ITO,WARD-3(1),KALYAN, KALYAN V. SHRI BHUSHAN DHARAMDAS KARIA, KALYAN

ITA 860/MUM/2020

AI Insights

The case revolves around an appeal by the Income Tax Officer (ITO) against the decision of the Commissioner of Income Tax (Appeals) - 1, Thane, which had allowed the appeal of Shri Bhushan Dharamdas Karia, the respondent. The core issue was the taxability of a lump sum amount received by the assessee upon his retirement from a partnership firm, M/s. Astha Housing Corporation. The ITO contended that this amount, derived from the appreciation of land under a development agreement, should be taxed as long-term capital gains (LTCG) in the hands of the assessee. However, the CIT (A) found in favor of the assessee, leading to the ITO's appeal to the tribunal. The tribunal, referencing Section 45(4) of the Income Tax Act and various judicial decisions, upheld the CIT (A)'s decision, emphasizing that the tax liability for such transactions lies with the partnership firm, not the individual partner.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123211 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 13-03-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 02-02-2020
• Other Referred Cases: CIT Vs Manshukh Dyeing and Printing Mills, Malabar Fisheries Company Vs CIT, Sudhakar M Shetty, Savitri Kudur, CIT v. A.N. Naik Associates
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SUBODH RATNAPARKHI
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Capital Gains
• Section: 143(3); 50C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B”, MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 860/Mum/2020 (A.Y. 2016-17) ITO, Ward-3 (1), 2 nd Floor, Rani Mansion, Murbad Road, Kalyan (W)-421 301 ...... Appellant Vs. Shri Bhushan Dharamdas Karia 603, Nimbule heights, Khadak Pada, Kalyan (W)-421 301 PAN: ABHPK3910D ..... Respondent Revenue by : Shri Chetan M. Kacha, Sr. AR Respondent by : Shri Subodh Ratnaparkhi, CA Date of hearing : 14/03/2023 Date of pronouncement : 21/03/2023 ORDER PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of Commissioner of Income Tax (Appeal)-1, Thane (for short ‘CIT (A)”) dated 18.11.2019 u/s. 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) for A.Y. 2016-17. The Revenue has raised the following grounds of appeal: 2 ITA No. 860/Mum/2020 SHRI BHUSHAN DHARAMDAS KARIA “1.On the facts and in the circumstances of the case, and in law, the Ld. CIT (A) has erred in deleting the addition of Rs.5.78 cr. and not appreciating that this is a case where the entire partnership arrangement is a device to avoid payment of tax by the assessee on the profit earned due to the appreciation of his share in the asset i.e. land acquired under development agreement. 2. On the facts and in the circumstances of the case, and in law, the Ld.CIT (A) while deleting the addition, has erred in not taking into consideration the fact that the assessee has received a lump sum amount in excess of the outstanding balance in the capital account a consideration for relinquishing his interest in the partnership asset consisting of land acquired under the development agreement. 3. On the facts and in the circumstances of the case, and in law, the Ld.CIT (A) while deleting the addition on LTCG, has erred in not taking into account the fact that there was no activity started/carried out by the firm from inception till date of retirement and no return of income filed by the firm and the returns filed for the first time by the firm for AY 2016-17 after assessee's retirement and AY. 2017-18 does not disclose the land as firm's property. 4. On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) has erred in not distinguishing the difference between a retiring partner receiving his share in the partnership asset wherein assessee's share is quantified by taking account on the assumption of notional sale of all assets as against a retiring partner receiving a lump sum amount by way of assigning, releasing and relinquishing his interest and share in the partnership in favour of continuing or new partnerand the amount received in excess is on account of revaluationof assets. 5. On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) has erred in not appreciating that the facts of the case of Bombay High Court relied upon by the CIT(A) is distinct from the facts of the present case, as in the case adjudicated by the Bombay High Court, the firm had carried activity of manufacturing, all firms assets were evaluated and the retiring partners were paid their share of partnership asset whereas in the present case, the retiring partner was paid a lumpsum amount on retirement when no business activity was carried out by the firm and the entire arrangement was to avoid the tax incidence on excess receipts arising due to relinquishment of his "50%" share on the land acquired jointly in the name of partnership firm. 3 ITA