KUNTAL J DAVE, MUMBAI V. ASST CIT 11(2), MUMBAI

ITA 6981/MUM/2011

• Counselvise Citation: 698119914 RSA 2011
• Duration Of Justice: 1 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 08-07-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 14-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURINDER JIT SINGH
• Keywords: Capital asset; Cost of acquisition; Capital receipt
• Section: 2(14)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A, MUMBAI BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 6981/MUM/2011 ASSESSMENT YEAR : 2008-09 MR. KUNTAL J. DAVE 517, SIR VITHALDASCHAMBERS 16, MUMBAI SAMACHAR MARG FORT MUMBAI-400 001. PAN NO.AACPD 3035 E VS. ACIT - 11(2) AAYAKAR BHAVAN M.K. ROAD MUMBAI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIJAY MEHTA REVENUE BY : SHRI SURINDER JIT SI NGH DATE OF HEARING : 09/07/2013 DATE OF PRONOUNCEMENT : 28 / 0 8 /2013 O R D E R PER B. RAMAKOTAIAH, AM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R OF CIT(A)-3, MUMBAI DATED 26.08.2011. THE ISSUE IN THIS APPEAL IS ABOUT CHARGEABILITY OF AMOUNTS RECEIVED FROM OTHER CONTINUING PARTNERS BY THE RETI RED PARTNER (ASSESSEE ) FROM THE FIRM, PARTICULARLY IN THE NATURE OF RIGHT TO SH ARE IN PARTNERSHIP (GOODWILL). 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS :- 1. A) THE LD. CIT(A)-III ERRED IN CONFIRMING THE UNWARRANTED AND ILLEGAL ADDITIONS MADE BY ACIT, RANGE-11(2), MUMBAI OF THE AMOUNTS OF RS.39,60,000/- AND RS.5,40,000/- RECEIVED BY THE AP PELLANT FROM THE FIRM DALAL & SHAH, MUMBAI AND DALAL & SHAH, AHMEDABAD BY CONFIRMING THE TREATMENT OF THE SAID AMOUNT AS SHORT TERM CAPITAL GAIN . ITA NO.6981/M/11 A.Y.08-09 2 B. THE APPELLANT MOST RESPECTFULLY FURTHER SUBMITS THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS THE LAW, THE A MOUNT OF RS.39,60,000/- AND OF RS.5,40,000/- RECEIVED BY TH E APPELLANT FROM THE FIRM OF DALAL & SHAH, MUMBAI AND DALAL & SHAH, AHME DABAD, RESPECTIVELY SHOULD NOT BE TAXED AS CAPITAL GAINS. II. THE APPELLANT PRAYS FOR RELIEF. DURING THE COURSE OF APPEAL ASSESSEE RAISED THE FOL LOWING ADDITIONAL GROUND, BEING LEGAL IN NATURE. THE SAME WAS ADMITTED. 1. THE LD. CIT(A) OUGHT TO HAVE HELD THAT AO HAS E RRED IN COMPUTING CAPITAL GAINS OF RS.51,06,697/-(RS.45,00,000/-) FOR GOODWILL + RS.6,06,697/- FOR ASSETS) WITHOUT APPRECIATING THAT THE APPELLANT HA ALREADY OFFERED CAPITAL GAIN OF RS.6,06,607/- IN TH E COMPUTATION OF INCOME WHILE DISCLOSING CAPITAL GAINS AT RS.6,67,842/-. 4. BRIEFLY STATED FACTS ARE, THE ASSESSEE WAS A PAR TNER IN DALAL & SHAH, MUMBAI AND DALAL & SHAH AHMEDABAD WHO HAS RETIRED FROM THESE PARTNERSHIP FIRM ON 11 TH DAY OF AUGUST 2007 W.E.F. 31-07-07. THE AO NOTED THAT THE FOLLOWING AMOUNTS WERE RECEIVED ON HIS RETIREMENT F ROM THE AFORESAID FIRMS. S.NO. NAME OF THE FIRM RETIREMENT DEED DATED RIGHT TO SHARE IN PARTNERSHIP (GOODWILL) (RS.) RIGHT TO SHARE IN PARTNERSHIP ASSETS (GOODWILL) (RS.) TOTAL AMOUNT RECEIVED BY THE ASSESSEE (RS.) 1. DALAL & SHAH MUMBAI 11.08.2007 39,60,000 10,64,000 50,24,000 2. DALAL & SHAH AHMEDABAD 11.08.2007 5,40,000 72,000 6,12,000 TOTAL 56,36,000 HOWEVER, THE ASSESSEE HAS CLAIMED THESE RECEIPTS AS CAPITAL RECEIPTS AND DID NOT OFFER THE SAME FOR TAXATION. THE ASSESSEE HAS A LSO RELIED UPON THE DECISION OF HONBLE SUPREME COURT, DELIVERED IN THE CASE OF MALABAR FISHERIES CO. V/S. 120 ITR 46 @ 59. IT WAS ALSO NOTICED FROM THE PERUS AL OF INCOME & EXPENDITURE A/C. THAT THE ASSESSEE HAS DEBITED A SUM OF RS. 3,0 0,000/- AND CLAIMED THE SAME AS EXPENDITURE ON ACCOUNT OF IRRECOVERABLE INV OICES RECEIVED BY DALAL & SHAH, MUMBAI. THE AO HAS REFERRED THE MATTER TO TH E JCIT. RG.11(2) FOR ITA NO.6981/M/11 A.Y.08-09 3 SEEKING GUIDELINES AND DIRECTION WITHIN THE MEANING OF SECTION 144A OF THE ACT. THE JCIT. HAS EXAMINED THE ISSUE AND ISSUED HIS DIR ECTIONS VIDE ORDER DATED 23.12.2010 WHICH WAS REPRODUCED BY THE AO IN THE AS SESSMENT ORDER. THE JCIT OBSERVED THAT THE CASE LAW QUOTED BY THE ASSES SEE ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE. SINCE, IN ALL CASE LAW, T HERE WAS PAYMENT BY THE FIRM TO THE RETIRED PARTNER OR PAYMENT TO THE PARTNERS O N DISSOLUTION OF THE FIRM. IN THE INSTANT CASE, THE FACTS ARE SOMEWHAT DIFFERENT. THE JCIT HAS REFERRED CLAUSE 9(A) OF THE PARTNERSHIP DEED OF DALAL & SHAH, MUMBA I DATED 31.3.2005 AND NOTED THAT THE ASSESSEE IS ONE OF THE PARTNER WHO W AS ENTITLED TO SHARE IN THE NET PARTNERSHIP ASSETS AND THEREFORE, HE WAS REQUIR ED TO MAINTAIN THE AGGREGATE CREDIT BALANCE IN HIS CAPITAL ACCOUNT I.E . BLOCKED AMOUNT. THUS, IT IS CLEAR THAT THE ASSESSEE HAD CONTRIBUTED TOWARDS SUC H BLOCKED AMOUNT AT THE TIME BECOMING PARTNER OF THE FIRM IN ORDER TO ACQUI RE THE NON-SEPARABLE RIGHTS AS PER CL.9(A) OF THE PARTNERSHIP DEED. THE RELEVAN T CLAUSE IN OTHER PARTNERSHIP DEED DATED 1.4.2005 IN RESPECT OF DALAL & SHAH, AHM EDABAD ARE ALSO IDENTICAL. THE CLAUSE 16 OF THE PARTNERSHIP DEED SPECIFIES THE CONDITIONS REGARDING EXIT OF A PARTNER DUE TO DEATH OR RETIREMENT AND THE PAYMEN TS TO BE MADE TO HIM OR THE NOMINEE OR LEGAL HEIR AS THE CASE MAY BE. THE J CIT HAS REPRODUCED CL.16 OF THE PARTNERSHIP DEED IN HIS DIRECTIONS WHICH WERE R EPRODUCED BY THE AO IN THE ASSESSMENT ORDER AT PAGE 9 & 10. THE JCIT THEREFORE , CONCLUDED THE AMOUNT STANDING IN THE CAPITAL ACCOUNT OF THE RETIRING PAR TNERS AND HIS SHARE IN THE NET PROFIT, TILL THE DATE OF HIS RETIREMENT TO BE PAID BY THE FIRM AND THE PARTNERS PASSES ON ARE UNDER OBLIGATION TO PAY THE RETIRING PARTNERS HIS SHARE OF SURPLUS IN THE ESTIMATED VALUE OF THE NET PARTNERSHIP ASSET S OVER THE BLOCKED VALUE AND THE VALUE OF RIGHTS INTO SHARE CAPITAL (GOODWILL). THE ASSESSEE RETIRED FROM BOTH THE FIRMS AS PER DEED OF RETIREMENT EXECUTED ON 1.8 .2007, 23.7.2007 RESPECTIVELY AND CLAUSES OF BOTH THE AGREEMENTS ARE IDENTICAL /EXCEPT FOR MINOR NECESSARY CHANGES. IT HAS BEEN MENTIONED IN CLAUSE 2 AS UNDER:_ PURSUANT TO CLAUSE 16 OF THE DEED OF PARTNERSHIP DA TED 3RD NOVEMBER, 2006, THE SHARE IN THE PARTNERSHIP OF THE RETIRING PARTNER, ALL ITA NO.6981/M/11 A.Y.08-09 4 AND ANY EFFECTS IN THE SAID SHARE AND ALL AND ANY T ITLES, INTERESTS, CLAIMS AND DEMANDS WHATSOEVER OF THE RETIRING PARTNER IN T HE ABSENCE OF ANY NOMINATION IS TO PASS ON TO THE CONTINUING PARTNERS IN THEIR RESPECTIVE PROPORTIONS IN THE RIGHT TO SHARE IN THE PARTNERSHI P (GOODWILL). IN TERMS OF THE SAME, IT IS NOW AGREED THAT IN FULL AND FINAL SETTLEMENT OF THE RIGHTS OF KUNTAL DAVE, HE HAS BEEN PAID ON OR B EFORE THE DATE OF EXECUTION OF THESE PRESENTS THE FOLLOWING SUMS: (A) VALUE OF THE RETIRING PARTNERS RIGHT TO SHARE IN THE PARTNERSHIP (GOODWILL) AND THE RIGHT TO SHARE IN THE NET PARTNE RSHIP ASSETS AS DEFINED IN CLAUSE 9(A) OF THE DEED OF PARTNERSHIP DATED 3RD NO VEMBER, 2006, WHICH IS MUTUALLY AGREED IN TERMS OF THE SAID DEED AT RS. 39 ,60,000/- AND RS. 10,64,000/- RESPECTIVELY. (C ) UNPAID INTEREST IN TERMS OF THE PARTNERSHIP DE EDS FROM TIME TO TIME ON THE KUNTAL DAVE CAPITAL ACCOUNT FROM 1ST APRIL, 200 6 UPTO 31ST JULY, 2007 AMOUNTING TO RS. 1,37,569/-. IT IS FURTHER AGREED IN TERMS OF CLAUSE 16 OF THE A FORESAID PARTNERSHIP DEED DATED 3RD NOVEMBER 29006 THAT THE SUM AS AGREED TOW ARDS (A) ABOVE RS. 39,60,000/- AND RS. 10,64,000/- RESPECTIVELY IS DEB ITED TO THE FOLLOWING SPECIFIED PARTNERS IN THE FOLLOWING RATIO IN WHICH THE AFORESAID SHARE OF THE RETIRING PARTNER PASSES ON TO THEM. SPECIFIED PARTNERS: SHARE IN THE PARTNERSHIP FIRM 1. MR. ASHISH 3. 06% 2. MR. SHISHIR 3. 06% 3. MR. ANISH 2. 38% AGGREGATING TO 8.50% IN VIEW OF THE ABOVE, IT IS CLEAR FROM CLAUSES OF T HE DEED OF RETIREMENT THAT 3 PARTNERS VIZ. MR. ASHISH S. DALAL, MR. SHISHIR S. D ALAL AND SHRI ANISH PRAFUL AMIN, TOOK OVER THE ASSESSEES SHARE IN THE PARTNER SHIP FIRM ON HIS RETIREMENT. THUS, THESE CONTINUING PARTNERS, IN OTHER WORDS, P URCHASED THE SHARE OF RETIRING PARTNERS I.E. ASSESSEE FOR THE AMOUNT OF R S. 39.60 LAKHS AND RS. 10.64 LAKHS IN RESPECT OF DALAL & SHAH, MUMBAI AND RS. 5. 