Vildirect: IncomeTax-caselaws-2012-VIL-951-ITAT-JAI

2012-VIL-951-ITAT-JAI

Income Tax Appellate Tribunal JAIPUR

ITA No. 808/JP/2011

Date: 06.01.2012

PAWAN LASHKARY

DCIT, CENTRAL CIRCLE-2, JAIPUR

For the Petitioner : Vijay Goyal
For the Respondent : Sunil Mathur

BENCH

R. K. Gupta (Judicial Member) And N. L. Kalra (Accountant Member)

JUDGMENT

N. L. Kalra (Accountant Member)

The assessee has filed an appeal against the order of the ld. CIT(A)-Central, Jaipur dated 12-08-2011 for the assessment year 2007-08.

2.1 The assessee filed the revised form no. 36 requesting for modifying the grounds of appeal. The modified grounds of appeal were admitted and these are reproduced as under:-

1. The order of the lower authorities is against law, weight of evidence and probabilities of the case.

2. On the facts and in the circumstances of the case and in law the ld. CIT(A) erred in confirming the addition of Rs. 5,24,47,943/- made by the AO for the capital account balance received by the appellant on account of his retirement from the firm M/s. Krishna Villa Apartments in spite of the fact that the said firm was not dissolved and continued as a going concern.

3. The lower authorities failed to appreciate that the share in profit on revaluation of partnership firm’s assets amounting to Rs. 5,24,47,943/- received by the assessee on his retirement from a partnership firm which is continuing in business was not taxable either under s. 10(2A), s. 28(iv) or s. 28 (v) or s. 45(4) and in view of the laws laid down by Hon’ble Apex Court in (1987) 165 ITR 166 (SC) and (2001) 247 ITR 801 (SC) and in view of the decision of Hon’ble Mumbai High Court in (2010) 324 ITR 154 (Bom). The order passed by the lower authorities violates Art. 141 of Constitution of India.

4. On the facts and in the circumstances of the case and in law the Ld CIT(A) erred in holding that the profit apparently shown on account of revaluation of land but effectively and actually is on account of transfer of rights in the land by the retiring partners to the new partners of the firm and such profit is liable to be taxed under the head income from other sources.

5. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in holding that development agreement with M/s Gold Dream Builders, allowing entry of four partners of M/s Gold Dream Builders as new partners in M/s Krishna Villa Apartment, revaluation of the land, and thereafter retirement of old partners from the firm M/s Krishan Villa Apartment and taking away the profit so earned on account of revaluation by the retiring partners are the arrangements, that have been used as device to evade the tax on profits earned on relinquishment of right, title and interest in the land by Sh. Pawan Lashkary and Shri Jitendra Agarwal. The ld CIT(A) failed to appreciate that no tax can be evaded in view of the findings of the Ld AO in the assessments of M/s Krishna Villa Apartment wherein she held that the cost of the land at revalued price will not be allowed for deduction for the purpose of part sale of the land in AY 2008-2009. The assessment of profit on account of revaluation of the land in the hands of retiring partners and not allowing the cost of the revaluation in the hands of the firm is amount to double taxation.

6. It is contended that while completing the assessment the learned DCIT Central Circle-2, Jaipur neither appreciated the facts of the case properly nor the provisions of Income tax Act and the learned A.O. passed the Assessment order u/s 153A/143(3) of Income Tax Act on presumption, assumption, surmises and conjectures based purely on no evidence or on irrelevant evidence; arbitrary or whimsical and ld CIT(A) confirmed the order of assessing officer without appreciating the facts of the case and provisions of Income Tax Law, thus, the Assessment Order u/s 153A/143(3) of Income Tax Act, is ab-initio void and bad in law and deserves to be annulled.

7. The Assessee prays for leave to Add, to amend, to delete, to modify the all or any grounds of appeal on or before the hearing of appeal.”

2.2 The assessee is an individual and filed the return of income in which the assessee has shown the income under the head ‘salaries’ , income from house property, income from capital gains , income under the head business and income from other sources. Under the head of income from business, the assessee has claimed income from partnership firm as exempt. The search and seizure operations were carried out at the residential and business premises of the assessee as well as the at the related firms on 06- 08-2008. Hence a notice u/s 153A of the Act was issued vide which the assessee filed the return declaring an income of Rs. 10,90,820/-. While making the assessment vide order dated 27th Dec. 2010, the AO has assessed the income at Rs. 5,24,47,943/-.

2.3 The assessee entered into an agreement of partnership with Shri Jitendra Agarwal on 15-07-06 for carrying out the real estate business. The firm was in the name of M/s.Krishna Villa Apartment in which the assessee was having 75% share while Shri Jitendra Agarwal was having 25% share. The firm purchased the land on 25-07-2006 for a sum of Rs. 1.05 crores in the village Siroli measuring 3.77 hectare. Such land was purchased from M/s. Pawan Creations (P) Ltd. (n short M/s. M/s.PCPL) This land was got converted into residential/ commercial land by M/s.PCPL . The necessary charges for conversion and other expenses were not deposited either by M/s.PCPL or by the owner / farmers of the land and therefore, the firm M/s.Krishna Villa Apartment deposited such charges and applied for group housing pattta from Jaipur Development Authority ( in short JDA). The JDA issued patta in the name of M/s.Krishna Villa Apartment and this firm entered into a development agreement on 30th Sept. 2006 with M/s. Gold Dream Developer, a partnership firm consisting of four partners Shri Shankar M Jethani, , Shri Arun Bansal, Shri Miraj Un Nabi Khan and Shri Naved Saidi. The two firms namely M/s.Gold Dream Builders and Developer and M/s.Krishna Villa Apartment merged together and M/s.Krishna Villa Apartment took over the assets and liabilities of M/s.Gold Dream Builders and Developer. Before this merger the land was revalued as on 18-01-2007 at Rs. 9,17,80,000/- and difference of revaluation was credited to the capital account of the existing partners as on 18-01-2007 i.e. Shri Pawan Lashkari and Shri Jitendra Agarwal to the extent of Rs. 5,24,47,943/- and Rs. 1,74,82,647/- respectively. A new partnership deed was executed on 19-1-2007 in which four partners of M/s.Gold Dream Builders and Developer were taken as partners in the firm M/s.Krishna Villa Apartment. Within one month of the constitution of the new firm, Shri Jitendra Agarwal retired from the firm w.e.f. 10-02-2007. The assessee also retired from the firm on 19-03- 2007 and thereafter a new partnership deed was executed in which four partners of M/s.Gold Dream Builders and Developer remained as partners in the firm M/s.Krishna Villa Apartment. The capital account of the assessee was credited on revaluation of the land on 18-01-2007 and this amount was withdrawn by the assessee. The case of the revenue is that all the arrangements have been made to transfer the land from the firm of two partners of erstwhile M/s.Krishna Villa Apartment to the four partners of M/s.Gold Dream Builders and Developer who became the partner of the firm of M/s.Krishna Villa Apartment w.e.f. 19-01-2007. In the profit and loss account of the firm i.e. M/s.Krishna Villa Apartment , the transaction of revaluation was taken as an expenditure under the head revaluation while the closing stock was taken at revalued value. The assessee claimed exemption u/s 10(2A) of the Act. The AO mentioned that the exemption u/s 10)2A)is available to the partner only on the condition that such income is taxed in the hands of the firm. This exemption rests on the cardinal principle of taxation that says that no income should be taxed twice. Thus, income taxed in the hands of the firm is exempt in the hands of the partner but amount considered as an expense by a firm is by no means exempt in the hands of the partner. With the result that Rs. 5.24 crores has neither been taxed in the hands of the firm (as claimed as an expense) nor in the hands of the partner, the assessee Sh Pawan Lashkary (claimed exemption u/s 10(2A)). In this connection, the AO referred the observation of the Hon’ble Supreme Court in the Kedarnath Jute Manufacturing Co. Ltd. V/s CIT (1971) 82 ITR 363 is appropriate to quote:

“Whether the assessee is entitled to a particular deduction or not will depend on the provisions of low relating thereto and not on the view which the assessee might take of his right, nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.”

2.4 The AO mentioned that the Department came into possession of several incriminating documents as the result of search on 6.8.2008 one of which is the page 33 from Annexure A 26 seized from 73-75, Talkatora and this paper indicates that the said facts and query were typed to be posed to Sh Manoj Chaudhary (written in top with Pencil) who is Chartered Accountant in the case of the firm, M/s Krishna Villa Apartment. The five queries deal with the trajectory of events described in the flow chart at Para 2 and the implications on income tax liability of the firm and the partners. This document seized during search clinches the answer arrived at in Para 6 of the order that the entire transaction involving ‘take-over agreement’ revaluation, crediting the difference between revaluation and book value, the retirement, the withdrawal of capital account and the claim of exemption are all through careful scheming and collusion to evade tax. During the course of search and during post search, the assessee was confronted with the above events and on 7/8.08.2007, vides reply of Question No. 19-24, 28 Sh. Pawan Lashkary stated as under:-

2.5 Thus by virtue of statement u/s 132 (4), the assessee surrendered Rs. 5.24 crores in his hands as undisclosed income for this assessment year. The binding nature of statement u/s 132 (4) on the assessee and its utility in assessment procedure has been clarified by various courts. In Rameshchand and Co. v CIT [1987] 168 ITR 375, the Bombay High Court observed that where an assessee has made a statement of facts, he can have no grievance if the taxing authority taxes him in accordance with that statement. In the case of Kunhambu (V) and Sons V. Commissioner of Income Tax (1996) 219 ITR 0235, Kerala High Court has held that addition made on the basis of statement u/s 132 (4) 132 (4) is valid. The AO mentioned that the assessee has not surrendered the above income in the return filed u/s 153A of Income Tax Act and reiterated his claim for exemption of Rs. 5.24 crores as his profit from firm. During the course of assessment proceedings, the assessee explained that since Shri Pawan Lashkary withdrawn his capital from firm, therefore the same cannot be treated as capital gain/business income in the hands of the partners because of the following reasons:-

i) Shri Pawan Lashkary has not transferred any capital assets to firm.

ii) At thje time of retirement of the assessee, the firm was continuing, and the retiring partner withdraw only his capital from firm, therefore the same cannot be treated as income.

iii) The share of partner in the income of the firm is exempt from tax as per provisions of Section 10(2A) of Income Tax Act. The firm is separate assessee. The PAN of the firm is AAIFK3348R. The firm has filed its income tax return for AY 2007-08 on 01.05.2008 at acknowledgement No. 19863390010508 before search. The copy of acknowledgement of the return of the firm M/s. Krishna Villa Apartment is enclosed herewith.

iv) So far surrender of income made on this account at the time of search this is to submit that the surrender was under wrong belief. The assessee was not expert in taxation law. The search party convinced the assessee that the amount is taxable in the hands of the assessee so he made the surrender. The income tax can be levied as per the provisions of Income Tax Act: not on the basis of admission or agreements. There cannot be estoppels again the law. Since there is no provision in section under which this income can be treated as income of the assessee, therefore the same was not offered as taxation in the hands of the assessee. The provisions of section 10 (2A) of Income Tax Act is very clear in the regard. Further, the amount received by the retiring partner is capital receipt, not liable to tax.

2.6 The AO mentioned that the above reply of the assessee indicates the stand of the AO as to the directions and the alternative pleas that the assessee can take when confronted with uncomfortable questions and show cause notices. The tenor of the assessee through his A/R is clear – there is no provision in section under which this income can be treated as income of the assessee. The AO mentioned that the AR is foreclosing additions on account of capital gain, business income as is unequivocal that the said withdrawal is but a capital receipt and hence not taxable. The assessee seems to be cocking a snook at the Act and it enforces that there is no section under which the income can be taxed. However, the assessee seems to be forgetting that he has filed his return of income in which he has suo moto labeled the receipt as Profit from firm Krishna Villa Apartment. It is here that the veil ought to be lifted and the colourable device exposed in order to tax a receipt which the assessee claims “there is no provision in section under which this income can be treated as income of the assessee”. The assessee through consultation has drafted a carefully worded agreement dated 19.01.2007 whereby the stock in trade (land in this case) of the firm has been revalued and the difference between the revalued value and the book value credited into the capital accounts of the partners. As per Accounting Standards (AS-2) stock is to be valued at cost or net realized value, WHICHEVER IS LOWER. By violation of this principle and valuing the stock at a substantially higher rate, the assessee has committed the first MISTAKE in accounting policies. Instead of creating a revaluation reserve, the assessee has credited the differential value to the capital account of the partners, which is mistake No. 2. These mistakes are committed with the ultimate intent of fattening the capital account which will be withdrawn post retirement. And in one innocent stroke of “non availability for business”, the assessee has retired from business and withdrawn the fattened capital account making it a capital receipt and NOT making it a capital gain/business income, according to him. It is appropriate at this juncture to quote the Supreme Court in the case of Sutlej Cotton Mills Vs CIT (1979) ITR 01:

“It is well settled that the way in which the entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether fact it has resulted in profit or loss to the assessee is”.

The AO held that the series of events starting from development agreement (September 2006). Take over agreement (18.01.2007), revaluation of land crediting difference in capital account, merging of firm and admission of new partners (19.01.2007), retirement and withdrawal of capital account is nothing but colourable devices employed by the assessee with active collusion and ‘expert advice’ from tax practitioners so as to bar the applicability of all sections of Income Tax Act. To quote the Apex Court in the case of the CIT vs Durga Prasad More (1971) 082 IRT 540:

“It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make selfserving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents”

2.7 The above sentiment was echoed in the case of Mc Dowell and Co. Ltd vs CTO (1985) 154 ITR 0148 where in the introductory part of the judgment delivered by Justice Chinnappa Reddy and the final judgment by Justice Ranganath Mishra, they have unequivocally stated that “colourable devices cannot be part of tax planning.”

2.8 Thus by crafting a carefully worded colourable device with active collusion and connivance with the opposite party and the tax practitioners, the assessee has claimed exemption in his computation of income (both in s. 139 and s. 153 A) that the receipt of Rs. 5.24 crores is his exempt income as “profit from the Krishna Villa”. As it is seen that such an amount has been taken as expenses in the hands of the firm, the same cannot be granted u/s 10(2A). by virtue of lifting the veil/unraveling a colourable device behind which the assessee is taking refuge that – There is no provision in section under which this income can be treated as income of the assessee, the AO held that the amount of Rs. 5,24,47,943/- is taxable income of the assessee and the exemption claimed by the assessee as profit from firm Krishna Villa Apartment was denied/disallowed.

2.9 Before the ld. CIT(A), the assessee made the following submissions.

3.2 The first and foremost reason to say that the assessment order is illegal is that the AO has not indicated as to under which head of income the alleged profit has been taxed. It is elementary in jurisprudence of levy of income tax that the receipt in question, first should be and ‘income’ and secondly it has to fall under one of the five heads of income stated in section 14 of the Income-tax Act, 1961. If a particular income does not fall in any of the Heads of Income, the same cannot be taxed as it is presumed that the same was not directed by the Parliament to be taxed. Article 265 of the Constitution provides that no tax shall be levied except by authority of law. There is no scope of intendment in a taxing statute. It was so laid down by the Hon’ble Apex Court of this land in celebrated judgment in the case of CIT vs. Elphinstone Spg. & Wvg. Mills Co. Ltd (1940) 40 ITR 142 (SC). In this regard a useful reference can also be made to Supreme Court in the case of Nalinikant Ambalal Mody Vs. S.A.L.Narayan Row, CIT [61 ITR 428 (SC)] as also Calcutta High Court decision in the case of CIT Vs. Justice R.M. Datta [180 ITR 86 (Cal)]. Learned authors Pithisaria & Chaturvedy in their commentary “Incometax Law” (Sixth Edition) Vol. 1 page 1126 have also, on the basis of above Calcutta High Court judgment, opined as under:

If any receipt is income it has to be computed under one of the five heads of income provided under section 4 of the Income-tax Act, 1961. If, however it cannot be brought to tax by computation under those sections, they would not be included in the “total income” as defined in section 2(45), for the purpose of chargeability, [CIT Vs Justice R.M.Datta 180 ITR 86, 92 (Cal)]

Specifying the head of income is not an idle formality but has very significant and substantive implications on the chargeability of receipt itself as also quantum of taxable part of it. It is essential because the conditions of taxation are different for different types of income. Until and unless it is specified as to under which head the income is proposed to be taxed, it will not be possible to see as to whether the receipt in question is taxable under the specified head and if at all it has to be taxed then to what extent.

The difference in the value of land in the books of account vis-àvis its estimated market value could AT BEST (saying it for the purpose of argument only) be taxed either under the head “Profits & Gains of Business & Profession” or under the head “Capital Gains”.

3.3 In case the AO wanted to tax the difference under the head “Profits & Gains of Business & Profession” in the hands of the appellant, it was essential to prove that the assessee was carrying on a business and the receipt in question pertained to that business. Carrying on business by the firm in which assessee is partner cannot be said to be business carried on by partner, more so because no tax is leviable on partner in respect of business income of/from the firm. It would have been less incomprehensible if the AO had attempted to tax the difference in the hands of the firm who owned the land as its stock-in-trade. But the AO has taxed it in the hands of the partner defying all rules of accountancy and Income Tax Law. It is not the case that the land was owned by the partners even before its purchase by the firm from a private limited company. The local authority (JDA) permitted the change of land use to the Firm for group housing and also allotted Patta in the name of the firm and not in the name of the Partners.

3.4 Not only under the Income-tax Act, but also under all other laws of the land the assets of the firm belong to the firm and not the partners. The legal and beneficiary owner of the land in question was Partnership Firm not the partner and the Partnership Firm is separate person under the Income Tax Act. The law relating to levy of stamp duty also does not exempt the transfer of land by the partner to the firm (or vice versa) without payment of stamp duty. Similarly, the Patta allotted to a firm cannot be utilized by the Partners of the firm. Since the land in question belonged to the Firm, it could have generated income only in question was stock-in-trade of the firm, it could have generated income in the hands of the firm only at the time of its sale by the firm. Therefore, by no stretch of imagination or logic the income could have been taxed in the hands of the partner/appellant.

