ACIT Vs. M/s. Jeannie Jamshed Madan (ITAT Mumbai)
The fact that the assessee is one of the beneficiaries in the Estate of late Shri M.S. Kotwal who is partner in the partnership firm of M/s. Mira Salt Works is not in dispute. The reason for bringing to tax the amount received by the assessee is, according to the Assessing Officer there was a revaluation of the assets in the partnership firm, the new partners introduced capital in the partnership firm, the assessee was paid from the capital introduced by the new partners and this transaction is nothing but transfer of property by the firm and there was no capital gains tax paid by the firm nor the assessee who has received the beneficial share from the partnership firm. Thus the Assessing Officer invoked the provisions of section 68/69 of the Act and held that the amount received by the assessee is from the firm which has not paid any taxes on the transaction of introduction of capital by new partners and transferred property there off relating to the firm and since the assessee did not pay the taxes it is the income and it should be treated as the income of the assessee and should be taxed u/s. 68 of the Act. Alternatively, Assessing Officer concluded that the investments made by the assessee should be treated as unexplained investment u/s. 69 of the Act. This in our view is not permissible under law. If the Assessing Officer was of the view that there is distribution/transfer of assets by the Firm appropriate action should be taken in the hands of the Firm. The assessee has fully explained the sources of the amounts received by her which were invested by her in purchase of properties and therefore none of the conditions laid down in the provisions of section 68/69 are attracted so as to invoke the said sections.
Assessing Officer is not justified in making addition u/s. 68 of the Act in respect of the amounts received by her from the Firm as a beneficiary. We further find that the assessee explained the source of investments made in the residential flats and therefore the investments made in such residential flats cannot be treated as unexplained investment u/s. 69 of the Act.
Full Text of the ITAT Order is as follows:-
1. This appeal is filed by the Revenue against the order of the CIT(A)-30, Mumbai dated 31.08.2015 for the Assessment Year 2011-12 in deleting the addition of ₹.7 Crores made by the Assessing Officer as unexplained investment u/s.69 of the Act.
2. Briefly stated the facts are that, the assessee filed her return of income for the Assessment Year 2011-12 on 19.03.2013 declaring income of ₹.42,38,628/-. The assessment was taken up for scrutiny and in the course of Assessment Proceedings based on the AIR information received by the Assessing Officer that assessee had purchased two immovable properties for ₹.2,50,02,054/- and ₹.6,95,00,000/- on 07.04.2010 and 12.07.2010 respectively, the assessee was asked to explain the source of the amounts for purchase of the said properties. In response the assessee explained vide letters dated 23.12.2013 and 15.01.2014 that the source of funds for purchase of properties was mainly from the bequeathal of property by her Maternal Grandfather namely late Shri M.S. Kotwal and the assessee also received certain amounts from her mother Mrs Perviz J. Madan and the total amount received between 21.05.2008 to 15.03.2009 was at ₹.7,91 ,65,329/- out of which an amount of ₹.2,05,00,000/- and ₹.4,95,00,000/- were invested in purchases of two properties.
3. Subsequently, show cause notice dated 07.02.2014 was issued by the Assessing Officer stating that assessee received money in her bank account from different accounts and no explanation was provided regarding the source of such receipts, purpose for which such amounts were transferred to assessee account and whether due tax had been paid on said amounts. Therefore, Assessing Officer required the assessee to show cause as to why the investments made on purchases of immovable properties during the relevant Assessment Year 2011-12 should not be deemed as income of the assessee and since assessee could not offer any explanation about the nature and source of investments, why it should not be treated as unexplained investment u/s. 69 of the Act. Assessee furnished her reply by letter dated 24.02.2014 explaining that assessee is a beneficiary in the profits of the partnership firm M/s. Mira Salt Works a firm in which her grandfather was a partner and after the demise of her grandfather as per the Will the Executors of the Estate of her grandfather late Shri M.S.Kotwal acted as partner in the capacity of Executors in the partnership. It was explained that in the year 2008 new partners were introduced and the new partners agreed to introduce capital in the firm amounting of ₹.105 crores and accordingly introduced capital into the firm. It was explained that since the assessee requested the Executors of Estate of late Shri M.S. Kotwal opted to withdrew the amount lying to the credit of the capital account and give it to the beneficiary as per the Will of late Shri M.S. Kotwal. It was explained that assessee got her share of ₹.8.75 crores as a beneficiary out of which assessee received ₹.7,91 ,65,329/- in instalments between 21.05.2008 to 15.03.2009 which amount is in turn invested for purchases of residential properties.
4. Subsequently the Assessing Officer issued one more show cause notice dated 10.03.2014 stating that the firm M/s. Mira Salt Works not engaged in any business and it was holding the ancestral property in respect of profit sharing ratio of partners/ beneficiary and in the case of the assessee it is not distribution of any income from property held by the firm but it is a case where the property of the firm has been effectively transferred in favour of the new partners. The Assessing Officer further observing that the sole basis of valuation of firms Goodwill at ₹.105 crores can be attributed nothing else than to the revaluation of Fixed Assets (i.e. land) as the firm did not have any business and by the said valuable property of the firm have effectively been transferred to the new partners and therefore required to show cause as to why the share of goodwill credited to assessee of ₹.8.75 crore in Financial Year 2007-08 and Financial Year 2008-09 should not be considered as unexplained income u/s. 68 of the Act. Alternatively, the Assessing Officer proposed to treat the investment in two residential properties as unexplained investment u/s. 69 of the Act because the source of such funds are not subjected to tax. Assessee filed detailed explanation submitting that the provisions of section 68 and 69 of the Act, have no application to the transaction in question. The conditions laid down in the provisions of section 68 and 69 are not fulfilled so as to apply the said sections to the transactions. However, the Assessing Officer without appreciating the submissions of the assessee held that the partnership of M/s. Mira Salt Works holding ancestral property did not distribute the property to the beneficial owners including the assessee but effectively sold/ transferred the property to new partners without payment of capital gains, stamp duty, registration fee, etc. He observed that the land was sold to D.B Reality Ltd. and no Capital Gain Tax was paid by the firm/beneficiaries and the assessee is one of the beneficial owner to the tune of ₹.8.75 Crores out of such consideration and the legitimate taxes are not paid and since the amount has been credited in the books of assessee by way of receipts in installments, he rejected the explanation of the assessee as not satisfactory and the conditions for applicability of sections 68 of the Act are satisfied. Alternatively Assessing Officer considered ₹.7 Crores i.e. ₹.4.95 Crores and ₹.2.05 Crores which was invested in the purchase of two residential flats out of the impugned receipts as unexplained investment u/s. 69 of the Act.
5. The assessee carried the matter before the Ld.CIT(A) and the Ld.CIT(A) considering the submissions, facts of the case concluded that none of the conditions of section 68 are satisfied in the present case and therefore invoking the provisions of section 68 are not warranted at all. He also observed that the Assessing Officer required the assessee to show cause as to why share of goodwill credited to the assessee’s account in the FY 2007-08 and FY 2008-09 should not be considered as unexplained income u/s 68 of the Act for the Assessment Year 2011-12 under consideration. Therefore Ld.CIT(A) observed that the Assessing Officer noticed that the said amounts were credited in Financial Year 2007-08 and Financial Year 2008-09 and therefore it cannot be taxed in the Assessment Year 2011-12. Further Ld.CIT(A) held that even if the stand of the Assessing Officer that goodwill estimation by the firm M/s. Mira Salt Works is incorrect and it should be treated as sale proceeds of land is accepted, there would not be no change in position as far as the assessee is concerned because the partnership may have income from several heads of income but the distribution of share of profits from partnership is taxable as business income in so far as the assessee concerned. He further observed that the share received from Executors of late Shri M.S. Kotwal from M/s. Mira Salt Works whether out of capital gains or goodwill falls under business income and is exempted u/s. 1 0(2A) of the I.T. Act, therefore Ld.CIT(A) held that the reason given by the Assessing Officer that the funds were received by the assessee out of untaxed money does not survive.
6. In so far as the alternative stand of the Assessing Officer that the investment of ₹.7 Crores made in the residential flats as unexplained investment invoking provisions of section 69 of the Act is concerned the Ld.CIT(A) held that the assessee explained that the investment was made out of the money received from the firm M/s. Mira Salt Works and the sources of such investments were explained satisfactorily to the Assessing Officer. The Ld.CIT(A) further observed that since there is no addition made by the Assessing Officer u/s. 69 of the Act in the final computation of the total income, he held that no adjudication is required on this issue. Against this order the Revenue is in appeal before us.
7. Ld. DR strongly supported the orders of the Assessing Officer in invoking provisions of section 68 and 69 of the Act and bringing to tax the amount of ₹.8.75 crores as income of the assessee u/s. 68 of the Act.
8. Learned Senior Advocate Shri Firoze B. Andhyarujina appearing on behalf of the assessee, submitted that the assessee is a beneficiary of the Estate of late Shri M.S. Kotwal, through the deceased’s The Executors of the Estate of late Shri M.S. Kotwal acted as partner (in capacity of Executors) in the partnership Firm – M/s Mira Salt Works, a firm registered with the Registrar of Firms. M/s. Mira Salt Works initially had three brothers as equal partners of the firm. (1) Mr. M.S. Kotwal (2) Mr. B.S. Kotwal and (3) Mr. D.S. Kotwal. After the death of Mr. D.S.Kotwal, his two sons – Mr Keki Kotwal and Mr Noshir Kotwal were introduced as partners bequeathing equally their deceased father’s 1/3 share in the Firm. Mr. M.S. Kotwal died on June 14, 1983 and as per his Will dated 08th May 1979 he had appointed his two daughters and their husbands as the Executors of his Will. The beneficiaries of his Will are his grand daughters. As per late Shri M.S. Kotwal’s Will, his 1/3 share in the Firm would be bequeathed by his grand-daughters (Beneficiaries) and such share would be given to the beneficiaries by the Executors of late Mr. M.S. Kotwal (comprising of 2 daughters and their husband) appointed as per the Will. Based on the Will of late Mr. M.S. Kotwal, the profit sharing ratios of the partners of the Firm were changed and the new profit sharing ratios are as under:
