ACIT, Coimbatore V. Sharadha Terry Products Ltd., Mettupalayam

ITA 990/CHNY/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7705 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 07-01-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 21-04-2014
• Court: TRIBUNAL
• Department Lawyers: DEBENDRA N KAR
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Business income; Depreciation; Fair market value; Capital receipt
• Section: 2(14); 115JB; 56

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , ! ' #! ' $ . %& ' () BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.958 /MDS./2014 ( / ASSESSMENT YEAR :2009-10) M/S.SHARADHA TERRY PRODUCTS LTD ., 8,BADRAKALIAMMAN KOIL ROAD, NELLITHURAI P.O. METTUPALAYAM 641 305. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, SALARY CIRCLE-I, COIMBATORE 641 018. PAN AADCS 0657 H ( *+ / APPELLANT ) ( ,-*+ / RESPONDENT ) ./ I.T.A.NO.990 /MDS./2014 ( / ASSESSMENT YEAR :2009-10) THE ASSISTANT COMMISSIONER OF INCOME TAX, SALARY CIRCLE-I, COIMBATORE 641 018. VS. M/S.SHARADHA TERRY PRODUCTS LTD ., 8,BADRAKALIAMMAN KOIL ROAD, NELLITHURAI P.O. METTUPALAYAM 641 305. PAN AADCS 0657 H ( *+ / APPELLANT ) ( ,-*+ / RESPONDENT ) ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 2 ASSESSEE BY : MR.S.SRIDHAR,ADVOCATE REVENUE BY : MR.DEBENDRA N.KAR, CIT, D.R / DATE OF HEARING : 07.01.2016 /DATE OF PRONOUNCEMENT : 18.03.2016 . / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE ARE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-II, COIMBATOR E DATED 08.01.214 PERTAINING TO THE ASSESSMENT YEAR 2009-1 0. 2.1 THE ASSESSEE CHALLENGED IN ITS APPEAL WITH REGA RD TO THE FINDINGS OF THE CIT(A) THAT THE RECEIPT OF AMOUNT O F ` 26.99 CRORES ON RETIREMENT AS A PARTNER FROM THE FIRM OF M/S. S.J.M . PROPERTY DEVELOPERS IS TAXABLE INCOME IN THE HANDS OF THE AS SESSEE IN VIEW OF THE PROVISIONS OF THE SECTION 45(4) OF THE ACT. 2.2 THE REVENUE IS IN APPEAL BEFORE US FOR DELETIO N OF ADDITION OF ` 27 CRORES FROM BOOK PROFIT BY PLACING RELIANCE ON T HE DECISION OF THE HONBLE APEX COURT IN THE CASE OF APOLLO TYRESVS CI T 255 ITR 273(SC) BY LD.CIT(A). ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 3 3.1 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE COMPANY IS INVOLVED IN THE BUSINESS OF MANUFACTURE OF TERRY TO WELS AND WEAVING OF YARN PRODUCTS. THE ASSESSEE-COMPANY HAS MADE ADJ USTMENTS TO THE PROFIT AND LOSS ACCOUNT AS PER BOOKS BY ADDING BACK INADMISSIBLE AND DEDUCTING ADMISSIBLE ITEMS UNDER THE INCOME-TAX ACT, THEREBY CLAIMED DEDUCTION U/S.10B IN RESPECT OF UNIT-2 (100 % ECU) AND UNIT- 3 (WEAVING DIVISION-100% ECU) AMOUNTING TO ` 49.27,77,765/- AND ARRIVED AT A LOSS OF ` 5,67,51,537/- IN THE COMPUTATION STATEMENT. HENCE THE ASSESSEE-COMPANY FILED THE RETURN OF INCO ME UNDER THE PROVISIONS OF SECTION 115JB ADMITTING TOTAL INCOME OF ` 56,75,15,374/- AND PAID TAX ACCORDINGLY. DURING THE COURSE OF ASS ESSMENT PROCEEDINGS, WHILE EXAMINING THE BALANCE SHEET OF T HE ASSESSEE- COMPANY, AS PER CLAUSE-17, (NOTES FORMING PART OF T HE BALANCE SHEET) IT WAS NOTICED THAT THE ASSESSEE HAD INVESTED BY WA Y OF CAPITAL IN THE PARTNERSHIP FIRM, M/S. SJM PROPERTY DEVELOPERS IN W HICH THE ASSESSEE-COMPANY HELD 99% OF INTEREST TILL 05/03/20 09. IT IS FURTHER FOUND THAT THE ASSESSEE-COMPANY HAS RECEIVED FROM T HE SAID PARTNERSHIP FIRM BY RELINQUISHING ITS RIGHT OF 99% VIDES RETIREMENT DEED DATED 06/03/2009. ON RELINQUISHING, THE COMPAN Y WAS ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 4 COMPENSATED BY A SUM OF ` 26.99 CRORES AS A SHARE IN SURPLUS IN THE SAID FIRM AND THIS HAS BEEN TREATED AS CAPITAL RECE IPT AND TAKEN TO THE CAPITAL RESERVE. AFTER PERUSING A NOTE FILED BY TH E ASSESSEE COMPANY DATED 08/12/2011, THE ASSESSEE COMPANY RECEIVED COM PENSATION FROM THE FIRM. IT IS FOUND THAT APART FROM THE SHAR E CAPITAL OF ` 99,000/- CONTRIBUTED BY THE COMPANY IN THE FIRM SJM PROPERTY DEVELOPERS, THE COMPANY HAD INVESTED FURTHER SUM OF ` 25 CRORES AS LOAN TO THE PARTNERSHIP FIRM. THESE FUNDS WERE UTILIZED BY THE FIRM FOR PURCHASE OF LAND AT BANGALORE FOR ` 4 CRORES AND THE BALANCE WAS ADVANCED TO ANOTHER FIRM, M/S METRO CORP, BANGALORE WHEREIN TWO OF THE PARTNERS OF M/S SJM PROPERTY DEVELOPERS, MR. DEEPAK KRISHNAP PA AND MR. UDAY REDDY ARE PARTNERS. OUT OF ` 25 CRORES ADVANCED TO M/S SJM PROPERTY DEVELOPERS BY THE ASSESSEE-COMPANY, ` 10 CRORES WAS WITHDRAWN DURING THE FINANCIAL YEAR 2007-08. FURTHE R IT WAS NOTICED BY THE AO THAT THERE HAD BEEN NO ACTIVITIES IN THE FIR M SJM PROPERTY DEVELOPERS AND NO BUSINESS OR DEVELOPMENT HAD TAKEN PLACE TILL THE DATE OF RETIREMENT OF THE ASSESSEE COMPANY. THE NOT E DATED 08/12/2011 ALSO REVEALS THAT THE FIRM HAD ENTERED I NTO JOINT VENTURE AGREEMENT WITH METRO CORP, BANGALORE FOR DEVELOPMEN T OF LAND ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 5 PURCHASED BY M/S SJM PROPERTY DEVELOPERS. SINCE MET RO CORP, BANGALORE DID NOT UNDERTAKE THE DEVELOPMENT OF THE PROPERTY DUE TO FINANCIAL PROBLEM, THE ASSESSEE-COMPANY WANT TO RET IRE FROM THE FIRM, M/S SJM PROPERTY DEVELOPERS AND SO AS ON 06/03/2009 , THE ASSETS WERE REVALUED IN THE BOOKS OF THE FIRM AND THE INCR EASED VALUE OF THE LAND AS ON THE DATE OF RETIREMENT WAS CREDITED TO T HE CAPITAL ACCOUNT OF THE ASSESSEE-COMPANY IN THE FIRM MIS SJM PROPERT Y DEVELOPERS. A SUM EQUAL TO COMPANYS CAPITAL AND CURRENT ACCOUNT BALANCE OUTSTANDING AS ON THE DATE OF REVALUATION WAS REPAI D TO IT AT THE TIME OF RETIREMENT AND THE REMAINING PARTNERS CONTINUED IN THE FIRM FOR THE ASSETS AND LIABILITIES. FURTHER, IT WAS FOUND THAT THE ASSESSEE HAS TAKEN A STAND ON THE BASIS OF THE ABOVE NOTE THAT T HERE IS NO TRANSFER OF ANY PROPERTY BY THE ASSESSEE-COMPANY AT THE TIME OF RETIREMENT FROM THE FIRM AND SO, COMPENSATION AMOUNT RECEIVED CANNOT BE TAXED AS INCOME OF THE ASSESSEE-COMPANY. 3.2 IN ORDER TO VERIFY THE CLAIM OF THE ASSESSEE, FURTHER DETAILS LIKE DEVELOPMENT AGREEMENT COPIES, RETIREMENT DEED COPIE S, ACCOUNT COPY OF THE ASSESSEE-COMPANY IN THE FIRM SJM PROPER TIES WERE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 6 CALLED FOR AND OBTAINED FROM THE ASSESSEE COMPANY. ON GOING THROUGH THE SETTLEMENT DEED DATED 0910312009, IT WA S SEEN THAT THERE WAS AN AGREEMENT DATED 06/02/2007 ENTERED INT O BETWEEN SJM PROPERTY DEVELOPERS AND MIS METRO CORP FOR RELINQUI SHMENT OF 99% OF SHARES OF THE ASSESSEE-COMPANY IN THE FIRM, M/S S,JM PROPERTY DEVELOPERS IN FAVOUR OF METRO CORP., A THIRD PARTY (NOT A PARTNER IN MIS SJM PROPERTY DEVELOPERS) FOR A CONSIDERATION OF ` 52 CRORES. THE ASSESSEE-COMPANY WAS ASKED TO FILE A NOTE ON THIS. IN RESPONSE, ASSESSEE FILED LETTER DATED 19/12/2011 ENCLOSING TH E FOLLOWING DOCUMENTS: I) COPY OF PROPERTY DEED PURCHASED ON 06/02/2007 FO R SJM PROPERTY DEVELOPERS FOR A CONSIDERATION OF ` 4 CRORES. II) MEMORANDUM OF UNDERSTANDING DATED 06/02/2007 BE TWEEN THE ASSESSEE-COMPANY, A.SRINIVASAN, S.SRINIVASAN, R EFERRED TO AS FIRST PARTY OF THIS AGREEMENT AND ANOTHER FIR M MIS METRO CORP. BANGALORE (COPY OF THIS AGREEMENT IS ENCLOSED WITH THE ASSESSMENT ORDER AS ANNEXURE-L). III) COPY OF THE RETIREMENT CUM RECONSTITUTED PARTN ERSHIP FIRM DEED DATED 31/01/2009 WHEREIN SHRI D.SRINIVASAN, SH RI ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 7 S.SRINIVASAN AND SHRI. UDAY REDDY HAVE RETIRED FROM THE FIRM. SHRI. D M DEVARAJ WAS ADMITTED AS NEW PARTNER. THE AMOUNT PAYABLE WAS TO THE OUTGOING PARTNERS SHRI. D.SRINIV ASAN, SHRI. S.SRINIVASAN AND SHRI. UDAY REDDY WAS DETERMINED AT NIL, NIL AND ` 37/-, RESPECTIVELY. TO SUPPORT THIS, THE BALANCE SH EET OF THE FIRM AS ON 06/03/2009 HAS BEEN FILED, AS STATED IN THE RETIREMENT DEED. IV) COPY OF THE BANK ACCOUNT OF SJM PROPERTY DEVELO PERS WITH VIJAYA BANK, R.S,PURAM BRANCH, COIMBATORE. FURTHER THE AO OBSERVED THAT PARTNERSHIP FIRM DEED DATED 01.02.2007 WAS FORMED WHEREIN ASSESSEE CONTRIBUTED A SUM OF ` 98,998/- AS CAPITAL AND SHRI D.SRINIVASAN HAS CONTRIBUTED ` 1/-, SHRI S.SRINIVASAN HAS CONTRIBUTED ` 1/-, SHRI KEEPAK KRISHNAPPA HAS CONTRIBUTED ` 500/- AND SHRI UDAY REDDY HAS CONTRIBUTED ` 500/- AND NET PROFIT AND LOSSES SHARED IN THE PROPORTION OF CAPITAL CONTRIBU TION BY THE PARTNERS. APART FROM THIS, A SUM OF ` 25 CRORES WAS DEPOSITED IN THE CURRENT ACCOUNT OF M/S. S.J.M. PROPERTY DEVELOPERS WITH VI JAYA BANK, COIMBATORE BY THE ASSESSEE COMPANY WHICH HAS BEEN S HOWN AS ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 8 LOAN BY THE ASSESSEE COMPANY. OUT OF THIS, ` 21 CRORES WAS TRANSFERRED TO M/S METRO CORP, BANGALORE AND ANOTHE R RS.4 CRORES WAS GIVEN TO M/S METRO CORP FOR PURCHASE OF LAND AT BANGALORE. AS PER DEED DATED 06.02.2007 BY PARTNERSHIP FIRM M/S. S.J.M. PROPERTY DEVELOPERS, M/S. S.J.M. PROPERTY DEVELOPERS HAS PU RCHASED PROPERTY AT BANGALORE ON 06.02.2007 FOR ` 4 CRORES MEASURING ABOUT 12 ACRE AND 2 GUNTAS. THE SAID PROPERTY WAS CONVERT ED FROM AGRICULTURAL TO NON-AGRICULTURAL RESIDENTIAL AREAS DURING THE YEAR 2005. THE RESIDENTIAL LAND OWNERS ENTERED INTO AN AGREEME NT WITH M/S.MADHAVI ASSETS PVT. LTD., ON 19.05.2005 TO DEVE LOP RESIDENTIAL TOWNSHIP IN THE SAID LAND. LATER, M/S.MADHAVI ASSE TS PVT. LTD., ENTERED INTO AN AGREEMENT WITH M/S METRO CORP ON 05 .08.2015 WHEREIN M/S.MADHAVI ASSETS PVT. LTD.,HAS ASSIGNED A LL THE RIGHTS AND AUTHORITY PERTAINING TO THE DEVELOPMENT OF THE SCHE DULED LAND IN FAVOUR OF M/S METRO CORP, BANGALORE. THERE IS ONE MORE JOINT VENTURE AGREEMENT ENTERED BY M/S. S.J.M. PROPERTY DEVELOPER S WITH M/S METRO CORP (DEVELOPERS) FOR DEVELOPMENT OF THE SAID LAND ON 06.02.2007. LATER ON 06.02.2007 ASSESSEES 99% SHA RE IN THE FIRM M/S. S.J.M. PROPERTY DEVELOPERS WAS RELINQUISHED IN FAVOUR OF M/S ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 9 METRO CORP, BANGALORE. AS PER THIS AGREEMENT DATED 06.02.2007, ASSESSEE TRANSFERRED 99% OF THE SHARE CAPITAL IN M/ S. S.J.M. PROPERTY DEVELOPERS AND FOR THAT ASSESSEE HAS TO RECEIVE ` 99,000/-. IN THE SAME DEED IN CLAUSE-2 ON PAGE-4 O F THE AGREEMENT, THE ASSESSEE COMPANY AGREED TO ADVANCE ` 25 CRORES TO M/S. S.J.M. PROPERTY DEVELOPERS. AS PER CLAUSE-3 OF THE AGREEM ENT, M/S METRO CORP HAS AGREED TO COMPENSATE THE ASSESSEE COMPANY A SUM OF ` 27 CRORES AND ISSUED A POST DATED CHEQUE. THERE I S A RETIREMENT CUM RECONSTITUTED PARTNERSHIP DEED DATED 31.01.2009 WHEREIN SHRI D.SRINIVASAN, SHRI S.SRINIVASAN AND SHRI UDAY REDDY WERE RETIRED FROM THE FIRM AND SHRED M DEVARAJ WAS ADMITTED A NE W PARTNER. THERE WAS NO REVALUATION OF ASSETS WAS DONE BUT THE AMOUNT PAYABLE WAS TO THE OUTGOING PARTNERS SHRI D.SRINIVASAN, SHR I S.SRINIVASAN AND SHRI UDAY REDDY WERE DETERMINED AS NIL, NIL AND ` 37/- RESPECTIVELY. SHRI D.M. DEVARAJ WAS ADMITTED TO THE PARTNERSHIP F IRM WITH A CONTRIBUTION OF ` 500/-. ACCORDINGLY, THE BALANCE SHEET WAS DRAWN ON 31.01.2009. THE ASSESSEE COMPANY WAS CONTRIBUTED A SUM OF ` 2/- TOWARDS CAPITAL. THUS LEAD O TOTAL SHARE CAPITAL C ONTRIBUTION OF THE ASSESSEE COMPANY IN THE PARTNERSHIP FIRM IS ` 99,000/- (99% OF THE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 10 SHARE HOLDING). THUS, ONCE AGAIN DEED OF RETIREMENT DATED 06.03.2009. AS PER WHICH OUTGOING PARTNERS HAS REC EIVED ` 27 CRORES TOWARDS THE AMOUNT LYING IN CAPITAL ACCOUNT. THUS, THE ASSESSEE HAS TO RECEIVE ` 27 CRORES FROM M/S METRO CORP DEVELOPERS. AS PER AGREEMENT DATED 09.03.2009, OUT OF A SUM OF ` 27 CRORES PAYABLE BY M/S METRO CORP, THE ASSESSEE R ECEIVED ` 22 CRORES ALONG WITH ANOTHER ` 15 CRORES AS REPAYMENT OF LOAN TOTALING TO ` 37 CRORES BY DD DRAWN ON VIJAYA BANK, JALAHALLI BR ANCH, BANGALORE. FURTHER A SUM OF ` 5 CRORES WAS ADJUSTED BY WAY OF RESIDENTIAL VILLA IN THE PROPOSED RESIDENTIAL TOWNS HIP TO BE CONSTRUCTED BY M/S METRO CORP. THE ASSESSEE PLEADED BEFORE THE AO THAT COMPENSATION RECEIVED AT ` 27 CRORES AS CAPITAL RECEIPT AND NOT LIABLE FOR TAXATION. HOWEVER, THE AO CONSIDERED IT AS A R EVENUE RECEIPT IN THE HANDS OF ASSESSEE RECEIVED IN LIEU OF RELINQUIS HMENT RIGHT IN PARTNERSHIP FIRM I.E. M/S. S.J.M. PROPERTY DEVELOPE RS IN FAVOUR OF M/S METRO CORP, BANGALORE. EVEN OTHERWISE, ACCORDING T O THE AO THE AMOUNT OF COMPENSATION RECEIVED TO BE TAXED AS SHOR T TERM CAPITAL GAINS AS INTEREST IN PARTNERSHIP FIRM IS A CAPITAL ASSET AND TRANSFER OF ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 11 THE SAME IN FAVOUR OF THE THIRD PARTY IS A TRANSFER AND LIABLE FOR CAPITAL GAINS. 