It will pertinent to quote the pronouncement of the Apex Court in respect of nature of interest of a partner in the assets of the firm as also the firm in general. The most important observation in this regard are found in the judgment in the case of Sunil Sidhharthbhai Vs CIT [156 ITR 509 (SC)]. On page 519 of the report, they observed:

During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner’s interest in the totality of the partnership assets. And in regard to the later, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner’s retirement.

It obviously means that when a person a person did not have any specified interest in a specific asset of the firm, there is no question of any partner having any right or capacity to transfer either the asset itself or any interest therein.

The Hon’ble Supreme Court again on the same page(519) observed:

It has been held by this court in CIT v. Dewas Cine Corporation [1968] 68 ITR 240 (SC), CIT v. bankey Lal Vaidya [1971] 79 ITR 594 (SC) and recently in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC) as well as by the Punjab and Haryana High Court in Kay Engineering Co. v. CIT [1971] 82 ITR 950, the Kerala High Court in CIT v. Natraj Moror Service [1972] 86 ITR 109 and the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393, that when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contemplated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realized by the receipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is not transfer. It is the realization of a pre-existing right. (Emphasis supplied)

3.5 A very illuminating exposition of law in respect of interest of a partner in the assets of the firm is found in the case of Addanki Narayanappa v. Bhaskara Krishnappa [AIR 1966 SC 1300], wherein the Hon’ble Supreme Court explained (p. 1303 of AIR) the nature of interest of the Partner in the firm as under:

“…………….. 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 realization 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 not legal existence, the partnership property will vest in all the partner, and in that sense every partner has 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 a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clause (i), (ii) and (iii) of clause (b) of section 48.”

Again on Page 1304

“The whole concept of partnership is to enter 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. ……….. 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.”

It will be pertinent to mention here itself that the revaluation of “Land” (which was stock-in-trade of the firm) at the time of reconstitution of the firm could not give rise to taxable event because as per principles of accountancy mere revaluation of the stock-in-trade does not give rise to income.

3.6 Even if it is presumed that the AO wanted to tax the revaluation gains in the hands of the partner at the time of his retirement from the firm, the same cannot be done in view of Supreme Court judgment in the case of CIT vs Bankey Lal Vaidya [79] ITR 594 (SC). Dissolution of the firm and reconstitution of the firm leading to retirement of one or more partners stand on the same footing and as per aforesaid decision of the Supreme Court in the case of Bankey Lal Vaidya, the retiring partner cannot be taxed in this regard because what he gets on retirement is capital receipt. The present appellant received the money value of his share in the assets of the firm; he did not agree to sell, exchange or transfer his share in the assets of the firm. The observations of the Ho’ble Court in above decision are quite instructive in this regard:

“……In the course of dissolution the assets of the firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying the money value equivalent thereof. This is a recognized method of making up the accounts of a dissolved firm. In that case the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm. The respondent received the money value of his share in the assets of the firm; he did not agree to sell, exchange or transfer his share in the assets of the firm. Payment of the amount agreed to be paid to the respondent under the arrangement of his share was therefore not in consequence of any sale, exchange or transfer of assets.”

In this case itself, the court has also stated that the method of making up the accounts of the firm at the time of dissolution of the firm or retirement of a partner is same and stands on the same footing.

[It may be stated that while the legislature has made changes in law by bringing to tax (in the hands of the firm) the transaction of dissolution of the firm and consequent distribution of assets etc it has, in its wisdom, not enacted any law so far to bring to tax the receipts in the hands of retiring partner on account of monetary realization of his interest in net assets of the firm.]

Even if it is presumed that the profit arose from revaluation of stock is a taxable income than also it cannot be assessed in the hands of the partners. The profit on account of revaluation of the stock arose in the hands of the partnership firm and if the same is treated as taxable income the computation of total income in the hands of M/s Krishna Kripa Apartment would be as under:-

Net Loss as per P & L A/c (As per Computation filed with return of firm )		-39288
Add Expenses disallowed:- Project Revaluation		69930590
Total Income		69891302
Allocation of Total Income in between partners:-
Shri Pawan Lashkary	75%	52418476
Shri Jitendra Agrawal	25%	7472826
Total	100%	69891302

By virtue of section 10(2A), the above profit cannot be taxed in the hands of the partner. The section 10(2A) of Income Tax Act is reproduced as under:-

”In the case of person being a partner of a firm, which is separately assessed as such, his share in the total income of the firm.”

Here admitted the assessee was partner of M/s Krishna Villa Apartment. M/s Krishna Villa Apartment is firm and separately assessed under income Tax by the same AO. The above firm has filed return u/s 139(1) of Income Tax Act 1- 5-2008. The assessment of this firm under Income Tax Act was made by the same AO on 27/12/2010. The copy of assessment order for AY 2007-2008 is at PB page 161-168. Therefore, all the ingredients of section 10(2A) is fulfilled and therefore, if the profit on account of revaluation of stock of the firm is treated as taxable income than it can be taxed in the hands of the partnership firm not in the hands of the partner.

3.7 The LD AO in Para at page 4 mentioned as under:-

“in a matter of 8 months starting from 19.017.06 to 19.03.07, the Siroli land has virtually changed ownership from Pawan Lashkary and Jitendra Agrawal (Collectively M/s. Krishna Villa Apartments) to Sh. Shankar M Jethani, Shri Miraj Un Nabi Khan and Shri Naved Saidi (collectively, M/s. Gold Dream Developer) for a consideration of Rs. 6.99 crores. The said stock (land in this case) virtually is the hands of the M/s. Gold Dream Developers & Builders and its original partners, albeit in the name of M/s. Krishna Villa ….”

Here, the LD AO says that the ownership of the land was transferred from M/s Krishna Villa Apartment to M/s Gold Dream Developers. In this regard, we submit that the part of the land was sold in AY 2008-2009 and the same AO assessed the sale of the said land in the hands of M/s Krishna Villa Apartment under the same PAN. If the ownership of the land changed from M/s Krishna Villa Apartment to M/s gold Dream Developers, the sale of the land should have been assessed in the hands of Gold Dream Developers. The copy of Assessment Order of M/s Krishna Villa Apartment for AY 2008-2009 is at PB page 169-171. Further again, if the ownership of the land changed from Krishna Villa Apartment to M/s Gold Dreams Developers, the profit arising there from can be taxed in the hands of the firm not in the hands of the partners.

3.8 The next possible head of income to tax the difference in value of land/Project, perhaps, could have been “Capital Gain”. To tax any gain under this head, the first and foremost condition is that the assessee should own the “asset”. In the present case, the land/project was not owned by the appellant. It was owned by the firm. In fact the Appellant never ever owned the land/Project. If the appellant did not own the asset, he could not have earned the capital gains which could be taxed. It will not be impertinent to mention that “capital gains” are not considered as normal ‘income’. In fact, the history of taxation of capital gains in India would show that there were times when capital gains were not taxablesame being not normally understood ‘income’. It was for this reason that “Capital Gains” have been specifically included in the definition of “Income” in section 2(24) of the Income-tax Act, unlike “Salaries” or “Profit & Gains of Business & Profession” etc. this fact has a significant legal bearing because it means that income under the head “Capital Gains” is a deemed income and the law of land provides that any provisions prescribing tax on deemed income should be strictly construed. Under this head “Capital Gains” – which provides for tax on deemed income- there are further deeming provisions, viz section 45(3) and 45(4) etc. None of the sections dealing with this head of income applies to the facts of this case, much less by strict interpretation thereof.

3.9 The Hon’bel Supreme Court again in the case of CIT vs R.Lingamallu Raghukumar (2001) 247 ITR 801 (SC) reiterated its earlier view as laid down in the case of Sunil Siddharthabhai (Supra) and held that where a partner retires from a firm and the amount of his share in the partnership assets after deduction of liabilities and prior charges is determined on taking account in the manner prescribed by the partnership law there is no element of transfer of 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 partner is not ‘capital gain’ under section 45 of the Income-tax Act. Similar reiteration of the view of the Hon’ble Supreme Court is found in the case of Addl. CIT vs Mohanbhai Pamabhai (1987) 165 ITR 166 (SC).

3.10 Ignoring a series of judgments of highest court of the land directly on the subject, it is humbly submitted, would be in violation of Article 141 of the Constitution of India, which reads as under:

Article 141: Law declared by Supreme Court to be binding on all courts:

“The law declared by the Supreme Court shall be binding on all courts within the territory of India.”

It has been laid down by the Supreme Court in the case of Dwarikesh Sugar Industries Ltd. Vs Prem Heavy Engineering Works (P) Ltd. [1997] 6 SCC 450 (Para 32) that it would amount to judicial impropriety for the subordinate courts including the High Courts to ignore a well settled position in law as a result of judicial pronouncement of the Supreme Court and pass a judicial order contrary to it. In the case of Spencer & Co. Ltd vs/ Vishwadarshan Distributors Pvt. Ltd. (1995) 1 SCC 259 (Para 10) Supreme Court held that ignoring a Supreme Court judgment may be treated by them as a contempt even where its judicial order was couched in the language of a request. It will not be out of place in the context of the facts of this case to mention the Supreme Court decision in the case of Mafatlal Industries Ltd. Vs Union of India (1997) 5 SCC 536 (Para 10) wherein it was held that a wrong concession on a question of law, made by a counsel, in not binding on his client and such concession cannot constitute a just ground.

3.11 Section 45(1) of the Act which is the primary/main charging section for capital gains requires that the assessee should have a ‘capital asset’ which has been ‘transferred’ during the previous year. The humble appellant begs to submit that the land/project in question were never ever the property of the appellant. It was either the property of the farmers or of a private limited company or of a partnership firm. It has already been held by the Supreme Court that settlement of accounts for the purpose of dissolution of the firm or retirement of one or more partners does not amount to transfer of any asset(s) by the retiring partner. (Pl. Refer to SC Decision in the case of Bankey Lal Vaidya (supra).

Section 45(1A) patently does not apply to the case of the appellant as the sub-section applies to receipts from insurance companies etc.

Section 45(2) also does not apply in the present case because that sub-section deals with conversion of a capital asset into stock-in-trade which was enacted to overcome the decision of the Supreme Court in the case of Bai Sirin Kooka.

Section 45(2A) is not applicable as the sub-section deals with gains arising on transfer of securities etc. to/by depository participants etc. Section 45(3) deals with a situation where a person transfers capital asset to a firm as his capital contribution, which obviously is not the case here.

Section 45(4) is the sub-section which comes to mind the moment there is any mention of dissolution of firm or retirement of a partner. BUT very importantly this deeming provision creates a fiction by which the FIRM/AOP (as the case may be) becomes liable to tax- the section states:

“… 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…”.

Obviously this section cannot be invoked to tax the partner of the firm or member of AOP or BOI.

While at Section 45(4), it will be pertinent to note that since capital gains tax itself is levy of tax on deemed income, and in any case the levy of tax on transfer/distribution of assets by the firm is by virtue of a deeming provision, the fiction created under this sub-section cannot be extended beyond the purpose for which it was enacted as held by Supreme Court in the case of CIT vs. Amarchand N. Shroff [1963] 48 ITR 59 (SC) and also in the case of CIT vs Ajax Products Limited [1965] 55 ITR 741. Since section 45(4) and all other sub-sections of section 45 are charging sections and therefore, according to Calcutta High Court [ref: the case of Justice R. M. Datta (Supra)], the rule of construction adopted by Rowlatt J. in the case of Cape Brandy Syndicate vs. IRC ([1921] 1 KB 64) should be applied. The Hon’ble Calcutta High Court quoted with approval the observation of Justice Rowalatt as under:

“In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly at the language used.”

If this mandatory rule of construction is applied, it will be clear that under section 45(4), only a firm/AOP or BOI alone can be taxed and not their partners/members.

For the sake of completeness of the argument, it may be stated that section 45(4) can be invoked only in a case of “distribution” of “capital asset” at the time of “dissolution” of the firm. In the present case, apart from the fact that this section does not apply to partners, other conditions are also not satisfied. There is neither ‘distribution’ to partners, nor any ‘capital asset’ was involved (the project/land was stock-in-trade). Further, there was not ‘dissolution’ of firm.

Section 45(5) deals with the cases of gains arising on account of compulsory acquisition of assets, which is not the case here. Section 45(6) deals with the gains arising on account of repurchase etc of units of mutual funds etc. hence not applicable.

As we have seen, no charging provision related to capital gains tax is applicable to the case of the appellant.

3.12 Realizing irrationality of taxing the difference in value at the time of settlement of accounts of the retiring partner under any of the heads of income provided in section 14 of the Act, the AO chose to remain silent about it and refrained from addressing the fundamental issue of taxability in the hands of the Partner/Appellant.

It will be fitness of things to bring to your kind notice a recent judgment of the Bombay High Court in the case of Prashant S Joshi vs ITO [324 ITR 154 (Bom)]

“During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On the dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does not involve an element of transfer within the meaning of section 2(47). Chief Justice P.N.Bhagwati (as the learned judge then was) speaking for a Division Bench of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 dealt with the issue in the following observations (page 402):

“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 by the relevant provisions of the partnership law and it is this and this only, 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 partners: vide also the recent decision of the Supreme Court in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594. It is true that section 2(47) defines ‘transfer’ in relation to a capital asset and this definition gives an artificially extended meaning to the term ‘transfer’ by including within its scope and ambit two kinds of transactions which would not ordinarily constitute ‘transfer’ in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partnership.”

The Gujarat High Court held that there is, in such a situation, no transfer of interest in the assets of the partnership within the meaning of section 2(47). When a partner retires from a partnership, what the partner receives is his share in the partnership which is worked out by taking accounts and this does not amount to a consideration for the transfer of his interest to the continuing partners.”

In view of above decisions and submissions, it is submitted that there was no justification whatsoever to tax the amount received by the appellant on his retirement from the firm and therefore addition deserves to be deleted.

3.13 Allegation of intention of tax evasion is devoid of any merit as such. In paragraph 6 of the assessment order the AO has alleged that the transaction of induction of new partners and retirement of old partners was with an intention of tax avoidance is incorrect both legally and factually. The learned AO stated that in the accounts of the firm, the difference in valuation of the land/Project has been shown as an expense. While the continuing/ new partners may have chosen a particular accounting treatment for a particular item of expense, it does not become binding on the department. And it has not. In fact, the self same Assessing Officer while framing the assessment order of the firm for subsequent year (during which the Firm sold a part of the land to an outsiders)did not allow any deduction on account of difference in valuation of the land/project at the time of induction of new partners. Thus it is clear that the AO had framed the assessment with a prejudiced mind and did indulge in misstatement of facts. Taking the said stand of the department a step further, it is logical to presume that in subsequent assessments of the firm also no such deduction shall be allowed by the department. And thus, in effect, the difference in valuation of the land would get taxed. Therefore, the allegation that there has been any tax evasion is devoid of the any truth.

The absence of any concrete evidence/argument for alleging tax avoidance/evasion by means of series of transaction has been attempted to be made up by the assessing officer by use of high sounding, repetitive and verbose language. Use of intemperate language bordering on defamation does not make a good argument, much less evidence. Multilateral transactions recorded/documented contemporaneously in the presence of witnesses and duly attested by government officials/government approved agencies (Notary Public), necessitated and driven by pure commercial considerations cannot be overlooked by mere high sounding verbose or poetic language. The Assessing Officer did precious little to prove any of the transaction to be sham/non-genuine or part of a pre-ordained series and motivated by sole objective of tax avoidance. She did not bring on record any third party evidence to suggest the above or even cross examine any of the parties to the transactions all of whom were unrelated to the assessee.

As stated in earlier part of these submissions, the transactions in question were neither pre-ordained nor were motivated by any considerations other than commercial considerations. In fact, as it turns out now- the Department has not lost any tax in the alleged series of transactions. The department (same assessing officer) has declined to allow the deduction of any part of revaluation amount as deduction from the receipts/income of the firm from which the Appellant had retired. In view of the above fact of non-deduction of any part of revaluation amount, the theory of the AO that the transactions were entered into with an objective of avoiding tax payment falls to the ground.

3.14 Much emphasis has been laid by the Assessing officer on the fact that the assessee/appellant had surrendered the aforesaid difference of Rs. 5.25 crores as his income and had undertaken to pay tax thereon. However, while filing the return, the assessee claimed the said difference to be exempt from tax. The AO seems to have taken it to her heart that the assessee did not honour his statement made during the search and seizure proceedings and retracted thereon. It is trite law to say that:

There is no estoppels against law; and

Taxation is not a matter of contract- and the same can be levied only under the authority of law (Article 265 of the Constitution).

Since there is no estoppels against law, even if the assessee has admitted to pay tax on any receipt which is not taxable in accordance with law, such admission cannot be held against him. It is more so because the assessing officer is duty bound to tax the correct and true income in accordance with law and there cannot be tax liability by contract.

There is no allegation that in the statement recorded during the course of search in respect of this transaction assessee made any averment of ‘facts’ which he retracted later. Comprehension of income-tax law by a common citizen is a mere fiction. More so, during the strenuous environment of search and seizure proceeding. Not that it would have made much difference, the appellant was not allowed any assistance of a legal expert/consultant during the course of search or before recording of statement on the matters which are essentially questions of law. If that be so, by the same logic the assessing officer (who is duly educated in the discipline of taxation/accounts and law) has also defaulted- in the first instance taxing the amount in the hands of the appellant and then barely a few months later taking a diametrically opposite stand in the case of the Firm. BUT THE LAW IS THAT THERE CANNOT BE ESTOPPEL AGAINST LAW-WHETHER IT BE ASSESSEE OR THE ASSESSING OFFICER. If the law requires that a certain tax is to be collected, it cannot be given up, and any assurance that it would not be collected, would not bind the Government. The liability of the assessee to pay Income-tax is created by the Income-tax Act. The amount on which the tax is to be paid, the rates at which the tax has to be determined in accordance with the provisions of the Income-tax Act and the relevant Finance Act. The liability to pay tax cannot be founded on any agreement. Assessee’s agreements or statements (as that of the appellant) in the matter of law, certainly, cannot form the basis of taxation. So much for the argument of the assessing officer. It need be, a fruitful reference can be made to the following judicial pronouncements;

1. Commissioner of Income-tax vs Mr. P. Firm, Muar [56 ITR 67 (SC)]

2. CIT vs Manik [74 ITR 1 (SC)]- in this case the assessee had given an undertaking to file a return for a year other than the year under appeal before ITAT. The Supreme Court disapproved enforcing such an undertaking.

