SHRI PAWAN LASHKARY, Jaipur V. DCIT, Jaipur

ITA 808/JPR/2011

• Counselvise Citation: 80823114 RSA 2011
• Duration Of Justice: 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 17-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 15-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Search and seizure; Document seized; Rule of consistency; Earning of tax free income; Deemed to accrue or arise in india; Additional evidence; Question of law; Fair market value; Avoidance of tax; Capital receipt; Commercial expediency
• Section: 45(2); 45(5); 2(14); 153A; 147; 132; 28; 10; 15; 139

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH A JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO.808/ JP/2011 ASSESSMENT YEAR 2007-08 PAN: AAVPL 3181 E SHRI PAWAN LASHKARY VS. THE DCIT B-304, JANTA COLONY CENTRAL CIRCLE- 2 JAIPUR JAIPUR (APPELLANT ) (RESPONDENT) ASSESSEE BY : SHRI VIJAY GOYAL DEPARTMENT BY : SHRI SUNIL MATHUR DATE OF HEARING: 17-11-2011 DATE OF PRONOUNCEMENT: 06-01-2012 ORDER PER N.L. KALRA, AM:- THE ASSESSEE HAS FILED AN APPEAL AGAINST THE ORD ER OF THE LD. CIT(A)-CENTRAL, JAIPUR DATED 12-08-2011 FOR THE ASSESSMENT YEAR 2007-08. 2.1 THE ASSESSEE FILED THE REVISED FORM NO. 36 REQU ESTING FOR MODIFYING THE GROUNDS OF APPEAL. THE MODIFIED GROUNDS OF APPEAL WERE ADMI TTED AND THESE ARE REPRODUCED AS UNDER:- 1. THE ORDER OF THE LOWER AUTHORITIES IS AGAINST LAW, WEIGHT OF EVIDENCE AND PROBABILITIES OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS. 5,2 4,47,943/- MADE BY THE AO FOR THE CAPITAL ACCOUNT BALANCE RECEIVED BY THE APPELLANT ON ACCOUNT OF HIS RETIREMENT FROM THE FIRM M/S. KRISHN A VILLA APARTMENTS IN SPITE OF THE FACT THAT THE SAID FIRM WAS NOT DIS SOLVED AND CONTINUED AS A GOING CONCERN. 3. THE LOWER AUTHORITIES FAILED TO APPRECIATE THAT THE SHARE IN PROFIT ON REVALUATION OF PARTNERSHIP FIRMS ASSETS AMOUNTING TO RS.5,24,47,943/- 2 RECEIVED BY THE ASSESSEE ON HIS RETIREMENT FROM A P ARTNERSHIP FIRM WHICH IS CONTINUING IN BUSINESS WAS NOT TAXABLE EIT HER UNDER S. 10(2A), S. 28(IV) OR S. 28 (V) OR S. 45(4) AND IN VIEW OF T HE LAWS LAID DOWN BY HONBLE APEX COURT IN (1987) 165 ITR 166 (SC) AND ( 2001) 247 ITR 801 (SC) AND IN VIEW OF THE DECISION OF HONBLE MUM BAI HIGH COURT IN (2010) 324 ITR 154 (BOM). THE ORDER PASSED BY T HE LOWER AUTHORITIES VIOLATES ART. 141 OF CONSTITUTION OF IN DIA. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD CIT(A) ERRED IN HOLDING THAT THE PROFIT APPARENTLY SHOWN ON ACCOUNT OF REVALUATION OF LAND BUT EFFECTIVELY AND ACTUALLY IS ON ACCOUNT OF TRANSFER OF RIGHTS IN THE LAND BY THE RETIRING PARTNERS TO T HE NEW PARTNERS OF THE FIRM AND SUCH PROFIT IS LIABLE TO BE TAXED UNDER TH E HEAD INCOME FROM OTHER SOURCES. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD CIT(A) ERRED IN HOLDING THAT DEVELOPMENT AGREEMENT WITH M/S GOLD DREAM BUILDERS, ALLOWING ENTRY OF FOUR PARTNERS OF M/S GOLD DREAM BUILDERS AS NEW PARTNERS IN M/S KRISHNA VILLA APART MENT, REVALUATION OF THE LAND, AND THEREAFTER RETIREMENT OF OLD PARTN ERS FROM THE FIRM M/S KRISHAN VILLA APARTMENT AND TAKING AWAY THE PROFIT SO EARNED ON ACCOUNT OF REVALUATION BY THE RETIRING PARTNERS ARE THE ARRANGEMENTS, THAT HAVE BEEN USED AS DEVICE TO EVADE THE TAX ON P ROFITS EARNED ON RELINQUISHMENT OF RIGHT, TITLE AND INTEREST IN THE LAND BY SH. PAWAN LASHKARY AND SHRI JITENDRA AGARWAL. THE LD CIT(A) F AILED TO APPRECIATE THAT NO TAX CAN BE EVADED IN VIEW OF THE FINDINGS OF THE LD AO IN THE ASSESSMENTS OF M/S KRISHNA VILLA APARTMEN T WHEREIN SHE HELD THAT THE COST OF THE LAND AT REVALUED PRICE WI LL NOT BE ALLOWED FOR DEDUCTION FOR THE PURPOSE OF PART SALE OF THE LAND IN AY 2008-2009. THE ASSESSMENT OF PROFIT ON ACCOUNT OF REVALUATION OF THE LAND IN THE HANDS OF RETIRING PARTNERS AND NOT ALLOWING THE CO ST OF THE REVALUATION IN THE HANDS OF THE FIRM IS AMOUNT TO DOUBLE TAXATI ON. 6. IT IS CONTENDED THAT WHILE COMPLETING THE ASSESS MENT THE LEARNED DCIT CENTRAL CIRCLE-2, JAIPUR NEITHER APPRECIATED THE FA CTS OF THE CASE PROPERLY NOR THE PROVISIONS OF INCOME TAX ACT AND T HE LEARNED A.O. PASSED THE ASSESSMENT ORDER U/S 153A/143(3) OF INCO ME TAX ACT ON PRESUMPTION, ASSUMPTION, SURMISES AND CONJECTURES B ASED PURELY ON NO EVIDENCE OR ON IRRELEVANT EVIDENCE; ARBITRARY OR WH IMSICAL AND LD CIT(A) CONFIRMED THE ORDER OF ASSESSING OFFICER WIT HOUT APPRECIATING THE FACTS OF THE CASE AND PROVISIONS OF INCOME TAX LAW, THUS, THE ASSESSMENT ORDER U/S 153A/143(3) OF INCOME TAX ACT, IS AB-INITIO VOID AND BAD IN LAW AND DESERVES TO BE ANNULLED. 3 7. THE ASSESSEE PRAYS FOR LEAVE TO ADD, TO AMEND, T O DELETE, TO MODIFY THE ALL OR ANY GROUNDS OF APPEAL ON OR BEFORE THE HEARI NG OF APPEAL. 2.2 THE ASSESSEE IS AN INDIVIDUAL AND FILED THE RET URN OF INCOME IN WHICH THE ASSESSEE HAS SHOWN THE INCOME UNDER THE HEAD SALARIES , IN COME FROM HOUSE PROPERTY, INCOME FROM CAPITAL GAINS , INCOME UNDER THE HEAD BUSINES S AND INCOME FROM OTHER SOURCES. UNDER THE HEAD OF INCOME FROM BUSINESS, THE ASSESSE E HAS CLAIMED INCOME FROM PARTNERSHIP FIRM AS EXEMPT. THE SEARCH AND SEIZURE OPERATIONS WERE CARRIED OUT AT THE RESIDENTIAL AND BUSINESS PREMISES OF THE ASSESSEE A S WELL AS THE AT THE RELATED FIRMS ON 06- 08-2008. HENCE A NOTICE U/S 153A OF THE ACT WAS ISS UED VIDE WHICH THE ASSESSEE FILED THE RETURN DECLARING AN INCOME OF RS. 10,90,820/-. WHIL E MAKING THE ASSESSMENT VIDE ORDER DATED 27 TH DEC. 2010, THE AO HAS ASSESSED THE INCOME AT RS. 5,24,47,943/-. 2.3 THE ASSESSEE ENTERED INTO AN AGREEMENT OF PARTN ERSHIP WITH SHRI JITENDRA AGARWAL ON 15-07-06 FOR CARRYING OUT THE REAL ESTATE BUSINE SS. THE FIRM WAS IN THE NAME OF M/S.KRISHNA VILLA APARTMENT IN WHICH THE ASSESSEE W AS HAVING 75% SHARE WHILE SHRI JITENDRA AGARWAL WAS HAVING 25% SHARE. THE FIRM PUR CHASED THE LAND ON 25-07-2006 FOR A SUM OF RS. 1.05 CRORES IN THE VILLAGE SIROLI MEAS URING 3.77 HECTARE. SUCH LAND WAS PURCHASED FROM M/S. PAWAN CREATIONS (P) LTD. (N SH ORT M/S. M/S.PCPL) THIS LAND WAS GOT CONVERTED INTO RESIDENTIAL/ COMMERCIAL LAND BY M/S.PCPL . THE NECESSARY CHARGES FOR CONVERSION AND OTHER EXPENSES WERE NOT DEPOSIT ED EITHER BY M/S.PCPL OR BY THE OWNER / FARMERS OF THE LAND AND THEREFORE, THE FIRM M/S.KRISHNA VILLA APARTMENT DEPOSITED SUCH CHARGES AND APPLIED FOR GROUP HOUSIN G PATTTA FROM JAIPUR DEVELOPMENT AUTHORITY ( IN SHORT JDA). THE JDA ISSUED PATTA IN THE NAME OF M/S.KRISHNA VILLA APARTMENT AND THIS FIRM ENTERED INTO A DEVELOPMENT AGREEMENT ON 30 TH SEPT. 2006 WITH 4 M/S. GOLD DREAM DEVELOPER, A PARTNERSHIP FIRM CONSI STING OF FOUR PARTNERS SHRI SHANKAR M JETHANI, , SHRI ARUN BANSAL, SHRI MIRAJ UN NABI K HAN AND SHRI NAVED SAIDI. THE TWO FIRMS NAMELY M/S.GOLD DREAM BUILDERS AND DEVELOPER AND M/S.KRISHNA VILLA APARTMENT MERGED TOGETHER AND M/S.KRISHNA VILLA APARTMENT TOO K OVER THE ASSETS AND LIABILITIES OF M/S.GOLD DREAM BUILDERS AND DEVELOPER. BEFORE THIS MERGER THE LAND WAS REVALUED AS ON 18-01-2007 AT RS. 9,17,80,000/- AND DIFFERENCE OF R EVALUATION WAS CREDITED TO THE CAPITAL ACCOUNT OF THE EXISTING PARTNERS AS ON 18-01-2007 I.E. SHRI PAWAN LASHKARI AND SHRI JITENDRA AGARWAL TO THE EXTENT OF RS. 5,24,47,943/- AND RS. 1,74,82,647/- RESPECTIVELY. A NEW PARTNERSHIP DEED WAS EXECUTED ON 19-1-2007 IN W HICH FOUR PARTNERS OF M/S.GOLD DREAM BUILDERS AND DEVELOPER WERE TAKEN AS PARTNERS IN THE FIRM M/S.KRISHNA VILLA APARTMENT. WITHIN ONE MONTH OF THE CONSTITUTION OF THE NEW FIRM, SHRI JITENDRA AGARWAL RETIRED FROM THE FIRM W.E.F. 10-02-2007. THE ASSESS EE ALSO RETIRED FROM THE FIRM ON 19-03- 2007 AND THEREAFTER A NEW PARTNERSHIP DEED WAS EXEC UTED IN WHICH FOUR PARTNERS OF M/S.GOLD DREAM BUILDERS AND DEVELOPER REMAINED AS P ARTNERS IN THE FIRM M/S.KRISHNA VILLA APARTMENT. THE CAPITAL ACCOUNT OF THE ASSESSE E WAS CREDITED ON REVALUATION OF THE LAND ON 18-01-2007 AND THIS AMOUNT WAS WITHDRAWN BY THE ASSESSEE. THE CASE OF THE REVENUE IS THAT ALL THE ARRANGEMENTS HAVE BEEN MADE TO TRANSFER THE LAND FROM THE FIRM OF TWO PARTNERS OF ERSTWHILE M/S.KRISHNA VILLA APARTME NT TO THE FOUR PARTNERS OF M/S.GOLD DREAM BUILDERS AND DEVELOPER WHO BECAME THE PARTNER OF THE FIRM OF M/S.KRISHNA VILLA APARTMENT W.E.F. 19-01-2007. IN THE PROFIT AND LOSS ACCOUNT OF THE FIRM I.E. M/S.KRISHNA VILLA APARTMENT , THE TRANSACTION OF REVALUATION W AS TAKEN AS AN EXPENDITURE UNDER THE HEAD REVALUATION WHILE THE CLOSING STOCK WAS TAKEN AT REVALUED VALUE. THE ASSESSEE CLAIMED EXEMPTION U/S 10(2A) OF THE ACT. THE AO ME NTIONED THAT THE EXEMPTION U/S 5 10)2A)IS AVAILABLE TO THE PARTNER ONLY ON THE COND ITION THAT SUCH INCOME IS TAXED IN THE HANDS OF THE FIRM. THIS EXEMPTION RESTS ON THE CARD INAL PRINCIPLE OF TAXATION THAT SAYS THAT NO INCOME SHOULD BE TAXED TWICE. THUS, INCOME TAXED IN THE HANDS OF THE FIRM IS EXEMPT IN THE HANDS OF THE PARTNER BUT AMOUNT CONSIDERED A S AN EXPENSE BY A FIRM IS BY NO MEANS EXEMPT IN THE HANDS OF THE PARTNER. WITH THE RESULT THAT RS. 5.24 CRORES HAS NEITHER BEEN TAXED IN THE HANDS OF THE FIRM (AS CLAIMED AS AN EX PENSE) NOR IN THE HANDS OF THE PARTNER, THE ASSESSEE SH PAWAN LASHKARY (CLAIMED EXEMPTION U /S 10(2A)). IN THIS CONNECTION, THE AO REFERRED THE OBSERVATION OF THE HONBLE SUPREME COURT IN THE KEDARNATH JUTE MANUFACTURING CO. LTD. V/S CIT (1971) 82 ITR 363 IS APPROPRIATE TO QUOTE: WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DE DUCTION OR NOT WILL DEPEND ON THE PROVISIONS OF LOW RELATING THERE TO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHT, NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN HIS BOOKS OF ACCOUNT BE DECIS IVE OR CONCLUSIVE IN THE MATTER. 2.4 THE AO MENTIONED THAT THE DEPARTMENT CAME INTO POSSESSION OF SEVERAL INCRIMINATING DOCUMENTS AS THE RESULT OF SEARCH ON 6.8.2008 ONE OF WHICH IS THE PAGE 33 FROM ANNEXURE A 26 SEIZED FROM 73-75, TALKATORA AND THIS PAPER INDICATES THAT THE SAID FACTS AND QUERY WERE TYPED TO BE POSED TO SH MANOJ CHAUDHARY (WRITTEN IN TOP WITH PENCIL) WHO IS CHARTERED ACCOUNTANT IN THE CASE OF THE FIRM, M/S KRISHNA VILLA APARTMENT. THE FIVE QUERIES DEAL WITH THE TRAJECTOR Y OF EVENTS DESCRIBED IN THE FLOW CHART AT PARA 2 AND THE IMPLICATIONS ON INCOME TAX LIABIL ITY OF THE FIRM AND THE PARTNERS. THIS DOCUMENT SEIZED DURING SEARCH CLINCHES THE ANSWER A RRIVED AT IN PARA 6 OF THE ORDER THAT THE ENTIRE TRANSACTION INVOLVING TAKE-OVER AGREEME NT REVALUATION, CREDITING THE DIFFERENCE BETWEEN REVALUATION AND BOOK VALUE, THE RETIREMENT, THE WITHDRAWAL OF CAPITAL ACCOUNT AND THE CLAIM OF EXEMPTION ARE ALL THROUGH CAREFUL SCHEMING AND COLLUSION TO EVADE TAX. DURING THE COURSE OF SEARCH AND DURING P OST SEARCH, THE ASSESSEE WAS 6 CONFRONTED WITH THE ABOVE EVENTS AND ON 7/8.08.2007 , VIDES REPLY OF QUESTION NO. 19-24, 28 SH. PAWAN LASHKARY STATED AS UNDER:- 11- IZU 19 ANNEXURE A-60 FTLESA I ` 'B LA- 1 LS 72 GSA FTLS VKIDKS FN[KK;K TK JGK GSA FTLESA DQN IKVZUJFKI MHM GS] DS I ` 'B LA- 52 LS 58 RD FNUKAD 19-01-2007 DH IKVZUJFKI MHM DS I ` 'B LA- 42 LS 51 FNUKAD 10-02-2007 I ` 'B LA- 39 LS 41 RD FNUKAD 19-07-2006 DH IKVZUJFKI MHM GSA TKS HKKXHNKJH QEZ D``'.K FOYK VI KVZESAV DS LANHKZ ESA FY[KH XBZ GS ,OA IRK 60] RKYDVKSJK] T;IQ J FUFNZ'V FD;K X;K GS ,OA BLESA HKKXHNKJH 'KQ: DH FRFKH I ` 'B LA- 57 IJ VAFDR GSAA BLH I ` 'B IJ XZKE FLJKSYH] 160 QHV JKSM+ TXRIQJK RGLHY LKA XKUSJ ESA FLFKR HKWEH DK HKH FOOJ.K GS ,OA MLESA 18-01-2007 D KS ES- XKSYM M HE FCYMLZ ,.M MOYOLZ ,OA VU; LFEEFYR GKSUS OKYS HKKXHNKJH }KJK MIJKSDR HKWFE DKS IGYS HKOU CUKUS GS RQ ,OA CKN ESA MLS [KJHNUS GSRQ FY[KK GQVK GSA D`I;K BL LANHKZ ESA FLJKSYH ESA HKWFE ,OA QEZ DS YSU NSU DS CKJS ESA C;KSJK NSO SAA MRRJ& ES- D``'.K FOYK VIKVZESAV ESA ESJS LO;A ,OA J H FTRSUNZ VXZOKY DH HKKXHNKJH QEZ GS FTLDH LFKKIUK FNUKAD 15- 07-2006 DKS DH XBZA BL HKKXHNKJH QEZ ESA ESJK FGLLK 75 IZFR KR ,OA 25 IZFRKR HKKXHNKJH JH FTRSUNZ VXZOKY XKSFOUN UXJ IWO Z T;IQJ DH GSA BLDS I'PKR ESA D``'.K FOYK VIKVZESAV ESA GEKJS }KJK XZKE FLJKSYH ESA FLFKR 3-67 GSDVS;J HKWFE GS] ES- IOU FDZ;SKU I ZK- FY- LS DZ; DH FKHA BLDK IATHD ` R DK;KZY; CH&304] TURK DKYKSUH GS FTLES ESA FUNSKD GWA ES- IOU FDZ;SKU IZK- FY- US XZKE FLJKS YH DYK DH HKWFE FNUKAD 26-10-2005 DKS UKSVJKBZT BDJKJUKES DS }KJK , OA EQ[;R;KUKEK FNUKAD 26-10-2005 }KJK GLRKURFJR GKS XB Z FKHA BLDS I'PKR ES- D``'.K FOYK VIKVZESAV ES- IOU FDZ;SKU IZ K- FY- LS DZ; DJ YH FKHA TKS :I;S ,D DJKSM+ IPKL YK[K ESA YH XBZ FKH ,O A BLDS I'PKR ES- D``'.K FOYK VIKVZESAV US ESJH HKKXHNKJH DS O GSFL;R IV~VS T;IQJ FODKL IZKF/KDJ.K LS TKJH DJOK;K ,OA NS; 'KQYD HKH E S- D``'.K FOYK VIKVZESAV }KJK GH TEK DJK;K X;K TKS FD RDJHCU :I;S ,D DJKSM+ DS VKLIKL FKK BLDS I'PKR~ GEUS ES- XKSYM M HE FCYMLZ ,.M MOYOLZ LS HKKXHNKJH DH RRIPKR~ VKILH JTKEANH LS GEKJH HKKXHN KJH DK FO?KVU GKS X;K ,OA LVKD DK FJOSYOSKU DJ CKDH CPS L K>SNKJKSA }KJK GESA GEKJH FGLLS DH JKFK DK LEIW.KZ HKQXRKU DJ FN; K X;KA 7 IZU 20& ESA VKIDKS ANNEXURE A-60 DS I ` 'B LA- 71 FN[KK JGK GWWAA D`I;K BLDKS NS[K DJ CRK;S FD ;G FDLLS LACAF/KR GS\ MRRJ& ;G GEKJH QEZ ES- D``'.K FOYK VIKVZESAV DH CSY SUL 'KHV FNUKAD 31-03-2007 FN[KK JGS GS BLDS VUQLKJ DSFIVY [ KKRS ESA JH EHJKT [KKA JH UKOSN LBZNH] JH 'KADJ TSBKUH DH IWATH : 5000 IZR;SD NKKZ;H X;H GSA TCFD ES- XKSYM M HE FCYMLZ ,.M MOYOLZ DH DSFIVY : 9]18]00]000@& NKKZ;H X;H GS BLH IZDKJ ASSET SIDE IJ CURRENT ASSETS : 9]18]20]000@& UKS DJKSM+ VBKJG YK[K CHL GTKJ CRKBZ X;H GSA IZU 21& D`I;K BL QEZ DH MRIFRR GS ,OA IWATH L=KSR DS CKJS ESA FOLRKJ LS CRK;S\ MRRJ& ES- D``'.K FOYK VIKVZESAV FNUKAD 15-07-2006 D KS VFLRRO ESA VKBZA BLESA NKS IKVZUJ ,D ESA] LO;A IOU YDJH , OA JH FTRSUNZ VXZOKY DZEK% 75 ,OA 25 IZFRKR DS HKKXHNKJ FKSA BL DS CKN GEUS BL QEZ DS IZKSTSDV DKS MOYI DJUS DK FUP; FD;KA BL GSRQ ES- XKSYM M HE FCYMLZ ,.M MOYOLZ LS HKKXHNKJH DHA RRIPKR~ ES- XKSYM M HE OKYKS DS O GEKJS CHP FDUGHA DKJ.KKSA LS LK>SNKJH DK FO?KVU GKS X;KA IZU 22& D`I;K CRKOSA VKIDS }KJK ES- D``'.K FOYK VI KVZESAV ESA TKS HKWFE DS :I ESA LVKWD ES- IOU FDZ;SKU IZK- FY- LS [KJHNK FKK MLDK D;K IZFRQY PQDK;K FKK\ MRRJ& ;G TEHU TKS FD XZKE FLJKSYH] TXRIQJK] RGLHY L KAXKUSJ ESA FLFKR FKH ,OA FTLDK ,FJ;K YXHKX 3-69 GSDVS;J DS FY;S GEUS ES- IOU FDZ;SKU IZK- FY- DKS ,D DJKSM+ IKAP YK[K :I;S DK H KQXRKU FD;KA BLDS BL HKWFE DS :IKURJ.K ,OA JFTLV SKU IJ YXHKX ,D DJKSM+ :I;K [KPKZ GQVKA BL IZDKJ BL HKWFE DH YKXR YXHKX NKS DJKSM+ : IM+HA ;G NKS DJKSM+ :I;K GE NKUKSA IKVZULZ }KJK QEZ ESA YXK;K X; K FKKA IZU 22& D`I;K CRK;S MDR 5-25 DJKSM+ DS YKHK IJ VKI DS }KJK D;K DKSBZ VSDL PQDK;K X;K GS\ 8 MRRJ& MIJ FN;S X;S C;KUKSA ESA IZU LA- 24 DS MRRJ ESA ESAUS ES- D``'.K FOYK VIKVZESAV DS ISVS IZKIR YKHKKAK JKFK : 7 DJKSM+ DKS LO;A DH VKSJ VIUS IKVZUJ JH FTRSUNZ VXZOKY DH V?KKS F'KR VK; DE :I ESA LEFIZR DJ PQDK GWAA BLH IZDKJ IZU LA- 26 DS MR RJ ESA 21 YK[K :I;S DH V?KKSF'KR TOSYJH DE ISVS V?KKSF'KR VK; DS : I ESA LEFIZR FD;K GSA BLDS VFRFJDR TKS VU; NLRKOST FTUDK OSFJFQDSKU UGHA GKS IK;K GS MUGSA ESA CKN ESA OSFJQKBZ DJOK NWAXK VKSJ ;FN D KSBZ V KATSDKU V?KKSF'KR VFKOK VFU;FER IK;H TKRH GS RKS M LS VK;DJ GSRQ LEFIZR DJ NAWXKA 2.5 THUS BY VIRTUE OF STATEMENT U/S 132 (4), THE AS SESSEE SURRENDERED RS.5.24 CRORES IN HIS HANDS AS UNDISCLOSED INCOME FOR THIS ASSESSMENT YEAR. THE BINDING NATURE OF STATEMENT U/S 132 (4) ON THE ASSESSEE AND ITS UTILI TY IN ASSESSMENT PROCEDURE HAS BEEN CLARIFIED BY VARIOUS COURTS. IN RAMESHCHAND AND CO. V CIT [1987] 168 ITR 375, THE BOMBAY HIGH COURT OBSERVED THAT WHERE AN ASSESSEE H AS MADE A STATEMENT OF FACTS, HE CAN HAVE NO GRIEVANCE IF THE TAXING AUTHORITY TAXES HIM IN ACCORDANCE WITH THAT STATEMENT. IN THE CASE OF KUNHAMBU (V) AND SONS V. COMMISSIONE R OF INCOME TAX (1996) 219 ITR 0235, KERALA HIGH COURT HAS HELD THAT ADDITION MADE ON THE BASIS OF STATEMENT U/S 132 (4) 132 (4) IS VALID. THE AO MENTIONED THAT THE ASSESSE E HAS NOT SURRENDERED THE ABOVE INCOME IN THE RETURN FILED U/S 153A OF INCOME TAX A CT AND REITERATED HIS CLAIM FOR EXEMPTION OF RS.5.24 CRORES AS HIS PROFIT FROM FIRM . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE EXPLAINED THAT SINCE SHRI PAWAN LASHKARY WITHDRAWN HIS CAPITAL FROM FIRM, THEREFORE THE SAME CANNOT BE TREATED AS CAPITAL GAIN/BUSINESS INCOME IN THE HANDS OF THE PARTNERS BECAUSE OF THE FOLLOWING REAS ONS:- I) SHRI PAWAN LASHKARY HAS NOT TRANSFERRED ANY CAPITAL ASSETS TO FIRM. II) AT THJE TIME OF RETIREMENT OF THE ASSESSEE, THE FIR M WAS CONTINUING, AND THE RETIRING PARTNER WITHDRAW ONLY HIS CAPITAL FROM FIRM, THEREF ORE THE SAME CANNOT BE TREATED AS INCOME. 9 III) THE SHARE OF PARTNER IN THE INCOME OF THE FIRM IS E XEMPT FROM TAX AS PER PROVISIONS OF SECTION 10(2A) OF INCOME TAX ACT. THE FIRM IS SEPA RATE ASSESSEE. THE PAN OF THE FIRM IS AAIFK3348R. THE FIRM HAS FILED ITS INCOME T AX RETURN FOR AY 2007-08 ON 01.05.2008 AT ACKNOWLEDGEMENT NO. 19863390010508 BE FORE SEARCH. THE COPY OF ACKNOWLEDGEMENT OF THE RETURN OF THE FIRM M/S. KRIS HNA VILLA APARTMENT IS ENCLOSED HEREWITH. IV) SO FAR SURRENDER OF INCOME MADE ON THIS ACCOUNT AT THE TIME OF SEARCH THIS IS TO SUBMIT THAT THE SURRENDER WAS UNDER WRONG BELIEF. THE ASSE SSEE WAS NOT EXPERT IN TAXATION LAW. THE SEARCH PARTY CONVINCED THE ASSESSEE THAT T HE AMOUNT IS TAXABLE IN THE HANDS OF THE ASSESSEE SO HE MADE THE SURRENDER. THE INCOM E TAX CAN BE LEVIED AS PER THE PROVISIONS OF INCOME TAX ACT: NOT ON THE BASIS OF A DMISSION OR AGREEMENTS. THERE CANNOT BE ESTOPPELS AGAIN THE LAW. SINCE THERE IS N O PROVISION IN SECTION UNDER WHICH THIS INCOME CAN BE TREATED AS INCOME OF THE ASSESSE E, THEREFORE THE SAME WAS NOT OFFERED AS TAXATION IN THE HANDS OF THE ASSESSEE. T HE PROVISIONS OF SECTION 10 (2A) OF INCOME TAX ACT IS VERY CLEAR IN THE REGARD. FURTHER , THE AMOUNT RECEIVED BY THE RETIRING PARTNER IS CAPITAL RECEIPT, NOT LIABLE TO TAX. 2.6 THE AO MENTIONED THAT THE ABOVE REPLY OF THE AS SESSEE INDICATES THE STAND OF THE AO AS TO THE DIRECTIONS AND THE ALTERNATIVE PLEAS T HAT THE ASSESSEE CAN TAKE WHEN CONFRONTED WITH UNCOMFORTABLE QUESTIONS AND SHOW CA USE NOTICES. THE TENOR OF THE ASSESSEE THROUGH HIS A/R IS CLEAR THERE IS NO PRO VISION IN SECTION UNDER WHICH THIS INCOME CAN BE TREATED AS INCOME OF THE ASSESSEE. TH E AO MENTIONED THAT THE AR IS FORECLOSING ADDITIONS ON ACCOUNT OF CAPITAL GAIN, B USINESS INCOME AS IS UNEQUIVOCAL THAT THE SAID WITHDRAWAL IS BUT A CAPITAL RECEIPT AND HE NCE NOT TAXABLE. THE ASSESSEE SEEMS TO BE COCKING A SNOOK AT THE ACT AND IT ENFORCES THAT THERE IS NO SECTION UNDER WHICH THE INCOME CAN BE TAXED. HOWEVER, THE ASSESSEE SEEMS TO BE FORGETTING THAT HE HAS FILED HIS RETURN OF INCOME IN WHICH HE HAS SUO MOTO LABELED T HE RECEIPT AS PROFIT FROM FIRM KRISHNA VILLA APARTMENT. IT IS HERE THAT THE VEIL OUGHT TO BE LIFTED AND THE COLOURABLE DEVICE EXPOSED IN ORDER TO TAX A RECEIPT WHICH THE ASSESSE E CLAIMS THERE IS NO PROVISION IN SECTION UNDER WHICH THIS INCOME CAN BE TREATED AS I NCOME OF THE ASSESSEE. THE ASSESSEE THROUGH CONSULTATION HAS DRAFTED A CAREFULLY WORDED AGREEMENT DATED 19.01.2007 WHEREBY 10 THE STOCK IN TRADE (LAND IN THIS CASE) OF THE FIRM HAS BEEN REVALUED AND THE DIFFERENCE BETWEEN THE REVALUED VALUE AND THE BOOK VALUE CREDI TED INTO THE CAPITAL ACCOUNTS OF THE PARTNERS. AS PER ACCOUNTING STANDARDS (AS-2) STOCK IS TO BE VALUED AT COST OR NET REALIZED VALUE, WHICHEVER IS LOWER. BY VIOLATION OF THIS PRI NCIPLE AND VALUING THE STOCK AT A SUBSTANTIALLY HIGHER RATE, THE ASSESSEE HAS COMMI TTED THE FIRST MISTAKE IN ACCOUNTING POLICIES. INSTEAD OF CREATING A REVALUATION RESERVE , THE ASSESSEE HAS CREDITED THE DIFFERENTIAL VALUE TO THE CAPITAL ACCOUNT OF THE PA RTNERS, WHICH IS MISTAKE NO. 2. THESE MISTAKES ARE COMMITTED WITH THE ULTIMATE INTENT OF FATTENING THE CAPITAL ACCOUNT WHICH WILL BE WITHDRAWN POST RETIREMENT. AND IN ONE INNOC ENT STROKE OF NON AVAILABILITY FOR BUSINESS, THE ASSESSEE HAS RETIRED FROM BUSINESS A ND WITHDRAWN THE FATTENED CAPITAL ACCOUNT MAKING IT A CAPITAL RECEIPT AND NOT MAKING IT A CAPITAL GAIN/BUSINESS INCOME, ACCORDING TO HIM. IT IS APPROPRIATE AT THIS JUNCTUR E TO QUOTE THE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS VS CIT (1979) ITR 01: IT IS WELL SETTLED THAT THE WAY IN WHICH THE ENTRI ES ARE MADE BY AN ASSESSEE IN HIS BOOKS OF ACCOUNT IS NOT DETER MINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSS. THE ASSESSEE MAY, BY MAKING ENTRIES WHICH ARE NOT IN CONFORMITY WITH THE PROPER PRINCIPLES OF ACCOUNTANC Y, CONCEAL PROFIT OR SHOW LOSS AND THE ENTRIES MADE BY HIM CAN NOT, THEREFORE, BE REGARDED AS CONCLUSIVE ONE WAY OR THE OTHER. WHA T IS NECESSARY TO BE CONSIDERED IS THE TRUE NATURE OF THE TRANSACT ION AND WHETHER FACT IT HAS RESULTED IN PROFIT OR LOSS TO THE ASSES SEE IS. THE AO HELD THAT THE SERIES OF EVENTS STARTING FROM DEVELOPMENT AGREEMENT (SEPTEMBER 2006). TAKE OVER AGREEMENT (18.01.2007), REVALUATIO N OF LAND CREDITING DIFFERENCE IN CAPITAL ACCOUNT, MERGING OF FIRM AND ADMISSION OF N EW PARTNERS (19.01.2007), RETIREMENT AND WITHDRAWAL OF CAPITAL ACCOUNT IS NOTHING BUT CO LOURABLE DEVICES EMPLOYED BY THE ASSESSEE WITH ACTIVE COLLUSION AND EXPERT ADVICE FROM TAX PRACTITIONERS SO AS TO BAR THE 11 APPLICABILITY OF ALL SECTIONS OF INCOME TAX ACT. TO QUOTE THE APEX COURT IN THE CASE OF THE CIT VS DURGA PRASAD MORE (1971) 082 IRT 540: IT IS TRUE THAT AN APPARENT MUST BE CONSIDERED REA L UNTIL IT IS SHOWN THAT THERE ARE REASONS TO BELIEVE THAT THE APPARENT IS NOT THE REAL. IN A CASE OF THE PRESENT KIND A PARTY WHO RELIES ON A RECITAL IN A DEED HAS TO ESTABLISH THE TRUTH OF THOSE RECITALS, OTHERWISE IT WILL BE V ERY EASY TO MAKE SELF- SERVING STATEMENTS IN DOCUMENTS EITHER EXECUTED OR TAKEN BY A PARTY AND RELY ON THOSE RECITALS. IF ALL THAT AN ASSESSEE WHO WANTS TO EVADE TAX IS TO HAVE SOME RECITALS MADE IN A DOCUMENT EITHER EXECUT ED BY HIM OR EXECUTED IN HIS FAVOUR THEN THE DOOR WILL BE LEFT WIDE OPEN TO EVADE TAX. A LITTLE PROBING WAS SUFFICIENT IN THE PRESENT CASE TO SHOW THAT THE APPARENT WAS NOT THE REAL. THE TAXING AUTHORITIES WERE NOT REQUI RED TO PUT ON BLINKERS WHILE LOOKING AT THE DOCUMENTS PRODUCED BEFORE THEM . THEY WERE ENTITLED TO LOOK INTO THE SURROUNDING CIRCUMSTANCES TO FIND OUT THE REALITY OF THE RECITALS MADE IN THOSE DOCUMENTS 2.7 THE ABOVE SENTIMENT WAS ECHOED IN THE CASE OF M C DOWELL AND CO. LTD VS CTO (1985) 154 ITR 0148 WHERE IN THE INTRODUCTORY PART OF THE JUDGMENT DELIVERED BY JUSTICE CHINNAPPA REDDY AND THE FINAL JUDGMENT BY JUSTICE R ANGANATH MISHRA, THEY HAVE UNEQUIVOCALLY STATED THAT COLOURABLE DEVICES CANNO T BE PART OF TAX PLANNING. 2.8 THUS BY CRAFTING A CAREFULLY WORDED COLOURABLE DEVICE WITH ACTIVE COLLUSION AND CONNIVANCE WITH THE OPPOSITE PARTY AND THE TAX PRAC TITIONERS, THE ASSESSEE HAS CLAIMED EXEMPTION IN HIS COMPUTATION OF INCOME (BOTH IN S. 139 AND S. 153 A) THAT THE RECEIPT OF RS. 5.24 CRORES IS HIS EXEMPT INCOME AS PROFIT FRO M THE KRISHNA VILLA. AS IT IS SEEN THAT SUCH AN AMOUNT HAS BEEN TAKEN AS EXPENSES IN THE HA NDS OF THE FIRM, THE SAME CANNOT BE GRANTED U/S 10(2A). BY VIRTUE OF LIFTING THE VEIL/U NRAVELING A COLOURABLE DEVICE BEHIND WHICH THE ASSESSEE IS TAKING REFUGE THAT THERE IS NO PROVISION IN SECTION UNDER WHICH THIS INCOME CAN BE TREATED AS INCOME OF THE ASSESSE E, THE AO HELD THAT THE AMOUNT OF RS.5,24,47,943/- IS TAXABLE INCOME OF THE ASSESSEE AND THE EXEMPTION CLAIMED BY THE ASSESSEE AS PROFIT FROM FIRM KRISHNA VILLA APARTMEN T WAS DENIED/DISALLOWED. 12 2.9 BEFORE THE LD. CIT(A), THE ASSESSEE MADE THE FO LLOWING SUBMISSIONS. 3.1 IT IS HUMBLY SUBMITTED THAT THE IMPUGNED ASSE SSMENT ORDER SUFFERS FROM FATAL ILLEGALITIES OF LAW AND FACTS, I S PERVERSE BECAUSE OF CONSIDERATION OF IRRELEVANT FACTS WHILE IGNORING TH E RELEVANT FACTS. 3.2 THE FIRST AND FOREMOST REASON TO SAY THAT THE A SSESSMENT ORDER IS ILLEGAL IS THAT THE AO HAS NOT INDICATED A S TO UNDER WHICH HEAD OF INCOME THE ALLEGED PROFIT HAS BEEN TAXED. IT IS ELE MENTARY IN JURISPRUDENCE OF LEVY OF INCOME TAX THAT THE RECEIPT IN QUESTION, FIRST SHOULD BE AND INCOME AND SECONDLY IT HAS TO FALL UNDER ONE OF T HE FIVE HEADS OF INCOME STATED IN SECTION 14 OF THE INCOME-TAX ACT, 1961. I F A PARTICULAR INCOME DOES NOT FALL IN ANY OF THE HEADS OF INCOME, THE SA ME CANNOT BE TAXED AS IT IS PRESUMED THAT THE SAME WAS NOT DIRECTED BY THE P ARLIAMENT TO BE TAXED. ARTICLE 265 OF THE CONSTITUTION PROVIDES THAT NO TA X SHALL BE LEVIED EXCEPT BY AUTHORITY OF LAW. THERE IS NO SCOPE OF INTENDMEN T IN A TAXING STATUTE. IT WAS SO LAID DOWN BY THE HONBLE APEX COURT OF THIS LAND IN CELEBRATED JUDGMENT IN THE CASE OF CIT VS. ELPHINSTONE SPG. & WVG. MILLS CO. LTD (1940) 40 ITR 142 (SC). IN THIS REGARD A USEFUL REF ERENCE CAN ALSO BE MADE TO SUPREME COURT IN THE CASE OF NALINIKANT AMBALAL MODY VS. S.A.L.NARAYAN ROW, CIT [61 ITR 428 (SC)] AS ALSO CA LCUTTA HIGH COURT DECISION IN THE CASE OF CIT VS. JUSTICE R.M. DATTA [180 ITR 86 (CAL)]. LEARNED AUTHORS PITHISARIA & CHATURVEDY IN THEIR CO MMENTARY INCOME- TAX LAW (SIXTH EDITION) VOL. 1 PAGE 1126 HAVE ALSO , ON THE BASIS OF ABOVE CALCUTTA HIGH COURT JUDGMENT, OPINED AS UNDER: IF ANY RECEIPT IS INCOME IT HAS TO BE COMPUTED UNDE R ONE OF THE FIVE HEADS OF INCOME PROVIDED UNDER SECTION 4 OF THE INC OME-TAX ACT, 1961. IF, HOWEVER IT CANNOT BE BROUGHT TO TAX BY COMPUTATION UNDER THOSE SECTIONS, THEY WOULD NOT BE INCLUDED IN THE TOTAL INCOME AS DEFINED IN SECTION 2(45), FOR THE PURPOSE OF CHARGEABILITY, [CIT VS JU STICE R.M.DATTA 180 ITR 86, 92 (CAL)] SPECIFYING THE HEAD OF INCOME IS NOT AN IDLE FORMAL ITY BUT HAS VERY SIGNIFICANT AND SUBSTANTIVE IMPLICATIONS ON THE CHA RGEABILITY OF RECEIPT ITSELF AS ALSO QUANTUM OF TAXABLE PART OF IT. IT IS ESSENTIAL BECAUSE THE CONDITIONS OF TAXATION ARE DIFFERENT FOR DIFFERENT TYPES OF INCOME. UNTIL AND UNLESS IT IS SPECIFIED AS TO UNDER WHICH HEAD THE I NCOME IS PROPOSED TO BE TAXED, IT WILL NOT BE POSSIBLE TO SEE AS TO WHETHER THE RECEIPT IN QUESTION IS TAXABLE UNDER THE SPECIFIED HEAD AND IF AT ALL IT H AS TO BE TAXED THEN TO WHAT EXTENT. THE DIFFERENCE IN THE VALUE OF LAND IN THE BOOKS OF ACCOUNT VIS-- VIS ITS ESTIMATED MARKET VALUE COULD AT BEST (SAYIN G IT FOR THE PURPOSE OF ARGUMENT ONLY) BE TAXED EITHER UNDER THE HEAD P ROFITS & GAINS OF BUSINESS & PROFESSION OR UNDER THE HEAD CAPITAL G AINS. 13 3.3 IN CASE THE AO WANTED TO TAX THE DIFFERENCE UND ER THE HEAD PROFITS & GAINS OF BUSINESS & PROFESSION IN THE H ANDS OF THE APPELLANT, IT WAS ESSENTIAL TO PROVE THAT THE ASSESSEE WAS CAR RYING ON A BUSINESS AND THE RECEIPT IN QUESTION PERTAINED TO THAT BUSINESS. CARRYING ON BUSINESS BY THE FIRM IN WHICH ASSESSEE IS PARTNER CANNOT BE SAI D TO BE BUSINESS CARRIED ON BY PARTNER, MORE SO BECAUSE NO TAX IS LEVIABLE O N PARTNER IN RESPECT OF BUSINESS INCOME OF/FROM THE FIRM. IT WOULD HAVE BEE N LESS INCOMPREHENSIBLE IF THE AO HAD ATTEMPTED TO TAX THE DIFFERENCE IN THE HANDS OF THE FIRM WHO OWNED THE LAND AS ITS STOCK-I N-TRADE. BUT THE AO HAS TAXED IT IN THE HANDS OF THE PARTNER DEFYING ALL RU LES OF ACCOUNTANCY AND INCOME TAX LAW. IT IS NOT THE CASE THAT THE LAND WA S OWNED BY THE PARTNERS EVEN BEFORE ITS PURCHASE BY THE FIRM FROM A PRIVATE LIMITED COMPANY. THE LOCAL AUTHORITY (JDA) PERMITTED THE CHANGE OF LAND USE TO THE FIRM FOR GROUP HOUSING AND ALSO ALLOTTED PATTA IN THE NAME O F THE FIRM AND NOT IN THE NAME OF THE PARTNERS. 