTEREST IN THE TOTALITY OF THE PARTNERSHIP ASSETS. IN THE CASE UNDER CONSIDERATION, ASSET OF THE FIRM I.E. PLOT OF LAND, WAS NEVER TRANSFERRED TO ANYBODY - IT ALWAYS REMAINED WITH THE ASSESSEE - FIRM ONLY. FROM THE DATE OF P URCHASE OF THE PLOT FROM THE BMCL TILL 27.05.2008,WHEN THREE PARTNERS RETIRED, IT WAS THE ASSET OF THE FIRM AND THERE WAS NO CHANGE IN THE OWNERSHIP OF THE SAID PLOT. THUS, THERE WAS NO EXTINGUISHMENT OF RIGHTS, AS ENVISAGED BY SECTION 2(47) OF THE ACT, IN THE CASE OF ASSESSEE - ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 27 FIRM. HERE, IT WILL BE USEFUL TO REFER TO A PORTION OF DECISION OF PARU D DAVE (SUPRA),DELIVERED BY THE TRIBUNAL - 'REVALUATION OF ASSETS BY PARTNERSHIP FIRM DOES NOT ATTRACT CAPITAL GAINS. THE REVALUATION OF ASSETS OF PARTNERSHIP AND THE CREDIT OF REVALUED AMOUNT TO THE CAPITAL ACCOUNT OF PARTNERS IN THEIR RESPECTIVE SHARE RATIO DO NOT ENTAIL ANY TRANSFER AS DEFINED UNDER S. 2(47) OF THE IT ACT. THE INTRODUCTION OF NEW PARTNERS TO A PARTNERSHIP FIRM OWNING IMMOVABLE ASSETS AND CONSEQUENT REDUCTION IN THE SHARE RATIO OF PRESENT PARTNERS DO NOT ENTAIL ANY RELINQUISHMENT OF THEIR RIGHTS IN THE PARTNERSHIP PROPERTY. ON INTRODUCTION OF NEW PARTNERS, THERE IS REALIGNMENT OF SHARE RATIO INTER SE BETWEEN THE PARTNERS ONLY TO THE EXTENT OF SHARING THE M/S. FINE DEVELOPERS PROFITS OR LOSSES, IF ANY, OF THE PARTNERSHIP BUSINESS. WHEN ANY NEW PARTNER IS INTRODUCED INTO AN EXISTING PARTNERSHIP FIRM , THE PROFIT SHARING RATIOS UNDERGO A CHANGE, WHICH DOES NOT AMOUNT TO TRANSFER AS DEFINED UNDER S. 2(47) OF THE ACT, AS THERE IS NO CHANGE IN THE OWNERSHIP OF ASSETS BY THE PARTNERSHIP FIRM. AS DURING TH E SUBSISTENCE OF THE PARTNERSHIP FIRM, THE PARTNERS HAVE NO DEFINED SHARE IN THE ASSETS OF THE PARTNERSHIP AND THUS ON REALIGNMENT OF PROFIT SHARING RATIO, ON INTRODUCTION OF NEW PARTNERS, THERE IS NO RELINQUISHMENT OF ANY NONEXISTENT SHARE IN THE PARTNERS HIP ASSETS AS THE ASSETS REMAINED WITH THE FIRM. SUCH AN ARRANGEMENT IS NOT COVERED BY THE PROVISIONS OF S. 45(4) OF THE ACT, WHICH COVERS THE CASE OF DISSOLUTION OF PARTNERSHIP FIRM. ACCORDINGLY, NO CA PITAL GAINS ARISE ON SUCH RELINQUISHMENT OF SHARE RATIO IN THE PARTNERSHIP FIRM.' 5.2. THOUGH THE AO HAS HELD THAT HDIL HAD TREATED THE PLOT OF LAND, OWNED BY THE FIRM, AS ITS OWN WHILE IT HAD SIGNED THE MOU WITH MIAL, YET HE HAS NOT MENTIONED AS HOW HE AR RIVED AT THE SAID CONCLUSION. WE HAVE PERUSED THE SAID MOU AND WE HAVE NOT FOUND ANY CLAUSE WHICH PROVES THAT THE NEW PARTNER OF THE ASSESSEE - FIRM WAS TREATING THE SAID ASSET AS ITS OWN. WE FULLY AGREE WITH THE FAA THAT MOU WAS NOT ANALYSED BY THE AO IN CO RRECT PERSPECTIVE. 