Dr. Vithal V. Kamat Vs JCIT (ITAT Mumbai)
The undisputed facts are that the assessee became the partner in the partnership firm called M/s. Sports Field Construction vide deed of partnership dated 06.05.1992. The details of other partners who joined the partnership have been given in para 6 (supra). So in all, there were six partners in the firm. The first four partners namely Smt. Amrabai Malsi, Smt. Velbai Devsi Shah, Shri Bipin Talakshi Shah and Smt. Hirbai Nanji Sojpal brought into the partnership firm as land measuring 15,250 sq. yards situated at survey No.41L situated at Lokhandwala, Mumbai as their capital contribution which was valued at Rs.1.5 crores. The other two partners namely Shri Samir P. Shah and Shri Vittal V. Kamat were to bring in Rs.1.5 crores as capital contribution in the firm.
The sole objective of the firm was to develop the said plot of land. As per the terms of the partnership deed, the said plot was to be brought into the partnership firm and other partners also to contribute their respective contribution. Thereafter, Smt. Hirbai Nanji Sojpal died on 22.08.2001 leaving behind her will and testament dated 10.10.2000 under which Shri Bipin Talakshi Shah as executor and trustee and nominated him in her place in the partnership firm and accordingly the share of the said person increased to 7.16% from 3.58%.
Pertinent to state that certain disputes arose between Shri Samir T. Shah and the assessee and the firm filed a suit in Bombay High Court seeking the dissolution of the firm, however, the same was resolved by filing Consent Terms under which Shri Samir P. Shah retied on 11.08.2002 from the said firm vide deed of retirement dated 29.01.2003 and his share in terms of the Consent Terms was transferred to the assessee and thus assessee’s share in the firm increased to 50% in terms of deed of retirement dated 29.01.2003.
Finally, in between the firm also entered into a MOU with M/s. Runwal Developers Pvt. Ltd. dated 12.11.2003 for the development of the plot on certain terms and conditions which could not materialize. Thereafter, a deed of admission cum retirement was executed on 04.04.08 retiring all the existing partners and inducting four new partners namely M/s. Runwal Developers Pvt. Ltd. and the three nominees.
Upon said retirement Shri Vithal V. Kamat he received a consideration of Rs.48.15 crore as share in the assets of the firm as full and final settlement of his account in the firm. The AO added Rs.47,13,14,000/- as long term capital gain in the hands of the assessee by holding that the said amount was received in consideration of transfer of interest of the assessee in the said assets of the firm and after deducting Rs.1,01,86,000/- from the total consideration of Rs.48.15 crores, added the same to the income of the assessee as long term capital gain under section 45 of the Act.
The Ld. CIT(A) after taking into consideration the facts, contentions and submissions as made by the assessee during the course of assessment proceedings and also after considering the ratio laid down by various judicial forums allowed the appeal of the assessee on this issue by holding that the compensation received by the assessee upon retirement from the partnership firm as his share in the assets of the partnership firm is not liable to tax as there is no transfer of assets involved. In the case of Addl. CIT vs. Mohanbhai Pamabhai (supra) the Hon’ble Supreme Court has affirmed the decision of the Hon’ble Gujarat High Court as reported in (1973) 91 ITR 393 (Guj.) wherein the Hon’ble Bombay High Court has held that any money received by the partner upon retirement from the partnership firm as his share in the assets of the partnership concern is not a consideration for transfer of his interest in the partnership to the continuing partners and there is no transfer within the meaning of section 2(47) of the Act.
Hon’ble Supreme Court in the case of CIT v. Tribhuvandas G. Patel (supra) has held that any amount paid to the partner upon his retirement towards his share in assets is not a transfer within the meaning of section 47(ii) of the Act and not liable to capital gain.
In the case of CIT v. Lingamallu Raghu Kumar (supra) the Hon’ble Supreme Court has held that where the assessee received on retirement from the firm a sum more than what is due towards his capital and profit amount received was not assessable to capital gain as there was no transfer of any asset as contemplated in section 2(47) of the Act.
Even we find merit in the alternative plea taken by the assessee that if the computational provision of capital gain as provided under section 48 of the Act breaks down then the charging provision as provided under section 45 of the Act would also fail as held by the Hon’ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (128 ITR 294). Therefore, the case of the assessee is squarely covered by the decisions of the Hon’ble Apex Court as discussed above and in view of the ratio laid down in the above decisions by the Apex Court, we are inclined to dismiss the appeal of the Revenue by upholding the order of Ld. CIT(A) on this ground.
FULL TEXT OF THE ITAT JUDGEMENT
The above tilted cross appeals have been preferred by the assessee and the Revenue against the order dated 21.03.2018 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2009-10.
2. The facts in brief are that the assessee filed return of income on 29.09.2009 declaring total income at Rs.2,63,86,107/- which was processed under section 143(1) of the Act. Thereafter, the case of the assessee was selected under scrutiny and statutory notices under section 143(2) of 142(1) were issued and duly served upon the assessee. The assessee is an individual and is engaged in the business of hotel consultancy. During the year, the assessee derived income by way of salary from M/s. Kamat Hotels India Pvt. Ltd. in the capacity of a director Rs. 51,92,900/-, income from business of Rs.29,419/- and income from other sources of Rs.2,12,63,788/-.
3. The grounds raised by the Revenue are reproduced as under:
“1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in holding the consideration received is retirement benefit without appreciating the fact that the same is in the nature of capital gain.
2. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in treating the same as retirement benefit without appreciating that the other partners of the firm have transferred the land of the project which was treated as long term capital gain and the assessee has taken the shade of the deed to avoid tax as per the provisions of sec. 45 of the Act.
3. On the facts and in the circumstances of the case and in law the Ld. CIT(A) failed to appreciate that consideration received by the assessee is towards the transfer of rights in the buildings, health club etc. which is a capital and the same is taxable as long term capital gain.
4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made under section 14A read with Rule 8D(2) of Income-tax Rules, 1962 holding that ‘no disallowance has to be made’ where no exempt income was earned by the assessee in spite of the extant of circular of CBDT bearing No. 05/2014 dated 11.02.2014 wherein the Board has clarified that provisions of section 14A of the Act are applicable in the cases of investments in shares which has not yielded any dividend/exempt income.
5. On the facts and circumstances of the case and in law, Rule 8D(2) of the Income-tax Rules, 1962 can be applied even when no exempt income has been earned during the year on the investments made in as much as making such investments require systematic planning and management that cannot be performed without incurring any expenses, and, therefore, to cover such expenses Rule 8D(2) of Income-tax Rules, 1962 is attracted even when no exempt income is earned.”
4. At the outset, the Ld. D.R. submitted before the Bench that ground No.4 & 5 in the Revenue’s appeal are not pressed and therefore dismissed as not pressed. Ground No.6 & 7 are general in nature.
5. The Revenue has raised a common issue in all these three grounds No.1 to 3 challenging the order of Ld. CIT(A) wherein the Ld. CIT(A) has held that consideration received by the partner of a firm upon retirement from the firm is in the nature of retirement benefit and no capital gain tax is attracted thereon as the said receipt was in the nature of retirement benefit.
6. The facts in brief are that during the course of assessment proceedings the AO noticed that assessee has credited a sum of Rs.45,67,74,730/- under the head “Exempt income and receipt” in the capital account and accordingly the assessee was called upon to furnish the detail of the said amount. The Ld. A.R. submitted before the AO during the course of assessment proceedings that assessee retired from the partnership M/s. Sports Field Construction in terms of deed of admission and retirement dated 04.04.2008. The assessee got his accounts audited under section 44AB of the Act and in the audit report filed along with the return of income, the auditors have reported that assessee has received upon his retirement from M/s. Sports Field Construction a partnership firm on 04.04.2008 subject to takeover of debts and liabilities under the agreement dated 04.04.2008 net amount of Rs.45,67,74,731/- which is not taxable and is taken to the capital account as shown in the balance sheet. Initially the assessee entered into a partnership business including construction and running of a club vide deed of partnership dated 06.05.1992 with the following partners:
i) Amrabai Malsi 21.42%
ii) Velbai Devsi Shah 21.42%
iii) Shri Bipin Talakshi Shah 58%
iv) Hirbai Nanji Sojpal 3.58%
v) Shri Smir P. Shah 25%
vi) Shri Vithal V. Kamat 25%
7. The assessee retired from the said partnership on 04.04.2008 and relinquished his rights, title and interest in the partnership properties. The assessee’s account with the partnership was settled on his retirement on 04.04.2008 and a sum of Rs.48.15 crore was received by him by way of retirement in full and final settlement of his account with the firm. The assessee filed the copy of deed of admission and retirement dated 04.04.2008 signed by the four incoming partners and retiring partner Mr. Vithal V. Kamat the assessee duly attested by the solicitor. The assessee received Rs.46.65 crore directly and Rs.1.50 crores deposited in Escrow Account. Besides, the assessee furnished before the AO the deed of reconstitution dated 04.04.2008 and copies of cheques issued by the firm to the assessee. The AO brushed aside the submissions of the assessee and came to the conclusion that the money received by the assessee from the partnership concern Rs.47,13,47,000/-after reducing Rs.1,01,86,000/- payment to the club members was in consideration of transfer of right, title and interest in the properties and as such held the same to be taxable under section 45(1) of the Act. According to the AO the said gain is a long term capital gain on the ground that the said right was acquired since 1992 and cost of acquisition is taken at nil because assessee was having debit balance of Rs.1,00,04,690/-in the firm which shows that the amount introduced by the assessee for acquiring such rights stood withdrawn. Accordingly, the AO held that the amount received of Rs.48,15,00,000/- as reduced by the payments due to members of Rs.1,01,86,000/- is to be assessed as long term capital gain for the reasons namely;
“(1) Mr. Vithal V. Kamat entered into partnership with five others under the name and style of M/s. Sports Field Construction vide deed of partnership dated 06.05.1992 whose profit sharing ratio was reproduced hereinabove.
(2) Under the said deed of partnership the first four partners namely Smt. Amrabai Malsi, Smt. Velbai Devsi Shah, Shri Bipin Talakshi Shah and Smt. Hirbai Nanji Sojpal were brought in the partnership. The land measuring 15,260 sq. yard comprised in survey No.41L situated at Lokhandwala, Mumbai as their capital contribution with all right title and interest in the said land and were allotted in the partnership firm as stated hereinabove. As per clause 6 of the partnership deed the land was valued at Rs.5 crores which was treated as capital contribution of the above four partners in the firm and the other two partners Shri Samir P. Shah and Shri Vithal V. Kamat were to bring minimum of Rs.1.5 crore as their capital contribution in the firm as required from time to time. As per para 8 of the partnership deed any further capital contribution which may be required for the purpose of partnership business was to be contributed by Shri Samir P. Shah and Shri Vithal V. Kamat. As per clause of the partnership deed, the objective of the partnership firm was to develop the said land into flats, shops and to construct health club in the name of Kamat Klub Lokhandwala and thus this was a limited venture partnership concern. The AO noted that assessee had physical possession of the said immovable property. Vide deed of admission and retirement dated 04.04.2008, the four partners were retired namely Smt. Amrabai Malsi, Smt. Velbai Devsi Shah, Shri Bipin Talakshi Shah and Smt. Hirbai Nanji Sojpal and four new partners were taken in the partnership in the M/s. Runwal Developers Pvt. Ltd. namely;
(1) M/s. Runwal Developers Pvt. Ltd.
(2) Subhash S. Runwal
(3) Sandeep S. Runwal and
(4) Suboth S. Runwal
According to the AO, the said deed was only signed by Mr. Vithal V. Kamat and not by other retiring partners. The AO also noted that the other partners sold their share in the land namely Shri Smt. Amrabai Malsi and Smt. Velbai Devsi Shah to M/s. Runwal Developers Pvt. Ltd. on 26.12.2007 for Rs.11 crore and the amount was offered by the respective partners as long term capital gain in A.Y. 2008-09 and similarly Bipin T. Shah sold his share in the property to M/s. Runwal Developers Pvt. Ltd. for Rs.5.86 crores on which the said partner has duly paid taxes in the capacity of executor of will late Shri Nanji Sojpar and Smt. Hirbai Nanji. Thus according to the AO the said deed of retirement and admission dated 04.04.2008 was signed by four incoming partners and one by Mr. Vithal V. Kamat and thus held that amount received by the assessee is a consideration for transfer of capital assets and hence same is taxable under section 45(1) of the Act and ultimately added the same to the income of the assessee under the head “long term capital gain” by making addition of Rs.47,13,14,000/- by framing assessment vide order dated 26.12.2011 passed under section 143(3) of the Act.
8. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee after taking into consideration the contentions and submissions as raised by the counsel of the assessee during the course of appellate proceedings by observing and holding as under:
“4.4.1 The admitted facts related to these issues are:
(i) M/s. Sportsfield Construction, a partnership firm, was formed vide Deed of Partnership dated 6.5.1992. The objects of the partnership included development of the said plot of land, enter into agreements for sale of flats, shops to be constructed and to establish sports complex. The firm was validly constituted and duly registered with the Registrar of Firms vide entry dated 30th July, 1999. Initially the firm had 6 partners including the appellant as under:
