Anant R Jani, Mumbai vs Assessee

आयकर अपील य अ धकरण, ए खंडपीठ मुंबई INCOME TAX APPELLATE TRIBUNAL,MUMBAI - A BENCH सव ी आई पी बंसल , या यक सद य एवं राजे , लेखा सद य Before S/Sh. I P Bansal,Judicial Member & Rajendra,Accountant Member आयकर अपील सं/.ITA No.2352/Mum/2012, नधारण वष/Assessment Year-2006-07 Mr. Anant R Jani Asstt. Commissioner of Income th Flat No.57, 12 Floor, Ameeta Bldg. tax-11(2) Opp. Chavan Centre Vs Mumbai-20 Gen. J. Bhosale Marg Mumbai-400 021.

PAN:AACPJ7051J (अपीलाथ /Assessee) ( यथ / Respondent) नधा रती ओर से/Assessee by :Shri Dharmesh Shah & Shri Ashwin Kashinath राज व क ओर से/ Revenue by :Shri Sachichidanand Dube सुनवाई क तार ख/ Date of Hearing :06- 04 -2015 घोषणा क तार ख / Date of Pronouncement :06-04-2015 आयकर अ ध नयम,1961 क धारा 254(1)के अ तगत आदे श Order u/s.254(1)of the Income-tax Act,1961(Act)

लेखा सद य राजे के अनुसार PER RAJENDRA, AM-

Challenging the order dt.12.03.2012 of the CIT(A)-3,Mumbai,assessee has raised following Grounds of Appeal:

"1. On the Facts and circumstances of the case and in Law the Ld. Commissioner of Income Tax (A) erred in confirming the addition of Rs.705,972/- as Long Term Capital Gain on dissolution of firm in which the appellant was a partner.

2. On the Facts and circumstances of the case and in Law the Ld. Commissioner of Income Tax (A) failed to appreciate the fact that the appellant has no right in any immovable properties or in goodwill of the erstwhile firm in which he was a partner.

3.The Appellant reserves its right to add. amend, alter or delete any of the grounds of appeal.

2.Assessee,an individual,filed his return of income on 31.10.2006,declaring total income of Rs.15, 98,156/-.The Assessing Officer(AO)completed the assessment u/s.143(3) of the Act on15.12.2008, determining the income of the assessee at Rs. 25,52,720/-.

3.Effective ground of appeal is about assessment of capital gains on dissolution of firm.During the assessment proceedings,the (AO) found that the assessee was a partner in partnership firm in M/s. Gagrat & Co.,that the partnership dissolved in April 2005, that the assessee received an amount of Rs.7.05 lacs on dissolution of the said firm. The AO was of the opinion that disputed amount, received by the assessee on dissolution of the firm as per arbitration award for giving up his rights was chargeable to tax under the head capital gains. He held the assessee was paid the amount in question on dissolution of the firm for relinquishing his rights in the immovable properties held by the firm, that the contention of the assessee that the disputed amount was not received in any specific item of the partnership property was not tenable.

4.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee argued that assessee had received Rs.7.05 lacs only and not Rs.9.44 lacs as alleged by the AO,that amount in question was not taxable.After considering the submission of the assessee and the assessment order,the FAA held that the AO had rightly ITA/2352/Mum/2012,AY.2006-07-ARJ

taxed the capital gains in the hands of the assessee, that Rs.7.05 lacs represented assessee's taxable income. Finally, he upheld the addition made the AO.

5.Before us,Authoritsed Representative(AR)stated that the similar issue had arisen in the case of the father of the assessee i.e., Shri Chandrahans A. Jani (ITA No./2353/Mum/2012-AY 2006-07 dt. 18.03.2015).Departmental Representative(DR) supported the order of the FAA.