3. Allahabad Milling vs CIT [6 ITC 286]

4. Parbati Devi vs CIT [75 ITR 625]

5. Muthiah Chettiar vs CIT (1959) 35 ITR 339 (Mad)

6. Pullangode Rubber Produce Co Ltd vs State of Kerala & Anothers (1973) 91 ITR 18 (SC) Hon’ble Apex Court has held that admission is an extremely important piece of evidence but it can’t be said that it is conclusive. It is upon to the assessee to show that it is incorrect.

7. Gargidin Jwala Prasad vs CIT (1974) 96 ITR 97 (All) Held that the addition merely based on statement cannot be made.

3.14 A very important fact which need to be highlighted, is that the Assessing has not proved, in fact not even alleged, that the Firm- M/s Krishna Villa Apartments was a bogus firm or not genuine firm. The AO has also not challenged the genuineness of the Partnership Deed dated 15.07.2006 by which the said firm was constituted. In fact, even when the assessment of the Firm has been made in the status of Firm and not as AOP or any other status. The AO has also not challenged the genuineness of the transaction of sale of land by the company to the firm. If, such sale was genuine and the firm was genuine, there is no justification to hold that the land in question was owned by any of the partners. The Partnership Law in India provides that the assets of the firm are owned by the firm and not by the partners. The land was purchased by the firm in its own name, by paying consideration and also substantial amount of conversion Charges, stamp duty etc. the request for issue of the Patta for Group Housing Project was made by the firm and the Patta was also allotted to the firm only. The legal and beneficiary owner of the land was firm not partners. All these facts go to establish that no transaction or conduct of the assessee leading to his retirement from the partnership firm was driven by any intention of tax evasion.

3.15 The facts of the cases referred by the LD AO in the assessment order are not similar to the case of the assessee, hence the ration laid down in these cases are not applicable to the case of the assessee. The assessee has cited several direct decisions of Apex Court and other courts which are relevant for the case of the assessee.”

2.10 The ld. CIT(A) after considering the submissions gave the following finding which are summarized as under:-

1. The assessee entered into a partnership agreement with Shri Jitendra Agarwal on 15-07-2006. Within 9 days of the constitution of the firm, land measuring 3.77 hectare was purchased for a consideration of Rs. 1.05 crores by the firm namely M/s.Krishna Villa Apartment in which the assessee and Shri Jitendra Agarwal were partners. The land was purchased from M/s.PCPL. M/s.PCPL is the company in which the assessee and his son were directors. A sum of s 25.00 lacs was paid by the firm to the company on 18-07-2006 i.e. just after 3 days of the formation of the firm and second cheqe of Rs. 24.25 lacs was given on 20-07-2006. The funds were mostly provided by the assessee which the ld. CIT(A) noticed from the ledger account of the assessee in the books of M/s.Krishna Villa Apartment. Such land was purchased by M/s.PCPL vide agreement to sell dated 1-08- 2005 and after that such agricultural land was converted into residential/ commercial land. The expenses for such conversion were not paid by M/s.PCPL and these were paid by M/s.Krishna Villa Apartment. The JDA issued letter on 27-07-2006in the name of M/s.Krishna Villa Apartment. Another letter by JDA in respect of application of group housing scheme and for that purpose the firm was to deposit Rs. 43,81,121/-. From the above facts, the ld. CIT(A) concluded that the assessee was pursing the application for conversion and allotment of group housing patta and the firm was only an entity while the real person behind such activity was the assessee.

2. The firm M/s.Krishna Villa Apartment entered into development agreement with M/s.Gold Dream Builders and Developer on 13-09-2006 and since the copy of the development agreement was not filed therefore, the terms and conditions of the development agreement could not perused by the ld. CIT(A)

3. the firm M/s.Krishna Villa Apartment took over the firm M/s.Gold Dream Builders and Developer on 19-01-2007 and before such take over, the value of the land was enhanced and the capital account of the assessee and Shri Jitendra Agarwal were credited on account of revaluation of the land. Shri Jitendra Agarwal and the assessee retired from the firm M/s.Krishna Villa Apartment on 19-03-2007 and 10-02-2007 respectively and after retirement of the assessee, the firm M/s.Krishna Villa Apartment consisted of four partner which were earlier partners of M/s.Gold Dream Builders and Developer. The apparent reason of retirement as mentioned in the deed is not true as the reason was to relinquish the right in the land as partner of the firm. The firm M/s.Krishna Villa Apartment consisting of two partners upto 19-01-2007, was having only one asset i.e. land. After joining of four new partners, which were erstwhile partners of M/s.Gold Dream Builders and Developer, the existing two partners who started the firm retired and thus relinquished their right, title and interest in the land and the objective was to avoid taxability of profit under the Income Tax Act.

4. The ld. CIT(A) mentioned that the decision of Hon'ble Apex Court in the case of CIT Vs. Bankey Lal Vaidya, 79 ITR 594 referred by the ld. AR is not applicable as the Act has been amended and Section 45(4) has been introduced.

5. The ld. CIT(A) has referred to the decision of Hon'ble Apex Court in the case of Shri Sunil Siddddhartha Vs. CIT 156 ITR 509 in which the Hon'ble Apex Court held that if transfer of personal asset to the firm represent a real attempt to contribute the share capital of the partnership firm then it will not be chargeable to capital gain (before introduction of Section 45(4) of Income Tax Act) and in case the revenue establishes that it is a device or rouse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on capital gain then such transaction is to be taxed. Thus one will have to take a decision as to whether the transaction is sham or genuine. From the sequence of events, the ld. CIT(A) held that the assessee by making an arrangement of transferring the land had used this arrangement as a device to evade the tax.

6. The ld. CIT(A) has referred to the decision of Hon'ble Apex Court in the case of Mc Dowell and Co. Ltd. Vs. CTO, 154 ITR 148 in which the Hon'ble Apex Court held that colourable device cannot be a part of tax planning. The ld. CIT(A) has referred to the decision of Mc Dowell Co. Ltd. (supra) in which Hon'ble Apex Court held that it is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction.

7. The ld. CIT(A) rejected the contention of the ld. AR that such amount cannot be taxed under any head. The ld. CIT(A) referred to Section 56(1) of the Act in which it has been mentioned that any income which is not taxable under any of the specified head can be taxed under the head Income from other sources.

8. The contention of the assessee that profit cannot be taxed because the land still remains in the hands of the firm. The ld. CIT(A) stated that two erstwhile partners of the M/s.Krishna Villa Apartment received their shares of profit on account of relinquishing their controlling interest in the land and therefore, the retirement of these two partners from the firm is to be taxed in the hands of the assessee and Shri Jitendra Agarwal

9. The ld. CIT(A) has reproduced the statement of the assessee recorded at the time of search. In the statement, the assessee surrendered profit arising from M/s.Krishna Villa Apartment in his hands as well in the hands of Shri Jitendra Agarwal. The statement recorded during search in respect of the facts can be relied upon for taxation and the assessee should not have any grievance. Reference is made to the decision of The Hon'ble Bombay High Court in the case of Ramchandra & Co. Vs. CIT, 168 ITR 375

10. The ld. CIT(A) has also referred to the decision of The Hon'ble Kerala High Court in the case of V Kunhambu & Sons Vs. CIT, 219 ITR 235 in which Hon'ble High Court held that the assessee cannot challenge the correctness of the assessment in case the statement is voluntarily. The assessee has not established that the statement was under a mistaken belief of fact and law. Accordingly ld. CIT(A) confirmed the addition.

2.11 During the course of proceedings before us, the ld. AR has filed written submission. Page 1 to 3 of the written submission refers to the facts of the case and these facts have already been mentioned. It as submitted that two firms were merged to generate greater synergy of operations. However, the things were not destined to be that way. Shri Jitendra Agarwal found himself uncomfortable in new setting and therefore, desired to retired the newly constituted firm. On the retirement of Shri Jitendra Agarwal, the accounts of the firm were made up and he was allowed to withdraw balance in his capital account. The assessee’s main business was garment manufacturing and export business. In respect of such business, the assessee was required to go abroad frequently and hence was not in a position to give time in the business of M/s.Krishna Villa Apartment. The assessee could not adjust himself from the working style and conduct of the new partners and accordingly decided to retire from the firm w.e.f. 19-03-2007. The submissions of the assessee filed before us are reproduced as under:-

“3.1 It is humbly submitted that the impugned assessment order suffers from fatal illegalities of law and facts, is perverse because of consideration of irrelevant facts while ignoring the relevant facts. We are submitting our detailed explanation on the following points which are relevant to the issue under appeal:-

(i) Whether there was any transfer of controlling interest in land by the assessee:-

(ii) Whether the amount received by the assessee against the settlement of account of retiring partner from partnership firm, involves transfer u/s 2(47) of Income Tax Act.

(iii) Whether the share of profit on revaluation of assets of the partnership firm is chargeable to tax in the hands of the partner.

(iv) Even if it is presumed that the land in question changed the hands from one set of persons to another set of persons, whether the tax can be charged from assessee more so when the assessee never remained the owner of the land and it is not a case of conversion of personal asset into asset of partnership firm in which the assessee is a partner and conversion of partnership asset into individual asset on retirement.

(v) Whether the receipt in the hands of the assessee is revenue receipt and chargeable to tax as income from other source.

(vi) Whether the firm was not a genuine firm.

(vii) Whether there was colourful device to avoid tax and the ratio laid down by Hon’ble Supreme Court in the case of McDowell & Co Ltd Vs CTO 154 ITR 148 are applicable to the case of the assessee.

(viii) Whether the income can assessed merely on surrender basis.

Now submissions in respect to each point are as under:-

3.2 Whether there was any transfer of controlling interest in land by the assessee:-

The CIT(A) has wrongly held that the assessee has transferred his controlling interest in land to the other partners. The retirement deed is placed at PB page 49- 53. There is no clause in the retirement deed to say the transfer of controlling interest in land in favour of other partners. Further the assessee has received no any consideration against the retirement or so called transfer of controlling interest and for this reason also, the amount cannot be held as capital gain of the assessee.

The relevant clause in retirement deed is 5 (PB page 51), which is as under:-

“ 5. That balance in the capital account of the retiring partner will be paid to him within the period of three months from the date of the deed and no interest on such balance will be paid for this period of three months. After payment of this entire capital, the retiring partner shall not have any right in the business of the firm and also will not claim his share in the goodwill of the firm, if any.”

This clause contemplates three things (i) the payment of balance in capital of retiring partner (ii) no right in business of the firm and (iii) no right in goodwill of the firm. Therefore, this clause does not speak that the assessee has relinquished his right in the land or other assets of the firm.

Therefore, nothing has been mentioned in the deed to say that the assessee has transferred his controlling interest in the land in favour of other partners. Further, no where it has been mentioned that the assessee will not have any right in the assets of the firm. The business of the firm and assets of the firm are two different things and cannot be taken at same meaning. Business indicates the activity of purchase, sell, production, trade, dealing etc. Therefore, according to this clause, the assessee will not have any right in the business activities of the firm or result of the business activities i.e. profit or loss. Further, it has been specifically mentioned that the assessee will not have any right in goodwill of the firm. Further, the incoming partners have not brought substantial capital in the firm.

The balance in their capital account as on 31.03.2007 was only Rs. 28,63,000/- (Capital A/c PB Page 134). Therefore, it cannot be said that the assessee has transferred his controlling interest in land in favour of new partners for a consideration of Rs. 5,24,47,943/-.

3.3 Whether the amount received by the assessee against the settlement of account of retiring partner from partnership firm, involves transfer u/s 2(47) of Income Tax Act:-

It is a well-settled principle of law that the settlement of account of retiring partners from the partnership firm does not involve any transfer, the reason being that as long as the partnership firm continues, no partner can claim any shares in any of the assets of the partnership firm and as such, when the accounts of the retiring partner are settled even on the basis of revaluation of assets, there is no transfer of any interest of the retiring partner in any of the assets of the partnership firm. It is nothing but settling the account of a retiring partner and as such no transfer is involved, there is no question of any liability on account of capital gains.

The assessee received the balance lying to his credit on the capital as reflected in the books of account as on 19/03/2007 in full and final settlement of his dues on account of retirement. The balance in the capital account of the assessee on 18/03/2007 with the firm was Rs. 16,52,943/- which were received by the assessee on retirement. The copy of the capital account of the assessee with the firm is placed at (PB page 126-128)

The amount received by the assessee is Capital Receipt not chargeable to tax in view of the law laid down by the Supreme Court in successive decisions to the effect that an amount paid to a retiring partner in a partnership firm does not amount to a transfer within the meaning of s. 2(47). During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. An amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does not involve an element of transfer within the meaning of s. 2(47). Chief Justice P.N. Bhagwati (as the learned Judge then was) speaking for a Division Bench of the Gujarat High Court in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) (Copy at PB page 188-200) dealt with the issue in the following observations:-

”...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 by the relevant provisions of the partnership law and it is this and this only, 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 partners : vide also the recent decision of the Supreme Court in CIT vs. Bankey Lal Vaidya (1971) 79 ITR 594 (SC). It is true that s. 2(47) defines Transfer’ in relation to a capital asset and this definition gives an artificially extended meaning to the term transfer by including within its scope and ambit two kinds of transactions which would not ordinarily constitute ‘transfer’ in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partnership”.

Hon’ble Gujarat High Court held that there is, in such a situation, no transfer of interest in the assets of the partnership within the meaning of s. 2(47). When a partner retires from a partnership, what the partner receives is his share in the partnership which is worked out by taking accounts and this does not amount to a consideration for the transfer of his interest to the continuing partners.

The appeal against the judgment of the Gujarat High Court was dismissed by a Bench of three learned Judges of the Supreme Court in Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) (Copy at PB page 187). The Supreme Court relied upon its judgment in Sunil Siddharthbhai vs. CIT (1985) 49 CTR 172 : (1985) 156 ITR 509 (SC).

Hon’ble Supreme Court in a further case CIT vs. R. Lingmallu Raghukumar (2001) 166 CTR (SC) 398 : (2001) 247 ITR 801 (SC), (Copy at PB page 179-180) held, while affirming the principle laid down in Mohanbhai Pamabhai (supra) that when 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, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners.

It may also be noted that in CIT vs. Tribhuvandas G. Patel (1978) 115 ITR 95 (Bom), (Copy at PB page 205-219) which was decided by a Division Bench of Bombay High 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 s. 2(47) in as much 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 vs. CIT (1999) 236 ITR 515 (SC). (Copy at PB page 201-204)

Further more, Hon’ble ITAT Jaipur Bench has also decided the similar issue in the case of Hemchand Govil Vs ACIT 30 Taxworld 14 (Copy at PB Page 177- 178) wherein Hon’ble bench has fallowed the decision of Hon’ble Supreme Court in the case of R Lingmallu Raghukumar (2001) 247 ITR 801 (SC) and held that there is no element of transfer of interest in the firm on retirement in favour of remaining partners.

There are series of decision of Gujarat High Court, Madras High Court, Kerala High Court, Allahabad High Court, Andra Pradesh High Court, and Calcutta High Court on this issue. Further more, Bombay High Court has also changed its view after the reversion of its earlier decision in the case of Tribhuvandas G Patel by Hon’ble Apex Court on this issue. The assessee also relies on the following decisions:-

(i) Prashant S. Joshi Vs. Income Tax Officer & Anr.* HIGH COURT OF BOMBAY (2010) 324 ITR 154 (Copy at PB page 231- 239)

In this case Hon’ble Court quashed the notice issued u/s 148 by the department fallowing the principles laid down by Hon’ble Gujarat High Court in the case of CIT Vs Mohanbhai Pamabhai 91 ITR 393 (Guj) that an amount paid to a partner upon retirement after taking accounts and upon deduction of liabilities does not involve an element of transfer within the meaning of s. 2(47) of Income Tax Act and quashed the notice issued by the department u/s 147 of Income Tax Act. In para 15 of the judgment Hon’ble Court mentioned as under:-

“15. At this stage, it may be noted that in CIT vs. 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 s. 2(47) in as much 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 Tribuvandas G. Patel vs. CIT (1999) 157 CTR (SC) 519 : (1999) 236 ITR 515 (SC). Following the judgment of the Supreme Court in Sunil Siddharthbhai (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 cl.

(ii) of s. 47. Therefore, the question was answered in favour of the assessee and against the Revenue. Sec. 47(u) which held the field at the material time provided that nothing contained in s. 45 was applicable to certain transactions specified therein and one of the transactions specified in cl. (ii) was distribution of the capital assets on a dissolution of a firm. Sec. 47(u) was subsequently omitted by the Finance Act of 1987 w.e.f. 1st April, 1988. Simultaneously, sub-s. (4) of s. 45 came to be inserted by the same Finance Act. Sub-s. (4) of s. 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 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. 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 s. 48. Ex facie subs. (4) of s. 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-s. (4) of s. 45 applies, profits or gains arising from the transfer are chargeable to tax as income of the firm.”

(ii) Commissioner Of Income Tax Vs. G. Seshagiri Rao (1995) 213 ITR 304 (AP) (Copy at PB page 258-260):- The brief facts of the case are that there was a partnership under the name and style of M/s White Field Industrial Corporation, Bangalore. It purchased certain land under a registered sale deed dt. 15th May, 1972. The assessee was partner in this firm. The land which was purchased was converted for industrial purposes and was revalued at Rs. 12 lakhs. The assessee’s share in the said partnership in a sum of Rs. 2 lakhs was credited to his account. On 20th Feb., 1980, the old partners including the assessee retired and the assessee received the said sum of Rs. 2 lakhs on retirement. For the asst. yr. 1980-81, in the assessment proceedings, the assessee claimed that the said amount of Rs. 2 lakhs received by him did not constitute “transfer” within the meaning of s. 2(47) of the IT Act. Hon’ble Court followed its decision in the case of CIT Vs L Raghu Kumar 141 ITR 674 (AP) and held that when the amount standing to the capital account of the retiring partner is drawn by him at the time of his retirement, it cannot be said that there was any transfer of a capital asset in favour of the existing partners by him for the purpose of 5. 45.

(iii) In Commissioner of Income Tax Vs. Anant Narhar Nimkar (HUF) (1997) 224 ITR 221 (Guj) (Copy at PB page 240-243), it was held that what a partner gets at the time of his retirement is not through transfer of an asset for the consideration. What really he gets at the end of the relationship with the firm is the value of the interest he already had in the firm which he was enjoying jointly and which grows or diminishes with the growth or fall in the prosperity of the partnership firm. He does not get any new right at the time of dissolution or his retirement.. What the partner gets at the time of dissolution or upon retirement is realisation of his own preexistence of right or interest in the firm and no transfer of property in his favour which is not already (sic) his takes place. If that is so, it cannot amount to transfer of partner’s interest on getting value of his share on retirement. Obviously, realisation of one’s own interest in money value after evaluating the value of existing interest in the firm cannot in any terms be considered as transfer unless a legal fiction exists to that for that purpose and in the absence of any transfer, there cannot be any question of arising of any capital gains for taxable purpose. In this case the decisions CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj); CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300, and decision in the case of Sunil Siddharthbhai vs. CIT (1985) 156 ITR 509 (SC) were followed.

(iv) In Commissioner of Income Tax Vs Kunnamkulam Mill Board (2002) 257 ITR 544 (Kar), (Copy at PB page 244-248), Hon’ble Karnataka High Court held that on retirement of the partner of the firm there is no transfer of the assets of the firm in favour of the continuing partners. The facts of this case are that the assessee is a partnership firm. It had originally five partners and it was constituted under a deed executed on 14th Sept., 1983. Subsequently, there was a change in the constitution of the partnership as evidenced by a new partnership deed executed on 13th Jan., 1989. Two more partners were admitted at that time. At the time of admission of the new partners there was a revaluation made in respect of the assets of the firm. As per cl. 6 of the partnership deed it was agreed that the difference representing enhancement by revaluation of the assets would be credited to the accounts of the original partners and the two new partners would have no share in it. The fixed assets of the firm had been thus revalued and that revaluation was credited equally in the accounts of the original five partners. The firm continued with seven partners for a short time and thereafter on 31st Jan., 1989, the original five partners retired and the business was continued by the partnership consisting of the surviving two partners. A deed of retirement was executed on 31st Jan., 1989, between the two continuing partners on the one hand and the five retiring partners on the other. Clause 3 of the deed shows that the retiring partners would be entitled to the credit balances in their accounts with the firm. In the assessment the AO added the sum of Rs. 7,63,559 as the income of the assessee-firm under s. 45(4) and afterwards adding the said amount the assessment was completed. In this behalf, the Department took the stand that there was a transfer of capital asset within the meaning of s. 45(4) of the IT Act as amended. In Para 6 of the order Hon’ble Court held as under:-

“ 6. The firm is the assessee while it had five partners or seven partners or even when it had only two partners. There is no change in the status of the assessee. What further has to be noticed is that the firm has its own rights and liabilities and it can incur liabilities or own and possess properties. In a case of this nature what happens is that with the admission of new partners, the rights of the existing partner are reduced and that a right is created in favour of the newly inducted partners. But the ownership of the property does not change even with the change in the constitution of the firm. As long as there is no change in ownership of the firm and its properties merely for the simple reason that the partnership of the firm stood reconstituted, there is no transfer of capital asset. Likewise, if a partner retires he does not transfer any right in the immovable property in favour of the surviving partner because he had no specific right with respect to the properties of the firm. What transpires is the right to share the income of the properties stood transferred in favour of the surviving partners, and there is no transfer of ownership of the property in such cases.”

(v) In Addl. CIT vs.. Smt. Mahinderpal Bhasin (1979) 117 ITR 26 (All) , Allahabad High Court followed the decision of the Gujarat High Court in CIT vs. Mohanbhai Pamabhai (supra) and held that when a partner retires, what he receives is really his share in the partnership assets. It is not a consideration for transfer of his interest in the partnership to the continuing partners. In the case of a retirement of a partner, just as in the case of a dissolution of partnership, there is no element of transfer. It is only an adjustment of the right of the partners and not relinquishment or extinguishment of interest of retiring partner.

(vi) The same view was followed in CIT vs. Madan Lal Bhargava (1980) 122 ITR 545 (All) (Copy at PB page 253-257), wherein it was observed that all that the assessee received on his retirement from the firm in respect of his share in the goodwill was its value to which he was all along entitled and that the case need not fall within the purview of s. 2, cl. (47) and consequently s. 45 had no application.

(vii) In CIT vs. Bhupinder Singh Atwal (1981) 128 ITR 67 (Cal) (Copy at PB page 261-267), Hon’ble Calcutta High Court has held when a partner retires from the partnership the amount of his share in the partnership asset after deduction of liabilities and prior charges is determined and on taking the accounts, what he received is the share in the partnership and there is no consideration for any transfer of his interest in his partnership to the continuing partners. Consequently there is no transfer or sale as contemplated by s.45 of the IT Act, 1961. The Calcutta High Court decision in part and also referred to the contrary decisions of the Bombay High Court in the case of Tribhuvandas G. Patel (1978) 115 ITR 95 (Bom) and Aslot 1978 CTR (Bom) 612 but preferred to follow the decision of the Gujarat High Court in the case of Addl. CIT vs. Nagindas Kilabhai & Co. reported in (1975) 101 ITR 197 (Guj) and Allahabad High Court in the case of AddI. CIT vs. Mahinderpal Bhasin 117 ITR 26 (All) . The court has also observed that in the case of retirement of partner or the dissolution of partnership there was no element of transfer or relinquishment or extinguishment of interest of the retiring partner and the legal incidence is the same.

(viii) In Commissioner of Income Tax Vs. N. Palaniappa Gounder (1983) 143 ITR 343 (Mad) (Copy at PB page 268-273), Hon’ble Madras High Court held that the receipt by a partner his share in the assets of the firm on retirement does not give rise to capital gains resulting from any sale, exchange, transfer or relinquishment by him as capital asset. Further held that one cannot see why the retirement of a partner from a firm should be treated as having different kinds of attributes according to the mode of settlement of the retiring partner’s accounts in the partnership. Whether the retiring partner receives a lump sum consideration or whether the amount is paid to him after a general taking of accounts and after ascertainment of his share in the net assets of the partnership as on the date of his retirement, the result, in terms of the legal character of the payment as well as the consequences thereof, is precisely the same. For, as observed by the Gujarat High Court, in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj),

(ix) Smt. Aruna A. Bhat Vs. Assistant Commissioner Of Income Tax ITAT, PUNE THIRD MEMBER BENCH : (2002) 81 lTD 218 (Pune)(TM) (Copy at PB page 274-291):- The main issue involved in this appeal is, whether the amount of Rs. 62.50 lakhs received by the assessee on retirement from the partnership firm of M/s A.V. Bhat & C.V. Shah is a capital receipt not liable to capital gains tax and whether the entirely new findings and different case made out by the CIT(A) holding that there was a systematic plan right from the beginning to avoid tax and various agreements entered into including the partnership deed was merely advice to avoid the tax is sustainable.

The question whether the amount of Rs. 62.50 lakhs received by the assessee on retirement from the partnership firm of M/s A.V. Bhat & C.V. Shah is a capital receipt not liable to capital gains tax was answered in favour of the assessee by holding that the amount received by the assessee on retirement from the partnership firm was not liable to tax as capital gains.

(xi) Second Wealth Tax Officer Vs. P Thirumalai Nainar & Anr ITAT, MADRAS BENCH (1983) 17 TTJ (MAD) 535 (Copy at PB page 292- 295A),

The facts of the case are that the assessee partners retired from a partnership firm. As a result the retiring partners were paid Rs. 2,86,494 and 3,99,110 respectively which amounts have been arrived by mutual agreement. The ITO assessed the excess of the payment received by the retiring partner over their respective credit balances to capital gains as in his view the excess payment was on account of assignment and relinquishment of their rights in the partnership assets and therefore fell within the mischief of s 2(47) and consequently liable to capital gains tax. Hon’ble Tribunal held that when a partner retires from partnership there is no transfer of interest in partnership asset and what he receives is the share in the net assets of the partnership and not any consideration for transfer of his interest in favour of the continuing partners of the firm. In such an event there is no element of transfer or relinquishment or extinguishment of interest of the retiring partner and the legal incidence is the same.

(x) In Deputy Commissioner Of Income Tax Vs. G.K. Enterprises ITAT, Madras ‘B’ Bench (2003) 79 TTJ (Mad) 82 (Copy at PB page 303- 308), Hon’ble Tribunal held that what a partner on retirement from partnership firm receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners Further there was no dissolution of the assessee-firm when the two partners retired; remaining partners along with two new partners continued the business of the assessee. Further, retirement of a partner does not result in a transfer. The transaction in question did not fall within the mischief of s. 45(4).

(xi) Income Tax Officer Vs. Ramesh M. Shah ITAT, MUMBAI ‘D’ BENCH (2004) 2 SOT 558 (Mumbai) Hon’ble Tribunal Relied on the decision of the apex Court in Tribuvandas G. Patel vs. CIT (1999) 236 ITR 515 (SC) and CIT vs. R. Lingmallu Raghukumar (2001) (2001) 247 ITR 801 (SC), wherein their Lordships held that when a partner retires from a firm and the amount of his share in the partnership assets after deduction of 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 partner is not capital gain under s. 45 of the IT Act, 1961 held that credit of amount to capital account of partner on his retirement on revaluation of assets as per partnership law does not involve ‘transfer’ hence no capital gains arise.

(xii) Deputy Commissioner of Income Tax Vs. Jayendra V. Sharma & Ors ITAT, AHMEDABAD ‘C’ BENCH (1993) 48 ITD 1 (Ahm) (Copy at PB page 299-302), Held that revaluation of assets of firm undertaken and appreciation as a result thereof credited to the account of assessee-partner, same cannot be brought to tax. Held that there being no transfer of capital assets on distribution of assets of firm among partners on dissolution of firm, no capital gains are attracted. McDowell & Co. vs. CIT (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) distinguished; CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj), Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC), CIT vs. Dewas Cine Corporation (1968) 68 ITR 240 (SC) and Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC) relied on.

3.4 Whether the share of profit on revaluation of assets of the partnership firm is chargeable to tax in the hands of the partner.

We submit that there would be no incidence give rise to capital gain either at the stage of revaluation or at the stage of crediting to the account of partner. We submit that Hon’ble Supreme Court in the case of CIT vs. Hind Construction Ltd. (1972) 83 ITR 211 (SC) has held that when assets of a partnership firm are revalued and revaluation is credited to the partner’s account, there is no transfer of any assets and as such there is no question of liability on account of capital gain when the assets are revalued and revaluation effect is given to the partner’s account by crediting to the partner’s account..

Further, for argument sake only even if it is presumed that the profit arose from revaluation of stock is a taxable income than also it cannot be assessed in the hands of the partners. The profit on account of revaluation of the stock arose in the hands of the partnership firm and if the same is treated as taxable income the computation of total income in the hands of M/s Krishna Kripa Apartment would be as under:-

Net Loss as per P & L A/c (As per Computation filed with return of firm PB page 131)	-39288
Add Expenses disallowed :- Project Revaluation	69930590
Total Income	69891302

Allocation of Total Income in between Partners:-

Shri Pawan Lashkari	75%	52418476
Shri Jitendra Agarwal	25%	17472826
Total	100%	69891302

By virtue of section 10(2A), the above profit cannot be taxed in the hands of the partner. The section 10(2A) of Income Tax Act is reproduced as under:-

“in the case of a person being a partner of a firm, which is separately assessed as such, his share in the total income of the firm.”

Here admitted the assessee was partner of M/s Krishna Villa Apartment. M/s Krishna Villa Apartment is firm and separately assessed under income Tax by the same AO. The above firm has filed return u/s 139(1) of Income Tax Act 1-5-2008 . In response to notice u/s 153A, this firm has filed return u/s 153A on 12/11/2010 . The assessment of this firm under Income Tax Act was made by the same AO on 27/12/2010. The copy of assessment order for AY 2007-2008 is at PB page 161- 168. Therefore, all the ingredients of section 10(2A) is fulfilled and therefore, if the profit on account of revaluation of stock of the firm is treated as taxable income than also it can not be taxed in the hands of the partners.

3.5 Even if it is presumed that the land in question changed the hands from one set of persons to another set of persons, whether the tax can be charged from assessee more so when the assessee never remained the owner of the land and it is not a case of conversion of personal asset into asset of partnership firm in which the assessee is a partner and conversion of partnership asset into individual asset on retirement.

The ld AO in para 4 at page 4 mentioned as under:-

“in a matter of 8 months starting from 19.07.06 to 19.03.07, the Siroli land has virtually changed ownership from Pawan Lashkary and Jitendra Agarwal (Collectively M/s. Krishna Villa Apartments) to Sh. Shankar M Jethani, Shri Miraj Un Nabi Khan and Shri Naved Saidi (collectively, M/s. Gold Dream Developer) for a consideration of Rs. 6.99 crores. The said stock (land in this case) virtually is the hands of the M/s. Gold Dream Developers & Builders and its original partners, albeit in the name of M/s. Krishna Villa….”

Here, the Ld AO wanted to say that the ownership of the land was transferred from M/s Krishna Villa Apartment to M/s Gold Dream Developers. Even on this presumption of ld AO, the assessee cannot be taxed in respect to the so called profit arose on account of so called transfer.

Further the assessee never remained the owner of the land at any stage. The original owner of the land was farmers who sold the land to M/s Pawan Creations Pvt Limited which is a separate legal person under the Act, and M/s Pawan Creations Pvt Ltd sold the land to the partnership firm who is also separate person as defined under section 2(31) of Income Tax Act. Therefore, it is not a case of conversion of personal asset into asset of partnership firm in which the assessee is a partner and conversion of partnership asset into individual asset on retirement. Further, The local authority (JDA) permitted the change of land use to the Firm for group housing and also allotted Patta in the name of the firm and not in the name of the Partners. The beneficial and legal owner of the land was partnership firm not the partner.

In this regard, we further submit that the part of the land was sold in AY 2008- 2009 and the same AO assessed the sale of the said land in the hands of M/s Krishna Villa Apartment under the same PAN further more without allowing the benefit of increase in the cost of the land (on account of revaluation) on account of so called transfer. The Copy of Assessment Order of M/s Krishna Villa Apartment for AY 2008-2009 is at PB page 169-171.

3.6 Whether the receipt in the hands of the assessee is revenue receipt and chargeable to tax as income from other source:-

AO has not indicated as to under which head of income the alleged profit has been taxed. However, the CIT(A) held at page 32 in Para 4.10 that where certain income is not taxable under any of the specified head, same is taxable under the head “Income from other Sources”

In this regard we submit that only revenue receipts can be taxed under the heads income from salaries, income from house properties, income from business or profession and income from other sources. The capital receipts cannot be taxed under these heads. There is specific provision in section 2(24) of Income Tax Act as regard chargeability of tax in respect of capital receipts and as per this section, only those capital receipts can be taxed under the head capital gain which are chargeable to tax u/s 45. Hon’ble Allahabad High Court in the case of Additional CIT Vs Smt. Mahinderpal Bhasin 117 ITR 26 (All) has held that consideration for relinquishment of interest in partnership firm is not revenue receipt as with the relinquishment of interest, the assessee’s source of income entirely extinguished

The elementary in jurisprudence of levy of income-tax that the receipt in question, first should be an ‘income’ and secondly it has to fall under one of the five heads of income stated in section 14 of the Income-tax Act, 1961. If a particular income does not fall in any of the Heads of Income, the same cannot be taxed as it is presumed that the same was not directed by the Parliament to be taxed. Article 265 of the Constitution provides that no tax shall be levied except by authority of law. There is no scope of intendment in a taxing statute. It was so laid down by the Hon’ble Apex Court of this land in celebrated judgment in the case of CIT Vs. Elphinstone Spg. & Wvg. Mills Co. Ltd (1940) 40 ITR 142 (SC). In this regard a useful reference can also be made to Supreme Court in the case of Nalinikant Ambalal Mody Vs. S.A.L.Narayan Row ,CIT [61 ITR 428 (SC)] as also Calcutta High Court decision in the case of CIT Vs. Justice R.M. Datta [180 ITR 86 (Cal)]. Learned authors Pithisaria & Chaturvedy in their commentary “Income-tax Law” (Sixth Edition) Vol. 1 page 1126 have also , on the basis of above Calcutta High Court judgment, opined as under :

If any receipt is income it has to be computed under one of the five heads of income provided under section 14 of the Income-tax Act, 1961. If, however, it cannot be brought to tax by computation under those sections, they would not be included in the “total income” as defined in section 2(45), for the purpose of chargeability, [CIT Vs Justice R.M.Datta 180 ITR 86, 92 (Cal)]

3.7 Whether the firm was not genuine firm and whether there was colourful device to avoid tax and the ratio laid down by Hon’ble Supreme Court in the case of McDowell & Co Ltd Vs CTO 154 ITR 148 are applicable to the case of the assessee.

A very important fact which need to be highlighted, is that the lower authorities have not proved, that the Firm- M/s Krishna Villa Apartments was not a genuine firm and transactions/agreements were colourful device to avoid tax. In this regard, we submit that the entire findings of the lower authorities are based on surmises, conjectures and guess and without having any positive material and basis. Further, more no inquiry in this regard was made by the lower authorities and even the opportunity of confrontation was not given to the assessee before making such findings. In this regard we submit that:-

(i) Justification of formation of partnership firm on 15.07.2006:-

The partnership dated 15.07.2006 by which the said firm was constituted was a genuine partnership formed by the assessee with the outsider person who is expertise work relating to residential complexes, commercial complexes and group housing project. The land under question could not be converted for group housing project inspite of great efforts made by original owners of the land. The original owners of the land were trying to develop a residential colony in the name of Krishna Villa since 2004 but they could go further except getting the order u/s 90B of Rajasthan Land Revenue Act, and when they completely tired, they sold the land to Pawan Creation Pvt Limited on 1.8.2005 by executing agreement to sale in favour of this company and by executing Registered Power of Attorney in favour of representative of the company Shri Arun Lashkary. After purchasing this land, this company was tried its best to get “Single Unit Patta” from JDA but it could not got success. The file was going up and down for one and another reason in JDA. In April 2006, Shri Jitendra Agarwal made a proposal to Shri Pawan Lashkary that he can get the work done from JDA provided this project of group housing on this land is done with his partnership. Therefore, it was orally decided that a new partnership firm would be formed in between Pawan Lashkary and Jitnedra Agarwal and this project will be done in partnership with Shri Jitendra Agarwal. After getting assurance of partnership, Shri Jitendra Agarwal started work on the file. When the assessee saw some positive progress on the file, it was decided to take Shri Jitendra Agarwal as partner and partnership deed was inked on 15.07.2006 in the name & style M/s Krishna Villa Apartment and the land belonging to M/s Pawan Creations Pvt Ltd was purchased by this partnership firm.