3.3 THE ASSESSEE CARRIED THE APPEAL TO THE CIT(A). THE CIT(A) OBSERVED THAT THE EXTINGUISHMENT OF RIGHT IN THE PA RTNERSHIP FIRM BY ASSESSEE RESULTED IN TRANSFER ON RETIREMENT. THERE FORE, AN AMOUNT OF ` 26.99 CRORES RECEIVED BY ASSESSEE ON RETIREMENT IS LIABLE TO BE TAXED IN TERM OF SEC.45(4) OF THE ACT. FURTHER, TH E AO ALSO CONSIDERED THE SAID AMOUNT OF RS.26.99 CRORES SO AS TO DETERMI NE THE BOOK PROFIT U/S.115JB OF THE ACT AND ADDED THE SAME, THOUGH THE ASSESSEE DIRECTLY TAKEN THE SAME FROM GENERAL RESERVE ACCOU NT IN BALANCE SHEET WITHOUT ROUTING THROUGH P&L A/C, THE CIT(A) OBSERVED THAT IN VIEW OF THE SUPREME COURT DECISION IN THE CASE OF A PPOLLO TYRES REPORTED IN 255 TR 273, HE ALLOWED THE CLAIM AND OB SERVED THAT THE AO CANNOT CONSIDER THIS AMOUNT FOR THE PURPOSE OF D ETERMINING BOOK PROFIT. AGAINST THIS REVENUE IS IN APPEAL BEFORE U S. 4. BEFORE US, LD.A.R SUBMITTED THAT THE ASSETS OF THE FIRM ARE REVALUED AND THE INCREASED VALUE OF LAND SHOWN IN T HE ASSETS IN THE BALANCE SHEET OF M/S. S.J.M. PROPERTY DEVELOPERS AS ON 05.03.2009. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 12 AS A RESULT, THE INCREASED VALUE OF THE LAND OWNED BY THE FIRM WAS SETTLED TO THE EXTENT OF THE SHARE HELD BY THE ASSE SSEE AND THIS AMOUNT WAS CREDITED TO THE CAPITAL ACCOUNT OF THE A SSESSEE IN THE BOOKS OF ACCOUNT OF M/S. S.J.M. PROPERTY DEVELOPERS . CONSEQUENTLY, THE DEED OF RETIREMENT WAS EXECUTED ON 06.03.2009 A ND THE ACCOUNT WAS SETTLED ON RETIREMENT AND FIRM WAS CONTINUED BY THE REMAINING PARTNERS. ACCORDING TO THE LD.A.R, THE AMOUNT CRED ITED TO THE CAPITAL ACCOUNT OF THE ASSESSEE COMPANY BEING PARTNER OF M/ S. S.J.M. PROPERTY DEVELOPERS CANNOT BE TAXED IN TERMS OF SEC .45(4) OF THE ACT. 4(A)(I). HE RELIED ON THE JUDGEMENT OF KERALA HIGH COURT IN THE CASE OF KUNNAMKULAM MILLS REPORTED IN 257 ITR 544 W HEREIN IT WAS HELD THAT: WHAT IS POSTULATED UNDER SECTION 45(4) OF THE INCO ME-TAX ACT, 1961, IS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION O F A FIRM WOULD BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM. OWNERS HIP OF PROPERTY DOES NOT CHANGE WITH THE CHANGE IN THE CONSTITUTION OF T HE FIRM. AS LONG AS THERE IS NO CHANGE IN OWNERSHIP OF THE FIRM AND ITS PROPE RTIES, FOR THE SIMPLE REASON THAT THE PARTNERSHIP OF THE FIRM STOOD RECON STITUTED, THERE IS NO TRANSFER OF CAPITAL ASSETS. LIKEWISE, IF A PARTNER RETIRES HE DOES NOT TRANSFER ANY RIGHT IN THE IMMOVABLE PROPERTY IN FAVOUR OF A SURVIVING PARTNER BECAUSE HE HAD NO SPECIFIC RIGHT WITH RESPECT TO TH E PROPERTIES OF THE FIRM. WHAT TRANSPIRES IS THAT THE RIGHT TO SHARE THE INCO ME OF THE PROPERTIES STOOD TRANSFERRED IN FAVOUR OF THE SURVIVING PARTNE RS, AND THERE IS NO TRANSFER OF OWNERSHIP OF THE PROPERTY IN SUCH CASES . WHEN A PARTNERSHIP IS ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 13 RE-CONSTITUTED BY ADDING A NEW PARTNER, THERE IS NO TRANSFER OF ASSETS WITHIN THE MEANING OF SECTION 45(4) . 4(A)(II) HE ALSO RELIED ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT VS. LINGAMALLU RAGHUKUMAR REPORTED IN 2 47 ITR 801(SC) WHEREIN IT WAS HELD THAT: WHEN A PARTNER RETIRES FROM A FIRM AND THE AMOUNT O F HIS SHARE IN THE PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES A ND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNTS IN THE MANNER PRESCRI BED BY THE PARTNERSHIP LAW THERE IS NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRED PARTNER TO THE CONTINUING PARTNERS AND THE AMOUNT RECEIVED BY THE RETIRING PARTNER IS NOT CAPITAL GAIN . 4.(A)(III) FURTHER, HE RELIED ON THE JUDGEMENT OF MADRAS HIGH COURT IN THE CASE OF V.RANGASWAMY NAIDU VS.CIT REPORTED I N 31 ITR 711 WHEREIN IT WAS HELD THAT: THE CONGRESS OF RIGHTS WHICH THE ASSESSEE ENJOYED U NDER THE PARTNERSHIP AGREEMENT OF A&CO. AND WHICH HE CONVEYED FOR A PRIC E TO V.G.N. WAS A 'CAPITAL ASSET' WITHIN THE MEANING OF SECTION 2(4A) OF THE INCOME-TAX ACT; (II) WHAT WAS PAYABLE UNDER THE MANAGING AGENCY AGR EEMENT BETWEEN A & CO. AND THE COIMBATORE SPINNING CO. WAS NOT MERE RE MUNERATION FOR SERVICES RENDERED BY EACH OF THE PARTNERS, BUT THE MANAGING AGENCY ITSELF WAS A TRANSFERABLE ASSET OF A & CO.; (III) THAT THE TRANSACTION INVOLVED BOTH AN EXCHANGE AND TRANSFER OF CAPITAL ASSETS, AND HAD ALL THE ELEMENTS OF A SALE, AND THE SUM OF RS.1,00,000 RECEIVED BY THE AS SESSEE WAS, THEREFORE, ASSESSABLE TO INCOME-TAX AS CAPITAL GAINS UNDER SEC TION 12B OF THE INCOME-TAX ACT. 4.(B) ACCORDING TO THE LD.A.R, THE BENEFIT DERIVED BY THE ASSESSEE IS A CAPITAL RECEIPT AND IT CANNOT BE LIABLE TO BE TAX ED IN THE HANDS OF ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 14 ASSESSEE. ACCORDING TO THE LD.A.R., MEMORANDUM OF AGREEMENT ON 06.02.2007 BETWEEN THE ASSESSEE, D.SRINIVASAN, S.SR INIVASAN AND M/S METRO CORP, OR AGREEMENT DATED 07.03.2009 BETW EEN M/S METRO CORP INFRASTRUCTURE AND THE ASSESSEE TO SELL VILLA IN FAVOUR OF SHARADHA TERRY PRODUCTS LTD., OR FACILITY AGREEMENT DATED 07.03.2009 BETWEEN M/S METRO CORP INFRASTRUCTURE AN D ASSESSEE IN FAVOUR OF THE ASSESSEE TOWARDS PART OF CONSIDERATIO N OF PAYMENT OR CONSTRUCTION AGREEMENT DATED 07.03.2009 BETWEEN M/S METRO CORP INFRASTRUCTURE AND THE ASSESSEE AS PART OF CONSIDER ATION OF PAYMENT OR SETTLEMENT DEED DATED 09.03.2009 BETWEEN THE ASS ESSEE AND M/S METRO CORP, DEEPAK KRISHNAPPA AND UDAY REDDY CANNOT HAVE ANY BEARING TO HOLD THAT THE AMOUNT RECEIVED BY THE ASS ESSEE IS TAXABLE AMOUNT. ACCORDING TO HIM ON 06.02.2007 ON THE DATE OF AGREEMENT WITH M/S METRO CORP, IT IS ONLY A THIRD PARTY. TH E ONLY RELATION BETWEEN THE ASSESSEE AND M/S METRO CORP IS THAT TH EY WERE TO ACT AS DEVELOPER OF THE PROPERTY TO BE OWNED BY THE FIR M M/S. S.J.M. PROPERTY DEVELOPERS. THE SAID AGREEMENT WAS FOR A COMMITMENT BY THE DEVELOPER AND HAD NOTHING TO DO WITH ANY COMPEN SATION AS NARRATED BY THE AO. IF HE ASSESSEE PROPOSED TO RE TIRE FROM THE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 15 PARTNERSHIP, AS PER THE AGREEMENT CITED, THE AO HAS NO BASIS FOR TAKING IT AS AN EVIDENCE TO HOLD THAT THE AMOUNT RE CEIVED BECOMES TAXABLE. THE AO HAS TO LEGALLY TAKE INTO CONSIDERA TION ONLY THE EVET THAT SUBSEQUENTLY HAPPENED IN FEBRUARY 2009. THIS A GREEMENT AT BEST COULD ONLY BE CALLED A PROPOSAL WHICH WAS ENT ERED IN ABUNDANT CAUTION. THE SUBSEQUENT EVENT THAT HAPPENS CANNOT B E TREATED AS AN ARRANGEMENT AND IT IS FOR THE PURPOSE OF AVOIDING A NY TAX. THE APPRECIATION IN VALUE OF ASSETS AND REVALUING THE S AME AND CREDITING OF THE SAME TO THE CAPITAL ACCOUNT OF THE PARTNERS CANNOT BE CONSTRUED AS CAPITAL GAIN IN THE HANDS OF THE ASSES SEE. ACCORDING TO HIM, NEITHER SEC.28(VA) OR SEC.45 OR SEC.46 OR SEC. 56 ARE APPLICABLE TO THE FACTS OF THE CASE. REGARDING NON-VALUATION OF ASSETS WHEN SHRI D.SRINIVASAN, SHRI S.SRINIVASAN, AND SHRI UDAY REDD Y RETIRED, TO HOLD THAT THE REVALUATION OF ASSETS WHEN ASSESSEE RETIRE S IS MADE BELIEVE STORY AND LD.A.R SUBMITTED THAT REVALUATION OF ASS ETS OF THE FIRM DIRECTLY BETWEEN PARTNERS AND THE AO CANNOT THRUST UPON THE FIRM TO REVALUE THE ASSETS ON EVERY TIME OF RETIREMENT OF T HE PARTNERS. MOREOVER, SINCE REVALUATION CANNOT BE DONE AT THE T IME OF RETIREMENT OF ONE PARTNER, CANNOT BE THE REASON FOR TAXATION O F REVALUATION WHEN ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 16 SUBSEQUENT PARTNERS WHO DESIRE TO RETIRE, REQUIRES REVALUATION AND ACCEPTED BY OTHER EXISTING PARTNERS OF ASSESSEE CO MPANY, HOLDING 99% IN THE PARTNERSHIP FIRM. WHEN PARTNERS RETIRED FROM THE FIRM, IT HAS EVERY RIGHT TO GET ITS DUE SHARE IN THE ASSETS OF THE PARTNERSHIP FIRM AND IT CANNOT BE QUESTIONED BY THE REVENUE AUT HORITIES TO HOLD THAT IT IS COLORABLE DEVICE ADOPTED BY THE ASSESSEE TO AVOID TAX. ACCORDING TO HIM, THE TRANSACTION WAS IN NORMAL COU RSE OF THE BUSINESS OPERATION OF THE ASSESSEE FIRM AND IT IS A CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE, NOT LIABLE TO BE TAXED IN TERMS OF SEC.45(4) OF THE ACT. HE RELIED ON THE FOLLOWING H IGHER JUDICIARY PRONOUNCEMENTS:- (I) VANA SILK MILLS (P) LTD., VS. CIT REPORTED IN 191 ITR 647(SC) (II) MARYBONG KYEL TEA INDUSTRIES REPORTED IN 224 I TR 589(SC) (III) CIT VS. DYNAMIC ENTERPRISE REPORTED IN 359 IT R 83-FB (KARNATAKA HIGH COURT) 5. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE TR ANSACTION ENTERED BY THE ASSESSEE WITH M/S. S.J.M. PROPERTY D EVELOPERS AS WELL AS M/S.METRO CROP IS A COLORABLE DEVICE SO AS TO REDUCE TAX ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 17 LIABILITY. ACCORDING TO HIM, ALL THE AGREEMENTS ENT ERED BY THE ASSESSEE TO BE SEEN COLLECTIVELY AND TRULY IN ITS P ERSPECTIVE AND IT HAS TO BE TREATED AS ONE COMMON TRANSACTION ENTERED THR OUGH VARIOUS SEPARATE AGREEMENTS, BUT THE COMMON PRINCIPLE EVOLV ING IS THAT IT IS THE BENEFIT DERIVED BY THE ASSESSEE IN THE FIELD OF REVENUE ACCOUNT FOR INVESTING ` 25 CRORES IN M/S. S.J.M. PROPERTY DEVELOPERS BY WAY OF LOAN AND IT IS TO BE BROUGHT TO TAX. FURTHER, HE S UBMITED THAT THE APPROACH OF ASSESSEE IN REVALUATION OF ASSET IS NOT CONSISTENT AND WHEN ON 31.01.2009 THREE PARTNERS WERE RETIRED, THE RE IS NO REVALUATION OF ASSETS. ON 06.03.2009, ONLY WHEN TH E ASSESSEE WAS RETIRED, THERE IS REVALUATION OF ASSETS. HE SUBMIT ED THAT IF THE PROVISIONS OF THE SECTION 45(4) IS NOT APPLICABLE, IT SHOULD BE ASSESSED AS AN INCOME IN TERMS OF SEC.28(IV) OR SEC .28(V) OR SEC.28(VA) OF THE ACT. 5(A)(I) ACCORDING TO DR THE TRIBUNAL CAN GIVE SUC H DIRECTION, BEING THE FINAL FACT-FINDING AUTHORITY IN VIEW OF T HE JUDGEMENT OF SUPREME COURT IN THE CASE OF KAPUR CHAND SHRIMAL VS . CIT REPORTED IN 131 ITR 451(SC) WHEREIN HELD THAT: IT IS WELL KNOWN THAT AN APPELLATE AUTHORITY HAS TH E JURISDICTION AS WELL AS THE DUTY TO CORRECT ALL ERRORS IN THE PROCEEDINGS U NDER APPEAL AND TO ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 18 ISSUE, IF NECESSARY, APPROPRIATE DIRECTIONS TO THE AUTHORITY AGAINST WHOSE DECISION THE APPEAL IS PREFERRED TO DISPOSE OF THE WHOLE OR ANY PART OF THE MATTER AFRESH, UNLESS FORBIDDEN FROM DOING SO BY ST ATUTE . 5(A)(II) FURTHER, HE PLACED RELIANCE IN THE CASE O F CIT VS.MANOHAR GLASS WORKS REPORTED IN 232 ITR 302(ALL) WHEREIN HE LD THAT: THE APPELLATE TRIBUNAL BEING THE FINAL FACT-FINDING BODY IS UNDER A LEGAL OBLIGATION TO RECORD A CORRECT FINDING OF FACT AND AS AND WHEN IT FEELS SOME DIFFICULTY IN RECORDING A FINDING OF FACT ON A CCOUNT OF CONTRADICTIONS IN THE FACTUAL POSITION, IT MAY REMAND THE MATTER T O THE LOWER AUTHORITY TO STATE THE CORRECT FACTS . HE ALSO RELIED ON THE ORDER OF TRIBUNAL REPORTED IN THE CASE OF M/S.TECUMSEH INDIA PRIVATE LIMITED VS. ADDITIONAL.C IT,NEW DELHI [2010] 127 ITD 1(DEL.)(SB ). FURTHER THE LD.D.R SUBMITTED THAT THE AMOUNT RECEIVED BY THE ASSESSEE BEING A RETIRED PAR TNER REPRESENTS THE MARKET VALUE OF THE ASSETS OF M/S. S.J.M. PROPE RTY DEVELOPERS, THE ASSESSEES RIGHTS AND INTEREST INCLUDING ITS SH ARE IN THE FIRM BY RETIRING FROM THE FIRM WAS SURRENDERED AL ITS RIGHT S THEREIN, WHICH WERE LATER TO BE ENJOYED BY THE CONTINUING PARTNERS. IT S RIGHTS OVER THE ASSETS OF THE FIRM ARE NOT TRANSFERRED FREE OF COST , BUT FOR THE CONSIDERATION RECEIVED FROM FIRM AT ` 26.99 CRORES FROM THE FIRM. THUS, THE SURRENDER OF RIGHTS FOR CONSIDERATION IS A TRANSFER WITHIN THE MEANING OF SEC.2(14) OF THE ACT. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 19 5(A)(III) HE RELIED ON THE JUDGEMENT OF BOMBAY HI GH COURT IN THE CASE OF CIT VS. A. N. NAIK ASSOCIATES AND ANOTHER R EPORTED IN [2004] 265 ITR 346 (BOM) WHEREIN IT WAS HELD THAT THE DOCUMENTS WOULD CLEARLY SHOW THAT BEFORE THE CO NTINUING PARTNERS RETIRED THERE WAS AN INDUCTION OF A NEW PARTNER IN THE MORNING OF THE SAID DAY AND OUTGOING PARTNERS RETIRED AT THE CLOSING OF BUSINESS HOURS ON THAT DAY. IN OTHER WORDS, THE PARTNERSHIP SUBSISTED BUT WITH TWO PARTNERS AND THE BUSINESS ALSO CONTINUED. THAT WOULD, THEREFORE, NOT AMOUNT TO DISSOLUTION OF THE FIRM. THERE WAS NO DENIAL THAT T HERE WERE FAMILY DISPUTES AMONGST THE PARTNERS AND THE GENESIS OF TH E FAMILY ARRANGEMENT WAS NOT DISPUTED. THE ARRANGEMENT BY WAY OF DIVISIO N OF THE ASSETS AND BUSINESS INTERESTS WAS CLEARLY DEFINED AND WAS NOT AN ISOLATED TRANSACTION IN RESPECT OF THE FIRMS. THE FINDING BY THE INCOME-TAX APPELLATE TRIBUNAL THAT THE DEED OF RECONSTITUTION BY INDUCTING A PARTNER IN THE ASSESSEE-FIRM WAS NOT A DEVICE TO AVOID TAX HAD TO BE UPHELD. HOWEVER, THE TRANSFER OF ASSETS OF THE PARTNERSHIP TO THE RETIRING PARTNERS WOULD AMOUNT TO THE TRANSFER OF THE CAPITAL ASSETS IN THE NATURE OF CAPITAL GAINS AND BUSINESS PROFITS WHICH WERE CHARGEABLE TO TAX UNDER SECTION 45(4) . 