40 LAKHS + RS. 72,000/- IN RESPECT OF DALAL & SHAH, AHEMDABAD. THE PAYMENTS IN RESPECT OF TRANSFER OF ITA NO.6981/M/11 A.Y.08-09 5 ASSESSEES RIGHT IN THE PARTNERSHIP WERE MADE BY 3 CONTINUING PARTNERS AND NOT BY THE FIRM. THEREFORE, THERE IS TRANSFER OF RIGHT FROM ASSESSEE TO THESE 3 CONTINUING PARTNERS AS ALREADY MENTIONED IN THE PAR TNERSHIP DEED. RIGHT IN THE SHARE OF THE ASSESSEE IN THE PARTNERSHIP DEED COMPR ISES OF THE INHERENT NON- SEPARABLE RIGHTS . THEREFORE, WHAT HAS BEEN TRANSFERRED BY THE ASSESSE E WAS SHARE IN THE PARTNERSHIP FIRM AT THE TIME OF RETIRE MENT. 4.2 THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN IN RESPECT OF SALE PROCEEDS OF RS. 10, 64,000/- AND RS. 72,000/- RECEIVED FROM THE PARTNERS OF M/S. DALAL & SHAH, MU MBAI AND AHMEDABAD. HE HAS SHOWN THE COST OF ACQUISITION AT RS. 5,16,150/- AND RS. 13,153/- AS ON 1.4.2005 RESPECTIVELY. THESE ARE THE AMOUNTS PAID B Y THE ASSESSEE TO THE FIRMS AT THE TIME OF BECOMING PARTNER OF THE SAID FIRMS A PART FROM HIS CONTRIBUTION TO THE CAPITAL ACCOUNT BLOCKED AMOUNT. IT MAY BE MEN TIONED HERE THAT THE ASSESSEE AFTER MAKING THE PAYMENTS OF THESE AMOUNTS OF RS. 5,16,150/- AND RS. 13,153/- RESPECTIVELY HAS ACQUIRED THE RIGHTS I N THE PARTNERSHIP DEED (NOT ONLY HIS RIGHT TO SHARE IN PARTNERSHIP ASSET BUT AL SO THE OTHER NON SEPARABLE RIGHT). THEREFORE, THIS COST OF ACQUISITION ALSO PE RTAINS TO HIS RIGHT TO SHARE IN THE PARTNERSHIP (GOODWILL). THE AO NOTED THAT IN VIEW OF ABOVE ASPECT, THERE IS TRANSFER OF ASSESSEES RIGHT TO SHARE IN PARTNERSHI P TO THE CONTINUING PARTNERS THOUGH THE SHARE IN PARTNERSHIP GOODWILL AND SHARE IN NET PARTNERSHIP ASSET ARE VALUED INDEPENDENTLY. THE TOTAL CONSIDERATION FOR TRANSFER OF ASSESSEES RIGHT TO SHARE IN PARTNERSHIP IS THEREFORE RS. 50,2 4,000/- (39,60,000 + 10,64,000) IN RESPECT OF M/S. DALAL & SHAH, MUMBAI AND RS.6,12,000/- (5,40,000 + 72,000) IN RESPECT OF MIS. DALAL & SHAH , AHMEDABAD. THE SHORT TERM CAPITAL GAIN IS THEREFORE WORKED OU T AS UNDER :- (A) IN RESPECT OF TRANSFER OF RIGHT TO SHORE IN M/S . DALAL & SHAH, MUMBAI SALE PROCEEDS RS. 50,24, 000/- LESS: COST OF ACQUISITION RS. 5, 16, 15 0/- SHORT TERM CAPITAL GAIN RS. 45,07,850/ - ITA NO.6981/M/11 A.Y.08-09 6 (B) IN RESPECT OF TRANSFER OF RIGHTS TO SHARE IN M/ S. DALAL & SHAH, AHMEDABAD. SALE PROCEEDS RS. 6,12 ,000/- LESS: COST OF ACQUISITION RS. 13,15 3/- SHORT TERM CAPITAL GAIN RS. 5,98,847/ - 4.3 ALTERNATIVELY, IT WAS FURTHER CONSIDERED THAT THE AMOUNTS OF RS. 39,60,000/- AND RS. 5,40,000/- HAVE TO BE BROUGHT T O TAX AS CAPITAL GAIN ON TRANSFER OF GOODWILL BY TAKING THE COST OF ACQUISIT ION AS RS. NIL. THE ASSESSEE HAS SUBMITTED A COPY OF THE VALUATION OF GOODWILL M UTUALLY AGREED BY THE PARTNERS OF THE FIRMS. THE TOTAL AMOUNT OF RS. 45,0 0,000/- HAS BEEN MUTUALLY ARRIVED AT AS THE VALUATION OF ASSESSEES SHARE OF GOODWILL IN DALAL & SHAH, MUMBAI AND M/S. DALAL & SHAH, AHMEDABAD AND EQUAL A MOUNT WAS RECEIVED BY THE ASSESSEE FROM THREE CONTINUING PARTNERS OF T HOSE FIRMS TOWARDS SUCH TRANSFER OF ASSESSEES RIGHT IN GOODWILL OF THOSE F IRMS. THE ASSESSEE HAS STATED THAT THE COST OF ACQUISITION OF RS.5, 16, 150/- AND RS. 13,153/- WERE IN RESPECT OF HIS RIGHT TO SHARE IN THE PARTNERSHIP ASSET IN M /S. DALAL & SHAH, MUMBAI AND M/S. DALAL & SHAH, AHMEDABAD RESPECTIVELY AND T HAT THESE AMOUNTS ARE NOT FOR ACQUISITION OF HIS SHARE IN GOODWILL OF THO SE FIRMS. HE HAS SEPARATELY COMPUTED THE CAPITAL GAINS IN RESPECT OF TRANSFER O F HIS SHARE IN THE PARTNERSHIP ASSETS. CONSIDERING THIS TRANSFER OF HIS SHARE IN G OODWILL OF THESE FIRMS AND THE COST OF ACQUISITION OF SUCH GOODWILL HAS TO BE TAKE N AT RS. NIL BY INVOKING PROVISIONS OF SECTION 55(2) (A), THEREFORE, THE CAP ITAL GAINS IN RESPECT OF TRANSFER OF ASSESSEE S SHARE IN GOODWILL FOR BOTH THE FIRMS TAKEN TOGETHER WILL BE RS. 45,00,000/-. THEREFORE, THIS AMOUNT OF CAPITAL GAIN OF RS. 45,00,000/- ALONG WITH CAPITAL GAIN OF RS.6,06,697/- DECLARED BY THE ASSESSEE ON ACCOUNT OF TRANSFER OF HIS SHARE IN PARTNERSHIP ASSET WILL HAV E TO BE BROUGHT TO TAX. THE TOTAL SHORT TERM GAIN WILL THUS BE RS. 51,06,697/-. 5. ASSESSEE CONTESTED BEFORE THE LD.CIT(A) THAT THE AMOUNTS RECEIVED FROM THE FIRM ON RETIREMENT IS NOT TAXABLE AND RELIED ON VARIOUS CASE LAW. FURTHER, ON THE ALTERNATE CONTENTION THAT GOODWILL IS TAXA BLE IN VIEW OF SECTION 55(2)(A). ITA NO.6981/M/11 A.Y.08-09 7 IT WAS SUBMITTED THAT THE SAME IS ALSO NOT APPLICAB LE AS ASSESSEE FIRM IS A PROFESSIONAL FIRM AND GOODWILL FROM BUSINESS ONLY CAN BE TAXED UNDER THAT PORTION. 6. AFTER CONSIDERING THE DETAILED DISCUSSIONS OF TH E ASSESSEE LD. CIT(A), DID NOT ACCEPT AND CONFIRMED THE ORDER OF ASSESSING OFF ICER BY STATING AS UNDER :- 1.3 I HAVE CONSIDERED THE FACTS, FINDINGS OF THE AO AN D MATERIAL ON RECORD AND SUBMISSION OF THE APPELLANT. IT IS SEEN THAT THE CI.9(A) OF THE PARTNERSHIP DEED OF M/S.DALAL & SHAH, MUMBAI DATED 31.3.2005 PROVIDES THAT THE SHARE IN PARTNERSHIP FIRM COMPRISES OF INH ERENT NON-SEPARABLE BUT RECOGNISABLE RIGHTS AND REMUNERATION TO PARTNERS, T HE RIGHT TO SHARE IN NET PARTNERSHIP, THE RIGHT TO SHARE IN NET PARTNERSHIP ASSET AND THE RIGHT TO SHARE IN THE PARTNERSHIP (GOODWILL) WHICH SHALL BE COMPUTED AND DISTRIBUTED AS DETAILED IN THE CHART 1 TO 4 OF THE SAID CLAUSE AND UNLESS THE PARTNERS MUTUALLY DECIDED TO CHANGE THE SHARING PROPORTION IN ANY MANNER WHATSOEVER IN WRITING. SIMILAR PROVISIONS WE RE ALSO MADE IN PARTNERSHIP DEED IN CL.9(E) OF PARTNERSHIP DEED DAT ED 31.3.2005 EXECUTED IN RESPECT OF DALAL & SHAH, MUMBAI. THUS, THE APPEL LANT IS ONE OF THE PARTNERS WHO WAS ENTITLED TO SHARE IN NET PARTNERSH IP ASSETS, AND THEREFORE HE WAS REQUIRED TO MAINTAIN AGGREGATE CRE DIT BALANCE IN HIS CAPITAL ACCOUNT AS BLOCKED AMOUNT. FURTHER, CLAUSE 16 OF THE PARTNERSHIP DEED SPECIFIES THE CONDITION REGARDING THE EXIT OF A PARTNER DUE TO DEATH OR RETIREMENT IN THE PAYMENTS TO BE MADE TO HIM OR THE NOMINEE OR LEGAL HEIR AS THE CASE MAY BE. THE CL 16(B) READS AS UNDER :- THE NOMINEE OR A NEW PARTNER OR THE CONTINUING PAR TNERS TO WHOM THE SHARE OF SUCH RETIRING DECEASED (EXISTING) PARTNERS PASSES ON, THE EXCLUDING THE SITUATION WHERE THE SHARE WOULD VEST IN CIRCUMSTANCES EVENT OF VESTING, SHALL PAY TO THE RETIRING OR DECEASED P ARTNERS (EXISTING) PARTNER OR HIS ESTATE AS THE CASE MAY BE; ITA NO.6981/M/11 A.Y.08-09 8 I. HIS SHARE OF THE SURPLUS IN THE ESTIMATED VALUE OF THE NET PARTNERSHIP ASSETS OF THE FIRM OVER THE BOOK VALUE OF SUCH ASSE TS, AND II. VALUE OF HIS SHARE IN THE RIGHT TO SHARE IN PAR TNERSHIP (GOODWILL) IN ACCORDANCE WITH THE PROVISIONS SET OUT. THUS IT IS SEEN THAT THE AMOUNT STANDING IN THE CAP ITAL ACCOUNT OF THE RETIRING PARTNERS AND SHARE IN THE NET PROFIT TILL THE DATE OF HIS RETIREMENT ARE TO BE PAID BY THE FIRM AND THE PARTNERS TO WHOM THE SHARE OF RETIRING PARTNERS PASSES ON ARE UNDER OBLIGATION TO PAY THE RETIRING PARTNERS HIS SHARE OF SURPLUS IN THE ESTIMATED VALUE OF THE NET PARTNERSHIP ASSETS OVER THE BLOCK VALUE AND VALUE OF HIS RIGHT TO SHARE IN CAPITAL. 1.3.1 I FIND THAT THE APPELLANT HAS RETIRED FROM BOTH T HE FIRMS AS PER DEED OF RETIREMENT EXECUTED ON 11.8.2007 AND 23.7.2007 R ESPECTIVELY. THE CLAUSES OF BOTH THE AGREEMENTS ARE MORE OR LESS IDE NTICAL EXCEPT FOR BARE NECESSARY CHANGES. IT HAS BEEN MENTIONED IN CLAUSE 2 AS UNDER :- PURSUANT TO CLAUSE 16 OF THE DEED OF PARTNERSHIP D ATED 3RD NOVEMBER, 2006, THE SHARE IN THE PARTNERSHIP OF THE RETIRING PARTNER, ALL AND ANY EFFECTS IN THE SAID SHARE AND ALL AND ANY TITLES, I NTERESTS, CLAIMS AN DEMANDS WHATSOEVER OF THE RETIRING PARTNER IN THE A BSENCE OF ANY NOMINATION IS TO PASS ON TO THE CONTINUING PARTNERS IN THEIR RESPECTIVE PROPORTIONS IN THE RIGHT TO SHARE IN THE PARTNERSHI P (GOODWILL). IN TERMS OF THE SAME, IT IS NOW AGREED THAT IN FULL AND FINAL SETTLEMENT OF THE RIGHTS OF KUNTAL DAVE, HE HAS BEEN PAID ON OR B EFORE THE DATE OF EXECUTION OF THESE PRESENTS THE FOLLOWING SUMS: (B) VALUE OF THE RETIRING PARTNERS RIGHT TO SHARE IN THE PARTNERSHIP (GOODWILL) AND THE RIGHT TO SHARE IN THE NET PARTNE RSHIP ASSETS AS DEFINED IN CLAUSE 9(A) OF THE DEED OF PARTNERSHIP DATED 3RD NO VEMBER, 2006, WHICH IS MUTUALLY AGREED IN TERMS OF THE SAID DEED AT RS. 39 ,60,000/- AND RS.10,64,000/- RESPECTIVELY. (C) UNPAID INTEREST IN TERMS OF THE PARTNERSHIP DEE DS FROM TIME TO TIME ON THE KUNTAL DAVE CAPITAL ACCOUNT FROM APRIL, 2006 UP TO 31 JULY, 2007 AMOUNTING TO RS. 1,37,569/-. ITA NO.6981/M/11 A.Y.08-09 9 IT IS FURTHER AGREED IN TERMS OF CLAUSE 16 OF THE A FORESAID PARTNERSHIP DEED DATED 3RD NOVEMBER 29006 THAT THE SUM AS AGREED TOW ARDS (A) ABOVE RS. 39,60,000/- AND RS. 10,64,000/- RESPECTIVELY IS DEB ITED TO THE FOLLOWING SPECIFIED PARTNERS IN THE FOLLOWING RATIO IN WHICH THE AFORESAID SHARE OF THE RETIRING PARTNER PASSES ON TO THEM. SPECIFIED PARTNERS SHARE IN THE PARTNER SHIP FIRM 1. MR. ASHISH 3.06% 2. MR. SHISHIR 3.06% 3. MR. ANISH 2.38% AGGREG ATING TO 8.50% 1.3.2 THUS, IT IS EXPLICITLY CLEAR FROM THE CLAUSE OF THE DEED OF RETIREMENT AS REPRODUCED ABOVE THAT 3 PARTNERS VIZ. MR. ASHISH S. DALAL, MR. SHISHIR B. DALAL AND SHRI ANISH PRAFUL AMIN, TOOK OVER THE ASSESSEES SHARE IN THE PARTNERSHIP FIRM ON HIS RETIREMENT. THUS, THESE CON TINUING PARTNERS, IN OTHER WORDS, PURCHASED THE SHARE OF RETIRING PARTNE RS I.E. ASSESSEE FOR THE AMOUNT OF RS. 39.60 LAKHS AND RS. 10.64 LAKHS IN RE SPECT OF DALAL & SHAH, MUMBAI AND RS. 5.40 LAKHS + RS. 72,000/- IN RESPECT OF DALAL & SHA H, AHEMDABAD. THE PAYMENTS IN RESPECT OF TRANSFER OF ASSESSEES RIGHT IN THE PARTNERSHIP WERE MADE BY 3 CONTINUING PARTNERS AND NOT BY THE FIRM. THEREFORE, THERE IS TRANSFER OF RIGHT FROM ASSESSEE TO THESE 3 CONTINUI NG PARTNERS AS DULY MENTIONED IN THE PARTNERSHIP DEED. RIGHT IN THE SHA RE OF THE ASSESSEE IN THE PARTNERSHIP DEED COMPRISES OF THE INHERENT NON- SEPARABLE RIGHTS. THEREFORE, WHAT HAS BEEN TRANSFERRED BY THE ASSESSE ES SHARE IN THE PARTNERSHIP FIRM AT THE TIME OF RETIREMENT. 