ITO 25(1)(3), MUMBAI v. A.R. ASHER AND 3 OTHERS, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT ASHA VIJAYARAGHA VAN (JM) ITA NO.5256/MUM/2009 (ASSESSMENT YEAR-2006-07) THE ITO 25(1)(3) C-10 PRATYAKSHKAR BHAVAN BKC BANDRA (E) MUMBAI-400 051 VS. A.R. ASHER AND 3 OTHERS (ALIES A.R. ASHER & CO.) DEVLA PADA BORIVALI(W) MUMBAI-400 066 PAN-AAGFA 2637P (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SURENDRA KUMAR RESPONDENT BY: SHRI SATISH MODY O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE LD. CIT(A)-XXV MUMBAI DATED 7.7.2009 FOR THE A.Y.20 06-07. 2. FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PAR TNERSHIP FIRM ENGAGED IN THE BUSINESS OF SUPPLYING WELL WATER. THE ASSES SEE FIRM IS OWNING A PIECE OF LAND ADMEASURING 2175 SQ.MTRS SITUATED AT MAGAT HANE VILLAGE BORIVALI. THE WELL IS CONSTRUCTED ON THIS PLOT ITSELF FROM WH ERE THE WATER IS SUPPLIED. THE ASSESSEE FIRM WAS HAVING FOUR PARTNERS UPTO 31 .1.2006. FIVE NEW PARTNERS WERE INTRODUCED ON 1.2.2006 AND THE FIRM W AS RECONSTITUTED. OLD FOUR PARTNERS RETIRED ON 31.3.2006. BEFORE 29.2. 2006 PLOT OWNED BY THE FIRM WAS REVALUED AT RS. 36 LACS AND THE REVALUATIO N AMOUNT WAS TRANSFERRED TO THE CAPITAL ACCOUNT OF EXISTING FOUR PARTNERS IN THE CAPITAL SHARING RATIO I.E. 1/4 TH TO EACH PARTNER. THE RETIRING PARTNERS WHEN RETIR ED ON 31.3.2006 CARRIED AWAY THEIR CAPITAL WHICH INCLU DED REVALUATION AMOUNT OF THE PLOT IN THEIR CAPITAL ACCOUNT. ITA NO. 5256/M/09 2 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS TH E ASSESSING OFFICER APPLIED PROVISIONS OF SECTION 45(3) AND 45(4) OF TH E INCOME TAX ACT IN THE LIGHT OF JUDGMENT OF BOMBAY HIGH COURT IN THE CASE OF A.N. NAIK & ASSOCIATES 265 ITR 346 AND COMPUTED LONG TERM CAPIT AL GAIN OF RS 36 LACS. 4. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE TH E LD. CIT(A) AND SUBMITTED AS FOLLOWS: DURING THE COURSE OF APPELLATE PROCEEDINGS COUNSEL OF APPELLANT FILED THAT THE APPELLANT HAS NOT TRANSFERRED THE PL OT TO THE PARTNERS. THE PLOT CONTINUES TO BE WITH THE RECONSTITUTED FIRM EV EN AFTER 31.3.2006. HENCE DECISION OF BOMBAY HIGH COURT QUOTED IN THE P ROCEDING PARA WOULD NOT BE APPLICABLE TO THE CASE. HE RELIED ON T HE DECISION OF ITAT MUMBAI IN THE CASE OF SMT. PARU D. DAVE 110 ITD 410 AND ALSO DECISION OF KERALA HIGH COURT IN THE CASE OF CIT VS KUNNAMK ULAM MILL BOARD 257 ITR 544. 5. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE GONE THROUGH THE SUBMISSIONS. I HAVE GONE T HROUGH ALL THE THREE DECISIONS ONE DECISION RELIED UPON BY THE AO AND TWO DECISIONS RELIED UPON BY THE APPELLANT. DECISIO N OF GOA BENCH OF BOMBAY HIGH COURT IN THE CASE OF A.N. NAIK ASSOC IATES & OTHERS 265 ITR 346 HELD THAT IN A CASE WHERE HINDU UNDIVIDED PARTNERSHIP FIRM WAS RECONSTITUTED DUE TO FAMILY SE TTLEMENT AND SOME OF THE ASSETS OF THE FIRM WERE DISTRIBUTED TO THE RETIRING PARTNERS AND THE FIRM CONTINUED WITH THE OTHER PART NERS WITH SOME OF THE ASSETS THEN IT WAS HELD BY BOMBAY HIGH COURT THAT SECTION 45(3) AND 45(4) OF INCOME TAX WOULD BE APPL ICABLE IN THAT CASE EVEN THOUGH THE FIRM WAS NOT DISSOLVED AS THE RETIRING PARTNERS TOOK AWAY THE ASSETS OF THE FIRM. HANDING OVER THE ASSETS TO RETIRING PARTNERS WOULD AMOUNT TO TRANSF ER WITHIN THE MEANING OF SECTION 2(47) AND HENCE CAPITAL GAIN WOU LD BE TAXABLE. IN THE CASE OF SMT. PARU D. DAVE 110 ITD 410 (MUM) AND KERALA HIGH COURT IN THE CASE OF KUNNAMKULAM MILL BOARD 257 ITR 544. THE FACTS WERE THAT SOME OF THE ASSETS WER E REVALUED AND THE REVALUED SURPLUS WAS TRANSFERRED TO THE CAP ITAL ACCOUNT OF PARTNERS. WHEN THOSE PARTNERS RETIRED THEY CARR IED AWAY THAT REVALUATION AMOUNT ALSO AS PART OF THEIR INTEREST IN THE FIRM WHILE THE FIRM CONTINUED WITH NEW PARTNERS AND SAME ASSET S. IN THE CASE OF PARU D DAVE THE FINDINGS GIVEN BY MUMBAI ITAT ARE AS UNDER: ITA NO. 5256/M/09 3 THE PARTNERSHIP FIRM IS NOT A LEGAL ENTITY AND PRO PERTY OF THE PARTNERSHIP VESTS IN ITS PARTNERS IN AS MUCH AS ALL THE PARTNERS HAVE AN INTEREST IN THE PARTNERSHIP PROPER TY. THE PARTNERSHIP ACT CLEARLY PROVIDES THAT A PROPER TY WHICH IS BROUGHT IN BY PARTNERS ON THE FORMATION OF PARTNERSHIP OR ACQUIRED IN THE COURSE OF BUSINESS O F PARTNERSHIP BECOMES THE PROPERTY OF THE FIRM. THE PARTNERS OF A FIRM ARE ENTITLED TO A SHARE OF THE P ROFITS OF THE BUSINESS TO THE EXTENT OF THEIR PROFIT SHARING RATIO. DURING THE SUBSISTENCE OF PARTNERSHIP NO PARTNER HA S ANY ASSIGNED RIGHT OR SHARE IN THE PARTNERSHIP PROPERTY . DURING THE CONTINUANCE OF THE PARTNERSHIP THE PARTN ERS HAVE ONLY A RIGHT IN THE PROFITS OF THE PARTNERSHIP AND INTEREST IN EACH AND EVERY PROPERTY OF THE PARTNERS HIP AND INTEREST IN EACH AND EVERY PROPERTY OF THE FIRM. N O PARTNER CAN DEAL WITH ANY PORTION OF THE PARTNERSHI P PROPERTY AS HIS OWN DURING THE CONTINUANCE OF THE PARTNERSHIP. AS THE PARTNERS HAVE NO RIGHT IN THE AS SETS OF THE PARTNERSHIP FIRM THERE IS NO TRANSFER OF ANY RIGHT IN THE SAID PROPERTY ON RECONSTITUTION RETIREMENT OF A PAR TNER. IN CASE ANY ASSET PROPERTY IS ALLOCATED TO A PARTNER I N PROPORTION TO HIS SHARE IN THE PROFITS OF THE FIRM THERE IS NO PARTITION OR TRANSFER TAKING PLACE NOR THERE IS ANY RELINQUISHMENT OF INTEREST OF OTHER PARTNERS IN THE ALLOCATED PROPERTY IN THE SENSE OF TRANSFER OR EXTINGUISHMENT OF INTEREST AS ENVISAGED UNDER 17 OF THE REGISTRATION ACT. KERALA HIGH COURT ALSO HELD SIMILAR FINDINGS IN THE CASE (QUOTED SUPRA). 