6.We have heard the rival submissions and perused the material before us. We find that in the case of Chandrahans A. Jani (supra), the Tibunal has decided the issue as under :-

"6. Having considered the rival submissions as well as relevant material on record, we find that erstwhile partnership firm M/s Gagrat & Co. was formed vide partnership deed dated 18.5.2000. As per the partnership deed, the name and goodwill of the firm M/s Gagrat & Co. shall belong to M/s J.R. Gagrat only and its user to the other partners shall not create any right or title in them whatsoever. Further as per clause 6.4 and 6.5 all rights, tangible or intangible, benefits and interest in the premises (business premises) shall be continuous or deemed to continue and belong to Mr. J. R. Gagrat only. Thus the other partners of the partnership firm including the assessee did not acquire any right or interest either in the goodwill of the firm or in the business premise of the firm. We further note that the amount in question was received by the assessee in pursuant to the arbitration award dated 16.09.2005. From the perusal of the arbitration award, it is clear that it was a payment to the assessee as full and final settlement of all dues and rights whatsoever nature whether past, present or future as regards the erstwhile firm and further for handing over the quiet, vacant and peaceful possession of the said premises to Mr. J. R. Gagrat. Thus it is clear that the amount was paid only as a full and final settlement of their rights in the firm and not for relinquishment of any right or interest in any specific asset of firm. Even, otherwise, we note that the amount received by the assessee being a partner of a erstwhile firm on dissolution of the firm is not taxable in the hands of the assessee in view of the various judgments relied upon by the assessee. In case of Nisha Capital Services Pvt. Ltd. Vs. CIT (supra), the co-ordinate bench of this Tribunal after considering all the relevant Judgments on this point has held in para 15 to 18 as under:-

"15. Thus the issue of taxability of the amount paid to a retiring partner towards the share in the asset was decided in favour of the assessee and against the revenue. As it is clear from the finding of the Hon 'ble Supreme Court that this issue was already settled by the Hon 'ble Supreme Court in the case of CIT vs. Mohan Bhai PamaBhai (165 ITR 166) as well as in the case of CIT Vs. Sunil Siddharthbhai Vs. C1T (156 ITR 509). In the case of Mohanbhai Pamabhai (supra), the Hon'ble Gujarat High Court in (91 ITR 393) held that interest of a partner in a partnership firm has no interest in any specific item of partnership firm. It is the right to obtain his share or profit from time to time during the subsistence of the partnership and dissolution of the partnership or towards retirement from partnership to get the value of share in the net partnership asset which remain after satisfying the due debts and liabilities of the partnership. The said amount received by the retiring partner is his share in the partnership and not any consideration for transferring all his interest to the continuing partners. In the case of N.A. Modi Vs. CIT (supra), the Hon'ble jurisdictional High Court has followed the judgment in the case of Tribhuvandas C. Patel (supra). As we have already mentioned that the judgment in the case of Tribhuvandas C. Patel (supra) was reversed by the Hon 'ble Supreme Court. Therefore, following the decision in the case of N.A. Modi Vs. CIT (Supra) without considering the judgment of Hon 'ble Supreme Court in the case of Tribhuvandas C. Patel ( supra) made out a case that the Commissioner has guided himself by a particular decision and not by considering the other relevant decisions on the point. Further a similar issue was considered by the Hon 'ble Supreme Court in the case of CIT Vs. R. Lingmallu Raghukumar (247 ITR 801), wherein, the Hon'ble Apex Court has considered the earlier judgment and held as under.-

"Whether, on the facts and in the circumstances of the case, the excess amount of Rs. 46,500 received by the assessee on retirement from the two partnership firms is assessable to capital gains ?" (p. 676)

2. The High Court has held that there was no transfer of any assets as contemplated by the expression 'transfer' as defined in section 2(47) of the Income-tax Act, 1961. The High Court had placed reliance on the judgment of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393. wherein it has been held that where 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 in the 2 ITA/2352/Mum/2012,AY.2006-07-ARJ

manner prescribed by the relevant provisions of the partnership law, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners. The said judgment of the Gujarat High Court has been affirmed by this Court in Addl. CIT v.Mohanbhai Pamabhai [1987] 165 ITR 166. In view of the said judgment, we find no merit in this appeal and the same is, therefore, dismissed. No order as to costs.