3.4 NOT ONLY UNDER THE INCOME-TAX ACT, BUT ALSO UND ER ALL OTHER LAWS OF THE LAND THE ASSETS OF THE FIRM BELONG TO T HE FIRM AND NOT THE PARTNERS. THE LEGAL AND BENEFICIARY OWNER OF THE LA ND IN QUESTION WAS PARTNERSHIP FIRM NOT THE PARTNER AND THE PARTNERSHI P FIRM IS SEPARATE PERSON UNDER THE INCOME TAX ACT. THE LAW RELATING T O LEVY OF STAMP DUTY ALSO DOES NOT EXEMPT THE TRANSFER OF LAND BY THE PA RTNER TO THE FIRM (OR VICE VERSA) WITHOUT PAYMENT OF STAMP DUTY. SIMILARLY, TH E PATTA ALLOTTED TO A FIRM CANNOT BE UTILIZED BY THE PARTNERS OF THE FIRM . SINCE THE LAND IN QUESTION BELONGED TO THE FIRM, IT COULD HAVE GENERA TED INCOME ONLY IN QUESTION WAS STOCK-IN-TRADE OF THE FIRM, IT COULD H AVE GENERATED INCOME IN THE HANDS OF THE FIRM ONLY AT THE TIME OF ITS SALE BY THE FIRM. THEREFORE, BY NO STRETCH OF IMAGINATION OR LOGIC THE INCOME COULD HAVE BEEN TAXED IN THE HANDS OF THE PARTNER/APPELLANT. IT WILL PERTINENT TO QUOTE THE PRONOUNCEMENT OF THE APEX COURT IN RESPECT OF NATURE OF INTEREST OF A PARTNER IN THE A SSETS OF THE FIRM AS ALSO THE FIRM IN GENERAL. THE MOST IMPORTANT OBSERVATION IN THIS REGARD ARE FOUND IN THE JUDGMENT IN THE CASE OF SUNIL SIDHHARTHBHAI VS CIT [156 ITR 509 (SC)]. ON PAGE 519 OF THE REPORT, THEY OBSERVED: DURING THE SUBSISTENCE OF THE PARTNERSHIP, THE VALU E OF THE INTEREST OF EACH PARTNER QUA THAT ASSET CANNOT BE I SOLATED OR CARVED OUT FROM THE VALUE OF THE PARTNERS INTEREST IN THE TOTALITY OF THE PARTNERSHIP ASSETS. AND IN REGARD TO THE LATER, THE VALUE WILL BE REPRESENTED BY HIS SHARE IN THE NET ASSETS ON THE D ISSOLUTION OF THE FIRM OR UPON THE PARTNERS RETIREMENT. IT OBVIOUSLY MEANS THAT WHEN A PERSON A PERSON DID NOT HAVE ANY SPECIFIED INTEREST IN A SPECIFIC ASSET OF THE FIRM, THERE IS NO QUESTION OF ANY 14 PARTNER HAVING ANY RIGHT OR CAPACITY TO TRANSFER EI THER THE ASSET ITSELF OR ANY INTEREST THEREIN. THE HONBLE SUPREME COURT AGAIN ON THE SAME PAGE(51 9) OBSERVED: IT HAS BEEN HELD BY THIS COURT IN CIT V. DEWAS CINE CORPORATION [1968] 68 ITR 240 (SC), CIT V. BANKEY LAL VAIDYA [1 971] 79 ITR 594 (SC) AND RECENTLY IN MALABAR FISHERIES CO. V. CIT [ 1979] 120 ITR 49 (SC) AS WELL AS BY THE PUNJAB AND HARYANA HIGH COURT IN KAY ENGINEERING CO. V. CIT [1971] 82 ITR 950, THE KERALA HIGH COURT IN CIT V. NATRAJ MOROR SERVICE [1972] 86 ITR 109 AND THE GUJARAT HIGH COUR T IN CIT V. MOHANBHAI PAMABHAI [1973] 91 ITR 393, THAT WHEN A P ARTNER RETIRES OR THE PARTNERSHIP IS DISSOLVED, WHAT THE PARTNER RECE IVES IS HIS SHARE IN THE PARTNERSHIP. WHAT IS CONTEMPLATED HERE IS A SHARE O F THE PARTNER QUA THE NET ASSETS OF THE PARTNERSHIP FIRM. ON EVALUATION, THAT SHARE IN A PARTICULAR CASE MAY BE REALIZED BY THE RECEIPT OF ONLY ONE OF ALL T HE ASSETS. WHAT HAPPENS HERE IS THAT A SHARED INTEREST IN ALL THE ASSETS OF THE FIRM IS REPLACED BY AN EXCLUSIVE INTEREST IN AN ASSET OF EQUAL VALUE. THAT IS WHY IT HAS BEEN HELD THAT THERE IS NOT TRANSFER. IT IS THE REALIZATION O F A PRE-EXISTING RIGHT. (EMPHASIS SUPPLIED) 3.5 A VERY ILLUMINATING EXPOSITION OF LAW IN RESPEC T OF INTEREST OF A PARTNER IN THE ASSETS OF THE FIRM IS FOUND IN THE CASE OF ADDANKI NARAYANAPPA V. BHASKARA KRISHNAPPA [AIR 1966 SC 130 0], WHEREIN THE HONBLE SUPREME COURT EXPLAINED (P. 1303 OF AIR) TH E NATURE OF INTEREST OF THE PARTNER IN THE FIRM AS UNDER: .. WHATEVER MAY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY THE PARTNERS WHEN T HE PARTNERSHIP IS FORMED OR WHICH MAY BE ACQUIRED IN THE COURSE OF THE BUSINESS OF THE PARTNERSHIP IT BECOMES THE PROPERTY OF THE F IRM AND WHAT A PARTNER IS ENTITLED TO IS HIS SHARE OF PROFITS, IF ANY, ACCRUING TO THE PARTNERSHIP FROM THE REALIZATION OF THIS PROPERTY, AND UPON DISSOLUTION OF THE PARTNERSHIP TO A SHARE IN THE MO NEY REPRESENTING THE VALUE OF THE PROPERTY. NO DOUBT, SINCE A FIRM H AS NOT LEGAL EXISTENCE, THE PARTNERSHIP PROPERTY WILL VEST IN AL L THE PARTNER, AND IN THAT SENSE EVERY PARTNER HAS AN INTEREST IN THE PROPERTY OF THE PARTNERSHIP. DURING THE SUBSISTENCE OF THE PARTNERS HIP, HOWEVER, NO PARTNER CAN DEAL WITH ANY PORTION OF THE PROPERTY A S HIS OWN, NOR CAN HE ASSIGN HIS INTEREST IN A SPECIFIC ITEM OF TH E PARTNERSHIP PROPERTY TO ANYONE. HIS RIGHT IS TO OBTAIN SUCH PRO FITS, IF ANY, AS FALL TO HIS SHARE FROM TIME TO TIME AND UPON THE DISSOLU TION OF THE FIRM TO A SHARE IN THE ASSETS OF THE FIRM WHICH REMAIN A FTER SATISFYING THE LIABILITIES SET OUT IN CLAUSE (A) AND SUB-CLAUSE (I ), (II) AND (III) OF CLAUSE (B) OF SECTION 48. 15 AGAIN ON PAGE 1304 THE WHOLE CONCEPT OF PARTNERSHIP IS TO ENTER UPON A JOINT VENTURE AND FOR THAT PURPOSE TO BRING IN AS CAPITAL MONEY OR EVEN PROPERTY INCLUDING IMMOVABLE PROPERTY. ONCE THAT IS DONE WHATEVER IS BROUGHT IN WOULD CEASE TO BE THE EXCLUS IVE PROPERTY OF THE PERSON WHO BROUGHT IT IN. IT WOULD BE THE TRADI NG ASSET OF THE PARTNERSHIP IN WHICH ALL THE PARTNERS WOULD HAVE IN TEREST IN PROPORTION TO THEIR SHARE IN THE JOINT VENTURE OF T HE BUSINESS OF PARTNERSHIP. .. AS ALREADY STATED, HIS RIGHT DU RING THE SUBSISTENCE OF THE PARTNERSHIP IS TO GET HIS SHARE OF PROFITS FROM TIME TO TIME AS MAY BE AGREED UPON AMONG THE PARTNE RS AND AFTER THE DISSOLUTION OF THE PARTNERSHIP OR WITH HIS RETI REMENT FROM PARTNERSHIP OF THE, OF HIS SHARE IN THE NET PARTNER SHIP ASSETS AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER A DEDUC TION OF LIABILITIES AND PRIOR CHARGES. IT WILL BE PERTINENT TO MENTION HERE ITSELF THAT TH E REVALUATION OF LAND (WHICH WAS STOCK-IN-TRADE OF THE FIRM) AT THE TIME OF RECONSTITUTION OF THE FIRM COULD NOT GIVE R ISE TO TAXABLE EVENT BECAUSE AS PER PRINCIPLES OF ACCOUNTANCY MERE REVALUATION OF THE STOCK-IN-TRADE DOES NOT GIVE RISE TO INCOME. 3.6 EVEN IF IT IS PRESUMED THAT THE AO WANTED TO TA X THE REVALUATION GAINS IN THE HANDS OF THE PARTNER AT TH E TIME OF HIS RETIREMENT FROM THE FIRM, THE SAME CANNOT BE DONE IN VIEW OF S UPREME COURT JUDGMENT IN THE CASE OF CIT VS BANKEY LAL VAIDYA [7 9] ITR 594 (SC). DISSOLUTION OF THE FIRM AND RECONSTITUTION OF THE F IRM LEADING TO RETIREMENT OF ONE OR MORE PARTNERS STAND ON THE SAME FOOTING A ND AS PER AFORESAID DECISION OF THE SUPREME COURT IN THE CASE OF BANKEY LAL VAIDYA, THE RETIRING PARTNER CANNOT BE TAXED IN THIS REGARD BEC AUSE WHAT HE GETS ON RETIREMENT IS CAPITAL RECEIPT. THE PRESENT APPELLAN T RECEIVED THE MONEY VALUE OF HIS SHARE IN THE ASSETS OF THE FIRM; HE DI D NOT AGREE TO SELL, EXCHANGE OR TRANSFER HIS SHARE IN THE ASSETS OF THE FIRM. THE OBSERVATIONS OF THE HOBLE COURT IN ABOVE DECISION ARE QUITE INSTRU CTIVE IN THIS REGARD: IN THE COURSE OF DISSOLUTION THE ASSETS OF THE F IRM MAY BE VALUED AND THE ASSETS DIVIDED BETWEEN THE PARTNE RS ACCORDING TO THEIR RESPECTIVE SHARES BY ALLOTTING THE INDIVIDUAL ASSETS OR PAYING THE MONEY VALUE EQUIVALENT THEREOF. THIS IS A RECOG NIZED METHOD OF MAKING UP THE ACCOUNTS OF A DISSOLVED FIRM. IN THAT CASE THE RECEIPT OF MONEY BY A PARTNER IS NOTHING BUT A RECEIPT OF H IS SHARE IN THE DISTRIBUTED ASSETS OF THE FIRM. THE RESPONDENT RECE IVED THE MONEY VALUE OF HIS SHARE IN THE ASSETS OF THE FIRM; HE DI D NOT AGREE TO SELL, EXCHANGE OR TRANSFER HIS SHARE IN THE ASSETS OF THE FIRM. PAYMENT OF THE AMOUNT AGREED TO BE PAID TO THE RESPONDENT UNDE R THE 16 ARRANGEMENT OF HIS SHARE WAS THEREFORE NOT IN CONSE QUENCE OF ANY SALE, EXCHANGE OR TRANSFER OF ASSETS. IN THIS CASE ITSELF, THE COURT HAS ALSO STATED THAT THE METHOD OF MAKING UP THE ACCOUNTS OF THE FIRM AT THE TIME OF D ISSOLUTION OF THE FIRM OR RETIREMENT OF A PARTNER IS SAME AND STANDS ON THE S AME FOOTING. [IT MAY BE STATED THAT WHILE THE LEGISLATURE HAS MA DE CHANGES IN LAW BY BRINGING TO TAX (IN THE HANDS OF THE FIRM) THE T RANSACTION OF DISSOLUTION OF THE FIRM AND CONSEQUENT DISTRIBUTION OF ASSETS E TC IT HAS, IN ITS WISDOM, NOT ENACTED ANY LAW SO FAR TO BRING TO TAX THE RECE IPTS IN THE HANDS OF RETIRING PARTNER ON ACCOUNT OF MONETARY REALIZATION OF HIS INTEREST IN NET ASSETS OF THE FIRM.] EVEN IF IT IS PRESUMED THAT THE PROFIT AROSE FROM REVALUATION OF STOCK IS A TAXABLE INCOME THAN ALSO IT CANNOT BE ASSESSED IN THE HANDS OF THE PARTNERS. THE PROFIT ON ACCOUNT OF REVALUATION OF THE STOCK AROSE IN THE HANDS OF THE PARTNERSHIP FIRM AND IF THE SAME IS TR EATED AS TAXABLE INCOME THE COMPUTATION OF TOTAL INCOME IN THE HANDS OF M/S KRISHNA KRIPA APARTMENT WOULD BE AS UNDER:- NET LOSS AS PER P & L A/C (AS PER COMPUTATION FILED WITH RETURN OF FIRM ) -39288 ADD EXPENSES DISALLOWED:- PROJECT REVALUATION 6993 0590 TOTAL INCOME 69891302 ALLOCATION OF TOTAL INCOME IN BETWEEN PARTNERS:- SHRI PAWAN LASHKARY 75% 52418476 SHRI JITENDRA AGRAWAL 25% 17472826 TOTAL 100% 69891302 BY VIRTUE OF SECTION 10(2A), THE ABOVE PROFIT CANNO T BE TAXED IN THE HANDS OF THE PARTNER. THE SECTION 10(2A) OF INCOME TAX AC T IS REPRODUCED AS UNDER:- IN THE CASE OF PERSON BEING A PARTNER OF A FIRM, W HICH IS SEPARATELY ASSESSED AS SUCH, HIS SHARE IN THE TOTAL INCOME OF THE FIRM. HERE ADMITTED THE ASSESSEE WAS PARTNER OF M/S KRISH NA VILLA APARTMENT. M/S KRISHNA VILLA APARTMENT IS FIRM AND SEPARATELY ASSESSED UNDER INCOME TAX BY THE SAME AO. THE ABOVE FIRM HAS FILED RETURN U/S 139(1) OF INCOME TAX ACT 1- 5-2008. THE ASSESSMENT OF THIS FIRM UNDER INCOME TA X ACT WAS MADE BY THE SAME AO ON 27/12/2010. THE COPY OF ASSESSMENT ORDER FOR AY 2007-2008 IS AT PB PAGE 161-168. THEREFORE, ALL THE INGREDIENTS OF SEC TION 10(2A) IS FULFILLED AND THEREFORE, IF THE PROFIT ON ACCOUNT OF REVALUATION OF STOCK OF THE FIRM IS TREATED AS TAXABLE INCOME THAN IT CAN BE TAXED IN THE HANDS OF THE PARTNERSHIP FIRM NOT IN THE HANDS OF THE PARTNER. 17 3.7 THE LD AO IN PARA AT PAGE 4 MENTIONED AS UNDER: - IN A MATTER OF 8 MONTHS STARTING FROM 19.017.06 TO 19.03.07, THE SIROLI LAND HAS VIRTUALLY CHANGED OWNERSHIP FROM PA WAN LASHKARY AND JITENDRA AGRAWAL (COLLECTIVELY M/S. KRISHNA VILLA A PARTMENTS) TO SH. SHANKAR M JETHANI, SHRI MIRAJ UN NABI KHAN AND SHRI NAVED SAIDI (COLLECTIVELY, M/S. GOLD DREAM DEVELOPER) FOR A CON SIDERATION OF RS. 6.99 CRORES. THE SAID STOCK (LAND IN THIS CASE) VIRTUALL Y IS THE HANDS OF THE M/S. GOLD DREAM DEVELOPERS & BUILDERS AND ITS ORIGINAL P ARTNERS, ALBEIT IN THE NAME OF M/S. KRISHNA VILLA . HERE, THE LD AO SAYS THAT THE OWNERSHIP OF THE LAND WAS TRANSFERRED FROM M/S KRISHNA VILLA APARTMENT TO M/S GOLD DREAM DEVELOPERS. IN THIS REGARD, WE SUBMIT THAT THE PART OF THE LAND WAS SOLD IN AY 2008-2009 AND THE SAME AO ASSESSED THE SALE OF T HE SAID LAND IN THE HANDS OF M/S KRISHNA VILLA APARTMENT UNDER THE SAME PAN. IF THE OWNERSHIP OF THE LAND CHANGED FROM M/S KRISHNA VILL A APARTMENT TO M/S GOLD DREAM DEVELOPERS, THE SALE OF THE LAND SHOULD HAVE BEEN ASSESSED IN THE HANDS OF GOLD DREAM DEVELOPERS. THE COPY OF ASS ESSMENT ORDER OF M/S KRISHNA VILLA APARTMENT FOR AY 2008-2009 IS AT PB PAGE 169-171. FURTHER AGAIN, IF THE OWNERSHIP OF THE LAND CHANGED FROM KRISHNA VILLA APARTMENT TO M/S GOLD DREAMS DEVELOPERS, THE PROFIT ARISING THERE FROM CAN BE TAXED IN THE HANDS OF THE FIRM NOT IN THE HA NDS OF THE PARTNERS. 3.8 THE NEXT POSSIBLE HEAD OF INCOME TO TAX THE DIF FERENCE IN VALUE OF LAND/PROJECT, PERHAPS, COULD HAVE BEEN CA PITAL GAIN. TO TAX ANY GAIN UNDER THIS HEAD, THE FIRST AND FOREMOST CONDIT ION IS THAT THE ASSESSEE SHOULD OWN THE ASSET. IN THE PRESENT CASE, THE LA ND/PROJECT WAS NOT OWNED BY THE APPELLANT. IT WAS OWNED BY THE FIRM. I N FACT THE APPELLANT NEVER EVER OWNED THE LAND/PROJECT. IF THE APPELLANT DID NOT OWN THE ASSET, HE COULD NOT HAVE EARNED THE CAPITAL GAINS WHICH CO ULD BE TAXED. IT WILL NOT BE IMPERTINENT TO MENTION THAT CAPITAL GAINS ARE NOT CONSIDERED AS NORMAL INCOME. IN FACT, THE HISTORY OF TAXATION O F CAPITAL GAINS IN INDIA WOULD SHOW THAT THERE WERE TIMES WHEN CAPITAL GAINS WERE NOT TAXABLE- SAME BEING NOT NORMALLY UNDERSTOOD INCOME. IT WAS FOR THIS REASON THAT CAPITAL GAINS HAVE BEEN SPECIFICALLY INCLUDED IN THE DEFINITION OF INCOME IN SECTION 2(24) OF THE INCOME-TAX ACT, UN LIKE SALARIES OR PROFIT & GAINS OF BUSINESS & PROFESSION ETC. THIS FACT HAS A SIGNIFICANT LEGAL BEARING BECAUSE IT MEANS THAT INCOME UNDER TH E HEAD CAPITAL GAINS IS A DEEMED INCOME AND THE LAW OF LAND PROVIDES THA T ANY PROVISIONS PRESCRIBING TAX ON DEEMED INCOME SHOULD BE STRICTLY CONSTRUED. UNDER THIS HEAD CAPITAL GAINS WHICH PROVIDES FOR TAX ON DE EMED INCOME- THERE ARE FURTHER DEEMING PROVISIONS, VIZ SECTION 45(3) A ND 45(4) ETC. NONE OF THE SECTIONS DEALING WITH THIS HEAD OF INCOME APPLI ES TO THE FACTS OF THIS CASE, MUCH LESS BY STRICT INTERPRETATION THEREOF. 18 3.9 THE HONBEL SUPREME COURT AGAIN IN THE CASE OF CIT VS R.LINGAMALLU RAGHUKUMAR (2001) 247 ITR 801 (SC) REI TERATED ITS EARLIER VIEW AS LAID DOWN IN THE CASE OF SUNIL SIDDHARTHABH AI (SUPRA) AND HELD THAT WHERE A PARTNER RETIRES FROM A FIRM AND THE AM OUNT OF HIS SHARE IN THE PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES A ND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNT IN THE MANNER PRESCRIB ED BY THE PARTNERSHIP LAW THERE IS NO ELEMENT OF TRANSFER OF THE MANNER P RESCRIBED BY THE PARTNERSHIP LAW THERE IS NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRED PARTNER TO THE CONTINUING PAR TNERS AND THE AMOUNT RECEIVED BY THE RETIRING PARTNER IS NOT CAPITAL GA IN UNDER SECTION 45 OF THE INCOME-TAX ACT. SIMILAR REITERATION OF THE VIEW OF THE HONBLE SUPREME COURT IS FOUND IN THE CASE OF ADDL. CIT VS MOHANBHA I PAMABHAI (1987) 165 ITR 166 (SC). 3.10 IGNORING A SERIES OF JUDGMENTS OF HIGHEST COUR T OF THE LAND DIRECTLY ON THE SUBJECT, IT IS HUMBLY SUBMITTED, WO ULD BE IN VIOLATION OF ARTICLE 141 OF THE CONSTITUTION OF INDIA, WHICH REA DS AS UNDER: ARTICLE 141: LAW DECLARED BY SUPREME COURT TO BE BI NDING ON ALL COURTS: THE LAW DECLARED BY THE SUPREME COURT SHALL BE BIN DING ON ALL COURTS WITHIN THE TERRITORY OF INDIA. IT HAS BEEN LAID DOWN BY THE SUPREME COURT IN THE C ASE OF DWARIKESH SUGAR INDUSTRIES LTD. VS PREM HEAVY ENGIN EERING WORKS (P) LTD. [1997] 6 SCC 450 (PARA 32) THAT IT WOULD AMOUN T TO JUDICIAL IMPROPRIETY FOR THE SUBORDINATE COURTS INCLUDING TH E HIGH COURTS TO IGNORE A WELL SETTLED POSITION IN LAW AS A RESULT OF JUDIC IAL PRONOUNCEMENT OF THE SUPREME COURT AND PASS A JUDICIAL ORDER CONTRARY TO IT. IN THE CASE OF SPENCER & CO. LTD VS/ VISHWADARSHAN DISTRIBUTORS PV T. LTD. (1995) 1 SCC 259 (PARA 10) SUPREME COURT HELD THAT IGNORING A SU PREME COURT JUDGMENT MAY BE TREATED BY THEM AS A CONTEMPT EVEN WHERE ITS JUDICIAL ORDER WAS COUCHED IN THE LANGUAGE OF A REQUEST. IT WILL NOT BE OUT OF PLACE IN THE CONTEXT OF THE FACTS OF THIS CASE TO MENTION THE SUPREME COURT DECISION IN THE CASE OF MAFATLAL INDUSTRIES LTD. VS UNION OF INDIA (1997) 5 SCC 536 (PARA 10) WHEREIN IT WAS HELD THAT A WRONG CONCESSION ON A QUESTION OF LAW, MADE BY A COUNSEL, IN NOT BINDING ON HIS CLIENT AND SUCH CONCESSION CANNOT CONSTITUTE A JUST GROUND. 3.11 SECTION 45(1) OF THE ACT WHICH IS THE PRIMARY/ MAIN CHARGING SECTION FOR CAPITAL GAINS REQUIRES THAT TH E ASSESSEE SHOULD HAVE A CAPITAL ASSET WHICH HAS BEEN TRANSFERRED DURING THE PREVIOUS YEAR. THE HUMBLE APPELLANT BEGS TO SUBMIT THAT THE LAND/PROJE CT IN QUESTION WERE NEVER EVER THE PROPERTY OF THE APPELLANT. IT WAS EI THER THE PROPERTY OF THE 19 FARMERS OR OF A PRIVATE LIMITED COMPANY OR OF A PAR TNERSHIP FIRM. IT HAS ALREADY BEEN HELD BY THE SUPREME COURT THAT SETTLEM ENT OF ACCOUNTS FOR THE PURPOSE OF DISSOLUTION OF THE FIRM OR RETIREMENT OF ONE OR MORE PARTNERS DOES NOT AMOUNT TO TRANSFER OF ANY ASSET(S) BY THE RETIRING PARTNER. (PL. REFER TO SC DECISION IN THE CASE OF BANKEY LAL VAID YA (SUPRA). SECTION 45(1A) PATENTLY DOES NOT APPLY TO THE CASE OF THE APPELLANT AS THE SUB-SECTION APPLIES TO RECEIPTS FROM INSURAN CE COMPANIES ETC. SECTION 45(2) ALSO DOES NOT APPLY IN THE PRESENT CA SE BECAUSE THAT SUB-SECTION DEALS WITH CONVERSION OF A CAPITAL ASSE T INTO STOCK-IN-TRADE WHICH WAS ENACTED TO OVERCOME THE DECISION OF THE S UPREME COURT IN THE CASE OF BAI SIRIN KOOKA. SECTION 45(2A) IS NOT APPLICABLE AS THE SUB-SECTION DEALS WITH GAINS ARISING ON TRANSFER OF SECURITIES ETC. TO/BY DEPOSI TORY PARTICIPANTS ETC. SECTION 45(3) DEALS WITH A SITUATION WHERE A PERSON TRANSFERS CAPITAL ASSET TO A FIRM AS HIS CAPITAL CONTRIBUTION , WHICH OBVIOUSLY IS NOT THE CASE HERE. SECTION 45(4) IS THE SUB-SECTION WHICH COMES TO MIN D THE MOMENT THERE IS ANY MENTION OF DISSOLUTION OF FIRM OR RETI REMENT OF A PARTNER. BUT VERY IMPORTANTLY THIS DEEMING PROVISION CREATES A F ICTION BY WHICH THE FIRM/AOP (AS THE CASE MAY BE) BECOMES LIABLE TO TAX - THE SECTION STATES: SHALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCIATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSF ER TAKES PLACE. OBVIOUSLY THIS SECTION CANNOT BE INVOKED TO TAX THE PARTNER OF THE FIRM OR MEMBER OF AOP OR BOI. WHILE AT SECTION 45(4), IT WILL BE PERTINENT TO NOT E THAT SINCE CAPITAL GAINS TAX ITSELF IS LEVY OF TAX ON DEEMED INCOME, A ND IN ANY CASE THE LEVY OF TAX ON TRANSFER/DISTRIBUTION OF ASSETS BY THE FI RM IS BY VIRTUE OF A DEEMING PROVISION, THE FICTION CREATED UNDER THIS S UB-SECTION CANNOT BE EXTENDED BEYOND THE PURPOSE FOR WHICH IT WAS ENACTE D AS HELD BY SUPREME COURT IN THE CASE OF CIT VS. AMARCHAND N. SHROFF [1 963] 48 ITR 59 (SC) AND ALSO IN THE CASE OF CIT VS AJAX PRODUCTS LIMITE D [1965] 55 ITR 741. SINCE SECTION 45(4) AND ALL OTHER SUB-SECTIONS OF S ECTION 45 ARE CHARGING SECTIONS AND THEREFORE, ACCORDING TO CALCUTTA HIGH COURT [REF: THE CASE OF JUSTICE R. M. DATTA (SUPRA)], THE RULE OF CONSTRUCT ION ADOPTED BY ROWLATT J. IN THE CASE OF CAPE BRANDY SYNDICATE VS. IRC ([1 921] 1 KB 64) SHOULD BE APPLIED. THE HONBLE CALCUTTA HIGH COURT QUOTED WITH APPROVAL THE OBSERVATION OF JUSTICE ROWALATT AS UNDER: IN A TAXING ACT ONE HAS TO LOOK MERELY AT WHAT IS CLEARLY SAID. THERE IS NO ROOM FOR ANY INTENDMENT. THERE IS NO EQUITY ABOUT A TAX. THERE IS NO PRESUMPTION AS TO A TAX. N OTHING IS TO BE 20 READ IN, NOTHING TO BE IMPLIED. ONE CAN ONLY LOOK F AIRLY AT THE LANGUAGE USED. IF THIS MANDATORY RULE OF CONSTRUCTION IS APPLIED, IT WILL BE CLEAR THAT UNDER SECTION 45(4), ONLY A FIRM/AOP OR BOI AL ONE CAN BE TAXED AND NOT THEIR PARTNERS/MEMBERS. FOR THE SAKE OF COMPLETENESS OF THE ARGUMENT, IT MA Y BE STATED THAT SECTION 45(4) CAN BE INVOKED ONLY IN A CASE OF DIS TRIBUTION OF CAPITAL ASSET AT THE TIME OF DISSOLUTION OF THE FIRM. IN THE PRESENT CASE, APART FROM THE FACT THAT THIS SECTION DOES NOT APPLY TO P ARTNERS, OTHER CONDITIONS ARE ALSO NOT SATISFIED. THERE IS NEITHER DISTRIBUT ION TO PARTNERS, NOR ANY CAPITAL ASSET WAS INVOLVED (THE PROJECT/LAND WAS STOCK-IN-TRADE). FURTHER, THERE WAS NOT DISSOLUTION OF FIRM. SECTION 45(5) DEALS WITH THE CASES OF GAINS ARISING ON ACCOUNT OF COMPULSORY ACQUISITION OF ASSETS, WHICH IS NOT THE CASE HERE. SECTION 45(6) DEALS WITH THE GAINS ARISING ON ACCOU NT OF REPURCHASE ETC OF UNITS OF MUTUAL FUNDS ETC. HENCE NOT APPLICA BLE. AS WE HAVE SEEN, NO CHARGING PROVISION RELATED TO C APITAL GAINS TAX IS APPLICABLE TO THE CASE OF THE APPELLANT. 3.12 REALIZING IRRATIONALITY OF TAXING THE DIFFEREN CE IN VALUE AT THE TIME OF SETTLEMENT OF ACCOUNTS OF THE RETIRING PARTNER UNDER ANY OF THE HEADS OF INCOME PROVIDED IN SECTION 14 OF THE ACT, THE AO CHOSE TO REMAIN SILENT ABOUT IT AND REFRAINED FROM ADDRESSING THE F UNDAMENTAL ISSUE OF TAXABILITY IN THE HANDS OF THE PARTNER/APPELLANT. IT WILL BE FITNESS OF THINGS TO BRING TO YOUR KIND NOTICE A RECENT JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF PR ASHANT S JOSHI VS ITO [324 ITR 154 (BOM)] DURING THE SUBSISTENCE OF A PARTNERSHIP, A PARTNER DOES NOT POSSESS AN INTEREST IN SPECIE IN ANY PARTICULAR ASS ET OF THE PARTNERSHIP. DURING THE SUBSISTENCE OF A PARTNERSHI P, A PARTNER HAS A RIGHT TO OBTAIN A SHARE IN PROFITS. ON THE DISSOLUT ION OF A PARTNERSHIP OR UPON RETIREMENT, A PARTNER IS ENTITLED TO A VALU ATION OF HIS SHARE IN THE NET ASSETS OF THE PARTNERSHIP WHICH REMAIN A FTER MEETING THE DEBTS AND LIABILITIES. AN AMOUNT PAID TO A PARTNER IS ENTITLED TO A VALUATION OF HIS SHARE IN THE NET ASSETS OF THE PAR TNERSHIP WHICH REMAIN AFTER MEETING THE DEBTS AND LIABILITIES. AN AMOUNT PAID TO A PARTNER UPON RETIREMENT, AFTER TAKING ACCOUNTS AND UPON DEDUCTION OF LIABILITIES DOES NOT INVOLVE AN ELEMENT OF TRANS FER WITHIN THE MEANING OF SECTION 2(47). CHIEF JUSTICE P.N.BHAGWAT I (AS THE LEARNED JUDGE THEN WAS) SPEAKING FOR A DIVISION BEN CH OF THE 21 GUJARAT HIGH COURT IN CIT V. MOHANBHAI PAMABHAI [19 73] 91 ITR 393 DEALT WITH THE ISSUE IN THE FOLLOWING OBSERVATI ONS (PAGE 402): WHEN, THEREFORE, A PARTNER RETIRES FROM A PARTNERS HIP AND THE AMOUNT OF HIS SHARE IN THE NET PARTNERSHIP ASSE TS AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES IS DETERMINED ON T AKING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE OF THE PARTNERSHIP ASS ETS AND GIVEN TO HIM, WHAT HE RECEIVES IS HIS SHARE IN THE PARTNERSH IP AND NOT ANY CONSIDERATION FOR TRANSFER OF HIS INTEREST IN THE P ARTNERSHIP TO THE CONTINUING PARTNERS. HIS SHARE IN THE PARTNERSHIP I S WORKED OUT BY TAKING ACCOUNTS IN THE MANNER PRESCRIBED BY THE REL EVANT PROVISIONS OF THE PARTNERSHIP LAW AND IT IS THIS AN D THIS ONLY, NAMELY, HIS SHARE IN THE PARTNERSHIP WHICH HE RECEI VES IN TERMS OF MONEY. THERE IS IN THIS TRANSACTION NO ELEMENT OF T RANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRING PARTNER TO THE CONTINUING PARTNERS: VIDE ALSO THE RECENT DECISION OF THE SUPREME COURT IN CIT V. BANKEY LAL VAIDYA [1971] 79 ITR 594 . IT IS TRUE THAT SECTION 2(47) DEFINES TRANSFER IN RELATION T O A CAPITAL ASSET AND THIS DEFINITION GIVES AN ARTIFICIALLY EXTENDED MEAN ING TO THE TERM TRANSFER BY INCLUDING WITHIN ITS SCOPE AND AMBIT TWO KINDS OF TRANSACTIONS WHICH WOULD NOT ORDINARILY CONSTITUTE TRANSFER IN THE ACCEPTED CONNOTATION OF THAT WORD, NAMELY, RELINQUI SHMENT OF THE CAPITAL ASSET AND EXTINGUISHMENT OF ANY RIGHTS IN I T. BUT EVEN IN THIS ARTIFICIALLY EXTENDED SENSE, THERE IS NO TRANSFER O F INTEREST IN THE PARTNERSHIP ASSETS INVOLVED WHEN A PARTNER RETIRES FROM THE PARTNERSHIP. THE GUJARAT HIGH COURT HELD THAT THERE IS, IN SUCH A SITUATION, NO TRANSFER OF INTEREST IN THE ASSETS OF THE PARTNERSH IP WITHIN THE MEANING OF SECTION 2(47). WHEN A PARTNER RETIRES FROM A PARTNE RSHIP, WHAT THE PARTNER RECEIVES IS HIS SHARE IN THE PARTNERSHIP WHICH IS W ORKED OUT BY TAKING ACCOUNTS AND THIS DOES NOT AMOUNT TO A CONSIDERATIO N FOR THE TRANSFER OF HIS INTEREST TO THE CONTINUING PARTNERS. IN VIEW OF ABOVE DECISIONS AND SUBMISSIONS, IT IS S UBMITTED THAT THERE WAS NO JUSTIFICATION WHATSOEVER TO TAX THE AM OUNT RECEIVED BY THE APPELLANT ON HIS RETIREMENT FROM THE FIRM AND THERE FORE ADDITION DESERVES TO BE DELETED. 