1.3.3 . I FIND THAT THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN IN RESPECT OF SALE PROCEEDS OF RS. 10,64,000/- AND RS. 72,000/- RECEIVED FROM THE PARTNERS OF M/S. DALAL & SHAH, MUMBAI AND AHMEDABAD. HE HAS SHOW THE COST OF ACQUISITION AT RS. 5,16,150/- AND RS. 13,153/- AS ON 1.4.2005 RESPECTIVELY. THESE ARE THE AMOUNTS PAID B Y THE ASSESSEE TO THE ITA NO.6981/M/11 A.Y.08-09 10 FIRMS AT THE TIME OF BECOMING PARTNER OF THE SAID F IRMS APART FROM HIS CONTRIBUTION TO THE CAPITAL ACCOUNT BLOCKED AMOUN T. IT MAY BE MENTIONED HERE THAT THE ASSESSEE AFTER MAKING THE PAYMENTS OF THESE AMOUNTS OF RS. 5.16,150/- AND RS. 13,153/- RESPECTIVELY HAS ACQUIR ED THE RIGHTS IN THE PARTNERSHIP DEED (NOT ONLY HIS RIGHT TO SHARE IN PA RTNERSHIP ASSET BUT ALSO THE OTHER NON SEPARABLE RIGHT. THEREFORE, THIS COST OF ACQUISITION ALSO PERTAINS TO HIS RIGHT TO SHARE IN THE PARTNERSHIP ( GOODWILL). CONSIDERING THE AFORESAID FACTS THERE IS TRANSFER OF ASSESSEES RIG HT TO SHARE IN PARTNERSHIP TO THE CONTINUING PARTNERS THOUGH THE SHARE IN PART NERSHIP (GOODWILL) AND SHARE IN NET PARTNERSHIP ASSET ARE VALUED INDEPENDE NTLY. THE TOTAL CONSIDERATION FOR TRANSFER OF ASESSEES RIGHT TO SH ARE IN PARTNERSHIP IS THEREFORE RS. 50,24,000/- (39,60,000 + 10,64,000) I N RESPECT OF M/S. DALAL & SHAH, MUMBAI AND RS. 6,12,000/- (5,40,000 + 72,00 0) IN RESPECT OF M/S. DALAL & SHAH, AHMEDABAD. THE SHORT TERM CAPITA L GAIN IS THEREFORE AS UNDER :- (C) IN RESPECT OF TRANSFER OF RIGHT TO SHARE IN M/S . DALAL & SHAH, MUMBAI. SALE PROCEEDS RS. 50,24,000/- LESS: COST OF ACQUISITION RS. 5,16,150/- SHORT TERM CAPITAL GAIN RS. 45,07,850/- (D) IN RESPECT OF TRANSFER OF RIGHTS TO SHARE IN M/ S. DALAL & SHAH, AHMEDABAD. SALE PROCEEDS RS. 6,12,000/- LESS: COST OF ACQUISITION RS . 13,153/- SHORT TERM CAPITAL GAIN RS . 5,98,847/- 1.3.4 I ALSO AGREE WITH THE ALTERNATIVE FINDING OF THE AC THAT THE AMOUNTS OF RS. ( 39,60,000/- AND AS CAPITAL GAIN ON TRANSF ER OF GOODWILL BY TAKING THE COST OF ACQUISITION AS RS. NIL. THE ASSESSEE HA S SUBMITTED A COPY OF THE VALUATION OF GOODWILL MUTUALLY AGREED BY THE PA RTNERS OF THE FIRMS. THE TOTAL AMOUNT OF RS. 45,00,000/- HAS BEEN MUTUALLY A RRIVED AT AS THE VALUATION OF ASSESSEES SHARE OF GOODWILL IN DALAL & SHAH, MUMBAI AND ITA NO.6981/M/11 A.Y.08-09 11 M/S. DALAL & SHAH, AHMEDABAD AND EQUAL AMOUNT WAS R ECEIVED BY THE ASSESSEE FROM THREE CONTINUING PARTNERS OF THOSE FI RMS TOWARDS SUCH TRANSFER OF ASSESSEES RIGHT IN GOODWILL OF THOSE F IRMS. THE ASSESSEE HAS STATED THAT THE COST OF ACQUISITION OF RS. 5,16,150 /- AND RS. 13,153/- WERE IN RESPECT OF HIS RIGHT TO SHARE IN THE PARTNERSHIP ASSET IN DALAL & SHAH, MUMBAI AND M/S. DALAL & SHAH, AHMEDABAD RESPECTIVEL Y AND THAT THESE AMOUNTS ARE NOT FOR ACQUISITION OF HIS SHARE IN GOO DWILL OF THOSE FIRMS. HE HAS SEPARATELY COMPUTED THE CAPITAL GAINS IN RESPEC T OF TRANSFER OF HIS SHARE IN THE PARTNERSHIP ASSETS. CONSIDERING THIS T RANSFER OF HIS SHARE IN GOODWILL OF THESE FIRMS AND THE COST OF ACQUISITION OF SUCH GOODWILL HAS TO BE TAKEN AT RS. NIL BY INVOKING PROVISIONS OF SECTI ON 55(2)(A), THEREFORE, THE CAPITAL GAINS IN RESPECT OF TRANSFER OF ASSESSEES SHARE IN GOODWILL FOR BOTH THE FIRMS TAKEN TOGETHER WILL BE RS. 45,00,000/-. T HEREFORE, THIS AMOUNT OF CAPITAL GAIN OF RS. 45,00,000/- ALONGWITH CAPITAL G AIN OF RS. 6,06,697/- DECLARED BY THE ASSESSEE ON ACCOUNT OF TRANSFER OF HIS SHARE IN PARTNERSHIP ASSET WILL HAVE TO BE BROUGHT TO TAX. THE TOTAL SHO RT TERM CAPITAL GAIN WILL THUS BE RS.51,06,697/-. 1.3.4. IN THE LIGHT OF THE ABOVE FACTS, I AM OF THE CONS IDERED OPINION THAT THE AC HAS RIGHTLY BROUGHT TO TAX THE AMOUNT RECEIV ED BY THE APPELLANT IN LIEU OF TRANSFER OF HIS RIGHT TO SHARE IN GOODWILL OF BOTH AS MENTIONED ABOVE. 1.3.5. IT IS ALSO NOTICED THAT THE AC ALSO TAKEN A ALTERN ATIVE PLEA THAT THE AMOUNTS OF RS. 39.60 LAKHS AND RS. 5.40 LAKHS H AVE TO BE BROUGHT TO TAX AS CAPITAL GAIN ON TRANSFER OF GOODWILL BY TAKI NG COST OF ACQUISITION AS NIL. AS PER COPY OF VALUE SUBMITTED BY THE APPELLAN T, THE TOTAL AMOUNT OF GOODWILL MUTUALLY AGREED BY THE PARTNERS OF THE FIR M COMES TO RS.45 LAKHS WHICH HAS BEEN MUTUALLY ARRIVED AT AS THE VALUATION OF ASSESSEES SHARE OF GOODWILL IN THE AFORESAID FIRMS, IT IS SEEN THAT TH E EQUAL AMOUNT WAS RECEIVED BY THE APPELLANT FROM 3 CONTINUING PARTNER S OF THOSE FIRMS TOWARDS SUCH TRANSFER OF ASSESSEES RIGHT IN GOODWI LL OF THOSE FIRMS. ITA NO.6981/M/11 A.Y.08-09 12 THEREFORE, THE AC HAS CONSIDERED THE COST OF ACQUIS ITION OF SUCH GOODWILL AT NIL BY INVOKING THE SECTION 55(2)(A) OF THE ACT. TH EREFORE, THE CAPITAL GAIN IN RESPECT OF TRANSFER OF ASSESSEES SHARE IN GOODWILL FOR BOTH THE FIRMS TAKEN TOGETHER WILL BE AT RS. 45 LAKHS. THEREFORE, THE AM OUNT OF CAPITAL GAIN OF RS.45 LAKHS ALONGWITH THE CAPITAL GAIN OF RS. 6,06, 697/- DECLARED BY THE ASSESSEE ON ACCOUNT OF TRANSFER OF SHARE IN PARTNER SHIP ASSETS HAS BEEN RIGHTLY BROUGHT TO TAX BY THE AO. THEREFORE, THE SHORT TERM CAPITAL GAIN WILL BE AT R S.51,06,697/-. IN VIEW OF THE ABOVE, FINDINGS OF THE AO ARE UPHELD. ACCORDING LY, THIS GROUND OF APPEAL IS TREATED AS DISMISSED. 1.3.6 AS REGARDS RELIANCE OF VARIOUS DECISION OF THE ASS ESSEE IS CONCERNED, IT IS NOTICED THAT THESE ARE RELATED TO TAX LIABI LITY OF FIRM WHEN THE PARTNER RETIRED, HENCE, NOT RELEVANT FOR THE ASSESSEES CAS E. HENCE, IN THE CASE WHERE THE APPELLANT HAS RECEIVED GOODWILL ON HIS RE TIREMENT FROM THE CONTINUING PARTNERS, IN LIEU OF HIS RELINQUISHMENT OF HIS SHARE IN FIRM IN FAVOUR OF CONTINUING PARTNERS, AS WELL AS GOODWILL FOR WHICH CONSIDERATION RECEIVED BY THE ASSESSEE FROM PARTNERS AND NOT FROM FIRM, THEREFORE, THE CASE LAWS ARE DISTINGUISHABLE ON FACTS AND IN LAW. IN THE LIGHT OF ABOVE FACTS, THIS GROUND OF APPEAL IS DISMISSED. 7. REFERRING TO THE PAPER BOOK AND DEED OF PARTNERS HIPS AT THE TIME OF ADMISSION ON 1.4.2005 AND RETIREMENT ON 31.07.2007 AND THE DEED IN BETWEEN ON 3.11.2006, THE LD. COUNSEL FAIRLY ADMITTED THAT THE ARGUMENT THAT THERE IS NO TRANSFER IS NOT BEING PRESSED AS ASSESSEE ADMI TTED THAT THERE IS TRANSFER OF RIGHTS, EXIGIBLE TO CAPITAL GAINS. HOWEVER WHAT IS CONTESTED IS THE AMOUNTS RECEIVED AS SHARE IN ASSETS OF FIRM AS GOODWILL, TR ANSFERED TO THREE PARTNERS AS PER THE DEED. IT WAS THE CONTENTION THAT RIGHTS IN FIRM ARE SEPARATE RIGHTS AND ASSESSEE OFFERED CAPITAL GAIN RECEIVED ON SHARE OF ASSETS IN THE FIRM WHEREAS SHARE OF GOODWILL RECEIVED WAS CONTESTED. LD. COUNS EL REFERRED TO THE TERMS OF DEED TO SUBMIT THAT DEED PROVIDES FOR SEPARATE RIGH TS: A) RIGHT TO SHARE IN THE NET PARTNERSHIP ASSETS (A SSESSEE RECEIVED RS.11,36,000) AND ITA NO.6981/M/11 A.Y.08-09 13 B) RIGHT TO SHARE IN PARTNERSHIP GOODWILL (RS.45,0 0,000/-) FROM TWO FIRMS. SINCE, THESE RIGHTS ARE SEPARATE, ASSESSING OFFICER S ACTION IN BRINGING IT TO TAX TOGETHER IS NOT CORRECT. 7.1 REFERRING TO THE PROVISIONS OF SECTION 55(2)(A) , IT WAS SUBMITTED THAT THE TERM GOODWILL APPEARING AT CL. (A) SHOULD BE INTE RPRETED IN THE CONTEXT AND HAVING REGARD TO OTHER SIMILAR CAPITAL ASSETS APPEA RING UNDER CLAUSE (A). INTERPRETING THE TERM GOODWILL APPEARING AT CLAUS E (A) IN THIS MANNER WILL CONCLUDE THAT ONLY THE CAPITAL ASSETS WHICH ARE IN THE NATURE OF GOODWILL RELATED TO A BUSINESS CANNOT BE APPLIED TO THE PRESENT CASE . THE SCHEME OF THE ACT CLEARLY DISTINGUISHES BUSINESS AS WELL AS PROFES SION. LD. COUNSEL REFERRED TO THE DEFINITION OF BUSINESS AS PROVIDED U/S. 2(13) BUSINESS INCLUDES ANY TRADE, COMMERCE OR MANUFACTURE OR ANY ADVENTURE OR CONCE RN IN THE NATURE OF TRADE, COMMERCE OR MANUFACTURE, WHEREAS THE DEFINITION OF PROFESSION AS PROVIDED U/S. 2(36) READS PROFESSION INCLUDES VOCATION. TH EREFORE, THE SCHEME OF THE ACT ALSO CLEARLY MAINTAINS INDEPENDENCE AND DISTINC TION BETWEEN BUSINESS AND PROFESSION. THE AR ALSO INVITED ATTENTION TOWARDS S ECTION 44AA, 44AB, 8OQQA, 80R, 8ORR, WHEREIN INDEPENDENCE AND DISTINCTION OF THE TERM BUSINESS AND PROFESSION IS MAINTAINED. THE AR ALSO CITED FOLLOWI NG CASE LAWS WHEREIN, IT HAS BEEN HELD THAT TERM BUSINESS WILL NOT INCLUDE PR OFESSION. JANAB A. SYED JALAL SAHIB V. CIT [39 ITR 660 (MAD] CIT V. P.V.G. RAJU [101 ITR 465 (SC)] CIT V. LALLUBHAI NAGARDAS & SONS [204 ITR 93 (BOM] CIT V. JIVANLAL LALLOOBHAI & CO. [73 TAXMAN 619 (BO M] CIT V. BHAGWAN BROKER AGENCY [70 TAXMAN 453 (RAJ)] CIT V. MANMOHAN DAS (DECEASED) [59 ITR 699 (SC] IN VIEW OF ABOVE, THE AR SUBMITTED THAT THE TERM G OODWILL OF BUSINESS SHALL NOT COVER GOODWILL OF THE APPELLANT (WHO IS A CHARTERED ACCOUNTANT BY QUALIFICATION AND WHO WAS A PARTNER IN THE PROFESSIONAL FIRM OF C HARTERED ACCOUNTANTS). LD. COUNSEL ALSO REFERRED TO THE BOARD CIRCULARNO.495 DATED 22.09.87 [168 ITR ITA NO.6981/M/11 A.Y.08-09 14 87(ST.)] TO SUBMIT THAT THE SAID PROVISION ADMITTED LY IS NOT APPLICABLE TO PROFESSIONAL FIRMS. 7.2 WITH REFERENCE TO THE ADDITIONAL GROUND LD. CO UNSEL SUBMITTED THAT THE AMOUNT OFFERED BY THE ASSESSEE WAS BROUGHT TO TAX T WICE AS UNDER :- S.NO. PARTICULARS DECLARED IN RETURN OF INCOME (RS.) AS PER A.O (RS.) 1. GAIN FROM SALE OF TRANSFER OF SHARE IN PARTNERSHIP ASSETS (5,47,850 + 58,847) = 6,06,697 GAIN FROM SALE OF SHARES = 61,145 6,67,842/- 6,67,842 2. GAIN FROM SALE OF TRANSFER OF SHARE IN GOODWILL AND GAIN FROM SALE OF TRANSFER OF SHARE IN ASSETS (45,00,000 + 6,06,697) 51,06,697 (NOTE 1) 3. TOTAL ADDITION BY ASSESSING OFFICER 57,74,539/ - 8. LD. CIT-DR REFERRED TO THE ORDER OF AO AND CIT(A ) AND THE TERMS OF DEED TO SUBMIT THAT THERE IS AN ELEMENT OF TRANSFER EXIG IBLE TO TAX WHEN THE CONTINUING PARTNERS PAID AMOUNTS TO RELIEVING PARTN ER. HE RELIED ON THE PRINCIPLES LAID DOWN BY THE FOLLOWING CASES. 1. BISHAN LAL KANODIA (122 TAXMANN 460 DEL.) 2. GIRIJA REDDY 23 TAXMANN.COM HYD. 3. SUDHAKAR SHETTY 130 ITD 197 (MUM.) 8.1 HE ALSO REFERRED TO THE TERM OF SHARE IN ASSETS OF FIRM AND GOODWILL IN VARIOUS DEEDS TO SUBMIT THE SAME RIGHTS ARE VARYING TOGETHER. HE ALSO REFERRED TO THE DEED DATED 31.03.2005 TO SUBMIT THAT THE GOO DWILL WAS EXISTING AT THE TIME OF JOINING THE PARTNERSHIP AND AMOUNT PAID AT THAT TIME CAN ALSO BE CONSIDERED FOR ACQUIRING ALL OTHER ASSETS AS HELD B Y THE HON'BLE SUPREME COURT IN THE CASE OF A. R. KRISHNAMURTHY VS. CIT 43 TAXM ANN.30(SC) DATED 10.02.1989 IN WHICH MADRAS HIGH COURT DECISION IN 133 ITR 922 WAS AFFIRMED. IT WAS HIS SUBMISSION THAT WHATEVER AMOUNT WAS PAI D FOR ACQUIRING RIGHTS AT THE TIME OF JOINING CAN BE APPORTIONED, THEREFORE, THE ENTIRE AMOUNT RECEIVED AT ITA NO.6981/M/11 A.Y.08-09 15 THE TIME OF RETIREMENT CAN BE TAXED. HE ALSO SUPPOR TED THE ORDER OF CIT(A) ON APPLICATION OF PROVISION OF SECTION 55(2A). 9. PER CONTRA, LD. COUNSEL SUBMITS THAT THE CONSIDE RATION WAS RECEIVED SEPARATELY AND SO SEPARATE RIGHTS ARE TO BE DECIDED SEPARATELY. FURTHER IT WAS SUBMITTED THAT INCREASE IN GOODWILL IS A COMMERCIAL DECISION AND EXCEPT ASSUMPTIONS THERE IS NO EVIDENCE THAT THE ASSESSEE PAID ANY AMOUNT FOR ACQUIRING RIGHTS IN GOODWILL. IT WAS FURTHER CONTE NDED THAT THE AMOUNT PAID FOR ACQUIRING RIGHT A CAN NOT BE APPORTIONED TO RIGH T B AND FURTHER A RIGHT IN GOODWILL IS NOT A GOODWILL AND NOTHING WAS SPENT BY PARTNER FOR ACQUIRING THE GOODWILL. BY VIRTUE OF BOARD CIRCULAR AND PROVISION OF SECTION 55(2)(B) THE AMOUNT RECEIVED FOR TRANSFER OF GOODWILL IS NOT TAX ABLE. 10. WE HAVE CONSIDERED THE ISSUE AND RIVAL CONTENTI ONS. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THERE ARE SEPARATE RIGHTS A ND THE RIGHT TO SHARE IN PARTNERSHIP (GOODWILL) IS SEPARATE FOR WHICH NO COS T WAS PAID AND PROVISIONS OF SECTION 55(2)(B) ARE NOT APPLICABLE AS IT IS A PROF ESSIONAL FIRM. IN ORDER TO EXAMINE THE SAME ONE HAS TO REFER TO THE TERMS OF P ARTNERSHIP DEED DATED 31.3.2005 AT THE TIME OF ADMISSION. THE IMPORTANT T ERMS ARE AS UNDER : DALAL & SHAH MUMBAI: 3(A) THE PARTIES HERETO HEREBY AGREE THAT THE PARTIES O F THE FIRST, THE SECOND AND THE THIRD PARTS VIZ. MR. AMIRI, MR. VASA NT AND MR. SHARAD SHALL BE THE PROMOTER PARTNERS, THE PARTIES OF TH E FOURTH, THE FIFTH AND THE SIXTH PARTS VIZ. MR. ASHISH, MR. SHISHIR AND MR . ANISH SHALL BE THE SENIOR PARTNERS, THE PARTIES OF THE SEVENTH AND TH E EIGHTH PARTS VIZ. MR. VENKATESH AND MR. MAYUR SHALL BE THE JUNIOR PARTNER S AND THE PARTY OF THE NINTH PART VIZ. MR. KUNTAL SHALL BE THE SENIOR -SUBORDINATE PARTNER. MESSRS. DALAL & SHAH THE FIRM NAME SHALL REMAIN V ESTED ONLY IN THE PROMOTER PARTNERS AND THE SENIOR PARTNERS. ITA NO.6981/M/11 A.Y.08-09 16 (B) IT IS AGREED THAT EACH PARTNERS SHARE IN THE PART NERSHIP FIRM COMPRISES OF INHERENT NON-SEPARABLE BUT RECOGNIZABLE RIGHTS IN DIFFERING PROPORTIONS AS SPECIFIED IN CLAUSE 9 HEREIN. .. 9. (A) IT IS AGREED THAT THE SHARE IN THE PARTNERSHIP FIR M COMPRISES OF THE FOLLOWING INHERENT NON-SEPARABLE BUT RECOGNIZABLE R IGHTS - REMUNERATION TO PARTNERS, THE RIGHT TO SHARE IN THE NET PROFITS OF THE PARTNERSHIP, THE RIGHT TO SHARE IN THE NET PARTNERSHIP ASSETS AND THE RIGH T TO SHARE IN THE PARTNERSHIP (GOODWILL), WHICH SHALL BE COMPUTED AN D DISTRIBUTED AS DETAILED IN CHARTS 1 TO 4 HEREIN, UNLESS THE PARTNE RS MUTUALLY DECIDE TO CHANGE THE SHARING PROPORTIONS IN ANY MANNER WHATSO EVER IN WRITING. EACH OF THE PARTNERS SHALL BE ENTITLED TO A REMUNER ATION AS DETAILED IN CHARTS I TO 4 HEREUNDER, AND WHICH. IN THE AGGREGAT E, FOR ALL PARTNERS. PUT TOGETHER, SHALL NOT EXCEED THE FOLLOWING LIMITS: ON THE FIRST RS.1,00,000 RS. 50,000 OR AT THE RATE OF 90 OF THE BOOK PROFIT OR PERCENT OF THE BOOK PROFIT IN CASE OF A LOSS WHICHEVER IS MORE. ON THE NEXT RS.1,00,000 AT THE RATE OF 60 PERCENT OF THE BOOK PROFIT OF THE BOOK PROFIT ON THE BALANCE OF THE AT THE RATE OF 4O PERCENT BOOK PROFIT OF THE BOOK PROFIT EXPLANATION : FOR THE PURPOSE OF THIS CLAUSE THE EX PRESSION BOOK PROFIT SHALL MEAN THE BOOK PROFITS AS DEFINED IN SEC.40(B) OF THE INCOME TAX ACT, 1961 OR ANY STATUTORY MODIFICATION OR RE-ENACTMENT THEREOF, FOR THE TIME BEING IN FORCE. CHART 1-YEAR: 1 ST APRIL, 2005 UPTO31 ST MARCH, 2006 COLUMN-1 COLUMN-2 COLUMN-3 COLUMN-4 COLUMN-5 RIGHT TO ITA NO.6981/M/11 A.Y.08-09 17 PARTNER REMUNERATION SHARE IN THE NET PROFITS SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (PERCENT) (PERCENT) (PERCENT) (PERCENT) MR. AMIN 1.00 1.00 1.00 1.00 MR. VASANT 10.00 10.00 10.00 10.00 MR. SHARAD 8.00 8.00 8.00 8.00 MR. ASHISH 24.67 24.13 24.67 24.67 MR. SHISHIR 22.67 22.13 22.67 22.67 MR. ANISH 24.41 23.99 24.41 24.41 MR. KUNTAL 9.25 9.25 9.25 9.25 (RUPEES) MR. VENKATESH 1,250,000 1.00 0 0 MR. MAYUR 850,000 0.50 0 0 CHART 2-YEAR: 1 ST APRIL, 2006 UPTO31 ST MARCH, 2007 COLUMN-1 COLUMN-2 COLUMN-3 COLUMN-4 COLUMN-5 PARTNER REMUNERATION SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (PERCENT) (PERCENT) (PERCENT) (PERCENT) MR. AMIN 1.00 1.00 1.00 1.00 MR. VASANT 10.00 10.00 10.00 10.00 MR. SHARAD 8.00 8.00 8.00 8.00 MR. ASHISH 24.31 23.77 24.31 24.31 MR. SHISHIR 22.31 21.77 22.31 22.31 MR. ANISH 24.13 23.71 24.13 24.13 MR. KUNTAL 10.25 10.25 10.25 10.25 (RUPEES) MR. VENKATESH 1,250,000 1.00 0 0 MR. MAYUR 850,000 0.50 0 0 CHART 3-YEAR: 1 ST APRIL, 2007 UPTO31 ST MARCH, 2008 COLUMN-1 COLUMN-2 COLUMN-3 COLUMN-4 COLUMN-5 PARTNER REMUNERATION SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (PERCENT) (PERCENT) (PERCENT) (PERCENT) ITA NO.6981/M/11 A.Y.08-09 18 MR. AMIN 1.00 1.00 1.00 1.00 MR. VASANT 10.00 10.00 10.00 10.00 MR. SHARAD 8.00 8.00 8.00 8.00 MR. ASHISH 24.04 23.50 24.04 24.04 MR. SHISHIR 22.04 21.50 22.04 22.04 MR. ANISH 23.92 23.50 23.92 23.92 MR. KUNTAL 11.00 11.00 11.00 11.00 (RUPEES) MR. VENKATESH 1,250,000 1.00 0 0 MR. MAYUR 850,000 0.50 0 0 CHART 4-YEAR: 1 ST APRIL, 2008 ONWARDS EVERY FINANCIAL YEAR COLUMN-1 COLUMN-2 COLUMN-3 COLUMN-4 COLUMN-5 PARTNER REMUNERATION SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (PERCENT) (PERCENT) (PERCENT) (PERCENT) MR. AMIN 1.00 1.00 1.00 1.00 MR. VASANT 10.00 10.00 10.00 10.00 MR. SHARAD 8.00 8.00 8.00 8.00 MR. ASHISH 23.86 23.32 23.86 23.86 MR. SHISHIR 21.86 21.32 21.86 21.86 MR. ANISH 23.78 23.36 23.78 23.78 MR. KUNTAL 11.50 11.50 11.50 11.50 (RUPEES) MR. VENKATESH 1,250,000 1.00 0 0 MR. MAYUR 850,000 0.50 0 0 (B) THE REMUNERATION PAYABLE TO THE PARTNERS AS SHOWN IN CHARTS 1, , 3 AND 4 ABOVE, SHALL BE CREDITED TO THEIR RESPECTIVE REMUNERATION ACCOUNT WITH THE FIRM, UPON ASCERTAINMENT OF BOOK PROFIT. 1 -LOWEVER, IN CASE OF MR. VENKATESH ARID MR. MAYUR, THE SENIOR PARTNERS HAVE THE POWER AND AUTHORITY UNDER THIS DEED TO INSTRUCT A REVISION IN THEIR REMUNERATION AT ANY TIME AS THEY DEEM FIT AND THE SAME SHALL BE IMP LEMENTED WITH EFFECT FROM THE DATE DECIDED BY THE SENIOR PARTNER. ITA NO.6981/M/11 A.Y.08-09 19 (C) NO OTHER PARTNER, EXCEPT FOR THE PROMOTER PARTNERS AND THE SENIOR PARTNERS, SHALL HAVE ANY RIGHT OVER THE USAGE AND O WNERSHIP OF THE FIRMS NAME DALAL & SHAH AND WHICH RIGHT, SHALL VEST SO LELY WITH THE PROMOTOR PARTNERS AND THE SENIOR PARTNERS. (D) THE NET PROFITS OR LOSSES OF THE PARTNERSHIP SHALL BE DETERMINED AFTER DEBITING (DEDUCTING) THE AGGREGATE REMUNERATION PAY ABLE TO PARTNERS AS SHOWN ABOVE. (E) IN CASE OF THOSE PARTNERS WHO ARE ENTITLED TO SHAR E IN THE NET PARTNERSHIP ASSETS, THEY SHALL BE REQUIRED TO MAINT AIN AN AGGREGATE CREDIT BALANCE IN THEIR RESPECTIVE PARTNERS CAPITAL ACCOU NT WITH THE FIRM, AS CAPITAL OF THE PARTNERSHIP (REFERRED TO AS THE BLOC KED AMOUNT) WHICH IS SUFFICIENT TO COVER, AT THE END, OF THE FINANCIAL Y EAR AT LEAST RS.1,00,00,000 BETWEEN ALL THESE PARTNERS, IN THE PROPORTION MENTI ONED IN FOURTH COLUMN OF CHARTS I TO 4 IN CLAUSE 9(A) ABOVE, AS APPLICABLE , UNLESS THEY MUTUALLY DECIDE TO MODIFY THE SAID BLOCKED, AMOUNT. (F) THE PARTNERS, EXCEPT FOR MR. VENKATESH AND MR. MAY UR, SHALL, AS IF THEY AGGREGATE TO 100%, IN THE PROPORTION TO THEIR SHARE IN THE NET PROFITS OF PARTNERSHIP, BEAR ALL LOSSES, INCLUDING LOSS OF PA RTNERS CAPITAL. MR. VENKATESH AND MR. MAYUR SHALL NOT BEAR ANY LOSS OF PARTNES CAPITAL-THE BLOCKED AMOUNT SINCE, THEY SHALL NOT BE LIABLE TO B LOCK ANY PATNERS CAPITAL BY WAY OF BLOCKED AMOUNT IN TERMS OF CLAUSE 10 HEREIN. EACH PARTNERS SHARE IN THE NET PROFITS OF THE PARTNERSH IP (AS ABOVE) SHALL BE CREDITED TO THEIR RESPECTIVE SHARE OF PROFIT ACCO UNT WITH THE FIRM ON ASCERTAINMENT OF THE NET PROFITS AT THE PARTNERSHIP . . 16 SUBJECT TO AND WITHOUT PREJUDICE TO THE OTHER PROV ISIONS OF THESE PRESENTS, IN CASE OF AN EXIT OF A PARTNER DUE TO DE ATH OR RETIREMENT ITA NO.6981/M/11 A.Y.08-09 20 (INCLUDING COMPULSORY RETIREMENT IN TERMS OF CLAUSE 17(A) HEREIN UNDER ) OF A PARTNER, THE OTHER PARTNERS SHALL BE ENTITLED TO CONTINUE THE PROFESSION. THE SHARE OF SUCH RETIRING OR DECEASED PARTNER SHA LL, PASS ON, IF HE SO WISHES, EXCEPT IN CASE MR. VENKATESH AND AND MR. M AYUR WHO ARE NOT ENTITLED TO PASS ON THEIR SHARE BY WAY OF NOMINATIO N OR OTHERWISE, TO A PERSON, WHO WOULD HAVE BEEN NOMINATED BY THE EXITIN G PARTNER (EXCEPT IN CASE OF MR. VENKATESH AND MR. MAYUR) AT THE TIME O F SIGNING OF THIS DEED. SUCH A NOMINEE, MUST BE A CHARTERED ACCOUNTANT, AND CAN BE NOMINATED, IF AND ONLY IF, HE/SHE IS ACCEPTABLE AS A FUTURE-PA RTNER TO THE PROMOTER PARTNERS AND THE SENIOR PARTNERS OF THE FIRM TOTALL Y REPRESENTING A MAJORITY IN TERMS OF PROFIT SHARING, AT THE TIME THE NOMINA TION IS INTIMATED THE FIRM. EACH PARTNER HERETO, WHO HAS A RIGHT UNDER THIS DEE D TO (THUS) NOMINATE, AND WISHES TO EXERCISE THAT RIGHT, IS HEREBY DUTY B OUND TO INTIMATE HIS NOMINATION OR TO INTIMATE THE KEEPING-IN-ABEYANCE OF HIS NOMINATION FOR A FUTURE DATE TO THE FIRM, IN WRITING, AT THE TIME, O F SIGNING THIS DEED. IN CASE THERE IS NO NOMINATION EXERCISED BY A PARTNER TILL THE DATE OF HIS EXIT, THEN, THE SHARE OF SUCH RETIRING OR DECEASED PARTN ER WILL PASS ON TO THE CONTINUING PARTNERS IN THEIR RESPECTIVE SHARING PR OPORTIONS IN THE RIGHT TO SHARE IN THE PARTNERSHIP (GOODWILL) AS IF THEY AG GREGATE TO 100% (UNLESS THEY AGREE AMONGST THEMSELVES OTHERWISE). IN THE EVENT THAT., EITHER, AT A FUTURE DATE WHICH IS NEARER TO INDUCTION OF A NEW PARTNER WHO WAS NOMINATED UNDER THIS CLAUSE AN D WAS ACCEPTABLE AS A FUTURE PARTNER UNDER THIS CLAUSE, IS THEN, AT SUCH FUTURE DATE, UNANIMOUSLY NOT ACCEPTABLE TO ALL PARTNERS, OR IF U NDER ANY OTHER CIRCUMSTANCES A NEW INCUR BENT PARTNER CHOSEN BY TH E EXITING PARTNER (EXCEPT FOR MR. VENKATESH AND MR. MAYUR) IS NOT ACC EPTABLE AS A PARTNER, THE SHARE OF SUCH EXITING PARTNER, SHALL VEST IN T HE HANDS OF THE CONTINUING PARTNERS IN THEIR RESPECTIVE SHARING PRO PORTION IN THE RIGHT TO SHARE IN THE NET PROFITS OF THE PARTNERSHIP AS IF T HEY AGGREGATE TO 100%. ITA NO.6981/M/11 A.Y.08-09 21 (UNLESS THEY AGREE AMONGST THEMSELVES OTHERWISE)( A LSO REFERRED TO HEREIN AS THE EVENT OF VESTING). HOWEVER, IN CASE OF AN EVENT OF VESTING, IT SHALL B ECOME THE LIABILITY OF THE FIRM TO DISCHARGE THE VALUE OF THE EXITING PARTNER S SHARE, WHICH IS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISION SET OU T ELSEWHERE IN THIS DEED. THE FIRM HAS AN OPTION OF DISCHARGING THE LIABILITY TOWARDS SUCH VESTED SHARE AS A CONSEQUENCE OF THE EVENT OF VESTING, EIT HER BY WAY OF BORROWING AND DISCHARGING, OR BY WAY OF LIQUIDATIN G ASSETS AND DISCHARGING,. OR BY WAY OF ALLOWING THE EXITING PA RTNER OR HIS, HEIRS OR ESTATE TO OPT TO RECEIVE INCOME WHICH SUCH SHARE W OULD HAVE OTHERWISE EARNED IF THE EXITING PARTNER WAS CONTINUING OVER 60 MONTHS FROM THE MONTH FOLLOWING THE MONTH OF EXIT OF THE PARTNER; A ND SUCH ALLOWANCE TO CONTINUE TO RECEIVE INCOME FOR 60 CONTINUOUS MONTHS SHALL BE CONSTRUED UNDER THIS DEED TO BE A FULL DISCHARGE OF THE LIABI LITY OF THE FIRM TOWARDS THE ENTIRE VALUE OF THE EXITING PARTNERS SHARE. UPON EXIT OF MR. VENKATESH OR MR. MAYUR DUE TO ANY REASON WHATSOEVER, THEIR SHARE IN THE FIRM SHALL PASS ONTO THE SENIOR PARTNERS IN THEIR RIGHT TO HARE IN THE NET PROFITS OF THE PARTNERSHIP, AS IF T HEY AGGREGATE TO 100% (UNLESS THEY AGREE AMONGST THEMSELVES OTHERWISE). CONSEQUENTLY, IN THE EVENT OF AN EXIT OF A PARTNER, (A) THE FIRM SHALL PAY TO THE RETIRING OR DECEASED (EXISTING) PARTNER OR HIS ESTATE AS THE CASE MAY BE: (I) ALL AMOUNTS STANDING TO HIS CREDIT IN THE FIRM, BY WAY OF HIS PARTNERS CAPITAL ACCOUNT - BLOCKED AMOUNT, AND HIS REMUNERAT ION, IF ANY PAYABLE TO HIM UNDER CLAUSE 9 HEREIN TILL THE DATE OF DEATH OR RETIREMENT OR DETERMINATION. (II) HIS SHARE OF THE NET PROFITS OF THE P ARTNERSHIP FOR THE PERIOD SINCE THE ITA NO.6981/M/11 A.Y.08-09 22 CLOSE OF THE PREVIOUS ACCOUNTING YEAR TI LL THE DATE OF DEATH OR RETIREMENT OR DETERMINATION WHICH WILL BE BASED ON THE ACCOU NTS FOR THE PERIOD FROM THE CLOSE OF THE PREVIOUS ACCOUNTING YEAR TILL THE DATE OF DEATH OR RETIREMENT OR DETERMINATION, WHICH SHALL BE MADE UP ON THE BAS IS OF ACTUAL CASH RECEIVED, PLUS THE OUTSTANDING FEES PLUS FEES FOR THE MATTERS COMPLETED BUT NOT BILLED AND ALSO PROPORTIONATE ESTIMATED NE T FEES FOR THE WORK PARTLY COMPLETED. IN COMPUTING ABOVE, DUE ALLOWANCE SHALL BE MADE, AS ESTIMATED BY THE SENIOR PARTNERS, FOR THE EXPENSES NECESSARY OR PROPERLY ALLOCABLE FOR COMPLETING SUCH WORK. THE ABOVE MAY B E DETERMINED ON A LUMP SUM BASIS IF THE RETIRING PARTNER AND/OR THE HEIRS OF THE DECEASED PARTNER SO AGREE. AS TO THE FEES DUE HUT NOT RECEIV ED THE SAME, UNLESS OTHERWISE AGREED, WILL BE SHARED WHEN RECEIVED. (A FTER DEDUCTING EXPENSES INCURRED OR ALLOCABLE TO SUCH RECOVERY) (B) THE NOMINEE OR ANEW PARTNER, OR THE OTHER CONT INUING PARTNERS WHOM THE SHARE OF SUCH RETIRING OR DECEASED (EXITING) PA RTNER PASSES ON, EXCLUDING THE SITUATION WHERE THE SHARE WOULD VEST IN CIRCUMSTANCES OF EVENT OF VESTING, SHALL PAY TO THE RETIRING OR DEC EASED (EXITING) PARTNER OR HIS ESTATE AS THE CASE MAY BE: (I) HIS SHARE OF THE SURPLUS IN THE ESTIMATED V ALUE OF THE NET PARTNERSHIP ASSETS OF THE FIRM OVER THE BOOK VALUE OF SUCH ASSETS, AND (II) VALUE OF HIS SHARE IN THE RIGHT TO SHA RE IN PARTNERSHIP (GOODWILL) IN ACCORDANCE WITH THE PROVISIONS SET OUT BELOW: SUBJECT TO AND WITHOUT PREJUDICE AS AFORESAI D: THE VALUE OF RIGHT TO SHARE IN PARTNERSHIP (GOODWILL)MUST BE, EITHER, A MUTUAL LY AGREED VALUE BETWEEN THE TRANSFEROR AND TRANSFEREE, OR BE DETERM INED AS A FAIR VALUE, COMPUTED BY REFERENCE TO ONE OF THE FOLLOWIN G BASIS: (IIA) PURCHASE OF SO MANY TIMES THE ESTIMATED AVERA GE FUTURE EARNINGS; (IIB) CAPITALIZATION OF ESTIMATED AVERAGE FUTURE EA RNINGS; (IIC) CAPITALIZATION OF DISCOUNTED FUTURE CASH FLOW S; (IID) COMBINATIONS OF ANY OF THE ABOVE. (C) IT IS CLARIFIED THAT IN ARRIVING AT THE AMOUNTS PAYABLE TO THE EXITING PARTNER OR HIS HEIRS OR HIS ESTATE HEREINABOVE, THE RE SHALL BE DEDUCTED, SUCH REASONABLE SUM, AS MAY BE REQUIRED TO BE RET AINED AGAINST PROBABLE TAX LIABILITY OF, OR ATTRIBUTABLE TO, THE EXITING P ARTNER, AND AGAINST ANY DEBIT BALANCES OUTSTANDING IN ANY ACCOUNT OF SUCH PARTNER . (D) IT IS CLARIFIED HEREBY THAT, IN THE EVENT THAT ANY PARTNER WHO HAS A RIGHT TO DIVEST A PORTION OF HIS SHARE, DECIDES TO D O SO IN ANY MANNER, THE ITA NO.6981/M/11 A.Y.08-09 23 PROVISIONS CONTAINED IN CLAUSE 16(A), (B), AND (C) ABOVE, TO THE EXTENT AND IN THE MANNER THEY ARE APPLICABLE TO THE CIRCUMSTANCES , SHALL APPLY AND BE OPERATIVE, AND THE RIGHTS AND LIABILITIES OF BOTH T HE TRANSFEROR PALMER AND THE TRANSFEREE PARTNER SHALL ACCORDINGLY BE GOVERNE D BY THE SAID CLAUSE 16 AND ITS SUB-CLAUSES. DALAL & SHAH (AHMEDABAD) 9. (A) IT IS AGREED THAT THE SHARE IN THE PARTNERSH IP FIRM COMPRISES OF THE FOLLOWING INHERENT NON-SEPARABLE BUT RECOGNIZABLE R IGHTS - REMUNERATION TO PARTNERS, THE RIGHT TO SHARE IN THE NET PROFITS OF THE PARTNERSHIP, THE RIGHT TO SHARE IN THE NET PARTNERSHIP ASSETS AND THE RIGH T TO SHARE IN THE PARTNERSHIP (GOODWILL), I WHICH SHALL BE COMPUTED A ND DISTRIBUTED AS DETAILED IN CHARTS 1 TO 4 HEREIN, UNLESS THE PARTNE RS MUTUALLY DECIDE TO CHANGE THE SHARING PROPORTIONS IN ANY MANNER WHATSO EVER IN WRITING. EACH OF THE PARTNERS SHALL BE ENTITLED TO A REMUNER ATION AS DETAILED IN CHARTS I TO 4 HEREUNDER, AND WHICH. IN THE AGGRE GATE, FOR ALL PARTNERS. PUT TOGETHER, SHALL NOT EXCEED THE FOLLOWING LIMITS : ON THE FIRST RS.1,00,000 RS. 50,000 OR AT THE RATE OF 90 OF THE BOOK PROFIT OR PERCENT OF THE BOOK PROFIT IN CASE OF A LOSS WHICHEVER IS MORE. ON THE NEXT RS.1,00,000 AT THE RATE OF 60 PERCENT OF THE BOOK PROFIT OF THE BOOK PROFIT ON THE BALANCE OF THE AT THE RATE OF 40 PERCENT BOOK PROFIT OF THE BOOK PROFIT EXPLANATION : FOR THE PURPOSE OF THIS CLAUSE THE EX PRESSION BOOK PROFIT SHALL MEAN THE BOOK PROFITS AS DEFINED IN SEC.40(B) OF THE INCOME TAX ACT, 1961 OR ANY STATUTORY MODIFICATION OR RE-ENACTMENT THEREOF, FOR THE TIME BEING IN FORCE. CHART 1-YEAR: 1 ST APRIL, 2005 UPTO31 ST MARCH, 2006 COLUMN-1 COLUMN-2 COLUMN-3 COLUMN-4 COLUMN-5 PARTNER REMUNERATION SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET RIGHT TO SHARE IN ITA NO.6981/M/11 A.Y.08-09 24 PARTNERSHIP THE PARTNERSHI P ASSETS (GOODWIL