16. The question before the Hon 'ble Supreme Court was that the excess amount received by the assessee on retirement from two partnership firms is assessable as capital gains. The judgment in the case of ACIT Vs. Mohanbhani Pamabhai (supra) was reiterated by the Hon 'ble Supreme Court. The decisions which are relied upon by the Ld. Commissioner are all based on the judgment of Hon 'ble jurisdictional High Court in the case of Tribhuvandas G. Patel ( supra) which was reversed by the Hon 'ble Supreme Court. Even the Hon 'ble jurisdictional High Court in the case of Prashant S. joshi Vs. ITO (supra) by following the judgment in the case of Tribhuvandas G. Patel ( supra) held in para 16 as under:-

"16. At this stage, it may be noted that in CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom.), which was decided by a Division Bench of this Court, under a deed of partnership, the assessee retired from the partnership firm and was inter alia paid an amount of Rs. 4,77,941 as his share in the remaining assets of the firm. The Division Bench of this Court had held that the transaction would have to be regarded as amounting to a transfer within the meaning of section 2(47) inasmuch as the assessee had assigned, released and relinquished his share in the partnership and its assets in favour of the continuing partners. This part of the judgment was reversed in appeal by the Supreme Court in Tribhuvandas G. Patel v. CIT [1999] 236 ITR 515. Following the judgment of the Supreme Court in Sunil Siddharthbhai's case (supra), the Supreme Court held that even when a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (ii) of section 47. Therefore, the question was answered in favour of the assessee and against the revenue. Section 47(ii) which held the field at the material time provided that nothing contained in section 45 was applicable to certain transactions specified therein and one of the transactions specified in clause

(ii) was distribution of the capital assets on a dissolution of a firm. Section 47(ii) was subsequently omitted by the Finance Act of 1987 with effect from 1- 4-1988. Simultaneously, sub-section (4) of section 45 came to be inserted by the same Finance Act. Sub-section (4) of section 45 provides that 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 association of persons or body of individuals (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. The fair market value of the assets 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 for the purpose of section 48. Ex facie sub-section (4) of section 45 deals with a situation where there is a transfer of a capital asset by way of a distribution of capital assets on the dissolution of a firm or otherwise. Evidently, on the admitted position before the Court, there is no transfer of a capital asset by way of a distribution of the capital assets, on a dissolution of the firm or otherwise in the facts of this case. What is to be noted is that even in a situation where sub-section (4) of section 45 applies, profits or gains arising from the transfer are chargeable to tax as income of the firm."

17. Though the issue before the Hon 'ble jurisdictional High Court was the validity of reopening, however, the reopening was on the issue of excess amount received by the retiring persons from the partnership firm. The Hon 'ble High Court has given the finding that in case of transfer of a capital asset by way of distribution of capital on dissolution of firm or otherwise, dealt with by section 45(4) and, therefore, there is no transfer of capital asset by way of distribution of capital asset on dissolution of firm or otherwise. The Pune Benches of this Tribunal in the case of Reyaz Shaikn Vs. ITO (supra) has taken a view that the amounts received by the partner on his retirement are exempt from capital gain tax. The tribunal in the said case after discussing the various judgments on the point held in para 8 as under:-