5(A)(IV) FURTHER, HE RELIED ON THE JUDGEMENT OF DEL HI HIGH COURT IN THE CASE OF BISHAN LAL KANODIA VS. CIT REPORTED IN [200 2] 257 ITR 449 (DEL) WHEREIN IT WAS HELD THAT: WHETHER IT WAS HELD TO BE A CASE OF DISSOLUTION OF THE PARTNERSHIP OR OF RETIREMENT, HAVING REGARD TO THE PROVISIONS CONTAIN ED IN SECTION 47(II) OF THE ACT, AS IT STOOD PRIOR TO 1988, THE ASSESSEE WA S ENTITLED TO THE BENEFIT THEREOF ONLY WITH RESPECT TO THE ASSETS, HE DERIVED FROM THE PARTNERSHIP FIRM AND NOT TO THE EXCESS AMOUNT. THE EXCESS AMOUNT WAS LIABLE TO TAX AS CAPITAL GAINS . ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 20 6.1 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GO NE THROUGH THE ORDERS OF THE LOWER AUTHORITIES AND PERUSED THE PAP ER BOOK FILED BY THE ASSESEE BEFORE US INCLUDING FOLLOWING DOCUMENT S : S.NO. DATE PARTICULARS 1 01.02.2007 PARTNERSHIP DEED DATED 01/02/2007 OF M /S. S.J.M. PROPERTY DEVELOPERS BETWEEN SHARADHA TERRY PRODUCTS LTD, D.SRINIVASAN, S. SRINIVASAN DEEPAK KRISHNAPPA AND UDAY REDDY 2 01.02.2007 PAN CARD COPY SJM PROPERTY DEVELOPERS 3 06.02.2007 ACKNOWLEDGEMENT OF REGISTRATION OF FIRM SJM PROPE RTY DEVELOPERS 4 06.02.2007 LAND PURCHASE DEED BY SJM PROPERTY DEVELOPERS DATED 06/02/2007 5 06.02.2007 DEVELOPMENT AGREEMENT BETWEEN SJM PROPERTY DEVELOPERS AND METROCORP DATED 06/02/2007 6 06.02.2007 MEMORANDUM OF AGREEMENT BETWEEN SHARADHA TERRY PRODUCTS LTD, D.SRINIVASAN, S. SRINIVASAN AND METRO CROP REPRESENTED BY ITS PARTNERS DEEPAK KRISHNAPPA AND U DAY REDDY. 31.01.2009 RETIREMENT CUM RECONSTITUTION OF PARTNE RSHIP DEED - ADMISSION OF D.M.DEVARAJ & RETIREMENT OF D.SRINIVAS AN, S.SRINIVASAN AND UDAY REDDY ALONG WITH BALANCE SHEE T AS ON 31.01.2009 BEFORE AND AFTER ADMISSION OF A NE W PARTNER. 8 06.03.2009 MEMORANDUM OF AGREEMENT OF RETIREMENT FROM PARTNERSHIP BY SHARADHA TERRY PRODUCTS LTD 9 07.03.2009 AGREEMENT BETWEEN METROCORP AND SHARADHA TERRY PRODUCTS LTD TO SELL VILLA IN FAVOUR OF SHARADHA TE RRY PRODUCTS LTD. 10 07.03.2009 FACILITY AGREEMENT BETWEEN METROCORP INFRASTRUCTURE ANDSHARADHA TERRY PRODUCTS LTD IN FAVOUR OF SHARADH A TERRY PRODUCTS LTD AS A PART OF CONSIDERATION OF PA YMENT. 11 07.03.2009 CONSTRUCTION AGREEMENT BETWEEN METROCORP INFRASTRUC TURE AND SHARADHA TERRY PRODUCTS LTD IN FAVOUR OF SHARAD HA TERRY PRODUCTS LTD AS A PART OF CONSIDERATION OF PA YMENT. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 21 12 09.03.2009 SETTLEMENT DEED SHARADHA TERRY PRODUCTS LTD AND METROCORP, DEEPAK KRISHNAPPA AND UDAY REDDY ALONG WITH BALANCE SHEET AS ON 06.03.2009 BEFORE AND AFTE R RETIREMENT OF SHARADHA TERRY PRODUCTS LTD. 13 31.03.2009 ANNUAL ACCOUNTS FOR THE YEAR 2008 - 2009 6.2 AT THIS POINT OF TIME, IT IS APPROPRIATE TO RE FER TO CERTAIN PROVISIONS OF THE ACT RELEVANT TO THE FACTS OF THE PRESENT CASE. 6.2.1 SECTION 2(47) DEFINES WHAT IS TRANSFER AND IT READS AS FOLLOWS : ' (47) ' TRANSFER ', IN RELATION TO A CAPITAL ASSET, INCLUDES, (I) THE SALE, EXCHANGE OR RELINQUISHMENT OF THE AS SET; OR (II) THE EXTINGUISHMENT OF ANY RIGHTS THEREIN; OR (III) THE COMPULSORY ACQUISITION THEREOF UNDER ANY LAW; OR (IV) IN A CASE WHERE THE ASSET IS CONVERTED BY THE OWNER THEREOF INTO, OR IS TREATED BY HIM AS, STOCK-IN-TRA DE OF A BUSINESS CARRIED ON BY HIM, SUCH CONVERSION OR TREA TMENT; (V) ANY TRANSACTION INVOLVING THE ALLOWING OF THE P OSSESSION OF ANY IMMOVABLE PROPERTY TO BE TAKEN OR RETAINED I N PART PERFORMANCE OF A CONTRACT OF THE NATURE REFERRED TO IN S. 53A OF THE TRANSFER OF PROPERTY ACT, 1882 (4 OF 1882); OR (VI) ANY TRANSACTION (WHETHER BY WAY OF BECOMING A MEMBER OF OR ACQUIRING SHARES IN, A COOPERATIVE SOCIETY, C OMPANY OR OTHER AOP OR BY WAY OF ANY AGREEMENT OR ANY ARRANGE MENT OR IN ANY OTHER MANNER WHATSOEVER) WHICH HAS THE EF FECT OF TRANSFERRING, OR ENABLING THE ENJOYMENT OF, ANY IMM OVABLE PROPERTY.' ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 22 EXPLANATION : FOR THE PURPOSES OF SUB-CLS. (V) AND (VI), 'IMMOVABLE PROPERTY' SHALL HAVE THE SAME MEANING AS IN CL. (D) OF S. 269UA.' 6.2.2 SECTION 2(14) DEFINES CAPITAL ASSET, AS MEANING 'PROPERTY' OF ANY KIND HELD BY THE ASSESSEE, WHETHE R OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION. THE ABOV E EXHAUSTIVE DEFINITION IS SUBJECT TO THE FOLLOWING E XCLUSIONS LIKE STOCK-IN-TRADE, CONSUMABLE STORES OR RAW MATERIAL H ELD FOR THE PURPOSE OF BUSINESS OR PROFESSION, PERSONAL EFFECTS , AGRICULTURAL LAND IN INDIA, CERTAIN GOLD BONDS, SPECIAL BEARER B ONDS AND GOLD DEPOSIT BONDS. THE SHARE OR INTEREST OF A PARTNER I N THE PARTNERSHIP AND ITS ASSETS WOULD BE PROPERTY AND, T HEREFORE, A CAPITAL ASSET WITHIN THE MEANING OF THE AFORESAID D EFINITION. TO THIS EXTENT, THERE CAN BE NO DOUBT. THE NEXT QUESTI ON IS AS TO WHETHER IT CAN BE SAID THAT THERE WAS A TRANSFER OF CAPITAL ASSET BY THE RETIRING PARTNER IN FAVOUR OF THE FIRM AND I TS CONTINUING PARTNERS SO AS TO ATTRACT A CHARGE UNDER S. 45 OF THE ACT. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 23 A LOOK AT HOW FORMATION AND DISSOLUTION OF PARTNERS HIP WAS USED AS A DEVICE TO EVADE TAX ON CAPITAL GAINS TO CONVERT A N 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. 6.2.2.1 PARTNERSHIP IS A FORM OF CARRYING ON BUSIN ESS EVOLVED SO THAT TWO OR MORE PERSONS CAN TO JOIN TOGETHER BY PO OLING RESOURCES IN THE FORM OF CAPITAL AND EXPERTISE. ONE OF THE DE VICES USED BY ASSESSEE TO EVADE TAX ON CAPITAL GAIN WAS TO CONVER T IN ASSET HELD INDIVIDUALLY INTO ASSET OF THE FIRM IN WHICH THE IN DIVIDUAL IS A PARTNER. SIMILARLY, PARTNERSHIP ASSETS WERE CONVERTED INTO I NDIVIDUAL ASSETS ON DISSOLUTION OR OTHERWISE. 6.2.2.2 SUCH INTRODUCTION OF CAPITAL ASSET AS CAPI TAL CONTRIBUTION BY A PARTNER UP TO 1ST APRIL, 1988 DID NOT RESULT I N INCIDENCE OF CAPITAL GAIN. IT WAS SO HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI V. CIT [1985] 156 ITR 5 09. THE HON'BLE SUPREME COURT HELD THAT UNDER THE IT ACT, 1961, WHE RE A PARTNER OF A FIRM MAKES OVER CAPITAL ASSETS WHICH ARE HELD BY HIM TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPITAL, THERE IS A TRANSF ER OF A CAPITAL ASSET ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 24 WITHIN THE TERMS OF S. 45 OF THE ACT, BECAUSE AN EX CLUSIVE INTEREST OF THE PARTNER IN PERSONAL ASSETS IS REDUCED, ON THEIR ENTRY INTO THE FIRM, INTO A SHARE INTEREST. ON SUCH INTRODUCTION O F CAPITAL THE PARTNER'S CAPITAL ACCOUNT IS CREDITED WITH THE MARK ET VALUE OF THE PROPERTY. SUCH ENTRY DOES NOT REPRESENT THE TRUE VA LUE OF CONSIDERATION. IT IS A NOTIONAL VALUE ONLY, INTENDE D TO BE TAKEN INTO ACCOUNT AT THE TIME OF DETERMINING THE VALUE OF THE PARTNER'S SHARE IN THE NET PARTNERSHIP ASSETS ON THE DATE OF DISSOLUTI ON OR ON HIS RETIREMENT, A SHARE WHICH WILL DEPEND UPON DEDUCTIO N OF THE LIABILITIES AND PRIOR CHARGES EXISTING ON THE DATE OF DISSOLUTION OR RETIREMENT. IT IS NOT POSSIBLE TO PREDICATE BEFORE HAND WHAT WILL BE THE POSITION IN TERMS OF MONETARY VALUE OF A PARTNE R'S 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 CO ME. ALL THAT LIES WITHIN THE WOMB OF THE FUTURE. IT IS IMPOSSIBLE TO CONCEIVE OF EVALUATING THE CONSIDERATION ACQUIRED BY THE PARTNE R WHEN HE BRINGS HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM WHEN N EITHER CAN THE DATE OF DISSOLUTION OR RETIREMENT BE ENVISAGED NOR CAN THERE BE ANY ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 25 ASCERTAINMENT OF LIABILITIES AND PRIOR CHARGES WHIC H MAY NOT HAVE EVEN ARISEN YET. THEREFORE, THE CONSIDERATION WHICH A PARTNER ACQUIRES ON MAKING OVER HIS PERSONAL ASSET TO THE F IRM AS HIS CONTRIBUTION TO ITS CAPITAL CANNOT FALL WITHIN THE TERMS OF S. 48 OF THE ACT. AND AS THAT PROVISION IS FUNDAMENTAL TO THE CO MPUTATION MACHINERY INCORPORATED IN THE SCHEME RELATING TO TH E DETERMINATION OF THE CHARGE PROVIDED IN S. 45, SUCH A CASE MUST B E REGARDED AS FALLING OUTSIDE THE SCOPE OF CAPITAL GAINS TAXATION ALTOGETHER. IN COMING TO THE ABOVE CONCLUSION THE HON'BLE COURT RE LIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN ADDANKI NA RAYANAPPA V. BHASKARA KRISHNAPPA AIR 1966 SC 1300. THE HON'BLE S UPREME COURT IN THE SAID DECISION EXPLAINED THE NATURE OF PARTNERSHIP AND THE RIGHT OF THE PARTNERS OVER THE ASSETS OF THE PA RTNERSHIP AS FOLLOWS (P. 1303 OF AIR) : '.... WHATEVER MAY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY THE PARTNERS WHEN THE PARTNERSHIP IS FORMED OR WHICH MAY BE ACQUIRED IN THE COURSE OF THE BUSINESS OF THE PARTNERSHIP IT BECOMES THE PROPERTY OF THE FIRM AND WHAT A PARTNER IS ENTITLED TO IS HIS SHARE OF PROFITS, IF ANY, ACCRUING TO THE PARTNERSHIP FROM THE REALISATION OF THIS PROPER TY, AND UPON DISSOLUTION OF THE PARTNERSHIP TO A SHARE IN THE MO NEY REPRESENTING THE VALUE OF THE PROPERTY. NO DOUBT, S INCE A FIRM HAS NO LEGAL EXISTENCE, THE PARTNERSHIP PROPERTY WI LL VEST IN, ALL THE PARTNERS, AND IN THAT SENSE EVERY PARTNER WAS A N INTEREST IN ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 26 THE PROPERTY OF THE PARTNERSHIP. DURING THE SUBSIST ENCE OF THE PARTNERSHIP, HOWEVER, NO PARTNER CAN DEAL WITH ANY PORTION OF THE PROPERTY AS HIS OWN. NOR CAN HE ASSIGN HIS INTE REST IN A SPECIFIC ITEM OF THE PARTNERSHIP PROPERTY TO ANYONE . HIS RIGHT IS TO OBTAIN SUCH PROFITS, IF ANY, AS FALL TO HIS SHAR E FROM TIME TO TIME AND UPON THE DISSOLUTION OF THE FIRM TO L SHAR E IN THE ASSETS OF THE FIRM WHICH REMAIN AFTER SATISFYING TH E LIABILITIES SET OUT IN CL. (A) AND SUB CLS. (I), (II) AND (III) OF CL. (B) OF S. 48.' 6.2.3 THE POSITION WAS LATER EXPLAINED IN THE SAME JUDGMENT AS FOLLOWS (P. 1304 ) : 'THE WHOLE CONCEPT OF PARTNERSHIP IS TO ENTRY UPON A JOINT VENTURE AND FOR THAT PURPOSE TO BRING IN AS CAPITAL MONEY OR EVEN PROPERTY INCLUDING IMMOVABLE PROPERTY. ONCE TH AT 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 TR ADING ASSET OF THE PARTNERSHIP IN WHICH ALL THE PARTNERS WOULD HAV E INTEREST IN PROPORTION TO THEIR SHARE IN THE JOINT VENTURE OF T HE BUSINESS OF PARTNERSHIP. THE PERSON WHO BROUGHT IT IN WOULD, TH EREFORE, NOT BE ABLE TO CLAIM OR EXERCISE ANY EXCLUSIVE RIGHT OV ER ANY PROPERTY WHICH HE HAS BROUGHT IN, MUCH LESS OVER AN Y OTHER PARTNERSHIP PROPERTY. HE WOULD NOT BE ABLE TO EXERC ISE HIS RIGHT EVEN TO THE EXTENT OF HIS SHARE IN THE BUSINESS OF THE PARTNERSHIP. AS ALREADY STATED, HIS RIGHT DURING TH E SUBSISTENCE OF THE PARTNERSHIP IS TO GET HIS SHARE OF PROFITS F ROM TIME TO TIME AS MAY BE AGREED UPON AMONG THE PARTNERS AND AFTER THE DISSOLUTION OF THE PARTNERSHIP OR WITH HIS RETIREME NT FROM PARTNERSHIP OF THE, OF HIS SHARE IN THE NET PARTNER SHIP ASSETS AS ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 27 ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER A DE DUCTION OF LIABILITIES AND PRIOR CHARGES.' 6.2.4 PARLIAMENT WITH THE AVOWED OBJECT OF BLOCKING THIS ESCAPE ROUTE FOR AVOIDING CAPITAL GAINS TAX BY THE FINANCE ACT, 1987, INTRODUCED SUB-S. (3) TO S. 45 W.E.F. 1ST APRIL, 19 88. THE EFFECT OF THIS WAS THAT THE PROFITS AND GAINS ARISING FROM THE TRA NSFER OF A CAPITAL ASSET BY A PARTNER TO A FIRM ARE CHARGEABLE AS THE PARTNER'S INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND THE AMOUNT RECORDED IN THE BOOKS OF ACCOUNT OF THE FIRM, SHALL BE DEEMED TO BE THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUIN G AS A RESULT OF TRANSFER OF THE CAPITAL ASSET. 6.2.5 IN THE CASE OF DISSOLUTION WHERE PARTNERS A RE ALLOTTED CAPITAL ASSETS OF THE FIRM, IT WAS HELD THAT THERE WAS NO TRANSFER. IN MALABAR FISHERIES CO. V. CIT [1979] 120 ITR 49/ 2 T AXMAN 409, THE HON'BLE SUPREME COURT HAS EXPLAINED THE NATURE OF D ISTRIBUTION OF ASSETS OF A PARTNERSHIP ON DISSOLUTION AMONGST ITS PARTNERS AND AS TO WHETHER SUCH DISTRIBUTION OF ASSETS WOULD CONSTITUT E TRANSFER WITHIN THE MEANING OF S. 2(47) OF THE IT ACT AS FOLLOWS : ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 28 'A PARTNERSHIP FIRM UNDER THE INDIAN PARTNERSHIP AC T, 1932 IS NOT A DISTINCT LEGAL ENTITY APART FROM THE PARTNERS CONSTITUTING IT AND EQUALLY IN LAW THE FIRM AS SUCH HAS NO SEPAR ATE RIGHTS OF ITS OWN IN THE PARTNERSHIP ASSETS AND WHEN ONE T ALKS OF THE FIRM'S PROPERTY OR FIRM'S ASSETS ALL THAT IS ME ANT IS PROPERTY OR ASSETS IN WHICH ALL PARTNERS HAVE A JOI NT OR COMMON INTEREST. IF THAT BE THE POSITION IT IS DIFF ICULT TO ACCEPT THE CONTENTION THAT UPON DISSOLUTION THE FIR M'S RIGHTS IN THE PARTNERSHIP ASSETS ARE EXTINGUISHED. THE FIR M AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN THE PARTNERSHI P ASSETS BUT IT IS THE PARTNERS WHO OWN JOINTLY BY OR IN COM MON THE ASSETS OF THE PARTNERSHIP AND, THEREFORE, THE CONSE QUENCE OF THE DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSET S TO THE PARTNERS WHICH FLOWS UPON DISSOLUTION AFTER DISCHAR GE OF LIABILITIES IS NOTHING BUT A MUTUAL ADJUSTMENT OF R IGHTS BETWEEN THE PARTNERS AND THERE IS NO QUESTION OF AN Y EXTINGUISHMENT OF THE FIRM'S RIGHTS IN THE PARTNERS HIP ASSETS AMOUNTING TO A TRANSFER OF ASSETS WITHIN THE MEANIN G OF S. 2(47) OF THE ACT. FURTHER, IT IS NECESSARY THAT THE SALE OR TRANSFER OF ASSETS MUST BE BY THE ASSESSEE TO A PER SON. NOW EVERY DISSOLUTION MUST IN POINT OF TIME BE ANTE RIOR TO THE ACTUAL DISTRIBUTION, DIVISION OR ALLOTMENT OF T HE ASSETS THAT TAKES PLACE AFTER MAKING UP ACCOUNTS AND DISCH ARGING THE DEBTS AND LIABILITIES DUE BY THE FIRM. UPON DIS SOLUTION THE FIRM CEASES TO EXIST, THEN FOLLOWS THE MAKING UP OF ACCOUNTS, ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 29 THEN THE DISCHARGE OF DEBTS AND LIABILITIES AND THE REUPON DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TAKES PLACE INTER SE BETWEEN THE ERSTWHILE PARTNERS BY WAY OF MUTUAL ADJUSTMENT OF RIGHTS BETWEEN THEM. THE DISTRIBUTION , DIVISION OR ALLOTMENT OF ASSETS TO THE ERSTWHILE PARTNERS, I S NOT DONE BY THE DISSOLVED FIRM. IN THIS SENSE THERE IS NO TR ANSFER OF ASSETS BY THE ASSESSEE (DISSOLVED FIRM) TO ANY PERS ON.' 6.2.6 TO PLUG THIS LOOPHOLE THE FINANCE ACT, 1987, BROUGH T ON THE STATUTE BOOK A NEW SUB-S. (4) IN S. 45 OF THE ACT, W.E.F. 1ST APRIL, 1988, WHICH READS AS FOLLOWS : ' THE 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 BEIN G A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SH ALL BE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCI ATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSF ER TAKES PLACE AND, FOR THE PURPOSES OF S. 48, THE FAIR MARK ET 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.' 6.2.7 BEFORE THE INTRODUCTION OF SUB-S. (4) TO S. 45, THE RE WAS CL. (II) OF S. 47 WHICH READ AS UNDER : 'ANY DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUT ION OF A FIRM, BODY OF INDIVIDUALS OR OTHER ASSOCIATION OF P ERSONS.' ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 30 SECTION 47 OF THE ACT LAYS DOWN WHICH ARE THE TRANSACTIONS NOT REGARDED AS TRANSFER FOR THE PURPOSE OF S. 45 OF TH E ACT . 6.2.8 THE FINANCE ACT, 1987, W.E.F. 1ST APRIL, 1988, OMIT TED THIS CLAUSE, THE EFFECT OF WHICH WAS THAT DISTRIBUTION O F CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM WOULD W.E.F. 1ST APRIL, 1 988 BE REGARDED AS 'TRANSFER'. THEREFORE, INSTEAD OF AMENDING S. 2(47) , THE AMENDMENT WAS CARRIED OUT BY THE FINANCE ACT, 1987, BY OMITTI NG S. 47(II), THE RESULT OF WHICH WAS THAT DISTRIBUTION OF CAPITAL AS SETS 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 CAPITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRM'S INCOME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND FOR THE PURPOSES OF COMPUTATION OF CAPITA L GAINS, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER W AS DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACC RUING AS A RESULT OF THE TRANSFER. 6.2.9 THUS PARLIAMENT BROUGHT INTO THE TAX NET TRANSACT IONS WHEREBY ASSETS WERE BROUGHT INTO A FIRM OR TAKEN OU T OF THE FIRM. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 31 THUS S. 45(4) COVERS CASES WHERE THERE IS DISSOLUTI ON OF THE FIRM AND DISTRIBUTION OF ASSETS OF THE FIRM BY THE FIRM TO I TS PARTNERS. 6.2.10 DISSOLUTION AND RETIREMENT ARE TWO DIFFERENT CONC EPTS. IN THE CASE OF RETIREMENT, THE RETIRING PARTNER GOES O UT OF THE FIRM BUT THE REMAINING PARTNERS CONTINUE TO CARRY ON THE BUS INESS OF THE PARTNERSHIP AS A FIRM. IN THE CASE OF DISSOLUTION, THE FIRM NO LONGER EXISTS AND THE DISSOLUTION IS BETWEEN ALL THE PARTN ERS OF THE FIRM. 6.2.11 IN THE CASE OF RETIREMENT OF A PARTNER THE RE COULD BE TWO SITUATIONS. IN THE FIRST SITUATION THERE CAN BE A R ETIREMENT OF A PARTNER FROM THE FIRM AND THE FIRM MIGHT CONTINUE ITS EXIST ENCE AND THE RETIRING PARTNER MIGHT BE GIVEN ASSETS IN LIEU OF A MOUNTS PAYABLE TO HIM ON RETIREMENT. THIS COULD BE DONE EITHER ON THE BASIS OF SETTLING AMOUNTS STANDING TO THE CREDIT OF HIS CAPITAL ACCOU NT OR ON A LUMP SUM BASIS. THERE COULD BE A SECOND SITUATION WHERE THE RETIRING PARTNER IS PAID CONSIDERATION IN CASH AND HE GIVES UP HIS RIGHTS AS PARTNER INCLUDING HIS RIGHTS OVER THE ASSETS OF THE PARTNERSHIP. THIS AGAIN CAN BE DONE EITHER ON THE BASIS OF SETTLING A MOUNTS STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT OR ON A LUMP SUM BASIS. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 32 6.2.12 IN THE FIRST SITUATION I.E., RETIREMENT OF A PARTNER FROM THE FIRM AND THE FIRM CONTINUING ITS EXISTENCE AND THE RETIR ING PARTNER IS GIVEN ASSETS IN LIEU OF AMOUNTS PAYABLE TO HIM ON RETIREM ENT, IT HAS BEEN HELD BY THE HON'BLE BOMBAY HIGH COURT TO BE COVERED BY THE PROVISIONS OF S. 45(4) OF THE ACT VIZ., A TRANSFER GIVING RISE TO A CAPITAL GAIN. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS.,A.N.NAIK ASSOCIATES (265 ITR 346)(BOM.). IN THE CASE OF A.N. NAIK ASSOCIATES (SUPRA) WAS DEALING WITH A CASE OF RECONSTITUTION OF FIRM AND ALLOTMENT OF ASSETS TO RETIRING PARTNERS. THE RECONSTITUTION HAD TAKEN PLACE PURSUANT TO A FAMILY ARRANGEMENT. T HE CHARGEABILITY TO CAPITAL GAIN TAX IN SUCH CIRCUMSTANCES WAS IN IS SUE BEFORE THE HON'BLE COURT. THE COURT DEALT WITH THE ISSUE AS TO WHAT WOULD BE THE EFFECT OF PARTNERS OF A SUBSISTING PARTNERSHIP DISTRIBUTING ASSETS TO PARTNERS WHO RETIRE FROM THE PARTNERSHIP. DOES THE ASSET OF THE PARTNERSHIP, ON BEING ALLOTTED TO THE RETIRED PARTN ER/PARTNERS FALL WITHIN THE EXPRESSION 'OTHERWISE' ? THE COURT HELD THAT THE PURPOSE AND OBJECT OF THE ACT OF 1987 WAS TO BRING TO CHARG E OF TAX ARISING ON DISTRIBUTION OF CAPITAL ASSETS OF FIRMS WHICH OTHER WISE WAS NOT SUBJECT TO TAXATION. IF THE LANGUAGE OF SUB-S. (4) IS CONST RUED TO MEAN THAT ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 33 THE EXPRESSION 'OTHERWISE' HAS TO PARTAKE OF THE NA TURE OF DISSOLUTION OR DEEMED DISSOLUTION, THEN THE VERY OBJECT OF THE AMENDMENT COULD BE DEFEATED BY THE PARTNERS BY DISTRIBUTING THE ASS ETS TO SOME PARTNERS WHO MAY RETIRE. THE FIRM THEN WOULD NOT BE LIABLE TO BE TAXED THUS DEFEATING THE VERY PURPOSE OF THE AMENDI NG ACT. THE COURT NOTICED THAT THE POSITION PRIOR TO THE AMENDM ENT BY INTRODUCTION OF S. 45(4) BY THE FINANCE ACT, 1987, WAS THAT THERE WAS NO TRANSFER OF ASSETS BY THE FIRM TO THE PARTNERS O N DISSOLUTION OR TRANSFER OF ASSETS TO THE RETIRING PARTNER ON RETIR EMENT. THE EFFECT WAS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOU LD BE CHARGEABLE AS THE FIRM'S INCOME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND FOR THE PURPOSES OF COMPUTATION OF CAPITA L GAINS, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER W OULD BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUED AS A RESULT OF THE TRANSFER. THEREFORE, IF THE OBJECT OF THE AC T IS SEEN AND THE MISCHIEF IT SEEKS TO AVOID, IT WOULD BE CLEAR THAT THE INTENTION OF PARLIAMENT WAS TO BRING INTO THE TAX NET TRANSACTIO NS WHEREBY ASSETS WERE BROUGHT INTO A FIRM OR TAKEN OUT OF THE FIRM. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 34 6.2.13 PRIOR TO THE AFORESAID DECISION, CASES WHE RE ON RETIREMENT, PROPERTY WAS ALLOTTED TO A PARTNER BY T HE FIRM IN LIEU OF AMOUNTS PAYABLE TO HIM WERE SUBJECTED TO CAPITAL GA INS TAX. IN THAT SCENARIO THE ASSESSEES TOOK A STAND THAT RETIREMENT IS ALSO ONE FORM OF DISSOLUTION OF THE FIRM BECAUSE DISTRIBUTION OF ASSETS ON RETIREMENT WAS NOT REGARDED AS A TRANSFER UNDER S. 47(II) OF T HE ACT. THIS WAS NOT ACCEPTED BY HON'BLE BOMBAY HIGH COURT AND THEY HELD IN THE CASE OF N.A. MODI V. CIT [1986] 162 ITR 420/ 24 TAX MAN 219 THAT A CLEAR DISTINCTION EXISTS BETWEEN RETIREMENT OF A PA RTNER FROM A FIRM AND DISSOLUTION OF THE FIRM. IN THE CASE OF RETIREM ENT OF A PARTNER FROM THE FIRM IT IS ONLY THAT PARTNER WHO GOES OUT OF TH E FIRM AND THE REMAINING PARTNERS CONTINUE TO CARRY ON THE BUSINES S OF THE PARTNERSHIP AS A FIRM, WHILE IN THE CASE OF DISSOLU TION OF THE FIRM THE FIRM AS SUCH NO MORE EXISTS AND THE DISSOLUTION IS BETWEEN ALL THE PARTNERS OF THE FIRM. THE ABOVE DECISION IN THE CAS E OF A.N. NAIK ASSOCIATES (SUPRA) HOWEVER, TREATS DISTRIBUTION OF ASSETS OF THE FIRM TO PARTNERS ON DISSOLUTION OR ON RETIREMENT AS FALL ING WITHIN THE AMBIT OF S. 45(4). ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 35 6.2.14 THE SITUATION WITH WHICH, WE ARE CONCERNED IN THIS APPEAL IS A CASE WHERE THE RETIRING PARTNER IS PAID CONSID ERATION IN CASH AND HE GIVES UP HIS RIGHTS AS PARTNER INCLUDING HIS RIG HTS OVER THE ASSETS OF THE PARTNERSHIP. THERE IS DIVERGENCE OF VIEW ON THE QUESTION AS TO WHETHER THERE IS ANY TRANSFER AT ALL IN SUCH SITUAT ION BY THE FIRM IN FAVOUR OF THE RETIRING PARTNER OR BY THE RETIRING P ARTNER IN FAVOUR OF THE FIRM AND ITS CONTINUING PARTNERS. 6.2.15 IN CIT V. MOHANBHAI PAMABHAI [1973] 91 ITR 393 THE QUESTION BEFORE THE HON'BLE GUJARAT HIGH COURT WAS AS TO WHETHER ON RETIREMENT OF A PARTNER FROM A FIRM WHETHER THER E IS RELINQUISHMENT OF INTEREST IN PARTNERSHIP ASSETS AM OUNTING TO A TRANSFER. THE HON'BLE GUJARAT HIGH COURT HELD : 'THE INTEREST OF A PARTNER IN A PARTNERSHIP IS NOT AN INTEREST IN ANY SPECIFIC ITEM OF THE PARTNERSHIP PROPERTY. IT I S A RIGHT TO OBTAIN HIS SHARE OF PROFITS FROM TIME TO TIME DURIN G THE SUBSISTENCE OF THE PARTNERSHIP AND ON DISSOLUTION O F THE PARTNERSHIP OR ON HIS RETIREMENT FROM THE PARTNERSH IP TO GET THE VALUE OF HIS SHARE IN THE NET PARTNERSHIP ASSET S WHICH REMAIN AFTER SATISFYING THE DEBTS AND LIABILITIES O F THE PARTNERSHIP. WHEN THEREFORE A PARTNER RETIRES FROM A PARTNERSHIP AND THE AMOUNT OF HIS SHARE IN THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES A ND PRIOR CHARGES IS DETERMINED ON TAKING ACCOUNTS ON THE FOO TING OF NOTIONAL SALE OF THE PARTNERSHIP ASSETS AND GIVEN T O HIM, WHAT HE RECEIVES IS HIS SHARE IN THE PARTNERSHIP AND NOT ANY CONSIDERATION FOR TRANSFER OF HIS INTEREST IN THE P ARTNERSHIP TO ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 36 THE CONTINUING PARTNERS. HIS SHARE IN THE PARTNERSH IP IS WORKED OUT BY TAKING ACCOUNTS IN THE MANNER PRESCRI BED IN THE RELEVANT PROVISIONS OF THE PARTNERSHIP LAW AND IT IS THIS, NAMELY, HIS SHARE IN THE PARTNERSHIP WHICH HE RECEI VES IN TERMS OF MONEY. THERE IS IN THIS TRANSACTION NO ELE MENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY T HE RETIRING PARTNER TO THE CONTINUING PARTNER. THE TRANSFER OF A CAPITAL ASSET IN ORDER TO ATTRACT CAPITAL GAINS TAX MUST BE ONE AS A RESULT OF WHICH CONSIDERATION IS RECEIVED BY THE ASSESSEE OR ACCRUES TO THE ASSESSEE. WHEN A PARTNER RETIRES FROM A PARTNERSHIP WHAT HE RECEIVES IS HIS SHARE IN THE PARTNERSHIP WHICH IS WORKED OUT AND REALIZED AND DO ES NOT REPRESENT CONSIDERATION RECEIVED BY HIM AS A RESULT OF THE EXTINGUISHMENT OF HIS INTEREST IN PARTNERSHIP ASSET S. HENCE, WHEN AN ASSESSEE RETIRES FROM A FIRM AND REC EIVES AN AMOUNT IN RESPECT OF HIS SHARE IN THE PARTNERSHIP T HERE IS NO TRANSFER OF INTEREST OF THE ASSESSEE IN THE GOODWIL L OF THE FIRM AND NO PART OF THE AMOUNT RECEIVED BY HIM WOULD BE ASSESSABLE TO CAPITAL GAINS TAX UNDER S. 45.' THE HON'BLE COURT HELD THAT THE EXTENDED DEFINITI ON OF THE TERM 'TRANSFER' UNDER S. 2(47) OF THE ACT, BY WHICH RELINQUISHMENT AND EXTINGUISHMENT OF ANY RIGHT IN A CAPITAL ASSET IS CONSIDERED AS TRANSFER WOULD ALSO NOT APPL Y WHEN A PARTNER RETIRES FROM THE PARTNERSHIP AND THERE WOUL D BE NO TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS. THE HON'BLE SUPREME COURT CONFIRMED THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN MOHANBHAI PAMABHAI'S CASE (SUPRA). SI MILAR VIEW WAS ALSO EXPRESSED BY THE HON'BLE SUPREME COUR T IN THE CASE OF R. LINGMALLU RAGHUKUMA FOLLOWING ITS DE CISION IN THE CASE OF MOHANBHAI PAMABHAI. IN CIT V. KUNNAMKUL AM MILL BOARD [2002] 257 ITR 544/ 125 TAXMAN 802, THE HON'BLE KERALA HIGH COURT ALSO EXPRESSED THE VIEW THAT WHER E THERE IS REVALUATION OF ASSETS OF THE FIRM ON RECONSTITUT ION OF A FIRM CONSEQUENT TO RETIREMENT OF SOME OF THE PARTNERS, I T CANNOT BE SAID THAT THERE WAS ANY TRANSFER OF ANY RIGHT IN IMMOVABLE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 37 PROPERTY IN FAVOUR OF CONTINUING PARTNERS AND THERE FORE THERE CAN BE NO CAPITAL GAIN WHICH CAN BE BROUGHT TO TAX. HOWEVER, THE HON'BLE BOMBAY HIGH COURT IN THE FOLL OWING CASES: (A) TRIBUVANDAS G. PATEL'S CASE (SUPRA ); (B) CIT V. H.R. ASLOT [1978] 115 ITR 255(BOM); (C) N.A. MODI'S CASE [1986] (162 ITR 420 ). 