Further, it has been wrongly mentioned by the CIT(A) at page 25 of his order that the land was already converted land and the firm has not done any worthwhile activity in order to improve upon the worth/value of the land and it was Shri Pawan Lashkary who has been involved in these activities. In this regard, we submit that the CIT(A) made this findings merely on surmises and conjectures and without making any inquiry and appreciating the role of Jitendra Agarwal. Shri Jitendra Agarwal is not relative of the assessee and he is complete outsider person and the assessee joined the hands with Shri Jitendra Agarwal only because of commercial expediency. After joining with Jitendra Agarwal as partner the assessee could get the project approved for group housing which M/s Pawan Creation Pvt Ltd as well as the original owners/farmers of the land could not got approved since 2004.

(ii) Development agreement with Gold Dream Builders:- The main business of the assessee is to manufacture and export of ready made garments. He has two firms in his partnership namely, M/s Pawan Enterprises and M/s Goverdhan Creations. He has no experience of construction activities. Further, the work of construction is always carried out through some outside agencies, builders. Therefore, the partners felt that it will be better if the work of construction and further physical development of the land is entrusted to some established and technically/financially capable party. Accordingly, on the recommendation of Shri Jitendra Agarwal, the development work of the group housing project was given to M/s Gold Dreams Builders & Developers, a partnership firm consisting of four partners namely– (i) Shri Shankar M. Jethani, (ii) Shri Arun Bansal, (iii) Shri Meraj Un Nabi Khan, and (iv) Shri Naved Saidi. These persons are also outsiders and not related to the assessee. The development agreement was entered into on 30th Sept. 2006. Therefore, this assignment of the development work was purely a commercial transaction done in business expediency. The assessee could not produce the copy of development agreement before the lower authorities as the same was lying with the office of M/s Krishna Villa Apartment and he did not think necessity to keep the copy thereof with him at the time of leaving office of the firm as partner.

(iii) Merger of developer with the firm:-

The Developer firm (M/s Gold Dreams Builders & Developers) started developing the land. After about four months, both the parties to the Development Agreement realized that merger of both the firms and their competencies and strengths will generate greater synergy of operations. Therefore, the decision for merger was a purely a commercial decision in business expediency with a motive to enlarge the scale of operations and to go further in some more projects with greater strength and experience. Therefore, it was decided to merge M/s Gold Dreams & Developers into M/s Krishna Kripa Apartment w.e.f 19.01.2007.

(iv) Revaluation of land at market price.

It is common practice to make the revaluation of the assets and liabilities at the time of reconstitution of firm as old partners never want to pass the existing appreciations or benefit to the new partners and similarly the new partners never want to take responsibilities of the work/liabilities of the old partners. In the case of the assessee, the land was only asset which was required to put at market price in the books on the reconstitution of the firm. Therefore at the time of admission of new partner market value of all the assets was appraised and the old partners and incoming partners found that the market value of the land has substantially increased because of issuance of Patta for Group Housing Project. So it was decided to account far the land in the books of the firm at prevailing market rate on the admission of new partners. Therefore, on admission of new partners the land was revalued as on 18.1.2007 at Rs. 9,17,80,000/- and difference on revaluation was credited to the capital accounts of existing partners in their profit sharing ratio , i.e Shri Pawan Lashkari Rs. 5,24,47,943/- and Shri Jitendra Agarwal Rs. 1,74,82,647/- It may be seen that for revaluating the land the market rate of land was taken on estimate basis as mutually agreed by existing partners and incoming partners as specifically mentioned under clause 5 of partnership deed dated 19.01.2007. The accounting entries were made as per the principles of the Accounting. For this purpose we are enclosing herewith relevant pages of Book “Advanced Accounts” written by famous author Shukla & Grewal (prescribed book for CA Course) in respect of accounting treatment in case of revaluation of Assets and Liabilities in Partnership Firm.

(v) Retirement of Shri Jitendra Agarwal on 10.02.2007. Very soon after the merger, Shri Jitendra Agarwal found himself uncomfortable in new setting. The working style of the incoming partners was not suitable to Shri Jitendra Agarwal and therefore he desired to retire from the firm and therefore a new partnership deed was executed with effect from 10.02.2007 under which Shri Jitendra Agarwal retired and remaining five partners continued.

(vi) Retirement of Shri Pawan Lashkary:- The ld CIT(A) mentioned at page 27 of his order that it cannot be said that Shri Pawan Lashkary was so busy in other business activity, so as to retire from this firm. The findings of the ld CIT(A) is based on surmises and conjectures without examining the affairs of the assessee. The Appellant’s main business was garment manufacturing and export business. He has to remain busy in his main business and he used to go abroad frequently to look after his garment export business so it was not practically possible for the assessee to give much time for the business of M/s Krishna Villa Apartment, and his hardship exaggerated because the other old partner Shri Jitendra Agarwal left the firm. Further, the assessee could not adjust himself from the working style of the new partners. Therefore, the assessee decided to retire from the partnership and he retired from the partnership w.e.f 19.03.2007. It is also relevant to mention here that the new partners started working in defiance of business ethics, which the assessee did not like. This may be seen from the fact that later on (about in 2010) criminal cases were registered against the new partners for excess booking of flats and this news was also appeared in leading news paper. Had the assessee continued in the partnership, he would have also faced such criminal proceedings for the offence made by the new partners.

Further, the retirement of the assessee was not only for name sake. There was actual and real retirement. The department has no material to show that the retirement of Shri Pawan Lashkary was name sake only and he remained real or beneficial partner even after the retirement was inked on 19.03.2007.

Further more the Ld AO herself treated the firm genuine. In fact, even when the assessment of the Firm has been made in the status of Firm and not as AOP or any other status. The AO has also not challenged the genuineness of the transaction of sale of land by the company to the firm. If, such sale was genuine and the firm was genuine. All the government authorities like JDA has accepted the firm as genuine firm and all the proceedings as regard issue of the Patta was made in the name of firm. The financial institutions also recognized the firm as genuine and the loans were sanctioned by RFC.

(vii) Allegation of intention of tax evasion is devoid of any merit as such. The lower authorities have alleged that the transaction of induction of new partners and retirement of old partners was with an intention of tax avoidance is incorrect both legally and factually. This finding was made merely on surmises, conjectures and guess without having any positive material and without conducting any inquiry. Neither the assessee nor his partners were examined by the lower authorities in this regard.

In fact, the same Assessing Officer while framing the assessment order of the firm for subsequent year (AY 2008-2009 during which the Firm sold a part of the land of Rs. 73,99,640/- to an outsiders) did not allow any deduction on account of revaluation cost. This shows that when the land would be sold to the outsiders, no deduction on account of revaluation cost would be allowed and there will no loss of the revenue to the department. On the other hand, if the profit on account of revaluation is charged to the tax in the hands of the partner and cost of the revaluation is also not allowed as deduction from the receipt of consideration from the outsiders, it would be amount to DOUBLE TAXATION.

Therefore, the allegation that there has been any tax evasion is devoid of any truth.

Similar situation was arose in the case of Smt Aruna A. Bhat Vs. Assistant Commissioner Of Income Tax ITAT, PUNE THIRD MEMBER BENCH : (2002) 81 lTD 218 (Pune)(TM) wherein similar findings were made by CIT(A). In this case the husband of the assessee Shri A.V. Bhat and Shri C.V. Shah (another financier and developer) entered into an agreement to purchase land belonging to Yadav group by agreement dt. 22nd June, 1986. Shri A.V. Bhat and Shri C.V. Shah constituted an oral partnership. The husband of the assessee expired and assessee stepped into the business of her husband. The Partnership Deed was inked on 15th Dec., 1993 and it provided that the partnership deed shall be deemed to have commenced from 27th Oct., 1990. The assessee retired from the said partnership by executing a deed of retirement dt. 25th Jan., 1994. On retirement, the assessee received a sum of Rs. 62.50 lakhs. The learned CIT(A) interpreted various agreements and came to a finding that the series of agreements were nothing but an arrangement and the partnership entered into were a mere ploy to create an alibi that the sum were received on retirement.

The question was answered by Hon’ble Tribunal in para 10 by holding as under:-

“…There was nothing wrong/sham in entering into regular partnership with Shri Shah. In fact, it was her late husband who was in partnership with Shri Shah and after the unfortunate death of her husband, the assessee was bound to inherit her husband’s share and, if in the process keeping in view the legal complications involved and her own perception of Shri Shah, she entered into a partnership deed, the whole thing was within the framework of law and such an arrangement cannot be termed as a mere ploy to create an alibi that sums were received on retirement, as held by the learned CIT (A). In fact, the CIT(A) has reversed the finding of the AO that the arrangement was not sham without bringing on record any material whatsoever. He has overlooked the facts that as early as on 14th July, 1991, the assessee and Shri Shah had reaffirmed their partnership and undertook all the obligations of the old partnership between Shri Shah and the assessee’s husband late Shri A.V. Bhat. His conclusion, therefore, that what was transferred was share in immovable property is totally baseless. Accordingly, we hold that the CIT(A) is not justified either on facts or in law in making out an entirely new case totally unsupported by any factual evidence.”

Even otherwise, the ratio laid down by the Hon’ble Supreme Court does not apply to the facts of the present case. In the case of McDowell & Co. Ltd., the Hon’ble Supreme Court has held that “the tax planning may be legitimate provided it is within the framework of the law. Hon’ble Gujarat High Court in the case of Banyan & Berry Vs CIT-222 ITR 831 (Guj) held that every legitimate and genuine act on the part of the taxpayer resulting in reduction of tax liability cannot be treated as device for avoidance of tax- McDowell & Co. Ltd. vs. CTO has not affected the freedom of citizen to plan his business affairs within the framework of law unless they may properly be called a subterfuge- McDowell does not lay down that a taxpayer must arrange his affairs so as to attract maximum tax liability and every act resulting in tax reduction or exemption or not attracting tax should be treated as device of tax avoidance.

3.9 Whether the income can assessed merely on surrender basis. Much emphasis has been laid by the lower authorities on the fact that the assessee/ appellant had surrendered the aforesaid difference of Rs. 5.25 crores as his income and had undertaken to pay tax thereon. However, while filing the return, the assessee claimed the said difference to be exempt from tax. The AO seems to have taken it to her heart that the assessee did not honour his statement made during the search and seizure proceedings and retracted thereon. It is trite law to say that:

• There is no estoppels against law; and

• Taxation is not a matter of contract- and the same can be levied only under the authority of law (Article 265 of the Constitution).

Since there is no estoppel against law, even if the assessee has admitted to pay tax on any receipt which is not taxable in accordance with law, such admission cannot be held against him. It is more so because the assessing officer is duty bound to tax the correct and true income in accordance with law and there cannot be tax liability by contract.

There is no allegation that in the statement recorded during the course of search in respect of this transaction assessee made any averment of ‘facts” which he retracted later. Comprehension of income-tax law by a common citizen is a mere fiction, more so, during the strenuous environment of search and seizure proceeding. Further, the appellant was not allowed any assistance of a legal expert/ consultant during the course of search or before recording of statement on the matters which are essentially questions of law. If the law requires that a certain tax is to be collected, it cannot be given up, and any assurance that it would not be collected, would not bind the Government. The liability of the assessee to pay Income-tax is created by the Income-tax Act. The amount on which the tax is to be paid, the rates at which the tax has to be computed and the reliefs which the assesses are entitled to, must all be determined in accordance with the provisions of the Income-tax Act and the relevant Finance Act. The liability to pay tax cannot be founded on any agreement. Assessee’s agreements or statements (as that of the appellant) in the matter of law, certainly, cannot form the basis of taxation. Reliance is placed on the following decisions:-

(1) Commissioner of Income-tax Vs. Mr. P. Firm, Muar [56 ITR 67 (SC)]

(2) CIT Vs Manik [74 ITR 1 (SC)] – In this case the assessee had given an undertaking to file a return for a year other than the year under appeal before ITAT. The Supreme Court disapproved enforcing such an undertaking.

(3) Allahabad Milling Vs CIT [ 6 ITC 286]

(4) Parbati Devi Vs. CIT [75 ITR 625]

(5) Muthiah Chettiar Vs CIT (1959) 35 ITR 339 (Mad).

(6) Pullangode Rubber Produce Co Ltd vs State of Kerala & Anothers (1973) 91 ITR 18 (SC) Hon’ble Apex Court has held that admission is an extremely important piece of evidence but it can’t be said that it is conclusive. It is upon to the assessee to show that it is incorrect.

(7) Gargidin Jwala Prasad vs CIT (1974) 96 ITR 97 (All) Held that the addition merely based on statement cannot be made.

(8) Hon’ble Rajasthan High Court in the case of CIT Vs Ashok Kumar Soni 291 ITR 172 (Raj.) has held that admission in statement during search is not conclusive proof of fact and can always be explained.

In view of the above submission, the humble assessee prays your honour kindly to delete the addition of Rs. 5,24,47,943/- made by the Ld AO by setting aside the findings of CIT(A) who confirmed this addition.”

2.12 During the course of proceeding before us, the ld. DR has also filed the written submission. We are not reproducing the basic facts from the submissions of the ld. DR as these have been already mentioned and the balance submissions are reproduced as under:-

“3.2. In respect of the above transactions about transfer of the above land and retirement of the assessee from the firm M/s Krishna Vila Apartments the statement of Sh. Pawan Lashkary was recorded during the search operation on 8/9.08.08. In this statement, he accepted that he and his partner earned profit of Rs. 7.00 crores from M/s Krishna Vila Apartment. He accepted that this profit was earned in lieu of giving the land to the new partners and he had not paid any tax on this profit. He accepted this profit as his undisclosed income and offered it for tax. (PI. refer question & answer to Q.Nos. 23, 24 and 28 reproduced on pg. 33 of the CIT(A) order)

3.3. In his computation of income the assessee showed Rs. 5,24,47,043/- as 'profit from the firm M/s Krishna Vila Apartment' but claimed it as exempt u/s 10(2A) of the IT. Act.

3.4. The A.O did not accept the contention of the assessee about theabove amount of Rs. 5,24,47,043/- being exempt. In view of the facts of this case, she was of the opinion that in a matter of 8 months starting from 15.07.2006 to 19.03.2007, the Siroii land had virtually changed ownership from Pawan Lashkary and Jitendra Agarwal(Collectively M/s Krishna Villa Apartments) to Sh. Shankar M.Jethani, Sh. Arun Bansal, Sh. Miraj Un Nabi Khan and Shri Naved Saidi(collectively, M/s Gold Dream Builders & Developers) for a consideration of Rs. 6.99 crores. The said stock (land in this case) virtually was in the hands of the M/s Gold Dream Builders & Developers and its original partners, albeit in the name of M/s Krishna Villa Apartments. The A.O felt that whether in the name of M/s Krishna Villa Apartments or M/s Gold Dream Developers, through a series of almost conspiratorial and well orchestrated moves, Sh. Shankar M Jethani, Sh. Miraj Un Nabi Khan, Sh. Arun Bansal and Sh. Naved Saidi had the ownership of the Siroii land from Sh. Pawan Lashkary and Sh. Jitendra Agarwal.

3.5. The A.O held that through a series of steps involving take over agreements, revaluation of stock, crediting the difference between book value and revalued value, retirement one by one and ultimately the withdrawal from the capital account and declaration of such withdrawal as profit from firm the assessee and his partner have used a colorable device to avoid tax on the profit earned by them by selling the Siroii land to the four partners of M/s Gold Dream Builders & Developers. She relied on the decisions of Hon'ble Supreme Court in the cases of CIT vs. Durga Prasad More(1971) 82 ITR 540 and Mc. Dowell & Co. Ltd. Vs. CTO(1965) 154 ITR 148 and held that the profit of Rs. 5,24,47,943/- cannot be exempted in the hands of the assessee and added this amount as his income.

3.6 Ld. CIT(A) confirmed the findings of the A.O that the assessee had adopted a colorable device to avoid payment of tax on the profit of Rs. 5,24,47,943/- earned by him on the sale of Siroii land. He held that the conduct of the persons involved in the various transactions clearly proved that what was apparent was not real. He was of the view that in reality the controlling interest in the land had been relinquished by both the earlier partners Sh. Pawan Lashkary and Sh. Jitendra Agarwal by adopting the dubious and circuitous route of entering the four new partners in the firm M/s Krishna Villa Apartment having the impugned land as the only important asset and by resorting to revaluation of the land at the time of entry of these new partners and thereafter both the old partners retiring one by one in a short span of time and thereby getting the proportionate share of profit on relinquishment of their right, title, interest in the impugned land and same was done with a view to avoid taxability of this profit under the IT. Act.

Ld. C1T(A) also confirmed this addition of income on the ground that during the search operations, the assessee had himself accepted that he had earned profit on the sale of the land at Siroii but did not pay tax on this. He offered this amount for tax as his undisclosed income.

4. In this appeal the assessee has challenged the above decision of Ld. CIT(A)-Central.

4.1 In this respect first of all, I would like to submit that the case of the assessee is squarely covered by the decision of Hon'ble ITAT, Mumbai, Bench T in the case of Sudhakar M. Shetty vs. ACIT reported at (2011) 130 ITD 197Mumbai).

4.2. In this case the assessee Sh. Sudhakar M. Shetty entered into a partnership with one Sh. Rakesh Wadhwan to carry on the business of building and development of immovable properties. The partnership firm was named M/s D.S. Corporation. Subsequently, some more relatives and associates of these two partners were admitted but essentially the partnership remained under the control of the Shetty and Wadhwan groups. This partnership firm bought a land in Mumbai for Rs. 6.5 crores and made expenditure for clearing and regularizing this land. Later the firm admitted 4 more partners from outside the two main groups viz. Sh. Ashok Gupta, Sh. Waryam Singh, Sh. Kapil Rajesh Kumar and Sh. Sunpreet Singh into the partnership. Just before admitting these new partners the land was got revalued at Rs. 193,90,60,000/- and the surplus amount of Rs. 154,39,90,435/- was credited to the accounts of the existing partners in their profit sharing ratio. The amount credited to the capital account of the assessee Sh. Sudhakar Shetty was Rs. 30,87,98,087/- During F.Yr. 2006-07, the assessee retired from the partnership firm and was paid all the amount standing to his credit in the capital account including his share of the surplus on revaluation of the land amounting to Rs. 30,87,98,087/- The A.O was of the view that the assessee had adopted a colourable device to hookwink the revenue. Accordingly, he brought to tax the amount of Rs. 30,87,98,088/- as income He did not specify as to under which head, it was to be brought to tax. However, as per the ITAT order, a reading of the entire order suggested that the income was assesseed as short term capital gain.

4.3. On appeal by the assessee, the CIT(A) held that the sum in question was liable to be assessed as short-term capital gain. He held that there was a transfer of a capital asset resulting in a capital gain and that all the conditions contemplated under section 45 and section 48 were satisfied. The CIT(A) in coming to the above conclusion, referred to the various clauses in the retirement deed and held that there was an assignment of the interest of the assessee in the partnership in favour of the continuing partners. According to him the decision in the case of Mohanbhai Pamabhai 165 ITR 166(SC) did not apply because in that case, there was only minutes under which a partner retired and it contained no assignment of interest in favour of continuing partners The CIT(A) then concluded that relinquishment of interest would be "transfer" within the meaning of section 2(47) of the Act. Thereafter , the CIT(A) referred to three judgments of the Hon'ble Bombay Hight Court viz., (a) CIT V. Tribhuvandas G Patel(1978) 115 ITR 95 (b) CIT V. H.R. Aslot(1978) 115 ITR 255 (c) N A Modv V.CIT(1986) 162 ITR 420 and concluded that as laid down in the aforesaid judgments, there would be a transfer when on retirement of a partner, there is an assignment and releasing of his share in partnership firm in favour of continuing partners.

4.4. Hon'ble Mumbai Tribunal has discussed the various aspects of this issue in detail in its order and has considered a large number of court decisions in this regard. After a detailed discussion Hon'ble Tribunal has held as under:

(I) Thus, the question whether a transaction would amount to an assignment or release of interest by the retiring partner in favour of the continuing partners or not would depend upon the way a 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 amount 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 section 2(47).

In the instant case, the assesse retired from the partnership firm and was paid the sum standing to the credit of his capital account, but for the re-valuation of the asset, the capital account of the partner would not have shown a sum of Rs. 35,59,84,050/-. To the extent of Rs. 30,87,98,087/- the capital account had been artificially increased just to ensure that the retiring partner was paid consideration standing to the credit of his capital account. Thus, it was a case where instead of quantifying the assessee's share by taking accounts on the footing of notional sale, parties had agreed 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. Thus, the retiring partner was paid something over and above the sum standing to the credit of his capital account and, therefore, there was a capital gain.)

(II) Further, it was to be seen as to whether there was any assigning or relinquishing of any share or right in the partnership and its assets in favour of the continuing partners by the retiring partner.

4.5 In the case of the assessee, Sh. Pawan Lashkary the facts are exactly the same. Here also the assessee entered into a partnership with other partners and the firm thus formed purchased a land on which they made some expenses. Later the original partners admitted outside partners in the partnership and at the time of admitting the new partners the land was got revalued at the market rate. After revaluation the surplus was credited to the capital accounts of the existing partners. Later the existing partners retired from the firm taking away the balance standing in their capital accounts, including the surplus amount credited to their capital account on revaluation of the land. Here also it is a case where there is assigning or relinquishing of a share or right in the partnership and its assets in favour of the continuing partners by the retiring partners. This fact is clear from the clause 5 of the retirement-cum- reconstitution deeds dated 10.02.2007(APB page 41) 19.03.2007(APB page 51) in which it is mentioned as follows:

"That balance in the capital account of the retiring partner will be paid to him within the period of three months from the date of the deed and no interest on such balance will be paid for this period of three months. After payment of his entire capital, the retiring partner shall not have any right in the business of the firm and also will not claim his share in the good will of the firm, if any".

Thus, in this case also the retiring partner has assigned or relinquished his share or right or interest in the business of the partnership firm in the favour of the continuing partners.

Therefore, the case of the assessee is squarely covered by the decision of Hon'ble ITAT Mumbai in the case of Sudhakar M.Shetty and therefore the amount of Rs. 5,24,47,943/- has been rightly taxed by the A.O as the income of the assessee.

5. In the case of Sudhakar M. Shetty out of the two groups of original partners only one group retired from the partnership. Still Hon'ble ITAT held that the amount received by the retiring partner will be taxed in his hand as capital gain. In the case of the assessee, the assessees have gone one step further. Both the original partners have retired from the partnership firm and the remaining partners are the 4 partners who were newly admitted. Therefore, this is a clear case where the assessees have used the colorable device described by the A.O in paras 3, 4 and 5 of her order to sell land owned by them to a set of people and have not paid any tax on the profit earned in this sale.

In paras 4, and 4.1 to 4.2 Ld. CIT(A) has described how through the various transactions spread over a period of about 9 months the land in question has been effectively transferred from Sh. Pawan Lashkary and Sh. Jitendra Agarwal to a group of 4 persons. Ld. CIT(A) has rightly held these transactions as a colorable device for avoiding payment of taxes on the profit and gains earned on the transfer of the said land.

On page 25 of his order Id. CIT(A) has mentioned that the land at Village Siroii was purchase by M/s Krishna Villa Apartment on 24.07.2006 and on 27.07.2006, the J DA issued letters in the name of this firm for payment of conversion charges, development charges and charges for approval of group housing scheme. Ld. CIT(A) was of the opinion that in the institutions like the J DA applications for conversion of land and approval of group housing scheme takes time and the letters in the name of the firm could not have been issued in a short period of three days. Therefore, he inferred that these applications were filed before the firm M/s Krishna Villa Apartment came into existence and certainly before the said land was purchased by this firm on 24.07.2006. In respect of this observation of Ld. CIT(A) some inquiries were recently made from the JDA and it was learnt that one Sh. Arun Lashkary son of Sh. Pawan Lashkary had applied to the JDA on 27.02.2006 on behalf of the original owners and requested the JDA to issue Single Unit Patta in the name of M/s Krishna Villa Apartments. The copy of this letter dated 27.02.2006 is enclosed. This document proves the inference drawn by Ld. CIT(A) that request for issue of Patta in the name of the firm M/s Krishna Villa Apartment was made even before this firm came into existence and even before this land was purchased in the name of this firm. This also proves the inference made by Ld. CIT(A) that the firm M/s Krishna Villa Apartment has not done any worthwhile activity in order to improve the worth/ value of the land and it was Sh. Pawan Lashkary and his son who have been involved in all these activities.

Therefore, besides the applicability of the case of Sudhakar M.Shetty discussed above, this case is also a case where through a colorable device the two persons Sh. Pawan Lashkary(assessee) and Sh. Jitendra Agarwal transferred their controlling interests in the land to a group of 4 persons. The profit earned by the assessee and Sh. Jitendra Agarwal has been rightly held as taxable by Ld. CIT(A) in the hands of these two persons.

6. As regards the grounds taken by the assessee in the modified/additional grounds filed on 31.10.2011, my submissions are as follows:

Ground no. 1: In this ground, the assessee has termed the orders of the lower authorities as against law, weight of evidence and probability of the case . In this respect, it is submitted that in view of the submissions made above and the discussion made in the orders of the A.O and Ld. CIT(A), the addition of the income of Rs. 5, 24, 47,943/- has been made in the hands of the assessee as per law and on correct appreciation of the evidences. Ground no. 2: In ground no. 2, the assessee has claimed that the amount of Rs. 5,24,47,943/- cannot be taxed as his income since this is capital account balance received on account of his retirement from the firm M/s Krishna Villa Apartment and also because the said firm was not dissolved and continued as a going concern.

In this respect, it is submitted that the balance in the capital account is not the tax paid profit of the firm M/s Krishna Villa Apartment. Rather it includes an amount of Rs. 5,24,47,943/- which is the profit earned by the assessee on sale of the land at Siroii which has been credited to his capital account in the guise of revaluation of the land at market rate. As discussed above this profit is very much the income of the assessee.

The fact that the firm M/s KVA has not been dissolved does not make any difference. In the case of Sudhakar M. Shetty, discussed above Hon'ble ITAT has clearly held the amount received by the retiring partner as taxable in his hand as short term capital gain. Similarly, CIT(A) has held this amount as a device used by the retiring partner to avoid tax and has held it as income for transfer of controlling interest in the land transferred by the retiring partner to the continuing partners.

Ground no. 3: In this ground, the assessee has claimed that the amount of Rs. 5,24,47,943/- is not taxable either u/s 10(2A) or 28(iv) or 28(v), or 45(4) as per decisions of Hon'ble Supreme Court in the cases of 165 ITR 166(SC), 247 ITR 801 (SC), and Mumbai HC decision in the case of 324 ITR 154(Bom).

In this respect, it is submitted that all these sections and court decisions referred by the assessee have been considered in detail by Hon'ble ITAT, Mumbai in the case of Sudhakar M.Shetty and only after that have they held the amount as taxable in the hands of the assessee.

Further, these court cases do not help the assessee against the findings of Ld. CIT(A) also because Ld. CIT(A) has held the profit earned by the assesseeas taxable by holding the various transactions as colourable device whereas in these court cases the issue did not pertain to use of any colourable device.

The assessee has heavily relied on the decision of Sh. Prashant S. Joshi (2010) 324 ITR 154. First of all this decision was not cited before Ld. CIT(A). Secondly, the issue and facts of this case are quite different from the case of the assessee. The Prashant Joshi case was a writ petition which was mainly related to the validity of the notices issued u/s 148 for A.Yrs. 2005-06 and 2006- 07. The merits of the issue under consideration in the case of our assessee were not decided in detail. Moreover, as in the case of our assessee, there was no admission of new partners in the existing firm, no revaluation of the land at the time of admitting new partners, and the retiring partners were not paid the surplus of the revalued land. Thus, the facts of the case of the assessee and those of the case of Prashant Joshi are totally different.

Ground no. 4: In this ground, the assessee has contended that Ld. CIT(A) has wrongly treated the amount of Rs. . 5,24,47,943/- as transfer of right of land by the retiring partners to the new partner of the firm and has held it as taxable under the head income from other sources.

In this respect, it is submitted that as discussed in his order, Ld. CIT(A) has rightly held the sequence of events in this case as a colourable device to relinquish controlling interest in the land in favour of the new partners of M/s Krishna Villa Apartments by Sh. Pawan Lashkary and Sh. Jitendra Agarwal. Since these two persons have earned profit on relinquishment of the controlling interest therefore such profit needs to be taxed as their income only.

Ld. CIT(A) has held this amount as taxable under the 'income from other sources' only to counter the persistent argument of the assessee that this profit cannot be taxed under any head of income under the IT. Act,1961. If Hon'ble ITAT desires, since the controlling interest in the land is a property in the hands of the assessee under sec. 2(14) of the I.T. Act, 1961, this profit may be taxed as short term capital gain. However, the bottom- line is that this amount is a taxable income of the assessee.

Ground no. 5: In this ground, the assessee has argued that Ld. CIT(A) has wrongly held that the series of transactions done by the assessee and the new partners were arrangements that have been used as a device to evade profit earned by Sh. Pawan Lashkary and Sh. Jitendra Agarwal on relinquishment of rights, title, interest in the land.

It is claimed that the assessee has not evaded any tax on this amount because in the assessment of the firm M/s Krishna Villa Apartment, the A.O did not allow the revalued value of the land as deduction in A.Yr 2008-09. It is claimed that this has resulted in double taxation of the same amount in the hands of the firm and the retiring partners.

As described in this submission above there is no doubt that the transactions done by Sh. Pawan Lashkary and Sh. Jitendra Agarwal and the four new partners'from 19.07.2007 to 31.03.2008 were well orchestrated and planned moves to evade tax on the profit earned by Sh. Lashkary and Sh. Agarwal to relinquish their rights in the Siroii land to the four new partners. This allegation is proved by the simple fact that the whole of the revalued value of the land was claimed by the firm M/s Krishna Villa Apartments as an expenditure in P & L A/c and the surplus received on revaluation of the land was not offered by Sh. Lashkary and Sh. Agarwal for tax. Thus, one group of persons is making payment to other group of persons for purchase of land and the first group is claiming the payment as expenditure but the recipient group is not prepared to accept the amount received as sale consideration by resorting to certain well orchestrated transactions as described above. If this is not a colourable device then what else will be. If such transactions are allowed to go Scot free by resorting to legal technicalities then everybody will resort to this technique and no tax will be paid on the profits earned from the sale of land . This will be a serious travesty of justice.

The assessee has argued that there is double taxation of the same amount as in the assessment order OF M/s Krishna Villa Apartment the A.O had not allowed the closing stock of land to be taken at the enhanced revalued amount In this respect it is submitted that for A.Yrs. 2007-08 and 2008-09, the A.O had to pass the assessment u/s144 as the notices sent u/s 143(2) was refused. Thus these assessments were best judgement assessments made on the basis of the material on record. During these assessment proceedings the assessee firm did not explain the nature of the revalued value of the land and hence the AO rejected the claim of revalued value as expenditure as discussed in para 7 and 8 of her order for A. Y 2007-08(APB Pg. 166,167). The A.O rejected the claim of the assessee on the ground that the stock, as per accounting standard AS-2, is to be valued at cost or market price whichever is lower but the assessee valued it at a higher rate which was not allowable . The A.O had to make this disallowance because there was no explanation by the assessee firm on this issue. Therefore, it cannot be said to be a case of double taxation.

Ground no: 6: In this ground the assessee has claimed that the assessment order u/s 153A is bad-in-law and void because the A.O has not considered the evidences and has made assessment based on the assumptions and conjectures.

In this respect, it is submitted that as discussed above, the assessment has been rightly made after proper consideration of all the material evidences and facts on record.”

2.13 The ld. DR has heavily relied on the decision of ITAT Mumbai Bench in the case of Sudhakar M Shetty Vs. ACIT, 130 ITD 197. It was stated that the facts in the instant case are similar to the facts of the case of Sudhakar M Shetty Vs. ACIT (supra) and the decision is squarely applicable and the appeal of the assessee is required to be dismissed. It will be useful to reproduce the held portion from that order which are relevant for the issue before us.

“The issue that arose for consideration in the instant appeal was as to whether any part of the sum received by the assessee on retirement from the firm would give rise to capital gain chargeable to tax under the Act. [Para 17]

Section 45(1) 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. Section 2(47) defines as to what is transfer.

Capital asset has been defined in section 2(14), 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. [Para 19]

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 that extent there can be no doubt. The next question was as to whether it could 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 section 45. [Para 20]

A look at how formation and dissolution of the 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 was a partner and conversion of capital assets into individual assets on dissolution or otherwise, was necessary. [Para 21]

Partnership as a form of carrying on business was evolved so that two or more persons could join together by pooling resources in the form of capital and expertise. One of the devices used by the assesses to evade tax on capital gain was to convert an asset held individually into an asset of the firm in which the individual was a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise. [Para 22]

Such an introduction of capital asset as capital contribution by a partner upto 1.4.1988 did not result in incidence of capital gain. It was so held by the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W. The Supreme Court held that under the Act, 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 section 45 because an exclusive interest of the partner in the personal assets is reduced, on his entry into the firm into a shared interest. On such introduction of capital the partner’s capital account is credited with the market value of the property. Such an entry does not represent the true value of the 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 beforehand 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; 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 been arisen at the relevant time. 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 section 48. As that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. [Para 23]

The Parliament with the avowed object of blocking this escape route for avoiding capital gains tax, introduced sub-section (3) to section 45 by the Finance Act, 1987, with effect from 1.4.1988. The effect 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 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, would be deemed to be the full value of the consideration received or accrued as a result of transfer of the capital asset.

In the case of dissolution where the partners had been allotted capital assets of the firm, it was held that there was no transfer. [Para 25] Section 47 lays down as to which are the transactions not regarded as transfer for the purpose of section 45. [Para 27]

The Finance Act, 1987 omitted clause (ii) of section 47 with effect from 1.4.1988, the effect of which was that distribution of the capital assets on the dissolution of a firm would be regarded as ‘transfer’ with effect from 1.4.1988. Therefore, instead of amending section 2(47), the amendment was carried out by the Finance Act, 1987, by omitting section 47(ii), the result of which was that distribution of the 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. [Para 28]

Thus, the Parliament brought into the tax net transactions whereby assets were brought into a firm or were taken out of the firm. Thus, section 45(4) covers cases where there is a dissolution of the firm and distribution of the assets of the firm by the firm to its partners. [Para 29]

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.

In the case of retirement of a partner there can be two situations. In the first situation can be a retirement of a partner from the firm and the firm may continue its existence and the retiring partner may be given assets in lieu of amounts payable to one on retirement. This can be done either on the basis of settling amounts standing to the credit of his capital account or on a lump sum basis. There can be a second situation where the retiring partner is paid consideration in cash and he gives up his rights as a partner, including his rights over the assets of the partnership.

This again can be done either on the basis of settling amount standing to the credit of his capital account on a lump sum basis.

In the first situation, i.e. retirement of a partner from the firm and the firm continuing its existence and the retiring partner given assets in lieu of amounts payable to him on retirement, it has been held by the Bombay High Court in the case of CIT v. A.N.Naik Associates [2004] 265 ITR 346 Taxman 107 to be covered by the provisions of section 45(4) of the Act, viz., a transfer giving rise to a capital gain.