6. THE LD. CIT(A) FURTHER HELD AS FOLLOWS: IN THE CASE OF APPELLANT THE RETIRING PARTNERS DID NOT TAKE AWAY THE PLOT BUT ONLY TOOK AWAY THE REVALUED AMOUNT I. E. THEIR INTEREST IN THE FIRM. THE PLOT CONTINUED TO BE THE PROPERTY OF THE FIRM EVEN AFTER 31.3.2006 WHEN THE FIRM WAS RECONST ITUTED WITH THE NEW PARTNERS. AS NO ASSET IS TRANSFERRED TO TH E RETIRING PARTNERS DECISION OF A.N. NAIK (QUOTED SUPRA) WOULD NOT BE APPLICABLE. THE PARTNERS ONLY TOOK AWAY THEIR INTE REST IN THE [PROFIT OF THE PARTNERSHIP FIRM. THEY HAVE NOT TAK EN AWAY THE PROPERTY OF THE FIRM. IN VIEW OF ABOVE CAPITAL GAI N TAXED BY THE A.O. ON RETIREMENT OF THE PARTNERS IS NOT TAXABLE. NO CAPITAL GAIN ITA NO. 5256/M/09 4 WOULD ALSO BE TAXABLE ON REVALUATION OF PLOT AS THE PLOT WAS PROPERTY OF THE FIRM SINCE ITS INCEPTION WHICH IS C LEAR FROM THE PARTNERSHIP DEED DATED 15.6.1995. IN VIEW OF ABOVE ADDITION IS DELETED AND THE APPEAL STANDS ALLOWED 7. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE AO AND INSISTED THAT THE CASE OF A.N. NAIK & ASSOCIAT ES 265 ITR 346 HAS TO BE FOLLOWED. 8. THE LD. COUNSEL FOR THE ASSESSEE SHRI SATISH MOD Y RELIED ON THE ORDER OF THE LD. CIT(A). 9. WE HEARD BOTH THE PARTIES. IN THE CASE OF SMT. PARU D. DAVE 110 ITD 410 THE FACTS ARE AS FOLLOWS: BOTH THE ASSESSES WERE PARTNERS IN A PARTNERSHIP F IRM HAVING EQUAL SHARE IN THE PROFITS OF BUSINESS. THE FIRM OWNED A FACTORY BUILDING WHICH WAS SHOWN AT COST IN THE BAL ANCE SHEET FROM YEAR TO YEAR AND NO DEPRECIATION WAS BEING CLA IMED THEREON. ON 1.4.1993 THE BOOK VALUE OF THE SAID FACTORY BUI LDING WAS REFLECTED AT RS. 79 452. ON 15.4.1993 THE SAID BU ILDING WAS REVALUED AT RS. 23 LAKHS AND THE DIFFERENCE ON ACCO UNT OF REVALUATION OF ASSET I.E. RS. 22 20 548 WAS CREDITE D EQUALLY TO THE CAPITAL ACCOUNTS OF BOTH THE PARTNERS. ON 29.4.199 3 THE FIRM WAS RECONSTITUTED BY THE ADMISSION OF GIVE NEW PARTNERS AND TOTAL PROFIT SHARING RATIO OF THE OLD PARTNERS WAS REDUC ED TO 5 PER CENT. SUBSEQUENTLY BOTH THE PARTNERS HAD WITHDRAWN A SUM OF RS. 18 53 700 FROM THEIR RESPECTIVE ACCOUNTS. THE SAID CONSIDERATION RECEIVED BY THE PARTNERS WAS TREATED AS ASSIGNMENT AND RELINQUISHMENT OF THEIR RESPECTIVE SHARES IN THE PA RTNERSHIP ASSETS IN FAVOUR OF THE NEW PARTNERS ADMITTED TO THE RECON STITUTED FIRM. THE TRANSACTION WAS TREATED AS TRANSFER WITHIN THE MEANING OF SECTION 2(47) AND THE GAIN ARISING THEREFROM WAS HE LD LIABLE TO BE TAXED AS CAPITAL GAINS U/S. 45. 