DCIT, Circle-16(2), Hyd, Hyderabad V. P Ravindra Reddy, Hyd, Hyderabad

ITA 660/HYD/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2524 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 21-06-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 09-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KPC RAO
• Assessee Lawyers: G KALYAN DAS
• Keywords: Capital asset; Salary income
• Section: 80C; 143(3); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 660/HYD/2016 ASSESSMENT YEAR: 2008-09 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 16(2), HYDERABAD. VS. P. RAVINDRA REDDY, HYDERABAD. PAN AFXPP 2428R (APPELLANT) (RESPONDENT) REVENUE BY : SHRI K.P.C. RAO ASSESSEE BY : SHRI G. KALYAN DAS & A. HARISH DATE OF HEARING : 29-09-2017 DATE OF PRONOUNCEMENT : 17-10-2017 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX(A) - 4, HYDE RABAD, DATED 05-02-2016 FOR AY 2008-09. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE IS A DIRECTOR IN M/S MTAR TECHNOLOGIES PVT. LTD., WHO RECEIVED SA LARY, CAPITAL GAINS AND OTHER SOURCES, FILED HIS RETURN OF INCOME FOR THE AY 2008-09 ON 31/07/2008 ADMITTING A TOTAL INCOME OF RS. 6,69, 63,432/-. THE RETURN WAS PROCESSED U/S 143(1) ON 22/08/2009. SUBS EQUENTLY, THE AO BELIEVED THAT THE INCOME OF THE ASSESSEE HAD ESC APED ASSESSMENT TO TAX AND HENCE, NOTICE U/S 148 WAS ISS UED AND ASSESSMENT WAS COMPLETED U/S 143(3) RWS 147 OF THE ACT ON 19/03/2014 BY ADDING AN AMOUNT OF RS. 8,22,17,952/- ON ACCOUNT OF LONG TERM CAPITAL GAINS. 2 ITA NO. 660/H/16 P. RAVINDRA REDDY 2.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO OBSERVED THAT THE ASSESSEE HAD RECEIVED AN AMOUNT OF RS. 8,2 2,17,952/- FROM M/S MONTAGE MANUFACTURERS, ON GETTING RETIRED AS A PARTNER DURING THE PREVIOUS YEAR RELEVANT TO AY UNDER CONSIDERATION. O N POINTING OUT THE PROPOSED ADDITION ON THIS ACCOUNT UNDER THE HEAD CA PITAL GAINS, THE ASSESSEE, INTER-ALIA, SUBMITTED THAT HAVING REGARD TO THE LAW AND FACTS THE QUESTION FOR TRANSFER OF ASSET BY THE FIRM IN F AVOUR OF THE RETIRING PARTNER DOES NOT GIVE RISE TO CAPITAL GAINS AND IN VIEW OF THE VARIOUS DECISIONS, THE QUESTION OF DETERMINATION OF CAPITAL GAINS AND ASSESSMENT OF SUCH CAPITAL GAINS IN THE HANDS OF TH E ASSESSEE IS AGAINST LAW AND THEREFORE, THE PROCEEDINGS FOR MAKI NG ADDITION ARE NOT WARRANTED. 2.2 HOWEVER, AO HAD NOT ACCEPTED THE CONTENTIONS OF THE ASSESSEE ON THE GROUND THAT AS PER SECTION 45(1) OF THE ACT, ANY PROFITS OR GAINS ARISING FROM THE TRANSFER OF CAPITAL ASSET EFFECTED IN THE PREVIOUS YEAR SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD CA PITAL GAINS AND SHALL BE DEEMED TO BE INCOME OF THE PREVIOUS YEAR I N WHICH THE TRANSFER TOOK PLACE AND CONCLUDED THAT SINCE THE RI GHT IN A FIRM IS CAPITAL ASSET WITHIN THE MEANING OF SECTION 2(24) O F THE ACT AND EXTINGUISHMENT OF RIGHT IN SUCH ASSET BY WAY OF RET IREMENT IS A TRANSFER AS PER SECTION 2(47) OF THE ACT. WHILE DIS TINGUISHING THE CASES RELIED UPON BY THE ASSESSEE, AO RELIED ON THE CASE LAWS OF BISHANLAL KANODIA VS. CIT [2002] 257 ITR 449 (DELHI ) AND SMT. P. GIRIJA REDDY VS. ITO TO CONCLUDE THAT THE AMOUNT RE CEIVED BEING CAPITAL ASSET, BY A PARTNER FROM THE FIRM UPON RETI REMENT, AS A PROFIT OR GAIN IS TAXABLE. ACCORDINGLY, HE ADDED THE ENTIRE A MOUNT RECEIVED BY THE ASSESSEE ON THE EVENT OF RETIREMENT FROM THE AB OVE FIRM, UNDER THE HEAD CAPITAL GAINS. 