6.2.16 AFTER CONSIDERING THE DECISION IN THE CASE O F MOHANBHAI PAMABHAI HELD AS FOLLOWS IN THE CASE OF TRIBHUVANDAS G. PATEL (SUPRA ): 'A COUPLE OF THINGS EMERGE CLEARLY FROM THE AFORESA ID PASSAGES. IN THE FIRST PLACE, A RETIRING PARTNER WH ILE GOING OUT AND WHILE RECEIVING WHAT IS DUE TO HIM IN RESPECT O F HIS SHARE, MAY ASSIGN HIS INTEREST BY A DEED OR HE MAY INSTEAD OF ASSIGNING HIS INTEREST, TAKE THE AMOUNT DUE TO HIM FROM THE FIRM AND GIVE A RECEIPT FOR THE MONEY AND ACKNOWLED GE THAT HE HAD NO MORE CLAIM ON HIS CO-PARTNERS. THE FORMER TYPE OF TRANSACTION WILL BE REGARDED AS SALE OR RELEASE OR ASSIGNMENT OF HIS INTEREST BY A DEED ATTRACTING STAMP DUTY WHI LE THE LATTER TYPE OF TRANSACTION WOULD NOT. IN OTHER WORDS, IT I S CLEAR, THE RETIREMENT OF A PARTNER CAN TAKE EITHER OF TWO FORM S, AND APART FROM THE QUESTION OF STAMP DUTY, WITH WHICH WE ARE NOT CONCERNED, THE QUESTION WHETHER THE TRANSACTION WOU LD AMOUNT TO AN ASSIGNMENT OR RELEASE OF HIS INTEREST IN FAVOUR OF THE CONTINUING PARTNERS OR NOT WOULD DEPEND UPON WHAT PARTICULAR MODE OF RETIREMENT IS EMPLOYED AND AS IN DICATED EARLIER, IF INSTEAD OF QUANTIFYING HIS SHARE BY TAK ING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE, PARTIES AGREE TO P AY A LUMP SUM IN CONSIDERATION OF THE RETIRING PARTNER ASSIGN ING OR RELINQUISHING HIS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS, THE TR ANSACTION WOULD AMOUNT TO A TRANSFER WITHIN THE MEANING OF S. 2(47) OF THE ACT.' ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 38 6.2.17 THE ABOVE DECISION WAS FOLLOWED BY THE HON'BLE BOMBAY HIGH COURT IN THE OTHER TWO CASES OF N.A. MO DI ( SUPRA) AND H.R. ASLOT ( SUPRA). THE PUNE BENCH OF T HE TRIBUNAL IN THE CASE OF SHEVANTIBHAI C. MEHTA(83 TT J 542)(PUNE) HAD CONSIDERED THE AFORESAID DECISION O F HON'BLE BOMBAY HIGH COURT AND OTHER DECISIONS RELIED UPON B Y LEARNED COUNSEL FOR THE ASSESSEE BEFORE US AND HAS REITERATED THAT THE QUESTION OF TAXABILITY OF AN AM OUNT RECEIVED BY A PARTNER ON RETIREMENT FROM FIRM WOULD DEPEND UPON MODE IN WHICH RETIREMENT IS EFFECTED AS LAID D OWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASES OF TRIBH UVANDAS G. PATEL (SUPRA) AND N.A. MODI'S CASE ( SUPRA). BEF ORE THE PUNE BENCH, THE ASSESSEE HAD ARGUED THAT THE DECISI ON OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF TRIBHU VANDAS G. PATEL (SUPRA) HAS SINCE BEEN REVERSED BY THE HON 'BLE SUPREME COURT IN TRIBHUVANDAS G. PATEL'S CASE (SUPR A). THE PUNE BENCH AFTER ANALYZING ALL ASPECTS AND THE VARI OUS DECISIONS ON THE ISSUE HELD THAT NEITHER THE HON'BL E SUPREME COURT NOR OTHER HIGH COURTS HAVE DISAPPROVED THE PR OPOSITION ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 39 LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT HAVING R EGARD TO THE PARTICULAR MODE OF RETIREMENT. THE PUNE BENC H FURTHER FOUND THAT ON THE CONTRARY, THE HON'BLE DELHI HIGH COURT IN THE CASE OF BISHAN LAL KANODIA'S CASE (SUPRA) HAD CONCU RRED WITH THE SAID PROPOSITION PROPOUNDED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF N.A. MODI (SUPRA). THUS T HE QUESTION WHETHER A TRANSACTION WOULD AMOUNT TO AN ASSIGNMENT OR RELEASE OF INTEREST BY THE CONTINUING PARTNER IN FAVOUR OF THE CONTINUING PARTNERS OR NOT WOULD DEPE ND UPON WHAT PARTICULAR MODE OF RETIREMENT IS EMPLOYED AND AS INDICATED EARLIER, IF INSTEAD OF QUANTIFYING HIS SH ARE BY TAKING ACCOUNTS ON THE FOOTING OF NOTIONAL SALE, PARTIES A GREE TO PAY A LUMP SUM IN CONSIDERATION OF THE RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS SHARE OR RIGHT IN THE PARTNERS HIP AND ITS ASSETS IN FAVOUR OF THE CONTINUING PARTNERS, THE TR ANSACTION WOULD AMOUNT TO A TRANSFER WITHIN THE MEANING OF S. 2(47) OF THE ACT. 6.2.18 WE SHALL THEREFORE EXAMINE THE MODE OF RETIREMENT IN THE CASE OF THE ASSESSEE, TO SEE IF THE SAME CAN BE SAID TO ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 40 BE A TRANSFER OR NOT ON THE PRINCIPLE LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF N.A. MODI (SUPRA). 6.2.19 IN THE CASE OF TRIBHUVANDAS G. PATEL (SUPRA), THE ASSESSEE WAS A PARTNER IN THE FIRM OF KEW. THE ASSE SSEE HAD SERVED ON THE OTHER TWO PARTNERS A NOTICE OF DI SSOLUTION OF THE FIRM W.E.F. 31ST DEC., 1960, WHICH WAS NOT A CCEPTED BY THE OTHER PARTNERS. THE ASSESSEE, THEREFORE, FILED A SUIT FOR DISSOLUTION AND ACCOUNTS, BUT, ULTIMATELY, THE DISP UTES BETWEEN THE PARTIES WERE AMICABLY SETTLED OUT OF CO URT AND UNDER A DEED DT. 19TH JAN., 1962, THE ASSESSEE RETI RED FROM THE FIRM W.E.F. 31ST AUG., 1961, AND THE REMAINING PARTNERS CONTINUED TO CARRY ON THE BUSINESS OF THE FIRM. ON THE OCCASION OF SUCH RETIREMENT, THE ASSESSEE WAS PAID : (1) ` 1 LAKH AS HIS SHARE OF PROFITS OF THE FIRM FOR THE BR OKEN PERIOD ENDED 31ST AUG., 1961, (2) ` 50,000 AS HIS SHARE OF THE VALUE OF THE GOODWILL, AND (3) ` 4,77,941 AS HIS SHARE IN THE REMAINING ASSETS OF THE FIRM. THE ISSUE RELEVANT F OR OUR PURPOSE IS THE LIABILITY OF THE SUM OF ` 4,77,941 OR ANY PART ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 41 THEREOF TO CAPITAL GAINS TAX. THE HON'BLE COURT TOO K UP FOR CONSIDERATION AS TO WHAT IS THE REAL NATURE OF THE TRANSACTION WHEN A PARTNER RETIRES FROM THE PARTNERSHIP. DOES T HE TRANSACTION AMOUNT TO ANY RELINQUISHMENT OF HIS SHA RE OR INTEREST IN THE PARTNERSHIP IN FAVOUR OF THE CONTIN UING PARTNERS, OR DOES IT STAND ON THE SAME FOOTING AS AN ADJUSTME NT OF HIS RIGHTS THAT RESULTS UPON DISSOLUTION OF THE PARTNER SHIP. ON BEHALF OF THE ASSESSEE IT WAS CONTENDED THAT RETIRE MENT OF A PARTNER AND QUANTIFICATION OF HIS SHARE AND PAYMENT THEREOF TO HIM STANDS ON THE SAME FOOTING AS ADJUSTMENT OF RIG HTS THAT RESULTS UPON DISSOLUTION OF A FIRM AND, THEREFORE, SINCE THERE WAS NO TRANSFER OF ANY CAPITAL ASSET IN THE INSTANT CASE, THE SUM OF RS. 4,77,941 OR ANY PART THEREOF WAS NOT LIA BLE TO BE CHARGED UNDER THE HEAD 'CAPITAL GAINS'. THIS WAS NO T ACCEPTED BY HON'BLE BOMBAY HIGH COURT AND THEY HELD THAT A CLEAR DISTINCTION EXISTS BETWEEN RETIREMENT OF A PA RTNER FROM A FIRM AND DISSOLUTION OF THE FIRM. IN THE CASE OF RE TIREMENT OF A PARTNER FROM THE FIRM IT IS ONLY THAT PARTNER WHO G OES OUT OF THE FIRM AND THE REMAINING PARTNERS CONTINUE TO CAR RY ON THE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 42 BUSINESS OF THE PARTNERSHIP AS A FIRM, WHILE IN THE CASE OF DISSOLUTION OF THE FIRM AS SUCH NO MORE EXISTS AND THE DISSOLUTION IS BETWEEN ALL THE PARTNERS OF THE FIRM . THEREAFTER THE HON'BLE COURT HELD THAT WHERE ACCOUNTS ARE TAKE N AND THE PARTNER IS PAID THE AMOUNT STANDING TO THE CREDIT O F HIS CAPITAL ACCOUNT THERE WOULD BE NO TRANSFER. IF, ON THE OTHE R HAND, THE PARTNER IS PAID A LUMP SUM CONSIDERATION FOR TRANSF ERRING OR RELEASING HIS INTEREST IN THE PARTNERSHIP ASSETS TO THE CONTINUING PARTNERS THEN THERE WOULD BE AN ELEMENT OF TRANSFER. THIS ASPECT WE HAVE ALREADY EXAMINED IN T HE EARLIER PARAS. WHAT WE HAVE TO SEE NOW IS WHETHER THE TERMS OF THE DEED OF RETIREMENT CONSTITUTES RELEASE OF ANY ASSET S OF THE FIRM IN FAVOUR OF THE CONTINUING PARTNERS. THEREAF TER THE COURT REFERRED TO THE DEED BETWEEN THE PARTIES AND THE FO LLOWING CLAUSES : (AT PP. 117 AND 118) 'AND WHEREAS THE SA ID SUMS OF ` 1,00,000, ` 50,000 AND ` 7,50,000 IN ALL AGGREGATING TO A TOTAL SUM OF ` 9,00,000 THUS BECAME PAYABLE BY THE CONTINUING PARTNERS TO THE RETIRING PARTNER IN FULL AND FINAL SATISFACTION OF ALL HIS CLAIMS IN RESPECT OF HIS UN DIVIDED HALF ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 43 SHARE IN THE BUSINESS OF THE SAID PARTNERSHIP FIRM OF M/S KUMAR ENGINEERING WORKS AND ALL ASSETS THEREOF AND WHEREAS THE CONTINUING PARTNERS HAVE TAKEN OVER THE SAID BUSINESS CARRIED ON BY THE SAID OLD FIRM OF M/S KUM AR ENGINEERING WORKS CONSTITUTED UP TO 31ST AUG., 1961 , AS THE ENTIRE BUSINESS AS A GOING CONCERN TOGETHER WITH AL L ITS ASSETS, LIABILITIES AND GOODWILL, BENEFITS OF TRADE NAME, TENANCY RIGHTS, IMPORT LICENCES AND/OR QUOTA RIGHTS ..... AND THIS INDENTURE FURTHER WITNESSETH THAT IN CONSI DERATION OF THE PREMISES AFORESAID THEY THE CONTINUING PARTNERS DO AND EACH OF THEM DOTH HEREBY RELEASE THE RETIRING PARTN ER AND THE RETIRING PARTNER DOTH HEREBY RELEASE THE CONTINUING PARTNERS AND EACH OF THEM FROM ALL COVENANTS, AGREEMENTS, MA TTERS AND THINGS IN THE HERE BEFORE RECITED PARTNERSHIP D ATED, THE 8TH JAN., 1951, AND THE SUPPLEMENTARY AGREEMENT DT. 24TH AUG., 1957, CONTAINED AND IN FURTHER PURSUANCE OF T HE SAID AGREEMENT AND IN CONSIDERATION OF THE PREMISES AFOR ESAID AND WITHOUT MAKING ANY FURTHER PAYMENT OF ANY AMOUN T TO HIM THE RETIRING PARTNER AS BENEFICIAL OWNER DOTH H EREBY ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 44 ASSIGN AND RELEASE UPTO THE CONTINUING PARTNERS AND EACH OF THEM ALL THAT HIS RIGHT, TITLE, INTEREST AND UNDIVI DED HALF SHARE IN THE SAID PARTNERSHIP FIRM AND ALL HIS SHARE AND INTEREST ON THE SAID PIECES OF LAND AND PREMISES, STRUCTURES AN D BUILDINGS STANDING THEREON ....... AND MACHINERY, P LANT, EQUIPMENT, ETC...TO HOLD THE SAME UNTO THE CONTINUI NG PARTNERS ABSOLUTELY IN EQUAL SHARES AS TENANTS-IN-C OMMON ........ AND THIS INDENTURE FURTHER WITNESSETH THA T IN PURSUANCE OF THE SAID AGREEMENT AND IN CONSIDERATION OF THE P REMISES AFORESAID THE RETIRING PARTNER DOTH HEREBY RELEASE, GRANT, CONVEY AND TRANSFER AND ASSURE ALL THAT HIS INDIVID UAL HALF SHARE IN ALL THE SEVERAL PIECES OR PARCELS OF LAND TO HAVE AND TO HOLD THE SAID UNDIVIDED HALF SHARE AND THE PREMI SES HEREBY GRANTED AS EXPRESSED SO AS TO BE UNTO AND TO THE US E OF THE CONTINUING PARTNERS ABSOLUTELY AS TENANTS-IN- COMMO N IN EQUAL SHARES FOREVER ....... ' 6.2.20 HAVING REGARD TO THE PARTICULAR MODE EMPLOYED BY THE ASSESSEE AND THE CONTINUING PARTNERS TO EFFECT AND BRING ABOUT RETIREMENT OF THE ASSESSEE FROM THE PARTNERSH IP, THE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 45 COURT HELD THAT THE TRANSACTION WILL HAVE TO BE REG ARDED AS AMOUNTING TO 'TRANSFER' WITHIN THE MEANING OF S. 2( 47) OF THE IT ACT, IN AS MUCH AS THE ASSESSEE COULD BE SAID TO HAVE ASSIGNED, RELEASED AND RELINQUISHED HIS INTEREST AN D SHARE IN PARTNERSHIP AND ITS ASSETS IN FAVOUR OF THE CONTINU ING PARTNERS AND THE TRANSACTION CANNOT BE REGARDED AS AMOUNTING TO ANY DISTRIBUTION OF CAPITAL ASSETS UPON DISSOLUTION OF A FIRM. 6.2.21 IN THE CASE OF N.A. MODI (SUPRA) AND H.R. ASLOT'S CASE (SUPRA) THE FACTS AND MANNER OF RETIREMENT AND PAYMENT OF CONSIDERATION WERE IDENTICAL . 6.3 NOW, WE ARE CONCERNED WITH RECEIPT OF ` 26.99 CRORES BY THE ASSESSEE FROM M/S. S.J.M. PROPERTY DEVELOPERS ON 6 TH DAY OF MARCH, 2009 VIDE RETIREMENT DEED 06.03.2009. AS PER THIS RETIREMENT DEED, THE CONTINUING PARTNERS SETTLED A SUM OF ` 27.00 CRORES TOWARDS CURRENT ACCOUNT BALANCE AND ` 99,000/- IN CAPITAL ACCOUNT LYING FOR ITS ACCOUNT AS ON 06.03.2009. OUT OF THIS AMOUNT, ` 26.99 CRORES HAS BEEN EMANATED ON 06.02.2007 BETWEEN SHARADHA TERRY PRODUCTS ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 46 LTD, D.SRINIVASAN, S. SRINIVASAN AND MEROCROP FOR C LARITY, WE REPRODUCING RELEVANT CONDITIONS OF THE AGREEMENT. NOW THIS MEMORANDUM OF AGREEMENT WITNESSETH AS FOLLOWS: THE FIRST PARTY OPTS TO RETIRE AND LEAVE THE PARTNE RSHIP ENTERED INTO BETWEEN THEM BEFORE THE LAPSE OF SIX MONTHS FROM TH E DATE OF THE REGISTRATION OF LANDED PROPERTIES (IN FAVOUR OF THE FIRM S J M PROPERTY DEVELOPERS) SITUATED AT IILATHORE VILLAGE, KASABA H OBLI, DEVANAHALIL TALUK, BANGALORE RURAL DISTRICT, THE PARTY OF THE F IRST PART, HOLDING 98% OF THE SHARE CAPITAL IN THE FIRM M/S S J M PROP ERTY DEVELOPERS, SHALT SURRENDER TO THE PARTY OF THE SECOND PART THE ENTIRE 98% OF ITS HOLDING, IN THE CAPITAL OF S J M PROPERTY DEVETOPER 5, BEING THE CAPITAL / CONTRIBUTED BY THEM, AMOUNTING TO RS. 99, 000. 