5.3. AS PER THE SETTLED PRINCIPLES OF TAXATION REVALUATION OF CAPITAL ASSETS DOES NOT RESULT IN ACCRUAL OR RECEIPT OF TAXABLE INCOME UNLESS AND UNTIL THE CAPITAL ASSET IS ACTUALLY TRANSFERRED. SECONDLY, REVALUATION OF ASSETS BEFORE CONVE RSION OF A FIRM INTO COMPANY CANNOT BE EQUATED WITH DISSOLUTION OF FIRM/TRANSFER OF ASSETS OF FIRM. IF THE ABOVE PRINCIPLE IS APPLIED TO THE BASIC FACTS OF THE CASE, IT CAN BE SAFELY HELD THAT RE - VALUATION OF THE PLOT OF LAND DID NOT RESULT IN ANY PROFIT OR GAIN TO THE FIRM AND HENCE QUESTION OF DISTRIBUTION OF PROFIT BY THE FIRM DOES NOT ARISE. THUS, THE BASIC INGREDIENT FOR INVOKING PROVISIONS OF SECTION 45(4) OF THE ACT IS MISSING IN THE CASE UNDER C ONSIDERATION. THE TWIN REQUIREMENTS OF THE SECTION 45(4) CONTEMPLATE NOT ONLY THE RETIREMENT OF THE PARTNERS FROM THE PARTNERSHIP FIRM BUT ALSO THE TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS. IT IS A FACT THAT RETIRING PARTNERS HAD ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 28 WITHDRAWN THE SUMS TO CREDIT IN THEIR ACCOUNTS, BUT SUCH WITHDRAWALS CANNOT BE TREATED AS 'DISTRIBUTION OF CAPITAL ASSETS EITHER ON DISSOLUTION OF FIRM OR OTHERWISE'. 5.3.1. HERE, WE WOULD LIKE TO MENTION THAT SUB - SECTION 3 AND 4 OF THE SECTION 45 OF THE ACT WERE BROUGHT ON STATUTE WITH SPECIFIC PURPOSES. FOR OVER COMING THE DIFFICULTIES, ARISING OUT OF THE DECISIONS DELIVERED BY THE HON'BLE SUPREME COURT IN THE CASES OF MALABAR FISHRIES (2TAXMAN469) AND KARTIKEYA SARABHAI (SUPRA),SAID SUB - SECTIONS WERE INTRODUCED. SUB - SECTION 4 DEALS WITH THE SITUATION WHERE A CAPITAL ASSET IS TRANSFERRED BY A PARTNERSHIP FIRM AND SUCH TRANSFER IS VIA DISTRIBUTION. WE FIND THAT IN THE CASE UNDER CONSIDERATION NO CAPITAL ASSET WAS TRANSFERRED BY THE ASSESSEE DURING THE RELEVANT AY. FROM THE VERY BEGINNING OF THE PARTNERSHIP THE PLOT OF LAND IN QUESTION WAS TREATED STOCK IN TRADE BY THE ASSESSEE FIRM. EVEN ON 31.03.2008 IT WAS SHOWN AS CURRENT ASSET (I.E.W - I - P) IN THE BALANCE SHEET. AO HAS NOWHERE REBUTTED/ DOUBTED THIS FACTUAL POSIT ION. CONSIDERING THE ABOVE WE ARE INCLINED TO AGREE WITH THE FAA THAT NO CAPITAL ASSET WAS TRANSFERRED BY THE ASSESS - FIRM AND HENCE PROVISIONS OF SECTION 45(4) SHOULD NOT HAVE BEEN INVOKED. 5.3.2. HON'BL E BOMBAY HIGH COURT IN THE CASE OF A.N.NAIK (265 ITR 346) HAS EXPLAINED THE EXPRESSION 'OTHERWISE' USED IN SECTION 45 OF THE ACT. IT WAS HELD BY HON'BLE COURT THAT THE EXPRESSION OTHERWISE HAS TO BE REA D WITH WORD 'TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSET' AND NOT WITH THE WORD 'DISSOLUTION'. THUS, FROM THE ABOVE JUDGMENT ALSO, IT IS CLEAR THAT TRANSFER OF A CAPITAL ASSET IS THE PRE - CONDITION FOR M/S. FINE DEVELOPERS INVOKING THE PROVISIONS OF SE C.45(4) OF THE ACT. SECONDLY, SUCH A TRANSFER SHOULD TAKE PLACE AT THE TIME OF DISSOLUTION OR OTHER SIMILAR EVENTS SUCH AS RETIREMENT OF THE PARTNERS. UNTIL SUCH TIME, THE SHARED RIGHTS OF THE PARTNERS BECOME THE EXCLUSIVE RIGHT OF ANY RETIRING PARTNER AND NO OCCASION ARISES FOR TO TAX THE SAME UNDER THE HEAD 'CAPITAL GAINS' AS ENVISAGED BY SEC.45(4) OF THE ACT. AS STATED EARLIER, IN THE PRESENT CASE, THERE WAS NO EXTINGUISHMENT OF RIGHTS OF ANY OF THE ASSETS OWNED BY THE FIRM. IN OTHER WORDS, CONTINUING PA RTNERS HAD NOT TRANSFERRED ANY