"8. We have carefully considered the rival submissions and perused the orders of the authorities below. As noted earlier. the short point Involved In this appeal relates to taxability of amount receIved by the assesseee on retirement from partnership firm. The Hon 'ble Supreme Court in the case of Mohanbhai Pamabhoi (supra) following its judgment in the case of Sunil Siddharthbhai Vs. CIT 156 ITR 509 (SC) held that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there is no transfer 3 ITA/2352/Mum/2012,AY.2006-07-ARJ

of interest of the partner in the goodwill, and no part of the amount received is assessable as capital gain u/s 45 of the Act. The judgment of the Hon'ble Guiarat High Court ITR B01(SC), the Supreme Court held, while affirming the principle laid down in the case of Mohanbhai Pamabhai (supra) that when a partner retires from the partnership firm and the amount of hrs share in net partnership assets after deduction of liabilities is determined, 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 partner is not "capital gain" under section 4S o] the Act. Further, the Learned Counsel for the appellant has correctly pointed out that the decision of the Hon 'ble Bombay High Court in Tribhuvandas C.Patel (Supra) followed in the case of N.A. Mody (supra) has been reversed by the Hon 'ble Supreme Court in the case of Tribhuvandas C.Patel reported In 236 ITR 515 (SC) on this aspect of the matter. In [act, the Hon'ble Bombay High Court in a recent decision in the case of Prashant S. joshi (Supra) has noted the aforesaid legal position. In this circumstances the reliance placed by the authorities below on the judgment of the Hon 'ble Bombay High Court in the case of N.A.Mody (supra) to decide the controversy against the assessee, cannot be upheld. Infect, the judgment of the Hon 'ble Bombay High Court in the case of Prashant S. Joshi (supra) has also noted the omission of section 47(ii) of the Act and insertion of Section 4S( 4) of the Act with effect from 1.4.1988. Considering the entirety of the legal position, it has been affirmed by the Hon 'ble High Court that amounts received by the partner on his retirement, are exempt from capital gains tax. In this view of the matter, we find it appropriate to allow the claim of the assessee and accordingly the order of the CIT(A) is set aside. The Assessing Officer Is directed to delete the impugned addition. Thus, In Ground Nos. 2. & 3, assessee succeeds as above. "

18. Thus it is clear that the Tribunal has taken a view which is based on the subsequent decision of Hon 'ble Supreme Court as well as Hon 'ble High Court after considering the judgment in the case of N.A. Modi (supra). A similar vie· has been taken by the Hyderabad benches of this Tribunal in the case of ACIT Vs. S.N. Prasad vide order dated 27.01.2014 in ITA No. 120O/HYD/2010. Even the case of Sudhakar M. Shetty (supra), the Tribunal has taken note of dichotomy/diverse view on the question as to whether there is any transfer all in such situation by the firm in favour of the retiring partner or by retiring partner in favour of the firm or in favour of its continuing partners ."

7. In view of the above facts and circumstances of the case as well as the decisions relied upon by the assessee, we hold that the amount in question received by the assessee on dissolution of the firm is not taxable in the hands of the assessee, accordingly, we delete the addition made Assessing Officer." Respectfully following the above order,we decide the effective ground of appeal in favour of the assessee As a result,appeal filed by the assessee stands allowed .

फलतः नधा रती वारा दा खल क गई अपील मंजरू क जाती है . Order pronounced in the open court on 6th,April,2015. आदे श क घोषणा खल ु े यायालय म दनांक 6 अ ैल,2015 को क गई ।

Sd/- Sd/- (आई पी बंसल/I P Bansal) (राजे / RAJENDRA) या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER मब ुं ई/Mumbai, दनांक/Date: 06.04.2015 JV आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1.Appellant /अपीलाथ 2. Respondent / यथ

3.The concerned CIT(A)/संब ध अपील य आयकर आयु त, 4.The concerned CIT /संब ध आयकर आयु त

5.DR "A" Bench, ITAT, Mumbai / वभागीय त न ध, खंडपीठ,आ.अ. याया.मब ुं ई

6.Guard File/गाड फाईल 4 ITA/2352/Mum/2012,AY.2006-07-ARJ

स या पत त //True Copy//

आदे शानस ु ार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपील य अ धकरण, मब ुं ई /ITAT, Mumbai.

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