2. THE PARTY OF THE FIRST PART HOLDING 99% OF SHARE IN THE PARTNERSHIP HAS AGREED TO ADVANCE A LOAN OF RS.25, 00,00,000 (R S. TWENTY FIVE CRORES) TO M/S S J M PROPERTY DEVELOPERS. THIS AMOU NT WILL BE REIMBURSED BY THE FIRM M/S SJM PROPERTY DEVELOPERS OUT OF THE ADVANCE RECEIPTS BF THE SALE PROCEEDS. IN CASE THER E IS A SHORTFALL IN THE RE-PAYMENT SUCH SHORTFALL SHALL BE PAID BY THE PARTY OF THE SECOND PART .TO MIS S J M DEVELOPERS FOR REPAYMENT OF THE LOAN AT THE TIME OF RELINQUISHMENT OF SHARE OF 99%OF THE PARTIES OF THE FIRST PART ALONG WITH THE ORIGINAL CAPITAL CONTRIBUTED BY THE PARTY OF THE FIRST PART RS.99,000 (RS NINETY NINE THOUSAND). FOR ENSURING A ND SECURING THE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 47 AFOREALD REPAYMENTS OF THE AMOUNTS TO THE PARTIES O F THE FIRST PART, THE PARTY OF THE SECOND PASRT SHALL ISSUE_POST DAT ED CHEQUES FOR THE REQUISITE AMOUNT, FROM VIJAYA BANK, JATAHATTI BRANC H, BANGATORE. THE PARTY OF THE SECOND PART SHALL ALSO ISSUE A LETTER TO VIJAYA BANK, INDICATING THAT THEY WILL NOT ISSUE A STOP PAYRMENT INSTRUCTION TO THE BANK, ON THE ABOVE MENTIONED CHEQUES. THE PARTY OF THE SECOND PART SHALL..COMPENSATE THE PARTY OF THE FIRST PART WITH A SUM OF RS 27,00,00,000 (RUPEES TWENTY S EVEN CRORES ONLY), ON RELINQUISHMENT, AS A CONSIDERATION FOR TH E 99% SHARE HELD BY THE PARTY OF THE FIRST PART. THE ABOVE FIGURE IS BASED ON CURRENT INCOME TAX RATE OF 33.66 %. IN CASE THE TAX RATE IS REVISED BY THE GOVERNMENT OF INDIA, THE REVISED TAX RATE HAS TO BE TAKEN INTO ACCOUNT ON THE AMOUNT PAYABLE BY THE PARTY OF THE S ECOND PART. FOR ENSURING AND SECURING THE 3FORESALD REPAYMENTS OF T HE AMOUNTS TO THE PARTIES OF THE FIRST PART, THE PARTY OF THE SEC OND PART SHALL ISSUE POST / DATED CHEQUES FOR THE REQUISITE AMOUNT, FROM VIJAYA BANK, JATAHLLI BRANCH, BANGALORE. THE PARTY OF THE SECOND PART SHALL ALSO ISSUE A LETTER TO VIJAYA BANK, INDICATING THAT THEY WILL NOT ISSUE A STOP PAYMENT INSTRUCTION TO THE BANK, ON THE ABOVE MENTI ONED CHEQUES. COMPENSATION AMOUNT OF RS 27,00,00,000. ... .... 4. THE SAID COMPENSATION SHALL BE PAID BY THE PARTY OF THE SECOND PART IRRESPECTIVE OF THE PROFITABILITY O THE FIRM S J M PROPERTY DEVELOPERS, DURING THE ABOVE SAID SIX MONTHS PERIOD . ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 48 5. THE RE-PAYRNENT OF THE LOAN AMOUNT AND THE COMPE NSATION SUM ALONG WITH THE INCOME TAX COMPONENT WOULD BE PAID TO THE PARTY OF THE FIRST PART BY WAY OF POST DATED CHEQUES WITH A COMFORT LETTER FROM MIS. VIJAYA BANK. THE PAYMENTS OF THE ABOVE SHALL T AKE PLACE ON OR BEFORE THE FOLLOWING DAYS FROM THE LAND REGISTRATIO N DATE 61 ST DAY - RS. 8,00,00,000 91 ST DAY- RS. 12,00,00,000 121 ST DAY- RS. 16,00,00,000 180 TH DAY - RS, 16,00,00,000 THE PARTY OF THE SECOND PART SHALL TAKE ALT EFFORTS TO REPAY EARLIER THAN THE DAYS INDICATED ABOVE. WHEN THE AMOUNT IS PAID E ARLIER THAN THE FINAL DATES, THE POST DATED CHEQUES RELATED TO THE EARLIER PAYMENTS SHALL BE RETURNED TO THE PARTY OF THE SECOND PART. 6. THE PARTIES OF THE FIRST PART WHO ARE THE PARTNE RS ALONG WITH SI DEEPAK KNSHNAPPA AND SRI UDAY REDDY OF THE FIRM SJM PROPERTY DEVELOPERS HEREBY ASSURE, COVENANT AND CON FIRM WITH THE PARTY OF THE SECOND PART THAT THEY WILL COME FORWAR D EITHER INDIVIDUALLY OR CORRECTIVELY TO REGISTER THE DEEDS OF ABSOLUTE SALE AND CONVEYANCE FOR AND ON BEHALF OF THE AFORESAID FIRM IN FAVOUR OF PROSPECTIVE PURCHASERS OF THE SITES IN THE LAYOUT T O BE FORMED ON THE SCHEDULE PROPERTY TO THE EXTENT OF 70% OF THE TOTA L THE FIRST STAGE PROVIDED THAT THE PAYMENTS RECEIVED FROM THE PROSPE CTIVE PURCHASERS FOR SALE OF THE SITES IN RESPECT OF THE 70% SITAL A REA ARE CREDITED TO THE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 49 ACCOUNT OF SJM PROPERTY DEVELOPERS ON A PRO-RATA BA SIS FROM TIME TO TIME. AS FAR AS THE BALANCE_30%: OF THE TOTAL SITAL AREA IS CONCERNED, THEY WILL COME FORWARD EITHER INDIVIDUALLY OR COLLE CTIVELY TO REGISTER THE DEEDS OF ABSOLUTE SALE AND CONVEYANCE FOR AND ON BE HALF OF THE AFORESAID FIRM, IN FAVOUR OF PROSPECTIVE PURCHASERS OF THE SITES IN THE LAYOUT TO BE FORMED ON THE SCHEDULE PROPERTY ON TH RECEIPT OF THE ENTIRE CONSIDERATION DUE FROM THE PARTY OF THE SE COND PART UNDER THIS AGREEMENT. 7. THE PARTIES OF THE FIRST PART AND SECOND PART AG REE THAT THEY SHALL HAVE THE RIGHT TO ENFORCE SPECIFIC PERFORMANCE OF T HIS AGREEMENT AND THE PARTIES ARE BOUND BY THIS MEMORANDUM OF AGREEM ENT. 8. IT IS HEREBY AGREED BY BOTH THE PARTIES THAT A S EPARATE RETIREMENT DEED SHALL BE PREPARED ON THE DATE OF RETIREMENT OF THE PARTY OF THE FIRST PART. THE TERMS OF SUCH RETIREMENT DEED SHALL BE IN LINE WITH THE TERMS AGREED BY THIS AGREEMENT AS FAR AS THE COMPEN SATION PAYABLE BY THE PARTY OF THE SECOND PART FOR THE RELINQUISHM ENT OF THE SAID 99% IN FAVOR OF THE PARTY OF THE SECOND PART. 9. TIME IS THE ESSENCE OF THIS AGREEMENT. 10. THIS AGREEMENT IS PREPARED IN DUPLICATE AND EA CH ONE OF THEM SHALL BE TREATED AS ORIGINAL. SD/- SD/- S J M PROPERTY DEVELOPERS FOR METROCORP SD/- SHARADHA TERRY PRODUCTS LTD - PARTNER ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 50 6.4 THE CONTENTION OF THE LD.D.R IS THAT THE ASSES SEE RECEIVED THE ABOVE AMOUNT OF ` 26.99 CORES ON RETIREMENT, IT SHOULD BE TAXED IN TH E HANDS OF ASSESSEE AS A CAPITAL GAIN IN TERMS OF SEC .45(4) OF THE ACT. THE AMOUNT OF ` 27.00 CRORES, THOUGH MENTIONED IN THE RETIREMENT DEED OF 6 TH MARCH, 2009, THIS AMOUNT, ` 27 CRORES WAS ACCRUED TO THE ASSESSEE ACCOUNT VIDE AGREEMENT DATED 06.02.2009 AS REPRODUCED ABOVE AND IT CANNOT BE SAID THAT THE SAID AMOUNT WA S AS A LUMP SUM PAYMENT IN CONSIDERATION OF THE RETIRING PARTNER R ELINQUISHING ITS SHARE OR RIGHT IN THE PARTNERSHIP AND ITS ASSETS I N FAVOUR OF THE CONTINUING PARTNERS. WE ARE OF THE VIEW THAT THE R ECEIPT OF THIS AMOUNT ON RETIREMENT IN THIS CASE CANNOT BE REGARD ED AS RELINQUISHMENT BY THE RETIRING PARTNER OF ITS SHARE OR IN THE PARTNERSHIP FIRM AND ITS ASSET IN FAVOUR OF CONTINUING PARTNERS . 6.5 FURTHER IN THE CASE OF CIT VS.DYNAMIC ENTERPRI SE REPORTED IN 359 ITR 83(KAR.) HELD THAT WHEN RETIRING PARTNER TA KES ONLY MONEY, TOWARDS VALUE OF ITS SHARE AND WHEN THERE IS NO DIS TRIBUTION OF CAPITAL ASSET AMONG PARTNERS, THERE IS NO TRANSFER OF CAPIT AL ASSET AND CONSEQUENTLY NO PROFIT OR GAIN IS PAYABLE U/S.45(4) OF THE ACT. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 51 6.6 THE HONBLE ANDHRA PRADESH HIGH COURT IN THE C ASE OF CIT VS. UNITED FISH NETS ( 372 ITR 67) HELD THAT THE DISTRI BUTION MUST RESULT IN SOME TANGIBLE ACT OF PHYSICAL TRANSFER OF PROPERTIE S OR INTANGIBLE ACT OF CONFERRING EXCLUSIVE RIGHTS VIS-A-VIS AN ITEM OF PR OPERTY ON THE ERSTWHILE PARTNER. 6.7 IN THE CASE OF CIT VS. VIJAYALAKSHMI METAL IND USTRIES (256 ITR 540) WHEREIN HELD THAT S.45. (4) IS CONCERNED THAT THE CAPITAL GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM. 6.8 THE LEARNED AR SUBMITTED THAT THE ISSUE IS C OVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE APEX COURT IN T RIBUVANDAS G. PATEL V. CIT [1999] 236 ITR 515, WHEREIN THEIR LORD SHIPS HELD THAT ANY SUM RECEIVED BY THE ASSESSEE AS HIS SHARE OF VA LUE OF GOODWILL IS NOT ASSESSABLE AS CAPITAL GAINS, WHEREIN FOLLOWED T HE DECISION IN CIT V. B.C. SRINIVAS SETTY [1981] 128 ITR 294(SC) AND T HAT EVEN WHERE A PARTNER RETIRES AND SOME AMOUNT IS PAID TO HIM TOWA RDS HIS SHARE IN ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 52 THE ASSETS, IT SHOULD BE TREATED AS FALLING UNDER C LAUSE (II) OF SECTION 47 AND ACCORDINGLY, CANNOT BE ASSESSED AS CAPITAL G AINS. IN THE SUBSEQUENT DECISION IN CIT V. R. LINGMALLU RAGHUKUM AR [2001] 247 ITR 801(SC), THEIR LORDSHIPS HELD THAT WHEN A PARTN ER RETIRES FROM A FIRM AND THE AMOUNT OF HIS SHARE IN THE PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES IS DETER MINED ON TAKING ACCOUNTS IN THE MANNER PRESCRIBED BY THE PARTNERSHI P LAW, THERE IS NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSETS BY THE RETIRED PARTNER TO THE CONTINUING PARTNERS AND THE AMOUNT R ECEIVED BY THE RETIRING PARTNER IS NOT CAPITAL GAIN UNDER SECTION 45 OF THE INCOME-TAX ACT, 1961. IN THIS VIEW OF THE MATTER, WE DO NOT FI ND ANY SUBSTANCE IN THE ARGUMENT OF THE D.R. 6.9 IT IS WORTHWHILE TO MENTION HEREIN THAT THE TR IBUNAL ,HYDERABAD BENCH IN CASE OF SMT.GIRIJA REDDY VS. ITO (52 SOT 1 13) HAS TAKEN A CONTRARY VIEW BY HOLDING THAT LUMP SUM PAYMENT RECE IVED BY A RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS/HER RIGHT IN THE PARTNERSHIP AND ITS ASSET IN FAVOUR OF THE CONTINUI NG PARTNERS WILL ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 53 ATTRACT CAPITAL GAIN TAX. THE TRIBUNAL HYDERABAD BE NCH WHILE COMING TO SUCH CONCLUSION HAD MAINLY RELIED UPON THE FOLLO WING DECISIONS:- A) CIT VS.TRIBHUVAN DAS G.PATEL (115 ITR 95) B) CIT VS. H.R.AHOT (115 ITR 255) C) N.A.MODY VS. CIT(162 ITR 420) D) MUMBAI TRIBUNAL IN THE CASE OF SUDHAKAR M.SHETT Y VS. ACIT (130 ITD 197) E) SHEVANTI BHAI VS. ITO (4 SOT 94) HOWEVER, IT APPEARS THAT THE DECISION OF TRIBUNAL ,HYDERABAD IN CASE OF DOORDANA KHATOON VS. ITO (52 SOT 113) WAS NOT PL ACED BEFORE THE TRIBUNAL. THAT BESIDES THE AFORESAID DECISION O F TRIBUNAL IN THE CASE OF SMT.GIRIJA REDDY WAS PRIOR TO THE JUDGEMENT OF THE ANDHRA PRADESH HIGH COURT IN THE CASE OF CHALASANI VENKATE SWARA RAO VS. ITO (25 TAXMANN COM.378). THAT APART, THE AMOUNT R ECEIVED BY THE PRESENT ASSESSEE IS ON ACCOUNT OF CREDIT BALANCE ST ANDING IN CAPITAL ACCOUNT AND CURRENT ACCOUNT AND NOT FOR RELINQUISH ING OR EXTINGUISHING HIS RIGHTS OVER ANY ASSETS OF THE FI RM. FURTHERMORE, THE AMOUNT ALSO NOT CREDITED TO HIS ACCOUNT ON THE DATE OF RETIREMENT ON SIGNING THE RETIREMENT OF PARTNERSHIP DEED TO HOLD THAT THERE IS CAPITAL ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 54 GAIN IN THE HANDS OF THE ASSESSEE. FURTHER, IN THE JUDGEMENT OF SUPREME COURT IN THE CASE OF ADDITIONAL CIT VS. MOH ANBHAI PAMABHAI (165 ITR 166), TRIBHUVAN DAS G.PATEL VS. C IT ( 236 ITR 515) AND CIT VS.R.LINGAMALLU RAGHU KUMAR (247 ITR 8 01) AND HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS.RIY AZ A.SHIKH IN 1969 OF 2011 DATED 26.02.2013 HELD THAT AMOUNT RECE IVED BY THE RETIRING PARTNER STANDING TO THE CREDIT OF HIS ACCO UNT NOT CHARGEABLE TO TAX IN THE HANDS OF THE PARTNERS. 6.9.1 IN THE CASE OF N.PRASAD,EXECUTIVE CHAIRMAN, MATRIX LABORATORIES LTD., IN ITA NO.1200/HYD./ 2010 DATED 27.01.2014 OBSERVED AS UNDER: 13. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIALS ON RECORD. WE HAVE ALSO CAREFULLY APPLIED OUR MIND TO THE DECISIONS CITED BEFORE US. UNDISPUTED FACTS ARE, THE ASSESSEE ALONG WITH TWO OTHERS WAS CARRYING ON BUSINESS IN PARTNERSHIP IN THE NAME AND STYLE OF SQUARE PROJECTS ASSOCIATES BY VIRTUE OF A PARTNERSHIP DEED DATED 12 -3-2003. ASSESSEE VIDE LETTER DATED 18-1-2005 EXPRESSED HIS INTENTION OF RETIRING FROM THE PARTNERSHIP. ON THE BASIS OF MUTUAL AGREEMENT BETWEEN THE PARTNERS THE ASSESSEE WAS ALLOWED TO RETIRE FROM THE PARTNERSHIP W.E.F. 20-4-2005 BY VIR TUE OF A DEED OF RETIREMENT EXECUTED ON 20- 4-2005 AND THE OTHER PARTNERS CONTI NUED TO CARRY ON THE PARTNERSHIP BUSINESS. AS PER THE TERMS OF THE DEED OF RETIREMENT, THE ASSESSEE WAS TO BE PAID A LUMP SUM AMOUNT OF RS.1,25,00,000/ -. THE ITA NO.L2OO OF 2010 SHRI N. PRASAD ,EXECUTIVE CHAIRMAN, MATRIX LABORATO RIES LIMITED. RELEVANT CLAUSE OF THE DEED OF RETIREMENT IS EXTRAC TED HEREUNDER FOR CONVENIENCE: IT IS AGREED BETWEEN THE PARTIES A THAT AFTER TAKI NG INTO ACCOUNT THE CAPITAL INVESTMENT MADE BY THE RETIRING PARTNER, TH E GOODWILL OF THE PARTNERSHIP BUSINESS WITH REGARD TO THE IMMOVABLE P ROPERTIES PURCHASED BY THE PARTNERSHIP FIRM AND EFFORTS MADE AND TIME G IVEN BY THE RETIRING ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 55 PARTNER OF THE PARTNERSHIP BUSINESS, THE PARTY OF F IRST PART IS ENTITLED TO RECEIVE A SUM OF RS.1,25,00,000/- ( RUPEES ONE CROR E TWENTY FIVE LAKHS ONLY) FROM THE CONTINUING PARTNERS TOWARDS FULL AND FINAL SETTLEMENT AND PAYMENT OF HIS SHARES, RIGHT, TITLE AND INTEREST AN D THE CLAIMS OF THE PARTNERSHIP BUSINESS AND ITS ASSETS INCLUDING GOODW ILL 14. WHILE THE ASSESSING OFFICER BROUGHT TO TAX THE SURPLUS AMOUNT OF RS.25 IAKHS BY TREATING IT AS A TRANSFER OF GOODWILL, THE CIT ( A) DELETED THE ADDITION BY HOLDING THAT THERE IS NO TRANSFER WHEN A PARTNER RECEIVED HIS SHARE IN THE PARTNERSHIP BUSINESS. KEEPING IN VIEW THE AFORESAID BASIC FACTS WE WILL NOW EXAMINE THE LEGAL ISSUE WHETHER THERE AT ALL IS A TRANSFER WI THIN THE MEANING OF SEC. 2(47) OF THE ACT . 