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 assessee took a stand that retirement was also one form of dissolution of the firm, because the distribution of assets on retirement was not regarded as a transfer under section 48(ii). This was not accepted by the Bombay High Court and it held that a clear distinction exists between retirement of a partner from a firm and the dissolution of the firm. In the case of retirement of a partner from a firm it is only the 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, the firm, as such, no more exists and the dissolution is between all the partners of the firm. The decision in the case of A.N.Naik Associate (supra), however, treats distribution of the assets of the firm to partners on dissolution or on retirement as falling within the ambit of section 45(4).

The second situation with which the instant appeal was concerned was a case where the retiring partner was paid consideration in cash and he gave up his rights as a partner, including his rights over the assets of the partnership. There was divergence of views on the question as to whether there was any transfer at all in such situation by the firm in fvour of the retiring partner or by the retiring partner in fvour of the firm and its continuing partners.

Thus the question whether a transaction would amount to an assignment or release of interest by the retiring partner in favour of the continuing partners or not would depend upon the way of 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 amount 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 section 2(47).

In the instant case, the assessee retired from the partnership firm and was paid the sum standing to the credit of his capital account, but for the re-valuation of the asset, the capital account of the partner would not have shown a sum of Rs. 35,59,84,050. To the extent of Rs. 30,87,98,087 the capital account had been artificially increased just to ensure that the retiring partner was paid consideration standing to the credit of his capital account. Thus, it was a case where instead of quantifying the assessee’s share by taking account on the footing of notional sale, parties had agreed 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. Thus, the retiring partner was paid something over and above the sum standing to the credit of his capital account and, therefore, there was a capital gain.

Further, it was to be seen as to whether there was any assigning or relinquishing of any share or right in the partnership and its assets in favour of the continuing partners by the retiring partner.

In the case of the assessee the clauses in the retirement deed did convey interest in immovable property and further referred to the fact that the assessee would not have any interest over the assets of the firm. Thus, it was a case of lump sum payment 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 manner of retirement in the case of the assessee was such that it could be regarded as assigning or relinquishing by the retiring partner of his share or right in the partnership and its assets in favour of the continuing partners. Therefore, the assessee satisfied the partners laid down by the Bombay High Court in the case referred to above and, therefore, there was a transfer of interest of the retiring partner over the assets of the partnership on retirement. Therefore, there was liability to tax on account of capital gain.

For the reasons given above, there was no justifiable ground to interfere with the order of the Commissioner (Appeals). Therefore, the order of the Commissioner (Appeals) was to be confirmed and the appeal by the assessee was to be dismissed.”

2.14 Alongwith written submission, the ld. DR also enclosed the copy of letter signed by Shri Arun Lashkari and addressed to Dy. Commissioner, JDA on 27-02-2006. In this letter, the request was made to issue a single unit patta in the name of the company. However, the name of the firm is mentioned in hand writing as M/s.Krishna Villa Apartment. From this, the ld. DR submitted that firm was in existence in Feb, 2006 and all the subsequent actions represent arrangements for evading the tax.

21.5 The ld. AR submitted a rejoinder and the contention as given in the rejoinder are as under:-

Income has been defined in section 2(24) of Income Tax Act. In sub clause (vi) specifies that any capital gain chargeable under section 45 is income.

Section 45 contemplates that profit or gains arising from transfer of capital assets effected in the previous year shall, save other wise provided be chargeable to income Tax under the head “Capital Gain”

Therefore in order to charge tax on capital gain two conditions must be satisfied (i) there should be capital asset and (ii) There should be transfer of capital asset. Therefore any thing which is not a capital asset or which is not amount to transfer cannot be put to charge capital gain. Capital Assets have been defined in section 2(14) and Transfer in relation to capital assets defined in section 2(47) of Income Tax Act.

Further a section 47 is in the Act, which says that certain transaction which are otherwise considered as “Transfer” in view of section 2(47) but still these will not be considered as transfer.

There was clause (ii) in section 47 which provides exemption from provision of s. 45. Section 47(ii) was as follows:-

“47(ii) Any distribution of capital assets on dissolution of a firm, body of individual or other association of person.”

Therefore, what are not “Transfer in relation to capital assets”

a) Transactions which are not within the preview of section 2(47) or

b) Transaction which comes into preview of section 47.

Hon’ble Supreme Court in successive decisions held that an amount paid to a retiring partner in a Partnership Firm does not amount to a transfer within meaning of section 2(47). Therefore, even after the deletion of section 47(ii) w.e.f 1.4.88 amount paid to a retiring partner in Partnership Firm will not be taxable as capital gain as the same does not amount to transfer as defined in section 2(47) of Income Tax Act in view of successive decisions of Hon’ble Apex Court.

There are several decisions which pertains to Assessment Years after the amendment.

(i) ITAT Jaipur 30 Tax World 14 AY 91-92

(ii) Bombay High Court 324 ITR 154 AY 05-06 and 06-07

(iii) Kerala High Court 257 ITR 544 (Kar) AY 89-90

(iv) ITAT Pune Third Member decision 81 ITD 218 (Pune) TM AY 94-95

(v) ITAT Mumbai D Bench 2 SOT 558 AY 94-95

(vi) ITAT Madras B Bench 79 TTJ 82 AY 89-90

S.No	Name of Case	Difference on facts to the case of assessee
1	Sudhakar M Shetty Vs Assistant Commissioner of Income Tax 130 ITD 197 (ITAT Mumbai)	1. As per rule of consistency, the Hon’ble Tribunal Jaipur Bench should fallow its own judgment on the same issue instead of judgment delivered by other bench of the Tribunal.
		2. Hon’ble Mumbai I Bench decided the case while considering the following findings made in para 21 & 22 of its order:-
		“21. 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.
		22. 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 an asset held individually into asset of the firm in which the individual as a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise.” In the case of the assessee there is no such findings of the lower authorities.
		3. (Para 42). Hon’ble Mumbai “I” bench of the Tribunal took the note of clauses of Retirement Deed as mentioned in Para 42. Cls. 2, 4, 5 and 7 of the deed of retirement clearly envisages an extinguishment of rights of the retiring partners and assignment rights over the partnership and its properties in favour of the continuing partners/firm. Further it has been specifically mentioned that the capital account balance Rs. 35,59,84,050/- payable to the retiring partner in full and final settlement of his claim in the capital and assets of the firm and this fund will be brought by the continuing partners. In the case of the assessee there is no such clauses in the retirement deed.
		4. This case was decided on the basis of receiving lump sum payment by the retiring Partner in consideration of his assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners. (Para 49).
		5. Hon'ble Bench relied on the decision of Bombay High Court in the case of Tribuvandas G Patel 115 ITR 95; CIT Vs HR Aslot 115 ITR 255 and NA Mody Vs CIT 162 ITR 420. The case of Tribuvandas G Patel is no longer good law because the same was reversed by SC reported in 236 ITR 515. The facts of HR Aslot and NA Mody 's case are similar to Tribuvandas G Patel's case, therefore, the same also impliedly overruled by Hon'ble SC. Further,
		6. Hon'ble Bench has not considered the principles and ratio laid down by Bombay High Court in its later decision in the case of Prashant S Joshi Vs ITO 324 ITR 154 (Bom) while quashing the notice issued u/s 148 of Income Tax Act.
2	Bishan Lal Kanodiya Vs CIT 257 ITR 499 (Delhi)	In this case it has been held that without taking accounts on the footing of notional sale, by mutual agreement, a retiring partner may receive an agreed lump sum for going out as and by way of consideration for transferring or releasing or assigning or relinquishing his interest in the partnership assets to the continuing partners and if the retirement takes this form and the deed in the behalf is executed, it will be “transfer” and liable for capital gain tax. Further more, Hon'ble Delhi High Court has followed the decision of Hon'ble Bombay High Court in the Case of Tribhuvandas G Patel reported in 115 ITR 95 (Bom) which was reversed by Hon’ble Apex Court.
3	CIT Vs Bharani Pictures 129 ITR 244 (Mad)	Two partners were in firm; one partner relinquished his share in favour of other partner. The controversy was whether the firm sold its assets to the partner and whether the firm is liable to pay capital gain tax. In this cases retirement of all the old partners, continuation of business of firm by new partners, the taxability of capital gain was not held in the hands of retiring partners.
4	CIT Vs Gurunath Talkies 328 ITR 59 (Karnataka)	Four partners were in firm; two more partner introduced as incoming partners and thereafter all the old four partners retired. New partners brought amount in the firm towards their capital contribution and old partners shared that amount minus WDV of assets. The controversy was whether there was transfer of assets of the firm to newly added partners. Held that provisions of section 45(4) are applicable and firm is liable to pay capital gain tax. In this cases retirement of all the old partners, continuation of business of firm by new partners, the taxability of capital gain was not held in the hands of retiring partners.
5	CIT Vs A.N. Naik Associates 265 ITR 346 (Bombay)	Word "Otherwise" in section 45(4) covers not only the cases of dissolution but also cases of subsisting partners of a partnership transferring assets in favour of a retiring partner. In this case new partners were inducted in morning and old partners retired on close of the business on that day. In para 27 of the order it was held that on retirement of partner, the partner got his share, it was held that there was no extinguishment of right. In this cases retirement of all the old partners, continuation of business of firm by new partners, the taxability of capital gain was not held in the hands of retiring partners.
6	N.A.Mody Vs CIT 162 ITR 420 (Bombay)	In this case, lump sum consideration received for assignment of his share in the firm by partner on his retirement was held to be liable for capital gain tax, following its earlier decision in the case of CIT Vs Tribhuvandas G Patel 115 ITR 95. Further more, the decision of Hon'ble Gujarat High Court in the case of CIT Vs Mohanbhai Pamabhai 91 ITR 393 was not followed because of its decision in the case of Tribhuvandas G Patel. Hon'ble SC confirmed the decision of Gujarat High Court in the case of Mohanbhai Pamabhai reported in 165 ITR 166 (SC) and reversed the decision of Bombay High Court given in the case of CIT Vs Tribhuvandas G Patel reported in 236 ITR 515 (SC). Further, the Bombay High Court has also changed its earlier view in its recent decision Prasant S Joshi Vs ITO reported in 324 ITR 154 (Bom). However, in the case of the assessee, the retirement deed does not specify any consideration against relinquishment of his share on retirement from partnership.
7	CIT Vs Tribhuvandas G Patel (Bom)/ 115 ITR 95/ (Bombay) Reversed by SC in 236 ITR 515 (SC)	In this case it has been held that without taking accounts on the footing of notional sale, by mutual agreement, a retiring partner may receive an agreed lump sum for going out as and by way of consideration for transferring or releasing or assigning or relinquishing his interest in the partnership assets to the continuing partners and if the retirement takes this form and the deed in the behalf is executed, it will be “transfer” and liable for capital gain tax. Further more, Hon'ble Bombay High Court in this case has not approved the decision of Hon'ble Gujarat High Court in the case of CIT Vs Mohanbhai Pamabhai 91 ITR 393. Hon'ble SC confirmed the decision of Gujarat High Court in the case of Mohanbhai Pamabhai reported in 165 ITR 166 (SC) and reversed the decision of Bombay High Court given in the case of CIT Vs Tribhuvandas G Patel reported in 236 ITR 515 (SC). Further, the Bombay High Court has also changed its earlier view in its recent decision Prasant S Joshi Vs ITO reported in 324 ITR 154 (Bom). However, on the facts this case differs from the case of the assessee as in the case of the assessee, the retirement deed does not specify any consideration against relinquishment of his share on retirement from partnership.
8	CIT Vs H.R.Aslot 115 ITR 255 (Bombay)	In this case, lump sum amount received by retiring partner for assigning and releasing his share in the partnership in favour of continuing partner was held to be liable for capital gain tax, following its earlier decision in the case of CIT Vs Tribhuvandas G Patel 115 ITR 95

2.16 In the rejoinder, the ld. AR submitted that the name of the firm is mentioned in hand writing while the entire letter stands typed. The ld. AR also filed the copies of the order sheet from the file maintained in the office of JDA. The order sheet entry showed that the request was made by M/s. PCPL company for issuing a single unit patta. We are not aware as to how the name of the firm has been mentioned in the copy of letter filed by the ld. DR. Such entry may be a subsequent interpolation.

2.17 We have heard both the parties. The copy of partnership deed dated 15-07-2006 in which the assessee and Shri Jitendra Agarwal were partners is available at pages 31 to 33 of the paper book. The partnership was a partnership at will. As per clause 13 of the partnership deed , it was provided that the partners if deem proper and in their interest may admit any other person or persons as partners on the terms and conditions as may be mutually agreed among themselves.. The bank account was to be operated either singly or jointly by the partners. The net profit or loss after deduction of all expenses and outgoing shall be divided between the partners in proportion to their sharing ratio i.e. 75% and 25% in favour of the assessee and Shri Jitendra Agarwal respectively. The copy of partnership deed as on 19-01-2007 is available at pages 34 to 40 of the paper book. In this deeds, it is mentioned the firm is having a land measuring 33986.97 Sq. Yard in stock in trade and entered into an agreement for constructing the building of multistoried residential / commercial units with M/s.Gold Dream Builders and Developer as on 30-09- 2006. It is mentioned that continuing partners i.e. assessee and the Shri Jitendra Agarwal were mainly engaged in their own business obligation, offered the merging the firms i.e. M/s.Gold Dream Builders and Developer in the business of the firm of M/s.Krishna Villa Apartment as a going concern and offered the partners of the merging firm to become the partners of the firm in view of the consideration of the expertise of the merging firm in developing a multistoried building for marketing of turnkey / huge project and its financial position. The partners of the merging firm gave their consent for the same and incoming partners have entered into a take over agreement on 18-01-2007. As per agreement of takeover, stock in trade of the firm was revalued at its current market value and difference in book value and revalued value was to be transferred to the capital account of the contuning partners i.e. assessee and Shri Jitendra Agarwal. In view of such take over agreement, the new partners were admitted..

2.18 We had already mentioned that the clause 13 of the partnership deed dated 15-07- 2007 provided the partners to admit other partners on the terms and conditions as may be mutually agreed upon. Thus the terms and conditions was that stock in trade will be revalued and the merging firm will provide its expertise and financial position and they were to have benefit of development agreement. The development agreement was to build a housing complex/ commercial complex building in which both the firms would have right to some extent. In absence of any details of sharing of the built up area between two firms, we are unable to comment further. But it is clear that merging firm will get the benefit of the project. The share of profit to the erstwhile partners was to the extent of 50% in the firm constituted on 19-01-2007. As per clause 12of the partnership deed, it is mentioned that no partner shall mortgage or charge his share into partnership or any part thereof or make any person a partner with him without written previous consent of other partners. The three partners of M/s.Gold Dream Builders and Developer were considered as working partners in the partnership deed dated 19-01-207 and such partners were to be allowed remuneration in the ratio as mutually decided. These partners were required to devote their time and attention to the conduct of the affairs / day today working of the firm.

2.19 Thus the firm M/s.Krishna Villa Apartment got benefit of the services of three partners of erstwhile M/s.Gold Dream Builders and Developer. Clause 16 of the partnership deed stated that any person can include in the firm as new partner only after the clear and mutual consent of all the partners. It was further provided that any existing partner can also buy the share/interest of any other partner. If the partners wants to retire from the firm then he has to give clear notice to other remaining partners and the retiring partner will not claim any share in good will of the firm. It was further provided that no partner can substitute himself with any other person in the business of the firm except his legal heirs.

2.20 When Shri Jitendra Agarwal retired from the firm then another partnership deed was executed on 10-02-2007 and it is available at pages 41 to 48 of the paper book. In this deed, it is clearly mentioned that Shri Jitendra Agarwal due to his other business obligations gave notice to other partners of his firm to retire from the firm w.e.f. 10-02- 2007. The clauses in this partnership deed are similar to the clauses in partnership deed dated 19-01-2007. In the partnership deed dated 10-01-2007, Shri Jitendra Agarwal was having a profit sharing ratio of 12.5%. The shares of other partners were as under:-

1.	Assessee	37.5%
2.	Shri Shankar M Jethani	25%
3.	Shri Arun Bansal	8.03%
4.	Shri Meraj Un Nabi Khan	8.94%
5.	Shri Naved Saidi	8.03%

2.21 In the partnership deed executed n 10-02-2007, the profit sharing ratio was as under:-

1.	Assessee	40%
2.	Shri Shankar M Jethani	30%
3.	Shri Arun Bansal	10%
4.	Shri Meraj Un Nabi Khan	10%
5.	Shri Naved Saidi	10%

From the above, it is clear that profit sharing ratio of 12.5% of Shri Jitendra Agarwal was not transferred to the four partners of erstwhile M/s.Gold Dream Builders and Developer in case the intention was to transfer the land to the four persons of the erstwhile M/s.Gold Dream Builders and Developer then share of the erstwhile partners of M/s.Gold Dream Builders and Developer should have been increased by the share of Shri Jitendra Agarwal. The share of the assessee also stood increased from 37.5% to 40%. This fact indicate that the transaction of forming fresh deed is genuine and not sham.

2.22 The assessee also retired from the firm on 19-03-2007 and fresh partnership deed was executed and i.e. available at pages 49 to 53 of the paper book.. In this deed, it is mentioned that the assessee due to his non-availability for the business of the firm has given notice to the continuing partners of his desire to retire from partnership deed w.e.f 18-03-2007. This was accepted by the continuing partners. In the partnership deed dated 19-03-2007, the clauses in respect of retirement of the partners, the assignment of right of the partners and admission of new partners are the same as in the earlier partnership deed.

2.23 In the documentary evidences filed before the lower authorities, it is clearly mentioned that both the partners have retired on account of their other commitment relating to their own business. It is not the contention of the revenue that such facts mentioned in the partnership deed are facade. Sham means which is good in appearance but false in fcts. The word ‘sham’ also means that the act done by document executed by he parties to the sham which are intended by them , to give to third parties or to the Court, the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. The onus is on the party which wants to plead that the transaction is sham. The clauses in the partnership deed and arguments of the ld. AR indicate that the merger of the firm was not sham transaction. The three partners of the merged firm i.e. M/s.Gold Dream Builders and Developer were required to look after the day to day affairs and they were entitled to remuneration. The firm M/s.Gold Dream Builders and Developer was having expertise in building the project and marketing it.