RIGHTS OF THE PLOT OF THE LAND IN QUESTION IN FAVOUR OF THE RETIRING PARTNERS AND HENCE THERE WAS NO TRANSFER CAPITAL ASSET WITHIN THE MEANING OF SECTION 2(47) BY THE FIRM T O THE RETIRING/CONTINUING PARTNERS. WE WOULD LIKE TO REFER TO THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT, DELIVERED IN THE CASE OF A.N. NAIK (SUPRA): ' SECTION 45 OF THE INCOME - TAX ACT, 1961,I S A CHARGING SECTION..... THE ACT OF 1987 ALSO BROUGHT ON THE STATUTE BOOK A NEW SUB - SECTION (4) IN SECTION 45 OF THE ACT. THE EFFECT IS THAT THE PROF ITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRM'S INCOME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE. FROM A READING OF SUB - SECTION (4) ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 29 TO ATTRACT CAPITA L GAINS TAX WHAT WOULD BE REQUIRED WOULD BE AS UNDER : (1) TRANSFER OF CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS : (A) ON ACCOUNT OF DISSOLUTION OF A FIRM ; (B) OR OTHER ASSOCIATION OF PERSONS ; (C) OR BODY OF INDIVIDUALS ; (D) OR OTHER - WISE ; THE GAINS SHALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCIATION OR BODY OF PERSONS. THE EXPRESSION 'OTHERWISE' HAS TO BE READ WITH THE WORDS 'TRANSFER OF CAPITAL ASSETS.... IT IS NOW CLEAR THAT WHEN THE ASSET IS TRANSFERRED TO A PARTNER, THAT FALLS WITHIN THE EXPRESSION 'OTHERWISE' AND THE RIGHTS OF THE OTHER PARTNERS IN THAT ASSET OF THE PARTNERSHIP ARE EXTINGUISHED.' 5.3.3. FROM THE ABOVE, IT CAN SAFELY BE HELD THAT ALLOCATION OF ASSETS OF THE FIRM TO THE RETIRING PARTNERS IS THE BASIS FOR IN VOCATION OF PROVISIONS OF SECTION 45(4) .IN THE CASE UNDER CONSIDERATION, NEITHER THERE WAS ANY DISSOLUTION NOR OTHER EVENT TOOK PLACE THAT HAD AN EFFECT OF ALLOCATION OF EXCLUSIVE INTEREST IN ANY CAPITA L ASSET TO THE RETIRING PARTNERS. IN THESE CIRCUMSTANCES, FAA WAS JUSTIFIED IN HOLDING THAT CONDITIONS OF SECTION 45(4) WERE NOT FULFILLED. IN OUR OPINION THE FIRM OR THE CONTINUING PARTNERS WERE NOT LI ABLE TO BE TAXED UNDER THE HEAD 'CAPITAL GAINS', AS HELD BY THE FAA. RETIRING PARTNERS HAD RELINQUISHED THEIR RIGHTS IN THE ASSETS OF THE FIRM AND IN LIEU OF THAT FIRM HAD PAID THE RETIRING PARTNERS MONEY LYING IN THEIR CAPITAL ACCOUNT. OBVIOUSLY, ASSESSEE - FIRM HAD NOT TRANSFERRED ANY RIGHT IN CAPITAL ASSET TO THE RETIRING PARTNERS RATHER IT IS THE RETIRING PARTNERS WHO HAVE TRANSFERRED THE RIGHTS IN CAPITAL ASSETS IN FAVOUR OF THE CONTINUING PARTNERS. SO, EVEN IF CAPITAL GAIN HAS TO BE TAXED IT HAS TO BE I N THE HANDS OF THE RETIRING PARTNERS NOT IN THE CASE OF THE ASSESSEE - FIRM. 6. WE HAVE CONSIDERED THE CASES RELIED UPON BY THE DR AND THE AR.AS FAR AS MATTER OF GURUNATH TALKIES (SUPRA) IS CONCERNED, WE ARE OF THE OPINION THAT FACTS OF THE PRESENT CASE ARE DISTINGUISHABLE, AS HELD BY THE FAA. IN THE CASE UNDER CONSIDERATION ASSETS WERE NOT TAKEN OVER BY THE NEW PARTNERS. AS STATED EARLIER, SECTION 45 WAS AMENDED TO OVERCOME THE DIFFICULTIES FACED BY THE R EVENUE BECAUSE OF THE DECISIONS OF MALABAR FISHRIES AND KARTIKEYA SARABHAI (SUPRA). SO, IN OUR OPINION THEY ARE OF NO HELP AFTER INTRODUCTION OF SUB - SECTION 3 AND 4 TO THE SEC.45 OF THE ACT. CASE RELIED UPON BY THE AR SUPPORT THE VIEW TAKEN BY THE FAA. 6.1. AS THERE WAS NO TRANSFER OF A CAPITAL ASSET BY THE ASSESSEE - FIRM BY WAY OF DISTRIBUTION OR OTHERWISE IN THE AY UNDER CONSIDERATION, THEREFORE, WE DO NOT SEE ANY M/S. FINE DEVELOPERS REASON TO DISAGREE WITH THE LOGICAL FINDINGS GIVEN BY THE FAA. UPHOLDING HIS ORDER WE DECIDE THE GROUNDS AGAINST THE AO. IN THE RESULT, APPEAL FILED BY THE AO STANDS DISMISSED. ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 30 17. RIVAL CONTENTIONS HAVE BEEN HEARD AND REC ORD PERUSED. 18. WE HAVE ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LEARNED AR AND DR DURING THE COURSE OF HEARING BEFORE US. WE HAVE ALSO GONE THROUGH THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING ASSESSMENT YEAR 2008 - 09. FROM THE RECORD WE FOUND THAT A SSESSEE FIRM IS A BUILDER AND DEVELOPER CONSTITUTED VIDE PARTNERSHIP DEED ON 25.11.2005 WITH THE FOLLOWING PARTNERS AND PROFIT SHARING RATIOS . SR . NO . NAME OF PARTNER % HOLDING 1 SAPPHIRE LAND DEVELOPERS 60 2 VISION FINSTOCK PVT LTD 20 3 NISHA CAPITAL SERVICES PVT LTD 10 4 SURAKSHA DEVELOPERS PVT LTD 10 19. ON 28/11/2005 I.E. AY 06 - 07 ASSESSEE PURCHASED LAND LOCATED AT KURLA FROM M/S BHANDARY METALLURGICAL CORPORATION LTD FOR RS 28CRORES. THE L AND WAS SHOWN AS STOCK IN TRADE AND SHOWN AT BOOK VALUE OF RS . 39,27,19,547 AS ON 31.3.2008. 20. ON 6/7/ 2007 FALLING IN THE A.Y 08 - 09 , HDIL WAS ADMITTED TO PARTNERSHIP WHEREBY HDIL GOT 50% SHARE AND SHARE OF SAPPHIRE LAND DEVELOPERS W AS REDUCED FROM 60% TO 10%. ON 1/4/2008 REVALUATION TOOK PLACE AND LAND WAS VALUED AT RS 268,37,42,000/ - AS PER VALUATION REPORT OF M/S. VINOD GANDHI AND ASSOCIATES. ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 31 21. ON 27/5/2008 I.E. AY 09 - 10 VIDE DEED OF RETIREMENT AND RECONSTITUTION S APPHIRE LAND DEVELOPERS (CONTINUED WITH 10% SHARE) AND HDIL (CONTINUED WITH 90% SHARE). THE RETIRING PARTNERS WITHDREW AMOUNTS STANDING TO THE CREDIT OF THEIR ACCOUNTS. DURING THE YEAR ASSESSEE HAD SOLD FSI AND TDK FOR TOTAL OF RS 46,66,22,771/ - OBTAINED O N CONVEYANCE DATED 3/11/2008 BETWEEN ASSESSEE, HDIL AND SRA, I.E. SURRENDER OF LAND. FOR EARLIER AY 2008 - 2009, A.O. HAD APPLIED S.45(4) ON ADMISSION OF HDIL AS WELL AS ON RETIREMENT OF PARTNERS IN AY 09 - 10. THE CIT(A) DECLINED IN FAVOUR OF ASSESSEE. IN AN APPEAL FILED BY DEPARTMENT, T HE HON'BLE ITAT FOR AY 08 - 09 HAS HELD THAT S.45(4) WOULD NOT BE APPLICABLE, THUS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. THE ORDER OF THE TRIBUNAL FOR THE A.Y.2008 - 09 HAS ALREADY BEEN REPRODUCED HEREINABOVE. 22 . DURING THE Y EAR UNDER CONSIDERATION ALSO AO APPLIED SECTION 45(4) TO BOTH SITUATIONS I.E., ADMISSION OF HDIL ON 06/07/2007 AND RETIREMENT OF SOME PARTNERS ON 27/5/2008 BY CONSIDERING IT - AS TRANSFER OF LAND TO HDIL AND COMPUTED TOTAL CAPITAL GAINS OF RS 206,19,20,209/ - .