No. 860/Mum/2020 SHRI BHUSHAN DHARAMDAS KARIA 6. On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) has erred in deleting the addition on LTCG, without considering the decision of the jurisdictional ITAT in the case of Sudhakar M Shetty (ITA No. 1515/Mum/2010) and the decision of Bangalore ITAT in the case of Savitri Kudur (177 ITD 259) (2019), wherein it is held that lump-sum amount paid to retiring partner in consideration of retirement from the partnership and assignment of retiring partner's interest to other partners, the transaction would amount to transfer u/s 2(47) and liable to tax excess amount over partner's capital account under the provisions of Sec 45, 7. On the facts and in the circumstances of the case, and in law,the Ld. CIT (A) has erred in not adjudicating the applicability ofprovisions of section 50C in the case. 8. The appellant craves leave to add, amend, alter or delete any ground of appeal.” 1. Brief facts of the case that assessee his return of income on 06-03-2017 declaring total income at Rs 10, 27,510/-. The assessee is engaged in the business of land development and construction. Assessee is a partner in various firms engaged in the activity of builder and developers. Case of the assessee was selected for limited scrutiny vides notice dated 19-09-2017. 2. During the assessment proceedings it was observed that assessee received Rs. 2,59,50,000/- being gain from sale of share in partnership firm M/s. Astha Housing Corporation. During the assessment proceedings assessee submitted deed of reconstitution of partnership firm M/s. Astha Housing Corporation dated: 27-04-2015. This amount of Rs 2, 59, 50,000/- assessee had shown as exempted income. During the assessment proceedings assessee submitted various document including balance-sheet, partnership deed, deed of reconstitution dated: 27-04-2015 and also relied on various judicial pronouncements in his favor to claim the said amount as exempted income. But AO was not satisfied with the explanation along with judicial pronouncement submitted by the assessee and treated the same as taxable under the head capital gains by further applying the provisions of sec. 50C also. Resultantly income of the assessee was assessed at Rs 5,78,81,506/- 4 ITA No. 860/Mum/2020 SHRI BHUSHAN DHARAMDAS KARIA under the head long term capital gains (in addition to the returned income declared at Rs 10,25,510/-) 3. Assessee being aggrieved with the order of AO preferred an appeal before the Ld. CIT (A) challenging the assessment order. Ld. CIT (A) accepted the contention of assessee and she allowed the appeal of the assessee. Against this order of Ld. CIT (A) department felt aggrieved and preferred this appeal before us. We have gone through the order of AO, order of the Ld.CIT (A) and submissions of the assessee along with case laws relied upon by both the sides. 4. There is no challenge to the facts of the case as enumerated by the AO and Ld. CIT (A) in their respective orders. The issue here is a pure question of law hence, before proceeding further it will be relevant to discuss the provisions of section 45(4) as under w.e.f. A.Y. 2022-23: “Notwithstanding anything contained in sub-section (1), where a specified person receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from such receipt by the specified person shall be chargeable to income-tax as income of such specified entity under the head "Capital gains" and shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person,” and position before this change was as under till A.Y. 2021-22” “The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer." 5. As relevant extract reproduced (supra) is absolutely clear that amount received by the retiring partner on reconstitution of the firm is taxable, but in the hands of the partnership firm and prior to this amendment also amount received by the retiring partner would not attract any tax liability in 5 ITA No. 860/Mum/2020 SHRI BHUSHAN DHARAMDAS KARIA the hands of partner but the same is taxable in the hands of partnership firm on this issue the recent decision of the honourable supreme court in the case of CIT Vs Manshukh Dyeing and Printing Mills (2022) 449 ITR 439 is a guiding pronouncement and above this, a law of land on this issue. 6. Assessee was never an owner of the assets hold by the partnership firm. He is simply having a right to share the profits arisen out of the working of the firm in addition to interest and remuneration if provided in partnership deed. On a reconstitution of a firm, it is simply a revaluation of assets and liabilities as on that date so that the capital account of retiring partner can be settled appropriately one for all. 7. We further relied on the decision of honorable apex court in the case of Malabar Fisheries Company Vs CIT (1979) 120 ITR 49 wherein it was observed by the honorable court that “partnership firm is not a distinct legal entity apart from the members constituting it. In that sense there is no transfer of assets by the assessee firm to any person”. The dissolution of a firm and reconstitution of a firm are two separate and distinct legal events and taxability arising in any of these events is also accordingly different. 