3.13 ALLEGATION OF INTENTION OF TAX EVASION IS DEVO ID OF ANY MERIT AS SUCH. IN PARAGRAPH 6 OF THE ASSESSMENT ORDER THE AO HAS ALLEGED THAT THE TRANSACTION OF INDUCTION OF NEW PARTNERS AND RETIRE MENT OF OLD PARTNERS WAS WITH AN INTENTION OF TAX AVOIDANCE IS INCORRECT BOT H LEGALLY AND FACTUALLY. THE LEARNED AO STATED THAT IN THE ACCOUNTS OF THE F IRM, THE DIFFERENCE IN VALUATION OF THE LAND/PROJECT HAS BEEN SHOWN AS AN EXPENSE. WHILE THE CONTINUING/ NEW PARTNERS MAY HAVE CHOSEN A PARTICUL AR ACCOUNTING 22 TREATMENT FOR A PARTICULAR ITEM OF EXPENSE, IT DOES NOT BECOME BINDING ON THE DEPARTMENT. AND IT HAS NOT. IN FACT, THE SELF SAME ASSESSING OFFICER WHILE FRAMING THE ASSESSMENT ORDER OF THE FIRM FOR SUBSEQUENT YEAR (DURING WHICH THE FIRM SOLD A PART OF THE LAND TO AN OUTSID ERS)DID NOT ALLOW ANY DEDUCTION ON ACCOUNT OF DIFFERENCE IN VALUATION OF THE LAND/PROJECT AT THE TIME OF INDUCTION OF NEW PARTNERS. THUS IT IS CLEAR THAT THE AO HAD FRAMED THE ASSESSMENT WITH A PREJUDICED MIND AND DID INDUL GE IN MISSTATEMENT OF FACTS. TAKING THE SAID STAND OF THE DEPARTMENT A ST EP FURTHER, IT IS LOGICAL TO PRESUME THAT IN SUBSEQUENT ASSESSMENTS OF THE FIRM ALSO NO SUCH DEDUCTION SHALL BE ALLOWED BY THE DEPARTMENT. AND THUS, IN EF FECT, THE DIFFERENCE IN VALUATION OF THE LAND WOULD GET TAXED. THEREFORE, T HE ALLEGATION THAT THERE HAS BEEN ANY TAX EVASION IS DEVOID OF THE ANY TRUTH . THE ABSENCE OF ANY CONCRETE EVIDENCE/ARGUMENT FOR A LLEGING TAX AVOIDANCE/EVASION BY MEANS OF SERIES OF TRANSACTION HAS BEEN ATTEMPTED TO BE MADE UP BY THE ASSESSING OFFICER BY USE OF HIGH SOUNDING, REPETITIVE AND VERBOSE LANGUAGE. USE OF INTEMPERATE LANGUAGE B ORDERING ON DEFAMATION DOES NOT MAKE A GOOD ARGUMENT, MUCH LESS EVIDENCE. MULTILATERAL TRANSACTIONS RECORDED/DOCUMENTED CONTE MPORANEOUSLY IN THE PRESENCE OF WITNESSES AND DULY ATTESTED BY GOVERNME NT OFFICIALS/GOVERNMENT APPROVED AGENCIES (NOTARY PUBL IC), NECESSITATED AND DRIVEN BY PURE COMMERCIAL CONSIDERATIONS CANNOT BE OVERLOOKED BY MERE HIGH SOUNDING VERBOSE OR POETIC LANGUAGE. THE ASSES SING OFFICER DID PRECIOUS LITTLE TO PROVE ANY OF THE TRANSACTION TO BE SHAM/NON-GENUINE OR PART OF A PRE-ORDAINED SERIES AND MOTIVATED BY SOLE OBJECTIVE OF TAX AVOIDANCE. SHE DID NOT BRING ON RECORD ANY THIRD PA RTY EVIDENCE TO SUGGEST THE ABOVE OR EVEN CROSS EXAMINE ANY OF THE PARTIES TO THE TRANSACTIONS ALL OF WHOM WERE UNRELATED TO THE ASSESSEE. AS STATED IN EARLIER PART OF THESE SUBMISSIONS, THE TRANSACTIONS IN QUESTION WERE NEITHER PRE-ORDAINED NOR WERE MOTIVAT ED BY ANY CONSIDERATIONS OTHER THAN COMMERCIAL CONSIDERATIONS . IN FACT, AS IT TURNS OUT NOW- THE DEPARTMENT HAS NOT LOST ANY TAX IN THE ALLEGED SERIES OF TRANSACTIONS. THE DEPARTMENT (SAME ASSESSING OFFICE R) HAS DECLINED TO ALLOW THE DEDUCTION OF ANY PART OF REVALUATION AMOU NT AS DEDUCTION FROM THE RECEIPTS/INCOME OF THE FIRM FROM WHICH THE APPE LLANT HAD RETIRED. IN VIEW OF THE ABOVE FACT OF NON-DEDUCTION OF ANY PART OF REVALUATION AMOUNT, THE THEORY OF THE AO THAT THE TRANSACTIONS WERE ENT ERED INTO WITH AN OBJECTIVE OF AVOIDING TAX PAYMENT FALLS TO THE GROU ND. 3.14 MUCH EMPHASIS HAS BEEN LAID BY THE ASSESSING O FFICER ON THE FACT THAT THE ASSESSEE/APPELLANT HAD SURRENDERE D THE AFORESAID DIFFERENCE OF RS. 5.25 CRORES AS HIS INCOME AND HAD UNDERTAKEN TO PAY TAX THEREON. HOWEVER, WHILE FILING THE RETURN, THE ASSE SSEE CLAIMED THE SAID DIFFERENCE TO BE EXEMPT FROM TAX. THE AO SEEMS TO H AVE TAKEN IT TO HER 23 HEART THAT THE ASSESSEE DID NOT HONOUR HIS STATEMEN T MADE DURING THE SEARCH AND SEIZURE PROCEEDINGS AND RETRACTED THEREON. IT I S TRITE LAW TO SAY THAT: THERE IS NO ESTOPPELS AGAINST LAW; AND TAXATION IS NOT A MATTER OF CONTRACT- AND THE SAME CAN BE LEVIED ONLY UNDER THE AUTHORITY OF LAW (ARTICLE 265 OF THE CONSTITUTION). SINCE THERE IS NO ESTOPPELS AGAINST LAW, EVEN IF TH E ASSESSEE HAS ADMITTED TO PAY TAX ON ANY RECEIPT WHICH IS NOT TAX ABLE IN ACCORDANCE WITH LAW, SUCH ADMISSION CANNOT BE HELD AGAINST HIM. IT IS MORE SO BECAUSE THE ASSESSING OFFICER IS DUTY BOUND TO TAX THE CORRECT AND TRUE INCOME IN ACCORDANCE WITH LAW AND THERE CANNOT BE TAX LIABILI TY BY CONTRACT. THERE IS NO ALLEGATION THAT IN THE STATEMENT RECORD ED DURING THE COURSE OF SEARCH IN RESPECT OF THIS TRANSACTION ASS ESSEE MADE ANY AVERMENT OF FACTS WHICH HE RETRACTED LATER. COMPREHENSION OF INCOME-TAX LAW BY A COMMON CITIZEN IS A MERE FICTION. MORE SO, DURING T HE STRENUOUS ENVIRONMENT OF SEARCH AND SEIZURE PROCEEDING. NOT T HAT IT WOULD HAVE MADE MUCH DIFFERENCE, THE APPELLANT WAS NOT ALLOWED ANY ASSISTANCE OF A LEGAL EXPERT/CONSULTANT DURING THE COURSE OF SEARCH OR BEFORE RECORDING OF STATEMENT ON THE MATTERS WHICH ARE ESSENTIALLY QUES TIONS OF LAW. IF THAT BE SO, BY THE SAME LOGIC THE ASSESSING OFFICER (WHO IS DULY EDUCATED IN THE DISCIPLINE OF TAXATION/ACCOUNTS AND LAW) HAS ALSO D EFAULTED- IN THE FIRST INSTANCE TAXING THE AMOUNT IN THE HANDS OF THE APPE LLANT AND THEN BARELY A FEW MONTHS LATER TAKING A DIAMETRICALLY OPPOSITE ST AND IN THE CASE OF THE FIRM. BUT THE LAW IS THAT THERE CANNOT BE ESTOPPEL AGAINST LAW-WHETHER IT BE ASSESSEE OR THE ASSESSING OFFICER. IF THE LAW REQUIRES THAT A CERTAIN TAX IS TO BE COLLECTED, IT CANNOT BE GIVEN UP, AND ANY ASSURANCE THAT IT WOULD NOT BE COLLECTED, WOULD NOT BIND THE GOVERNMENT. THE LIABILITY OF THE ASSESSEE TO PAY INCOME-TAX IS CREATED BY THE INCOME-TAX ACT. THE AMOUNT ON WHICH THE TAX IS TO BE PAID, THE RATES AT WHICH THE TAX HAS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME-TAX ACT AND THE RELEVANT F INANCE ACT. THE LIABILITY TO PAY TAX CANNOT BE FOUNDED ON ANY AGREE MENT. ASSESSEES AGREEMENTS OR STATEMENTS (AS THAT OF THE APPELLANT) IN THE MATTER OF LAW, CERTAINLY, CANNOT FORM THE BASIS OF TAXATION. SO MU CH FOR THE ARGUMENT OF THE ASSESSING OFFICER. IT NEED BE, A FRUITFUL REFER ENCE CAN BE MADE TO THE FOLLOWING JUDICIAL PRONOUNCEMENTS; 1. COMMISSIONER OF INCOME-TAX VS MR. P. FIRM, MUAR [56 ITR 67 (SC)] 2. CIT VS MANIK [74 ITR 1 (SC)]- IN THIS CASE THE A SSESSEE HAD GIVEN AN UNDERTAKING TO FILE A RETURN FOR A YEAR OTHER TH AN THE YEAR UNDER APPEAL 24 BEFORE ITAT. THE SUPREME COURT DISAPPROVED ENFORCIN G SUCH AN UNDERTAKING. 3. ALLAHABAD MILLING VS CIT [6 ITC 286] 4. PARBATI DEVI VS CIT [75 ITR 625] 5. MUTHIAH CHETTIAR VS CIT (1959) 35 ITR 339 (MAD) 6. PULLANGODE RUBBER PRODUCE CO LTD VS STATE OF KER ALA & ANOTHERS (1973) 91 ITR 18 (SC) HONBLE APEX COURT HAS HELD T HAT ADMISSION IS AN EXTREMELY IMPORTANT PIECE OF EVIDENCE BUT IT CANT BE SAID THAT IT IS CONCLUSIVE. IT IS UPON TO THE ASSESSEE TO SHOW THAT IT IS INCOR RECT. 7. GARGIDIN JWALA PRASAD VS CIT (1974) 96 ITR 97 (A LL) HELD THAT THE ADDITION MERELY BASED ON STATEMENT CANNOT BE MADE. 3.14 A VERY IMPORTANT FACT WHICH NEED TO BE HIGHLIG HTED, IS THAT THE ASSESSING HAS NOT PROVED, IN FACT NOT EVEN ALLE GED, THAT THE FIRM- M/S KRISHNA VILLA APARTMENTS WAS A BOGUS FIRM OR NOT GE NUINE FIRM. THE AO HAS ALSO NOT CHALLENGED THE GENUINENESS OF THE PARTNERS HIP DEED DATED 15.07.2006 BY WHICH THE SAID FIRM WAS CONSTITUTED. IN FACT, EV EN WHEN THE ASSESSMENT OF THE FIRM HAS BEEN MADE IN THE STATUS OF FIRM AND NO T AS AOP OR ANY OTHER STATUS. THE AO HAS ALSO NOT CHALLENGED THE GENUINEN ESS OF THE TRANSACTION OF SALE OF LAND BY THE COMPANY TO THE FIRM. IF, SUCH S ALE WAS GENUINE AND THE FIRM WAS GENUINE, THERE IS NO JUSTIFICATION TO HOLD THAT THE LAND IN QUESTION WAS OWNED BY ANY OF THE PARTNERS. THE PARTNERSHIP LAW I N INDIA PROVIDES THAT THE ASSETS OF THE FIRM ARE OWNED BY THE FIRM AND NOT BY THE PARTNERS. THE LAND WAS PURCHASED BY THE FIRM IN ITS OWN NAME, BY PAYING CO NSIDERATION AND ALSO SUBSTANTIAL AMOUNT OF CONVERSION CHARGES, STAMP DUT Y ETC. THE REQUEST FOR ISSUE OF THE PATTA FOR GROUP HOUSING PROJECT WAS MA DE BY THE FIRM AND THE PATTA WAS ALSO ALLOTTED TO THE FIRM ONLY. THE LEGAL AND BENEFICIARY OWNER OF THE LAND WAS FIRM NOT PARTNERS. ALL THESE FACTS GO TO E STABLISH THAT NO TRANSACTION OR CONDUCT OF THE ASSESSEE LEADING TO HIS RETIREMENT F ROM THE PARTNERSHIP FIRM WAS DRIVEN BY ANY INTENTION OF TAX EVASION. 3.15 THE FACTS OF THE CASES REFERRED BY THE LD AO I N THE ASSESSMENT ORDER ARE NOT SIMILAR TO THE CASE OF THE ASSESSEE, HENCE THE RATION LAID DOWN IN THESE CASES ARE NOT APPLICABLE TO THE CASE OF THE ASSESSEE. THE ASSESSEE HAS CITED SEVERAL DIRECT DECISIONS OF APEX COURT AND OTHER COURTS WHICH ARE RELEVANT FOR THE CASE OF THE ASSESSEE. 2.10 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIO NS GAVE THE FOLLOWING FINDING WHICH ARE SUMMARIZED AS UNDER:- 25 1. THE ASSESSEE ENTERED INTO A PARTNERSHIP AGREEMEN T WITH SHRI JITENDRA AGARWAL ON 15-07-2006. WITHIN 9 DAYS OF THE CONSTITUTION OF THE FIRM, LAND MEASURING 3.77 HECTA RE WAS PURCHASED FOR A CONSIDERATION OF RS. 1.05 CRORES BY THE FIRM NAMELY M/S.KRISHNA VILLA APARTMENT IN WHICH THE ASS ESSEE AND SHRI JITENDRA AGARWAL WERE PARTNERS. THE LAND WAS PURCHASED FROM M/S.PCPL. M/S.PCPL IS THE COMPANY IN WHICH TH E ASSESSEE AND HIS SON WERE DIRECTORS. A SUM OF S 25.00 LACS W AS PAID BY THE FIRM TO THE COMPANY ON 18-07-2006 I.E. JUST AFTER 3 DAYS OF THE FORMATION OF THE FIRM AND SECOND CHEQE OF RS. 24.25 LACS WAS GIVEN ON 20-07-2006. THE FUNDS WERE MOSTLY PROVIDED BY TH E ASSESSEE WHICH THE LD. CIT(A) NOTICED FROM THE LEDGER ACCOUN T OF THE ASSESSEE IN THE BOOKS OF M/S.KRISHNA VILLA APARTMEN T. SUCH LAND WAS PURCHASED BY M/S.PCPL VIDE AGREEMENT TO SELL DA TED 1-08- 2005 AND AFTER THAT SUCH AGRICULTURAL LAND WAS CON VERTED INTO RESIDENTIAL/ COMMERCIAL LAND. THE EXPENSES FOR SUCH CONVERSION WERE NOT PAID BY M/S.PCPL AND THESE WERE PAID BY M/ S.KRISHNA VILLA APARTMENT. THE JDA ISSUED LETTER ON 27-07-200 6IN THE NAME OF M/S.KRISHNA VILLA APARTMENT. ANOTHER LETTER BY J DA IN RESPECT OF APPLICATION OF GROUP HOUSING SCHEME AND FOR TH AT PURPOSE THE FIRM WAS TO DEPOSIT RS. 43,81,121/-. FROM THE ABOVE FACTS, THE LD. CIT(A) CONCLUDED THAT THE ASSESSEE WAS PURSING THE APPLICATION FOR CONVERSION AND ALLOTMENT OF GROUP HOUSING PATTA AND THE FIRM WAS ONLY AN ENTITY WHILE THE REAL PERSON BEHIND SUCH AC TIVITY WAS THE ASSESSEE. 2. THE FIRM M/S.KRISHNA VILLA APARTMENT ENTERED INT O DEVELOPMENT AGREEMENT WITH M/S.GOLD DREAM BUILDERS AND DEVELOPER ON 13-09-2006 AND SINCE THE COPY OF THE D EVELOPMENT AGREEMENT WAS NOT FILED THEREFORE, THE TERMS AND CO NDITIONS OF THE DEVELOPMENT AGREEMENT COULD NOT PERUSED BY THE LD. CIT(A) 26 3. THE FIRM M/S.KRISHNA VILLA APARTMENT TOOK OVER T HE FIRM M/S.GOLD DREAM BUILDERS AND DEVELOPER ON 19-01 -2007 AND BEFORE SUCH TAKE OVER, THE VALUE OF THE LAND WAS EN HANCED AND THE CAPITAL ACCOUNT OF THE ASSESSEE AND SHRI JITENDRA A GARWAL WERE CREDITED ON ACCOUNT OF REVALUATION OF THE LAND. SH RI JITENDRA AGARWAL AND THE ASSESSEE RETIRED FROM THE FIRM M/S. KRISHNA VILLA APARTMENT ON 19-03-2007 AND 10-02-2007 RESPECTIVELY AND AFTER RETIREMENT OF THE ASSESSEE, THE FIRM M/S.KRISHNA VI LLA APARTMENT CONSISTED OF FOUR PARTNER WHICH WERE EARLIER PARTNE RS OF M/S.GOLD DREAM BUILDERS AND DEVELOPER. THE APPARENT REASON O F RETIREMENT AS MENTIONED IN THE DEED IS NOT TRUE AS THE REASON WAS TO RELINQUISH THE RIGHT IN THE LAND AS PARTNER OF THE FIRM. THE F IRM M/S.KRISHNA VILLA APARTMENT CONSISTING OF TWO PARTNERS UPTO 19- 01-2007, WAS HAVING ONLY ONE ASSET I.E. LAND. AFTER JOINING OF F OUR NEW PARTNERS, WHICH WERE ERSTWHILE PARTNERS OF M/S.GOLD DREAM BUI LDERS AND DEVELOPER, THE EXISTING TWO PARTNERS WHO STARTED TH E FIRM RETIRED AND THUS RELINQUISHED THEIR RIGHT, TITLE AND INTERE ST IN THE LAND AND THE OBJECTIVE WAS TO AVOID TAXABILITY OF PROFIT UND ER THE INCOME TAX ACT. 4. THE LD. CIT(A) MENTIONED THAT THE DECISION OF HON'BLE APEX COURT IN THE CASE OF CIT VS. BANKEY L AL VAIDYA, 79 ITR 594 REFERRED BY THE LD. AR IS NOT APPLICABLE A S THE ACT HAS BEEN AMENDED AND SECTION 45(4) HAS BEEN INTRODUCED. 5. THE LD. CIT(A) HAS REFERRED TO THE DECISION OF HON'BLE APEX COURT IN THE CASE OF SHRI SUNIL SIDDDD HARTHA VS. CIT 156 ITR 509 IN WHICH THE HON'BLE APEX COURT HELD TH AT IF TRANSFER OF PERSONAL ASSET TO THE FIRM REPRESENT A REAL ATTE MPT TO CONTRIBUTE THE SHARE CAPITAL OF THE PARTNERSHIP FIRM THEN IT W ILL NOT BE CHARGEABLE TO CAPITAL GAIN (BEFORE INTRODUCTION OF SECTION 45(4) OF INCOME TAX ACT) AND IN CASE THE REVENUE ESTABLISHES THAT IT IS A DEVICE OR ROUSE TO CONVERT THE PERSONAL ASSET INTO MONEY 27 SUBSTANTIALLY FOR THE BENEFIT OF THE ASSESSEE WHILE EVADING TAX ON CAPITAL GAIN THEN SUCH TRANSACTION IS TO BE TAXED. THUS ONE WILL HAVE TO TAKE A DECISION AS TO WHETHER THE TRANSACTI ON IS SHAM OR GENUINE. FROM THE SEQUENCE OF EVENTS, THE LD. CIT(A ) HELD THAT THE ASSESSEE BY MAKING AN ARRANGEMENT OF TRANSFERRING T HE LAND HAD USED THIS ARRANGEMENT AS A DEVICE TO EVADE THE TAX. 6. THE LD. CIT(A) HAS REFERRED TO THE DECISION OF H ON'BLE APEX COURT IN THE CASE OF MC DOWELL AND CO. LTD. VS . CTO, 154 ITR 148 IN WHICH THE HON'BLE APEX COURT HELD THAT C OLOURABLE DEVICE CANNOT BE A PART OF TAX PLANNING. THE LD. CI T(A) HAS REFERRED TO THE DECISION OF MC DOWELL CO. LTD. (SUP RA) IN WHICH HON'BLE APEX COURT HELD THAT IT IS NEITHER FAIR NOR DESIRABLE TO EXPECT THE LEGISLATURE TO INTERVENE AND TAKE CARE O F EVERY DEVICE AND SCHEME TO AVOID TAXATION. IT IS UPTO THE COURT TO TAKE STOCK TO DETERMINE THE NATURE OF THE NEW AND SOPHISTICATED L EGAL DEVICES TO AVOID TAX AND TO EXPOSE THE DEVICES FOR WHAT THEY R EALLY ARE AND TO REFUSE TO GIVE JUDICIAL BENEDICTION. 7. THE LD. CIT(A) REJECTED THE CONTENTION OF THE LD . AR THAT SUCH AMOUNT CANNOT BE TAXED UNDER ANY HEAD. THE LD. CIT(A) REFERRED TO SECTION 56(1) OF THE ACT IN WHICH IT HA S BEEN MENTIONED THAT ANY INCOME WHICH IS NOT TAXABLE UNDER ANY OF T HE SPECIFIED HEAD CAN BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. 8. THE CONTENTION OF THE ASSESSEE THAT PROFIT CANNO T BE TAXED BECAUSE THE LAND STILL REMAINS IN THE HANDS OF THE FIRM. THE LD. CIT(A) STATED THAT TWO ERSTWHILE PARTNERS OF THE M/ S.KRISHNA VILLA APARTMENT RECEIVED THEIR SHARES OF PROFIT ON ACCOU NT OF RELINQUISHING THEIR CONTROLLING INTEREST IN THE LAN D AND THEREFORE, THE RETIREMENT OF THESE TWO PARTNERS FROM THE FIRM IS T O BE TAXED IN THE HANDS OF THE ASSESSEE AND SHRI JITENDRA AGARWAL 9. THE LD. CIT(A) HAS REPRODUCED THE STATEMENT OF T HE ASSESSEE RECORDED AT THE TIME OF SEARCH. IN THE STA TEMENT, THE 28 ASSESSEE SURRENDERED PROFIT ARISING FROM M/S.KRISHN A VILLA APARTMENT IN HIS HANDS AS WELL IN THE HANDS OF SHRI JITENDRA AGARWAL. THE STATEMENT RECORDED DURING SEARCH IN RE SPECT OF THE FACTS CAN BE RELIED UPON FOR TAXATION AND THE ASSES SEE SHOULD NOT HAVE ANY GRIEVANCE. REFERENCE IS MADE TO THE DECISI ON OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RAMCHAND RA & CO. VS. CIT, 168 ITR 375 10. THE LD. CIT(A) HAS ALSO REFERRED TO THE DECISIO N OF THE HON'BLE KERALA HIGH COURT IN THE CASE OF V KUNHAMB U & SONS VS. CIT, 219 ITR 235 IN WHICH HON'BLE HIGH COURT HE LD THAT THE ASSESSEE CANNOT CHALLENGE THE CORRECTNESS OF THE AS SESSMENT IN CASE THE STATEMENT IS VOLUNTARILY. THE ASSESSEE HAS NOT ESTABLISHED THAT THE STATEMENT WAS UNDER A MISTAKEN BELIEF OF FACT A ND LAW. ACCORDINGLY LD. CIT(A) CONFIRMED THE ADDITION. 2.11 DURING THE COURSE OF PROCEEDINGS BEFORE US, TH E LD. AR HAS FILED WRITTEN SUBMISSION. PAGE 1 TO 3 OF THE WRITTEN SUBMISSION R EFERS TO THE FACTS OF THE CASE AND THESE FACTS HAVE ALREADY BEEN MENTIONED. IT AS SUBMITTED THAT TWO FIRMS WERE MERGED TO GENERATE GREATER SYNERGY OF OPERATIONS. HOWEVER, TH E THINGS WERE NOT DESTINED TO BE THAT WAY. SHRI JITENDRA AGARWAL FOUND HIMSELF UNCOMFORTA BLE IN NEW SETTING AND THEREFORE, DESIRED TO RETIRED THE NEWLY CONSTITUTED FIRM. ON T HE RETIREMENT OF SHRI JITENDRA AGARWAL, THE ACCOUNTS OF THE FIRM WERE MADE UP AND HE WAS AL LOWED TO WITHDRAW BALANCE IN HIS CAPITAL ACCOUNT. THE ASSESSEES MAIN BUSINESS WAS G ARMENT MANUFACTURING AND EXPORT BUSINESS. IN RESPECT OF SUCH BUSINESS, THE ASSESSE E WAS REQUIRED TO GO ABROAD FREQUENTLY AND HENCE WAS NOT IN A POSITION TO GIVE TIME IN THE BUSINESS OF M/S.KRISHNA VILLA APARTMENT. THE ASSESSEE COULD NOT ADJUST HIMSELF FR OM THE WORKING STYLE AND CONDUCT OF 29 THE NEW PARTNERS AND ACCORDINGLY DECIDED TO RETIRE FROM THE FIRM W.E.F. 19-03-2007. THE SUBMISSIONS OF THE ASSESSEE FILED BEFORE US ARE REP RODUCED AS UNDER:- 3.1 IT IS HUMBLY SUBMITTED THAT THE IMPUGNED AS SESSMENT ORDER SUFFERS FROM FATAL ILLEGALITIES OF LAW AND FACTS, IS PERVER SE BECAUSE OF CONSIDERATION OF IRRELEVANT FACTS WHILE IGNORING THE RELEVANT FACTS. WE ARE SUBMITTING OUR DETAILED EXPLANATION ON THE FOLLOWING POINTS WHICH ARE RELEV ANT TO THE ISSUE UNDER APPEAL:- (I) WHETHER THERE WAS ANY TRANSFER OF CONTROLLING I NTEREST IN LAND BY THE ASSESSEE:- (II) WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE AG AINST THE SETTLEMENT OF ACCOUNT OF RETIRING PARTNER FROM PARTNERSHIP FIRM, INVOLVES TRANSFER U/S 2(47) OF INCOME TAX ACT. (III) WHETHER THE SHARE OF PROFIT ON REVALUATION OF ASSETS OF THE PARTNERSHIP FIRM IS CHARGEABLE TO TAX IN THE HANDS OF THE PARTNER. (IV) EVEN IF IT IS PRESUMED THAT THE LAND IN QUESTI ON CHANGED THE HANDS FROM ONE SET OF PERSONS TO ANOTHER SET OF PERSONS, WHETH ER THE TAX CAN BE CHARGED FROM ASSESSEE MORE SO WHEN THE ASSESSEE NEV ER REMAINED THE OWNER OF THE LAND AND IT IS NOT A CASE OF CONVERSIO N OF PERSONAL ASSET INTO ASSET OF PARTNERSHIP FIRM IN WHICH THE ASSESSEE IS A PARTNER AND CONVERSION OF PARTNERSHIP ASSET INTO INDIVIDUAL ASSET ON RETIR EMENT. (V) WHETHER THE RECEIPT IN THE HANDS OF THE ASSESSE E IS REVENUE RECEIPT AND CHARGEABLE TO TAX AS INCOME FROM OTHER SOURCE. (VI) WHETHER THE FIRM WAS NOT A GENUINE FIRM. (VII) WHETHER THERE WAS COLOURFUL DEVICE TO AVOID T AX AND THE RATIO LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF MCDOWELL & CO LTD VS CTO 154 ITR 148 ARE APPLICABLE TO THE CASE OF THE ASSESSEE. (VIII) WHETHER THE INCOME CAN ASSESSED MERELY ON SU RRENDER BASIS. NOW SUBMISSIONS IN RESPECT TO EACH POINT ARE AS UN DER:- 30 3.2 WHETHER THERE WAS ANY TRANSFER OF CONTROLLING I NTEREST IN LAND BY THE ASSESSEE:- THE CIT(A) HAS WRONGLY HELD THAT THE ASSESSEE HAS T RANSFERRED HIS CONTROLLING INTEREST IN LAND TO THE OTHER PARTNERS. THE RETIREM ENT DEED IS PLACED AT PB PAGE 49- 53. THERE IS NO CLAUSE IN THE RETIREMENT DEED TO SAY TH E TRANSFER OF CONTROLLING INTEREST IN LAND IN FAVOUR OF OTHER PARTNERS. FURTH ER THE ASSESSEE HAS RECEIVED NO ANY CONSIDERATION AGAINST THE RETIREMENT OR SO CALL ED TRANSFER OF CONTROLLING INTEREST AND FOR THIS REASON ALSO, THE AMOUNT CANNO T BE HELD AS CAPITAL GAIN OF THE ASSESSEE. THE RELEVANT CLAUSE IN RETIREMENT DEED IS 5 (PB PAG E 51), WHICH IS AS UNDER:- 5. THAT BALANCE IN THE CAPITAL ACCOUNT OF THE RET IRING PARTNER WILL BE PAID TO HIM WITHIN THE PERIOD OF THREE MONTHS FROM THE DATE OF THE DEED AND NO INTEREST ON SUCH BALANCE WILL BE PAID FOR THIS PERI OD OF THREE MONTHS. AFTER PAYMENT OF THIS ENTIRE CAPITAL, THE RETIRING PARTNE R SHALL NOT HAVE ANY RIGHT IN THE BUSINESS OF THE FIRM AND ALSO WILL NOT CLAIM HIS SHARE IN THE GOODWILL OF THE FIRM, IF ANY. THIS CLAUSE CONTEMPLATES THREE THINGS (I) THE PAYME NT OF BALANCE IN CAPITAL OF RETIRING PARTNER (II) NO RIGHT IN BUSINESS OF THE F IRM AND (III) NO RIGHT IN GOODWILL OF THE FIRM. THEREFORE, THIS CLAUSE DOES NOT SPEAK THA T THE ASSESSEE HAS RELINQUISHED HIS RIGHT IN THE LAND OR OTHER ASSETS OF THE FIRM. THEREFORE, NOTHING HAS BEEN MENTIONED IN THE DEED T O SAY THAT THE ASSESSEE HAS TRANSFERRED HIS CONTROLLING INTEREST IN THE LAND IN FAVOUR OF OTHER PARTNERS. FURTHER, NO WHERE IT HAS BEEN MENTIONED THAT THE ASSESSEE WI LL NOT HAVE ANY RIGHT IN THE ASSETS OF THE FIRM. THE BUSINESS OF THE FIRM AND AS SETS OF THE FIRM ARE TWO DIFFERENT THINGS AND CANNOT BE TAKEN AT SAME MEANING. BUSINES S INDICATES THE ACTIVITY OF PURCHASE, SELL, PRODUCTION, TRADE, DEALING ETC. THE REFORE, ACCORDING TO THIS CLAUSE, THE ASSESSEE WILL NOT HAVE ANY RIGHT IN THE BUSINES S ACTIVITIES OF THE FIRM OR RESULT OF THE BUSINESS ACTIVITIES I.E. PROFIT OR LOSS. FUR THER, IT HAS BEEN SPECIFICALLY MENTIONED THAT THE ASSESSEE WILL NOT HAVE ANY RIGHT IN GOODWILL OF THE FIRM. 31 FURTHER, THE INCOMING PARTNERS HAVE NOT BROUGHT SUB STANTIAL CAPITAL IN THE FIRM. THE BALANCE IN THEIR CAPITAL ACCOUNT AS ON 31.03.20 07 WAS ONLY RS. 28,63,000/- (CAPITAL A/C PB PAGE 134). THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE HAS TRANSFERRED HIS CONTROLLING INTEREST IN LAND IN FAV OUR OF NEW PARTNERS FOR A CONSIDERATION OF RS. 5,24,47,943/-. 3.3 WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE AGA INST THE SETTLEMENT OF ACCOUNT OF RETIRING PARTNER FROM PARTNERSHIP FIRM, INVOLVES TRANSFER U/S 2(47) OF INCOME TAX ACT:- IT IS A WELL-SETTLED PRINCIPLE OF LAW THAT THE SETT LEMENT OF ACCOUNT OF RETIRING PARTNERS FROM THE PARTNERSHIP FIRM DOES NOT INVOLVE ANY TRANSFER, THE REASON BEING THAT AS LONG AS THE PARTNERSHIP FIRM CONTINUES, NO PARTNER CAN CLAIM ANY SHARES IN ANY OF THE ASSETS OF THE PARTNERSHIP FIRM AND AS SU CH, WHEN THE ACCOUNTS OF THE RETIRING PARTNER ARE SETTLED EVEN ON THE BASIS OF R EVALUATION OF ASSETS, THERE IS NO TRANSFER OF ANY INTEREST OF THE RETIRING PARTNER IN ANY OF THE ASSETS OF THE PARTNERSHIP FIRM. IT IS NOTHING BUT SETTLING THE AC COUNT OF A RETIRING PARTNER AND AS SUCH NO TRANSFER IS INVOLVED, THERE IS NO QUESTION OF ANY LIABILITY ON ACCOUNT OF CAPITAL GAINS. THE ASSESSEE RECEIVED THE BALANCE LYING TO HIS CRED IT ON THE CAPITAL AS REFLECTED IN THE BOOKS OF ACCOUNT AS ON 19/03/2007 IN FULL AND F INAL SETTLEMENT OF HIS DUES ON ACCOUNT OF RETIREMENT. THE BALANCE IN THE CAPITAL A CCOUNT OF THE ASSESSEE ON 18/03/2007 WITH THE FIRM WAS RS. 16,52,943/- WHICH WERE RECEIVED BY THE ASSESSEE ON RETIREMENT. THE COPY OF THE CAPITAL ACC OUNT OF THE ASSESSEE WITH THE FIRM IS PLACED AT (PB PAGE 126-128) THE AMOUNT RECEIVED BY THE ASSESSEE IS CAPITAL RECE IPT NOT CHARGEABLE TO TAX IN VIEW OF THE LAW LAID DOWN BY THE SUPREME COURT IN SUCCESSIVE DECISIONS TO THE EFFECT THAT AN AMOUNT PAID TO A RETIRING PARTNER IN A PARTNERSHIP FIRM DOES NOT AMOUNT TO A TRANSFER WITHIN THE MEANING OF S. 2(47) . DURING THE SUBSISTENCE OF A PARTNERSHIP, A PARTNER DOES NOT POSSESS AN INTEREST IN SPECIE IN ANY PARTICULAR ASSET 32 OF THE PARTNERSHIP. DURING THE SUBSISTENCE OF A PAR TNERSHIP, A PARTNER HAS A RIGHT TO OBTAIN A SHARE IN PROFITS. ON DISSOLUTION OF A PART NERSHIP OR UPON RETIREMENT, A PARTNER IS ENTITLED TO A VALUATION OF HIS SHARE IN THE NET ASSETS OF THE PARTNERSHIP WHICH REMAIN AFTER MEETING THE DEBTS AND LIABILITIE S. AN AMOUNT PAID TO A PARTNER UPON RETIREMENT, AFTER TAKING ACCOUNTS AND UPON DED UCTION OF LIABILITIES DOES NOT INVOLVE AN ELEMENT OF TRANSFER WITHIN THE MEANING O F S. 2(47). CHIEF JUSTICE P.N. BHAGWATI (AS THE LEARNED JUDGE THEN WAS) SPEAKING F OR A DIVISION BENCH OF THE GUJARAT HIGH COURT IN CIT VS. MOHANBHAI PAMABHAI (1 973) 91 ITR 393 (GUJ) (COPY AT PB PAGE 188-200) DEALT WITH THE ISSUE IN T HE FOLLOWING OBSERVATIONS:- ...WHEN, THEREFORE, A PARTNER RETIRES FROM A PARTN ERSHIP AND THE AMOUNT OF HIS SHARE IN THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE OF THE PARTNERSHIP ASSETS AND GIVEN TO HIM, WHAT HE RECEIVES IS HIS SH ARE IN THE PARTNERSHIP AND NOT ANY CONSIDERATION FOR TRANSFER OF HIS INTEREST IN T HE PARTNERSHIP TO THE CONTINUING PARTNERS. HIS SHARE IN THE PARTNERSHIP IS WORKED OU T BY TAKING ACCOUNTS IN THE MANNER PRESCRIBED BY THE RELEVANT PROVISIONS OF THE PARTNERSHIP LAW AND IT IS THIS AND THIS ONLY, NAMELY, HIS SHARE IN THE PARTNERSHIP WHICH HE RECEIVES IN TERMS OF MONEY. THERE IS IN THIS TRANSACTION NO ELEMENT OF T RANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRING PARTNER TO THE C ONTINUING PARTNERS : VIDE ALSO THE RECENT DECISION OF THE SUPREME COURT IN CIT VS. BANKEY LAL VAIDYA (1971) 79 ITR 594 (SC). IT IS TRUE THAT S. 2(47) DEFINES TRAN SFER IN RELATION TO A CAPITAL ASSET AND THIS DEFINITION GIVES AN ARTIFICIALLY EXTENDED MEANING TO THE TERM TRANSFER BY INCLUDING WITHIN ITS SCOPE AND AMBIT TWO KINDS OF T RANSACTIONS WHICH WOULD NOT ORDINARILY CONSTITUTE TRANSFER IN THE ACCEPTED CO NNOTATION OF THAT WORD, NAMELY, RELINQUISHMENT OF THE CAPITAL ASSET AND EXTINGUISHM ENT OF ANY RIGHTS IN IT. BUT EVEN IN THIS ARTIFICIALLY EXTENDED SENSE, THERE IS NO TR ANSFER OF INTEREST IN THE PARTNERSHIP ASSETS INVOLVED WHEN A PARTNER RETIRES FROM THE PAR TNERSHIP. HONBLE GUJARAT HIGH COURT HELD THAT THERE IS, IN S UCH A SITUATION, NO TRANSFER OF INTEREST IN THE ASSETS OF THE PARTNERSHIP WITHIN TH E MEANING OF S. 2(47). WHEN A 33 PARTNER RETIRES FROM A PARTNERSHIP, WHAT THE PARTNE R RECEIVES IS HIS SHARE IN THE PARTNERSHIP WHICH IS WORKED OUT BY TAKING ACCOUNTS AND THIS DOES NOT AMOUNT TO A CONSIDERATION FOR THE TRANSFER OF HIS INTEREST TO T HE CONTINUING PARTNERS. THE APPEAL AGAINST THE JUDGMENT OF THE GUJARAT HIGH COURT WAS DISMISSED BY A BENCH OF THREE LEARNED JUDGES OF THE SUPREME COURT IN ADDL. CIT VS. MOHANBHAI PAMABHAI (1987) 165 ITR 166 (SC) (COPY AT PB PAGE 1 87). THE SUPREME COURT RELIED UPON ITS JUDGMENT IN SUNIL SIDDHARTHBHAI VS. CIT (1985) 49 CTR 172 : (1985) 156 ITR 509 (SC). HONBLE SUPREME COURT IN A FURTHER CASE CIT VS. R. LINGMALLU RAGHUKUMAR (2001) 166 CTR (SC) 398 : (2001) 247 ITR 801 (SC), (COPY AT PB PAGE 179-180) HELD, WHILE AFFIRMING THE PRINCIPLE LAID DOWN IN MO HANBHAI PAMABHAI (SUPRA) THAT WHEN A PARTNER RETIRES FROM A PARTNERSHIP AND THE A MOUNT OF HIS SHARE IN THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNTS, THERE IS NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRED PARTNER TO THE CONTINUING PARTNERS . IT MAY ALSO BE NOTED THAT IN CIT VS. TRIBHUVANDAS G . PATEL (1978) 115 ITR 95 (BOM), (COPY AT PB PAGE 205-219) WHICH WAS DECIDED BY A DIVISION BENCH OF BOMBAY HIGH COURT, UNDER A DEED OF PARTNERSHIP, THE ASSESSEE RETIRED FROM THE PARTNERSHIP FIRM AND WAS INTER ALIA PAID AN AMOUNT OF RS. 4,77,941 AS HIS SHARE IN THE REMAINING ASSETS OF THE FIRM. THE DIVISION BENC H OF THIS COURT HAD HELD THAT THE TRANSACTION WOULD HAVE TO BE REGARDED AS AMOUNT ING TO A TRANSFER WITHIN THE MEANING OF S. 2(47) IN AS MUCH AS THE ASSESSEE HAD ASSIGNED, RELEASED AND RELINQUISHED HIS SHARE IN THE PARTNERSHIP AND ITS A SSETS IN FAVOUR OF THE CONTINUING PARTNERS. THIS PART OF THE JUDGMENT WAS REVERSED IN APPEAL BY THE SUPREME COURT IN TRIBHUVANDAS G. PATEL VS. CIT (1999) 236 ITR 515 (SC). (COPY AT PB PAGE 201-204) 34 FURTHER MORE, HONBLE ITAT JAIPUR BENCH HAS ALSO DE CIDED THE SIMILAR ISSUE IN THE CASE OF HEMCHAND GOVIL VS ACIT 30 TAXWORLD 14 ( COPY AT PB PAGE 177- 178) WHEREIN HONBLE BENCH HAS FALLOWED THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF R LINGMALLU RAGHUKUMAR (2001) 247 IT R 801 (SC) AND HELD THAT THERE IS NO ELEMENT OF TRANSFER OF INTEREST IN THE FIRM ON RETIREMENT IN FAVOUR OF REMAINING PARTNERS. THERE ARE SERIES OF DECISION OF GUJARAT HIGH COURT, MADRAS HIGH COURT, KERALA HIGH COURT, ALLAHABAD HIGH COURT, ANDRA PRADESH HIG H COURT, AND CALCUTTA HIGH COURT ON THIS ISSUE. FURTHER MORE, BOMBAY HIGH COU RT HAS ALSO CHANGED ITS VIEW AFTER THE REVERSION OF ITS EARLIER DECISION IN THE CASE OF TRIBHUVANDAS G PATEL BY HONBLE APEX COURT ON THIS ISSUE. THE ASSESSEE ALSO RELIES ON THE FOLLOWING DECISIONS:- (I) PRASHANT S. JOSHI VS. INCOME TAX OFFICER & ANR.* HIGH COURT OF BOMBAY (2010) 324 ITR 154 (COPY AT PB PAGE 231- 239) IN THIS CASE HONBLE COURT QUASHED THE NOTICE ISSUE D U/S 148 BY THE DEPARTMENT FALLOWING THE PRINCIPLES LAID DOWN BY HO NBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS MOHANBHAI PAMABHAI 91 I TR 393 (GUJ) THAT AN AMOUNT PAID TO A PARTNER UPON RETIREMENT AFTER T AKING ACCOUNTS AND UPON DEDUCTION OF LIABILITIES DOES NOT INVOLVE AN E LEMENT OF TRANSFER WITHIN THE MEANING OF S. 2(47) OF INCOME TAX ACT AND QUASH ED THE NOTICE ISSUED BY THE DEPARTMENT U/S 147 OF INCOME TAX ACT. IN PA RA 15 OF THE JUDGMENT HONBLE COURT MENTIONED AS UNDER:- 15. AT THIS STAGE, IT MAY BE NOTED THAT IN CIT VS. TRIB HUVANDAS G. PATEL (1978) 115 ITR 95 (BOM), WHICH WAS DECIDED BY A DIVISION BENCH OF THIS COURT, UNDER A DEED OF PARTNERSHIP, T HE ASSESSEE RETIRED FROM THE PARTNERSHIP FIRM AND WAS INTER ALIA PAID A N AMOUNT OF RS. 4,77,941 AS HIS SHARE IN THE REMAINING ASSETS OF TH E FIRM. THE DIVISION BENCH OF THIS COURT HAD HELD THAT THE TRANSACTION W OULD HAVE TO BE REGARDED AS AMOUNTING TO A TRANSFER WITHIN THE MEAN ING OF S. 2(47) IN AS MUCH AS THE ASSESSEE HAD ASSIGNED, RELEASED AND RELINQUISHED HIS SHARE IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR O F THE CONTINUING PARTNERS. THIS PART OF THE JUDGMENT WAS REVERSED IN APPEAL BY THE SUPREME COURT IN TRIBUVANDAS G. PATEL VS. CIT (1999 ) 157 CTR (SC) 519 : (1999) 236 ITR 515 (SC). FOLLOWING THE JUDGME NT OF THE SUPREME COURT IN SUNIL SIDDHARTHBHAI (SUPRA), THE S UPREME COURT 35 HELD THAT EVEN WHEN A PARTNER RETIRES AND SOME AMOU NT IS PAID TO HIM TOWARDS HIS SHARE IN THE ASSETS, IT SHOULD BE TREAT ED AS FALLING UNDER CL. (II) OF S. 47. THEREFORE, THE QUESTION WAS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. SEC. 47(U) WHICH HELD THE FIELD AT THE MATERIAL TIME PROVIDED THAT NOTHING CONTAINED I N S. 45 WAS APPLICABLE TO CERTAIN TRANSACTIONS SPECIFIED THEREI N AND ONE OF THE TRANSACTIONS SPECIFIED IN CL. (II) WAS DISTRIBUTION OF THE CAPITAL ASSETS ON A DISSOLUTION OF A FIRM. SEC. 47(U) WAS SUBSEQUE NTLY OMITTED BY THE FINANCE ACT OF 1987 W.E.F. 1ST APRIL, 1988. SIMULTA NEOUSLY, SUB-S. (4) OF S. 45 CAME TO BE INSERTED BY THE SAME FINANCE AC T. SUB-S. (4) OF S. 45 PROVIDES THAT PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON T HE DISSOLUTION OF A FIRM OR OTHER AOP OR BOI (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGEABLE TO TAX A S THE INCOME OF THE FIRM, ASSOCIATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE. THE FAIR MARKET VALUE OF THE ASSETS 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 FO R THE PURPOSE OF S. 48. EX FACIE SUBS. (4) OF S. 45 DEALS WITH A SITUATION WHERE THERE IS A TRANSFER OF A CAPITAL ASSET BY WAY OF A DISTRIBUTIO N OF CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM OR OTHERWISE. EVIDENTLY, ON THE ADMITTED POSITION BEFORE THE COURT, THERE IS NO TRANSFER OF A CAPITAL ASSET BY WAY OF A DISTRIBUTION OF THE CAPITAL ASSETS, ON A DISSO LUTION OF THE FIRM OR OTHERWISE IN THE FACTS OF THIS CASE. WHAT IS TO BE NOTED IS THAT EVEN IN A SITUATION WHERE SUB-S. (4) OF S. 45 APPLIES, PROFIT S OR GAINS ARISING FROM THE TRANSFER ARE CHARGEABLE TO TAX AS INCOME OF THE FIRM. (II) COMMISSIONER OF INCOME TAX VS. G. SESHAGIRI RAO (19 95) 213 ITR 304 (AP) (COPY AT PB PAGE 258-260):- THE BRIEF FACTS OF THE CASE ARE THAT THERE WAS A PARTNERSHIP UNDER THE NAME AND STYLE OF M/S W HITE FIELD INDUSTRIAL CORPORATION, BANGALORE. IT PURCHASED CERTAIN LAND U NDER A REGISTERED SALE DEED DT. 15TH MAY, 1972. THE ASSESSEE WAS PARTNER I N THIS FIRM. THE LAND WHICH WAS PURCHASED WAS CONVERTED FOR INDUSTRIAL PU RPOSES AND WAS REVALUED AT RS. 12 LAKHS. THE ASSESSEES SHARE IN T HE SAID PARTNERSHIP IN A SUM OF RS. 2 LAKHS WAS CREDITED TO HIS ACCOUNT. ON 20TH FEB., 1980, THE OLD PARTNERS INCLUDING THE ASSESSEE RETIRED AND THE ASS ESSEE RECEIVED THE SAID SUM OF RS. 2 LAKHS ON RETIREMENT. FOR THE ASST. YR. 1980-81, IN THE ASSESSMENT PROCEEDINGS, THE ASSESSEE CLAIMED THAT T HE SAID AMOUNT OF RS. 2 LAKHS RECEIVED BY HIM DID NOT CONSTITUTE TRANSFER WITHIN THE MEANING OF S. 2(47) OF THE IT ACT. HONBLE COURT FOLLOWED ITS DECISION IN THE CASE OF CIT VS L RAGHU KUMAR 141 ITR 674 (AP) AND HELD THAT WHEN THE AMOUNT STANDING TO THE CAPITAL ACCOUNT OF THE RETIRING PAR TNER IS DRAWN BY HIM AT THE TIME OF HIS RETIREMENT, IT CANNOT BE SAID THAT THERE WAS ANY TRANSFER OF A CAPITAL ASSET IN FAVOUR OF THE EXISTING PARTNERS BY HIM FOR THE PURPOSE OF 5. 45. 36 (III) IN COMMISSIONER OF INCOME TAX VS. ANANT NARHAR NIMK AR (HUF) (1997) 224 ITR 221 (GUJ) (COPY AT PB PAGE 240-243)__, IT WAS HELD THAT WHAT A PARTNER GETS AT THE TIME OF HIS RETIREMENT IS NOT T HROUGH TRANSFER OF AN ASSET FOR THE CONSIDERATION. WHAT REALLY HE GETS AT THE E ND OF THE RELATIONSHIP WITH THE FIRM IS THE VALUE OF THE INTEREST HE ALREA DY HAD IN THE FIRM WHICH HE WAS ENJOYING JOINTLY AND WHICH GROWS OR DIMINISH ES WITH THE GROWTH OR FALL IN THE PROSPERITY OF THE PARTNERSHIP FIRM. HE DOES NOT GET ANY NEW RIGHT AT THE TIME OF DISSOLUTION OR HIS RETIREMENT.. WHAT THE PARTNER GETS AT THE TIME OF DISSOLUTION OR UPON RETIREMENT IS REALISATI ON OF HIS OWN PRE- EXISTENCE OF RIGHT OR INTEREST IN THE FIRM AND NO T RANSFER OF PROPERTY IN HIS FAVOUR WHICH IS NOT ALREADY (SIC) HIS TAKES PLACE. IF THAT IS SO, IT CANNOT AMOUNT TO TRANSFER OF PARTNERS INTEREST ON GETTING VALUE OF HIS SHARE ON RETIREMENT. OBVIOUSLY, REALISATION OF ONES OWN INT EREST IN MONEY VALUE AFTER EVALUATING THE VALUE OF EXISTING INTEREST IN THE FIRM CANNOT IN ANY TERMS BE CONSIDERED AS TRANSFER UNLESS A LEGAL FICT ION EXISTS TO THAT FOR THAT PURPOSE AND IN THE ABSENCE OF ANY TRANSFER, THERE C ANNOT BE ANY QUESTION OF ARISING OF ANY CAPITAL GAINS FOR TAXABLE PURPOSE. I N THIS CASE THE DECISIONS CIT VS. MOHANBHAI PAMABHAI (1973) 91 ITR 393 (GUJ); CIT VS. MOHANBHAI PAMABHAI (1987) 165 ITR 166 (SC) ADDANKI NARAYANAPPA VS. BHASKARA KRISHNAPPA AIR 1966 SC 1300, AND DECISION IN THE CASE OF SUNIL SIDDHARTHBHAI VS. CIT (1985) 156 ITR 509 (SC ) WERE FOLLOWED. (IV) IN COMMISSIONER OF INCOME TAX VS KUNNAMKULAM MILL B OARD (2002) 257 ITR 544 (KAR), (COPY AT PB PAGE 244-248)__, HONB LE KARNATAKA HIGH COURT HELD THAT ON RETIREMENT OF THE PARTNER OF THE FIRM THERE IS NO TRANSFER OF THE ASSETS OF THE FIRM IN FAVOUR OF THE CONTINUI NG PARTNERS. THE FACTS OF THIS CASE ARE THAT THE ASSESSEE IS A PARTNERSHIP FI RM. IT HAD ORIGINALLY FIVE PARTNERS AND IT WAS CONSTITUTED UNDER A DEED EXECUT ED ON 14TH SEPT., 1983. SUBSEQUENTLY, THERE WAS A CHANGE IN THE CONSTITUTIO N OF THE PARTNERSHIP AS EVIDENCED BY A NEW PARTNERSHIP DEED EXECUTED ON 13T H JAN., 1989. TWO MORE PARTNERS WERE ADMITTED AT THAT TIME. AT THE TI ME OF ADMISSION OF THE NEW PARTNERS THERE WAS A REVALUATION MADE IN RESPEC T OF THE ASSETS OF THE FIRM. AS PER CL. 6 OF THE PARTNERSHIP DEED IT WAS A GREED THAT THE DIFFERENCE REPRESENTING ENHANCEMENT BY REVALUATION OF THE ASSE TS WOULD BE CREDITED TO THE ACCOUNTS OF THE ORIGINAL PARTNERS AND THE TW O NEW PARTNERS WOULD HAVE NO SHARE IN IT. THE FIXED ASSETS OF THE FIRM H AD BEEN THUS REVALUED AND THAT REVALUATION WAS CREDITED EQUALLY IN THE ACCOUN TS OF THE ORIGINAL FIVE PARTNERS. THE FIRM CONTINUED WITH SEVEN PARTNERS FO R A SHORT TIME AND THEREAFTER ON 31ST JAN., 1989, THE ORIGINAL FIVE PA RTNERS RETIRED AND THE BUSINESS WAS CONTINUED BY THE PARTNERSHIP CONSISTIN G OF THE SURVIVING TWO PARTNERS. A DEED OF RETIREMENT WAS EXECUTED ON 31ST JAN., 1989, BETWEEN THE TWO CONTINUING PARTNERS ON THE ONE HAND AND THE FIVE RETIRING PARTNERS ON THE OTHER. CLAUSE 3 OF THE DEED SHOWS THAT THE R ETIRING PARTNERS WOULD BE ENTITLED TO THE CREDIT BALANCES IN THEIR ACCOUNT S WITH THE FIRM. IN THE ASSESSMENT THE AO ADDED THE SUM OF RS. 7,63,559 AS THE INCOME OF THE ASSESSEE-FIRM UNDER S. 45(4) AND AFTERWARDS ADDING THE SAID AMOUNT THE ASSESSMENT WAS COMPLETED. IN THIS BEHALF, THE DEPAR TMENT TOOK THE STAND 37 THAT THERE WAS A TRANSFER OF CAPITAL ASSET WITHIN T HE MEANING OF S. 45(4) OF THE IT ACT AS AMENDED. IN PARA 6 OF THE ORDER HONB LE COURT HELD AS UNDER:- 6. THE FIRM IS THE ASSESSEE WHILE IT HAD FIVE PA RTNERS OR SEVEN PARTNERS OR EVEN WHEN IT HAD ONLY TWO PARTNERS. THERE IS NO CHANGE IN THE STATUS OF THE ASSESSEE. WHAT FURTHER HAS TO BE NOTICED IS THA T THE FIRM HAS ITS OWN RIGHTS AND LIABILITIES AND IT CAN INCUR LIABILITIES OR OWN AND POSSESS PROPERTIES. IN A CASE OF THIS NATURE WHAT HAPPENS I S THAT WITH THE ADMISSION OF NEW PARTNERS, THE RIGHTS OF THE EXISTI NG PARTNER ARE REDUCED AND THAT A RIGHT IS CREATED IN FAVOUR OF THE NEWLY INDUCTED PARTNERS. BUT THE OWNERSHIP OF THE PROPERTY DOES NOT CHANGE EVEN WITH THE CHANGE IN THE CONSTITUTION OF THE FIRM. AS LONG AS THERE IS NO CH ANGE IN OWNERSHIP OF THE FIRM AND ITS PROPERTIES MERELY FOR THE SIMPLE REASO N THAT THE PARTNERSHIP OF THE FIRM STOOD RECONSTITUTED, THERE IS NO TRANSFER OF CAPITAL ASSET. LIKEWISE, IF A PARTNER RETIRES HE DOES NOT TRANSFER ANY RIGHT IN THE IMMOVABLE PROPERTY IN FAVOUR OF THE SURVIVING PARTNER BECAUSE HE HAD NO SPECIFIC RIGHT WITH RESPECT TO THE PROPERTIES OF THE FIRM. W HAT TRANSPIRES IS THE RIGHT TO SHARE THE INCOME OF THE PROPERTIES STOOD TRANSFE RRED IN FAVOUR OF THE SURVIVING PARTNERS, AND THERE IS NO TRANSFER OF OWN ERSHIP OF THE PROPERTY IN SUCH CASES. (V) IN ADDL. CIT VS.. SMT. MAHINDERPAL BHASIN (1979) 11 7 ITR 26 (ALL) , ALLAHABAD HIGH COURT FOLLOWED THE DECISION OF THE G UJARAT HIGH COURT IN CIT VS. MOHANBHAI PAMABHAI (SUPRA) AND HELD THAT WH EN A PARTNER RETIRES, WHAT HE RECEIVES IS REALLY HIS SHARE IN THE PARTNER SHIP ASSETS. IT IS NOT A CONSIDERATION FOR TRANSFER OF HIS INTEREST IN THE P ARTNERSHIP TO THE CONTINUING PARTNERS. IN THE CASE OF A RETIREMENT OF A PARTNER, JUST AS IN THE CASE OF A DISSOLUTION OF PARTNERSHIP, THERE IS NO E LEMENT OF TRANSFER. IT IS ONLY AN ADJUSTMENT OF THE RIGHT OF THE PARTNERS AND NOT RELINQUISHMENT OR EXTINGUISHMENT OF INTEREST OF RETIRING PARTNER. (VI) THE SAME VIEW WAS FOLLOWED IN CIT VS. MADAN LAL BHA RGAVA (1980) 122 ITR 545 (ALL) (COPY AT PB PAGE 253-257)__, WHEREIN IT WAS OBSERVED THAT ALL THAT THE ASSESSEE RECEIVED ON HIS RETIREMENT FR OM THE FIRM IN RESPECT OF HIS SHARE IN THE GOODWILL WAS ITS VALUE TO WHICH HE WAS ALL ALONG ENTITLED AND THAT THE CASE NEED NOT FALL WITHIN THE PURVIEW OF S. 2, CL. (47) AND CONSEQUENTLY S. 45 HAD NO APPLICATION. (VII) IN CIT VS. BHUPINDER SINGH ATWAL (1981) 128 ITR 67 (CAL) (COPY AT PB PAGE 261-267)__, HONBLE CALCUTTA HIGH COURT HAS HELD WHEN A PARTNE R RETIRES FROM THE PARTNERSHIP THE AMOUNT OF HIS SHAR E IN THE PARTNERSHIP ASSET AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES IS DETERMINED AND ON TAKING THE ACCOUNTS, WHAT HE RECEIVED IS THE SHARE IN THE PARTNERSHIP AND THERE IS NO CONSIDERATION FOR ANY TRANSFER OF HIS INTEREST I N HIS PARTNERSHIP TO THE CONTINUING PARTNERS. CONSEQUENTLY THERE IS NO TRANS FER OR SALE AS CONTEMPLATED BY S.45 OF THE IT ACT, 1961. THE CALCU TTA HIGH COURT 38 DECISION IN PART AND ALSO REFERRED TO THE CONTRARY DECISIONS OF THE BOMBAY HIGH COURT IN THE CASE OF TRIBHUVANDAS G. PATEL (19 78) 115 ITR 95 (BOM) AND ASLOT 1978 CTR (BOM) 612 BUT PREFERRED TO FOLLO W THE DECISION OF THE GUJARAT HIGH COURT IN THE CASE OF ADDL. CIT VS. NAG INDAS KILABHAI & CO. REPORTED IN (1975) 101 ITR 197 (GUJ) AND ALLAHABAD HIGH COURT IN THE CASE OF ADDI. CIT VS. MAHINDERPAL BHASIN 117 ITR 2 6 (ALL) . THE COURT HAS ALSO OBSERVED THAT IN THE CASE OF RETIREMENT OF PARTNER OR THE DISSOLUTION OF PARTNERSHIP THERE WAS NO ELEMENT OF TRANSFER OR RELINQUISHMENT OR EXTINGUISHMENT OF INTEREST OF THE RETIRING PARTNER AND THE LEGAL INCIDENCE IS THE SAME. (VIII) IN COMMISSIONER OF INCOME TAX VS. N. PALANIAPPA GOU NDER (1983) 143 ITR 343 (MAD) (COPY AT PB PAGE 268-273)__, HONBLE MADRAS HIGH COURT HELD THAT THE RECEIPT BY A PARTNER HIS SHARE IN THE ASSETS OF THE FIRM ON RETIREMENT DOES NOT GIVE RISE TO CAPITAL GAINS R ESULTING FROM ANY SALE, EXCHANGE, TRANSFER OR RELINQUISHMENT BY HIM AS CAPI TAL ASSET. FURTHER HELD THAT ONE CANNOT SEE WHY THE RETIREMENT OF A PARTNER FROM A FIRM SHOULD BE TREATED AS HAVING DIFFERENT KINDS OF ATTRIBUTES ACC ORDING TO THE MODE OF SETTLEMENT OF THE RETIRING PARTNERS ACCOUNTS IN TH E PARTNERSHIP. WHETHER THE RETIRING PARTNER RECEIVES A LUMP SUM CONSIDERAT ION OR WHETHER THE AMOUNT IS PAID TO HIM AFTER A GENERAL TAKING OF ACC OUNTS AND AFTER ASCERTAINMENT OF HIS SHARE IN THE NET ASSETS OF THE PARTNERSHIP AS ON THE DATE OF HIS RETIREMENT, THE RESULT, IN TERMS OF THE LEGA L CHARACTER OF THE PAYMENT AS WELL AS THE CONSEQUENCES THEREOF, IS PRECISELY T HE SAME. FOR, AS OBSERVED BY THE GUJARAT HIGH COURT, IN CIT VS. MOHA NBHAI PAMABHAI (1973) 91 ITR 393 (GUJ), (IX) SMT. ARUNA A. BHAT VS. ASSISTANT COMMISSIONER OF IN COME TAX ITAT, PUNE THIRD MEMBER BENCH : (2002) 81 LTD 218 (PUNE)( TM) (COPY AT PB PAGE 274-291):- THE MAIN ISSUE INVOLVED IN THIS APPEAL IS, WHETHER THE AMOUNT OF RS. 62.50 LAKHS RECEIVED BY T HE ASSESSEE ON RETIREMENT FROM THE PARTNERSHIP FIRM OF M/S A.V. BH AT & C.V. SHAH IS A CAPITAL RECEIPT NOT LIABLE TO CAPITAL GAINS TAX AND WHETHER THE ENTIRELY NEW FINDINGS AND DIFFERENT CASE MADE OUT BY THE CIT(A) HOLDING THAT THERE WAS A SYSTEMATIC PLAN RIGHT FROM THE BEGINNING TO AVOID TAX AND VARIOUS AGREEMENTS ENTERED INTO INCLUDING THE PARTNERSHIP D EED WAS MERELY ADVICE TO AVOID THE TAX IS SUSTAINABLE. THE QUESTION WHETHER THE AMOUNT OF RS. 62.50 LAKHS RECEIVED BY T HE ASSESSEE ON RETIREMENT FROM THE PARTNERSHIP FIRM OF M/S A.V. BHAT & C.V. SHAH IS A CAPITAL RECEIPT NOT LIABLE TO CAPITAL GAI NS TAX WAS ANSWERED IN FAVOUR OF THE ASSESSEE BY HOLDING THAT THE AMOUNT R ECEIVED BY THE ASSESSEE ON RETIREMENT FROM THE PARTNERSHIP FIRM WAS NOT LIA BLE TO TAX AS CAPITAL GAINS. 39 (XI) SECOND WEALTH TAX OFFICER VS. P THIRUMALAI NAI NAR & ANR ITAT, MADRAS BENCH (1983) 17 TTJ (MAD) 535 (COPY AT PB PAGE 292- 295A ) , THE FACTS OF THE CASE ARE THAT THE ASSESSEE PARTNER S RETIRED FROM A PARTNERSHIP FIRM. AS A RESULT THE RETIRING PARTNERS WERE PAID RS.2,86,494 AND 3,99,110 RESPECTIVELY WHICH AMOUNTS HAVE BEEN A RRIVED BY MUTUAL AGREEMENT. THE ITO ASSESSED THE EXCESS OF THE PAYME NT RECEIVED BY THE RETIRING PARTNER OVER THEIR RESPECTIVE CREDIT BALAN CES TO CAPITAL GAINS AS IN HIS VIEW THE EXCESS PAYMENT WAS ON ACCOUNT OF ASSIG NMENT AND RELINQUISHMENT OF THEIR RIGHTS IN THE PARTNERSHIP A SSETS AND THEREFORE FELL WITHIN THE MISCHIEF OF S 2(47) AND CONSEQUENTLY LIA BLE TO CAPITAL GAINS TAX. HONBLE TRIBUNAL HELD THAT WHEN A PARTNER RETIRES F ROM PARTNERSHIP THERE IS NO TRANSFER OF INTEREST IN PARTNERSHIP ASSET AND WH AT HE RECEIVES IS THE SHARE IN THE NET ASSETS OF THE PARTNERSHIP AND NOT ANY CO NSIDERATION FOR TRANSFER OF HIS INTEREST IN FAVOUR OF THE CONTINUING PARTNERS O F THE FIRM. IN SUCH AN EVENT THERE IS NO ELEMENT OF TRANSFER OR RELINQUISH MENT OR EXTINGUISHMENT OF INTEREST OF THE RETIRING PARTNER AND THE LEGAL I NCIDENCE IS THE SAME. (X) IN DEPUTY COMMISSIONER OF INCOME TAX VS. G.K. ENTER PRISES ITAT, MADRAS B BENCH (2003) 79 TTJ (MAD) 82 (COPY AT PB PAGE 303- 308)__ , HONBLE TRIBUNAL HELD THAT WHAT A PARTNER ON RETI REMENT FROM PARTNERSHIP FIRM RECEIVES IS HIS SHARE IN THE PARTN ERSHIP AND NOT ANY CONSIDERATION FOR TRANSFER OF HIS INTEREST IN THE P ARTNERSHIP TO THE CONTINUING PARTNERS .FURTHER THERE WAS NO DISSOLUTI ON OF THE ASSESSEE-FIRM WHEN THE TWO PARTNERS RETIRED; REMAINING PARTNERS A LONG WITH TWO NEW PARTNERS CONTINUED THE BUSINESS OF THE ASSESSEE. FU RTHER, RETIREMENT OF A PARTNER DOES NOT RESULT IN A TRANSFER. THE TRANSAC TION IN QUESTION DID NOT FALL WITHIN THE MISCHIEF OF S. 45(4). (XI) INCOME TAX OFFICER VS. RAMESH M. SHAH ITAT, MUMBAI D BENCH (2004) 2 SOT 558 (MUMBAI) HONBLE TRIBUNAL RELIED ON THE DECISION OF THE APEX COURT IN TRIBUVANDAS G. PATEL VS. CIT (199 9) 236 ITR 515 (SC) AND CIT VS. R. LINGMALLU RAGHUKUMAR (2001) (2001) 2 47 ITR 801 (SC), WHEREIN THEIR LORDSHIPS HELD THAT WHEN A PARTNER RE TIRES FROM A FIRM AND THE AMOUNT OF HIS SHARE IN THE PARTNERSHIP ASSETS A FTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES IS DETERMINED ON TAKI NG ACCOUNTS IN THE MANNER PRESCRIBED BY THE PARTNERSHIP LAW, THERE IS NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRE D PARTNER TO THE CONTINUING PARTNERS AND THE AMOUNT RECEIVED BY THE RETIRING PA RTNER IS NOT CAPITAL GAIN UNDER S. 45 OF THE IT ACT, 1961 HELD THAT CREDIT OF AMOUNT TO CAPITAL ACCOUNT OF PARTNER ON HIS RETIREMENT ON REVALUATION OF ASSETS AS PER PARTNERSHIP LAW DOES NOT INVOLVE TRANSFER HENCE N O CAPITAL GAINS ARISE. (XII) DEPUTY COMMISSIONER OF INCOME TAX VS. JAYENDRA V. S HARMA & ORS ITAT, AHMEDABAD C BENCH (1993) 48 ITD 1 (AHM) ( COPY AT PB PAGE 299-302)__, HELD THAT REVALUATION OF ASSETS OF FIRM UNDERTAKEN AND 40 APPRECIATION AS A RESULT THEREOF CREDITED TO THE AC COUNT OF ASSESSEE-PARTNER, SAME CANNOT BE BROUGHT TO TAX. HELD THAT THERE BEIN G NO TRANSFER OF CAPITAL ASSETS ON DISTRIBUTION OF ASSETS OF FIRM AMONG PART NERS ON DISSOLUTION OF FIRM, NO CAPITAL GAINS ARE ATTRACTED. MCDOWELL & CO. VS. CIT (1985) 47 CTR (SC) 126 : (1 985) 154 ITR 148 (SC) DISTINGUISHED; CIT VS. MOHANBHAI PAMABHAI (197 3) 91 ITR 393 (GUJ), ADDL. CIT VS. MOHANBHAI PAMABHAI (1987) 165 ITR 166 (SC), CIT VS. DEWAS CINE CORPORATION (1968) 68 ITR 240 (SC) AND SUNIL SIDDHARTHBHAI VS. CIT (1985) 49 CTR (SC) 172 : (198 5) 156 ITR 509 (SC) RELIED ON. 3.4 WHETHER THE SHARE OF PROFIT ON REVALUATION OF A SSETS OF THE PARTNERSHIP FIRM IS CHARGEABLE TO TAX IN THE HANDS OF THE PARTNER. WE SUBMIT THAT THERE WOULD BE NO INCIDENCE GIVE RIS E TO CAPITAL GAIN EITHER AT THE STAGE OF REVALUATION OR AT THE STAGE OF CREDITING T O THE ACCOUNT OF PARTNER. WE SUBMIT THAT HONBLE SUPREME COURT IN THE CASE OF CI T VS. HIND CONSTRUCTION LTD. (1972) 83 ITR 211 (SC) HAS HELD THAT WHEN ASSETS OF A PARTNERSHIP FIRM ARE REVALUED AND REVALUATION IS CREDITED TO THE PARTNER S ACCOUNT, THERE IS NO TRANSFER OF ANY ASSETS AND AS SUCH THERE IS NO QUESTION OF LIAB ILITY ON ACCOUNT OF CAPITAL GAIN WHEN THE ASSETS ARE REVALUED AND REVALUATION EFFECT IS GIVEN TO THE PARTNERS ACCOUNT BY CREDITING TO THE PARTNERS ACCOUNT.. FURTHER, FOR ARGUMENT SAKE ONLY EVEN IF IT IS PRESU MED THAT THE PROFIT AROSE FROM REVALUATION OF STOCK IS A TAXABLE INCOME THAN ALSO IT CANNOT BE ASSESSED IN THE HANDS OF THE PARTNERS. THE PROFIT ON ACCOUNT OF REV ALUATION OF THE STOCK AROSE IN THE HANDS OF THE PARTNERSHIP FIRM AND IF THE SAME I S TREATED AS TAXABLE INCOME THE COMPUTATION OF TOTAL INCOME IN THE HANDS OF M/S KRI SHNA KRIPA APARTMENT WOULD BE AS UNDER:- NET LOSS AS PER P & L A/C (AS PER COMPUTATION FILED WITH RETURN OF FIRM PB PAGE 131) -39288 ADD EXPENSES DISALLOWED :- PROJECT REVALUATION 69 930590 TOTAL INCOME 69891302 ALLOCATION OF TOTAL INCOME IN BETWEEN PARTNERS:- SHRI PAWAN LASHKARI 75% 52418476 41 SHRI JITENDRA AGARWAL 25% 17472826 TOTAL 100% 69891302 BY VIRTUE OF SECTION 10(2A), THE ABOVE PROFIT CANNO T BE TAXED IN THE HANDS OF THE PARTNER. THE SECTION 10(2A) OF INCOME TAX ACT IS RE PRODUCED AS UNDER:- IN THE CASE OF A PERSON BEING A PARTNER OF A FIRM, WHICH IS SEPARATELY ASSESSED AS SUCH, HIS SHARE IN THE TOTAL INCOME OF THE FIRM. HERE ADMITTED THE ASSESSEE WAS PARTNER OF M/S KRISH NA VILLA APARTMENT. M/S KRISHNA VILLA APARTMENT IS FIRM AND SEPARATELY ASSE SSED UNDER INCOME TAX BY THE SAME AO. THE ABOVE FIRM HAS FILED RETURN U/S 139(1) OF INCOME TAX ACT 1-5-2008 . IN RESPONSE TO NOTICE U/S 153A, THIS FIRM HAS FIL ED RETURN U/S 153A ON 12/11/2010 . THE ASSESSMENT OF THIS FIRM UNDER INCOME TAX ACT WA S MADE BY THE SAME AO ON 27/12/2010. THE COPY OF ASSESSMENT ORDER FOR AY 200 7-2008 IS AT PB PAGE 161- 168. THEREFORE, ALL THE INGREDIENTS OF SECTION 10(2 A) IS FULFILLED AND THEREFORE, IF THE PROFIT ON ACCOUNT OF REVALUATION OF STOCK OF TH E FIRM IS TREATED AS TAXABLE INCOME THAN ALSO IT CAN NOT BE TAXED IN THE HANDS OF THE PARTNERS. 3.5 EVEN IF IT IS PRESUMED THAT THE LAND IN QUESTIO N CHANGED THE HANDS FROM ONE SET OF PERSONS TO ANOTHER SET OF PERSONS, WHETH ER THE TAX CAN BE CHARGED FROM ASSESSEE MORE SO WHEN THE ASSESSEE NEVER REMAINED T HE OWNER OF THE LAND AND IT IS NOT A CASE OF CONVERSION OF PERSONAL ASSET INTO ASS ET OF PARTNERSHIP FIRM IN WHICH THE ASSESSEE IS A PARTNER AND CONVERSION OF PARTNER SHIP ASSET INTO INDIVIDUAL ASSET ON RETIREMENT. THE LD AO IN PARA 4 AT PAGE 4 MENTIONED AS UNDER:- IN A MATTER OF 8 MONTHS STARTING FROM 19.07.06 TO 19.03.07, THE SIROLI LAND HAS VIRTUALLY CHANGED OWNERSHIP FROM PAWAN LASHKARY AND JITENDRA AGARWAL (COLLECTIVELY M/S. KRISHNA VILLA APARTMENTS) TO SH. SHANKAR M JETHANI, SHRI MIRAJ UN NABI KHAN AND SHRI NAVED SAIDI (COLLECTIVE LY, M/S. GOLD DREAM DEVELOPER) FOR A CONSIDERATION OF RS. 6.99 CRORES. THE SAID STOCK (LAND IN THIS 42 CASE) VIRTUALLY IS THE HANDS OF THE M/S. GOLD DREAM DEVELOPERS & BUILDERS AND ITS ORIGINAL PARTNERS, ALBEIT IN THE NAME OF M/S. KRISHNA VILLA. HERE, THE LD AO WANTED TO SAY THAT THE OWNERSHIP OF THE LAND WAS TRANSFERRED FROM M/S KRISHNA VILLA APARTMENT TO M/S GOLD DREAM DEVELOPERS. EVEN ON THIS PRESUMPTION OF LD AO, THE ASSESSEE CANNOT BE TAXED IN RESPECT TO THE SO CALLED PROFIT AROSE ON ACCOUNT OF SO CALLED TRANSFER. FURTHER THE ASSESSEE NEVER REMAINED THE OWNER OF TH E LAND AT ANY STAGE. THE ORIGINAL OWNER OF THE LAND WAS FARMERS WHO SOLD THE LAND TO M/S PAWAN CREATIONS PVT LIMITED WHICH IS A SEPARATE LEGAL PERSON UNDER THE ACT, AND M/S PAWAN CREATIONS PVT LTD SOLD THE LAND TO THE PARTNERSHIP FIRM WHO IS ALSO SEPARATE PERSON AS DEFINED UNDER SECTION 2(31) OF INCOME TAX ACT. T HEREFORE, IT IS NOT A CASE OF CONVERSION OF PERSONAL ASSET INTO ASSET OF PARTNERS HIP FIRM IN WHICH THE ASSESSEE IS A PARTNER AND CONVERSION OF PARTNERSHIP ASSET INTO INDIVIDUAL ASSET ON RETIREMENT. FURTHER, THE LOCAL AUTHORITY (JDA) PERMITTED THE CH ANGE OF LAND USE TO THE FIRM FOR GROUP HOUSING AND ALSO ALLOTTED PATTA IN THE NA ME OF THE FIRM AND NOT IN THE NAME OF THE PARTNERS. THE BENEFICIAL AND LEGAL OWNE R OF THE LAND WAS PARTNERSHIP FIRM NOT THE PARTNER. IN THIS REGARD, WE FURTHER SUBMIT THAT THE PART OF THE LAND WAS SOLD IN AY 2008- 2009 AND THE SAME AO ASSESSED THE SALE OF THE SAID LAND IN THE HANDS OF M/S KRISHNA VILLA APARTMENT UNDER THE SAME PAN FURTHER MORE WITHOUT ALLOWING THE BENEFIT OF INCREASE IN THE COST OF THE LAND (ON ACC OUNT OF REVALUATION) ON ACCOUNT OF SO CALLED TRANSFER. THE COPY OF ASSESSMENT ORDER OF M/S KRISHNA VILLA APARTMENT FOR AY 2008-2009 IS AT PB PAGE 169-171. 