[IDENTICAL ADDITION WAS MADE FOR AY 08 - 09 AS WELL] HE FURTHER TAXED RS 15,51,99,0207 - [IE RS 268,37,42,000 - 46,66,22,771 - 206,19,20,209] AS BUSINESS INCOME. 2 3 . BY THE IMPUGNED ORDER, CIT(A) DELETED BOTH THE ADDITIONS AGAINST WHICH REVENUE IS IN FURTHE R APPEAL BEFORE US. 24 . IN REVISED GROUND NO.1, REVENUE AGITATED THAT CIT(A) VIOLATED PRINCIPLE OF NATURAL JUSTICE. IN THIS REGARD, WE FOUND THAT THE LD CIT(A) HAS GIVEN AN OPPORTUNITY TO BOTH A.O. AS WELL AS SESSEE TO MAKE SUBMISSIONS AT A PPELLATE STAGE. REMAND REPORT WAS ALSO CALLED AND THE AO WAS ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 32 PRESENT IN THE COURSE OF HEARING. FURTHER, HE HAS ALSO RECORDED THAT THERE ARE NO ADDITIONAL EVIDENCE FILED BY ASSESSEE. REVENUE HAS NOT DEMONSTRATED THAT ANY ADDITIONAL EVIDENCE WAS FILED. ACCORDINGLY, WE DO NO T FIND ANY MERIT IN THE GROUND BY THE REVENUE. 2 5 . THE REVISED GROUND 2, 3(I) TO 3(IV), THE REVENUE HAS AGITATED THAT PROVISIONS U/S.45(4) IS APPLICABLE ON ADMISSION OF PARTNER, REVALUA TI ON OF ASSETS AND RETIREMENT OF PARTNER IN THE FACTS OF THE PRESENT C ASE. THE AO HAS DEALT WITH THE ISSUE IN PARA 14 PAGE 14 AND CIT(A) HAS DEALT WITH THE ISSUE IN PARA 4.3.3, PAGE 52. 2 6 . FROM THE RECORD, WE FOUND THAT I N AY 08 - 09, ASSESSING OFFICER HAD HELD THAT CONSIDERING THE FOLLOWING THREE EVENTS THERE WAS TRANSFER OF ASSET TO HDIL IN AY 08 - 09 ITSELF : I. ADMISSION OF HDIL ON 6/7/2007 II. MO U OF HDIL WITH MIAL DTD 15.10.2007 III. DEED OF RETIREMENT DATED 27.5.2008. 2 7 . ACCORDINGLY AO INVOKED S,45(4) AND TOOK VALUE OF LAND AT RS 226 CRORES AND WORKED OUT STCG OF RS 186.72 C RORES. THE SAID ADDITION WAS DELETED BY CIT(A). 2 8 . THE HON'BLE ITAT IN AY 08 - 09 VIDE ITS ORDER DATED 12/10/2012 AFTER CONSIDERING ADMISSION OF HDIL ON 6/7/2007 AND RETIREMENT OF SOME PARTNERS ON 27/5/2008 HELD THAT S.45(4) IS NOT APPLICABLE IN BOTH SITUA TIONS. THE HON'BLE ITAT HAS REBUTTED EACH AND EVERY CONTENTION RAISED BY AO IN ITS ORDER. ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 33 29 . IN ITS ORDER DATED 12/10/2012, THE TRIBUNAL HAVE DEALT WITH EACH AND EVERY OBJECTION OF THE AO AND WITH REGARD TO APPLICABILITY OF PROVISIONS OF SECTION 45(4) HEL D AS UNDER: - 'A BARE PERUSAL OF DEED OF ADMISSION (DTD. 06. 07. 2007) AND RETIREMENT DEED (DTD.27.05.2008) PROVE THAT ON BOTH THE OCCASIONS THERE WAS NO DISTRIBUTION OF ASSETS OF THE ASSESSEE - FIRM. ON 06.07.2007 HDIL WAS ADMITTED AS A NEW PARTNER IN OUR HUMBLE OPINION ADMISSION OF A NEW PARTNER TO THE EXISTING PARTNERSHIP - FIRM DOES NOT RESULT IN DISTRIBUTION OF ASSETS. SIMILARLY, ON 27TH MAY. 2008: WHEN THREE PARTNERS RETIRED AND REMAINING TWO PARTNERS CONTINUED THE BUSINESS OF THE FIRM; T HERE WAS NO REDISTRIBUTION OF ASSETS OF THE FIRM. AFTER GOING THROUGH THE ABOVE RETIREMENT DEED WE ARE OF THE OPINION THAT IT IS NOT A CASE WHERE FIRM WAS TAKEN OVER BY THE NEW PARTNER AND THUS PROVISIONS OF SECTION 45(4) OF THE ACT CAN BE I NVOKED.' 