8. To conclude the issue, we are reproducing the relevant extract of the decision of honourable supreme court in the case of CIT Vs Manshukh Dyeing and Printing Mills (2022) 449 ITR 439 is under: “The object and purpose of introduction of section 45(4) was to pluck the loophole by insertion of section 45(4) and omission of section 2(47) (ii). While introduction to section 45(4), clause (ii) of section 2(47) came to be omitted. Earlier, omission of clause (ii) of section 2(47) and section 47(ii) exempted the transform by way of distribution of capital assets from the ambit of the definition of "transfer". The same helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same at the time of dissolution. The said loophole came to be plucked by insertion of section 45(4) and omission of section 2(47) (ii). At this stage, it is required to be noted that the word used "OR OTHERWISE" in section 45(4) is very important. [Para 7.2]” “In the instant case, it was the case on behalf of the assessee that unless there is dissolution of partnership firm and thereby the transfer of the amount on revaluation to the capital accounts of the respective partners, section 45(4) shall not be applicable. It is the case on behalf of the assessee that there can be no income just due to revaluation of 6 ITA No. 860/Mum/2020 SHRI BHUSHAN DHARAMDAS KARIA the capital assets unless capital assets are also transferred. According to the assessee, the amount credited on revaluation to the capital accounts of the partners is only notional or book entry, which is not represented by any additional tangible assets or income. Therefore, the sum and substance of the submission on behalf of the assessee is that unless there is dissolution of the partnership firm, and there is only transfer of the amount on revaluation to the capital accounts of the respective partners. Section 45(4) shall not be applicable. [Para 7.3]” “However, in view of the amended section 45(4) inserted vide Finance Act, 1987, by which, "OR OTHERWISE" is specifically added, the aforesaid submission on behalf of the assessee has no substance. The Bombay High Court in the case of CIT v. A.N. Naik Associates [2004] 136 Taxman 107/265 ITR 346 had an occasion to elaborately consider the word "OTHERWISE" used in section 45(4). After detailed analysis of section 45(4), it is observed and held that the word "OTHERWISE" used in section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partners of a partnership, transferring the assets in favour of a retiring partner. [Para 7.4]” “In the instant case, the assets of the partnership firm were revalued to increase the value on 1-1-1993 (relevant to assessment year 1993-94) and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets' revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets to the partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can be said to be "transfer" and which fall in the category of "OTHERWISE" and therefore, the provision of section 45(4) inserted by Finance Act, 1987 with effect from 1-4-1988 shall be applicable. [Para 7.5]” “In view of the above and for the reasons stated, the impugned judgment and order passed by the High Court and that of the Tribunal are unsustainable and the same deserves to be quashed and set aside and are accordingly quashed and set aside. The order passed by the Assessing Officer is hereby restored. [Para 8]” 9. The decision cited and relied upon (supra), although is in the favour of revenue but the ratio laid down by the honourable apex court is very much relevant to the appeal under consideration. In view of the facts of the case, law pronounced by the honourable apex court and as agreed by the 7 ITA No. 860/Mum/2020 SHRI BHUSHAN DHARAMDAS KARIA assessee himself also in his submissions before us, we are of the considered view that the transaction under consideration is taxable under the hands of partnership firm and not in the hands of assessee under consideration. In the light of above we don’t see any reason to interfere in the order of Ld.CIT(A) and the same is sustained 10. In the result appeal of the revenue is dismissed. Order pronounced in the open court on 21 st day of March, 2023. Sd/- Sd/- (AMIT SHUKLA) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, दिन ांक/Dated: 21/03/2023 Mahesh R. Sonavane Copy of the Order forwarded to: 1. अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकर आयुक्त CIT 4. दवभ गीय प्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्ड फ इल/Guard file. BY ORDER, //True Copy// (Dy. /Asstt.Registrar) ITAT, Mumbai