Anik Industries Ltd. Vs DCIT (ITAT Mumbai)
During assessment proceedings, it transpired that the assessee was a partner of 30% in a partnership firm namely M/s Mahakosh Property Developers (in short ‘firm’). During the year, the assessee received a sum of Rs.400 Lacs on account of surrender of 5% share of profit from 30% to 25% and reduced the said income from its computation of income by submitting that the firm was reconstituted and right was created in favor of existing partners.
The assessee, relied upon the decision of Hon’ble Madras High Court in A.K.Sharfuddin V/s CIT (1960 39 ITR 333) for the proposition that compensation received by a partner from another partner for relinquishing rights in the partnership firm would be capital receipt and there would be no transfer of asset within the meaning of Sec.45(4) of the Act. Reliance was placed on other decisions also to submit that the provision of S.28(iv) and S.41(2) shall have no application to such receipts.
Before Ld.CIT(A), the assessee reiterated that the rights of the existing partner was reduced in the firm and the right was created in favor of the existing partner of the firm but the ownership of the property did not change even with the change in the constitution of the firm. The assessee relied upon plethora of decision to submit that in terms of Sec. 45(4), profits on distribution of capital asset on the dissolution of the firm would be taxable in the hands of the firm only.
Held by ITAT
Compensation received by the assessee from existing partners for reduction in profit sharing ratio would not tantamount to Capital Gains chargeable to M/s Anik Industries Ltd. Assessment Years-2010-11 & 2012-13 tax u/s 45(1).
FULL TEXT OF THE ITAT JUDGEMENT
Manor Kumar Aaaarwal (Accountant Member): –
1. Aforesaid appeals by assessee for Assessment Years [in short referred to as ‘AY] 2010-11 and 2012-13 contest separate orders of Ld. first appellate authority on certain grounds of appeal. Since identical issues are involved in both the appeals, the appeals are being disposed-off by way of this common order for the sake of convenience & brevity.
ITA No.7189/Mum/2014, AY 2010-11
2.1 The appeal for AY 2010-11 contest the order of Ld. Commissioner of Income-Tax (Appeals)-38, Mumbai, [in short referred to as `CIT(A)], Appeal No. CIT(A)-38/IT-239/2013-14 order dated 29/09/2014 on following grounds of appeal: ‑
1. That the learned CIT(A) erred in confirming the action of the Assessing Officer is quite arbitrary, unwarranted, unjustified and bad in law.
2. That confirmation of long-term capital gain taxable Rs.4 crores for reduction of share ratio in firm M/s. Mahakosh Property Developers is quite illegal, arbitrary, unwarranted, unjustified and bad in law.
3. That the confirmation of long-term capital gain taxable without considering the proper facts of the case.
4. That thus the order so passed is quite illegal, arbitrary, unwarranted, unjustified and bad in law.”
As evident, the assessee is contesting the chargeability of Capital Gains of Rs.400 Lacs received by it on account of reduction in share in a partnership firm namely M/s Mahakosh Property Developers.
2.2 We have carefully heard the rival submissions and perused relevant material on record including documents placed in the paper-book. We have also deliberated on various judicial pronouncements as relied upon by both the representatives. The written submissions filed subsequent to the hearing of the case has also been considered. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. The Ld.AR submitted that the factual matrix is squarely covered in assessee’s favor by certain binding judicial pronouncements.
2.3 Facts on record would reveal that the assessee being resident corporate assessee stated to be engaged in manufacturing & processing of milk products and also in the business of wind power generation, mining and trading in commodities was assessed for year under consideration u/s 143(3) on 22/03/2013 wherein the income of the assessee was determined at Rs.1419.55 Lacs after certain additions and disallowances as against returned income of Rs.1019.10 Lacs e-filed by the assessee on 13/10/2010. The Capital Gains of Rs.400 Lacs as brought to tax by Ld.AO is the sole subject matter of present appeal before us.
2.4 During assessment proceedings, it transpired that the assessee was a partner of 30% in a partnership firm namely M/s Mahakosh Property Developers (in short ‘firm’). During the year, the assessee received a sum of Rs.400 Lacs on account of surrender of 5% share of profit from 30% to 25% and reduced the said income from its computation of income by submitting that the firm was reconstituted and right was created in favor of existing partners. The change in profit sharing ratio before the constitution of the firm and after the constitution of the firm was as follows: –