10. SIMILARLY THE KERALA HIGH COURT IN THE CASE OF CIT VS KUNNAMKULAM MILL BOARD 257 ITR 544 IT HAS BEEN HEL D AS FOLLOWS: WHAT IS POSTULATED U/S. 45(4) OF THE I.T. ACT 19 61 IS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOL UTION OF A FIRM ITA NO. 5256/M/09 5 WOULD BE CHARGEABLE TO TAX AS THE INCOME OF THE FIR M. OWNERSHIP OF PROPERTY DOES NOT CHANGE WITH THE CHANGE IN THE CONSTITUTION OF THE FIRM. AS LONG AS THERE IS NO CHANGE IN OWNERSH IP OF THE FIRM AND ITS PROPERTIES FOR THE SIMPLE REASON THAT THE PARTNERSHIP OF THE FIRM STOOD RECONSTITUTED THERE IS NO TRANSFER OF C APITAL 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 THE PROPERTIE S OF THE FIRM. WHAT TRANSPIRES IS THAT THE RIGHT TO SHARE THE INCO ME OF THE PROPERTIES STOOD TRANSFERRED IN FAVOUR OF THE SURVI VING PARTNERS AND THERE IS NO TRANSFER OF OWNERSHIP OF THE PROPER TY IN SUCH CASES. WHEN A PARTNERSHIP IS RECONSTITUTED BY ADDI NG A NEW PARTNER THERE IS NO TRANSFER OF ASSETS WITHIN THE MEANING OF SEC. 45(4). 11. IN THE PRESENT CASE THE ASSESSEE HAS NOT TRANSF ERRED THE PLOT TO THE PARTNERS. THE PLOT CONTINUES TO BE WITH THE RE CONSTITUTED FIRM EVEN AFTER 31.3.2006. FURTHER REVALUATION BY ITSEL F WILL NOT RESULT IN CAPITAL GAIN BECAUSE THERE IS NO TRANSFER. HOWEVER THE COST OF ACQUISITION OF PLOT OF LAND TO THE FIRM WILL CONTIN UE TO BE ORIGINAL COST OF ACQUISITION AND NOT THE REVALUED VALUE. FOLLOWI NG THE DECISION IN THE CASE OF SMT. PARU D. DAVE 110 ITD 410 (SUPRA) AND CIT VS KUNNAMKULAM MILL BOARD 257 ITR 544 (SUPRA) WE ALLO W THE ASSESSEES APPEAL. 12. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 11 TH DAY OF FEBRUARY 2011 SD/- SD/- (R.S. SYAL) ( ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI DATED 11 TH FEBRUARY 2011. RJ ITA NO. 5256/M/09 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CENTRAL - I CONCERNED 5. THE DR A BENCH TRUE COPY BY ORDER ASST. REGISTRAR I.T.A.T MUMBAI ITA NO. 5256/M/09 7 DATE INITIALS 1 DRAFT DICTATED ON: 9.02 . 201 1 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 9.02 .201 1 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/ PS 6. KEPT FOR PRONOUNCEMENT ON: ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: ______ 9 DATE ON WHICH FILE GOES TO THE AR 10 . DATE OF DISPATCH OF ORDER: ______