3 ITA NO. 660/H/16 P. RAVINDRA REDDY 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE CIT(A) AND RAISED ADDITIONAL GROU NDS OF APPEAL, WHICH ARE AS UNDER: 1. WITHOUT PREJUDICE TO THE CONTENTIONS MADE IN THE GROUNDS OF APPEAL, THE APPELLANT STATES THAT THE LD. AO IS NOT CORRECT IN ASSESSING THE CAPITAL GAINS ALLEGED TO ARISE IN RES PECT OF GOODWILL AT RS.8,22,17,952/- AGAINST THE CORRECT AM OUNT OF GOODWILL RECEIVED BY THE APPELLANT AT RS.7, 98,58, 639/-. 1.2. THE LD. AO FAILED TO NOTE THAT THE AMOUNT OF G OOD WILL ASSESSED BY THE LD. AO AT RS.8,22,17,952/- INCLUDED REFUND OF CAPITAL RS.26,29,313/- AVAILABLE TO THE CREDIT OF T HE APPELLANT AND THEREFORE GOODWILL RECEIVED ON RETIREMENT BE RE DUCED BY RS.26.29 LAKHS. 2. THE LD. AO ERRED IN NOT ALLOWING CONTRIBUTION MA DE TOWARDS PROVIDENT FUND RS.1,00,000/-. THE APPELLANT HAD CON TRIBUTED FROM OUT OF THE SALARY INCOME RS.4.32 LAKHS TOWARDS PROVIDENT FUND AND THE CLAIM WAS RESTRICTED TO RS.1,00,000/- U/S. 80C OF THE ACT IN RETURN OF INCOME. 3. THE LD. AO FAILED TO NOTE THAT THE PF CONTRIBUTI ON WAS DISCLOSED IN TDS CERTIFICATE FORM NO. 16 AND ALSO I N THE COMPUTATION OF TOTAL INCOME AND RETURN OF INCOME. T HE APPELLANT THEREFORE STATES THAT CONTRIBUTION TOWARDS PROVIDEN T FUND RS.1,00,000/- BE ALLOWED U/S. 80C OF THE ACT. 4. THE CIT(A) REMANDED THE SAID GROUNDS TO AO, HOWE VER, THERE WAS NO REPLY FROM THE AO. 4.1 THE ASSESSEE DURING THE APPEAL PROCEEDINGS SUBM ITTED THAT THE GOODWILL CREATED BY THE FIRM M/S MONTAGE MANUFACTUR ER THROUGH ENTRIES WITHOUT INCURRING ANY COST AND PAYMENT OF S HARE OF THE GOODWILL TO THE ASSESSEE, A RETIRED PARTNER, CANNOT BE TAXED FOR CAPITAL GAINS IN THE HANDS OF THE ASSESSEE. FOR THI S PROPOSITION, HE RELIED ON THE CASE OF CHALASANI VENKATESWARA RAO VS . ITO WHEREIN IT WAS CATEGORICALLY HELD THAT IN THE FACT AND IN THE CIRCUMSTANCES OF THE CASE CAPITAL GAINS CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE. THE ASSESSEE ALSO REFERRED TO THE PROVISIONS OF SECTION 14 OF INDIAN PARTNERSHIP ACT. 4 ITA NO. 660/H/16 P. RAVINDRA REDDY 4.2 AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) DELETED THE ADDITION MADE BY THE AO ON ACCOUNT OF L ONG TERM CAPITAL GAINS. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE CIT(A) IS ERRONEOUS IN LAW AND ON FACTS OF THE CASE. 2. THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 8,22,17,952/- TOWARDS CAPITAL GAIN ON GOODWILL. 6. THE LD. DR BESIDES RELYING ON THE ORDER OF AO, R ELIED ON THE DECISION OF THE COORDINATE BENCH OF ITAT, HYDERABA D IN THE CASE OF SMT. GIRIJA REDDY P VS. ITO, ITA NO. 297/HYD/2012 V IDE ORDER DATED 25/05/2012 WHEREIN IT WAS HELD THAT THERE WAS A TRA NSFER OF INTEREST OF THE RETIRING PARTNER OVER THE ASSETS OF THE PARTNER SHIP FIRM ON HER RETIREMENT AND, THEREFORE, THERE WAS A LIABILITY TO TAX ON ACCOUNT OF CAPITAL GAIN. 7. ON THE OTHER HAND, LD. AR RELIED ON THE ORDER OF THE CIT(A) AND RELIED ON THE DECISION OF THE COORDINATE BENCH IN T HE CASE OF ACIT VS. SRI N. PRASAD IN ITA NO. 1200/HYD/2010, ORDER DATED 27/01/2014. 8. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE DECISIONS OF THE COORDINAT E BENCHES CITED BY BOTH THE COUNSELS. THE AO MADE THE ADDITION OF AN A MOUNT OF RS. 8,22,17,952/- RECEIVED BY THE ASSESSEE FROM M/S MON TAGE MANUFACTURERS ON GETTING RETIRED AS A PARTNER DURIN G THE PREVIOUS YEAR UNDER CONSIDERATION BY HOLDING THAT THE AMOUNT RECE IVED BEING CAPITAL ASSET, BY A PARTNER FROM THE FIRM UPON RETIREMENT, AS A PROFIT OR GAIN IS TAXABLE, FOR WHICH HE RELIED ON THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF BISHANLAL KANODIA VS. CIT (SUP RA) AND ITAT, HYDERABAD BENCH IN THE CASE OF SMT. P. GIRIJA REDDY VS. ITO (SUPRA). WHEREAS CIT(A) RELYING ON THE DECISION IN THE CASE OF CHALASANI 5 ITA NO. 660/H/16 P. RAVINDRA REDDY VENKATESWARA RAO VS. ITO, ON WHICH RELIANCE PLACED BY THE ASSESSEE, HAS DELETED THE ADDITION. 8.1 IN THE CASE OF SRI N. PRASAD (SUPRA), THE COORD INATE BENCH RELYING ON THE DECISION OF THE HONBLE JURISDICTION AL HIGH COURT IN THE CASE OF CHALASANI VENKATESWARA RAO, 25 TAXMAN.COM 3 78, UPHELD THE ORDER OF THE CIT(A) DISMISSING THE GROUNDS RAIS ED BY THE DEPARTMENT, BY OBSERVING AS UNDER: 17. HOWEVER, IT APPEARS THE DECISION OF INCOME-TAX APPELLATE TRIBUNAL , HYDERABAD BENCH IN CASE OF DOORDANA KHATOON VS. ITO (SUPRA) WAS NOT PLACED BEFORE THE BENCH. THAT BESIDES THE AFORESAID DECIS ION OF INCOME-TAX APPELLATE TRIBUNAL IN CASE OF SMT. GIRIJ A REDDY WAS PRIOR TO THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN CASE OF CHALASANI VENKATESWARA RAO VS. ITO (SUPRA). THAT APART, A READING OF CLAUSE 4 OF THE DEED OF RETIREMENT MAKES IT CLEAR THAT THE AMOUNT OF RS.1.25 CORES WAS PAID TO THE ASSESSEE TOWARDS HIS SHARE CAPITAL AND NOT FOR RELINQUISHING OR EXTINGUISHING HIS RIGHTS OVER ANY ASSETS OF THE FIRM. THE TERM GOODWILL, IN OUR VIEW HAS BEEN LOOSELY USED IN THE AFORESAID CLAUSE. FURTHERMORE, A PLAIN READING OF THE CLAUSE 4 WILL NOT IN ANY MANNE R INDICATE THAT PAYMENT OF RS.25 LAKHS WAS TOWARDS TRANSFER OF GOODWILL AS SUGGESTED BY THE ASSESSING OFFICER. THEREFORE, CONSIDERING TOTALITY OF FACTS AND THE CIRCUMSTANCES OF THE CASE AND APPLYING THE RATIO LA ID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CHALASANI VENKATESARA RAO (SUPRA), WHICH IS BIN DING ON US, WE ARE OF THE VIEW THAT THE ORDER PASSED BY THE CIT (A) NEEDS TO BE UPHELD. ACCORDINGLY, WE DISMIS S THE GROUNDS RAISED BY THE DEPARTMENT. 8.2 IN THE ABOVE DECISION, SMT. GIRIJA REDDY CASE ( SUPRA) WAS ALSO CONSIDERED AND DISTINGUISHED. LD. DR HEAVILY RELIED ON THE DECISION OF SMT. GIRIJA REDDY (SUPRA) CONSIDERING THE FACT THAT SMT. GIRIJA REDDY WAS ALSO ONE OF THE RETIRING PARTNER IN THE SAME FI RM FROM WHICH THE ASSESSEE HAS RETIRED AT THE SAME TIME. SINCE SMT. G IRIJA REDDY CASE WAS ADJUDICATED PRIOR TO THE HONBLE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF CHALASANI VENKATESWARA RAO (SUPRA), THE HIGH 6 ITA NO. 660/H/16 P. RAVINDRA REDDY COURT DECISION IS BINDING ON US OVER THE ITAT DECIS ION. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH IN THE CASE OF SRI N. PRASAD (SUPRA), WE UPHOLD THE ORDER OF TH E CIT(A) AND DISMISS THE GROUNDS RAISED BY THE REVENUE. 9. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. PRONOUNCED IN THE OPEN COURT ON 17 TH OCTOBER, 2017. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RA HMAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 17 TH OCTOBER, 2017. KV COPY TO:- 1) DCIT, CIRCLE 16(2), 7 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 2) SRI P. RAVINDRA REDDY, 7-1-214/12M AMEERPET, HYD 500 016 3) CIT(A) 4, HYDERABAD 4 PR. CIT 4, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./ P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER