Set-off not claimed in return can be claimed during assessment

IN THE ITAT HYDERABAD BENCH ‘A’

Smt. Girija Reddy

V/s.

Income-tax Officer

IT Appeal No. 297 (Hyd.) of 2012

SA No. 56 (Hyd.) of 2012

[Assessment year 2008-09]

May 25, 2012

ORDER

Chandra Poojari, Accountant Member

This appeal by the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 31.1.2012 for assessment year 2008-09.

2. The assessee raised the following grounds of appeal:

“1.  The order of the learned CIT(A) is not only erroneous both on facts and in law but is perverse.

 2.  The learned CIT(A) erred in holding that there is a transfer of capital asset when the assessee retired from partnership and thereby erred in holding that the amount received of Rs. 8,22,17,952 as capital gains.

 3.  The learned CIT(A) failed to appreciate the fact that the decisions relied upon by him in the case of Mrs. Arthi Shenoy reported in 75 ITD 100 of Special Bench ITAT and also that of 257 ITR 449 are in favour of assessee and thereby erred in holding that there is a transfer even on retirement and further that as per the decision in the case of Bishanlal reported in 257 ITR 449 the capital gains is assessable in the hands of the firm and not in the hands of partner and thereby erred in confirming the assessment of capital gains.

 4.  The learned CIT(A) erred in not referring to the decision of A.P. High Court in the case of Sudex reported in 290 ITR 511 and relying on the decision of Mumbai High Court to hold sec. 45(4) is applicable even on retirement.

 5.  The learned CIT(A) erred in not following the decision of Hyderabad ITAT in the case of Navnir Roller Flour Mills though the same is applicable on all fours to hold that there is no transfer.

 6.  The learned CIT(A) failed to appreciate the fact that as per sec. 6 of partnership act the Goodwill belong to the partnership firm and therefore, there cannot be any transfer by a partner of an asset that belong to firm to other partners and further erred in not appreciating the fact that a retiring partner is entitled to get share in value of all assets including goodwill and getting such share on retirement does not amount to transfer and thereby erred in holding that there is a transfer and confirming the order of the AO.

 7.  The learned CIT(A) erred in not entertaining the alternate claims of set off of capital loss and deduction u/s. 54 which arose because of AO’s proposal to treat the amounts as capital gains, on the ground that no revised return of income is filed, without appreciating the fact that as a commissioner he had powers to entertain claims if they are allowable and no necessity to file revised return of income.

 8.  Any other ground that may be urged at the time of hearing.”

3. Brief facts of the issue are that in the assessment year under consideration, the assessee’s account had been credited by the firm with Rs. 7,95,88,639 being her share of goodwill from the firm M/s. Montage Manufacturers on 23.12.2007. Subsequently the assessee retired as partner from the said firm and received a total amount of Rs. 8,22,17,952 comprising of her share of goodwill and her capital account balance at Rs. 26,29,313. The Assessing Officer noted that as and when the outgoing partners of the firm relinquish their rights in the firm in consideration of the amounts paid to them by the firm, there is a transfer of capital asset, and the resultant capital gain is liable to be taxed in the hands of each partner. He opined that the crediting of the amount of Rs. 7,95,88,639 in lieu of the assessee’s share of goodwill on her retirement also amounting to transfer, and therefore, such receipt is liable for capital gains tax, as her right in the firm is a capital asset and extinguishment thereof amounts to transfer. Accordingly, he proposed to treat the entire amount of Rs. 8,22,17,952 as long term capital gain. Vide reply dated 16.12.2010, the assessee submitted before him that sec. 45 of the Act does not provide to treat the amount received on retirement from partnership as an amount taxable as ‘capital gains’. However, the Assessing Officer felt that the above contention of the assessee was not correct, as sec. 45(1) of the Act provides that any profits or gains arising from the transfer of a capital asset effected in a previous year shall be chargeable to Income tax under the head ‘capital gains’ in the year in which the transfer takes place. He reiterated that the right in a firm is capital asset within the meaning of sec. 2(14) of the Act and extinguishment of such right therein is a transfer as per sec. 2(47) of the I T Act. He opined that goodwill in the instant case was a capital asset within the meaning of sec. 2(14), which had been relinquished to the firm or other partner amounting to transfer covered by both (i) and (ii) of sec. 2(47).

4. The Assessing Officer further opined that sec. 45(3) of the A also provides that gains arising from the transfer of a capital asset by person to a firm in which he is a partner, by way of a capital contribution shall be chargeable to tax as his income of the previous year in which such transfer takes place, and for the purpose of sec. 48, the amount recorded in the books of accounts of the firm as the value of the capital asset shall be deemed to be the full value of the consideration received as a result of the transfer of the capital asset. He noted that in the present case, the assessee, being a partner, had relinquished goodwill to the firm, i.e., transferred a capital asset to the firm for a consideration of Rs. 7,95,88,639/-, as recorded in the books of accounts of the firm, as value of the share of goodwill of that partner.

5. The Assessing Officer noted that the above view is supported by the decision of the Hon’ble Bombay High Court in the case of CIT v. A.N. Naik Associates [2004] 265 ITR 346/136 Taxman 107, wherein the Hon’ble Court had deliberated upon the purpose of introduction of sub sec. (3) of sec. 45 of the Act by the Finance Act, 1987 and observed that the effect thereof was that the profits and gains arising from the transfer of a capital asset by a partner to a firm would be chargeable as the partners income for the previous year in which the transfer takes place.

6. Before the Assessing Officer, the assessee had relied on the decisions in the cases of CIT v. R. Lingmallu Raghu kumar [2002] 124 Taxman 127 (SC), Sudex v. Asstt. CGT [2007] 290 ITR 511 (AP) and Navnir Roller Flour Mills, ITAT Hyd in GTA No. 1/Hyd/2004 dated 29.7.2007. However, the Assessing Officer felt that the above mentioned decisions do not have much relevance as the issue in those cases was whether the excess amount received by an assessee on retirement is assessable to capital gains. As against those, in the assessee’s case, there was a transfer of capital asset by the partner to the firm.

7. On the other hand, he observed that the decision of the Hon’ble Delhi High Court in the case of Bishan Lal Kanodia v. CIT [2002] 257 ITR 449/122 Taxman 460 answers all the objections raised by the assessee. He noted that in the said case, it was held that where “parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of sec. 2(47) of the Act.

8. The Assessing Officer relied on the order of the Tribunal in the case of Shevanti Bhai C. Mehta v. ITO [2004] 4 SOT 94 (Pune) wherein held that interest in the firm is an asset, as any other asset, as recognised by the Act and transfer thereof within the meaning of sec. 2(47) of the Act gives rise to capital gain exigible to tax. The Hon’ble Tribunal observed that in a situation where a partner receives for giving up his right in the firm, a price that is equated with reference to the market value of the assets of the firm, his right and interest had been valued at the market price and when the price exceeds the cost, sec. 45 comes into operation to treat the difference between the market price and the cost, being gains on account of transfer of capital asset, leading to levy of tax on capital gains. They held that since in the said case the outgoing partners had surrendered their rights and interest in the firm in consideration of the amount paid to them by the other parties who took over the business in an auction in accordance with the terms of the partnership deed, there was a transfer of capital asset and the resultant capital gain was liable to tax as long term capital gains in the hands of such partner.

9. The Assessing Officer noted that in the case of Arathi Shenoy v. Jt. CIT [2000] 75 ITD 100 (Bang.) (SB) wherein held that “retirement in the normal course also involves the same concept of relinquishment of capital asset i.e. the interest or rights in the firm’s property and consequent extinguishment of rights therein and this involves transfer from one to other. Interest or rights in the firm’s assets capable of being sold and purchase and such sale and purchase transaction involve transfer from one to other.

10. In the light of the above, the Assessing Officer concluded that the cases cited by the appellant pertained to the position prior to the amendment in the Act, i.e. omission of sec. 47(ii) by the Finance Act, 1987, which came into effect from 1.4.1988. He noted that after 1.4.1988, many High Courts and Tribunals have taken a view that relinquishment of capital asset on retirement is extinguishment of right in the firm in favour of the continuing partners and the amount received in consideration of that right is liable to capital gain tax. Accordingly, the entire receipt of Rs. 8,22,17,952/ – was considered as taxable as Long Term capital gains.

11. During the course of first appellate proceedings, the representative of the assessee submitted that in terms of the Partnership Act, when a partner is retiring, to settle the account between the partners, the goodwill is valued and share of the partner therein is credited as per the profit sharing ratio. Accordingly, the retiring partner had been paid whatever outstanding in the credit of the capital account at the time of retirement. However, the Assessing officer held that the amount received on transfer of goodwill is taxable as long term capital gains. While holding so, the Assessing Officer held the amount of Rs. 26,29,313 as the cost of acquisition but did not allow indexation for the same without assigning any reasons. He averred that if at all the same was taxed as ‘capital gains’, set off for short term capital loss should have been allowed. He also averred that the issue of set off had not been claimed originally, as the receipt itself had not been treated as taxable.

12. However, the CIT(A) was not convinced with the arguments of the assessee, he confirmed the addition on this issue. Against this the assessee is in appeal before us.

13. Before us, the learned AR submitted that the Assessing Officer did not examine whether the goodwill could have been held as belonging to the partner at all. Referring to sec. 14 of the Partnership Act, he submitted that the goodwill belongs to the partnership firm and not to the partners. He averred that what the assessee got was only her share in such goodwill at the time of retirement, which had been valued and her share was credited to her capital account as per the provisions of Partnership Act, which she withdrew at the time of retirement.

14. The AR further argued that if the amount is to be considered as receipt on transfer of goodwill, then all the other partners also had received goodwill, as their capital accounts had been credited with their shares therein. However, all of them did not retire. The representative contended that if the amount so credited is considered as received on transfer of goodwill and how the same would be taxed in the hands of the partners retiring in any subsequent year. He, therefore, claimed that. it would not be correct to tax the amounts as capital gains only in the hands of the retiring partners.

15. The counsel for the assessee further submitted that in fact the decision of the Hon’ble Delhi High Court in the case of Bishan Lal Kanodia (supra) is in favour of the assessee, as the amount received by the petitioner was held as not exigible to tax. He averred that what was held in the said decision is that when it relates to assets and only when the amount received on retirement is more than the share one is entitled to, then it is taxable. He also referred to the decisions of the Hon’ble Supreme Court in the case of Tribhuvandas G. Patel v. CIT [1999] 236 ITR 515 and Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 referred to therein. The representative averred that in the assessee’s case it was not the case of the Assessing Officer that she had received more than her share and in fact she had received only her share in goodwill and nothing more.

16. The AR placed reliance on the judgement of Supreme Court in the case of CIT v. R. Lingmallu Raghukumar (supra), wherein it was held that when a partner retires from a firm and the amount of his share in the partnership assets after deducting the liabilities and prior charges is determined on taking accounts in the manner prescribed 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 partners is not “capital gain” u/s 45 of the Income-tax Act, 1961. He also placed reliance on the order of the Tribunal in ITSSA No. 20/Hyd/2004 dated 24th August, 2004 in the case of Jaikumar Agarwal. He also relied on the judgement of Supreme Court in the case of Tribhuvandas G. Patel (supra) Mohanbhai Pamabhai’s case (supra), Sudex’s case (supra).

17. The learned DR submitted that the amount received by the retiring partner represents the market value of the assets of the firm, her right and interest including her share in the goodwill of the firm. By retiring from the firm the retiring partner surrendered all her rights therein which were later to be enjoyed by the continuing partners. Her rights over the assets of the firm are not transferred free of cost but for the consideration received from the firm. The surrendering of rights for a consideration is a transfer within the meaning of section 2(14) of the Act. He relied on the order of the Bangalore Special Bench of this Tribunal in the case of Arathi Shenoy (supra). He also relied on the judgement of Bombay High Court in the case of A.N. Naik Associates (supra) wherein it was held that

“Held, that the documents would clearly show that before the continuing 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 there were family disputes amongst the partners and the genesis of the family arrangement was not disputed. The arrangement by way of division 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 partners 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 partiers 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).”

18. The learned DR also relied on the judgement in the case of Bishan Lal Kanodia (supra) wherein it was held as under:

“Held, that whether it was held to be a case of dissolution of the partnership or of retirement, having regard to the provisions contained in section 47(ii) of the Act, as it stood prior to 1988, the assessee was 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 gain.”

19. The learned DR relied on the order of the Tribunal Pune Bench in the case of Shevantibhai C. Mehta (supra) wherein held that when the retiring partner assigning his interest in the partnership firm specifically by a deed of retirement executed in writing to the continuing partners for a consideration in lump sum, such consideration was chargeable to tax capital gain tax. He also relied on the order of the Tribunal in the case of Sudhakar M. Shetty v. Asstt. CIT [2011] 130 ITD 197/9 taxmann.com 274, ITAT Mumbai Bench.

20. We have heard the rival submissions. To appreciate the rival contentions we have to refer to certain provisions of the IT Act, 1961. Sec. 45(1) of the Act brings to tax any capital gain that accrues or arises on transfer of a capital asset. The capital gain is charged to tax in the previous year in which the transfer takes place. Sec. 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 asset; 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-trade of a business carried on by him, such conversion or treatment;

(v)  any transaction involving the allowing of the possession of any immovable property to be taken or retained in 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, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.’

Explanation : For the purposes of sub-cls. (v) and (vi), “immovable property” shall have the same meaning as in cl. (d) of s. 269UA.’

21. Capital asset has been defined in s. 2(14) of the Act, as meaning “property” of any kind held by the assessee, whether or not connected with his business or profession. The above exhaustive definition is subject to the following exclusions like stock-in-trade, consumable stores or raw material held for the purpose of business or profession, personal effects, agricultural land in India, certain gold bonds, special bearer bonds and gold deposit bonds.

22. The share or interest of a partner in the partnership and its assets would be property and, therefore, a capital asset within the meaning of the aforesaid definition. To this extent, there can be no doubt. The next question 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 its continuing partners so as to attract a charge under s. 45 of the Act.

23. A look at how formation and dissolution of partnership was used as a device to evade tax on capital gains to convert an asset held individually into an asset of the firm in which the individual is a partner and conversion of capital assets into individual assets on dissolution or otherwise, is necessary.

24. Partnership as a form of carrying on business evolved so that two or more persons can to join together by pooling resources in the form of capital and expertise. One of the devices used by assessee to evade tax on capital gain was to convert in asset held individually into asset of the firm in which the individual is a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise.

25. Such introduction of capital asset as capital contribution by a partner up to 1st April, 1988 did not result in 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 509/23 Taxman 14W. The Hon’ble Supreme Court held that under the IT Act, 1961, where 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 transfer of a capital asset within the terms of s. 45 of the Act, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest. On such introduction of capital the partner’s capital account is credited with the market value of the property. Such entry does not represent the true value of consideration. It is a notional value only, intended 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 dissolution or on his retirement, a share which will depend upon deduction 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 partner’s share on that date. At that time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm 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 computation machinery incorporated in the scheme relating to the determination of the charge provided in s. 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. In coming to the above conclusion the Hon’ble Court relied on the decision of the Hon’ble Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. The Hon’ble Supreme Court in the said decision explained the nature of partnership and the right of the partners over the assets of the partnership 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 property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in, all the partners, and in that sense every partner was an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to L share in the assets of the firm which remain after satisfying the liabilities set out in cl. (a) and sub cls. (i), (ii) and (iii) of cl. (b) of s. 48.”

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 that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the, of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges.”

26. 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, 1988. The effect of this was that the profits and gains arising from the transfer 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 accruing as a result of transfer of the capital asset.

27. In the case of dissolution where partners are 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 Taxman 409, the Hon’ble Supreme Court has explained the nature of distribution of assets of a partnership on dissolution amongst its partners and as to whether such distribution of assets would constitute transfer within the meaning of s. 2(47) of the IT Act as follows :

“A partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm’s property or firm’s assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position it is difficult to accept the contention that upon dissolution the firm’s rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly by or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm’s rights in the partnership assets amounting to a transfer of assets within the meaning 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 person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon 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, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person.”

28. To plug this loophole the Finance Act, 1987, brought 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 the dissolution of a firm or other AOP or BOI (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of s. 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.”

29. Before the introduction of sub-s. (4) to s. 45, there was cl. (ii) of s. 47 which read as under :

“Any distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons.”

Sec. 47 of the Act lays down which are the transactions not regarded as transfer for the purpose of s. 45 of the Act.

30. The Finance Act, 1987, w.e.f. 1st April, 1988, omitted this clause, the effect of which was that distribution of capital assets on the dissolution of a firm would w.e.f. 1st April, 1988 be regarded as “transfer”. Therefore, instead of amending s. 2(47), the amendment was carried out by the Finance Act, 1987, by omitting s. 47(ii), the result of which was that distribution of capital assets on the dissolution of a firm was regarded as “transfer”. 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 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 capital gains, the fair market value of the asset on the date of transfer was deemed to be the full value of the consideration received or accruing as a result of the transfer.

31. Thus Parliament brought into the tax net transactions whereby assets were brought into a firm or taken out of the firm. Thus s. 45(4) covers cases where there is dissolution of the firm and distribution of assets of the firm by the firm to its partners.

32. Dissolution and retirement are two different concepts. In the case of retirement, the retiring partner goes out of the firm but the remaining partners continue to carry on the business of the partnership as a firm. In the case of dissolution, the firm no longer exists and the dissolution is between all the partners of the firm.

33. In the case of retirement of a partner there could be two situations. In the first situation there can be a retirement of a partner from the firm and the firm might continue its existence and the retiring partner might be given assets in lieu of amounts payable to him on retirement. This could be done either on the basis of settling amounts standing to the credit of his capital account 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 amounts standing to the credit of his capital account or on a lump sum basis.

34. In the first situation i.e., retirement of a partner from the firm and the firm continuing its existence and the retiring partner is given assets in lieu of amounts payable to him on retirement, 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 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. The chargeability to capital gain tax in such circumstances was in issue 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 partner/partners fall within the expression “otherwise” ? The Court held that the purpose and object of the Act of 1987 was to bring to charge of tax arising on distribution of capital assets of firms which otherwise was not subject to taxation. If the language of sub-s. (4) is construed to mean that the expression “otherwise” has to partake of the nature of dissolution or deemed dissolution, then the very object of the amendment could be defeated by the partners by distributing the assets to some partners who may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the amending Act. The Court noticed that the position prior to the amendment 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 on dissolution or transfer of assets to the retiring partner on retirement. 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 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 capital gains, the fair market value of the asset on the date of transfer would 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 Act 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 transactions whereby assets were brought into a firm or taken out of the firm.

35. Prior to the aforesaid decision, cases where on retirement, property was allotted to a partner by the firm in lieu of amounts payable to him were subjected to capital gains 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 the 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 Taxman 219 that a clear distinction exists between retirement of a partner from a firm and dissolution of the firm. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while in the case of dissolution 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 case of A.N. Naik Associates (supra) however, treats distribution of assets of the firm to partners on dissolution or on retirement as falling within the ambit of s. 45(4).

36. The situation with which, we are concerned in this appeal is a case where the retiring partner is paid consideration in cash and she gives up her rights as partner including his rights 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 situation by the firm in favour of the retiring partner or by the retiring partner in favour of the firm and its continuing partners.

37. 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 there is relinquishment of interest in partnership assets amounting 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 is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or on his retirement from the partnership to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of 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 and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed in the relevant provisions of the partnership law and it is this, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the 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 does not represent consideration received by him as a result of the extinguishment of his interest in partnership assets.

Hence, when an assessee retires from a firm and receives an amount in respect of his share in the partnership there is no transfer of interest of the assessee in the goodwill of the firm and no part of the amount received by him would be assessable to capital gains tax under s. 45.”

38. The Hon’ble Court held that the extended definition 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 apply when a partner retires from the partnership and there would 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). Similar view was also expressed by the Hon’ble Supreme Court in the case of R. Lingmallu Raghukumar (supra) following its decision in the case of Mohanbhai Pamabhai (supra). In CIT v. Kunnamkulam Mill Board [2002] 257 ITR 544/125 Taxman 802, the Hon’ble Kerala High Court also expressed the view that where there is revaluation of assets of the firm on reconstitution of a firm consequent to retirement of some of the partners, it cannot be said that there was any transfer of any right in immovable property in favour of continuing partners and therefore there can be no capital gain which can be brought to tax.

39. However, the Hon’ble Bombay High Court in the following 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 (supra).

after considering the decision in the case of Mohanbhai Pamabhai (supra) held as follows in the case of Tribhuvandas G. Patel (supra):

“A couple of things emerge clearly from the aforesaid passages. In the first place, a retiring partner while going out and while receiving what is due to him in respect of 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 acknowledge 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 while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would 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 indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of s. 2(47) of the Act.”

40. The above decision was followed by the Hon’ble Bombay High Court in the other two cases of N.A. Modi (supra) and H.R. Aslot (supra). The Pune Bench of the Tribunal in the case of Shevantibhai C. Mehta (supra) had considered the aforesaid decision of Hon’ble Bombay High Court and other decisions relied upon by learned counsel for the assessee before us and has reiterated that the question of taxability of an amount received by a partner on retirement from firm would depend upon mode in which retirement is effected as laid down by the Hon’ble Bombay High Court in the cases of Tribhuvandas G. Patel (supra) and N.A. Modi’s case (supra). Before the Pune Bench, the assessee had argued that the decision of the Hon’ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) has since been reversed by the Hon’ble Supreme Court in Tribhuvandas G. Patel’s case (supra). The Pune Bench after analyzing all aspects and the various decisions on the issue held that neither the Hon’ble Supreme Court nor other High Courts have disapproved the proposition laid down by the Hon’ble Bombay High Court having regard to the particular mode of retirement. The Pune Bench further found that on the contrary, the Hon’ble Delhi High Court in the case of Bishan Lal Kanodia’s case (supra) had concurred with the said proposition propounded by the Hon’ble Bombay High Court in the case of N.A. Modi (supra). Thus the 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 depend upon what particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of s. 2(47) of the Act.

41. We shall therefore examine the mode of retirement in the case of the assessee, to see if the same can be said to 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).

42. In the case of Tribhuvandas G. Patel (supra), the assessee was a partner in the firm of KEW. The assessee had served on the other two partners a notice of dissolution of the firm w.e.f. 31st Dec., 1960, which was not accepted by the other partners. The assessee, therefore, filed a suit for dissolution and accounts, but, ultimately, the disputes between the parties were amicably settled out of Court and under a deed dt. 19th Jan., 1962, the assessee retired 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) Rs. 1 lakh as his share of profits of the firm for the broken period ended 31st Aug., 1961, (2) Rs. 50,000 as his share of the value of the goodwill, and (3) Rs. 4,77,941 as his share in the remaining assets of the firm.

43. The issue relevant for our purpose is the liability of the sum of Rs. ,77,941 or any part thereof to capital gains tax. The Hon’ble Court took up for consideration as to what is the real nature of the transaction when a partner retires from the partnership. Does the transaction amount to any relinquishment of his share or interest in the partnership in favour of the continuing partners, or does it stand on the same footing as an adjustment of his rights that results upon dissolution of the partnership. On behalf of the assessee it was contended that retirement of a partner and quantification of his share and payment thereof to him stands on the same footing as adjustment of rights 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 liable to be charged under the head “Capital gains”. This was not accepted by Hon’ble Bombay High Court and they held that a clear distinction exists between retirement of a partner from a firm and dissolution of the firm. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the 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.

44. Thereafter the Hon’ble Court held that where accounts are taken and the partner is paid the amount standing to the credit of his capital account there would be no transfer. If, on the other hand, the partner is paid a lump sum consideration for transferring 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 the earlier paras. What we have to see now is whether the terms of the deed of retirement constitutes release of any assets of the firm in favour of the continuing partners.

45. Thereafter the Court referred to the deed between the parties and the following clauses : (at pp. 117 and 118)

“And whereas the said sums of Rs. 1,00,000, Rs. 50,000 and Rs. 7,50,000 in all aggregating to a total sum of Rs. 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 undivided half 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 Kumar Engineering Works constituted up to 31st Aug., 1961, as the entire business as a going concern together with all its assets, liabilities and goodwill, benefits of trade name, tenancy rights, import licences and/or quota rights …..

And this indenture further witnesseth that in consideration of the premises aforesaid they the continuing partners do and each of them doth hereby release the retiring partner and the retiring partner doth hereby release the continuing partners and each of them from all covenants, agreements, matters and things in the here before recited partnership dated, the 8th Jan., 1951, and the supplementary agreement dt. 24th Aug., 1957, contained and in further pursuance of the said agreement and in consideration of the premises aforesaid and without making any further payment of any amount to him the retiring partner as beneficial owner doth hereby assign and release upto the continuing partners and each of them all that his right, title, interest and undivided half share in the said partnership firm and all his share and interest on the said pieces of land-hereditaments and premises, structures and buildings standing thereon ……. and machinery, plant, equipment, etc…To hold the same unto the continuing partners absolutely in equal shares as tenants-in-common ……..

And this indenture further witnesseth that in pursuance of the said agreement and in consideration of the premises aforesaid the retiring partner doth hereby release, grant, convey and transfer and assure all that his individual half share in all the several pieces or parcels of land-hereditaments … to have and to hold the said undivided half share and the premises hereby granted as expressed so as to be unto and to the use of the continuing partners absolutely as tenants-in- common in equal shares forever ……. “

46. 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 partnership, the Court held that the transaction will have to be regarded 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 and share in partnership and its assets in favour of the continuing partners and the transaction cannot be regarded as amounting to any distribution of capital assets upon dissolution of a firm.

47. 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.

48. In the case of the assessee the clauses in the retirement deed do convey interest in assets and further refer to the fact that the assessee will not have any interest over the assets of the firm. This is evident from clause No. 17 and 18 of the partnership deed dated 26.12.2007 which read as follows:

“17. On and with effect from the Effective Date, the Retiring Partners shall have no right, title or interest in the firm or its assets. The capital account of the Retiring Partners prior to their retirement was as follows:

18. All payments to the Retiring Partners by the Firm shall be on account of settlement of their capital accounts as set forth above. The Retiring Partners agree and confirm that they have no current claims of whatsoever nature against the Firm.”

49. Thus, in our opinion, it was a case of lump sum payment in consideration of the retiring partner assigning or relinquishing her share or right in the partnership and its assets in favour of the continuing partners. We are of the view that the manner of the retirement in case of the assessee is such that it can be regarded as assigning or relinquishing by the retiring partner of her share or right in the partnership firm and its assets in favour of the continuing partners. Therefore, we are of the view that the assessee satisfies the parameters laid down by the Bombay High Court in the cases referred to above and, therefore, there was a transfer of interest of the retiring partner over the assets of the partnership firm on her retirement and, therefore, there was a liability to tax on account of capital gain.

50. The next ground for our consideration is with regard to non-considering the ground relating to set off of short term capital loss arising from investment made by the assessee in SBI Mutual Fund.

51. Brief facts of the issue are that during the scrutiny proceedings, the assessee had filed a letter before the Assessing Officer claiming that she had incurred short term capital loss of Rs. 97,07,329 from her investments in SBI Mutual Funds during the year. Letters from SBI Fund Management P. Ltd. in this regard were also filed. Though the Assessing Officer noted that the claim was in order as per section 74 of the Act, he noted that such loss had not been claimed in the return of income. Accordingly, he held that in view of the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. v. CIT [2006] 284 ITR 323/57 Taxman 1, the assessee’s claim was not allowable. During the appellate proceedings, the representative of the assessee submitted that set off for the short term capital loss arising from investments in SBI Mutual Funds should have also been given. He averred that the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. (supra) was in a different context and not on the similar facts. In instant case, the Assessing Officer had proposed to tax the amount as capital gains, as against the assessee’s claim that the same is not taxable. Accordingly, having recorded the fact that the assessee otherwise qualified for such set off, the set off should not have been disallowed on the ground that the same was not claimed in the return of income. He maintained that the assessee was well within her right to make claims during the assessment proceedings and it does not amount to filing revised computation. In this regard he referred to the decision of the Hon’ble Ahmedabad ITAT in the case of Kisan Discretionary Family Trust v. Asstt. CIT [2008] 113 TTJ (Ahd.) 918, which was rendered after the decision of the Hon’ble Apex court in the case of Goetze India Ltd. (supra). He further claimed that even otherwise the said decision of the Hon’ble Supreme Court restricts itself only to the powers of the Assessing Officer and not of the CIT (appeals). As the ground was not considered by the CIT(A), the assessee is in appeal before us.

52. We have heard both the parties and perused the material on record. Considering the claim of the assessee, we direct the Assessing Officer to consider the plea of the assessee if the transaction relating to the acquisition of capital asset i.e., SBI Mutual Fund is already disclosed in the original return of the assessee as it has appeared in her books of accounts, the loss arising out of this transaction is to be considered in accordance with law.

53. Since we have disposed the appeal of the assessee, the Stay Application filed by the assessee has become infructuous and dismissed accordingly.

54. In the result, the appeal of the assessee is partly allowed and the stay application filed by the assessee is dismissed.