L) (RUPEES) (PERCENT) (PERCENT) (PERCENT) MR. AMIN 0 1.20 1.20 1.20 MR. ASHISH 0 19.60 19.60 32.67 MR. SHISHIR 0 19.60 19.60 32.67 MR. ANISH 0 14.05 14.05 24.21 MR. BHARAT 0 26.30 26.30 0 MR. JEYUR 500,000 5.00 5.00 0 MR. VIREN 500,000 5.00 5.00 0 MR. KUNTAL 0 9.25 9.25 9.25 CHART 2-YEAR: 1 ST APRIL, 2006 UPTO31 ST MARCH, 2007 COLUMN-1 COLUMN-2 COLUMN-3 COLUMN-4 COLUMN-5 PARTNER REMUNERATIO N SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (RUPEES) (PERCENT) (PERCENT) (PERCENT) MR. AMIN 0 1.20 1.20 1.20 MR. ASHISH 0 19.44 19.44 32.40 MR. SHISHIR 0 19.44 19.44 32.40 MR. ANISH 0 13.92 13.92 24.00 MR. BHARAT 0 26.00 26.00 0 MR. JEYUR 500,000 5.00 5.00 0 MR. VIREN 500,000 5.00 5.00 0 MR. KUNTAL 0 10.00 10.00 10.00 CHART 3- YEAR: 1 ST APRIL, 2007 UPTO31 ST ITA NO.6981/M/11 A.Y.08-09 25 MARCH, 2008 COLUMN-1 COLUMN-2 COLUMN-3 COLUMN-4 COLUMN-5 PARTNER REMUNERATIO N SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (RUPEES) (PERCENT) (PERCENT) (PERCENT) MR. AMIN 0 1.20 1.20 1.20 MR. ASHISH 0 19.22 19.22 32.04 MR. SHISHIR 0 19.22 19.22 32.04 MR. ANISH 0 13.76 13.76 23.72 MR. BHARAT 0 25.60 25.60 0 MR. JEYUR 500,000 5.00 5.00 0 MR. VIREN 500,000 5.00 5.00 0 MR. KUNTAL 0 11.00 11.00 11.00 CHART 4-YEAR: 1 ST APRIL, 2008 ONWARDS EVERY FINANCIAL YEAR COLUMN-1 COLUMN-2 COLUMN-3 COLUMN-4 COLUMN-5 PARTNER REMUNERATIO N SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (RUPEES) (PERCENT) (PERCENT) (PERCENT) MR. AMIN 0 1.20 1.20 1.20 MR. ASHISH 0 19.01 19.01 31.68 MR. SHISHIR 0 19.01 19.01 31.68 MR. ANISH 0 13.58 13.58 23.44 MR. BHARAT 0 25.20 25.20 0 MR. JEYUR 500,000 5.00 5.00 0 MR. VIREN 500,000 5.00 5.00 0 MR. KUNTAL 0 12.00 12.00 12.00 (B) THE REMUNERATION PAYABLE TO THE PARTNERS AS SHO WN IN CHARTS 1 2, 3 AND 4 ABOVE1 SHALL BE CREDITED TO THEIR RESPECTIVE REMUNERATION ACCOUNT WITH THE FIRM, UPON ASCERTAINMENT OF BOOK PROFIT. H OWEVER, IN CASE OF MR. JEYUR AND MR. VIREN, THE SENIOR PARTNERS HAVE THE P OWER. AND AUTHORITY ITA NO.6981/M/11 A.Y.08-09 26 UNDER THIS DEED TO INSTRUCT A REVISION IN THEIR REM UNERATION AT ANY TIME AS THEY DEEM FIT AND THE SAME SHALL BE IMPLEMENTED WIT H EFFECT FROM THE DATE DECIDED BY THE SENIOR PARTNERS. (C) NO OTHER PARTNER, EXCEPT FOR THE SENIOR PARTNER S, SHALL HAVE ANY RIGHT OVER THE USAGE AND OWNERSHIP OF THE FIRMS NAME - DALAL & SHAH AND WHICH RIGHT, SHALL VEST SOLELY WITH THE SENIOR PART NERS. (D) THE NET PROFITS OR LOSSES OF THE PARTNERSHIP SH ALL BE DETERMINED AFTER DEBITING (DEDUCTING) THE AGGREGATE REMUNERATION PAY ABLE TO PARTNERS AS SHOWN ABOVE. (E) IN CASE OF THOSE PARTNERS WHO ARE ENTITLED TO S HARE IN THE NET PARTNERSHIP ASSETS, THEY SHALL BE REQUIRED TO MAINT AIN AN AGGREGATE CREDIT BALANCE IN THEIR RESPECTIVE PARTNERS CAPITAL ACCOU NT WITH THE FIRM, AS CAPITAL OF THE PARTNERSHIP (REFERRED TO AS THE BLOC KED AMOUNT) WHICH IS SUFFICIENT TO COVER, AT THE END OF THE FINANCIAL YE AR, AT LEAST RS.5,00,000 BETWEEN ALL THESE PARTNERS, IN THE PROPORTION MENTI ONED IN FOURTH COLUMN OF CHARTS 1 TO 4 IN CLAUSE 9(A) ABOVE, AS APPLICABLE, UNLESS THEY MUTUALLY DECIDE TO MODIFY THE SAID BLOCKED AMOUNT. (F) THE PARTNERS SHALL, IN THE PROPORTION TO THEIR SHARE IN THE NET PROFITS OF PARTNERSHIP, BEAR ALL LOSSES, INCLUDING LOSS OF PAR TNERS CAPITAL. EACH PARTNERS SHARE IN THE NET PROFITS OF THE PARTNERSH IP (AS ABOVE) SHALL BE CREDITED TO THEIR RESPECTIVE SHARE OF PROFIT ACCO UNT WITH THE FIRM ON ASCERTAINMENT OF THE NET PROFITS OF THE PARTNERSHIP . 10.2 AS PER THE TERMS OF PARTNERSHIP DEED, SHRI KUN TAL DAVE ASSESSEE WAS ALSO PERMITTED TO BE A PARTNER IN M/S. NANUBHAI DES AI & CO. TILL 31.03.2009 (VIDE 13(A)). SHRI KUNTAL DAVE WAS ADMITTED AS SEN IOR SUB-ORDINATE PARTNER. IT WAS SPECIFICALLY STATED VIDE 3(A) THAT M/S. DALAL & SHAH , THE FIRM NAME SHALL REMAIN VESTED ONLY IN THE PROMOTER PARTNERS AND SE NIOR PARTNERS. ASSESSEE HAS NO VESTED RIGHT IN THE NAME OF THE FIRM. 10.3 VIDE 9(A) SHARE IN THE PARTNERSHIP FIRM COMPRI SES OF THE FOLLOWING INHERENT NON-SEPARABLE BUT RECOGNIZABLE RIGHTS- RE MUNERATION TO PARTNERS, THE RIGHT TO SHARE IN THE NET PROFITS OF THE PARTNERSHI P, THE RIGHT TO SHARE IN THE NET PARTNERSHIP (ASSETS) AND RIGHT TO SHARE IN THE PARTNERSHIP(GOODWILL). THE RIGHTS ARE RECOGNIZABLE BUT NON-SEPARABLE. ITA NO.6981/M/11 A.Y.08-09 27 10.4 AT THE TIME OF ADMISSION, THE ENTITLEMENT OF E ACH PARTNER WAS SPECIFIED IN CHART 1 TO 4. SHRI KUNTAL DAVE SHARE IS SPECIFIED A S UNDER (SUMMARISED): PERIOD REMUNERATI ON SHARE IN PROFIT RIGHT TO SHARE IN PARTNERSHIP ASSETS RIGHT TO SHARE IN PARTNERSHIP (GOODWILL) FROM 01.04.05 TO 31.03.06 CHART 1. 9.25 9.25 9.25 9.25 FROM 1.04.06 TO 31.03.07 CHART 2 10.25 10.25 10.25 10.25 FROM 1.04.07 TO 31.03.08 CHART-3 11.00 11.00 11.00 11.00 FROM 01.04.2008 ON WARDS CHART 4 11.50 11.50 11.50 11.50 SIMILARLY IN DALAL & SHAH (AHMEDABAD) THE SHARE IS AS UNDER :- PERIOD REMUNERA TION SHARE IN PROFIT RIGHT TO SHARE IN PARTNERSHIP ASSETS RIGHT TO SHARE IN PARTNERSHIP (GOODWILL) FROM 1.4.05 TO 31.3.06 CHART 1. 0 9.25 9.25 9.25 FROM 1.04.06 TO 31.3.07 CHART 2 0 10.00 10.00 10.00 FROM 1.04.07 TO 31.3.08 CHART-3 0 11.00 11.00 11.00 FROM 1.4.2008 ON WARDS CHART 4 0 12.00 12.0 0 12.00 ITA NO.6981/M/11 A.Y.08-09 28 10.4 HOWEVER, THE TERMS OF ABOVE DEEDS AT THE TIME OF ADMISSION HAVE BEEN MODIFIED VIDE THE DEED DATED 03.11.2006 WHEN NEW ME MBER WAS ADMITTED. THE SHARE OF ASSESSEE WAS MODIFIED AS UNDER :- PERIOD REMUNER -ATION SHARE IN PROFIT RIGHT TO SHARE IN PARTNERSHIP ASSETS RIGHT TO SHARE IN PARTNERSHIP (GOODWILL) DALAL & SHAH MUMBAI 8.50 8.50 8.50 8.50 DALAL & SHAH AHMEDABAD 0 8.50 8.50 8.50 THUS, THE ORIGINAL SHARE AT 9.25% GRANTED AT THE TI ME OF ADMISSION IN FIRST YEAR, WHICH WAS TO INCREASE TO 11.50% IN MUMBAI AND TO 12 % IN AHMEDABAD HAS BEEN RESTRICTED UNIFORMLY TO 8.5% VIDE THE PARTNERS HIP DEED DATED 03.11.2006. THIS INDICATES THAT THE RIGHTS ARE VARIABLE. IT WAS NOTICED THAT THE PERCENTAGE IN THESE RIGHTS ARE ALSO UNIFORM AND GO TOGETHER. FUR THER, THE RIGHTS WHICH ARE NON-SEPARABLE BECAME SEPARABLE BUT NON- ALIENABLE ( OUTSIDE THE PARTNERSHIP) RIGHTS VIDE AGREEMENT DATED 3.11.2006 (CLAUSE 9(A)) . THEREFORE, THERE IS JUSTIFICATION IN THE REVENUE CONTENTION THAT THE PR ICE PAID AT THE TIME OF ADMISSION FOR VARIOUS NON-SEPARABLE RIGHTS CAN BE A PPORTIONED TO SEPARABLE BUT NON-ALIENABLE RIGHTS DECIDED AMONG THE PARTNERS VIDE AGREEMENT DATED 03.11.2006. SINCE THESE BUNDLE OF RIGHTS GRANTED AT THE TIME OF ADMISSION WERE THERE WITH ASSESSEE, EVEN THOUGH RATIOS VARIED SUBS EQUENTLY, THE COST PAID AT THE TIME OF ADMISSION CAN BE APPORTIONED TO THESE R IGHTS. 10.5 IN THE CASE OF A.R. KRISHNAMURTHY VS. CIT (SU PRA), THE HON'BLE SUPREME COURT HAS CONSIDERED SIMILAR ISSUE: THE ASSESSEE, A BODY OF INDIVIDUALS, PURCHASED TWO PIECES OF LAND IN THE YEAR 1966 MEASURING 14.55 ACRES AT A PRICE OF RS. 2 7, 260. BY AN INSTRUMENT OF LEASE-CUM-LICENCE DT. 10.9. 1970, THE Y GRANTED A MINING LEASE IN FAVOUR OF K. LTD., AN ALLIED CONCERN OF TH E ASSESSEE. THE LEASE WAS ITA NO.6981/M/11 A.Y.08-09 29 FOR A PERIOD OF 10 YEARS AND THE LESSEE HAD TO PAY A PREMIUM OR SALAMI OF RS. 5 LAKHS IN ADDITION TO THE PAYMENT OF A ROYALTY OF RS. 12 PER HUNDRED CUBIC FEET OF CLAY EXTRACTS SUBJECT TO A MINIMUM OF RS. 60, 000 PER YEAR. THE ITO CONSTRUED THE LEASE-DEED AS TRANSFERRING A LEASEHOLD INTEREST IN THE LAND IN FAVOUR OF THE COMPANY AND CAME TO THE C ONCLUSION THAT THE TRANSFER WAS ASSESSABLE TO CAPITAL GAINS TAX. THE A AC UPHELD THE INCOME TAX OFFICERS ORDER AND HELD THAT THE COST FOR THE PURPOSE OF ASCERTAINING THE CAPITAL GAINS WOULD BE THE TOTAL PRICE OF THE L AND PAID BY THE ASSESSEE, THAT IS, RS. 27, 260. THE TRIBUNAL CONFIRMED THE AA CS ORDER. THE HIGH COURT HELD THAT THERE WAS A TRANSFER OF CAPITAL AS SET FOR A CONSIDERATION OF RS.5. LAKHS UNDER THE INSTRUMENT DATED 10.9.1970. I T WAS FURTHER HELD THAT THE RIGHTS OF THE OWNER OF A LAND INCLUDE A RIGHT T O GRANT THE LEASE FOR EXPLOITING THE LAND. ON APPEAL BY SPECIAL LEAVE, THE ASSESSEE CONTENTED THAT (I) CONCEPTUALLY THERE WAS NO COST OF ACQUISITION WHICH WAS ATTRIB UTABLE TO THE RIGHT OF LIMITED ENJOYMENT TRANSFERRED BY THE GRANT OF LEASE , (II) THERE WAS NO NEXUS BETWEEN THE COST OF ACQUISITION OF THE FREE HOLD LAND AND THE RIGHT GRANTED UNDER THE LEASE, (III) THERE WAS NO QUESTION OF APP ORTIONMENT OF SUCH COST OF ACQUISITION, AND (IV) SINCE THE COST OF ACQUISI TION OF THE RIGHT GRANTED UNDER THE LEASE COULD NOT BE DETERMINED THE COMPUTA TION PROVISIONS UNDER THE ACT COULD NOT APPLY TO ALL AND AS SUCH SECTION 45 WAS NOT ATTRACTED. HELD SECTION 2(14) DEFINES CAPITAL ASSET AS PROPERTY OF ANY KIND HELD BY AN ASSESSEE. IN THE INSTANT CASE, WHAT WAS PARTED WITH UNDER THE TERMS OF THE LEASE DEED WAS THE RIGHT TO EXPLOIT THE LAND BY EXTRACTING CLAY WHICH RIGHT DIRECTLY FLOWED FROM THE OWNERSHIP OF THE LAN D. THE SAID RIGHT EVALUATED IN TERMS OF MONEY FORMED PART OF THE COST OF ACQUIRING THE LAND IF TRANSFER OF CAPITAL