3.6 WHETHER THE RECEIPT IN THE HANDS OF THE ASSESSE E IS REVENUE RECEIPT AND CHARGEABLE TO TAX AS INCOME FROM OTHER SOURCE :- AO HAS NOT INDICATED AS TO UNDER WHICH HEAD OF INCO ME THE ALLEGED PROFIT HAS BEEN TAXED. HOWEVER, THE CIT(A) HELD AT PAGE 32 IN PARA 4.10 THAT WHERE CERTAIN INCOME IS NOT TAXABLE UNDER ANY OF THE SPECIFIED HE AD, SAME IS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES 43 IN THIS REGARD WE SUBMIT THAT ONLY REVENUE RECEIPTS CAN BE TAXED UNDER THE HEADS INCOME FROM SALARIES, INCOME FROM HOUSE PROPERTIES, INCOME FROM BUSINESS OR PROFESSION AND INCOME FROM OTHER SOURCES. THE CAPIT AL RECEIPTS CANNOT BE TAXED UNDER THESE HEADS. THERE IS SPECIFIC PROVISION IN S ECTION 2(24) OF INCOME TAX ACT AS REGARD CHARGEABILITY OF TAX IN RESPECT OF CAPITA L RECEIPTS AND AS PER THIS SECTION, ONLY THOSE CAPITAL RECEIPTS CAN BE TAXED UNDER THE HEAD CAPITAL GAIN WHICH ARE CHARGEABLE TO TAX U/S 45. HONBLE ALLAHABAD HIGH CO URT IN THE CASE OF ADDITIONAL CIT VS SMT. MAHINDERPAL BHASIN 117 ITR 26 (ALL ) HAS HELD THAT C ONSIDERATION FOR RELINQUISHMENT OF INTEREST IN PARTNERSHIP FIRM IS N OT REVENUE RECEIPT AS WITH THE RELINQUISHMENT OF INTEREST, THE ASSESSEES SOURCE O F INCOME ENTIRELY EXTINGUISHED SPECIFYING THE HEAD OF INCOME IS NOT AN IDLE FORMAL ITY BUT HAS VERY SIGNIFICANT AND SUBSTANTIVE IMPLICATIONS ON THE CHARGEABILITY OF RE CEIPT ITSELF AS ALSO QUANTUM OF TAXABLE PART OF IT. IT IS ESSENTIAL BECAUSE THE CON DITIONS OF TAXATION ARE DIFFERENT FOR DIFFERENT TYPES OF INCOME. UNTIL AND UNLESS IT IS S PECIFIED AS TO UNDER WHICH HEAD THE INCOME IS PROPOSED TO BE TAXED, IT WILL NOT BE POSSIBLE TO SEE AS TO WHETHER THE RECEIPT IN QUESTION IS TAXABLE UNDER THE SPECIFIED HEAD AND IF AT ALL IT HAS TO BE TAXED THEN TO WHAT EXTENT. THE ELEMENTARY IN JURISPRUDENCE OF LEVY OF INCOME-T AX THAT THE RECEIPT IN QUESTION, FIRST SHOULD BE AN INCOME AND SECONDLY IT HAS TO FALL UNDER ONE OF THE FIVE HEADS OF INCOME STATED IN SECTION 14 OF THE INCOME-TAX AC T, 1961. IF A PARTICULAR INCOME DOES NOT FALL IN ANY OF THE HEADS OF INCOME, THE SA ME CANNOT BE TAXED AS IT IS PRESUMED THAT THE SAME WAS NOT DIRECTED BY THE PARL IAMENT TO BE TAXED. ARTICLE 265 OF THE CONSTITUTION PROVIDES THAT NO TAX SHALL BE LEVIED EXCEPT BY AUTHORITY OF LAW. THERE IS NO SCOPE OF INTENDMENT IN A TAXING ST ATUTE. IT WAS SO LAID DOWN BY THE HONBLE APEX COURT OF THIS LAND IN CELEBRATED J UDGMENT IN THE CASE OF CIT VS. ELPHINSTONE SPG. & WVG. MILLS CO. LTD (1940) 40 ITR 142 (SC). IN THIS REGARD A USEFUL REFERENCE CAN ALSO BE MADE TO SUPREME COURT IN THE CASE OF NALINIKANT AMBALAL MODY VS. S.A.L.NARAYAN ROW ,CIT [61 ITR 428 (SC)] AS ALSO CALCUTTA HIGH COURT DECISION IN THE CASE OF CIT VS. JUSTICE R.M. DATTA [180 ITR 86 (CAL)]. LEARNED AUTHORS PITHISARIA & CHATURVEDY IN THEIR COMMENTARY INCOME-TAX LAW (SIXTH EDITION) VOL. 1 PAGE 1126 HAVE ALSO , ON THE BASIS OF ABOVE CALCUTTA HIGH COURT JUDGMENT, OPINED AS UNDER : 44 IF ANY RECEIPT IS INCOME IT HAS TO BE COMPUTED UNDE R ONE OF THE FIVE HEADS OF INCOME PROVIDED UNDER SECTION 14 OF THE INCOME-TAX ACT, 1961. IF, HOWEVER, IT CANNOT BE BROUGHT TO TAX BY COMPUTATION UNDER THOSE SECTIONS, THEY WOULD NOT BE INCLUDED IN THE TOTAL INCOME AS DEFINED IN SECTIO N 2(45), FOR THE PURPOSE OF CHARGEABILITY, [CIT VS JUSTICE R.M.DATTA 180 ITR 86 , 92 (CAL)] 3.7 WHETHER THE FIRM WAS NOT GENUINE FIRM AND WHETH ER THERE WAS COLOURFUL DEVICE TO AVOID TAX AND THE RATIO LAID DOWN BY HON BLE SUPREME COURT IN THE CASE OF MCDOWELL & CO LTD VS CTO 154 ITR 148 ARE APPLICA BLE TO THE CASE OF THE ASSESSEE. A VERY IMPORTANT FACT WHICH NEED TO BE HIGHLIGHTED , IS THAT THE LOWER AUTHORITIES HAVE NOT PROVED, THAT THE FIRM- M/S KRISHNA VILLA A PARTMENTS WAS NOT A GENUINE FIRM AND TRANSACTIONS/AGREEMENTS WERE COLOURFUL DEV ICE TO AVOID TAX. IN THIS REGARD, WE SUBMIT THAT THE ENTIRE FINDINGS OF THE L OWER AUTHORITIES ARE BASED ON SURMISES, CONJECTURES AND GUESS AND WITHOUT HAVING ANY POSITIVE MATERIAL AND BASIS. FURTHER, MORE NO INQUIRY IN THIS REGARD WAS MADE BY THE LOWER AUTHORITIES AND EVEN THE OPPORTUNITY OF CONFRONTATION WAS NOT G IVEN TO THE ASSESSEE BEFORE MAKING SUCH FINDINGS. IN THIS REGARD WE SUBMIT THA T:- (I) JUSTIFICATION OF FORMATION OF PARTNERSHIP FIRM ON 15.07.2006:- THE PARTNERSHIP DATED 15.07.2006 BY WHICH THE SAID FIRM WAS CONSTITUTED WAS A GENUINE PARTNERSHIP FORMED BY THE ASSESSEE WI TH THE OUTSIDER PERSON WHO IS EXPERTISE WORK RELATING TO RESIDENTIAL COMPL EXES, COMMERCIAL COMPLEXES AND GROUP HOUSING PROJECT. THE LAND UNDER QUESTION COULD NOT BE CONVERTED FOR GROUP HOUSING PROJECT INSPITE OF G REAT EFFORTS MADE BY ORIGINAL OWNERS OF THE LAND. THE ORIGINAL OWNERS OF THE LAND WERE TRYING TO DEVELOP A RESIDENTIAL COLONY IN THE NAME OF KRISHNA VILLA SINCE 2004 BUT THEY COULD GO FURTHER EXCEPT GETTING THE ORDER U/S 90B OF RAJASTHAN LAND REVENUE ACT, AND WHEN THEY COMPLETELY TIRED, THEY S OLD THE LAND TO PAWAN CREATION PVT LIMITED ON 1.8.2005 BY EXECUTING AGREE MENT TO SALE IN FAVOUR OF THIS COMPANY AND BY EXECUTING REGISTERED POWER OF ATTORNEY IN FAVOUR OF REPRESENTATIVE OF THE COMPANY SHRI ARUN LASHKARY . AFTER PURCHASING THIS LAND, THIS COMPANY WAS TRIED ITS BEST TO GET SINGLE UNIT PATTA FROM 45 JDA BUT IT COULD NOT GOT SUCCESS. THE FILE WAS GOIN G UP AND DOWN FOR ONE AND ANOTHER REASON IN JDA. IN APRIL 2006, SHRI JITE NDRA AGARWAL MADE A PROPOSAL TO SHRI PAWAN LASHKARY THAT HE CAN GET THE WORK DONE FROM JDA PROVIDED THIS PROJECT OF GROUP HOUSING ON THIS LAND IS DONE WITH HIS PARTNERSHIP. THEREFORE, IT WAS ORALLY DECIDED THAT A NEW PARTNERSHIP FIRM WOULD BE FORMED IN BETWEEN PAWAN LASHKARY AND JITNE DRA AGARWAL AND THIS PROJECT WILL BE DONE IN PARTNERSHIP WITH SHRI JITENDRA AGARWAL. AFTER GETTING ASSURANCE OF PARTNERSHIP, SHRI JITENDRA AGA RWAL STARTED WORK ON THE FILE. WHEN THE ASSESSEE SAW SOME POSITIVE PROGRESS ON THE FILE, IT WAS DECIDED TO TAKE SHRI JITENDRA AGARWAL AS PARTNER AN D PARTNERSHIP DEED WAS INKED ON 15.07.2006 IN THE NAME & STYLE M/S KRISHNA VILLA APARTMENT AND THE LAND BELONGING TO M/S PAWAN CREATIONS PVT LTD WAS PURCHASED BY THIS PARTNERSHIP FIRM. FURTHER, IT HAS BEEN WRONGLY MENTIONED BY THE CIT(A ) AT PAGE 25 OF HIS ORDER THAT THE LAND WAS ALREADY CONVERTED LAND AND THE FIRM HAS NOT DONE ANY WORTHWHILE ACTIVITY IN ORDER TO IMPROVE UPON TH E WORTH/VALUE OF THE LAND AND IT WAS SHRI PAWAN LASHKARY WHO HAS BEEN IN VOLVED IN THESE ACTIVITIES. IN THIS REGARD, WE SUBMIT THAT THE CIT( A) MADE THIS FINDINGS MERELY ON SURMISES AND CONJECTURES AND WITHOUT MAKI NG ANY INQUIRY AND APPRECIATING THE ROLE OF JITENDRA AGARWAL. SHRI JI TENDRA AGARWAL IS NOT RELATIVE OF THE ASSESSEE AND HE IS COMPLETE OUTSIDE R PERSON AND THE ASSESSEE JOINED THE HANDS WITH SHRI JITENDRA AGARWAL ONLY BE CAUSE OF COMMERCIAL EXPEDIENCY. AFTER JOINING WITH JITENDRA AGARWAL AS PARTNER THE ASSESSEE COULD GET THE PROJECT APPROVED FOR GROUP HOUSING WH ICH M/S PAWAN CREATION PVT LTD AS WELL AS THE ORIGINAL OWNERS/FAR MERS OF THE LAND COULD NOT GOT APPROVED SINCE 2004. (II) DEVELOPMENT AGREEMENT WITH GOLD DREAM BUILDERS:- THE MAIN BUSINESS OF THE ASSESSEE IS TO MANUFACTURE AND EXPORT OF REA DY MADE GARMENTS. HE HAS TWO FIRMS IN HIS PARTNERSHIP NAMELY, M/S PAWAN ENTERPRISES AND M/S GOVERDHAN CREATIONS. HE HAS NO EXPERIENCE OF CONSTR UCTION ACTIVITIES. 46 FURTHER, THE WORK OF CONSTRUCTION IS ALWAYS CARRIED OUT THROUGH SOME OUTSIDE AGENCIES, BUILDERS. THEREFORE, THE PARTNERS FELT THAT IT WILL BE BETTER IF THE WORK OF CONSTRUCTION AND FURTHER PHYSICAL DE VELOPMENT OF THE LAND IS ENTRUSTED TO SOME ESTABLISHED AND TECHNICALLY/FINAN CIALLY CAPABLE PARTY. ACCORDINGLY, ON THE RECOMMENDATION OF SHRI JITENDRA AGARWAL, THE DEVELOPMENT WORK OF THE GROUP HOUSING PROJECT WAS G IVEN TO M/S GOLD DREAMS BUILDERS & DEVELOPERS, A PARTNERSHIP FIRM CO NSISTING OF FOUR PARTNERS NAMELY (I) SHRI SHANKAR M. JETHANI, (II) SHRI ARUN BANSAL, (III) SHRI MERAJ UN NABI KHAN, AND (IV) SHRI NAVED SAIDI. THESE PERSONS ARE ALSO OUTSIDERS AND NOT RELATED TO THE ASSESSEE. THE DEVELOPMENT AGREEMENT WAS ENTERED INTO ON 30 TH SEPT. 2006. THEREFORE, THIS ASSIGNMENT OF THE DEVELOPMENT WORK WAS PURELY A COMMERCIAL TRANSACTIO N DONE IN BUSINESS EXPEDIENCY. THE ASSESSEE COULD NOT PRODUCE THE COPY OF DEVELOPMENT AGREEMENT BEFORE THE LOWER AUTHORITIES AS THE SAME WAS LYING WITH THE OFFICE OF M/S KRISHNA VILLA APARTMENT AND HE DID N OT THINK NECESSITY TO KEEP THE COPY THEREOF WITH HIM AT THE TIME OF LEAVI NG OFFICE OF THE FIRM AS PARTNER. (III) MERGER OF DEVELOPER WITH THE FIRM:- THE DEVELOPER FIRM (M/S GOLD DREAMS BUILDERS & DEVE LOPERS) STARTED DEVELOPING THE LAND. AFTER ABOUT FOUR MONTHS, BOTH THE PARTIES TO THE DEVELOPMENT AGREEMENT REALIZED THAT MERGER OF BOTH THE FIRMS AND THEIR COMPETENCIES AND STRENGTHS WILL GENERATE GREATER SY NERGY OF OPERATIONS. THEREFORE, THE DECISION FOR MERGER WAS A PURELY A C OMMERCIAL DECISION IN BUSINESS EXPEDIENCY WITH A MOTIVE TO ENLARGE THE SC ALE OF OPERATIONS AND TO GO FURTHER IN SOME MORE PROJECTS WITH GREATER ST RENGTH AND EXPERIENCE. THEREFORE, IT WAS DECIDED TO MERGE M/S GOLD DREAMS & DEVELOPERS INTO M/S KRISHNA KRIPA APARTMENT W.E.F 19.01.2007. (IV) REVALUATION OF LAND AT MARKET PRICE. IT IS COMMON PRACTICE TO MAKE THE REVALUATION OF T HE ASSETS AND LIABILITIES AT THE TIME OF RECONSTITUTION OF FIRM AS OLD PARTNE RS NEVER WANT TO PASS THE 47 EXISTING APPRECIATIONS OR BENEFIT TO THE NEW PARTNE RS AND SIMILARLY THE NEW PARTNERS NEVER WANT TO TAKE RESPONSIBILITIES OF THE WORK/LIABILITIES OF THE OLD PARTNERS. IN THE CASE OF THE ASSESSEE, THE LAND WAS ONLY ASSET WHICH WAS REQUIRED TO PUT AT MARKET PRICE IN THE BOOKS ON THE RECONSTITUTION OF THE FIRM. THEREFORE AT THE TIME OF ADMISSION OF NEW PAR TNER MARKET VALUE OF ALL THE ASSETS WAS APPRAISED AND THE OLD PARTNERS AND I NCOMING PARTNERS FOUND THAT THE MARKET VALUE OF THE LAND HAS SUBSTANTIALLY INCREASED BECAUSE OF ISSUANCE OF PATTA FOR GROUP HOUSING PROJECT. SO IT WAS DECIDED TO ACCOUNT FAR THE LAND IN THE BOOKS OF THE FIRM AT PREVAILING MARKET RATE ON THE ADMISSION OF NEW PARTNERS. THEREFORE, ON ADMISSION OF NEW PARTNERS THE LAND WAS REVALUED AS ON 18.1.2007 AT RS. 9,17,80,0 00/- AND DIFFERENCE ON REVALUATION WAS CREDITED TO THE CAPITAL ACCOUNTS OF EXISTING PARTNERS IN THEIR PROFIT SHARING RATIO , I.E SHRI PAWAN LASHKA RI RS. 5,24,47,943/- AND SHRI JITENDRA AGARWAL RS. 1,74,82,647/- IT MAY BE S EEN THAT FOR REVALUATING THE LAND THE MARKET RATE OF LAND WAS TAKEN ON ESTIM ATE BASIS AS MUTUALLY AGREED BY EXISTING PARTNERS AND INCOMING PARTNERS A S SPECIFICALLY MENTIONED UNDER CLAUSE 5 OF PARTNERSHIP DEED DATED 19.01.2007. THE ACCOUNTING ENTRIES WERE MADE AS PER THE PRINCIPLES OF THE ACCOUNTING. FOR THIS PURPOSE WE ARE ENCLOSING HEREWITH RELEVANT PAG ES OF BOOK ADVANCED ACCOUNTS WRITTEN BY FAMOUS AUTHOR SHUKLA & GREWAL (PRESCRIBED BOOK FOR CA COURSE) IN RESPECT OF ACCOUNTING TREATMENT I N CASE OF REVALUATION OF ASSETS AND LIABILITIES IN PARTNERSHIP FIRM. (V) RETIREMENT OF SHRI JITENDRA AGARWAL ON 10.02.2007. VERY SOON AFTER THE MERGER, SHRI JITENDRA AGARWAL FOUND HIMSELF UNCOMFO RTABLE IN NEW SETTING. THE WORKING STYLE OF THE INCOMING PARTNERS WAS NOT SUITABLE TO SHRI JITENDRA AGARWAL AND THEREFORE HE DESIRED TO R ETIRE FROM THE FIRM AND THEREFORE A NEW PARTNERSHIP DEED WAS EXECUTED WITH EFFECT FROM 10.02.2007 UNDER WHICH SHRI JITENDRA AGARWAL RETIR ED AND REMAINING FIVE PARTNERS CONTINUED. 48 (VI) RETIREMENT OF SHRI PAWAN LASHKARY :- THE LD CIT(A) MENTIONED AT PAGE 27 OF HIS ORDER THAT IT CANNOT BE SAID THAT SHRI PAWAN LASHKARY WAS SO BUSY IN OTHER BUSINESS ACTIVITY, SO AS TO RETIRE FROM THIS FIRM. THE FINDINGS OF THE LD CIT(A) IS BASED ON SURMISES AND CONJECTURES WITHOUT EXAMINING THE AFFAIRS OF THE ASSESSEE. THE APPELLANTS MAIN BUSINESS WAS GARMENT MANUFACTURING AND EXPORT BUSINESS. HE HAS TO REMAIN BUSY IN HIS MAIN BUSINESS AND HE USED TO GO ABROAD FREQUENTLY TO LOO K AFTER HIS GARMENT EXPORT BUSINESS SO IT WAS NOT PRACTICALLY POSSIBLE FOR THE ASSESSEE TO GIVE MUCH TIME FOR THE BUSINESS OF M/S KRISHNA VILLA APA RTMENT, AND HIS HARDSHIP EXAGGERATED BECAUSE THE OTHER OLD PARTNER SHRI JITENDRA AGARWAL LEFT THE FIRM. FURTHER, THE ASSESSEE COULD NOT ADJU ST HIMSELF FROM THE WORKING STYLE OF THE NEW PARTNERS. THEREFORE, THE A SSESSEE DECIDED TO RETIRE FROM THE PARTNERSHIP AND HE RETIRED FROM THE PARTNE RSHIP W.E.F 19.03.2007. IT IS ALSO RELEVANT TO MENTION HERE THAT THE NEW PA RTNERS STARTED WORKING IN DEFIANCE OF BUSINESS ETHICS, WHICH THE ASSESSEE DID NOT LIKE. THIS MAY BE SEEN FROM THE FACT THAT LATER ON (ABOUT IN 2010) CR IMINAL CASES WERE REGISTERED AGAINST THE NEW PARTNERS FOR EXCESS BOOK ING OF FLATS AND THIS NEWS WAS ALSO APPEARED IN LEADING NEWS PAPER. HAD T HE ASSESSEE CONTINUED IN THE PARTNERSHIP, HE WOULD HAVE ALSO FACED SUCH C RIMINAL PROCEEDINGS FOR THE OFFENCE MADE BY THE NEW PARTNERS. FURTHER, THE RETIREMENT OF THE ASSESSEE WAS NOT ONL Y FOR NAME SAKE. THERE WAS ACTUAL AND REAL RETIREMENT. THE DEPARTMENT HAS NO MATERIAL TO SHOW THAT THE RETIREMENT OF SHRI PAWAN LASHKARY WAS NAME SAKE ONLY AND HE REMAINED REAL OR BENEFICIAL PARTNER EVEN AFTER THE RETIREMENT WAS INKED ON 19.03.2007. FURTHER MORE THE LD AO HERSELF TREATED THE FIRM GEN UINE. IN FACT, EVEN WHEN THE ASSESSMENT OF THE FIRM HAS BEEN MADE IN TH E STATUS OF FIRM AND NOT AS AOP OR ANY OTHER STATUS. THE AO HAS ALSO NOT CHALLENGED THE GENUINENESS OF THE TRANSACTION OF SALE OF LAND BY T HE COMPANY TO THE FIRM. IF, SUCH SALE WAS GENUINE AND THE FIRM WAS GENUINE. ALL THE GOVERNMENT 49 AUTHORITIES LIKE JDA HAS ACCEPTED THE FIRM AS GENUI NE FIRM AND ALL THE PROCEEDINGS AS REGARD ISSUE OF THE PATTA WAS MADE I N THE NAME OF FIRM. THE FINANCIAL INSTITUTIONS ALSO RECOGNIZED THE FIRM AS GENUINE AND THE LOANS WERE SANCTIONED BY RFC. (VII) ALLEGATION OF INTENTION OF TAX EVASION IS DEVOID OF ANY MERIT AS SUCH. THE LOWER AUTHORITIES HAVE ALLEGED THAT THE TRANSACTION OF INDUCTION OF NEW PARTNERS AND RETIREMENT OF OLD PARTNERS WAS WITH AN INTENTION OF TAX AVOIDANCE IS INCORRECT BOTH LEGALLY AND FACTUALLY. THIS FINDING WAS MADE MERELY ON SURMISES, CONJECTURES AND GUESS WITHOUT H AVING ANY POSITIVE MATERIAL AND WITHOUT CONDUCTING ANY INQUIRY. NEITHE R THE ASSESSEE NOR HIS PARTNERS WERE EXAMINED BY THE LOWER AUTHORITIES IN THIS REGARD. IN FACT, THE SAME ASSESSING OFFICER WHILE FRAMING T HE ASSESSMENT ORDER OF THE FIRM FOR SUBSEQUENT YEAR (AY 2008-2009 DURING W HICH THE FIRM SOLD A PART OF THE LAND OF RS. 73,99,640/- TO AN OUTSIDERS ) DID NOT ALLOW ANY DEDUCTION ON ACCOUNT OF REVALUATION COST. THIS SHO WS THAT WHEN THE LAND WOULD BE SOLD TO THE OUTSIDERS, NO DEDUCTION ON ACC OUNT OF REVALUATION COST WOULD BE ALLOWED AND THERE WILL NO LOSS OF THE REVE NUE TO THE DEPARTMENT. ON THE OTHER HAND, IF THE PROFIT ON ACCOUNT OF REVA LUATION IS CHARGED TO THE TAX IN THE HANDS OF THE PARTNER AND COST OF THE REV ALUATION IS ALSO NOT ALLOWED AS DEDUCTION FROM THE RECEIPT OF CONSIDERAT ION FROM THE OUTSIDERS, IT WOULD BE AMOUNT TO DOUBLE TAXATION. THEREFORE, THE ALLEGATION THAT THERE HAS BEEN ANY T AX EVASION IS DEVOID OF ANY TRUTH. SIMILAR SITUATION WAS AROSE IN THE CASE OF SMT ARUN A A. BHAT VS. ASSISTANT COMMISSIONER OF INCOME TAX ITAT, PUNE THIRD MEMBER BENCH : (2002) 81 LTD 218 (PUNE)(TM) WHEREIN SIMILAR FINDI NGS WERE MADE BY CIT(A) . IN THIS CASE THE HUSBAND OF THE ASSESSEE SHRI A.V. BHAT AND SHRI C.V. SHAH (ANOTHER FINANCIER AND DEVELOPER) ENTERED INTO AN AGREEMENT TO PURCHASE LAND BELONGING TO YADAV GROUP BY AGREEMENT DT. 22ND JUNE, 1986. SHRI A.V. BHAT AND SHRI C.V. SHAH CONSTITUTED AN ORAL PARTNERSHIP. THE HUSBAND OF THE ASSESSEE EXPIRED AND ASSESSEE ST EPPED INTO THE BUSINESS OF HER HUSBAND. THE PARTNERSHIP DEED WAS I NKED ON 15TH DEC., 50 1993 AND IT PROVIDED THAT THE PARTNERSHIP DEED SHAL L BE DEEMED TO HAVE COMMENCED FROM 27TH OCT., 1990. THE ASSESSEE RETIR ED FROM THE SAID PARTNERSHIP BY EXECUTING A DEED OF RETIREMENT DT. 2 5TH JAN., 1994. ON RETIREMENT, THE ASSESSEE RECEIVED A SUM OF RS. 62.5 0 LAKHS. THE LEARNED CIT(A) INTERPRETED VARIOUS AGREEMENTS AND CAME TO A FINDING THAT THE SERIES OF AGREEMENTS WERE NOTHING BUT AN ARRANGEMEN T AND THE PARTNERSHIP ENTERED INTO WERE A MERE PLOY TO CREATE AN ALIBI TH AT THE SUM WERE RECEIVED ON RETIREMENT. THE QUESTION WAS ANSWERED BY HONBLE TRIBUNAL IN PA RA 10 BY HOLDING AS UNDER:- THERE WAS NOTHING WRONG/SHAM IN ENTERING INTO REG ULAR PARTNERSHIP WITH SHRI SHAH. IN FACT, IT WAS HER LATE HUSBAND WH O WAS IN PARTNERSHIP WITH SHRI SHAH AND AFTER THE UNFORTUNATE DEATH OF H ER HUSBAND, THE ASSESSEE WAS BOUND TO INHERIT HER HUSBANDS SHARE AND, IF IN THE PROCESS KEEPING IN VIEW THE LEGAL COMPLICATIONS INVOLVED AND HER OWN P ERCEPTION OF SHRI SHAH, SHE ENTERED INTO A PARTNERSHIP DEED, THE WHOL E THING WAS WITHIN THE FRAMEWORK OF LAW AND SUCH AN ARRANGEMENT CANNOT BE TERMED AS A MERE PLOY TO CREATE AN ALIBI THAT SUMS WERE RECEIVED ON RETIREMENT, AS HELD BY THE LEARNED CIT (A). IN FACT, THE CIT(A) HAS REVERS ED THE FINDING OF THE AO THAT THE ARRANGEMENT WAS NOT SHAM WITHOUT BRINGI NG ON RECORD ANY MATERIAL WHATSOEVER. HE HAS OVERLOOKED THE FACTS TH AT AS EARLY AS ON 14TH JULY, 1991, THE ASSESSEE AND SHRI SHAH HAD REAFFIRM ED THEIR PARTNERSHIP AND UNDERTOOK ALL THE OBLIGATIONS OF THE OLD PARTNE RSHIP BETWEEN SHRI SHAH AND THE ASSESSEES HUSBAND LATE SHRI A.V. BHAT. HIS CONCLUSION, THEREFORE, THAT WHAT WAS TRANSFERRED WAS SHARE IN IMMOVABLE PR OPERTY IS TOTALLY BASELESS. ACCORDINGLY, WE HOLD THAT THE CIT(A) IS N OT JUSTIFIED EITHER ON FACTS OR IN LAW IN MAKING OUT AN ENTIRELY NEW CASE TOTALLY UNSUPPORTED BY ANY FACTUAL EVIDENCE. EVEN OTHERWISE, THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT DOES NOT APPLY TO THE FACTS OF THE PRESENT CASE. IN THE CASE OF MCDOWELL & CO. LTD., THE HONBLE SUPREME COURT HAS HELD THAT THE TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHIN THE FRAMEWORK OF T HE LAW. HONBLE GUJARAT HIGH COURT IN THE CASE OF BANYAN & BERRY VS CIT - 222 ITR 831 (GUJ) HELD THAT EVERY LEGITIMATE AND GENUINE ACT ON THE P ART OF THE TAXPAYER RESULTING IN REDUCTION OF TAX LIABILITY CANNOT BE T REATED AS DEVICE FOR AVOIDANCE OF TAX MCDOWELL & CO. LTD. VS. CTO HAS N OT AFFECTED THE FREEDOM OF CITIZEN TO PLAN HIS BUSINESS AFFAIRS WIT HIN THE FRAMEWORK OF LAW UNLESS THEY MAY PROPERLY BE CALLED A SUBTERFUGE MC DOWELL DOES NOT LAY DOWN THAT A TAXPAYER MUST ARRANGE HIS AFFAIRS SO AS TO ATTRACT MAXIMUM TAX 51 LIABILITY AND EVERY ACT RESULTING IN TAX REDUCTION OR EXEMPTION OR NOT ATTRACTING TAX SHOULD BE TREATED AS DEVICE OF TAX A VOIDANCE. 3.9 WHETHER THE INCOME CAN ASSESSED MERELY ON SURRE NDER BASIS. MUCH EMPHASIS HAS BEEN LAID BY THE LOWER AUTHORITI ES ON THE FACT THAT THE ASSESSEE/ APPELLANT HAD SURRENDERED THE AFORESAID D IFFERENCE OF RS. 5.25 CRORES AS HIS INCOME AND HAD UNDERTAKEN TO PAY TAX THEREON. H OWEVER, WHILE FILING THE RETURN, THE ASSESSEE CLAIMED THE SAID DIFFERENCE TO BE EXEMPT FROM TAX. THE AO SEEMS TO HAVE TAKEN IT TO HER HEART THAT THE ASSESS EE DID NOT HONOUR HIS STATEMENT MADE DURING THE SEARCH AND SEIZURE PROCEEDINGS AND RETRACTED THEREON. IT IS TRITE LAW TO SAY THAT: THERE IS NO ESTOPPELS AGAINST LAW; AND TAXATION IS NOT A MATTER OF CONTRACT- AND THE SAME CAN BE LEVIED ONLY UNDER THE AUTHORITY OF LAW (ARTICLE 265 OF THE CONSTITUTION). SINCE THERE IS NO ESTOPPEL AGAINST LAW, EVEN IF THE ASSESSEE HAS ADMITTED TO PAY TAX ON ANY RECEIPT WHICH IS NOT TAXABLE IN ACCORDANCE W ITH LAW, SUCH ADMISSION CANNOT BE HELD AGAINST HIM. IT IS MORE SO BECAUSE THE ASSE SSING OFFICER IS DUTY BOUND TO TAX THE CORRECT AND TRUE INCOME IN ACCORDANCE WITH LAW AND THERE CANNOT BE TAX LIABILITY BY CONTRACT. THERE IS NO ALLEGATION THAT IN THE STATEMENT RECORD ED DURING THE COURSE OF SEARCH IN RESPECT OF THIS TRANSACTION ASSESSEE MADE ANY AVERM ENT OF FACTS WHICH HE RETRACTED LATER. COMPREHENSION OF INCOME-TAX LAW BY A COMMON CITIZEN IS A MERE FICTION, MORE SO, DURING THE STRENUOUS ENVIRONMENT OF SEARCH AND SEIZURE PROCEEDING. FURTHER, THE APPELLANT WAS NOT ALLOWED ANY ASSISTANCE OF A LEGAL EXPERT/ CONSULTANT DURING THE COURSE OF SEARCH OR B EFORE RECORDING OF STATEMENT ON THE MATTERS WHICH ARE ESSENTIALLY QUESTIONS OF LAW. IF THE LAW REQUIRES THAT A CERTAIN TAX IS TO BE COLLECTED, IT CANNOT BE GIVEN UP, AND ANY ASSURANCE THAT IT WOULD NOT BE COLLECTED, WOULD NOT BIND THE GOVERNME NT. THE LIABILITY OF THE ASSESSEE TO PAY INCOME-TAX IS CREATED BY THE INCOME -TAX ACT. THE AMOUNT ON WHICH THE TAX IS TO BE PAID, THE RATES AT WHICH THE TAX HAS TO BE COMPUTED AND THE 52 RELIEFS WHICH THE ASSESSES ARE ENTITLED TO, MUST AL L BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME-TAX ACT AND THE R ELEVANT FINANCE ACT. THE LIABILITY TO PAY TAX CANNOT BE FOUNDED ON ANY AGREE MENT. ASSESSEES AGREEMENTS OR STATEMENTS (AS THAT OF THE APPELLANT) IN THE MAT TER OF LAW, CERTAINLY, CANNOT FORM THE BASIS OF TAXATION. RELIANCE IS PLACED ON THE F OLLOWING DECISIONS:- (1) COMMISSIONER OF INCOME-TAX VS. MR. P. FIRM, MUA R [56 ITR 67 (SC)] (2) CIT VS MANIK [74 ITR 1 (SC)] IN THIS CASE THE ASSESSEE HAD GIVEN AN UNDERTAKING TO FILE A RETURN FOR A YEAR OTHER THAN THE YEAR UNDER APPEAL BEFORE ITAT. THE SUPREME COURT DISAPPROVED ENFORCIN G SUCH AN UNDERTAKING. (3) ALLAHABAD MILLING VS CIT [ 6 ITC 286] (4) PARBATI DEVI VS. CIT [75 ITR 625] (5) MUTHIAH CHETTIAR VS CIT (1959) 35 ITR 339 (MAD) . (6) PULLANGODE RUBBER PRODUCE CO LTD VS STATE OF KE RALA & ANOTHERS (1973) 91 ITR 18 (SC) HONBLE APEX COURT HAS HELD THAT ADM ISSION IS AN EXTREMELY IMPORTANT PIECE OF EVIDENCE BUT IT CANT BE SAID THAT IT IS CONCLUSIVE. IT IS UPON TO THE ASSESSEE TO SHOW THAT IT IS INCORRECT. (7) GARGIDIN JWALA PRASAD VS CIT (1974) 96 ITR 97 ( ALL) HELD THAT THE ADDITION MERELY BASED ON STATEMENT CANNOT BE MADE. (8) HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS ASHOK KUMAR SONI 291 ITR 172 (RAJ.) HAS HELD THAT ADMISSION IN STATEMENT DURING SEARCH IS NOT CONCLUSIVE PROOF OF FACT AND CAN ALWAYS BE EXPL AINED. IN VIEW OF THE ABOVE SUBMISSION, THE HUMBLE ASSESSE E PRAYS YOUR HONOUR KINDLY TO DELETE THE ADDITION OF RS. 5,24,47,943/- MADE BY THE LD AO BY SETTING ASIDE THE FINDINGS OF CIT(A) WHO CONFIRMED THIS ADD ITION. 2.12 DURING THE COURSE OF PROCEEDING BEFORE US, THE LD. DR HAS ALSO FILED THE WRITTEN SUBMISSION. WE ARE NOT REPRODUCING THE BASIC FACTS FROM THE SUBMISSIONS OF THE LD. DR AS THESE HAVE BEEN ALREADY MENTIONED AND THE BALANCE S UBMISSIONS ARE REPRODUCED AS UNDER:- 53 3.2. IN RESPECT OF THE ABOVE TRANSACTIONS ABOUT TRANSFER OF THE ABOVE LAND AND RETIREMENT OF THE ASSESSEE FROM THE FIRM M/S KRISHNA VILA APARTMENTS THE STATEMENT OF SH. PAWAN LASHKARY WAS RECORDED DURING THE SEARCH OPERATION ON 8/9.08.08. IN THIS STATEMENT, H E ACCEPTED THAT HE AND HIS PARTNER EARNED PROFIT OF RS. 7.00 CRORES FROM M/S K RISHNA VILA APARTMENT. HE ACCEPTED THAT THIS PROFIT WAS EARNED IN LIEU OF GIVING THE LAND TO THE NEW PARTNERS AND HE HAD NOT PAID ANY TAX ON THIS PROFIT . HE ACCEPTED THIS PROFIT AS HIS UNDISCLOSED INCOME AND OFFERED IT FOR TAX. ( PI. REFER QUESTION & ANSWER TO Q.NOS. 23, 24 AND 28 REPRODUCED ON PG. 33 OF THE CIT(A) ORDER) 3.3. IN HIS COMPUTATION OF INCOME THE ASSESSEE SHOWED RS.5,24,47,043/- AS 'PROFIT FROM THE FIRM M/S KRISH NA VILA APARTMENT' BUT CLAIMED IT AS EXEMPT U/S 10(2A) OF THE IT. ACT. 3.4. THE A.O DID NOT ACCEPT THE CONTENTION OF THE ASSESS EE ABOUT THEABOVE AMOUNT OF RS. 5,24,47,043/- BEING EXEMPT. IN VIEW OF THE FACTS OF THIS CASE, SHE WAS OF THE OPINION THAT IN A MATTER OF 8 MONTHS STARTING FROM 15.07.2006 TO 19.03.2007, THE SIROII LAND HAD VIRTU ALLY CHANGED OWNERSHIP FROM PAWAN LASHKARY AND JITENDRA AGARWAL(COLLECTIVE LY M/S KRISHNA VILLA APARTMENTS) TO SH. SHANKAR M.JETHANI, SH. ARUN BANS AL, SH. MIRAJ UN NABI KHAN AND SHRI NAVED SAIDI(COLLECTIVELY, M/S GOLD DR EAM BUILDERS & DEVELOPERS) FOR A CONSIDERATION OF RS. 6.99 CRORES. THE SAID STOCK (LAND IN THIS CASE) VIRTUALLY WAS IN THE HANDS OF THE M/S GO LD DREAM BUILDERS & DEVELOPERS AND ITS ORIGINAL PARTNERS, ALBEIT IN THE NAME OF M/S KRISHNA VILLA APARTMENTS. THE A.O FELT THAT WHETHER IN THE NAME O F M/S KRISHNA VILLA APARTMENTS OR M/S GOLD DREAM DEVELOPERS, THROUGH A SERIES OF ALMOST CONSPIRATORIAL AND WELL ORCHESTRATED MOVES, SH. SHA NKAR M JETHANI, SH. MIRAJ UN NABI KHAN, SH. ARUN BANSAL AND SH. NAVED S AIDI HAD THE OWNERSHIP OF THE SIROII LAND FROM SH. PAWAN LASHKAR Y AND SH. JITENDRA AGARWAL. 54 3.5. THE A.O HELD THAT THROUGH A SERIES OF STEPS INVOLVI NG TAKE OVER AGREEMENTS, REVALUATION OF STOCK, CREDITING TH E DIFFERENCE BETWEEN BOOK VALUE AND REVALUED VALUE, RETIREMENT ONE BY ON E AND ULTIMATELY THE WITHDRAWAL FROM THE CAPITAL ACCOUNT AND DECLARATION OF SUCH WITHDRAWAL AS PROFIT FROM FIRM THE ASSESSEE AND HIS PARTNER HAVE USED A COLORABLE DEVICE TO AVOID TAX ON THE PROFIT EARNED BY THEM BY SELLING T HE SIROII LAND TO THE FOUR PARTNERS OF M/S GOLD DREAM BUILDERS & DEVELOPERS. S HE RELIED ON THE DECISIONS OF HON'BLE SUPREME COURT IN THE CASES OF CIT VS. DURGA PRASAD MORE(1971) 82 ITR 540 AND MC. DOWELL & CO. LTD. VS. CTO(1965) 154 ITR 148 AND HELD THAT THE PROFIT OF RS. 5,24,47,943 /- CANNOT BE EXEMPTED IN THE HANDS OF THE ASSESSEE AND ADDED THIS AMOUNT AS HIS INCOME. 3.6 LD. CIT(A) CONFIRMED THE FINDINGS OF THE A.O THAT T HE ASSESSEE HAD ADOPTED A COLORABLE DEVICE TO AVOID PA YMENT OF TAX ON THE PROFIT OF RS. 5,24,47,943/- EARNED BY HIM ON THE SA LE OF SIROII LAND. HE HELD THAT THE CONDUCT OF THE PERSONS INVOLVED IN TH E VARIOUS TRANSACTIONS CLEARLY PROVED THAT WHAT WAS APPARENT WAS NOT REAL. HE WAS OF THE VIEW THAT IN REALITY THE CONTROLLING INTEREST IN THE LAND HAD BEEN RELINQUISHED BY BOTH THE EARLIER PARTNERS SH. PAWAN LASHKARY AND SH. JITENDRA AGARWAL BY ADOPTING THE D UBIOUS AND CIRCUITOUS ROUTE OF ENTERING THE FOUR NEW PARTNERS IN THE FIRM M/S KRISHNA VILLA APARTMENT HAVING THE IMPUGNED LAND AS THE ONLY IMPO RTANT ASSET AND BY RESORTING TO REVALUATION OF THE LAND AT THE TIME OF ENTRY OF THESE NEW PARTNERS AND THEREAFTER BOTH THE OLD PARTNERS RETIR ING ONE BY ONE IN A SHORT SPAN OF TIME AND THEREBY GETTING THE PROPORTIONATE SHARE OF PROFIT ON RELINQUISHMENT OF THEIR RIGHT, TITLE, INTEREST IN T HE IMPUGNED LAND AND SAME WAS DONE WITH A VIEW TO AVOID TAXABILITY OF THIS PR OFIT UNDER THE IT. ACT. LD. C1T(A) ALSO CONFIRMED THIS ADDITION OF INCOME O N THE GROUND THAT DURING THE SEARCH OPERATIONS, THE ASSESSEE HAD HIMSELF ACCEPTED THAT HE 55 HAD EARNED PROFIT ON THE SALE OF THE LAND AT SIROII BUT DID NOT PAY TAX ON THIS. HE OFFERED THIS AMOUNT FOR TAX AS HIS UNDISCL OSED INCOME. 4. IN THIS APPEAL THE ASSESSEE HAS CHALLENGED THE ABOV E DECISION OF LD. CIT(A)-CENTRAL. 4.1 IN THIS RESPECT FIRST OF ALL, I WOULD LIKE TO SUBMI T THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE DECISION OF HON'BLE ITAT, MUMBAI, BENCH T IN THE CASE OF SUDHAKAR M. SHETTY V S. ACIT REPORTED AT (2011) 130 ITD 197MUMBAI) . 4.2. IN THIS CASE THE ASSESSEE SH. SUDHAKAR M. SHETTY EN TERED INTO A PARTNERSHIP WITH ONE SH. RAKESH WADHWAN TO C ARRY ON THE BUSINESS OF BUILDING AND DEVELOPMENT OF IMMOVABLE PROPERTIES . THE PARTNERSHIP FIRM WAS NAMED M/S D.S. CORPORATION. SUBSEQUENTLY, SOME MORE RELATIVES AND ASSOCIATES OF THESE TWO PARTNERS WERE ADMITTED BUT ESSENTIALLY THE PARTNERSHIP REMAINED UNDER THE CONTROL OF THE SHETT Y AND WADHWAN GROUPS. THIS PARTNERSHIP FIRM BOUGHT A LAND IN MUMB AI FOR RS. 6.5 CRORES AND MADE EXPENDITURE FOR CLEARING AND REGULARIZING THIS LAND. LATER THE FIRM ADMITTED 4 MORE PARTNERS FROM OUTSIDE THE TWO MAIN GROUPS VIZ. SH. ASHOK GUPTA, SH. WARYAM SINGH, SH. KAPIL RAJESH KUM AR AND SH. SUNPREET SINGH INTO THE PARTNERSHIP. JUST BEFORE AD MITTING THESE NEW PARTNERS THE LAND WAS GOT REVALUED AT RS. 193,90,60 ,000/- AND THE SURPLUS AMOUNT OF RS. 154,39,90,435/- WAS CREDITED TO THE A CCOUNTS OF THE EXISTING PARTNERS IN THEIR PROFIT SHARING RATIO. THE AMOUNT CREDITED TO THE CAPITAL ACCOUNT OF THE ASSESSEE SH. SUDHAKAR SHETTY WAS RS. 30,87,98,087/- DURING F.YR. 2006-07, THE ASSESSEE RETIRED FROM THE PARTNERSHIP FIRM AND WAS PAID ALL THE AMOUNT STANDING TO HIS CREDIT IN T HE CAPITAL ACCOUNT INCLUDING HIS SHARE OF THE SURPLUS ON REVALUATION O F THE LAND AMOUNTING TO RS. 30,87,98,087/- THE A.O WAS OF THE VIEW THAT THE ASSESSEE HAD ADOPTED A COLOURABLE DEVICE TO HOOKWINK THE REVENUE. ACCORD INGLY, HE BROUGHT TO TAX THE AMOUNT OF RS.30,87,98,088/- AS INCOME HE DI D NOT SPECIFY AS TO 56 UNDER WHICH HEAD, IT WAS TO BE BROUGHT TO TAX. HOWE VER, AS PER THE ITAT ORDER, A READING OF THE ENTIRE ORDER SUGGESTED THAT THE INCOME WAS ASSESSEED AS SHORT TERM CAPITAL GAIN. 4.3. ON APPEAL BY THE ASSESSEE, THE CIT(A) HELD THAT THE SUM IN QUESTION WAS LIABLE TO BE ASSESSED AS SHORT-TERM CA PITAL GAIN. HE HELD THAT THERE WAS A TRANSFER OF A CAPITAL ASSET RESULTING I N A CAPITAL GAIN AND THAT ALL THE CONDITIONS CONTEMPLATED UNDER SECTION 45 AND SE CTION 48 WERE SATISFIED. THE CIT(A) IN COMING TO THE ABOVE CONCLU SION, REFERRED TO THE VARIOUS CLAUSES IN THE RETIREMENT DEED AND HELD THA T THERE WAS AN ASSIGNMENT OF THE INTEREST OF THE ASSESSEE IN THE P ARTNERSHIP IN FAVOUR OF THE CONTINUING PARTNERS. ACCORDING TO HIM THE DECIS ION IN THE CASE OF MOHANBHAI PAMABHAI 165 ITR 166(SC) DID NOT APPLY BE CAUSE IN THAT CASE, THERE WAS ONLY MINUTES UNDER WHICH A PARTNER RETIRE D AND IT CONTAINED NO ASSIGNMENT OF INTEREST IN FAVOUR OF CONTINUING PART NERS THE CIT(A) THEN CONCLUDED THAT RELINQUISHMENT OF INTEREST WOULD BE 'TRANSFER' WITHIN THE MEANING OF SECTION 2(47) OF THE ACT. THEREAFTER , T HE CIT(A) REFERRED TO THREE JUDGMENTS OF THE HON'BLE BOMBAY HIGHT COURT V IZ., (A) CIT V. TRIBHUVANDAS G PATEL(1978) 115 ITR 95 (B) CIT V. H. R. ASLOT(1978) 115 ITR 255 (C) N A MODV V.CIT(1986) 162 ITR 420 AND CO NCLUDED THAT AS LAID DOWN IN THE AFORESAID JUDGMENTS, THERE WOULD B E A TRANSFER WHEN ON RETIREMENT OF A PARTNER, THERE IS AN ASSIGNMENT AND RELEASING OF HIS SHARE IN PARTNERSHIP FIRM IN FAVOUR OF CONTINUING PARTNERS. 4.4. HON'BLE MUMBAI TRIBUNAL HAS DISCUSSED THE VARIOUS A SPECTS OF THIS ISSUE IN DETAIL IN ITS ORDER AND HAS CONSIDERE D A LARGE NUMBER OF COURT DECISIONS IN THIS REGARD. AFTER A DETAILED DISCUSSI ON HON'BLE TRIBUNAL HAS HELD AS UNDER: (I) THUS, THE QUESTION WHETHER A TRANSACTION WOULD AMOUNT TO AN ASSIGNMENT OR RELEASE OF INTEREST BY THE RETI RING PARTNER IN FAVOUR OF THE CONTINUING PARTNERS OR NOT WOULD DEPE ND UPON THE 57 WAY A PARTICULAR MODE OF RETIREMENT IS EMPLOYED AND AS INDICATED EARLIER, IF INSTEAD OF QUANTIFYING HIS SHARE BY TAK ING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE, PARTIES AGREE TO PAY A LUMP SUM AMOUNT IN CONSIDERATION OF THE RETIRING PARTNER ASS IGNING OR RELINQUISHING HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS, THE TRANSACTION WOULD AMOUNT TO A TRANSFER WITHIN THE MEANING OF SECTION 2(47). IN THE INSTANT CASE, THE ASSESSE RETIRED FROM THE P ARTNERSHIP FIRM AND WAS PAID THE SUM STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT, BUT FOR THE RE-VALUATION OF THE ASSET, THE CAPITAL ACCOUNT OF THE PARTNER WOULD NOT HAVE SHOWN A SUM OF RS.35,59, 84,050/-. TO THE EXTENT OF RS.30,87,98,087/- THE CAPITAL ACCOUNT HAD BEEN ARTIFICIALLY INCREASED JUST TO ENSURE THAT THE RETI RING PARTNER WAS PAID CONSIDERATION STANDING TO THE CREDIT OF HIS CA PITAL ACCOUNT. THUS, IT WAS A CASE WHERE INSTEAD OF QUANTIFYING TH E ASSESSEE'S SHARE BY TAKING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE, PARTIES HAD AGREED TO PAY A LUMP SUM IN CONSIDERATION OF TH E RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHARE OR RIG HT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINU ING PARTNERS. THUS, THE RETIRING PARTNER WAS PAID SOMETHING OVER AND ABOVE THE SUM STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT A ND, THEREFORE, THERE WAS A CAPITAL GAIN. ) (II) FURTHER, IT WAS TO BE SEEN AS TO WHETHER THERE WAS ANY ASSIGNING OR RELINQUISHING OF ANY SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS BY THE RETIRING PARTNER. IN THE CASE OF THE ASSESSEE THE CLAUSES IN THE RETI REMENT DEED DID CONVEY INTEREST IN IMMOVABLE PROPERTY AND FURTHER REFERRED TO THE FACT THAT THE ASSESSEE WOULD NOT HA VE ANY INTEREST OVER THE ASSETS OF THE FIRM. THUS, IT WAS A CASE OF LUMP SUM PAYMENT IN CONSIDERATION OF THE RETIRING PARTNER AS SIGNING OR RELINQUISHING OF HIS SHARE OR RIGHT IN THE PARTNE RSHIP AND ITSASSETS IN FAVOUR OF THE CONTINUING PARTNERS. THE REFORE, THE ASSESSEE SATISFIED THE PARAMETERS LAID DOWN BY THE BOMBAY HIGH 58 COURT IN THE CASE REFERRED TO ABOVE AND, THEREFORE THERE WAS LIABILITY TO TAX ON ACCOUNT OF CAPITAL GAIN. 4.5 IN THE CASE OF THE ASSESSEE, SH. PAWAN LASHKARY THE FACTS ARE EXACTLY THE SAME. HERE ALSO THE ASSESSEE ENTERED INTO A PARTNERSHIP WITH OTHER PARTNERS AND THE FIRM THUS F ORMED PURCHASED A LAND ON WHICH THEY MADE SOME EXPENSES. LATER THE ORIGINAL PARTNERS ADMITTED OUTSIDE PARTNERS IN THE PARTNERSH IP AND AT THE TIME OF ADMITTING THE NEW PARTNERS THE LAND WAS GOT REVA LUED AT THE MARKET RATE. AFTER REVALUATION THE SURPLUS WAS CRED ITED TO THE CAPITAL ACCOUNTS OF THE EXISTING PARTNERS. LATER TH E EXISTING PARTNERS RETIRED FROM THE FIRM TAKING AWAY THE BALANCE STAND ING IN THEIR CAPITAL ACCOUNTS, INCLUDING THE SURPLUS AMOUNT CRED ITED TO THEIR CAPITAL ACCOUNT ON REVALUATION OF THE LAND. HERE AL SO IT IS A CASE WHERE THERE IS ASSIGNING OR RELINQUISHING OF A SHAR E OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINU ING PARTNERS BY THE RETIRING PARTNERS. THIS FACT IS CLEAR FROM THE CLAUSE 5 OF THE RETIREMENT-CUM- RECONSTITUTION DEEDS DATED 10.02.20 07(APB PAGE 41) 19.03.2007(APB PAGE 51) IN WHICH IT IS MENTIONE D AS FOLLOWS: 'THAT BALANCE IN THE CAPITAL ACCOUNT OF THE RETIRIN G PARTNER WILL BE PAID TO HIM WITHIN THE PERIOD OF TH REE MONTHS FROM THE DATE OF THE DEED AND NO INTEREST ON SUCH BALANCE WILL BE PAID FOR THIS PERIOD OF THREE MONTH S. AFTER PAYMENT OF HIS ENTIRE CAPITAL, THE RETIRING PARTNER SHALL NOT HAVE ANY RIGHT IN THE BUSINESS OF THE FIRM AND ALSO WILL NOT CLAIM HIS SHARE IN THE GOOD WILL OF THE FIRM, IF AN Y'. THUS, IN THIS CASE ALSO THE RETIRING PARTNER HAS AS SIGNED OR RELINQUISHED HIS SHARE OR RIGHT OR INTEREST IN THE BUSINESS OF THE PARTNERSHIP FIRM IN THE FAVOUR OF THE CONTINUING PA RTNERS. 59 THEREFORE, THE CASE OF THE ASSESSEE IS SQUARELY COV ERED BY THE DECISION OF HON'BLE ITAT MUMBAI IN THE CASE OF SUDH AKAR M.SHETTY AND THEREFORE THE AMOUNT OF RS. 5,24,47,94 3/- HAS BEEN RIGHTLY TAXED BY THE A.O AS THE INCOME OF THE ASSES SEE. 5. IN THE CASE OF SUDHAKAR M. SHETTY OUT OF THE TWO GR OUPS OF ORIGINAL PARTNERS ONLY ONE GROUP RETIRED FROM TH E PARTNERSHIP. STILL HON'BLE ITAT HELD THAT THE AMOUNT RECEIVED BY THE RETIRING PARTNER WILL BE TAXED IN HIS HAND AS CAPITAL GAIN. IN THE CASE OF THE ASSESSEE, THE ASSESSEES HAVE GONE ONE STEP FURTHER. BOTH THE ORIGINAL PARTNERS HAVE RETIRED FROM THE PARTNERSHIP FIRM AND THE REMAINING PARTNERS ARE THE 4 PARTNERS WHO WERE NEWL Y ADMITTED. THEREFORE, THIS IS A CLEAR CASE WHERE THE ASSESSEES HAVE USED THE COLORABLE DEVICE DESCRIBED BY THE A.O IN PARAS 3, 4 AND 5 OF HER ORDER TO SELL LAND OWNED BY THEM TO A SET OF PEOPLE AND HAVE NOT PAID ANY TAX ON THE PROFIT EARNED IN THIS SALE. IN PARAS 4, AND 4.1 TO 4.2 LD. CIT(A) HAS DESCRIBED HOW THROUGH THE VARIOUS TRANSACTIONS SPREAD OVER A PERIOD OF AB OUT 9 MONTHS THE LAND IN QUESTION HAS BEEN EFFECTIVELY TRANSFERRED FROM SH. PAWAN LASHKARY AND SH. JITENDRA AGARWAL TO A GROUP OF 4 PERSONS. LD. C IT(A) HAS RIGHTLY HELD THESE TRANSACTIONS AS A COLORABLE DEVICE FOR AVOIDI NG PAYMENT OF TAXES ON THE PROFIT AND GAINS EARNED ON THE TRANSFER OF THE SAID LAND. ON PAGE 25 OF HIS ORDER ID. CIT(A) HAS MENTIONED TH AT THE LAND AT VILLAGE SIROII WAS PURCHASE BY M/S KRISHNA VILLA AP ARTMENT ON 24.07.2006 AND ON 27.07.2006, THE J DA ISSUED LETTE RS IN THE NAME OF THIS FIRM FOR PAYMENT OF CONVERSION CHARGES, DEVELOPMENT CHARGES AND CHARGES FOR APPROVAL OF GROUP HOUSING SCHEME. LD. CIT(A) WA S OF THE OPINION THAT IN THE INSTITUTIONS LIKE THE J DA APPLICATIONS FOR CONVERSION OF LAND AND APPROVAL OF GROUP HOUSING SCHEME TAKES TIME AND THE LETTERS IN THE NAME 60 OF THE FIRM COULD NOT HAVE BEEN ISSUED IN A SHORT P ERIOD OF THREE DAYS. THEREFORE, HE INFERRED THAT THESE APPLICATIONS WERE FILED BEFORE THE FIRM M/S KRISHNA VILLA APARTMENT CAME INTO EXISTENCE AND CERTAINLY BEFORE THE SAID LAND WAS PURCHASED BY THIS FIRM ON 24.07.2006. IN RESPECT OF THIS OBSERVATION OF LD. CIT(A) SOME INQUIRIES WERE RECEN TLY MADE FROM THE JDA AND IT WAS LEARNT THAT ONE SH. ARUN LASHKARY SO N OF SH. PAWAN LASHKARY HAD APPLIED TO THE JDA ON 27.02.2006 ON BE HALF OF THE ORIGINAL OWNERS AND REQUESTED THE JDA TO ISSUE SINGLE UNIT P ATTA IN THE NAME OF M/S KRISHNA VILLA APARTMENTS. THE COPY OF THIS LETT ER DATED 27.02.2006 IS ENCLOSED. THIS DOCUMENT PROVES THE INFERENCE DRAWN BY LD. CIT(A) THAT REQUEST FOR ISSUE OF PATTA IN THE NAME OF THE FIRM M/S KRISHNA VILLA APARTMENT WAS MADE EVEN BEFORE THIS FIRM CAME INTO EXISTENCE AND EVEN BEFORE THIS LAND WAS PURCHASED IN THE NAME OF THIS FIRM. THIS ALSO PROVES THE INFERENCE MADE BY LD. CIT(A) THAT THE FIRM M/S KRISHNA VILLA APARTMENT HAS NOT DONE ANY WORTHWHILE ACTIVITY IN O RDER TO IMPROVE THE WORTH/ VALUE OF THE LAND AND IT WAS SH. PAWAN LASHK ARY AND HIS SON WHO HAVE BEEN INVOLVED IN ALL THESE ACTIVITIES. THEREFORE, BESIDES THE APPLICABILITY OF THE CASE OF SUDHAKAR M.SHETTY DISCUSSED ABOVE, THIS CASE IS ALSO A CASE WHERE THROUGH A COLORABLE DEVICE THE TWO PERSONS SH. PAWAN LASHKARY (ASSESSEE) AND SH. JITENDRA AGARWAL TRANSFERRED THEIR CONTROLL ING INTERESTS IN THE LAND TO A GROUP OF 4 PERSONS. THE PROFIT EARNED BY THE ASSESSEE AND SH. JITENDRA AGARWAL HAS BEEN RIGHTLY HELD AS T AXABLE BY LD. CIT(A) IN THE HANDS OF THESE TWO PERSONS. 6. AS REGARDS THE GROUNDS TAKEN BY THE ASSESSEE IN THE MODIFIED/ADDITIONAL GROUNDS FILED ON 31.10.2011, MY SUBMISSIONS ARE AS FOLLOWS: GROUND NO. 1: IN THIS GROUND, THE ASSESSEE HAS TERMED THE ORDERS OF THE LOWER AUTHORITIES AS AGAINST LAW, WEI GHT OF EVIDENCE 61 AND PROBABILITY OF THE CASE . IN THIS RESPECT, IT I S SUBMITTED THAT IN VIEW OF THE SUBMISSIONS MADE ABOVE AND THE DISCUSSI ON MADE IN THE ORDERS OF THE A.O AND LD. CIT(A), THE ADDITION OF THE INCOME OF RS. 5, 24, 47,943/- HAS BEEN MADE IN THE HANDS O F THE ASSESSEE AS PER LAW AND ON CORRECT APPRECIATION OF THE EVIDENCE S. GROUND NO. 2 : IN GROUND NO. 2, THE ASSESSEE HAS CLAIMED THAT THE AMOUNT OF RS. 5,24,47,943/- CANNOT BE TAXE D AS HIS INCOME SINCE THIS IS CAPITAL ACCOUNT BALANCE RECEIV ED ON ACCOUNT OF HIS RETIREMENT FROM THE FIRM M/S KRISHNA VILLA A PARTMENT AND ALSO BECAUSE THE SAID FIRM WAS NOT DISSOLVED AND CO NTINUED AS A GOING CONCERN. IN THIS RESPECT, IT IS SUBMITTED THAT THE BALANCE I N THE CAPITAL ACCOUNT IS NOT THE TAX PAID PROFIT OF THE FIRM M/S KRISHNA VILLA APARTMENT. RATHER IT INCLUDES AN AMOUNT OF RS. 5,24 ,47,943/- WHICH IS THE PROFIT EARNED BY THE ASSESSEE ON SALE OF THE LAND AT SIROII WHICH HAS BEEN CREDITED TO HIS CAPITAL ACCOU NT IN THE GUISE OF REVALUATION OF THE LAND AT MARKET RATE. AS DISCUSSE D ABOVE THIS PROFIT IS VERY MUCH THE INCOME OF THE ASSESSEE. THE FACT THAT THE FIRM M/S KVA HAS NOT BEEN DISSOLV ED DOES NOT MAKE ANY DIFFERENCE. IN THE CASE OF SUDHAK AR M. SHETTY, DISCUSSED ABOVE HON'BLE ITAT HAS CLEARLY HELD THE A MOUNT RECEIVED BY THE RETIRING PARTNER AS TAXABLE IN HIS HAND AS SHORT TERM CAPITAL GAIN. SIMILARLY, CIT(A) HAS HELD THIS AMOUN T AS A DEVICE USED BY THE RETIRING PARTNER TO AVOID TAX AND HAS H ELD IT AS INCOME FOR TRANSFER OF CONTROLLING INTEREST IN THE LAND TR ANSFERRED BY THE RETIRING PARTNER TO THE CONTINUING PARTNERS. GROUND NO. 3: IN THIS GROUND, THE ASSESSEE HAS CLAIMED THAT THE AMOUNT OF RS. 5,24,47,943/- IS NOT TAXABLE EITH ER U/S 10(2A) OR 62 28(IV) OR 28(V), OR 45(4) AS PER DECISIONS OF HON'B LE SUPREME COURT IN THE CASES OF 165 ITR 166(SC), 247 ITR 801 (SC), AND MUMBAI HC DECISION IN THE CASE OF 324 ITR 154(BOM). IN THIS RESPECT, IT IS SUBMITTED THAT ALL THESE SEC TIONS AND COURT DECISIONS REFERRED BY THE ASSESSEE HAVE BEEN CONSIDERED IN DETAIL BY HON'BLE ITAT, MUMBAI IN THE CASE OF SUDHA KAR M.SHETTY AND ONLY AFTER THAT HAVE THEY HELD THE AMOUNT AS TA XABLE IN THE HANDS OF THE ASSESSEE. FURTHER, THESE COURT CASES DO NOT HELP THE ASSESSEE AGAINST THE FINDINGS OF LD. CIT(A) ALSO BECAUSE LD. CIT(A) HAS HELD THE PROFIT EARNED BY THE ASSESSEEAS TAXABLE BY HOLDING THE VARIOUS TRANSACTIONS AS COLOURABLE DEVICE WHEREAS IN THESE COURT CASES THE ISSUE DID NOT PERTAIN TO USE OF ANY COLOURABLE DEVI CE. THE ASSESSEE HAS HEAVILY RELIED ON THE DECISION OF SH. PRASHANT S. JOSHI (2010) 324 ITR 154. FIRST OF ALL THIS DECISION WAS NOT CITED BEFORE LD. CIT(A). SECONDLY, THE ISSUE AN D FACTS OF THIS CASE ARE QUITE DIFFERENT FROM THE CASE OF THE ASSES SEE. THE PRASHANT JOSHI CASE WAS A WRIT PETITION WHICH WAS MAINLY REL ATED TO THE VALIDITY OF THE NOTICES ISSUED U/S 148 FOR A.YRS. 2 005-06 AND 2006- 07. THE MERITS OF THE ISSUE UNDER CONSIDERATION IN THE CASE OF OUR ASSESSEE WERE NOT DECIDED IN DETAIL. MOREOVER, AS I N THE CASE OF OUR ASSESSEE, THERE WAS NO ADMISSION OF NEW PARTNERS IN THE EXISTING FIRM, NO REVALUATION OF THE LAND AT THE TIME OF ADM ITTING NEW PARTNERS, AND THE RETIRING PARTNERS WERE NOT PAID T HE SURPLUS OF THE REVALUED LAND. THUS, THE FACTS OF THE CASE OF THE A SSESSEE AND THOSE OF THE CASE OF PRASHANT JOSHI ARE TOTALLY DIFFERENT . GROUND NO. 4 : IN THIS GROUND, THE ASSESSEE HAS CONTENDED THAT LD. CIT(A) HAS WRONGLY TREATED THE AMOUNT OF R S. . 63 5,24,47,943/- AS TRANSFER OF RIGHT OF LAND BY THE R ETIRING PARTNERS TO THE NEW PARTNER OF THE FIRM AND HAS HELD IT AS TAXA BLE UNDER THE HEAD INCOME FROM OTHER SOURCES. IN THIS RESPECT, IT IS SUBMITTED THAT AS DISCUSSED IN HIS ORDER, LD. CIT(A) HAS RIGHTLY HELD THE SEQUENCE OF EVENTS IN THIS CASE AS A COLOURABLE DEVICE TO RELINQUISH CONTROLLING INTERES T IN THE LAND IN FAVOUR OF THE NEW PARTNERS OF M/S KRISHNA VILLA APA RTMENTS BY SH. PAWAN LASHKARY AND SH. JITENDRA AGARWAL. SINCE THES E TWO PERSONS HAVE EARNED PROFIT ON RELINQUISHMENT OF THE CONTROLLING INTEREST THEREFORE SUCH PROFIT NEEDS TO BE TAXED AS THEIR INCOME ONLY. LD. CIT(A) HAS HELD THIS AMOUNT AS TAXABLE UNDER TH E 'INCOME FROM OTHER SOURCES' ONLY TO COUNTER THE PER SISTENT ARGUMENT OF THE ASSESSEE THAT THIS PROFIT CANNOT BE TAXED UNDER ANY HEAD OF INCOME UNDER THE IT. ACT,1961. IF HON'B LE ITAT DESIRES, SINCE THE CONTROLLING INTEREST IN THE LAND IS A PROPERTY IN THE HANDS OF THE ASSESSEE UNDER SEC. 2(14) OF THE I .T. ACT, 1961, THIS PROFIT MAY BE TAXED AS SHORT TERM CAPITAL GAIN . HOWEVER, THE BOTTOM- LINE IS THAT THIS AMOUNT IS A TAXABLE INCOM E OF THE ASSESSEE. GROUND NO. 5: IN THIS GROUND, THE ASSESSEE HAS ARGUED THAT LD. CIT(A) HAS WRONGLY HELD THAT THE SERIES OF TRAN SACTIONS DONE BY THE ASSESSEE AND THE NEW PARTNERS WERE ARRANGEME NTS THAT HAVE BEEN USED AS A DEVICE TO EVADE PROFIT EARNED BY SH. PAWAN LASHKARY AND SH. JITENDRA AGARWAL ON RELINQUISHMENT OF RIGHTS, TITLE, INTEREST IN THE LAND. IT IS CLAIMED THAT THE ASSESSEE HAS NOT EVADED ANY TAX ON THIS AMOUNT BECAUSE IN THE ASSESSMENT OF THE FIRM M /S KRISHNA 64 VILLA APARTMENT, THE A.O DID NOT ALLOW THE REVALUED VALUE OF THE LAND AS DEDUCTION IN A.YR 2008-09. IT IS CLAIMED TH AT THIS HAS RESULTED IN DOUBLE TAXATION OF THE SAME AMOUNT IN T HE HANDS OF THE FIRM AND THE RETIRING PARTNERS. AS DESCRIBED IN THIS SUBMISSION ABOVE THERE IS NO D OUBT THAT THE TRANSACTIONS DONE BY SH. PAWAN LASHKARY AND SH. JITENDRA AGARWAL AND THE FOUR NEW PARTNERS'FROM 19.07.2007 T O 31.03.2008 WERE WELL ORCHESTRATED AND PLANNED MOVES TO EVADE T AX ON THE PROFIT EARNED BY SH. LASHKARY AND SH. AGARWAL TO RE LINQUISH THEIR RIGHTS IN THE SIROII LAND TO THE FOUR NEW PARTNERS. THIS ALLEGATION IS PROVED BY THE SIMPLE FACT THAT THE WHOLE OF THE REV ALUED VALUE OF THE LAND WAS CLAIMED BY THE FIRM M/S KRISHNA VILLA APARTMENTS AS AN EXPENDITURE IN P & L A/C AND THE SURPLUS RECEIVE D ON REVALUATION OF THE LAND WAS NOT OFFERED BY SH. LASH KARY AND SH. AGARWAL FOR TAX. THUS, ONE GROUP OF PERSONS IS MAKI NG PAYMENT TO OTHER GROUP OF PERSONS FOR PURCHASE OF LAND AND THE FIRST GROUP IS CLAIMING THE PAYMENT AS EXPENDITURE BUT THE RECIPIE NT GROUP IS NOT PREPARED TO ACCEPT THE AMOUNT RECEIVED AS SALE CONS IDERATION BY RESORTING TO CERTAIN WELL ORCHESTRATED TRANSACTIONS AS DESCRIBED ABOVE. IF THIS IS NOT A COLOURABLE DEVICE THEN WHAT ELSE WILL BE. IF SUCH TRANSACTIONS ARE ALLOWED TO GO SCOT FREE BY RE SORTING TO LEGAL TECHNICALITIES THEN EVERYBODY WILL RESORT TO THIS T ECHNIQUE AND NO TAX WILL BE PAID ON THE PROFITS EARNED FROM THE SAL E OF LAND . THIS WILL BE A SERIOUS TRAVESTY OF JUSTICE. THE ASSESSEE HAS ARGUED THAT THERE IS DOUBLE TAXATI ON OF THE SAME AMOUNT AS IN THE ASSESSMENT ORDER OF M/S KRISH NA VILLA APARTMENT THE A.O HAD NOT ALLOWED THE CLOSING STOCK OF LAND TO BE TAKEN AT THE ENHANCED REVALUED AMOUNT IN THIS RESPE CT IT IS 65 SUBMITTED THAT FOR A.YRS. 2007-08 AND 2008-09, THE A.O HAD TO PASS THE ASSESSMENT U/S144 AS THE NOTICES SENT U/S 143(2) WAS REFUSED. THUS THESE ASSESSMENTS WERE BEST JUDGEMENT ASSESSMENTS MADE ON THE BASIS OF THE MATERIAL ON RECORD. DURING THESE ASSESSMENT PROCEEDINGS THE ASSESSEE FIRM DID NOT EX PLAIN THE NATURE OF THE REVALUED VALUE OF THE LAND AND HENCE THE AO REJECTED THE CLAIM OF REVALUED VALUE AS EXPENDITURE AS DISCU SSED IN PARA 7 AND 8 OF HER ORDER FOR A. Y 2007-08(APB PG. 166,167 ). THE A.O REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND TH AT THE STOCK, AS PER ACCOUNTING STANDARD AS-2, IS TO BE VALUED AT CO ST OR MARKET PRICE WHICHEVER IS LOWER BUT THE ASSESSEE VALUED IT AT A HIGHER RATE WHICH WAS NOT ALLOWABLE . THE A.O HAD TO MAKE THIS DISALLOWANCE BECAUSE THERE WAS NO EXPLANATION BY THE ASSESSEE FI RM ON THIS ISSUE. THEREFORE, IT CANNOT BE SAID TO BE A CASE OF DOUBLE TAXATION. GROUND NO: 6: I N THIS GROUND THE ASSESSEE HAS CLAIMED THAT THE ASSESSMENT ORDER U/S 153A IS BAD-IN-LAW AND VOI D BECAUSE THE A.O HAS NOT CONSIDERED THE EVIDENCES AND HAS MADE A SSESSMENT BASED ON THE ASSUMPTIONS AND CONJECTURES. IN THIS RESPECT, IT IS SUBMITTED THAT AS DISCUSSED ABOVE, THE ASSESSMENT HAS BEEN RIGHTLY MADE AFTER PROPER CONSI DERATION OF ALL THE MATERIAL EVIDENCES AND FACTS ON RECORD. 2.13 THE LD. DR HAS HEAVILY RELIED ON THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF SUDHAKAR M SHETTY VS. ACIT, 130 ITD 197. IT WAS STATED THAT THE FACTS IN THE INSTANT CASE ARE SIMILAR TO THE FACTS OF THE CASE OF SUDHA KAR M SHETTY VS. ACIT (SUPRA) AND THE DECISION IS SQUARELY APPLICABLE AND THE APPEAL OF T HE ASSESSEE IS REQUIRED TO BE DISMISSED. IT WILL BE USEFUL TO REPRODUCE THE HELD PORTION FRO M THAT ORDER WHICH ARE RELEVANT FOR THE ISSUE BEFORE US. 66 THE ISSUE THAT AROSE FOR CONSIDERATION IN THE INS TANT APPEAL WAS AS TO WHETHER ANY PART OF THE SUM RECEIVED BY THE ASSE SSEE ON RETIREMENT FROM THE FIRM WOULD GIVE RISE TO CAPITAL GAIN CHARGEABLE TO TAX UNDER THE ACT. [PARA 17] SECTION 45(1) BRINGS TO TAX ANY CAPITAL GAIN THAT A CCRUES OR ARISES ON TRANSFER OF A CAPITAL ASSET. THE CAPITAL GAIN IS CHARGED TO TAX IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TAKES PLACE. SE CTION 2(47) DEFINES AS TO WHAT IS TRANSFER. CAPITAL ASSET HAS BEEN DEFINED IN SECTION 2(14), AS MEANING PROPERTY OF ANY KIND HELD BY THE ASSESSEE, WHETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION. THE ABOVE EXHAUSTIVE DE FINITION IS SUBJECT TO THE FOLLOWING EXCLUSIONS LIKE STOCK-IN-TRADE, CONSU MABLE STORES OR RAW MATERIAL HELD FOR THE PURPOSE OF BUSINESS OR PROFES SION, PERSONAL EFFECTS, AGRICULTURAL LAND IN INDIA, CERTAIN GOLD BONDS, SPE CIAL BEARER BONDS AND GOLD DEPOSIT BONDS. [PARA 19] THE SHARE OR INTEREST OF A PARTNER IN THE PARTNERSH IP AND ITS ASSETS WOULD BE PROPERTY AND, THEREFORE, A CAPITAL ASSET W ITHIN THE MEANING OF THE AFORESAID DEFINITION. TO THAT EXTENT THERE CAN BE N O DOUBT. THE NEXT QUESTION WAS AS TO WHETHER IT COULD BE SAID THAT TH ERE WAS A TRANSFER OF CAPITAL ASSET BY THE RETIRING PARTNER IN FAVOUR OF THE FIRM AND ITS CONTINUING PARTNERS SO AS TO ATTRACT A CHARGE UNDER SECTION 45 . [PARA 20] A LOOK AT HOW FORMATION AND DISSOLUTION OF THE PART NERSHIP WAS USED AS A DEVICE TO EVADE TAX ON CAPITAL GAINS TO C ONVERT AN ASSET HELD INDIVIDUALLY INTO AN ASSET OF THE FIRM IN WHICH THE INDIVIDUAL WAS A PARTNER AND CONVERSION OF CAPITAL ASSETS INTO INDIVIDUAL AS SETS ON DISSOLUTION OR OTHERWISE, WAS NECESSARY. [PARA 21] PARTNERSHIP AS A FORM OF CARRYING ON BUSINESS WAS E VOLVED SO THAT TWO OR MORE PERSONS COULD JOIN TOGETHER BY POOLING RESOURCES IN THE FORM OF CAPITAL AND EXPERTISE. ONE OF THE DEVICES USED B Y THE ASSESSES TO EVADE TAX ON CAPITAL GAIN WAS TO CONVERT AN ASSET HELD IN DIVIDUALLY INTO AN ASSET OF THE FIRM IN WHICH THE INDIVIDUAL WAS A PARTNER. SIMILARLY, PARTNERSHIP 67 ASSETS WERE CONVERTED INTO INDIVIDUAL ASSETS ON DIS SOLUTION OR OTHERWISE. [PARA 22] SUCH AN INTRODUCTION OF CAPITAL ASSET AS CAPITAL CO NTRIBUTION BY A PARTNER UPTO 1.4.1988 DID NOT RESULT IN INCIDENCE O F CAPITAL GAIN. IT WAS SO HELD BY THE SUPREME COURT IN THE CASE OF SUNIL SIDD HARTHBHAI V. CIT [1985] 156 ITR 509/23 TAXMAN 14W. THE SUPREME COURT HELD THAT UNDER THE ACT, WHERE A PARTNER OF A FIRM MAKES OVER CAPIT AL ASSETS WHICH ARE HELD BY HIM TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPITA L, THERE IS A TRANSFER OF A CAPITAL ASSET WITHIN THE TERMS OF SECTION 45 BECAUS E AN EXCLUSIVE INTEREST OF THE PARTNER IN THE PERSONAL ASSETS IS REDUCED, ON H IS ENTRY INTO THE FIRM INTO A SHARED INTEREST. ON SUCH INTRODUCTION OF CAPITAL THE PARTNERS CAPITAL ACCOUNT IS CREDITED WITH THE MARKET VALUE OF THE PR OPERTY. SUCH AN ENTRY DOES NOT REPRESENT THE TRUE VALUE OF THE CONSIDERAT ION. IT IS A NOTIONAL VALUE ONLY, INTENDED TO BE TAKEN INTO ACCOUNT AT THE TIME OF DETERMINING THE VALUE OF THE PARTNERS SHARE IN THE NET PARTNERSHIP ASSETS ON THE DATE OF DISSOLUTION OR ON HIS RETIREMENTA SHARE WHICH WILL DEPEND UPON DEDUCTION OF THE LIABILITIES AND PRIOR CHARGES EXI STING ON THE DATE OF DISSOLUTION OR RETIREMENT. IT IS NOT POSSIBLE TO PR EDICATE BEFOREHAND WHAT WILL BE THE POSITION IN TERMS OF MONETARY VALUE OF A PARTNERS SHARE ON THAT DATE. AT THAT TIME WHEN THE PARTNER TRANSFERS HIS P ERSONAL ASSET TO THE PARTNERSHIP FIRM, THERE CAN BE NO RECKONING OF THE LIABILITIES AND LOSSES, WHICH THE FIRM MAY SUFFER IN THE YEARS TO COME. ALL THAT LIES WITHIN THE WOMB OF THE FUTURE. IT IS IMPOSSIBLE TO CONCEIVE OF EVALUATING THE CONSIDERATION ACQUIRED BY THE PARTNER WHEN HE BRING S HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM; NEITHER CAN THE DATE OF DISSOLUTION OR RETIREMENT BE ENVISAGED NOR CAN THERE BE ANY ASCERTAINMENT OF LIABILITIES AND PRIOR CHARGES WHICH MAY NOT HAVE BEEN ARISEN AT THE RELEV ANT TIME. THEREFORE, THE CONSIDERATION WHICH A PARTNER ACQUIRES ON MAKIN G OVER HIS PERSONAL ASSET TO THE FIRM AS HIS CONTRIBUTION TO ITS CAPITA L CANNOT FALL WITHIN THE TERMS OF SECTION 48. AS THAT PROVISION IS FUNDAMENT AL TO THE COMPUTATION MACHINERY INCORPORATED IN THE SCHEME RELATING TO TH E DETERMINATION OF THE 68 CHARGE PROVIDED IN SECTION 45, SUCH A CASE MUST BE REGARDED AS FALLING OUTSIDE THE SCOPE OF CAPITAL GAINS TAXATION ALTOGET HER. [PARA 23] THE PARLIAMENT WITH THE AVOWED OBJECT OF BLOCKING T HIS ESCAPE ROUTE FOR AVOIDING CAPITAL GAINS TAX, INTRODUCED SU B-SECTION (3) TO SECTION 45 BY THE FINANCE ACT, 1987, WITH EFFECT FROM 1.4.1 988. THE EFFECT WAS THAT THE PROFITS AND GAINS ARISING FROM THE TRANSFE R OF A CAPITAL ASSET BY A PARTNER TO A FIRM WOULD BE CHARGEABLE AS THE PARTNE RS INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND THE AMOUNT RECORDED IN THE BOOKS OF ACCOUNT OF THE FIRM, WOULD BE DEEMED T O BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUED AS A RESULT O F TRANSFER OF THE CAPITAL ASSET. IN THE CASE OF DISSOLUTION WHERE THE PARTNERS HAD B EEN ALLOTTED CAPITAL ASSETS OF THE FIRM, IT WAS HELD THAT THERE WAS NO TRANSFER. [PARA 25] SECTION 47 LAYS DOWN AS TO WHICH ARE THE TRANSACTIO NS NOT REGARDED AS TRANSFER FOR THE PURPOSE OF SECTION 45. [PARA 27 ] THE FINANCE ACT, 1987 OMITTED CLAUSE (II) OF SECTIO N 47 WITH EFFECT FROM 1.4.1988, THE EFFECT OF WHICH WAS THAT DISTRIB UTION OF THE CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM WOULD BE REGARD ED AS TRANSFER WITH EFFECT FROM 1.4.1988. THEREFORE, INSTEAD OF AMENDIN G SECTION 2(47), THE AMENDMENT WAS CARRIED OUT BY THE FINANCE ACT, 1987, BY OMITTING SECTION 47(II), THE RESULT OF WHICH WAS THAT DISTRIBUTION O F THE CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM WAS REGARDED AS TRANSFER. T HE EFFECT WAS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAP ITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOULD BE CHARGE ABLE AS THE FIRMS INCOME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER T OOK PLACE AND FOR THE PURPOSES OF COMPUTATION OF CAPITAL GAINS, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER WAS DEEMED TO BE THE FULL V ALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. [ PARA 