'FROM THE DATE OF PURCHASE OF THE PLOT FROM THE BMCL TILL 27.05.2008, WHEN THREE PARTNERS RETIRED, IT WAS THE ASSET OF THE FIRM AND THERE WAS NO CHANGE IN THE OWNERSHIP OF THE SAID PLOT.' AFTER CONSIDERING THE DECISION OF BOMBAY HIGH COURT IN A .N. NAIK 265 ITR 346 CONSIDERED BY THE AO, ITAT AT PARA 5 .3 .2 HELD 'AS STATED EARLIER, IN THE PRESENT CASE, - THERE WAS NO EXTINGUISHMENT OF RIGHTS OF ANY OF THE ASSETS OWNED BY THE FIRM. IN OTHER WORDS, CONTINUING PARTNERS HAD NOT TRANSFERRED AN Y RIGHTS OF THE PLOT OF THE LAND IN QUESTION IN FAVOUR OF THE RETIRING PARTNERS AND HENCE THERE WAS NO TRANSFER OF CAPITAL ASSET WITHIN THE MEANING OF SECTION 2(4 7 ] B Y THE FIRM TO THE RETIRING/CONTINUING PARTNERS. 3 0 . T HE ORDER PASSED BY AO DURING THE YEAR UNDER CONSIDERATION AT PARA 14.2 AND THE IMPUGNED ORDER PASSED BY CIT(A) AT PARA 4.2.2 CLEARLY STATES THAT SIMILAR ISSUE WAS PENDING BEFORE THE ITAT FOR THE A.Y.2008 - 09. NOW, IT IS CLEAR THAT TRIBUNAL HAS DECIDED TH E ISSUE IN FAVOUR OF THE ASSESSEE , MERELY BECAUSE QUESTION OF LAW HAS BEEN ADMITTED BY HONBLE HIGH COURT VIDE ORDER DATED 16/04/2014, IT CANNOT BE INFERRED THAT VIEW TAKEN BY TRIBUNAL WAS WRONG. WHEN THE TRIBUNAL HAS GIVEN FINDINGS ON FACTS CONSIDERING TH E RETIREMENT DEED, SAME VALUATION REPORT, AGREEMENT OF HDIL WITH MIAL AND SPECIFIC FINDING STATING THAT NEITHER AT THE TIME OF ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 34 ADMISSION NOR AT THE TIME OF RETIREMENT, S. 45(4) CAN BE APPLIED . ACCORDINGLY, WE FOLLOW THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE SINCE THE SAME IS ON THE IDENTICAL FACTS. 31 . WITHOUT PREJUDICE , WE OBSERVE THAT THE AO HAS DECIDED THE MATTER RELYING ON THE RATIO IN CIT V. GURUNATH TALKIES ( 2010) 328 ITR 59 ( KARN) (HC) WHICH IS NOT GOOD LAW IN VIEW OF LATER FULL BENCH JUDG ME NT OF THE SAME HIGH COURT IN CIT V. DYNAMIC ENTERPRISES (2013) 359 ITR 83 ( KARN) (FB) (HC) . 3 2 . IN CIT V DYNAMIC ENTERPRISES (2013) 359 ITR 83(KARN.)(FB.). IN THIS CASE ALSO P. FIRM HAD PURCHASED LAND. 5 PERSONS BECAME NEW PARTNERS AND AFTER A YEAR 3 OLD PARTNERS RETIRED AFTER REVALUATION BY TAKING CASH TOWARDS VALUE OF THEIR SHARE. AO HELD THAT THERE WAS TRANSFER OF ASSET FROM OLD FIRM TO NEW FIRM AND LIABLE TO CAPITAL GAIN TAX U/S 45(4). THE HIGH COURT HELD THAT S.45(4) IS NOT APP LICABLE AS NO ASSET IS TRANSFERRED BY THE FIRM TO THE PARTNERS. IT FURTHER HELD THAT THE DECISION IN CIT V. GURUNATH TALKIES (2010)328 ITR 59(KARN.) IS NOT A GOOD LAW. IT FURTHER HELD THAT THERE IS NO TAX EVASION DEVICE. THE TEST LAID DOWN IN ABOVE DECISI ON HAS BEEN ALSO APPLIED BY THE ITAT IN ASSESSEE OWN CASE FOR AY 08 - 09. 3 3 . IN CASE OF KESHAV & CO. VS. ITO 161 ITD 798, PUNE BENCH HELD THAT IF PARTNERSHIP FIRM CONTINUES AND RETIRED PARTNER HAS NOT RECEIVED ANY ASSET, PROVISIONS OF SECTION 45(4) WIL L NOT APPLY. 