ASSET IN SECTION 45 INCLUDES GR ANT OF MINING LEASE FOR ANY PERIO4 THEN OBVIOUSLY THE COST OF ACQUISITION.. OF THE LAND WOULD INCLUDE THE COST OF ACQUISITION OF THE MINING RIG HT UNDER THE LEASE. UNDISPUTEDLY, THE GRANT OF LEASE BEING A TRANSFER OF AN ASSET THERE IS NO ESCAPE FROM THE CONCLUSION THAT THERE IS A LIVE NEX US BETWEEN THE COST OF ACQUISITION OF THE LAND AND THE RIGHTS GRANTED UND ER THE LEASE. THE AMOUNT OF RS. 27,260 PAID BY THE ASSESSEE WAS NOT ONLY THE COST OF ACQUIRING THE LAND BUT ALSO OF ACQUIRING BUNDLE OF RIGHTS IN THE SAID KIND INCLUDING THE RIGHT TO GRANT LEASE. THERE WAS, THUS, NO FORCE IN THE CONTENTION THAT CONCEPTUALLY THERE WAS NO COST OF ACQUISITION WHI CH WAS ATTRIBUTABLE TO THE RIGHT OF LIMITED ENJOYMENT TRANSFERRED BY THE G RANT OF THE LEASE. SO FAR AS THE APPORTIONMENT OF THE COST OF ACQUISITION WAS CONCERNED IT WAS A QUESTION OF FACT TO BE DETERMINED BY THE ITO IN EAC H CASE ON THE BASIS OF EVIDENCE. THE DETERMINATION OF THE COST OF THE RIGH T TO EXCAVATE CLAY IN THE LAND IN TERMS OF MONEY MAY BE DIFFICULT BUT WAS NON ETHELESS OF A MONEY VALUE AND THE BEST VALUATION POSSIBLE MUST BE MADE. ONCE THE COST OF THE LEASEHOLD RIGHTS WAS DETERMINED THEN THERE WAS NO D IFFICULTY IN MAKING ITA NO.6981/M/11 A.Y.08-09 30 APPORTIONMENT. THE VALUE OF LEASEHOLD RIGHTS IN THE COST OF ACQUISITION OF LAND BEING DETERMINABLE, THE COMPUTATION PROVISIONS UNDER THE ACT WERE APPLICABLE AND SECTION 45 WOULD BE ATTRACTED. ACCOR DINGLY, THE APPEAL WAS DISMISSED. THE ABOVE 3-JUDGE DECISION OF HONBLE SUPREME COURT IS SQUARELY APPLICABLE TO ASSESSEES CASE. THE LD. JOINT COMMISSIONER 11(2) H AS ANALYSED THESE ISSUES IN HIS DIRECTIONS GIVEN TO ASSESSING OFFICER, EXTRACTE D BY ASSESSING OFFICER IN THE ORDER. THE RELEVANT PARAS ARE AS UNDER :- 1.4. THE ASSESSEE SUBMITTED THAT IT MAY BE NOTED THAT T HE FIRM CONTINUED AS SUCH DESPITE RETIREMENT OF MR. KUNTAL DAVE. THE ONLY CHANGE IN LAW SINCE THE RATIO LAID DOWN BY THE SUPREME COURT IN T HE CASE OF MALABAR FISHERIES CO. V. CIT 120 ITR 46 @ 59 IS BY INSERTIO N OF SUB-SEC. (4) OF SECTION 45. HOWEVER, IT IS TO. BE NOTED THAT SECTIO N FASTENS LIABILITY ON THE FIRM & NOT ON THE RETIRING PARTNER & THAT TOO ONLY IF THERE IS DISTRIBUTION ASSETS IN KIND. IT DOES NOT APPLY TO PAYMENT OF MON EY. IN FACT, THE RESULT OF INSERTION OF S. 45(4) IS THAT ON RETIREMENT THE RET IRING PARTNER IS NOT LIABLE AT ALL AND THE LIABILITY IF CT ALL U/S. S. 45(4) IS AT TRACTED WILL BE ONLY ON THE FIRM. THE MANNER IN. WHICH THE ACCOUNTS ARE SETTLED & WHAT FROM THE RETIREMENT TAKES IS WHOLLY IRRELEVANT & IMMATERIAL. 1.5. I HAVE CONSIDERED THE ASSESSEES ARGUMENTS. IT MA Y BE MENTIONED HERE THAT THE CASE LAWS QUOTED BY THE ASSESSEE ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE SINCE IN ALL THE ABOVE CASE LA W, THERE WAS PAYMENT BY THE FIRM TO THE RETIRED PARTNERS OR PAYMENT TO T HE PARTNERS ON DISSOLUTION OF THE FIRM. IN THE INSTANT CASE THE F ACTS ARE SOME WHAT DIFFERENT. THE ASSESSEE ENTERED INTO PARTNERSHIP W.E.F. 01/04/2005 AS PER PARTNERSHIP DEED DTD. 31.3.2005 OF M/S. DALAL & SHAH, MUMBAI. THIS PARTNERSHIP DEED WAS MODIFIED SUBSEQUENTLY W.E.F. 01/11/206 VIDE PARTNERSHIP DEED DTD. 3/11/2006. SIMILARLY HE ENTER ED INTO A PARTNERSHIP OF M/S. DALAL & SHAH, AHMEDABAD VIDE PARTNERSHIP DE ED DTD. 1/4/2005 W.E.F. 01/04/2005. THE TERMS OF THIS PARTNERSHIP W ERE ALSO REVISED VIDE PARTNERSHIP DEED DTD. 03/11/2006 W.E.F. 01/11/2006. THE TERMS AND CONDITIONS OF THE PARTNERSHIP DEED OF BOTH THE FIRM S ARE MORE OR LESS IDENTICAL WITH MINOR CHANGES REGARDING SHARE OF PAR TNERS AND THE CONTRIBUTION TO THE CAPITAL ACCOUNT. THE CLAUSE 9( A) OF THIS PARTNERSHIP DEED OF M/S. DALAL & SHAH, MUMBAI DTD. 31/03/2005 S TATED THAT: IT IS AGREED THAT THE SHARE IN THE PARTNERSHIP FIR M COMPRISES OF THE FOLLOWING INHERENT NON SEPARABLE BUT RECOGNIZABLE R IGHT - REMUNERATION TO PARTNERS, THE RIGHT TO SHARE IN THE NET PROFITS OF THE PARTNERSHIP, THE RIGHT TO SHARE IN THE NET PARTNERSHIP ASSETS AND THE RIG HT TO SHARE IN THE PARTNERSHIP (GOODWILL), WHICH SHALL BE COMPUTED AND DISTRIBUTED AS ITA NO.6981/M/11 A.Y.08-09 31 DETAILED IN CHARTS 1 TO 4 HEREIN, UNLESS THE PARTNE RS MUTUALLY DECIDED TO CHANGE THE SHARING PROPORTIONS IN ANY MANNER WHATSO EVER IN WRITING. THUS, THE PARTNERS HAVE AGREED THAT THERE WILL BE R ECOGNIZABLE RIGHTS AND ALL THE RIGHTS ARE NON-SEPARABLE. CLAUSE 9(E) OF T HE PARTNERSHIP DEED OF M/S. DALAL & SHAH, MUMBAI DTD. 31/03/2005 IS AS UND ER: IN CASE OF THOSE PARTNERS WHO ARE ENTITLED TO SHAR E IN THE NET PARTNERSHIP ASSETS, THEY SHALL BE REQUIRED TO MAINT AIN AN AGGREGATE CREDIT BALANCE IN THEIR RESPECTIVE PARTNERS CAPITAL ACCOU NT WITH THE FIRM, AS CAPITAL OF THE PARTNERSHIP (REFERRED TO AS THE BLOC KED AMOUNT) WHICH IS SUFFICIENT TO COVER, AT THE END OF THE FINANCIAL YE AR, AT LEAST RS. 1,00,00,000/- BETWEEN ALL THESE PARTNERS, IN THE PR OPORTION MENTIONED IN FOURTH COLUMN OF CHARTS 1 TO 4 IN CLAUSE 9(A) ABOV E, AS APPLICABLE, UNLESS THEY MUTUALLY DECIDE TO MODIFY THE SAID BLOCKED AMO UNT. 1.6 THE RELEVANT CLAUSES IN THE OTHER PARTNERSHIP DEED ARE IDENTICAL EXCEPT FOR THE AMOUNT OF THE BLOCKED AMOUNT. THE ASSESSEE IS ONE OF THE PARTNERS WHO WAS ENTITLED TO SHARE IN THE NET PARTNERSHIP AS SET AND THEREFORE, HE WAS REQUIRED TO MAINTAIN THE AGGREGATE CREDIT BALAN CE IN HIS CAPITAL ACCOUNT AS BLOCKED AMOUNT. THUS, IT IS CLEAR THAT T HE ASSESSEE HAD TO CONTRIBUTE TOWARDS SUCH BLOCKED AMOUNT AT THE TIME OF BECOMING PARTNER OF THE FIRM IN ORDER TO ACQUIRE THE NON SEPARABLE RIGH TS AS PER CLAUSE 9(A) ABOVE. THE CLAUSE 16 OF THE PARTNERSHIP DEED SPECIF IES THE CONDITIONS REGARDING THE EXIT OF A PARTNER DUE TO DEATH OR RET IREMENT AND THE PAYMENTS TO BE MADE TO HIM OR THE NOMINEE OR LEGAL HEIRS AS THE CASE MAY. THIS CLAUSE STATES AS UNDER: CONSEQUENTLY, IN THE EVENT OF AN EXIST OF A PARTNE R, (A) THE FIRM SHALL PAY TO THE RETIRING OR DECEASED (EXISTING) PARTNERS OR HIS ESTATE AS THE CASE MAY BE: I. ALL AMOUNTS STANDING TO HIS CREDIT IN THE FIRM, BY WAY OF HIS PARTNERS CAPITAL ACCOUNT BLOCKED AMOUNT AND HIS REMUNERATION, IF ANY PAYABLE TO HIM UNDER CLAUSE HEREIN TILL THE DAT E OF DEATH OR RETIREMENT OR DETERMINATION; II. HIS SHARE OF THE NET PROFIT OF THE PARTNERSHIP FOR THE PERIOD SINCE THE CLOSE OF THE PREVIOUS ACCOUNTING YEAR TILL THE DATE OF DEATH OR RETIREMENT OR DETERMINATION WHICH WILL BE BASED ON THE ACCOUNT S FOR THE PERIOD FROM THE CLOSE OF PREVIOUS ACCOUNTING YEAR TILL THE DATE OF DEATH OR RETIREMENT OR DETERMINATION, WHICH SHALL BE MADE UP ON THE BASIS OF ACTUAL CASH RECEIVED, PLUS THE OUTSTANDING FEES, PL US FEES FOR THE MATTERS COMPLETED BUT NOT BILLED AND ALSO PROPORTIO NATE ESTIMATED NET FEES FOR THE WORK PARTLY COMPLETED. IN COMPUTING AB OVE, DUE ALLOWANCE SHALL BE MADE, AS ESTIMATED BY THE SENIOR PARTNERS FOR EXPENSES ITA NO.6981/M/11 A.Y.08-09 32 NECESSARY OR PROPERLY ALLOCABLE FOR COMPLETING SUCH WORK. THE ABOVE MAY BE DETERMINED ON A LUMP UM BASIS IF THE RETIRIN G PARTNER AND/OR THE HEIRS OF THE DECEASED PARTNER SO AGREE. AS TO T HE FEES DUE BUT NOT RECEIVED, THE SAME, UNLESS OTHERWISE AGREED, WILL B E SHARED WHEN RECEIVED (AFTER DEDUCTING EXPENSES INCURRED OR ALLO CABLE TO SUCH RECOVERY). (B) THE NOMINEE OR A NEW PARTNER, OR THE OTHER CONT INUING PARTNERS TO WHOM THE SHARE OF SUCH RETIRING OR DECEASED (EXISTING) P ARTNERS PASSES ON, EXCLUDING THE SITUATION WHERE THE SHARE WOULD VEST IN CIRCUMSTANCES OF EVENT OF VESTING, SHALL PAY TO THE RETIRING OR DECE ASED (EXISTING) PARTNER OR HIS ESTATE AS HE CASE MAY BE: I. HIS SHARE OF THE SURPLUS IN THE ESTIMATED VALUE OF THE NET PARTNERSHIP ASSETS OF THE FIRM OVER THE BOOK VALUE OF SUCH ASSE TS, AND II. VALUE OF HIS SHARE IN THE RIGHT TO SHARE IN PAR TNERSHIP (GOODWILL) IN ACCORDANCE WITH THE PROVISIONS SET OUT BELOW: SUBJECT TO AND WITHOUT PREJUDICE AS AFORESAID, THE VALUE OF RIGHT TO SHARE IN PARTNERSHIP (GOODWILL) MUST BE, EITHER, A MUTU ALLY AGREED VALUE BETWEEN THE TRANSFEROR AND TRANSFEREE, OR BE DETERM INED AS A FAIR VALUE, COMPUTED BY REFERENCE TO ONE OF THE FOLLOWING BASIS . (IIA) PURCHASE OF SO MANY TIMES THE ESTIMATED AVERA GE FUTURE EARNINGS. (IIB) CAPITALIZATION OF ESTIMATED AVERAGE FUTURE EA RNINGS. (IIC) CAPITALIZATION OF DISCOUNTED FUTURE CASH FLOW S; (IID) COMBINATION OF ANY OF THE ABOVE. (C) IT IS CLARIFIED THAT III ARRIVING AT THE AMOU NTS PAYABLE TO THE EXISTING PARTNER OR HIS HEIRS OR HIS ESTATE HEREIN ABOVE THE RE SHALL BE DEDUCTED, SUCH REASONABLE SUM, AS MAY BE REQUIRED TO BE RETAI NED AGAINST PROBABLE TAX LIABILITY OF, OR ATTRIBUTABLE TO, THE EXISTING PARTNER; AND AGAINST ANY DEBIT BALANCES OUTSTANDING IN ANY ACCOUNT OF SUCH P ARTNER. (D) IT IS CLARIFIED HEREBY THAT, IN THE EVENT THA T ANY PARTNER WHO HAS A RIGHT TO DIVEST A PORTION OF HIS SHARE, DECIDES TO DO SO IN ANY MANNER, THE PROVISIONS CONTAINED IN CLAUSE 16(A), (B) AND (C) A BOVE, TO THE EXTENT AND IN THE MANNER THEY ARE APPLICABLE TO THE CIRCUMSTANCES , SHALL APPLY AND BE OPERATIVE, AND THE RIGHTS AND THE LIABILITIES OF BO TH THE TRANSFEROR PARTNER AND THE TRANSFEREE PARTNER SHALL ACCORDINGLY BE GOV ERNED BY THE SAID CLAUSE 16 AND ITS SUB-CLAUSE ITA NO.6981/M/11 A.Y.08-09 33 THUS, THE AMOUNT STANDING IN THE CAPITAL ACCOUNT OF THE RETIRING PARTNERS AND HIS SHARE IN THE NET PROFIT TILL THE DATE OF HI S RETIREMENT ARE O BE PAID BY THE FIRM AND THE PARTNERS TO WHOM THE SHARE OF R ETIRING PARTNERS PASSES ON ARE UNDER1OBLIGATION TO PAY THE RETIRING PARTNER S HIS SHARE OF SURPLUS IN THE ESTIMATED VALUE OF THE NET PARTNERSHIP ASSET OV ER THE BLOCK VALUE AND THE VALUE OF HIS RIGHT TO SHARE IN CAPITAL (GOODWIL L). 