15. THE HONBLE SUPREME COURT IN CASE OF CIT VS. R. LINGAMALLU RAGHU KUMAR (SUPRA) WHILE CONSIDERING THE ISSUE OF EXCESS AMOUN T RECEIVED BY THE ASSESSEE ON RETIREMENT FROM PARTNERSHIP FIRM WHETHER IS ASSE SSABLE TO CAPITAL GAINS UPHELD THE VIEW OF THE HONBLE A.P. HIGH COURT AND THAT OF GUJARAT HIGH COURT IN CASE OF CIT VS. MOHANBHAI PAMABHAI (91 ITR 393) WHEREIN IT WAS HELD THAT THERE WAS NO TRANSFER OF ANY ASSET AS CONTEMPLATED BY THISION T RANSFER AS DEFINED IN SECTION 2(47) OF IT ACT. THE HONBLE KERALA HIGH COURT IN C ASE OF CIT VS. KUNNIKULAM MILL BOARD ITA NO.1200 OF 2010 SHRI N. PRASAD , EXECUTIV E CHAIRMAN, MATRIX LABORATORIES LIMITED. (SUPRA) HELD THAT WHERE THERE IS A RECONSTITUTION OF THE FIRM CONSEQUENT TO THE RETIREMENT OF SOME OF THE PARTNER S IT CANNOT BE SAID THAT THERE WAS ANY TRANSFER OF ANY RIGHT IN IMMOVABLE PROPERTY IN FAVOUR OF CONTINUING PARTNER. THE LARGER BENCH OF KARNATALCA HIGH COURT IN CASE OF CIT VS. DYNAMIC ENTERPRISES (SUPRA) WHILE INTERPRETING SECTION 45(4 ) OF THE IT ACT HELD THAT IN CASE OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTIO N OF THE FIRM, THERE IS A TRANSFER OF CAPITAL ASSET BY THE FIRM IN FAVNUR OF THE PERSON A ND RESULTING PROFITS OR GAINS SHALL BE CHARGEABLE TO TAX AS THE INCOME OF THE THE LARGE R BENCH FURTHER WENT ON TO HOLD THAT WHEN CASH REPRESENTING THE VALUE OF THE S HARE IN THE PARTNERSHIP IS GIVEN TO THE RETIRING PARTNERS, NO CAPITAL ASSET WA S TRANSFERRED BY THE FIRM TO THE PARTNER. THE HONBLE HIGH COURT HELD THAT TO ATTRAC T SECTION 45(4) THERE SHOULD BE A TRANSFER OF CAPITAL ASSET FROM THE FIRM TO THE RE TIRING PARTNER BY WHICH THE FIRM CEASES TO HAVE ANY RIGHT IN THE PROPERTY WHICH IS S O TRANSFERRED. IN OTHER WORDS, ITS RIGHT TO THE PROPERTY SHOULD STAND EXTINGUISHED AND THE RETIRING PARTNER ACQUIRES ABSOLUTE TITLE TO THE PROPERTY. IF WE APPL Y THE AFORESAID TESTS TO THE FACTS OF THE PRESENT CASE, THE ASSESSEE RECEIVED A LUMP S UM AMOUNT OF RS.1,25,000 FROM THE PARTNERSHIP FIRM TOWARDS HIS SHARE IN THE PARTNERSHIP. THE PARTNERSHIP FIRM DID NOT TRANSFER ANY CAPITAL ASSET TO THE ASSE SSEE TO THE EXTENT BY WHICH THE FIRM CEASED TO HAVE ANY RIGHT IN THE PROPERTY. IN T HE PRESENT CASE, ACCORDING TO THE ASSESSING OFFICER THERE IS TRANSFER OF GOODWIFI . THE ITAT, HYDERABAD BENCH IN CASE OF DURDANA KHATOON VS. ITO (SUPRA) HELD THA T WHEN A PARTNER RECEIVES HER/HIS SHARE IN THE ASSETS OF THE PARTNERSHIP FIRM OR WHEN HRECEIVES ANYTHING IN EXCESS OF HER/HIS SHARE IN THE ASSETS OF THE PARTNE RSHIP FIRM AND EVEN IN A CASE A ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 56 PARTNER RECEIVES A SHARE OF PROFIT EITHER IN CASE O F RETIREMENT OR IN CASE OF DISSOLUTION, THE SAME CANNOT BE BROUGHT TO TAX IN V IEW OF THE DECISION OF HONBLE SUPREME COURT IN CASE TRIBHUVAN DAS G. PATEL VS. CI T (236 1TR 515) AND IN CASE OF CIT VS. R. LINGAMALLU RAGHU KUMAR (SUPRA). WHILE DOING SO, THE TRIBUNAL, HYDERABAD BENCH ALSO HELD THAT IN VIEW OF THE DECISIONS OF HONBLE SUPREME COURT, JUDGMENTS OF HONBLE DELHI HIGH COUR T AND HONBLE BOMBAY HIGH COURT (SUPRA) ARE NOT APPLICABLE. THE HONBLE JURISDICTIONAL HIGH COURT IN CASE OF CHALASANI VENKATESWARA RAO VS. ITO (SUPRA) HELD AS UNDER: 20. IN L RAGHU KUMAR (SUPRA), A DIVISION BENCH OF THE ANDHRA PRADESH HIGH COURT FOLLOWED THE JUDGMENT OF THE GUJ ARAT HIGH COURT IN CIT V. MOHANBHAI PAMABHAI [19731 91 1TR 393 (GUJ.) AND HELD THAT NO TRANSFER IS INVOLVED WHEN A RETIRING PARTNER REC EIVES AT THE TIME OF RETIREMENT FROM THE FIRM, HIS SHARE IN THE PARTNERS HIP ASSETS EITHER IN CASH OR ANY OTHER ASSET. IT FURTHER HELD THAT FOR T HE PURPOSE OF SECTION 45 OF THE I.T. ACT, NO DISTINCTION CAN BE DRAWN BET WEEN AN AMOUNT RECEIVED BY THE PARTNER ON THE DISSOLUTION OF THE F IRM AND THAT RECEIVED ON HIS RETIREMENT, SINCE BOTH OF THEM STAND ON THE SAME FOOTING. 21. IN P.H. PATEL (SUPRA), A DIVISION BENCH OF THE AP HIGH COURT NOTICED THAT THE JUDGMENT M MOHANBHAI PAMABHAI (SUP RA) WAS APP THE SUPREME COURT IN ADDL. CIT V. MHANBHAI PAMABHAI [19 87] 165 ITR166 FOLLOWING THE JUDGMENT IN L RAGHUKUMAR (SUPRA) HELD THAT WHEN A PAER RETIRES FROM A PARTNERSHIP FIRM TAKING HIS SHARE OF PARTNERSHIP INTEREST, NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSH IP ASSET BY THE RETIRING PARTNER TO THE CONTINUING PARTNER WAS INVOLVED. 22. IN THE LIGHT OF THE ABOVE DECISIONS, WHICH ARE BINDING ON US, WE HOLD THAT THE I.T.A.T. WAS NOT CORRECT IN CONFIRMIN G THE ORDERS PASSED BY THE C.I.T. (APPEALS) AND THE RESPONDENT. WHEN TH E APPELLANT WAS PAID RS.15.00 LAKHS BY Y. KALYANA SUNDARAM IN FULL AND FINAL SETTLEMENT TOWARDS HIS 50% SHARE ON THE DISSOLUTION OF THE FIRM, THERE WAS NO TRANSFER AS UNDERSTOOD IN LAW AND CONSEQUE NTLY THERE CANNOT BE TAX ON ALLEGED CAPITAL GAIN. THE APPELLANT WAS C ORRECT IN LAW IN CONTENDING THAT THE AMOUNT HE RECEIVED FROM Y. KALY ANA SUNDARAM IS TOWARDS THE FUFL AND FINAL SETTLEMENT OF HIS SHARE AND SUCH ADJUSTMENT OF HIS RIGHT IS NOT A TRANSFER IN THE EYE OF LAW. IT IS A RECOGNIZED METHOD OF MAKING UP THE ACCOUNTS OF THE DISSOLVED F IRM AND THE RECEIPT OF MONEY BY HIM IS NOTHING BUT A RECEIPT OF HIS SHA RE IN THE DISTRIBUTED ASSET OF THE FIRM. THE APPELLANT RECEIVED THE MONEY VALUE OF HIS SHARE IN THE ASSETS OF THE FIRM. HE DID 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 APPELLANT UNDER THE COMPROMISE WAS NOT IN CONSEQUENCE OF ANY SHARE, EXCHANGE OR TRANSFER OF ASSETS TO Y. KAL YANA SUNDARAM. MOREOVER , AS RIGHTLY CONTENDED BY THE ASSESSEE, UP TO THE ASSESSMENT YEAR 1987-1988, SECTION 47(U) OF THE INC OME TAX ACT, ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 57 1961 EXCLUDED THESE N.PRASAD, HYDERABAD VS DEPAITNE NT OF INCOME TAX DISTRIBUTION OF CAPITAL ASSETS ON THE DLSSUTION 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 CHA RGEABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCIATION OR BODY, OF THE PRE VIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND, FOR THE PURPOSE OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH TRANS FER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. THUS IT IS CLEAR THAT THE LEGISLATURE, EVEN THOUGH IT WAS AWARE OF THE ABOVE DECISIONS, DID NOT CHOOSE TO AMEND THE LAW BY MAKING THE PARTNER LIABLE WHEN IT AMENDED THE I.T ACT,1961 BY INTRODUCING CLAUSE (4) TO S45 BY THE FINANCE ACT,1987 W.E.F 14.1988 AN D MADE ONLY THE FIRM LIABLE. THEREFORE THE CONTENTION OF THE ASSESS EE HAS TO BE ACCEPTED AND THAT OF THE REVENUE IS LIABLE TO BE RE JECTED. 16. A CAREFUL READING OF THE AFORESAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT WOULD MAKE IT CLEAR THAT THEY APPROVED THE VI EW OF THEIR EARLIER DECISION HOLDING THAT THE AMOUNT RECEIVED BY THE PARTNER ON THE DISSOLUTION OF THE FIRM OR ON HIS RETIREMENT STAND ON THE SAME FOOTING AND NO DISTINCTION CAN BE DRAWN. THE HONBLE HIGH COURT FURTHER REFERRED TO THE DECISION OF JURISDICTIONAL HIGH COURT IN CASE OF CIT VS. P.H. PATEL (171 1TR 128) WHEREIN IT WAS HELD THAT WHEN A PARTNER RETIRES FROM A PARTNERSHIP TAKING HIS SHARE OF PART NERSHIP INTEREST, NO ELEMENT OF TRANSFER OF INTEREST IN THE PARTNERSHIP ASSET BY TH E RETIRING PARTNER TO THE CONTINUING PARTNER WAS INVOLVED. THE AFORESAID RATI O LAID DOWN BY THE JURISDICTIONAL HIGH COURT CLEARLY APPLY TO THE FACT S OF THE ASSESSEES CASE. 1TA NO.L200 OF 2010 SHRI N. PRASAD , EXECUTIVE CHAI RMAN, MATRIX LABORATORIES LIMITED. HOWEVER, WE NEED TO MENTION HERE THAT THE INCOME-TA X APPELLATE TRIBUNAL, HYDERABAD BENCH IN CASE OF SMT. GIRIJA REDDY VS. IT O (52 SOT113) HAS TAKEN A CONTRARY VIEW BY HOLDING THAT LUMP SUM PAYMENT RECE IVED BY A RETIRING PARTNER ASSIGNING OR RELINQUISHING HIS/HER RIGHT IN THE PAR TNERSHIP AND ITS ASSET IN FAVOUR OF THE CONTINUING PARTNER WILL ATTRACT CAPITAL GAIN TA X. THE INCOME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH WHILE COMING TO SUCH CONC LUSION HAD MAINLY RELIED UPON THE FOLLOWING DECISIONS. I) CIT VS. TRIBHUVAN DAS G. PATEL (115 ITR 95) II) CIT VS. H.R. ASLOT III) N.A. MOODY VS. CIT (SUPRA) IV) MUMBAI TRIBUNAL IN THE CASE OF SUDHAKAR M. SHET TY VS. ACIT (130 ITO 197) V) SHEVANTI BHAI VS. ITO (4 SOT 94) ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 58 17. HOWEVER, IT APPEARS THE DECISION OF INCOME-TAX APPELLATE THBUNAL , HYDERABAD BENCH IN CASE OF DOORDANA KHATOON VS. ITO (SUPRA) WAS NOT PLACED BEFORE THE BENCH. THAT BESIDES THE AFORESAID DECISI ON OF THE LNCOME-TAX APPELLATE TRIBUNAL IN CASE OF SMT. GIRIJA REDDY WAS PRIOR TO THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN CASE OF CHALAS II VENKATESWARA RAO VS. ITO(SUPRA). THAT APART, A READING OF CLAUSE 4 OF T HE DEED OF RETIREMENT MAKES IT CLEAR THAT THE AMOUNT OF RS.1.25 CORES WAS PAID TO THE ASSESSEE TOWARDS HIS SHARE CAPITAL AND NOT FOR RELINQUISHING OR EXTINGUI SHING HIS RIGHTS OVER ANY ASSETS OF THE FIRM. THE TERM GOODWILL, IN OUR VIEW HAS B EEN LOOSELY USED IN THE AFORESAID CLAUSE. FURTHERMORE, A PLAIN READING OF T HE CLAUSE 4 WILL NOT IN ANY MANNER INDICATE THAT PAYMENT OF RS.25 LAKHS WAS TOW ARDS TRANSFER OF GOODWILL AS 1TA NO.1200 OF 2010 SHRI N. PRASAD, EXECUTIVE CHAIR MAN, MATRIX LABORATORIES LIMITED., SUGGESTED BY THE ASSESSING OFFICER. THERE FORE, CONSIDERING TOTALITY OF FACTS AND THE CIRCUMSTANCES OF THE CASE AND APPLYIN G THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CH ALASANI VENKATESARA RAO (SUPRA), WHICH IS BINDING ON US, WE ARE OF THE VIEW THAT THE ORDER PASSED BY THE CIT (A) NEEDS TO BE UPHELD. ACCORDINGLY, WE DISMISS THE GROUNDS RAISED BY THE DEPARTMENT. 18. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT STANDS DISMISSED. 6.9.2. FURTHER, BOMBAY HIGH COURT IN THE CASE OF CI T VS.RIYAZ A.SHIKH REPORTED IN ITA NO.1969 OF 2011 DATED 26.02 .2013, THERE WAS A QUESTION BEFORE BOMBAY HIGH COURT WHETHER TRI BUNAL WAS CORRECT IN REVERSING THIS DECISION OF CIT(A) AND D ELETING THE ADDITIONS MADE BY THE AO TOWARDS LONG TERM CAPITAL GAINS ON T RANSFER OF GOODWILL. BOMBAY HIGH COURT OBSERVED THAT TRIBUNAL WHILE HOLDING THAT AMOUNT RECEIVED BY THE PARTNER ON HIS RETIREME NT FROM PARTNERSHIP FIRM ARE EXEMPT FROM CAPITAL GAINS TAX, RELIED UPON THE DECISION IN THE CASE OF PRASHANT S.JOSHI VS. ITO. IN THE CASE OF ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 59 N.A.MODY VS. CIT(162 ITR 420) HAS FOLLOWED THE DECI SION OF THE TRIBHUVAN DAS G.PATEL VS. CIT (115 ITR 95) (BOM.) A ND THE SAME HAS BEEN REVERSED BY THE SUPREME COURT IN THE CASE OF TRIBHUVAN DAS G.PATEL (236 ITR 515)(SC) AND HELD THAT AMOUNTS PAID TO THE PARTNER TOWARDS HIS SHARES IN THE ASSETS, IT SHOULD BE TREATED UNDER CLAUSE (II) OF SECTION 47 OF THE ACT AND WILL NOT BE INCLUDED AS CAPITAL GAIN. IN PRASHANT S.JOSHI VS. ITO (324 ITR 504) BO MBAY HIGH COURT HAS REFERRED TO THE DECISION OF TRIBHUVAN DAS G.PAT EL VS. CIT (SUPRA) AND PLACED RELIANCE ON THE DECISION OF SUPREME COUR T IN THE CASE OF CIT VS.R.LINGAMALLU RAGHU KUMAR(SUPRA) AND HELD THA T THERE IS NO CAPITAL GAIN TAX ON RETIREMENT. FURTHER, IN ADDITIO NAL CIT VS. MOHANBHAI PAMABHAI (91 ITR 393)(GUJ), IT WAS HELD T HAT WHEN A PARTNER RETIRES FROM PARTNERSHIP WHAT HE RECEIVES I S HIS SHARE IN THE PARTNERSHIP, WHICH IS WORKED OUT AND REALIZED AND D OES NOT REPRESENT CONSIDERATION RECEIVED BY HIM AS A RESULT OF THE EX TINGUISHMENT OF HIS INTEREST IN PARTNERSHIP ASSETS. 