28] THUS, THE PARLIAMENT BROUGHT INTO THE TAX NET TRANS ACTIONS WHEREBY ASSETS WERE BROUGHT INTO A FIRM OR WERE TAKEN OUT O F THE FIRM. THUS, SECTION 69 45(4) COVERS CASES WHERE THERE IS A DISSOLUTION OF THE FIRM AND DISTRIBUTION OF THE ASSETS OF THE FIRM BY THE FIRM TO ITS PARTNE RS. [PARA 29] DISSOLUTION AND RETIREMENT ARE TWO DIFFERENT CONCEP TS. IN THE CASE OF RETIREMENT, THE RETIRING PARTNER GOES OUT OF THE FIRM BUT THE REMAINING PARTNERS CONTINUE TO CARRY ON THE BUSINESS OF THE P ARTNERSHIP AS A FIRM. IN THE CASE OF DISSOLUTION, THE FIRM NO LONGER EXISTS AND THE DISSOLUTION IS BETWEEN ALL THE PARTNERS OF THE FIRM. IN THE CASE OF RETIREMENT OF A PARTNER THERE CAN BE TWO SITUATIONS. IN THE FIRST SITUATION CAN BE A RETIREMENT OF A PARTNE R FROM THE FIRM AND THE FIRM MAY CONTINUE ITS EXISTENCE AND THE RETIRING PA RTNER MAY BE GIVEN ASSETS IN LIEU OF AMOUNTS PAYABLE TO ONE ON RETIREM ENT. THIS CAN BE DONE EITHER ON THE BASIS OF SETTLING AMOUNTS STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT OR ON A LUMP SUM BASIS. THERE CAN BE A SECO ND SITUATION WHERE THE RETIRING PARTNER IS PAID CONSIDERATION IN CASH AND HE GIVES UP HIS RIGHTS AS A PARTNER, INCLUDING HIS RIGHTS OVER THE ASSETS OF TH E PARTNERSHIP. THIS AGAIN CAN BE DONE EITHER ON THE BASIS OF SETTL ING AMOUNT STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT ON A LUMP SUM BASIS. IN THE FIRST SITUATION, I.E. RETIREMENT OF A PARTNE R FROM THE FIRM AND THE FIRM CONTINUING ITS EXISTENCE AND THE RETIRING PARTNER GIVEN ASSETS IN LIEU OF AMOUNTS PAYABLE TO HIM ON RETIREMENT, IT HA S BEEN HELD BY THE BOMBAY HIGH COURT IN THE CASE OF CIT V. A.N.NAIK AS SOCIATES [2004] 265 ITR 346 TAXMAN 107 TO BE COVERED BY THE PROVISIONS OF SECTION 45(4) OF THE ACT, VIZ., A TRANSFER GIVING RISE TO A CAPITAL GAIN. PRIOR TO THE AFORESAID DECISION, CASES, WHERE ON RE TIREMENT PROPERTY WAS ALLOTTED TO A PARTNER BY THE FIRM IN LIEU OF AM OUNTS PAYABLE TO HIM, WERE SUBJECTED TO CAPITAL GAINS TAX. IN THAT SCENAR IO THE ASSESSEE TOOK A STAND THAT RETIREMENT WAS ALSO ONE FORM OF DISSOLUT ION OF THE FIRM, BECAUSE THE DISTRIBUTION OF ASSETS ON RETIREMENT WAS NOT RE GARDED AS A TRANSFER 70 UNDER SECTION 48(II). THIS WAS NOT ACCEPTED BY THE BOMBAY HIGH COURT AND IT HELD THAT A CLEAR DISTINCTION EXISTS BETWEEN RETIREMENT OF A PARTNER FROM A FIRM AND THE DISSOLUTION OF THE FIRM. IN THE CASE OF RETIREMENT OF A PARTNER FROM A FIRM IT IS ONLY THE PARTNER WHO GOES OUT OF THE FIRM AND THE REMAINING PARTNERS CONTINUE TO CARRY ON THE BUSINES S OF THE PARTNERSHIP AS A FIRM, WHILE IN THE CASE OF DISSOLUTION, THE FIRM, A S SUCH, NO MORE EXISTS AND THE DISSOLUTION IS BETWEEN ALL THE PARTNERS OF THE FIRM. THE DECISION IN THE CASE OF A.N.NAIK ASSOCIATE (SUPRA), HOWEVER, TREATS DISTRIBUTION OF THE ASSETS OF THE FIRM TO PARTNERS ON DISSOLUTION OR ON RETIREMENT AS FALLING WITHIN THE AMBIT OF SECTION 45(4). THE SECOND SITUATION WITH WHICH THE INSTANT APPEAL WAS CONCERNED WAS A CASE WHERE THE RETIRING PARTNER WAS PAID CONS IDERATION IN CASH AND HE GAVE UP HIS RIGHTS AS A PARTNER, INCLUDING HIS R IGHTS OVER THE ASSETS OF THE PARTNERSHIP. THERE WAS DIVERGENCE OF VIEWS ON THE Q UESTION AS TO WHETHER THERE WAS ANY TRANSFER AT ALL IN SUCH SITUATION BY THE FIRM IN FVOUR OF THE RETIRING PARTNER OR BY THE RETIRING PARTNER IN FVOU R OF THE FIRM AND ITS CONTINUING PARTNERS. THUS THE QUESTION WHETHER A TRANSACTION WOULD AMOUN T TO AN ASSIGNMENT OR RELEASE OF INTEREST BY THE RETIRING P ARTNER IN FAVOUR OF THE CONTINUING PARTNERS OR NOT WOULD DEPEND UPON THE WA Y OF PARTICULAR MODE OF RETIREMENT IS EMPLOYED AND AS INDICATED EARLIER, IF INSTEAD OF QUANTIFYING HIS SHARE BY TAKING ACCOUNTS ON THE FOOTING OF NOTI ONAL SALE, PARTIES AGREE TO PAY A LUMP SUM AMOUNT IN CONSIDERATION OF THE RE TIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHARE OR RIGHT IN TH E PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS THE TR ANSACTION WOULD AMOUNT TO A TRANSFER WITHIN THE MEANING OF SECTION 2(47). IN THE INSTANT CASE, THE ASSESSEE RETIRED FROM THE PARTNERSHIP FIRM AND WAS PAID THE SUM STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT, BUT FOR THE RE-VALUATION OF THE ASSET, THE CAPITAL ACCOUNT OF THE PARTNER WOULD NOT HAVE SHOWN A SUM OF RS.35,59,84,050. TO THE EXTENT OF RS.30,87,98,087 71 THE CAPITAL ACCOUNT HAD BEEN ARTIFICIALLY INCREASED JUST TO ENSURE THAT THE RETIRING PARTNER WAS PAID CONSIDERATION STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT. THUS, IT WAS A CASE WHERE INSTEAD OF QUANT IFYING THE ASSESSEES SHARE BY TAKING ACCOUNT ON THE FOOTING OF NOTIONAL SALE, PARTIES HAD AGREED TO PAY A LUMP SUM IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS. THUS, THE RETIRING PARTNER WAS PAID SOMETHING OVER AND ABOVE THE SUM STANDING TO THE CREDIT OF HIS CAP ITAL ACCOUNT AND, THEREFORE, THERE WAS A CAPITAL GAIN. FURTHER, IT WAS TO BE SEEN AS TO WHETHER THERE WAS ANY ASSIGNING OR RELINQUISHING OF ANY SHARE OR RIGHT IN THE PARTNERS HIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS BY THE RETIRING P ARTNER. IN THE CASE OF THE ASSESSEE THE CLAUSES IN THE RETI REMENT DEED DID CONVEY INTEREST IN IMMOVABLE PROPERTY AND FURTHER R EFERRED TO THE FACT THAT THE ASSESSEE WOULD NOT HAVE ANY INTEREST OVER THE A SSETS OF THE FIRM. THUS, IT WAS A CASE OF LUMP SUM PAYMENT IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHARE OR RIGHT IN TH E PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS. THE MA NNER OF RETIREMENT IN THE CASE OF THE ASSESSEE WAS SUCH THAT IT COULD BE REGARDED AS ASSIGNING OR RELINQUISHING BY THE RETIRING PARTNER OF HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS . THEREFORE, THE ASSESSEE SATISFIED THE PARTNERS LAID DOWN BY THE BOMBAY HIGH COURT IN THE CASE REFERRED TO ABOVE AND, THEREFORE, THERE WAS A TRANS FER OF INTEREST OF THE RETIRING PARTNER OVER THE ASSETS OF THE PARTNERSHIP ON RETIREMENT. THEREFORE, THERE WAS LIABILITY TO TAX ON ACCOUNT OF CAPITAL GA IN. FOR THE REASONS GIVEN ABOVE, THERE WAS NO JUSTIFIAB LE GROUND TO INTERFERE WITH THE ORDER OF THE COMMISSIONER (APPEA LS). THEREFORE, THE ORDER OF THE COMMISSIONER (APPEALS) WAS TO BE CONFI RMED AND THE APPEAL BY THE ASSESSEE WAS TO BE DISMISSED. 72 2.14 ALONGWITH WRITTEN SUBMISSION, THE LD. DR ALSO ENCLOSED THE COPY OF LETTER SIGNED BY SHRI ARUN LASHKARI AND ADDRESSED TO DY. COMMISSI ONER, JDA ON 27-02-2006. IN THIS LETTER, THE REQUEST WAS MADE TO ISSUE A SINGLE UNIT PATTA IN THE NAME OF THE COMPANY. HOWEVER, THE NAME OF THE FIRM IS MENTIONED IN HAN D WRITING AS M/S.KRISHNA VILLA APARTMENT. FROM THIS, THE LD. DR SUBMITTED THAT FIR M WAS IN EXISTENCE IN FEB, 2006 AND ALL THE SUBSEQUENT ACTIONS REPRESENT ARRANGEMENTS F OR EVADING THE TAX. 21.5 THE LD. AR SUBMITTED A REJOINDER AND THE CONTE NTION AS GIVEN IN THE REJOINDER ARE AS UNDER:- INCOME HAS BEEN DEFINED IN SECTION 2(24) OF INCOME TAX ACT. IN SUB CLAUSE (VI) SPECIFIES THAT ANY CAPITAL GAIN CHA RGEABLE UNDER SECTION 45 IS INCOME. SECTION 45 CONTEMPLATES THAT PROFIT OR GAINS ARISIN G FROM TRANSFER OF CAPITAL ASSETS EFFECTED IN THE PREVIOUS YEAR SHALL, SAVE OTHER WISE PROVIDED BE CHARGEABLE TO INCOME TAX UNDER THE HEAD CAPITAL GAIN THEREFORE IN ORDER TO CHARGE TAX ON CAPITAL GAIN TW O CONDITIONS MUST BE SATISFIED (I) THERE SHOULD BE CAPITAL ASSET AND (II) THERE SHOULD BE TRANSFER OF CAPITAL ASSET. THEREFORE ANY THING WHIC H IS NOT A CAPITAL ASSET OR WHICH IS NOT AMOUNT TO TRANSFER CANNOT BE PUT TO CH ARGE CAPITAL GAIN. CAPITAL ASSETS HAVE BEEN DEFINED IN SECTION 2(14) A ND TRANSFER IN RELATION TO CAPITAL ASSETS DEFINED IN SECTION 2(47) OF INCOM E TAX ACT. FURTHER A SECTION 47 IS IN THE ACT, WHICH SAYS THAT CERTAIN TRANSACTION WHICH ARE OTHERWISE CONSIDERED AS TRAN SFER IN VIEW OF SECTION 2(47) BUT STILL THESE WILL NOT BE CONSIDERE D AS TRANSFER. THERE WAS CLAUSE (II) IN SECTION 47 WHICH PROVIDES EXEMPTION FROM PROVISION OF S. 45. SECTION 47(II) WAS AS FOLLOWS:- 47(II) ANY DISTRIBUTION OF CAPITAL ASSETS ON DISSO LUTION OF A FIRM, BODY OF INDIVIDUAL OR OTHER ASSOCIATION OF PE RSON. THEREFORE, WHAT ARE NOT TRANSFER IN RELATION TO CA PITAL ASSETS A) TRANSACTIONS WHICH ARE NOT WITHIN THE PREVIEW OF SE CTION 2(47) OR 73 B) TRANSACTION WHICH COMES INTO PREVIEW OF SECTION 47. HONBLE SUPREME COURT IN SUCCESSIVE DECISIONS HELD THAT AN AMOUNT PAID TO A RETIRING PARTNER IN A PARTNERSHIP FIRM DOES NOT AMOUNT TO A TRANSFER WITHIN MEANING OF SECTION 2(47). THEREFO RE, EVEN AFTER THE DELETION OF SECTION 47(II) W.E.F 1.4.88 AMOUNT PAID TO A RETIRING PARTNER IN PARTNERSHIP FIRM WILL NOT BE TAXABLE AS CAPITAL GAI N AS THE SAME DOES NOT AMOUNT TO TRANSFER AS DEFINED IN SECTION 2(47) OF I NCOME TAX ACT IN VIEW OF SUCCESSIVE DECISIONS OF HONBLE APEX COURT. THERE ARE SEVERAL DECISIONS WHICH PERTAINS TO ASS ESSMENT YEARS AFTER THE AMENDMENT. (I) ITAT JAIPUR 30 TAX WORLD 14 AY 91-92 (II) BOMBAY HIGH COURT 324 ITR 154 AY 05-06 AND 06-07 (III) KERALA HIGH COURT 257 ITR 544 (KAR) AY 89-90 (IV) ITAT PUNE THIRD MEMBER DECISION 81 ITD 218 (PUNE) T M AY 94-95 (V) ITAT MUMBAI D BENCH 2 SOT 558 AY 94-95 (VI) ITAT MADRAS B BENCH 79 TTJ 82 AY 89-90 S.NO NAME OF CASE DIFFERENCE ON FACTS TO THE CASE O F ASSESSEE 1 SUDHAKAR M SHETTY VS ASSISTANT COMMISSIONER OF INCOME TAX 130 ITD 197 (ITAT MUMBAI) 1. AS PER RULE OF CONSISTENCY, THE HONBLE TRIBUNAL JA IPUR BENCH SHOULD FALLOW ITS OWN JUDGMENT ON THE SAME ISSUE INSTEAD OF JUDGM ENT DELIVERED BY OTHER BENCH OF THE TRIBUNAL. 2. HONBLE MUMBAI I BENCH DECIDED THE CASE WHILE CONS IDERING THE FOLLOWING FINDINGS MADE IN PARA 21 & 22 OF ITS ORDER:- 21. A LOOK AT HOW FORMATION AND DISSOLUTION OF PARTNERS HIP WAS USED AS A DEVICE TO EVADE TAX ON CAPITAL GAINS TO CONVER T AN ASSET HELD INDIVIDUALLY INTO AN ASSET OF THE FIRM IN WHICH THE INDIVIDUAL IS A PARTNER AND CONVERSION OF CAPITAL ASSETS INTO INDIV IDUAL ASSETS ON DISSOLUTION OR OTHERWISE, IS NECESSARY. 22. PARTNERSHIP AS A FORM OF CARRYING ON BUSINESS EVOLV ED SO THAT TWO OR MORE PERSONS CAN TO JOIN TOGETHER BY POOLING RES OURCES IN THE FORM OF CAPITAL AND EXPERTISE. ONE OF THE DEVICES USED B Y ASSESSEE TO EVADE TAX ON CAPITAL GAIN WAS TO CONVERT AN ASSET HELD IN DIVIDUALLY INTO ASSET OF THE FIRM IN WHICH THE INDIVIDUAL AS A PARTNER. S IMILARLY, PARTNERSHIP ASSETS WERE CONVERTED INTO INDIVIDUAL ASSETS ON DIS SOLUTION OR OTHERWISE. 74 IN THE CASE OF THE ASSESSEE THERE IS NO SUCH FINDIN GS OF THE LOWER AUTHORITIES. 3. (PARA 42). HONBLE MUMBAI I BENCH OF THE TRIBUNAL TOOK THE NOTE OF CLAUSES OF RETIREMENT DEED AS MENTIONED IN PARA 42. C LS. 2, 4, 5 AND 7 OF THE DEED OF RETIREMENT CLEARLY ENVISAGES AN EXTINGU ISHMENT OF RIGHTS OF THE RETIRING PARTNERS AND ASSIGNMENT RIGHTS OVER TH E PARTNERSHIP AND ITS PROPERTIES IN FAVOUR OF THE CONTINUING PARTNERS/FIR M. FURTHER IT HAS BEEN SPECIFICALLY MENTIONED THAT THE CAPITAL ACCOUNT BAL ANCE RS. 35,59,84,050/- PAYABLE TO THE RETIRING PARTNER IN FULL AND FINAL S ETTLEMENT OF HIS CLAIM IN THE CAPITAL AND ASSETS OF THE FIRM AND THIS FUND WILL B E BROUGHT BY THE CONTINUING PARTNERS. IN THE CASE OF THE ASSESSEE THERE IS NO SUCH CLAUSE S IN THE RETIREMENT DEED. 4. THIS CASE WAS DECIDED ON THE BASIS OF RECEIVING LUM P SUM PAYMENT BY THE RETIRING PARTNER IN CONSIDERATION OF HIS ASSIGNING OR RELINQUISHING HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR O F THE CONTINUING PARTNERS . (PARA 49). 5. HON'BLE BENCH RELIED ON THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF TRIBUVANDAS G PATEL 115 ITR 95; CIT VS HR ASLOT 115 ITR 255 AND NA MODY VS CIT 162 ITR 420. THE CASE OF TRIBUVANDAS G PATEL IS NO LONGER GOOD LAW BECAUSE THE SAME WAS REVERSED BY SC REPORT ED IN 236 ITR 515. THE FACTS OF HR ASLOT AND NA MODY 'S CASE ARE SIMILAR TO TRIBUVANDAS G PATEL'S CASE, THEREFORE, THE SAME ALSO IMPLIEDLY OVERRULED BY HON'BLE SC. FURTHER, 6. HON'BLE BENCH HAS NOT CONSIDERED THE PRINCIPLES AND RATIO LAID DOWN BY BOMBAY HIGH COURT IN ITS LATER DECISION IN THE CASE OF PRASHANT S JOSHI VS ITO 324 ITR 154 (BOM) WHILE QUASHING THE NOTICE ISSUED U/S 148 OF INCOME TAX ACT. S.NO NAME OF CASE DIFFERENCE ON FACTS TO THE CASE OF ASSESSEE 75 2 BISHAN LAL KANODIYA VS CIT 257 ITR 499 (DELHI) IN THIS CASE IT HAS BEEN HELD THAT WITHOUT TAKING A CCOUNTS ON THE FOOTING OF NOTIONAL SALE, BY MUTUAL AGREEMENT, A RETIRING PARTNER MAY R ECEIVE AN AGREED LUMP SUM FOR GOING OUT AS AND BY WAY OF CONSIDERATION FOR TRANSF ERRING OR RELEASING OR ASSIGNING OR RELINQUISHING HIS INTEREST IN THE PARTNERSHIP AS SETS TO THE CONTINUING PARTNERS AND IF THE RETIREMENT TAKES THIS FORM AND THE DEED IN T HE BEHALF IS EXECUTED, IT WILL BE TRANSFER AND LIABLE FOR CAPITAL GAIN TAX. FURTHER MORE, HON'BLE DELHI HIGH COURT HAS FOLLOWED THE DECISION OF HON'BLE BOMBAY HIGH CO URT IN THE CASE OF TRIBHUVANDAS G PATEL REPORTED IN 115 ITR 95 (BOM) W HICH WAS REVERSED BY HONBLE APEX COURT. 3 CIT VS BHARANI PICTURES 129 ITR 244 (MAD) TWO PARTNERS WERE IN FIRM; ONE PARTNER RELINQUISHED HIS SHARE IN FAVOUR OF OTHER PARTNER. THE CONTROVERSY WAS WHETHER THE FIRM SOLD ITS ASSETS TO THE PARTNER AND WHETHER THE FIRM IS LIABLE TO PAY CAPITAL GAIN TAX. IN THIS CASES RETIREMENT OF ALL THE OLD PARTNERS, C ONTINUATION OF BUSINESS OF FIRM BY NEW PARTNERS, THE TAXABILITY OF CAPITAL GAIN WAS NO T HELD IN THE HANDS OF RETIRING PARTNERS. 4 CIT VS GURUNATH TALKIES 328 ITR 59 (KARNATAKA) FOUR PARTNERS WERE IN FIRM; TWO MORE PARTNER INTROD UCED AS INCOMING PARTNERS AND THEREAFTER ALL THE OLD FOUR PARTNERS RETIRED. NEW P ARTNERS BROUGHT AMOUNT IN THE FIRM TOWARDS THEIR CAPITAL CONTRIBUTION AND OLD PARTNERS SHARED THAT AMOUNT MINUS WDV OF ASSETS. THE CONTROVERSY WAS WHETHER THERE WAS TR ANSFER OF ASSETS OF THE FIRM TO NEWLY ADDED PARTNERS. HELD THAT PROVISIONS OF SECTI ON 45(4) ARE APPLICABLE AND FIRM IS LIABLE TO PAY CAPITAL GAIN TAX. IN THIS CASES RETIREMENT OF ALL THE OLD PARTNERS, C ONTINUATION OF BUSINESS OF FIRM BY NEW PARTNERS, THE TAXABILITY OF CAPITAL GAIN WAS NO T HELD IN THE HANDS OF RETIRING PARTNERS. 5 CIT VS A.N. NAIK ASSOCIATES 265 ITR 346 (BOMBAY) WORD 'OTHERWISE' IN SECTION 45(4) COVERS NOT ONLY T HE CASES OF DISSOLUTION BUT ALSO CASES OF SUBSISTING PARTNERS OF A PARTNERSHIP TRANS FERRING ASSETS IN FAVOUR OF A RETIRING PARTNER. IN THIS CASE NEW PARTNERS WERE IN DUCTED IN MORNING AND OLD PARTNERS RETIRED ON CLOSE OF THE BUSINESS ON THAT D AY. IN PARA 27 OF THE ORDER IT WAS HELD THAT ON RETIREMENT OF PARTNER, THE PARTNER GOT HIS SHARE, IT WAS HELD THAT THERE WAS NO EXTINGUISHMENT OF RIGHT. IN THIS CASES RETIREMENT OF ALL THE OLD PARTNERS, C ONTINUATION OF BUSINESS OF FIRM BY NEW PARTNERS, THE TAXABILITY OF CAPITAL GAIN WAS NO T HELD IN THE HANDS OF RETIRING PARTNERS. 76 6 N.A.MODY VS CIT 162 ITR 420 (BOMBAY) IN THIS CASE, LUMP SUM CONSIDERATION RECEIVED FOR A SSIGNMENT OF HIS SHARE IN THE FIRM BY PARTNER ON HIS RETIREMENT WAS HELD TO BE LI ABLE FOR CAPITAL GAIN TAX, FOLLOWING ITS EARLIER DECISION IN THE CASE OF CIT V S TRIBHUVANDAS G PATEL 115 ITR 95 . FURTHER MORE, THE DECISION OF HON'BLE GUJARAT HIG H COURT IN THE CASE OF CIT VS MOHANBHAI PAMABHAI 91 ITR 393 WAS NOT FOLLOWED B ECAUSE OF ITS DECISION IN THE CASE OF TRIBHUVANDAS G PATEL. HON'BLE SC CONFIR MED THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF MOHANBHAI PAMABHAI REPORT ED IN 165 ITR 166 (SC) AND REVERSED THE DECISION OF BOMBAY HIGH COURT GIVEN IN THE CASE OF CIT VS TRIBHUVANDAS G PATEL REPORTED IN 236 ITR 515 (SC) . FURTHER, THE BOMBAY HIGH COURT HAS ALSO CHANGED ITS EARLIER VIEW IN ITS RECE NT DECISION PRASANT S JOSHI VS ITO REPORTED IN 324 ITR 154 (BOM). HOWEVER, IN THE CASE OF THE ASSESSEE, THE RETIREMENT DEED DOES NOT SPECIFY ANY CONSIDERATION AGAINST RELINQUISHMENT OF HIS SHARE ON RETIREMENT FROM PARTNERSHIP. S.NO NAME OF CASE DIFFERENCE ON FACTS TO THE CASE OF ASSESSEE 7 CIT VS TRIBHUVANDAS G PATEL (BOM)/ 115 ITR 95/ (BOMBAY) REVERSED BY SC IN 236 ITR 515 (SC) IN THIS CASE IT HAS BEEN HELD THAT WITHOUT TAKING A CCOUNTS ON THE FOOTING OF NOTIONAL SALE, BY MUTUAL AGREEMENT, A RETIRING PARTNER MAY R ECEIVE AN AGREED LUMP SUM FOR GOING OUT AS AND BY WAY OF CONSIDERATION FOR TRANSF ERRING OR RELEASING OR ASSIGNING OR RELINQUISHING HIS INTEREST IN THE PARTNERSHIP AS SETS TO THE CONTINUING PARTNERS AND IF THE RETIREMENT TAKES THIS FORM AND THE DEED IN T HE BEHALF IS EXECUTED, IT WILL BE TRANSFER AND LIABLE FOR CAPITAL GAIN TAX. FURT HER MORE, HON'BLE BOMBAY HIGH COURT IN THIS CASE HAS NOT APPROVED THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS MOHANBHAI PAMABHAI 91 ITR 393. H ON'BLE SC CONFIRMED THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF MOHAN BHAI PAMABHAI REPORTED IN 165 ITR 166 (SC) AND REVERSED THE DECISION OF BOMBAY HI GH COURT GIVEN IN THE CASE OF CIT VS TRIBHUVANDAS G PATEL REPORTED IN 236 IT R 515 (SC). FURTHER, THE BOMBAY HIGH COURT HAS ALSO CHANGED ITS EARLIER VIEW IN ITS RECENT DECISION PRASANT S JOSHI VS ITO REPORTED IN 324 ITR 154 (BOM). HOWEV ER, ON THE FACTS THIS CASE DIFFERS FROM THE CASE OF THE ASSESSEE AS IN THE CAS E OF THE ASSESSEE, THE RETIREMENT DEED DOES NOT SPECIFY ANY CONSIDERATION AGAINST REL INQUISHMENT OF HIS SHARE ON RETIREMENT FROM PARTNERSHIP. 8 CIT VS H.R.ASLOT 115 ITR 255 (BOMBAY) IN THIS CASE, LUMP SUM AMOUNT RECEIVED BY RETIRING PARTNER FOR ASSIGNING AND RELEASING HIS SHARE IN THE PARTNERSHIP IN FAVOUR OF CONTINUING PARTNER WAS HELD TO BE LIABLE FOR CAPITAL GAIN TAX, FOLLOWING ITS EARLI ER DECISION IN THE CASE OF CIT VS TRIBHUVANDAS G PATEL 115 ITR 95 2.16 IN THE REJOINDER, THE LD. AR SUBMITTED THAT TH E NAME OF THE FIRM IS MENTIONED IN HAND WRITING WHILE THE ENTIRE LETTER STANDS TYPED. THE LD. AR ALSO FILED THE COPIES OF THE ORDER SHEET FROM THE FILE MAINTAINED IN THE OFFICE OF JDA. THE ORDER SHEET ENTRY SHOWED THAT THE REQUEST WAS MADE BY M/S. PCPL COMPANY FOR ISSUING A SINGLE UNIT PATTA. WE ARE 77 NOT AWARE AS TO HOW THE NAME OF THE FIRM HAS BEEN M ENTIONED IN THE COPY OF LETTER FILED BY THE LD. DR. SUCH ENTRY MAY BE A SUBSEQUENT INTE RPOLATION. 2.17 WE HAVE HEARD BOTH THE PARTIES. THE COPY OF PA RTNERSHIP DEED DATED 15-07-2006 IN WHICH THE ASSESSEE AND SHRI JITENDRA AGARWAL WER E PARTNERS IS AVAILABLE AT PAGES 31 TO 33 OF THE PAPER BOOK. THE PARTNERSHIP WAS A PARTNER SHIP AT WILL. AS PER CLAUSE 13 OF THE PARTNERSHIP DEED , IT WAS PROVIDED THAT THE PARTNER S IF DEEM PROPER AND IN THEIR INTEREST MAY ADMIT ANY OTHER PERSON OR PERSONS AS PARTNERS O N THE TERMS AND CONDITIONS AS MAY BE MUTUALLY AGREED AMONG THEMSELVES.. THE BANK ACCOUNT WAS TO BE OPERATED EITHER SINGLY OR JOINTLY BY THE PARTNERS. THE NET PROFIT OR LOSS AFTER DEDUCTION OF ALL EXPENSES AND OUTGOING SHALL BE DIVIDED BETWEEN THE PARTNERS IN P ROPORTION TO THEIR SHARING RATIO I.E. 75% AND 25% IN FAVOUR OF THE ASSESSEE AND SHRI JITE NDRA AGARWAL RESPECTIVELY. THE COPY OF PARTNERSHIP DEED AS ON 19-01-2007 IS AVAILABLE A T PAGES 34 TO 40 OF THE PAPER BOOK. IN THIS DEEDS, IT IS MENTIONED THE FIRM IS HAVING A L AND MEASURING 33986.97 SQ. YARD IN STOCK IN TRADE AND ENTERED INTO AN AGREEMENT FOR CO NSTRUCTING THE BUILDING OF MULTISTORIED RESIDENTIAL / COMMERCIAL UNITS WITH M/S.GOLD DREAM BUILDERS AND DEVELOPER AS ON 30-09- 2006. IT IS MENTIONED THAT CONTINUING PARTNERS I.E. ASSESSEE AND THE SHRI JITENDRA AGARWAL WERE MAINLY ENGAGED IN THEIR OWN BUSINESS OBLIGATIO N, OFFERED THE MERGING THE FIRMS I.E. M/S.GOLD DREAM BUILDERS AND DEVELOPER IN THE BUSIN ESS OF THE FIRM OF M/S.KRISHNA VILLA APARTMENT AS A GOING CONCERN AND OFFERED THE PART NERS OF THE MERGING FIRM TO BECOME THE PARTNERS OF THE FIRM IN VIEW OF THE CONSIDERA TION OF THE EXPERTISE OF THE MERGING FIRM IN DEVELOPING A MULTISTORIED BUILDING FOR MARKETING OF TURNKEY / HUGE PROJECT AND ITS FINANCIAL POSITION. THE PARTNERS OF THE MERGING FIR M GAVE THEIR CONSENT FOR THE SAME AND INCOMING PARTNERS HAVE ENTERED INTO A TAKE OVER AGR EEMENT ON 18-01-2007. AS PER 78 AGREEMENT OF TAKEOVER, STOCK IN TRADE OF THE FIRM W AS REVALUED AT ITS CURRENT MARKET VALUE AND DIFFERENCE IN BOOK VALUE AND REVALUED VALUE WA S TO BE TRANSFERRED TO THE CAPITAL ACCOUNT OF THE CONTUNING PARTNERS I.E. ASSESSEE AND SHRI JITENDRA AGARWAL. IN VIEW OF SUCH TAKE OVER AGREEMENT, THE NEW PARTNERS WERE ADMITTED .. 2.18 WE HAD ALREADY MENTIONED THAT THE CLAUSE 13 OF THE PARTNERSHIP DEED DATED 15-07- 2007 PROVIDED THE PARTNERS TO ADMIT OTHER PARTNERS ON THE TERMS AND CONDITIONS AS MAY BE MUTUALLY AGREED UPON. THUS THE TERMS AND CONDITIONS WAS THAT STOCK IN TRADE WILL BE REVALUED AND THE MERGING FIRM WILL PROVIDE ITS EXPE RTISE AND FINANCIAL POSITION AND THEY WERE TO HAVE BENEFIT OF DEVELOPMENT AGREEMENT. THE DEVELOPMENT AGREEMENT WAS TO BUILD A HOUSING COMPLEX/ COMMERCIAL COMPLEX BUILDIN G IN WHICH BOTH THE FIRMS WOULD HAVE RIGHT TO SOME EXTENT. IN ABSENCE OF ANY DETAIL S OF SHARING OF THE BUILT UP AREA BETWEEN TWO FIRMS, WE ARE UNABLE TO COMMENT FURTHER . BUT IT IS CLEAR THAT MERGING FIRM WILL GET THE BENEFIT OF THE PROJECT. THE SHARE OF P ROFIT TO THE ERSTWHILE PARTNERS WAS TO THE EXTENT OF 50% IN THE FIRM CONSTITUTED ON 19-01-2007 . AS PER CLAUSE 12OF THE PARTNERSHIP DEED, IT IS MENTIONED THAT NO PARTNER SHALL MORTGAG E OR CHARGE HIS SHARE INTO PARTNERSHIP OR ANY PART THEREOF OR MAKE ANY PERSON A PARTNER WITH HIM WITHOUT WRITTEN PREVIOUS CONSENT OF OTHER PARTNERS. THE THREE PARTNERS OF M/S.GOLD D REAM BUILDERS AND DEVELOPER WERE CONSIDERED AS WORKING PARTNERS IN THE PARTNERSHIP DEED DATED 19-01-207 AND SUCH PARTNERS WERE TO BE ALLOWED REMUNERATION IN THE RAT IO AS MUTUALLY DECIDED. THESE PARTNERS WERE REQUIRED TO DEVOTE THEIR TIME AND AT TENTION TO THE CONDUCT OF THE AFFAIRS / DAY TODAY WORKING OF THE FIRM. 2.19 THUS THE FIRM M/S.KRISHNA VILLA APARTMENT GOT BENEFIT OF THE SERVICES OF THREE PARTNERS OF ERSTWHILE M/S.GOLD DREAM BUILDERS AND D EVELOPER. CLAUSE 16 OF THE 79 PARTNERSHIP DEED STATED THAT ANY PERSON CAN INCLUDE IN THE FIRM AS NEW PARTNER ONLY AFTER THE CLEAR AND MUTUAL CONSENT OF ALL THE PARTNERS. IT WAS FURTHER PROVIDED THAT ANY EXISTING PARTNER CAN ALSO BUY THE SHARE/INTEREST OF ANY OTHE R PARTNER. IF THE PARTNERS WANTS TO RETIRE FROM THE FIRM THEN HE HAS TO GIVE CLEAR NOTICE TO O THER REMAINING PARTNERS AND THE RETIRING PARTNER WILL NOT CLAIM ANY SHARE IN GOOD WILL OF TH E FIRM. IT WAS FURTHER PROVIDED THAT NO PARTNER CAN SUBSTITUTE HIMSELF WITH ANY OTHER PERSO N IN THE BUSINESS OF THE FIRM EXCEPT HIS LEGAL HEIRS. 