1.7 THE ASSESSEE RETIRED FROM BOTH THE FIRMS AS PER D EEDS OF RETIREMENT EXECUTED ON 11/08/2007, 23/7/2007 RESPECTIVELY AND CLAUSES OF BOTH THE AGREEMENTS ARE IDENTICAL EXCEPT FOR BARE NECESSARY CHANGES. IT HAS BEEN MENTIONED IN CLAUSE (2) AS UNDER: PURSUANT T0 TO CLAUSE 16 OF THE DEED OF PARTNERSHI P DATED, 3RD NOVEMBER, 2006, THE SHARE IN THE PARTNERSHIP OF THE RETIRING PARTNER, ALL AND ANY EFFECTS IN THE SAID SHARE AND ALL AND ANY TITLES, I NTERESTS, CLAIMS AND DEMANDS WHATSOEVER OF THE RETIRING PARTNER IN THE A BSENCE OF ANY NOMINATION IS TO PASS ON TO THE CONTINUING PARTNERS IN THEIR RESPECTIVE PROPORTIONS IN THE RIGHT TO SHARE IN THE PARTNERSHI P(GOODWILL). IN TERMS OF THE SAME, IT IS NOW AGREED THAT IN FRIL L AND FINAL SETTLEMENT OF THE RIGHTS OF KUNTAL DAVE, HE HAS BEEN PAID ON OR B EFORE THE DATE OF EXECUTION OF THESE PRESENTS THE FOLLOWING SUMS. (A) VALUE OF THE RETIRING PARTNERS RIGHT TO SHARE IN THE PARTNERSHIP(GOODWILL) AND THE RIGHT TO SHARE IN THE NET PARTNERSHIP ASSETS AS DEFINED IN. CLAUSE 9(A) OF THE DEED OF PARTNERSH IP DATED 3RD NOVEMBER, 2006, WHICH IS MUTUALLY AGREED IN TERMS OF THE SAI D DEED AT RS. 39,60,000/- AND,RS.10,64,000/- RESPECTIVELY, .. (C) UNPAID INTEREST IN TERMS OF THE PARTNERSHIP DEE DS FROM TIME TO TIME ON THE KUNTAL DAVE CAPITAL ACCOUNT FROM 1ST APRIL, 200 6 UPTO 31ST JULY, 2007 AMOUNTING TO RS.1,37,59/- IT IS FURTHER AGREED IN TERMS OF CLAUSE 16 OF THE A FORESAID PARTNERSHIP DEED DATED 3RD NOVEMBER, 2006 THAT THE SUM AS AGREED TOW ARDS (A) ABOVE RS.39,60,000/- AND RS.10,64,000/ - RESPECTIVELY IS DEBITED TO THE FOLLOWING SPECIFIED PARTNERS IN THE FOLLOWING RATIO IN WHICH THE AFORESAID SNARE OF THE RETIRING PARTNER PASSES ON TO THEM: SPECIFIED PARTNERS SHARE IN THE PARTNERS HIP FIRM 1. MR.ASHISH 3.06% 2. MR. SHISHIR 3.06% ITA NO.6981/M/11 A.Y.08-09 34 3. MR. ANISH 2.38% AGGREGATING TO 8 .50% 1.8 THUS, IT IS CLEAR FROM THE CLAUSES OF THE DEEDS OF RETIREMENT THAT THREE PARTNERS NAMELY SHRI ASHISH SHARAD DALAL, SHR I SHISHIR V. DALAL AND SHRI ANISH PRAFUL AMIN TOOK OVER THE ASSESSEES SHAR E IN THE PARTNERSHIP FIRM ON HIS RETIREMENT. THUS THESE CONTINUING PART NERS, IN OTHER WORDS PURCHASED THE SHARE OF THE RETIRING PARTNERS I.E. A SSESSEES FOR THE AMOUNT OF RS. 39,60,000/- AND RS.10,64,000/- IN RESPECT OF DALAL & SHAH MUMBAI AND RS.5,40,000/- + RS.72,000/- IN RESPECT OF DALAL & SHAH, AHMEDABAD. THESE PAYMENTS IN RESPECT OF TRANSFER OF ASSESSEES RIGHT IN THE PARTNERSHIP WERE MADE BY THE THREE CONTINUING PARTN ERS AND NOT BY THE FIRM. THEREFORE, THERE IS TRANSFER OF RIGHT FROM ASSESSEE TO THESE THREE CONTINUING PARTNERS. AS ALREADY MENTIONED IN THE PA RTNERSHIP DEED RIGHT IN THE SHARE OF THE ASSESSEE IN THE PARTNERSHIP COMPRI SES OF THE INHERENT NON- SEPARABLE RIGHTS. THEREFORE, WHAT HAS BEEN TRANSFER RED BY THE ASSESSEE TO THESE THREE CONTINUING PARTNERS IS THE ASSESSEES S HARE IN THE PARTNERSHIP FIRM AT THE TIME OF RETIREMENT. 2. THE ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN IN RESPECT OF SALE PROCEEDS OF RS. 10,64,000/- AND RS. 72,000/- RECEIV ED FROM THE PARTNERS OF M/S.DALAL & SHAH, MUMBAI AND AHMEDABAD. HE HAS S HOWN THE COST OF ACQUISITION AT RS.5,16,150/- AND RS.13,153/- AS ON 01.04.2005 RESPECTIVELY. THESE ARE THE AMOUNTS PAID BY THE ASS ESSEE TO THE FIRMS AT THE TIME OF BECOMING PARTNER OF THE SAID FIRMS APAR T FROM HIS CONTRIBUTION TO THE CAPITAL ACCOUNT - BLOCKED AMOUNT. IT MAY BE MEN TIONED HERE THAT THE ASSESSEE AFTER MAKING THE PAYMENTS OF THESE AMOUNTS OF RS.5,16,150/- AND RS.13,153/- RESPECTIVELY HAS ACQUIRED THE RIGHT S IN THE PARTNERSHIP DEED( NOT ONLY HIS RIGHT TO SHARE IN PARTNERSHIP AS SET BUT ALSO THE OTHER NON SEPARABLE RIGHT). THEREFORE, THIS COST OF ACQUISITI ON ALSO PERTAINS TO HIS RIGHT TO SHARE IN THE PARTNERSHIP (GOODWILL). WE AGREE WITH THE ABOVE OBSERVATIONS OF ASSESSING O FFICER/JCIT. SINCE THE ASSESSEE OBTAINED NON-SEVERABLE BUNDLE OF RIGHTS IN THE PARTNERSHIP AT THE TIME OF ADMISSION, THE COST PAID AT THAT TIME CAN BE EQU ALLY APPORTIONED TO THE RIGHTS, WHICH WERE TERMED AS SEPARABLE BUT NON-ALIE NABLE LATER ON IN THE REVISED PARTNERSHIP DEEDS DT 03-11-06. 10.7 THERE IS NO DISPUTE TO THE FACT THAT THE SHARE IN PROFIT OF THE PARTNERSHIP WAS OFFERED TO TAX AS CAPITAL GAIN AND SO THE SHARE IN ASSETS OF THE PARTNERSHIP (ASSETS AND GOODWILL) ALSO REQUIRED TO BE TAXED ACC ORDINGLY. ASSESSEE RECEIVED ITA NO.6981/M/11 A.Y.08-09 35 SHARE IN PARTNERSHIP ASSETS AND GOODWILL BY TRANSFE RRING THE SAME TO THE CONTINUING PARTNERS ONLY. FIRM HAS NOT PAID ANY MO NEY TO THE RETIRED PARTNER, SO PROVISIONS OF SECTION 45(4) DOES NOT APPLY, AS T HE ASSESSEE TRANSFERRED THE RIGHTS TO THREE PARTNERS ONLY, NOT TO ALL OF THEM W HO PAID THE CONSIDERATION. THEREFORE, THE COMPUTATION AS MADE BY AO IS APPROVE D AND ASSESSEES GROUND IN THIS IS REJECTED. 10.8 ASSESSEE AND REVENUE HAS RELIED ON VARIOUS CAS E LAW WHICH ARE GIVEN IN VARIOUS FACT SITUATIONS. THE ASSESSEE HAS RELIED BE FORE THE AUTHORITIES ON VARIOUS CASE LAWS STATING THAT THERE IS NO TRANSFER INVOLVED WHEN A PARTNER RETIRES FROM THE PARTNERSHIP FIRM. HOWEVER, THIS C ONTENTION WAS WITHDRAWN AND IT WAS ADMITTED THAT THERE IS TRANSFER INVOLVED AND ASSESSEE IN FACT ADMITTED CAPITAL GAINS ON TRANSFER OF RIGHTS IN THE PARTNERS HIP ASSETS. THEREFORE TO THIS EXTENT THE CASE RELIED UPON BY ASSESSEE BEFORE THE AUTHORITIES ARE NO LONGER RELEVANT. THE LD. CIT-DR RELIED ON THE CASE OF BISHAN LAL KANODIA VS. CIT 122 TAXMAN 460(DEL.) TO HOLD THAT THERE IS TRANSFER AND AMOUNT EXCESS R ECEIVED IS TAXABLE UNDER THE HEAD CAPITAL GAINS. EVENTHOUGH TH E PRINCIPLE OF LAW IS APPLICABLE SINCE THE ASSESSEE ADMITTED THAT THERE I S TRANSFER, THERE IS NO NEED TO SPECIFICALLY APPLY THE PRINCIPLES IN THE CASE. T HE LD. DR ALSO RELIED ON THE CASE OF SMT. GIRIJA REDDY VS. INCOME TAX OFFICER 23 TAXMANN .COM 95(HYD.) WHICH IS ALSO MAINLY ON THE ISSUE OF TRANSFER WITHI N THE MEANING OF SECTION 2(47) OF THE ACT. THE CASE OF SUDHAKAR M. SHETTY VS. ACIT 130 ITD 197(MUM.) WAS ON AFFIRMING THE CAPITAL GAINS WHEN A PARTNER R ETIRED. THE SAID CASE WAS GIVEN IN THE CONTEXT OF RECEIVING THE AMOUNT FROM T HE FIRM AFTER RETIRING. IN THIS CASE, THE FACTS ARE THAT EVENTHOUGH THE ASSESSEE HA S RETIRED, THE SHARE IN GOODWILL AND ASSETS WAS RECEIVED FROM OTHER PARTNER S WHO PURCHASED THE SHARES AND NOT BY THE FIRM. THEREFORE, THE SAID CAS E EVEN THOUGH IN FAVOUR OF THE REVENUE IS NOT FULLY APPLICABLE TO THE FACTS OF THE CASE. ACCORDINGLY TO THE EXTENT RELEVANT AND APPLICABLE CASE LAW ARE CONSID ERED AND BALANCE OF THE CASE LAW ARE NOT REFERRED, AS THEY ARE NOT APPLICABLE TO THE FACTS OF THIS CASE. ITA NO.6981/M/11 A.Y.08-09 36 10.9 SINCE WE HAVE APPROVED THE COMPUTATION MADE BY AO TAXING THE AMOUNTS RECEIVED FROM THE OTHER THREE CONTINUING PA RTNERS BY THE RETIRED PARTNER (ASSESSEE ), THERE IS NO NEED TO CONSIDER T HE ALTERNATE CONTENTIONS THAT PROVISION OF SECTION 55(2B) ARE NOT APPLICABLE. THE RE MAY BE MERIT IN ASSESSEES CONTENTION IF THE SHARE IN GOODWILL IS CONSIDERED A S A SEPARATE RIGHT. SINCE THE FACTS INDICATE THAT THE SHARE IN ASSETS AND GOODWIL L ARE NON-SEPARABLE RIGHTS ACQUIRED AT THE TIME OF ADMISSION BY PAYING COST, T HE SAME IS LIABLE TO TAX UNDER THE PROVISION OF CAPITAL GAIN. THE GROUNDS RA ISED BY THE ASSESSEE ARE DISMISSED. 11. THE ASSESSEE RAISED AN ADDITIONAL GROUND. ON EX AMINATION OF COMPUTATION OF INCOME, ASSESSEES CONTENTION IS FOU ND TO BE CORRECT. ASSESSEE OFFERED SHORT TERM CAPITAL GAIN OF RS.6,06,697/- ON TRANSFER OF RECEIPTS IN SHARE OF ASSETS OF PARTNERSHIP. ASSESSING OFFICER INCLUDE D THE CONSIDERATION RECEIVED AGAIN IN HIS WORKING WHILE DETERMINING THE CAPITAL GAINS ON BOTH RIGHTS OF SHARE IN ASSET/GOODWILL. THEREAFTER, THE CAPITAL GAIN OFF ERED WAS AGAIN BROUGHT TO TAX (AS PER STATEMENT). THUS, THE AMOUNT WAS BROUGHT TO TAX TWICE. ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE AMOUNT OF RS.6,0 0,697/- AT THE TIME OF PASSING CONSEQUENTIAL ORDER. THE ADDITIONAL GROUND IS ALLOWED. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH AUGUST, 2013. SD/- SD/- (VIVEK VARMA ) JUDICIAL MEMBER (B. RAMAKOTAIAH ) ACCOUNTANT MEMBER MUMBAI, DATED: 28/08/2013. JV. ITA NO.6981/M/11 A.Y.08-09 37 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.