6.9.3 FURTHER, IT WAS HELD THAT THE EXTENDED DEFI NITION OF THE TERM TRANSFER U/S.2(47) OF THE ACT, BY WHICH RELI NQUISHMENT OR ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 60 EXTINGUISHMENT OF ANY RIGHT IN A CAPITAL ASSET IS C ONSIDERED AS TRANSFER WOULD ALSO NOT APPLY WHEN A PARTNER RETIRES FROM TH E PARTNERSHIP AND THERE WOULD BE NO TRANSFER OF INTEREST IN THE PARTN ERSHIP ASSETS. INTEREST OF A PARTNER IN A PARTNERSHIP FIRM IS NOT AN INTEREST IN A SPECIFIC ITEM OF PARTNERSHIP PROPERTY. IT IS HIS R IGHT TO OBTAIN HIS SHARE OF PROFIT FROM TIME TO TIME DURING THE SUBSISTENCE OF PARTNERSHIP, OR ON DISSOLUTION OF A PARTNERSHIP FIRM, OR ON HIS RETIR EMENT FROM PARTNERSHIP TO GET THE VALUATION OF HIS INTEREST IN THE PARTNERSHIP ASSET WHICH REMAINS AFTER DEBTS AND LIABILITIES OF PARTNE RSHIP. ON RETIREMENT SHARE IS DETERMINED ON TAKING ACCOUNTS OF NOTIONAL SALE OF PARTNERSHIP ASSETS AND GIVEN TO HIM WHAT HE RECEIVED IS HIS SHA RE IN THE PARTNERSHIP AND NOT ANY CONSIDERATION FOR TRANSFER OF HIS INTEREST IN THE PARTNERSHIP TO THE CONTINUING PARTNERS. NO ELEMENT OF TRANSFER OF INTEREST IN PARTNERSHIP ASSETS BY THE RETIRING PART NERS TO THE CONTINUING PARTNER NO EXTINGUISHMENT OF HIS INTEREST IN PARTNE RSHIP ASSETS. NO TRANSFER OF HIS INTEREST IN THE GOODWILL OF THE FIR M. THUS, NO CAPITAL GAINS IS CHARGEABLE U/S.45 OF THE ACT. THIS DECIS ION WAS CONFIRMED BY THE HONBLE SUPREME COURT IN THE CASE OF ADDITIO NAL CIT VS. MOHANBHAI PAMABHAI (165 ITR 166) ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 61 6.9.4 NOW REGARDING THE RELIANCE PLACED BY THE LD .D.R IN THE JUDGEMENT OF BOMBAY HIGH COURT IN THE CASE OF CIT V S. A. N. NAIK ASSOCIATES AND ANOTHER REPORTED IN [2004] 265 ITR 3 46 (BOM), IN OUR OPINION IT CANNOT BE APPLIED TO THE FACTS OF THE PR ESENT CASE. IN THAT CASE, THE ASSET OF THE PARTNERSHIP FIRM WAS TRANSFE RRED TO RETIRING PARTNER BY WAY OF DEED OF RETIREMENT, IT IS BASED O N THIS DOCUMENT AND SUBSEQUENT DEEDS OF RETIREMENT OF PARTNERSHIP THAT THE ORDER OF ASSESSMENT WAS MADE HOLDING THAT THE ASSESSEES ARE LIABLE FOR TAX ON CAPITAL GAINS, IN THAT CONTEXT THE BOMBAY HIGH C OURT HELD THAT WHEN THE ASSETS OF THE PARTNERSHIP IS TRANSFERRED T O RETIRING PARTNER, THE PARTNERSHIP WHICH IS ASSESSABLE TO TAX CEASED T O HAVE A RIGHT OR IT IS A RIGHT IN THE PROPERTIES STAND EXTINGUISHED IN FAVOUR OF THE PARTNER TO WHOM IT IS TRANSFERRED. 6.9.5 REGARDING THE APPLICABILITY OF PROVISIONS O F THE SECTION 28(IV), THERE IS NO RECEIPT OF ANY VALUE OF ANY BEN EFIT OR PERQUISITE, WHETHER CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR EXERCISE OF PROFESSION BY PRESENT ASSESSEE. IT IS O NLY BY RETIREMENT FROM THE PARTNERSHIP FIRM, THE ASSESSEE RECEIVED TH E IMPUGNED AMOUNT. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 62 6.9.6 REGARDING THE APPLICATION OF SEC.28(V) AS DISCUSSED IN EARLIER, WHAT THE ASSESSEE HAS RECEIVED ON RETIREME NT IS HIS SHARE IN THE VALUE OF THE BUSINESS CARRIED ON BY THE FIRM. THE SHARE IN THE VALUE OF THE BUSINESS IS A CAPITAL ASSET WHICH INC LUDE GOODWILL AND AS SUCH, SUCH RECEIPTS ARE CAPITAL RECEIPTS IN THEIR HANDS AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF ADDITIONAL CIT VS. MOHANBHAI PAMABHAI (SUPRA) AND THAT CANNOT BE CONSIDERED AS B USINESS INCOME OF ASSESSEE U/S.28(V) OF THE ACT AND SEC.28(V) CON FINED TO ANY INTEREST, SALARY, BONUS, COMMISSION OR REMUNERATION , BY WHATEVER NAME CALLED, DUE TO OR RECEIVED BY, PARTNER OF THE FIRM, FROM SUCH FIRM AND IT SHOULD BE IN REVENUE FIELD. THE RECEIPT WHICH IS IN THE CAPITAL FIELD CANNOT BE BROUGHT U/S.28(V) OF THE ACT THIS C ONTENTION OF THE LD.D.R CANNOT HAVE ANY MERIT. 6.9.7 REGARDING THE APPLICABILITY OF SEC.28(VA) O F THE ACT, THIS ISSUE CAME FOR CONSIDERATION BEFORE THIS CO-ORDINAT E BENCH OF CHENNAI IN THE CASE OF ACIT VS. P.SHIVAKUMAR(HUF) IN ITA NO.1584 TO 1590/MDS./2013 REPORTED IN (2014) 63 SOT 0091(CHENNAI)(URO) WHEREIN HELD AS FOLLOWS :- ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 63 NOW THE QUESTION TO BE CONSIDERED IS WHETHER THE AS SESSING OFFICER IS JUSTIFIED IN INVOKING SECTION 28(VA) SO AS TO TREAT THIS ADDITIONAL PAYMENT AS BUSINESS INCOME IT WAS HELD THAT THE REVENUE C ONTENTION THAT THE AMOUNTS RECEIVED BY THE RESPONDENT-ASSESSEES WERE F OR THE PURPOSE OF NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BU SINESS CANNOT BE ACCEPTED. THERE WAS NO AGREEMENT ENTERED INTO BETWE EN THE ASSESSEES WITH THE BUSINESS STATING THAT THEY WILL NOT BE CAR RYING ON ANY BUSINESS ACTIVITY. THERE WAS NO AGREEMENT WHATSOEVER INCLUDI NG IN THE NATURE OF NON-COMPETITION. THE ASSESSEES HAVE RECEIVED THE AM OUNT NOT BECAUSE OF ANY PARTICULAR AGREEMENT, BUT BECAUSE OF THEIR R ETIREMENT FROM THE BUSINESS. THE RETIREMENT DEEDS EXECUTED BY THE PART IES WERE NOT IN THE NATURE OF ANY AGREEMENT RESTRAINING THE PARTIES FRO M CARRYING ON BUSINESS ACTIVITIES. THEREFORE, SECTION 28(VA) IS NOT APPLIC ABLE TO THE CASE OF PARTNERS RETIRING FROM THE BUSINESS. THAT CLAUSE IS MORE APPLICABLE TO SITUATIONS LIKE NON-COMPETITION AGREEMENT, ETC. (PARA 8, 9) THERE IS NO ELEMENT OF PROFIT IN SUCH ADDITIONAL P AYMENTS TO THE ASSESSEES. THIS IS BECAUSE THE PROFIT TILL THE DATE OF RETIREMENT HAS BEEN WORKED OUT BY THE FIRMS AND THE SHARES OF THE RETIR ING PARTNERS HAVE ALREADY BEEN CREDITED TO THEIR CAPITAL ACCOUNTS. TH E CAPITAL ACCOUNTS OF THE RETIRING PARTNERS REFLECTED THE CAPITAL CONTRIB UTIONS MADE BY THEM, ALONG WITH THEIR PROFIT SHARES. WHEN THE CAPITAL AC COUNTS ARE SETTLED BY PAYING THE AMOUNTS TO RETIRING PARTNERS, THE SHARE OF THE PROFITS ALSO HAVE BEEN CREDITED. SETTLEMENT OF THE CAPITAL ACCOUNTS T AKES CARE OF SUCH THINGS. MOREOVER, EVEN IF THERE IS AN ELEMENT OF PR OFIT, FOR THE SAKE OF ARGUMENT, SUCH PROFITS ARE NOT TAXABLE IN THE HANDS OF THE PARTNERS BY VIRTUE OF PROVISIONS OF SECTION 10(2A) OF INCOME- TAX ACT, 1961. (PARA 10) THE ADDITIONAL PAYMENTS MADE TO THE RETIRING PARTNE RS WERE NOT IN THE NATURE OF ANY PROFIT OR INCOME WITHIN THE MEANING O F SECTION 28(VA) AND WERE NON- TAXABLE CAPITAL RECEIPTS. THE CIT (A) WAS JUSTIFIED RIGHT IN HOLDING THAT THE AMOUNTS ARE NOT TAXABLE. ( PARA 12, 13) BEING SO, IN OUR OPINION ADDITIONAL PAYMENT EVEN IF MADE TO THE RETIRING PARTNER IN EXCESS OF CAPITAL ACCOUNT IS NO T IN NATURE OF ANY ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 64 PROFIT OR INCOME WITHIN THE MEANING OF SEC.28(VA) O F THE ACT AND IT CANNOT BE BROUGHT TO TAX AS BUSINESS INCOME. 7. THE OTHER CONTENTION OF THE LD.D.R IS THAT THE AMOUNT RECEIVED BY THE ASSESSEE AT ` 26,99,00,000/- IS QUANTIFIED VIDE MEMORANDUM OF AGREEMENT ON 06.02.2007 BETWEEN THE ASSESSEE,D.SRIN IVASAN, S.SRINIVASAN AND M/S METRO CORP, AND FURTHER AGREE MENT MADE ON 31.01.2009, (RETIREMENT CUM RECONSTITUTION OF PARTN ERSHIP DEED) AND MEMORANDUM OF AGREEMENT OF RETIREMENT FROM PARTNERS HIP DATED 06.03.2009 ARE ONLY ARRANGEMENT TO COME OUT OF THE TAX NET BY ENTERING INTO SERIES OF RETIREMENT AND FRESH PARTNE RSHIP, BUT HAS TO GET OVER ARRANGEMENT DATED 06.02.2007 WHICH WERE ALREA DY IN EXISTENCE BETWEEN THE ASSESSEE COMPANY AND METRO CROP BANGALO RE AND THE AMOUNT WAS ACTUALLY RECEIVED BY THE ASSESSEE FROM M ETRO CROP AND NOT FROM FIRM M/S. S.J.M. PROPERTY DEVELOPERS WHERE THE ASSESSEE IS A PARTNER. AS SEEN FROM THE ARGUMENT OF LD.D.R, TH IS ARGUMENT IS TOTALLY CONTRADICTORY TO THE EARLIER ARGUMENT OF TH E LD.D.R. THERE IS A SERIOUS DOUBT IN THE MINDS OF THE AO AS WELL AS THE LD.D.R REGARDING THE TAXABILITY OF THE SAME IN THE HANDS OF THE ASSE SSEE IN TERMS OF ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 65 SEC.45(4) OF THE ACT ,SO THAT THIS ARGUMENT HAS BEE N ADDRESSED BY THE LD.D.R. IN OUR OPINION, WHEN WE HAVE GONE THRO UGH THE MEMORANDUM OF AGREEMENT DATED 06.02.2007, EVEN IF T HE AMOUNT OF ` 27 CRORES IS ACCRUED TO THE ASSESSEE, IT IS NOT R ELATING TO THE ASSESSMENT YEAR UNDER CONSIDERATION BEFORE US AS TH E ASSESSMENT YEAR INVOLVED IS 2008-09. HOW THE TRANSACTIONS ENT ERED ON 06.02.2007 WOULD BE BROUGHT TO TAX IN THE ASSESSMEN T YEAR 2008-09, EVEN IT IS ADMITTED THAT INCOME WAS ACCRUED TO THE ASSESSEE ON 06.02.2009 VIDE THAT MEMORANDUM OF AGREEMENT. MORE SO, WHEN THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG AS NOTED BY THE AO IN ITS FIRST PAGE OF ASSESSMENT ORDER AT SE RIAL NO.8, THERE IS NO FORCE IN THE ARGUMENT OF THE LD.D.R TO HOLD THAT TH E SAID AMOUNT TO BE TAXED IN THE ASSESSMENT YEAR 2008-09 8. THE NEXT GROUND IN THE ASSESSEES APPEAL IS TH AT THE LD.CIT(A) ERRED IN SUSTAINING THE RE-COMPUTATION OF THE DEDUC TION U/S.10B OF THE ACT BY SETTING OFF THE DEPRECIATION LOSS OF NON-ELI GIBLE UNITS AGAINST THE INCOME OF ELIGIBLE UNITS INVOLVED IN THE ACTIVI TY OF EXPORT IN THE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 66 COMPUTATION OF TAXABLE TOTAL INCOME WITHOUT ASSIGNI NG PROPER REASONS AND JUSTIFICATION. 9. THE FACTS ARE THAT IN THIS GROUND THE ASSESSEE WANTS NOT TO SET OFF DEPRECIATION LOSS OF OTHER UNITS AGAINST THE IN COME OF THE ASSESSEE FROM THE EXPORT BUSINESS, WHICH RUNS SEVE RAL UNITS. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF KARNAT AKA HIGH COURT IN THE CASE OF CIT V. YOKOGAWA INDIA LTD. REPORTED IN [2012] 341 ITR 385 (KAR) HELD THAT EXEMPTION U/S.10A HAS TO BE ALLOWED WITHOUT SETTING OFF BROUGHT FORWARD UNABSORBED LOSSES OR DE PRECIATION FROM EARLIER ASSESSMENT YEAR OR CURRENT ASSESSMENT YEAR EITHER IN THE CASE OF NON STP OR IN THE CASE OF FROM SOME OTHER UNDERTAKINGS, BEING SO DEPRECIATION LOSS OF OTHER UNITS CANNOT BE SET OFF AGAINST THE INCOME FO THE ASSESSEE FROM THE EXPORT PURPOSE. THU S, THIS GROUND OF THE ASSESSEE IS ALLOWED ACCORDINGLY. 10. THE LAST GROUND IS THAT THE CIT(A) ERRED IN S USTAINING THE REDUCTION OF ` 4,37,168/- BEING THE MISCELLANEOUS RECEIPTS FROM TH E ELIGIBLE PROFITS IN THE COMPUTATION OF DEDUCTION U/ S.10B OF THE ACT WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 67 11. THE FACTS OF THE CASE ARE THAT THE ASSESSEES CLAIM THAT THE SAID AMOUNT OF RECEIPTS WERE EARNED IN THE COURSE OF CAR RYING ON THE BUSINESS OF 100% EOU I.E RECEIPTS FROM THE SALE OF SCRAP WILL ALSO QUALIFY FOR DEDUCTION IS UNACCEPTABLE. SEC.10B(4) C LEARLY STATES THAT PROFITS DERIVED FROM EXPORT OF ARTICLES SHOULD ALON E BE CONSIDERED. NEEDLESS TO SAY THAT THE INCOME ATTRIBUTABLE TO AN ACTIVITY IS ONE STEP REMOVED FROM THE INCOME DERIVED. WE ARE OF THE VIEW THAT LD.CIT(A) PLACING RELIANCE ON SUPREME COURTS DECISION IN THE CASE OF LIBERTY LIBERTY INDIA VS. CIT REPORTED IN 183 TAXMAN 349, R EJECTED THIS GROUND. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.CIT(A). HENCE THIS GROUND IS NOT ALLOWED. REVENUES APPEAL IN ITA NO.990/MDS./2014 (A.Y 2009 -10) 12. THE REVENUE HAS RAISED THE GROUND WITH REGARD TO COMPUTATION OF BOOK PROFIT BY TREATING THE RECEIPT OF RS.27.99 CRORES AS SHORT TERM CAPITAL GAIN. 13. THIS AMOUNT IS STRAIGHT AWAY TAKEN TO GENERAL RESERVE ACCOUNT AND NOT APPEARING IN THE P&L A/C AND THERE IS NO AL LEGATION THAT BROUGHT ON LOSS ACCOUNT WAS NOT PREPARED IN ACCORDA NCE WITH PART-II & III SCHEDULES VI OF COMPANIES ACT. HENCE, THE AO IS PRECLUDED FROM DISTURBING THE AUDITED ACCOUNTS WHICH IS DULY FILED BEFORE THE ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 68 ROC AS HELD BY THE SUPREME COURT IN THE CASE OF APO LLO TYRES VS.CIT (255 ITR 273) WHEREIN HELD THAT: THE ASSESSING OFFICER, WHILE COMPUTING THE BOOK PRO FITS OF A COMPANY UNDER SECTION 115J OF THE INCOME-TAX ACT, 1 961, HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF AC COUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES AC T AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COM PANIES ACT. THE ASSESSING OFFICER, THEREAFTER, HAS THE LIM ITED POWER OF MAKING INCREASES AND REDUCTIONS AS PROVIDED FOR IN THE EXPLANATION TO SECTION 115J . THE ASSESSING OFFICER DOES NOT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFITS SHOWN IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVID ED IN THE EXPLANATION. THE USE OF THE WORDS IN ACCORDANCE WI TH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO TH E COMPANIES ACT IN SECTION 115J WAS MADE FOR THE LIMITED PURPO SE OF EMPOWERING THE ASSESSING OFFICER TO RELY UPON THE A UTHENTIC STATEMENT OF ACCOUNTS OF THE COMPANY. WHILE SO LOOK ING INTO THE ACCOUNTS OF THE COMPANY, THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERE NCE TO THE PROVISIONS OF THE COMPANIES ACT, WHICH OBLIGATE THE COMPANY TO MAINTAIN ITS ACCOUNTS IN A MANNER PROVIDED BY TH AT ACT AND THE SAME TO BE SCRUTINIZED AND CERTIFIED BY STATUTO RY AUDITORS AND APPROVED BY THE COMPANY IN GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE THE REGISTRAR OF COMP ANIES WHO HAS A STATUTORY OBLIGATION ALSO TO EXAMINE AND BE S ATISFIED THAT ITA NOS.958 & 990/MDS/2014 SHARADHA TERRY PRODUCTS LTD. 69 THE ACCOUNTS OF THE COMPANY ARE MAINTAINED IN ACCOR DANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT. SUB-SECTION (1A) OF SECTION 115J DOES NOT EMPOWER THE ASSESSING OFFICER TO EMBARK UPON A FRESH ENQUIRY IN REGARD TO THE ENTRIE S MADE IN THE BOOKS OF ACCOUNT OF THE COMPANY. ACCORDINGLY, WE ARE IN AGREEMENT WITH ORDER OF THE CIT(A). 14. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED AND APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 18 TH OF MARCH,2016 AT CHENNAI. SD/- SD/- ( . ! ) ( DUVVURU RL REDDY ) ) ( ( #$ % & ) ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 18 TH MARCH,2016 . K S SUNDARAM. () * +, -, /COPY TO: 1. ./ /APPELLANT 2. *0./ /RESPONDENT 3. 1 () /CIT(A) 4. 1 /CIT 5. ,23 * 4 /DR 6. 3! 5 /GF