3 4 . IN VIEW OF THE ABOVE DISCUSSION AS WELL AS THE DECISION OF ITAT IN ASSESSEES OWN CASE, IT CANNOT BE SAID THAT THERE IS ANY TRANSFER OF ASSET ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 35 FROM ASSESSEE - FIRM TO HDIL TO ATTRACT PROVISIONS OF S.45(4) AS HDIL CONTINUES TO BE A PARTNER AND PARTNERSHIP FIRM CONTINUES TO EXIST IN THE EYES OF LAW. 3 5 . WE ALSO FOUND THAT THE DECISION RELIED ON BY LEARNED DR DURING THE COURSE OF HEARING IN CASE OF ITO VS. PARU D DAVE 110 ITD 410 HAVE ALREADY BEEN CONSIDERED BY THE TRIBUNAL IN ITS ORDER FOR THE A.Y.2008 - 09. 36 . WITH RESPECT TO GROUND NO.2 TAKEN IN THE REVISED GROUND OF APPEAL, THE ISSUE OF WHETHER KURLA LAND IS STOCK IN TRADE OR CAPITAL ASSET BECOMES ACADEMIC. THE LD CIT(A) HAS GIVEN ITS FINDINGS AT PARA 4.2.2 PG 19 - 20. WE FOUND THAT KURLA LAND I S STOCK IN TRADE AND SECTION 45(4) IS NOT APPLICABLE AS ASSESSEE HAD ALWAYS SHOWN THE SAID LAND AS STOCK IN TRADE. FURTHER SALE OF TDR ARISING ON ACCOUNT OF SURRENDER OF SAID LAND WAS OFFERED AS BUSINESS INCOME AND ACCEPTED AS BUSINESS INCOME. 37 . FOR THIS PURPOSE RELIANCE CAN BE PLACED ON THE FOLLOWING DECISIONS: - G. VENKATASWAMY NAIDU & CO V CIT (1959) 35 ITR 59 4 (SC) (610) SAATHI DEVELOPERS PVT. LTD., VS. ITO ITA NO.3240/M/2009, A.Y.2006 - 07 DT. 15/06/2011 P.319 TO 326 3 8 . AO HAS MADE AN ADDITION OF R S.15,51,99,020/ - TAXED AS BUSINESS INCOME ACCRUED ON TRANSFER OF LAND TO SRA BY TREATING LAND AS STOCK IN TRADE. THE AO HAS DEALT WITH THE ISSUE AT PARA 15.5.2 AT PAGE 19 AND CIT(A) HAS DEALT WITH THE ISSUE AT PARA 4.6 AT PAGE 77 OF HIS APPELLATE ORDER. IN ITS ORDER, AO HELD THAT IF KURLA LAND IS TREATED AS STOCK IN TRADE THAN INCOME OF ASSESSE ON TRANSFER OF LAND IS TO BE COMPUTED AS UNDER : - MARKET VALUE OF LAND AS PER VALUATION REPORT(A) - RS 268 CRORES BUSINESS INCOME OFFERED BY ASSESSEE(B) - RS 46 CRORES ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 36 A - B - RS 221 CRORES INCOME TAXED AS CAPITAL GAINS - RS 206 CRORES HENCE, INCOME TAXED AS BUSINESS INCOME (BALANCE) - RS 15 CRORE 39 . BEFORE A.O. ASSESSEE HAD GIVEN DETAILED SUBMISSION THAT M.V. OF LAND AS PER VALUATION REPORT IS NOT FMV OF LAND FOR SECTION 45(4). WE FOUND THAT VALUATION REPORT AS ON 1.4.2008 WAS ON THE BASIS OF TDR RATE OF RS 3,500/ - WHEREAS WHEN LAND WAS SURRENDERED TO SRA, TDR RATE WAS RS 1,050/ - . ASSESSEE ALSO GAVE VALUATION BY SUBSTITUTING TDR RATE PREVAILING IN MARCH 2009. TDR RATE IN MARCH WAS SUPPORTED BY NEWSPAPER SUCH AS TIMES OF INDIA AND DNA. ALSO TDR WAS SOLD AT ARMS LENGTH PRICE. HOWEVER, A.O. IN HIS ORDE R MERELY STATED THAT SALE OF TDR WAS NOT AT ARMS LENGTH WITHOUT REBUTTING THE SUBMISSIONS OF A SSESSEE. 4 0 . ASSESSEE HAS FILED DETAILED SUBMISSION BEFORE THE AO REGARDING MARKET VALUE OF TDR. FROM THE RECORD WE FOUND THAT IN ORIGINAL GROUNDS IT WAS THE CASE OF THE REVENUE THAT THERE WAS TRANSFER OF LAND TO HDIL. NOW IT IS CONTENDED THAT TAXABLE EVENT IS TRANSFER OF LAND TO SRA. AS PER OUR CONSIDERED VIEW IF TAXABLE EVENT IS TRANSFER OF LAND TO HDIL THEN NO ADDITION CAN BE MADE AS THERE IS NO TRANSFER OF KURLA LAND FROM ASSESSEE TO HDIL AS HELD BY HON'BLE ITAT FOR EARLIER YEAR IE., IF S.45(4) DOES NOT APPLY AS THERE IS NO TRANSFER OF LAND FROM ASSESSEE TO HDIL THEN EVEN BUSINESS INCOME DOES NOT ACCRUE . 