2.24 The firm M/s.Krishna Villa Apartment entered into an agreement for developing the land and this shows that M/s.Krishna Villa Apartment was not having requisite funds. Both the firms were having their own rights in the development agreement and by merger of two firms such rights belong to reconstituted firm M/s.Krishna Villa Apartment firm.

2.25 The ld. CIT(A) has relied upon the decision of Hon'ble Apex Court in the case of Mc Dowel (supra). The Hon'ble Apex Court in the case of Union of India Vs. Azad Bachao Andolan 263 ITR 706 had an occasion to consider the law laid down in the case of Mc Dowell Company Ltd. (supra). The Hon'ble Apex Court in the case of Union of India Vs. Azad Bachao Andolan (supra) observed as under:-

“We may also refer to the judgment of the Gujarat High Court in Banyan and Berry v. Commissioner of Income-tax [1996] 222 ITR 831 at 850 where referring to McDowell's case [1985] 154 ITR 148 (SC), the court observed :-

"The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act ; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case [1958] 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity."

This accords with our own view of the matter.

In CWT v. Arvind Narottam [1988] 173 ITR 479 (SC), a case under the Wealth-tax Act, three trust deeds for the benefit of the assessee, his wife and children in identical terms were prepared under section 21(2) of the Wealth-tax Act. The Revenue placed reliance on McDowell's case [1985] 154 ITR 148 (SC). Both the learned judges of the Bench of this court gave separate opinions.

Chief Justice Pathak, in his opinion said (at page 486) :

"Reliance was also placed by learned counsel for the Revenue on McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). That decision cannot advance the case of the Revenue because the language of the deeds of settlement is plain and admits of no ambiguity."

Justice S. Mukharji said, after noticing McDowell's [1985] 154 ITR 148 (SC) case (at page 487) :

"Where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made, it has to be noted and rejected."

In Mathuram Agrawal v. State of Madhya Pradesh [1999] 8 SCC 667 at para. 12 another Constitution Bench had occasion to consider the issue. The Bench observed (page 673) :

We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents’

Hence tax planning within four corners of law is permissible.

2.26 In the instant case, we have noticed that the land is stock in trade of the firm. The Hon'ble Apex Court in the case of Shakting Trading Co. Vs. CIT, 250 ITR 871 held that when there is no cessation of business then the closing stock had to be valued at cost or market price whichever was lower. It is an established rule of commercial practice and accountancy that where there is no discontinuation of business the closing stock is to be valued at cost or market price whichever is lower. The Hon'ble Apex Court in the case of in the Chainlsukh Sampat Ram , 34 ITR 481 had an occasion to consider the importance of adopting the closing stock in the trading account. The closing stock shown on the credit side of the trading account is to balance the cost of purchases as remained at the end of the year and debited in the purchases account. In case the market price is less than the cost price then anticipated loss can be taken into account but anticipated profit in shape of appreciated value of the closing stock is not brought into the account as no prudent trader will care to show the increase in the profit before actual realization.

2.27 Before us, the ld. AR has referred to assessment order of the firm for the assessment year 2008-09. The AO while making assessment for the assessment year 2008-09 in the case of the firm has not allowed deduction on account of revaluation relating to part of the eland which has been sold. Thus the AO in the case of the firm has taxed the profit on the basis of the cost price of the land and therefore, the anticipated profit on account of revaluation has not accrued to the partners to be assessed.

2.28 The Hon'ble Apex Court in the case of ALA firm Vs. CIT, 189 ITR 285 has referred to the decision of in the case of N. Muhammad Ussain Sahib and another Vs. S.N. Adbul Gafoor Sahib and others, AIR (37) 1950 758 at page 306 and mentioned that valuation of the assets durng the subsistence of the partner is an immaterial and can be even notional. In the case of S.N. Abdul Gafoor Sahib (supra), the Hon'ble Apex Court observed “the asset at book value continues to belong to the firm of whatever fluctuations there may be in the value of that asset, the benefit or the loss of it could accrue to the firm

2.29 The ld. DR has referred to the order of the Mumbai Bench in the case of Sudhakar M Shetty (supra). In that case, one of the party threw his assets into the firm and formed the partnership. Such throwing of assets into the firm is transfer u/s 45(3) of the Act . In that case, the capital assets were revalued. The ITAT Mumbai has observed that there is divergence of view on the question as to whether there is any transfer at all by the firm in favour of the retiring partner or by the retiring partner in favour of the assessee and its continuing partner. The Mumbai Tribunal in that case observed that if instead of quantifying his share by taking accounts on fottings of notional sale, parties agrees to pay a lumpsum in consideration of retiring partner assigning or relinquishing his share or right in partnership and its assets in favour of continung partners, transaction would amount to a transfer within meaning of Section 2(47) of the Act. Section 2(47) refers to transfer of capital assets. It is not applicable to the transfer of stock in trade either by sale or otherwise as that is taxable under the head ‘business income ‘. In the case before the Mumbai Tribunal, there was a lumpsum payment.

2.30 On similar facts, ITAT Jodhpur bench in the case of ITO Vs. Shri Hanuman Das Sipani (HUF) (ITA No. 247/JU/2008 dated 22-03-2011 decided the issue in favour of the assessee. It will be useful to reproduce the para 6 from that order.

“6. We have herd both the sides, perused the records and gone thorough the orders of the authorities below. The assessee is a retired partner. The revaluation took placed in the books of account of the firm, as a result of which he fixed assets i.e. land and building value being inflated and the partners capital accounts were credited in their respective profit share ratio. Accordingly, the assessee being the partners I the firm, his capital account was credited worth Rs. 8,03,400/-. According to the ld. CIT(A) , Section 45(4) has no application to the assessee's case and same view as expressed by the Tribunal in the case of ACIT Vs. Smt. Shanty Devi Sipani (ITA No.399/JU/07 dated 19-02-2008), (supra), that anything done by the firm and any entry made in the books cannot be taxed in the hands of the partner. Since partners are consistent entities and separate from the firm, any income of the firm cannot be taxed, per se, in the hands of the partner. The revaluation entry in the books of accounts of the firm is notional and unilateral act. As per the provisions of Section 10(2)(a), the partner’s share in the total income of the firm is exempt. Therefore, the provisions of Section 45(4) relate to the case of partnership firm only and not that of its partners. Any amount credited in the capital account of a retired partner upon revaluation of assets of firm is not taxable as a capital gain as there is no transfer. In the case of CIT Vs. R Lingmallu (Raghukmar 247 ITR 801) (SC), it was held that there was no element of transfer of interest in partnership assets by the retired partner to the continuing partners and the amount received by him was not assessable to capital gains. In view of the above facts and the decision of the Hon'ble Supreme Court in the case of R Lungmallu Raghukumar (supra), we find no infirmity in the order passed by the ld. CIT(A). this ground of appeal raised by the revenue is dismissed.”

2.31 The partner’s share in the partnership is a bundle or rights. As per the classical English Partnership law cited by Linday, abd adopted by Indian Courts in Narayanapa Vs. Bhaskara Krishnapa (AIR 1966 SC 1300) and Dewas Cine Corporation 68 ITR 240 (SC), a partner’s monetary rights are two folds. Firstly , during his tenure as partner, whereas he has no specific right in any individual asset of the partnership , his right is only to receive his share of profit. Secondly, on dissolution or retirement, he has a right to a share in the net estate of the firm (i.e. assets minus liabilities and winding up expenses valued on the bais of a ntoinal sale ) as on the date of the retirement or dissolution. This bundle of right constitutes the ‘share ‘ of the partner. So when a partner retires, the accounts of the firm was made up – valuing the assets on basis of a notional sale, the liabilities and notional winding up expenses are deducted and the amount due to the retiring partner towards his share , as worked out by this arithmetic, is determined as payable to him. On retirement, the retiring partners takes away his money and the share of the continuing partners remained intact. There is no transfer of any property from the retiring partners to the continuing partners. Of course, if an assessee assigns his share to the partner as profit as per Section 29 of the Partnership Act, then it will constitute the transfer. In the partnership deed, it was clearly mentioned that continuing partner can buy or sale the share of the retired partner. Here , it is not the case where the share has been purchased by any one partner or all the partners . The partner has retired as per relevant provisions of Parntershp Act. Moreover, in the case before Bombay Tribunal, the issue was that retiring partner was paid a lumsum. The retiring partnr can have a right to assign his share. Here it cannot be a case of transfer. The Hon'ble Apex Court in the case of Sunil Sidhartha Vs. CIT, 156 ITR 509 held that introduction of capital asset by the partrner is a transfer but the consideration as reflected in the books cannot be considered as a consideration for the purpose of capital account. The Hon'ble Apex Court in the case of Sunil Siddharthbhai, 156 ITR 509 held that introduction of capital asset by the partner is transfer but the consideration as reflected in the books cannot be considered as a consideration for the purpose of capital gain. The Hon'ble Apex Court at page 522 has observed as under:-

“What is the profit or gains which can be said to accrue or arise to the assessee when lie makes over his personal asset to the partnership firm as his contribution to its capital ? The consideration, as we have observed, is the right of a partner during the subsistence of the partnership to get his share of profits from time to time and after the dissolution of the partnership or with his retirement from the partnership, to receive the value of the share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. When his personal asset merges into the capital of the partnership firm, a corresponding credit entry is made in the partner's capital account in the books of the partnership firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or the partner retires. It evidences no debt due by the firm to the partner. Indeed, the capital represented by the notional entry to the credit of the partner's account may be completely wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital account is credited. Having regard to the nature and quality of the consideration which the partner may be said to acquire on introducing his personal asset into the partnership firm as his contribution to its capital, it cannot be said that any income or gain arises or accrues to the assessee in the true commercial sense which a businessman would understand as real income or gain.”

The Hon'ble Jurisdictional High Court in the case of CIT Vs. Marudhar Hotel (P) Ltd. 269 ITR 310 had an occasion to consider the above decision of Hon'ble Apex Court and held that there is only notional consideration. The Hon'ble Jurisdictional High Court observed as under:-

“It is only where a transfer of property is for “inadequate consideration”, that the question of finding the market price can arise. As noticed above when an asset is brought into partnership the contributor partner acquires in consideration the right to obtain his share in the profits from time to time and also the right to share in the net assets of the firm on its dissolution or on his retirement in accordance with the provisions of the Partnership Act and the terms of the partnership agreement. All these rights fructify in future. The credit to his capital account is only a notional value and not the value of consideration as the same is incapable of determination.”

Hence, when partnership was reconstituted by the admitting the partners of M/s.Gold Dream Builders and Developer then the consideration was not considered for giving difference between the market value of the land and the cost price as consideration to the existing partners.

2.32 The AO in his order has not taxed Rs. 5,24,47,943/- as income under the head capital gain. Section 45(3) and Section 45(4) were introduced to plug the loopholes of avoiding tax by throwing the capital assets in the firm and thereafter transferring the same to other partner through dissolution of the firm. The Hon'ble Karnataka High Court in the case of CIT Vs. Gurunath Talkies 328 ITR 59 had an occasion to consider the case in which the facts were similar to the facts in the instant case. The only difference was in that case that the asset was not stock in trade. As a result of series of transactions of reconstitution of the firm twice, the Hon'ble Karnataka High Court held that the Section 45(4) will be applicable and the difference was to be taxed in the hands of the firm. Here the same AO while passing the assessment order in the case of the firm has taken the book value before revaluation for taxing the profit arising from part of the sale of land in subsequent assessment year.

2.33 The ITAT Chennai Bench in the case of ACIT Vs. Goyal Dresses, 126 ITD 131 held that distribution of capital asset on dissolution of a firm or otherwise cannot be extrapolated to bring retirement of one partner into ambit of this Section. In the instant case, there has been no dissolution of the firm. The partnership deed that firm will continue and cannot be dissolved due to retirement of one of the partner. Partner can retire as partnership is at will. There is a retirement of one of the partner. The Hon'ble Madras High Court in the case of Siddharth Media Holdings Pvt. Ltd. v. DCIT 260 ITR 286 had an occasion to consider the claim of the assessee of capital loss on the ground that the assessee has suffered losses in the firm for several years prior to the retirement. In this cae, the assessee was paid the balance in his capital account on settlement of accounts and it cannot be said the losses was on account of any transfer of capital. In the instant case also, the retiring partners were given their share. Hence, there cannot be any increase in profit or income.

2.34 The Hon'ble Apex Court in the case of Tribhuvandas G. Patel Vs. CIT , 236 ITR 515 had an occasion to consider the case in which one of the partner retired from the firm and received share of his profit and also share from goodwill of the firm and share in the asset of the firm. The Hon'ble Apex Court held that the same is not assessable as capital gain . It is true that at that relevant time that the provisions of Section 45(3) and 45(4) were not applicable in the statute book but still the decision will be applicable because the provisions of Section 45(4) will make the amount includible in the hands of the firm as capital gain. In the instant case, the AO is taxing it as business profit. Another interesting feature in this case is that the land was purchased by the firm in which the assessee was having 75% share. The firm made investment and got the approval for constructing the flats for housing society. The right to have a license of Green Housing Society patta is a valuable right with the firm M/s.Krishna Villa Apartment and such right still remained with the firm even after retirement of the firm.The firm in which the assessee was partners entered into a development agreement. Normally in the case of development agreement, the land owner as well as the developer share the constructed area and the investment in the constructed area is to be made by the developer. The land owner pools his land while the developers pools the fund and expertise. In the instant case, the developer firm stood merged into the firm in which the assessee was partner. Thus the rights which were held by the developer firm were also available to the firm in which the assessee was a partner. It is not a simple case where partners of the developer firm were entered into the firm in which the assessee was a partner. As we had already noticed that the stock in hand was there, therefore, there was no case of businss profit in the hands of the firm. The AO himself has not taxed such business profit in the hands of the firm. It is true that in the case of retirement of one of the partner from the firm due to reconstitution of the firm, it is being held by the Hon'ble High Court that capital gain is liable in the hands of the firm. However, some of the Hon'ble High Courts have held otherwise. In the following decisions, the Hon'ble Apex Court held that in case two views are possible then the view favourable to the assessee is to be adopted.

1. CIT Vs. . Vegetable Products Limited. , 88 ITR 192, (SC)

2. Bajaj Tempo Limited. Vs. CIT, 196 ITR 188 (SC)

3. Kerala State Industrial Development Corporation Ltd. Vs. CIT, 259 ITR 51 (SC)

2.35 Before us, the ld. DR stated that in case the amount on revaluation to the extent of amount credited in the account of an assessee is not being confirmed then the same should be directed to be considered in the hands of firm u/s 45(4)of Income Tax Act. The revaluation is of stock and not of capital asset or investment. The AO while making assessment in the hands of the firm has not given credit for revaluation which means that the revenue is of the opinion that the increase in revaluation of stock will not be considered while making assessment of the firm meaning thereby that the firm will earn profit on the basis of value of stock before revaluation. Hence the interest of revenue stands protected.

2.36 We have considered the additional evidences fled by the Department and the additional evidences filed by the ld. AR as rejoinder against the additional evidences filed. According to us, these additional evidences have no relevance for deciding the issue before us. Moreover, the additional evidences filed by the Department is not substantiated that the entry in the letter is in the handwriting of Shri Arun Lashkary and that too at the time of filing of application. We therefore, ignore these additional evidences for deciding the issue as not relevant.

2.37 The revenue has relied upon the statement of the assessee recorded during the course of search in which the assessee surrendered the amount on account of revaluation of land as undisclosed income. Kelkar Panel studied the problem of confessions and surrenders during its studies and deliberations in para 3.27 and the same is reproduced as under:-

“A cross section of people cutting across 4trade and industry complained of a high handed behaviour of raiding parties particularly while recording a statement. It was pointed out that overenthusiastic aiding parties would often coerce a ‘surrender’. As a result all follow up investigations are distracted and generally brought to a stand still. Since the surrender is not backed by adequate evidence, the tax evader invariably retracts from the statement of surrender by which time it is too late for the Department to resume investigations. Similarly, where adequate evidence is indeed found, a surrender is not necessary to establish tax evasion. Therefore, the Task Force recommends that the CBDT must issue immediate instructions to the effect that no raiding party should obtain any surrender whatsoever. Where a tax payable desires to voluntarily make a disclosure, he should be advised to make so after the search. As a result, the taxpayer will not be able to allege coercion and successfully distract investigations. All cases where surrender is obtained during the course of the search in violation of the instructions of the CBDT, the leader of the raiding party should be subjected to ‘vigilance enquiry. Further the task force also recommends that statements recorded during the search should be video recorded. This will indeed add to the confidence of the taxpayer in the impartiality of the system.”

2.38 The Finance Minister in the budget speech for the year 2003 stated that no confession shall be obtained during search and seizure operation. The instructions were followed by CBDT by issue of a circular on the lines desired by the Finance Minister. There can be an estoppel on the issue of the facts but there cannot be estoppel on the principle of law. It is not the case of the revenue that the assessee was not disclosing the amount received as a result of retirement from the firm. The assessee obtained the legal advice and was of the opinion that such revaluation is capital receipt which is not liable to tax. Hence, we feel that income cannot be added simply on the basis of surrender. The statement recorded u/s 132(4) can be rebutted by the assessee and the case of the assessee is that the amount is not liable to tax.

2.39 After considering various case laws relied upon by both the parties, we feel that the issue is to be decided in favour of the assessee because if two constructions are to possible then one has to adopt the construction which is favourable to the assessee. We had also noticed the distinguishing features in this case and it is not a simple case in which other partners joined the firm. This is a case where another firm has been taken over by the firm in which the assessee was a partner. Both the firms were having intangible rights arising from development agreement and right of constructing a housing / commercial complex and none of the firm valued such rights in the form of monetary consideration. Such rights remained with the firm even after retirement of the assessee. We therefore, hold that the ld. CIT(A) was not justified in confirming the addition of Rs. 5,24,47,943/-.

2.40 In respect of charging of interest, we hold that charging of interest is mandatory and the assessee will get consequential relief.

4. In the result, the appeal of the assessees is allowed

The order is pronounced in the open Court on 06-01-2012.

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