2.20 WHEN SHRI JITENDRA AGARWAL RETIRED FROM THE FI RM THEN ANOTHER PARTNERSHIP DEED WAS EXECUTED ON 10-02-2007 AND IT IS AVAILABLE AT P AGES 41 TO 48 OF THE PAPER BOOK. IN THIS DEED, IT IS CLEARLY MENTIONED THAT SHRI JITEND RA AGARWAL DUE TO HIS OTHER BUSINESS OBLIGATIONS GAVE NOTICE TO OTHER PARTNERS OF HIS FI RM TO RETIRE FROM THE FIRM W.E.F. 10-02- 2007. THE CLAUSES IN THIS PARTNERSHIP DEED ARE SIMI LAR TO THE CLAUSES IN PARTNERSHIP DEED DATED 19-01-2007. IN THE PARTNERSHIP DEED DATED 10- 01-2007, SHRI JITENDRA AGARWAL WAS HAVING A PROFIT SHARING RATIO OF 12.5%. THE SHARES OF OTHER PARTNERS WERE AS UNDER:- 1. ASSESSEE 37.5% 2. SHRI SHANKAR M JETHANI 25% 3. SHRI ARUN BANSAL 8.03% 4. SHRI MERAJ UN NABI KHAN 8.94% 5. SHRI NAVED SAIDI 8.03% 2.21 IN THE PARTNERSHIP DEED EXECUTED N 10-02-2007, THE PROFIT SHARING RATIO WAS AS UNDER:- 1. ASSESSEE 40% 2. SHRI SHANKAR M JETHANI 30% 3. SHRI ARUN BANSAL 10% 4. SHRI MERAJ UN NABI KHAN 10% 5. SHRI NAVED SAIDI 10% 80 FROM THE ABOVE, IT IS CLEAR THAT PROFIT SHARING RAT IO OF 12.5% OF SHRI JITENDRA AGARWAL WAS NOT TRANSFERRED TO THE FOUR PARTNERS OF ERSTWHILE M /S.GOLD DREAM BUILDERS AND DEVELOPER IN CASE THE INTENTION WAS TO TRANSFER THE LAND TO T HE FOUR PERSONS OF THE ERSTWHILE M/S.GOLD DREAM BUILDERS AND DEVELOPER THEN SHARE OF THE ERST WHILE PARTNERS OF M/S.GOLD DREAM BUILDERS AND DEVELOPER SHOULD HAVE BEEN INCREASED B Y THE SHARE OF SHRI JITENDRA AGARWAL. THE SHARE OF THE ASSESSEE ALSO STOOD INC REASED FROM 37.5% TO 40%. THIS FACT INDICATE THAT THE TRANSACTION OF FORMING FRESH DEED IS GENUINE AND NOT SHAM. 2.22 THE ASSESSEE ALSO RETIRED FROM THE FIRM ON 19- 03-2007 AND FRESH PARTNERSHIP DEED WAS EXECUTED AND I.E. AVAILABLE AT PAGES 49 TO 53 OF THE PAPER BOOK.. IN THIS DEED, IT IS MENTIONED THAT THE ASSESSEE DUE TO HIS NON-AVAILABI LITY FOR THE BUSINESS OF THE FIRM HAS GIVEN NOTICE TO THE CONTINUING PARTNERS OF HIS DESI RE TO RETIRE FROM PARTNERSHIP DEED W.E.F 18-03-2007. THIS WAS ACCEPTED BY THE CONTINUING PAR TNERS. IN THE PARTNERSHIP DEED DATED 19-03-2007, THE CLAUSES IN RESPECT OF RETIREMENT O F THE PARTNERS, THE ASSIGNMENT OF RIGHT OF THE PARTNERS AND ADMISSION OF NEW PARTNERS ARE T HE SAME AS IN THE EARLIER PARTNERSHIP DEED. 2.23 IN THE DOCUMENTARY EVIDENCES FILED BEFORE THE LOWER AUTHORITIES, IT IS CLEARLY MENTIONED THAT BOTH THE PARTNERS HAVE RETIRED ON A CCOUNT OF THEIR OTHER COMMITMENT RELATING TO THEIR OWN BUSINESS. IT IS NOT THE CONTE NTION OF THE REVENUE THAT SUCH FACTS MENTIONED IN THE PARTNERSHIP DEED ARE FACADE. SHAM MEANS WHICH IS GOOD IN APPEARANCE BUT FALSE IN FCTS. THE WORD SHAM ALSO MEANS THAT THE ACT DONE BY DOCUMENT EXECUTED BY HE PARTIES TO THE SHAM WHICH ARE INTENDED BY THEM , TO GIVE TO THIRD PARTIES OR TO THE COURT, THE APPEARANCE OF CREATING BETWEEN THE PARTI ES LEGAL RIGHTS AND OBLIGATIONS DIFFERENT FROM THE ACTUAL LEGAL RIGHTS AND OBLIGATI ONS (IF ANY) WHICH THE PARTIES INTENDED TO 81 CREATE. THE ONUS IS ON THE PARTY WHICH WANTS TO PLE AD THAT THE TRANSACTION IS SHAM. THE CLAUSES IN THE PARTNERSHIP DEED AND ARGUMENTS OF TH E LD. AR INDICATE THAT THE MERGER OF THE FIRM WAS NOT SHAM TRANSACTION. THE THREE PART NERS OF THE MERGED FIRM I.E. M/S.GOLD DREAM BUILDERS AND DEVELOPER WERE REQUIRED TO LOOK AFTER THE DAY TO DAY AFFAIRS AND THEY WERE ENTITLED TO REMUNERATION. THE FIRM M/S.GOLD DR EAM BUILDERS AND DEVELOPER WAS HAVING EXPERTISE IN BUILDING THE PROJECT AND MARKE TING IT. 2.24 THE FIRM M/S.KRISHNA VILLA APARTMENT ENTERED I NTO AN AGREEMENT FOR DEVELOPING THE LAND AND THIS SHOWS THAT M/S.KRISHNA VILLA APAR TMENT WAS NOT HAVING REQUISITE FUNDS. BOTH THE FIRMS WERE HAVING THEIR OWN RIGHTS IN THE DEVELOPMENT AGREEMENT AND BY MERGER OF TWO FIRMS SUCH RIGHTS BELONG TO RECONSTITUTED FI RM M/S.KRISHNA VILLA APARTMENT FIRM. 2.25 THE LD. CIT(A) HAS RELIED UPON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF MC DOWEL (SUPRA). THE HON'BLE APEX COURT IN THE CAS E OF UNION OF INDIA VS. AZAD BACHAO ANDOLAN 263 ITR 706 HAD AN OCCASION TO CONS IDER THE LAW LAID DOWN IN THE CASE OF MC DOWELL COMPANY LTD. (SUPRA). THE HON'BLE APEX COURT IN THE CASE OF UNION OF INDIA VS. AZAD BACHAO ANDOLAN (SUPRA) OBSERVED AS UNDER:- WE MAY ALSO REFER TO THE JUDGMENT OF THE GUJARAT HIGH COURT IN BANYAN AND BERRY V. COMMISSIONER OF INCOME -TAX [1996] 222 ITR 831 AT 850 WHERE REFERRING TO MCDOWELL'S CA SE [1985] 154 ITR 148 (SC), THE COURT OBSERVED :- 'THE COURT NOWHERE SAID THAT EVERY ACTION OR INACTI ON ON THE PART OF THE TAXPAYER WHICH RESULTS IN REDUCTION OF TAX LIABILITY TO WHICH HE MAY BE SUBJECTED IN FUTURE, IS TO BE VIEWE D WITH SUSPICION AND BE TREATED AS A DEVICE FOR AVOIDANCE OF TAX IRRESPECTIVE OF LEGITIMACY OR GENUINENESS OF THE AC T ; AN INFERENCE WHICH UNFORTUNATELY, IN OUR OPINION, THE TRIBUNAL A PPARENTLY APPEARS TO HAVE DRAWN FROM THE ENUNCIATION MADE IN MCDOWELL'S CASE [1958] 154 ITR 148 (SC). THE RATIO OF ANY DECI SION HAS TO BE UNDERSTOOD IN THE CONTEXT IT HAS BEEN MADE. THE FAC TS AND CIRCUMSTANCES WHICH LEAD TO MCDOWELL'S DECISION LEA VE US IN NO DOUBT THAT THE PRINCIPLE ENUNCIATED IN THE ABOVE CA SE HAS NOT 82 AFFECTED THE FREEDOM OF THE CITIZEN TO ACT IN A MAN NER ACCORDING TO HIS REQUIREMENTS, HIS WISHES IN THE MANNER OF DOING ANY TRADE, ACTIVITY OR PLANNING HIS AFFAIRS WITH CIRCUMSPECTIO N, WITHIN THE FRAMEWORK OF LAW, UNLESS THE SAME FALL IN THE CATEG ORY OF COLOURABLE DEVICE WHICH MAY PROPERLY BE CALLED A DE VICE OR A DUBIOUS METHOD OR A SUBTERFUGE CLOTHED WITH APPAREN T DIGNITY.' THIS ACCORDS WITH OUR OWN VIEW OF THE MATTER. IN CWT V. ARVIND NAROTTAM [1988] 173 ITR 479 (SC ), A CASE UNDER THE WEALTH-TAX ACT, THREE TRUST DEEDS FO R THE BENEFIT OF THE ASSESSEE, HIS WIFE AND CHILDREN IN IDENTICAL TE RMS WERE PREPARED UNDER SECTION 21(2) OF THE WEALTH-TAX ACT. THE REVE NUE PLACED RELIANCE ON MCDOWELL'S CASE [1985] 154 ITR 148 (SC) . BOTH THE LEARNED JUDGES OF THE BENCH OF THIS COURT GAVE SEPA RATE OPINIONS. CHIEF JUSTICE PATHAK, IN HIS OPINION SAID (AT PAGE 486) : 'RELIANCE WAS ALSO PLACED BY LEARNED COUNSEL FO R THE REVENUE ON MCDOWELL AND CO. LTD. V. CTO [1985] 154 ITR 148 (SC). THAT DECISION CANNOT ADVANCE THE CASE OF THE REVENUE BECAUSE THE LANGUAGE OF THE DEEDS OF SETTLEMENT IS PLAIN AND ADMITS OF NO AMBIGUITY.' JUSTICE S. MUKHARJI SAID, AFTER NOTICING MCDOWELL' S [1985] 154 ITR 148 (SC) CASE (AT PAGE 487) : 'WHERE THE TRUE EFFECT ON THE CONSTRUCTION OF THE DEEDS IS CLEAR, AS IN THIS CASE, THE APPEAL TO DISCOURAGE TA X AVOIDANCE IS NOT A RELEVANT CONSIDERATION. BUT SINCE IT WAS MADE, IT HAS TO BE NOTED AND REJECTED.' IN MATHURAM AGRAWAL V. STATE OF MADHYA PRADESH [1 999] 8 SCC 667 AT PARA. 12 ANOTHER CONSTITUTION BENCH HA D OCCASION TO CONSIDER THE ISSUE. THE BENCH OBSERVED (PAGE 673) : WE ARE UNABLE TO AGREE WITH THE SUBMISSION THAT AN ACT WHICH IS OTHERWISE VALID IN LAW CAN BE TREATED AS N ON EST MERELY ON THE BASIS OF SOME UNDERLYING MOTIVE SUPPOSEDLY RESU LTING IN SOME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INT ERESTS, AS PERCEIVED BY THE RESPONDENTS HENCE TAX PLANNING WITHIN FOUR CORNERS OF LAW IS PE RMISSIBLE. 83 2.26 IN THE INSTANT CASE, WE HAVE NOTICED THAT THE LAND IS STOCK IN TRADE OF THE FIRM. THE HON'BLE APEX COURT IN THE CASE OF SHAKTING TRADING CO. VS. CIT, 250 ITR 871 HELD THAT WHEN THERE IS NO CESSATION OF BUSINESS THEN THE CLO SING STOCK HAD TO BE VALUED AT COST OR MARKET PRICE WHICHEVER WAS LOWER. IT IS AN ESTABLIS HED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY THAT WHERE THERE IS NO DISCONTINUATION OF BUSINESS THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. THE HON'BLE APEX COURT IN THE CASE OF IN THE CHAINLSUKH SAMPAT RAM , 34 ITR 481 HAD AN O CCASION TO CONSIDER THE IMPORTANCE OF ADOPTING THE CLOSING STOCK IN THE TRADING ACCOUN T. THE CLOSING STOCK SHOWN ON THE CREDIT SIDE OF THE TRADING ACCOUNT IS TO BALANCE TH E COST OF PURCHASES AS REMAINED AT THE END OF THE YEAR AND DEBITED IN THE PURCHASES ACCOUN T. IN CASE THE MARKET PRICE IS LESS THAN THE COST PRICE THEN ANTICIPATED LOSS CAN BE TAKEN I NTO ACCOUNT BUT ANTICIPATED PROFIT IN SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT AS NO PRUDENT TRADER WILL CARE TO SHOW THE INCREASE IN TH E PROFIT BEFORE ACTUAL REALIZATION. 2.27 BEFORE US, THE LD. AR HAS REFERRED TO ASSESSME NT ORDER OF THE FIRM FOR THE ASSESSMENT YEAR 2008-09. THE AO WHILE MAKING ASSESS MENT FOR THE ASSESSMENT YEAR 2008-09 IN THE CASE OF THE FIRM HAS NOT ALLOWED DED UCTION ON ACCOUNT OF REVALUATION RELATING TO PART OF THE ELAND WHICH HAS BEEN SOLD. THUS THE AO IN THE CASE OF THE FIRM HAS TAXED THE PROFIT ON THE BASIS OF THE COST PRICE OF THE LAND AND THEREFORE, THE ANTICIPATED PROFIT ON ACCOUNT OF REVALUATION HAS NOT ACCRUED T O THE PARTNERS TO BE ASSESSED. 2.28 THE HON'BLE APEX COURT IN THE CASE OF ALA FIRM VS. CIT, 189 ITR 285 HAS REFERRED TO THE DECISION OF IN THE CASE OF N. MUHAM MAD USSAIN SAHIB AND ANOTHER VS. S.N. ADBUL GAFOOR SAHIB AND OTHERS, AIR (37) 1950 7 58 AT PAGE 306 AND MENTIONED THAT VALUATION OF THE ASSETS DURNG THE SUBSISTENCE OF TH E PARTNER IS AN IMMATERIAL AND CAN BE 84 EVEN NOTIONAL. IN THE CASE OF S.N. ABDUL GAFOOR SAH IB (SUPRA), THE HON'BLE APEX COURT OBSERVED THE ASSET AT BOOK VALUE CONTINUES TO BEL ONG TO THE FIRM OF WHATEVER FLUCTUATIONS THERE MAY BE IN THE VALUE OF THAT ASSE T, THE BENEFIT OR THE LOSS OF IT COULD ACCRUE TO THE FIRM 2.29 THE LD. DR HAS REFERRED TO THE ORDER OF THE MU MBAI BENCH IN THE CASE OF SUDHAKAR M SHETTY (SUPRA). IN THAT CASE, ONE OF THE PARTY TH REW HIS ASSETS INTO THE FIRM AND FORMED THE PARTNERSHIP. SUCH THROWING OF ASSETS INTO THE F IRM IS TRANSFER U/S 45(3) OF THE ACT . IN THAT CASE, THE CAPITAL ASSETS WERE REVALUED. THE I TAT MUMBAI HAS OBSERVED THAT THERE IS DIVERGENCE OF VIEW ON THE QUESTION AS TO WHETHER TH ERE IS ANY TRANSFER AT ALL BY THE FIRM IN FAVOUR OF THE RETIRING PARTNER OR BY THE RETIRING P ARTNER IN FAVOUR OF THE ASSESSEE AND ITS CONTINUING PARTNER. THE MUMBAI TRIBUNAL IN THAT CAS E OBSERVED THAT IF INSTEAD OF QUANTIFYING HIS SHARE BY TAKING ACCOUNTS ON FOTTING S OF NOTIONAL SALE, PARTIES AGREES TO PAY A LUMPSUM IN CONSIDERATION OF RETIRING PARTNER ASSI GNING OR RELINQUISHING HIS SHARE OR RIGHT IN PARTNERSHIP AND ITS ASSETS IN FAVOUR OF CO NTINUNG PARTNERS, TRANSACTION WOULD AMOUNT TO A TRANSFER WITHIN MEANING OF SECTION 2(47 ) OF THE ACT. SECTION 2(47) REFERS TO TRANSFER OF CAPITAL ASSETS. IT IS NOT APPLICABLE TO THE TRANSFER OF STOCK IN TRADE EITHER BY SALE OR OTHERWISE AS THAT IS TAXABLE UNDER THE HEAD BUSINESS INCOME . IN THE CASE BEFORE THE MUMBAI TRIBUNAL, THERE WAS A LUMPSUM PAYMENT. 2.30 ON SIMILAR FACTS, ITAT JODHPUR BENCH IN THE CA SE OF ITO VS. SHRI HANUMAN DAS SIPANI (HUF) (ITA NO. 247/JU/2008 DATED 22-03-2011 DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. IT WILL BE USEFUL TO REPRODUCE THE PARA 6 FROM THAT ORDER. 6. WE HAVE HERD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THOROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE A SSESSEE IS A RETIRED PARTNER. THE REVALUATION TOOK PLACED IN THE BOOKS O F ACCOUNT OF THE FIRM, AS 85 A RESULT OF WHICH HE FIXED ASSETS I.E. LAND AND BUI LDING VALUE BEING INFLATED AND THE PARTNERS CAPITAL ACCOUNTS WERE CREDITED IN THEIR RESPECTIVE PROFIT SHARE RATIO. ACCORDINGLY, THE ASSESSEE BEING THE PA RTNERS I THE FIRM, HIS CAPITAL ACCOUNT WAS CREDITED WORTH RS. 8,03,400/-. ACCORDING TO THE LD. CIT(A) , SECTION 45(4) HAS NO APPLICATION TO THE AS SESSEE'S CASE AND SAME VIEW AS EXPRESSED BY THE TRIBUNAL IN THE CASE OF A CIT VS. SMT. SHANTY DEVI SIPANI (ITA NO.399/JU/07 DATED 19-02-2008), (S UPRA), THAT ANYTHING DONE BY THE FIRM AND ANY ENTRY MADE IN THE BOOKS CA NNOT BE TAXED IN THE HANDS OF THE PARTNER. SINCE PARTNERS ARE CONSISTENT ENTITIES AND SEPARATE FROM THE FIRM, ANY INCOME OF THE FIRM CANNOT BE TAX ED, PER SE, IN THE HANDS OF THE PARTNER. THE REVALUATION ENTRY IN THE BOOKS OF ACCOUNTS OF THE FIRM IS NOTIONAL AND UNILATERAL ACT. AS PER THE PROVISIONS OF SECTION 10(2)(A), THE PARTNERS SHARE IN THE TOTAL INCOME OF THE FIRM IS EXEMPT. THEREFORE, THE PROVISIONS OF SECTION 45(4) RELATE TO THE CASE OF P ARTNERSHIP FIRM ONLY AND NOT THAT OF ITS PARTNERS. ANY AMOUNT CREDITED IN TH E CAPITAL ACCOUNT OF A RETIRED PARTNER UPON REVALUATION OF ASSETS OF FIRM IS NOT TAXABLE AS A CAPITAL GAIN AS THERE IS NO TRANSFER. IN THE CASE OF CIT VS . R LINGMALLU (RAGHUKMAR 247 ITR 801) (SC), IT WAS HELD THAT THER E WAS NO ELEMENT OF TRANSFER OF INTEREST IN PARTNERSHIP ASSETS BY THE R ETIRED PARTNER TO THE CONTINUING PARTNERS AND THE AMOUNT RECEIVED BY HIM WAS NOT ASSESSABLE TO CAPITAL GAINS. IN VIEW OF THE ABOVE FACTS AND THE D ECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF R LUNGMALLU RAGHUKUMAR (SUPRA), WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A). THIS GROUND OF APPEAL RAISED BY THE REVENUE IS DISMISSED. 2.31 THE PARTNERS SHARE IN THE PARTNERSHIP IS A BU NDLE OR RIGHTS. AS PER THE CLASSICAL ENGLISH PARTNERSHIP LAW CITED BY LINDAY, ABD ADOPT ED BY INDIAN COURTS IN NARAYANAPA VS. BHASKARA KRISHNAPA (AIR 1966 SC 1300) AND DEWA S CINE CORPORATION 68 ITR 240 (SC), A PARTNERS MONETARY RIGHTS ARE TWO FOLDS. FI RSTLY , DURING HIS TENURE AS PARTNER, WHEREAS HE HAS NO SPECIFIC RIGHT IN ANY INDIVIDUAL ASSET OF THE PARTNERSHIP , HIS RIGHT IS 86 ONLY TO RECEIVE HIS SHARE OF PROFIT. SECONDLY, ON DISSOLUTION OR RETIREMENT, HE HAS A RIGHT TO A SHARE IN THE NET ESTATE OF THE FIRM (I.E. ASSE TS MINUS LIABILITIES AND WINDING UP EXPENSES VALUED ON THE BAIS OF A NTOINAL SALE ) AS ON THE DATE OF THE RETIREMENT OR DISSOLUTION. THIS BUNDLE OF RIGHT CONSTITUTES THE SHARE OF THE PARTNER. SO WHEN A PARTNER RETIRES, THE ACCOUNTS OF THE FIRM WAS MADE UP VAL UING THE ASSETS ON BASIS OF A NOTIONAL SALE, THE LIABILITIES AND NOTIONAL WINDING UP EXPEN SES ARE DEDUCTED AND THE AMOUNT DUE TO THE RETIRING PARTNER TOWARDS HIS SHARE , AS WORKED OUT BY THIS ARITHMETIC, IS DETERMINED AS PAYABLE TO HIM. ON RETIREMENT, THE RETIRING PARTNER S TAKES AWAY HIS MONEY AND THE SHARE OF THE CONTINUING PARTNERS REMAINED INTACT. THERE I S NO TRANSFER OF ANY PROPERTY FROM THE RETIRING PARTNERS TO THE CONTINUING PARTNERS. OF CO URSE, IF AN ASSESSEE ASSIGNS HIS SHARE TO THE PARTNER AS PROFIT AS PER SECTION 29 OF THE PAR TNERSHIP ACT, THEN IT WILL CONSTITUTE THE TRANSFER. IN THE PARTNERSHIP DEED, IT WAS CLEARLY M ENTIONED THAT CONTINUING PARTNER CAN BUY OR SALE THE SHARE OF THE RETIRED PARTNER. HERE , IT IS NOT THE CASE WHERE THE SHARE HAS BEEN PURCHASED BY ANY ONE PARTNER OR ALL THE PARTNERS . THE PARTNER HAS RETIRED AS PER RELEVANT PROVISIONS OF PARNTERSHP ACT. MOREOVER, IN THE CASE BEFORE BOMBAY TRIBUNAL, THE ISSUE WAS THAT RETIRING PARTNER WAS PAID A LUMSUM. THE RE TIRING PARTNR CAN HAVE A RIGHT TO ASSIGN HIS SHARE. HERE IT CANNOT BE A CASE OF TRANSFER. TH E HON'BLE APEX COURT IN THE CASE OF SUNIL SIDHARTHA VS. CIT, 156 ITR 509 HELD THAT INTR ODUCTION OF CAPITAL ASSET BY THE PARTRNER IS A TRANSFER BUT THE CONSIDERATION AS REF LECTED IN THE BOOKS CANNOT BE CONSIDERED AS A CONSIDERATION FOR THE PURPOSE OF CAPITAL ACCOU NT. THE HON'BLE APEX COURT IN THE CASE OF SUNIL SIDDHARTHBHAI, 156 ITR 509 HELD THAT INTRO DUCTION OF CAPITAL ASSET BY THE PARTNER IS TRANSFER BUT THE CONSIDERATION AS REFLECTED IN T HE BOOKS CANNOT BE CONSIDERED AS A 87 CONSIDERATION FOR THE PURPOSE OF CAPITAL GAIN. THE HON'BLE APEX COURT AT PAGE 522 HAS OBSERVED AS UNDER:- WHAT IS THE PROFIT OR GAINS WHICH CAN BE SAID TO ACCRUE OR ARISE TO THE ASSESSEE WHEN LIE MAKES OVER HIS PERSONAL ASSE T TO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL ? THE CONS IDERATION, AS WE HAVE OBSERVED, IS THE RIGHT OF A PARTNER DURING THE SUB SISTENCE OF THE PARTNERSHIP TO GET HIS SHARE OF PROFITS FROM TIME TO TIME AND AFTER THE DISSOLUTION OF THE PARTNERSHIP OR WITH HIS RETIREMENT FROM THE PARTNER SHIP, TO RECEIVE THE VALUE OF THE SHARE IN THE NET PARTNERSHIP ASSETS A S ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER DEDUCTION OF LIABI LITIES AND PRIOR CHARGES. WHEN HIS PERSONAL ASSET MERGES INTO THE CAPITAL OF THE PARTNERSHIP FIRM, A CORRESPONDING CREDIT ENTRY IS MADE IN THE PARTNER'S CAPITAL ACCOUNT IN THE BOOKS OF THE PARTNERSHIP FIRM, BUT THAT ENTRY IS M ADE MERELY FOR THE PURPOSE OF ADJUSTING THE RIGHTS OF THE PARTNERS IN TER SE WHEN THE PARTNERSHIP IS DISSOLVED OR THE PARTNER RETIRES. IT EVIDENCES NO DEBT DUE BY THE FIRM TO THE PARTNER. INDEED, THE CAPITAL REPRE SENTED BY THE NOTIONAL ENTRY TO THE CREDIT OF THE PARTNER'S ACCOUNT MAY B E COMPLETELY WIPED OUT BY LOSSES WHICH MAY BE SUBSEQUENTLY INCURRED BY TH E FIRM, EVEN IN THE VERY ACCOUNTING YEAR IN WHICH THE CAPITAL ACCOUNT IS CREDITED. HAVING REGARD TO THE NATURE AND QUALITY OF THE CONSIDERATI ON WHICH THE PARTNER MAY BE SAID TO ACQUIRE ON INTRODUCING HIS PERSONAL ASS ET INTO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, IT CANNOT BE SAID THAT ANY INCOME OR GAIN ARISES OR ACCRUES TO THE ASSESSEE IN THE TRUE COMMERCIAL SENSE WHICH A BUSINESSMAN WOULD UNDERSTAND AS REAL INCOME OR GA IN. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE O F CIT VS. MARUDHAR HOTEL (P) LTD. 269 ITR 310 HAD AN OCCASION TO CONSIDER THE ABOVE D ECISION OF HON'BLE APEX COURT AND HELD THAT THERE IS ONLY NOTIONAL CONSIDERATION. THE HON'BLE JURISDICTIONAL HIGH COURT OBSERVED AS UNDER:- 88 IT IS ONLY WHERE A TRANSFER OF PROPERTY IS FOR I NADEQUATE CONSIDERATION, THAT THE QUESTION OF FINDING THE M ARKET PRICE CAN ARISE. AS NOTICED ABOVE WHEN AN ASSET IS BROUGHT INTO PARTNE RSHIP THE CONTRIBUTOR PARTNER ACQUIRES IN CONSIDERATION THE RIGHT TO OBT AIN HIS SHARE IN THE PROFITS FROM TIME TO TIME AND ALSO THE RIGHT TO SHARE IN T HE NET ASSETS OF THE FIRM ON ITS DISSOLUTION OR ON HIS RETIREMENT IN ACCORDA NCE WITH THE PROVISIONS OF THE PARTNERSHIP ACT AND THE TERMS OF THE PARTNERSH IP AGREEMENT. ALL THESE RIGHTS FRUCTIFY IN FUTURE. THE CREDIT TO HIS CAPIT AL ACCOUNT IS ONLY A NOTIONAL VALUE AND NOT THE VALUE OF CONSIDERATION AS THE SAM E IS INCAPABLE OF DETERMINATION. HENCE, WHEN PARTNERSHIP WAS RECONSTITUTED BY THE AD MITTING THE PARTNERS OF M/S.GOLD DREAM BUILDERS AND DEVELOPER THEN THE CONSIDERATION WAS NOT CONSIDERED FOR GIVING DIFFERENCE BETWEEN THE MARKET VALUE OF THE LAND AND THE COST PRICE AS CONSIDERATION TO THE EXISTING PARTNERS. 2.32 THE AO IN HIS ORDER HAS NOT TAXED RS. 5,24,47, 943/- AS INCOME UNDER THE HEAD CAPITAL GAIN. SECTION 45(3) AND SECTION 45(4) WERE INTRODUCED TO PLUG THE LOOPHOLES OF AVOIDING TAX BY THROWING THE CAPITAL ASSETS IN THE FIRM AND THEREAFTER TRANSFERRING THE SAME TO OTHER PARTNER THROUGH DISSOLUTION OF THE FIRM. T HE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. GURUNATH TALKIES 328 ITR 59 HAD A N OCCASION TO CONSIDER THE CASE IN WHICH THE FACTS WERE SIMILAR TO THE FACTS IN THE IN STANT CASE. THE ONLY DIFFERENCE WAS IN THAT CASE THAT THE ASSET WAS NOT STOCK IN TRADE. AS A RESULT OF SERIES OF TRANSACTIONS OF RECONSTITUTION OF THE FIRM TWICE, THE HON'BLE KAR NATAKA HIGH COURT HELD THAT THE SECTION 45(4) WILL BE APPLICABLE AND THE DIFFERENCE WAS TO BE TAXED IN THE HANDS OF THE FIRM. HERE THE SAME AO WHILE PASSING THE ASSESSMENT ORDER IN T HE CASE OF THE FIRM HAS TAKEN THE BOOK VALUE BEFORE REVALUATION FOR TAXING THE PROFIT ARISING FROM PART OF THE SALE OF LAND IN SUBSEQUENT ASSESSMENT YEAR. 89 2.33 THE ITAT CHENNAI BENCH IN THE CASE OF ACIT V S. GOYAL DRESSES, 126 ITD 131 HELD THAT DISTRIBUTION OF CAPITAL ASSET ON DISSOLUT ION OF A FIRM OR OTHERWISE CANNOT BE EXTRAPOLATED TO BRING RETIREMENT OF ONE PARTNER IN TO AMBIT OF THIS SECTION. IN THE INSTANT CASE, THERE HAS BEEN NO DISSOLUTION OF THE FIRM. T HE PARTNERSHIP DEED THAT FIRM WILL CONTINUE AND CANNOT BE DISSOLVED DUE TO RETIREMENT OF ONE OF THE PARTNER. PARTNER CAN RETIRE AS PARTNERSHIP IS AT WILL. THERE IS A RETIRE MENT OF ONE OF THE PARTNER. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF SIDDHARTH MEDIA H OLDINGS PVT. LTD. V. DCIT 260 ITR 286 HAD AN OCCASION TO CONSIDER THE CLAIM OF THE AS SESSEE OF CAPITAL LOSS ON THE GROUND THAT THE ASSESSEE HAS SUFFERED LOSSES IN THE FIRM F OR SEVERAL YEARS PRIOR TO THE RETIREMENT. IN THIS CAE, THE ASSESSEE WAS PAID THE BALANCE IN H IS CAPITAL ACCOUNT ON SETTLEMENT OF ACCOUNTS AND IT CANNOT BE SAID THE LOSSES WAS ON AC COUNT OF ANY TRANSFER OF CAPITAL. IN THE INSTANT CASE ALSO, THE RETIRING PARTNERS WERE GIVEN THEIR SHARE. HENCE, THERE CANNOT BE ANY INCREASE IN PROFIT OR INCOME. 2.34 THE HON'BLE APEX COURT IN THE CASE OF TRIBHUVA NDAS G. PATEL VS. CIT , 236 ITR 515 HAD AN OCCASION TO CONSIDER THE CASE IN WHICH O NE OF THE PARTNER RETIRED FROM THE FIRM AND RECEIVED SHARE OF HIS PROFIT AND ALSO SHARE FRO M GOODWILL OF THE FIRM AND SHARE IN THE ASSET OF THE FIRM. THE HON'BLE APEX COURT HELD THAT THE SAME IS NOT ASSESSABLE AS CAPITAL GAIN . IT IS TRUE THAT AT THAT RELEVANT TIME THAT THE PROVISIONS OF SECTION 45(3) AND 45(4) WERE NOT APPLICABLE IN THE STATUTE BOOK BUT STILL T HE DECISION WILL BE APPLICABLE BECAUSE THE PROVISIONS OF SECTION 45(4) WILL MAKE THE AMOUN T INCLUDIBLE IN THE HANDS OF THE FIRM AS CAPITAL GAIN. IN THE INSTANT CASE, THE AO IS TAX ING IT AS BUSINESS PROFIT. ANOTHER INTERESTING FEATURE IN THIS CASE IS THAT THE LAND W AS PURCHASED BY THE FIRM IN WHICH THE ASSESSEE WAS HAVING 75% SHARE. THE FIRM MADE INVEST MENT AND GOT THE APPROVAL FOR 90 CONSTRUCTING THE FLATS FOR HOUSING SOCIETY. THE RIG HT TO HAVE A LICENSE OF GREEN HOUSING SOCIETY PATTA IS A VALUABLE RIGHT WITH THE FIRM M/S .KRISHNA VILLA APARTMENT AND SUCH RIGHT STILL REMAINED WITH THE FIRM EVEN AFTER RETIREMENT OF THE FIRM.THE FIRM IN WHICH THE ASSESSEE WAS PARTNERS ENTERED INTO A DEVELOPMENT AG REEMENT. NORMALLY IN THE CASE OF DEVELOPMENT AGREEMENT, THE LAND OWNER AS WELL AS TH E DEVELOPER SHARE THE CONSTRUCTED AREA AND THE INVESTMENT IN THE CONSTRUCTED AREA IS TO BE MADE BY THE DEVELOPER. THE LAND OWNER POOLS HIS LAND WHILE THE DEVELOPERS POOLS THE FUND AND EXPERTISE. IN THE INSTANT CASE, THE DEVELOPER FIRM STOOD MERGED INTO THE FIRM IN WHICH THE ASSESSEE WAS PARTNER. THUS THE RIGHTS WHICH WERE HELD BY THE DEVELOPER FI RM WERE ALSO AVAILABLE TO THE FIRM IN WHICH THE ASSESSEE WAS A PARTNER. IT IS NOT A SIMPL E CASE WHERE PARTNERS OF THE DEVELOPER FIRM WERE ENTERED INTO THE FIRM IN WHICH THE ASSESS EE WAS A PARTNER. AS WE HAD ALREADY NOTICED THAT THE STOCK IN HAND WAS THERE, THEREFORE , THERE WAS NO CASE OF BUSINSS PROFIT IN THE HANDS OF THE FIRM. THE AO HIMSELF HAS NOT TAXED SUCH BUSINESS PROFIT IN THE HANDS OF THE FIRM. IT IS TRUE THAT IN THE CASE OF RETIREMENT OF ONE OF THE PARTNER FROM THE FIRM DUE TO RECONSTITUTION OF THE FIRM, IT IS BEING HELD BY THE HON'BLE HIGH COURT THAT CAPITAL GAIN IS LIABLE IN THE HANDS OF THE FIRM. HOWEVER, SOME OF T HE HON'BLE HIGH COURTS HAVE HELD OTHERWISE. IN THE FOLLOWING DECISIONS, THE HON'BL E APEX COURT HELD THAT IN CASE TWO VIEWS ARE POSSIBLE THEN THE VIEW FAVOURABLE TO THE ASSESSEE IS TO BE ADOPTED. 1. CIT VS. . VEGETABLE PRODUCTS LIMITED. , 88 ITR 192, (SC) 2. BAJAJ TEMPO LIMITED. VS. CIT, 196 ITR 188 (SC) 3. KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. VS. CIT, 259 ITR 51 (SC) 2.35 BEFORE US, THE LD. DR STATED THAT IN CASE THE AMOUNT ON REVALUATION TO THE EXTENT OF AMOUNT CREDITED IN THE ACCOUNT OF AN ASSESSEE IS NO T BEING CONFIRMED THEN THE SAME 91 SHOULD BE DIRECTED TO BE CONSIDERED IN THE HANDS OF FIRM U/S 45(4)OF INCOME TAX ACT. THE REVALUATION IS OF STOCK AND NOT OF CAPITAL ASSET OR INVESTMENT. THE AO WHILE MAKING ASSESSMENT IN THE HANDS OF THE FIRM HAS NOT GIVEN C REDIT FOR REVALUATION WHICH MEANS THAT THE REVENUE IS OF THE OPINION THAT THE INCREASE IN REVALUATION OF STOCK WILL NOT BE CONSIDERED WHILE MAKING ASSESSMENT OF THE FIRM MEAN ING THEREBY THAT THE FIRM WILL EARN PROFIT ON THE BASIS OF VALUE OF STOCK BEFORE REVALU ATION. HENCE THE INTEREST OF REVENUE STANDS PROTECTED. 2.36 WE HAVE CONSIDERED THE ADDITIONAL EVIDENCES FL ED BY THE DEPARTMENT AND THE ADDITIONAL EVIDENCES FILED BY THE LD. AR AS REJOIND ER AGAINST THE ADDITIONAL EVIDENCES FILED. ACCORDING TO US, THESE ADDITIONAL EVIDENCES HAVE NO RELEVANCE FOR DECIDING THE ISSUE BEFORE US. MOREOVER, THE ADDITIONAL EVIDENCES FILED BY THE DEPARTMENT IS NOT SUBSTANTIATED THAT THE ENTRY IN THE LETTER IS IN THE HANDWRITING OF SHRI ARUN LASHKARY AND THAT TOO AT THE TIME OF FILING OF APPLICATION. WE THEREFORE, IGNORE THESE ADDITIONAL EVIDENCES FOR DECIDING THE ISSUE AS NOT RELEVANT. 2.37 THE REVENUE HAS RELIED UPON THE STATEMENT OF T HE ASSESSEE RECORDED DURING THE COURSE OF SEARCH IN WHICH THE ASSESSEE SURRENDERED THE AMOUNT ON ACCOUNT OF REVALUATION OF LAND AS UNDISCLOSED INCOME. KELKAR PANEL STUDIED THE PROBLEM OF CONFESSIONS AND SURRENDERS DURING ITS STUDIES AND DELIBERATIONS IN PARA 3.27 AND THE SAME IS REPRODUCED AS UNDER:- A CROSS SECTION OF PEOPLE CUTTING ACROSS 4TRADE A ND INDUSTRY COMPLAINED OF A HIGH HANDED BEHAVIOUR OF R AIDING PARTIES PARTICULARLY WHILE RECORDING A STATEMENT. IT WAS PO INTED OUT THAT OVERENTHUSIASTIC AIDING PARTIES WOULD OFTEN COERCE A SURRENDER. AS A RESULT ALL FOLLOW UP INVESTIGATIONS ARE DISTRA CTED AND GENERALLY BROUGHT TO A STAND STILL. SINCE THE SURRENDER IS NO T BACKED BY ADEQUATE EVIDENCE, THE TAX EVADER INVARIABLY RETRAC TS FROM THE STATEMENT OF SURRENDER BY WHICH TIME IT IS TOO LATE FOR THE 92 DEPARTMENT TO RESUME INVESTIGATIONS. SIMILARLY, WHE RE ADEQUATE EVIDENCE IS INDEED FOUND, A SURRENDER IS NOT NECESS ARY TO ESTABLISH TAX EVASION. THEREFORE, THE TASK FORCE RECOMMENDS T HAT THE CBDT MUST ISSUE IMMEDIATE INSTRUCTIONS TO THE EFFECT THA T NO RAIDING PARTY SHOULD OBTAIN ANY SURRENDER WHATSOEVER. WHERE A TAX PAYABLE DESIRES TO VOLUNTARILY MAKE A DISCLOSURE, HE SHOULD BE ADVISED TO MAKE SO AFTER THE SEARCH. AS A RESULT, THE TAXPAYE R WILL NOT BE ABLE TO ALLEGE COERCION AND SUCCESSFULLY DISTRACT INVEST IGATIONS. ALL CASES WHERE SURRENDER IS OBTAINED DURING THE COURSE OF THE SEARCH IN VIOLATION OF THE INSTRUCTIONS OF THE CBDT, THE L EADER OF THE RAIDING PARTY SHOULD BE SUBJECTED TO VIGILANCE ENQ UIRY. FURTHER THE TASK FORCE ALSO RECOMMENDS THAT STATEMENTS RECORDED DURING THE SEARCH SHOULD BE VIDEO RECORDED. THIS WILL INDEED A DD TO THE CONFIDENCE OF THE TAXPAYER IN THE IMPARTIALITY OF T HE SYSTEM. 2.38 THE FINANCE MINISTER IN THE BUDGET SPEECH FOR THE YEAR 2003 STATED THAT NO CONFESSION SHALL BE OBTAINED DURING SEARCH AND SEIZ URE OPERATION. THE INSTRUCTIONS WERE FOLLOWED BY CBDT BY ISSUE OF A CIRCULAR ON THE LINE S DESIRED BY THE FINANCE MINISTER. THERE CAN BE AN ESTOPPEL ON THE ISSUE OF THE FACTS BUT THERE CANNOT BE ESTOPPEL ON THE PRINCIPLE OF LAW. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE WAS NOT DISCLOSING THE AMOUNT RECEIVED AS A RESULT OF RETIREMENT FROM THE FIRM. THE ASSESSEE OBTAINED THE LEGAL ADVICE AND WAS OF THE OPINION THAT SUCH REVALUATION IS CAPITAL RECEIPT WHICH IS NOT LIABLE TO TAX. HENCE, WE FEEL THAT INCOME CANNOT BE ADDED SIM PLY ON THE BASIS OF SURRENDER. THE STATEMENT RECORDED U/S 132(4) CAN BE REBUTTED BY TH E ASSESSEE AND THE CASE OF THE ASSESSEE IS THAT THE AMOUNT IS NOT LIABLE TO TAX. 2.39 AFTER CONSIDERING VARIOUS CASE LAWS RELIED UPO N BY BOTH THE PARTIES, WE FEEL THAT THE ISSUE IS TO BE DECIDED IN FAVOUR OF THE ASSESSE E BECAUSE IF TWO CONSTRUCTIONS ARE TO POSSIBLE THEN ONE HAS TO ADOPT THE CONSTRUCTION WHI CH IS FAVOURABLE TO THE ASSESSEE. WE HAD ALSO NOTICED THE DISTINGUISHING FEATURES IN TH IS CASE AND IT IS NOT A SIMPLE CASE IN WHICH OTHER PARTNERS JOINED THE FIRM. THIS IS A CA SE WHERE ANOTHER FIRM HAS BEEN TAKEN OVER BY THE FIRM IN WHICH THE ASSESSEE WAS A PARTNE R. BOTH THE FIRMS WERE HAVING 93 INTANGIBLE RIGHTS ARISING FROM DEVELOPMENT AGREEMEN T AND RIGHT OF CONSTRUCTING A HOUSING / COMMERCIAL COMPLEX AND NONE OF THE FIRM VALUED SU CH RIGHTS IN THE FORM OF MONETARY CONSIDERATION. SUCH RIGHTS REMAINED WITH THE FIRM E VEN AFTER RETIREMENT OF THE ASSESSEE. WE THEREFORE, HOLD THAT THE LD. CIT(A) WAS NOT JUST IFIED IN CONFIRMING THE ADDITION OF RS. 5,24,47,943/-. 2.40 IN RESPECT OF CHARGING OF INTEREST, WE HOLD T HAT CHARGING OF INTEREST IS MANDATORY AND THE ASSESSEE WILL GET CONSEQUENTIAL RELIEF. 4. IN THE RESULT, THE APPEAL OF THE ASSESSEES IS AL LOWED THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 06-01 -2012. SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 06 /01/2012 *MISHRA COPY FORWARDED TO :- 1. SHRI PAWAN LASHKARY, JAIPUR 2. DCIT, CENTRAL CIRCLE- 2,JAIPUR 3. THE LD. CIT BY ORDER 4. THE LD. CIT(A) 5. THE LD.DR 6. THE GUARD FILE (ITA NO. 808/JP /11) A.R, ITAT, JAIPUR 94 95 96 97