4 1 . WITH RESPECT TO CONTENTION OF TRANSFER OF LAND TO SRA, WE OBSERVE THAT THERE IS NO PROVISION TO SUBSTITUTE NOTIONAL MARKET VALUE FOR COMPUTING BUSINESS INCOME. ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 37 42 . IT IS ALSO A MATTER OF RECORD THAT BOOKS OF ACCOUNTS SO MAINTAINED BY ASSESSEE WAS NOT REJECTED BY THE AO. FURTHERMORE PROV ISIONS OF SECTION 43CA IS PROSPECTIVE IN NATURE AND APPLICABLE FROM AY 2014 - 15.FOR THIS PURPOSE RELIANCE MAY BE PLACED ON NEELKAMAL REALTORS & ERECTORS INDIA (P.) LTD. V DCIT [2013] 145 ITD 217 (MUMBAI - TRIB.) AFFIRMED GIT VS. NEELKAMAL REALTROS & ERECTOR S INDIA P. LTD. (2017) 246 TAXMANN.COM 274 (BOM.)(HC) P. 314 TO 318 . 4 3 . IN THE CASE OF DISCOVERY ESTATES (P) LTD., (2013) 356 ITR 159 HONBLE DELHI HIGH COURT HAS HELD AS UNDER: - 'MOREOVER, THERE IS NO OTHER PROVISION IN THE ACT PERMITTING THE ASSESSING O FFICER TO ENHANCE THE PROFITS OR THE SALE PRICE EXCEPT SECTION 50C AND SECTION 92BA, SECTION 50C DOES NOT APPLY TO THE PRESENT CASE AS IT APPLIES ONLY TO A CASE OF CAPITAL GAINS. SECTION 92BA ALSO DOES NOT APPLY AS IT CAME INTO FORCE ONLY FROM THE ASSESS MENT YEAR 2012 - 13. MOREOVER, IT APPLIES ONLY TO SUCH DOMESTIC TRANSACTIONS AS MAY BE PRESCRIBED BY THE COMPETENT AUTHORITY.' 44 . WE ALSO OBSERVE THAT KURLA LAND SURRENDER TO SRA IS TA XED AS BUSINESS INCOME THAN SAID INCOME W ILL BECOME COST OF SALE OF FSI/TDR AND THUS THE ULTIMATE TAXABLE BUSINESS WILL BE SALE CONSIDERAT ION OF FSI/TDR AS DISCLOSED BY A SSESSEE . HOWEVER, SINCE PROVISIONS OF SECTION 45(4) CANNOT BE INVOKED IN RESPECT OF STOCK IN TRADE, THERE IS NO JUSTIFICATION I N THE ORDER OF AO. FURTHERMORE, THE OBSERVATION OF A.O. THAT THE TRANSACTIONS ARE SHAM CANNOT BE ACCEPTED IN VIEW OF ITAT ORDER IN ASSESS E E OWN CASE AND DECISION OF KARNATAKA HIGH COURT IN CIT V DYNAMIC ENTERPRISES(SUPRA). WE FURTHER OBSERVE THAT THE DECIS ION IN ITO V LAKE WOOD CONSTRUCTION CO (P) LTD ( 2014) 146 ITD 19 (MUM) (TRIB), ITA NO. 5038/MUM/2012 M/S. FINE DEVELOPERS 38 CANN OT BE APPLIED . THE FACTS IN THE CASE WAS ADDITION U/S 69 OF THE ACT AND THE TRIBUNAL AT 6 SET ASIDE THE MATTER . AS THERE IS NO RATIO LAID DOWN IN THE CASE AND FACTS ARE DIFFERENT HENCE CANNOT BE APPLIED TO THE FACTS OF THE ASSESSEES CASE. 45 . RESPECTFULLY, FOLLOWING THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE DATED 12/10/2012, VIS - A - VIS DETAILED FINDING RECORDED BY CIT(A) WHICH HAS NOT BEEN CONTROVERTED, ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A). 47. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 28 / 02 /201 8 S D/ - ( AMARJIT SINGH ) S D/ - ( R.C.SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 28 / 02 /201 8 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD F ILE. //TRUE COPY//