Income Tax Appellate Tribunal - Panji
Smt. Vasumati Prafullachand ... vs Deputy Commissioner Of Income-Tax,, on 13 December, 2017
आयकर अपीलीय अिधकरण, पुणे ायपीठ "ए
ए" पुणे म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
ी डी.
डी क णाकरा राव , लेखा सद य
एवं ी िवकास अव थी,
अव थी याियक सद य के सम
BEFORE SHRI D.KARUNAKARA RAO, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No. 161/PUN/2015
िनधा रण वष / Assessment Year : 2008-09
Smt. Vasumati Prafullachand Sanghavi,
At Post Utran, Taluka Erandol,
Jalgaon - 425 109
PAN : AMFPS2502J .... अपीलाथ /Appellant
Vs.
DCIT, Circle-1, Jalgaon .... यथ / Respondent
Assessee by : Shri Sunil Pathak
Revenue by : Shri Rajeev Kumar, CIT
सुनवाई क तारीख
/ घोषणा क तारीख /
Date of Hearing : 07.12.2017 Date of Pronouncement: 13.12.2017
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
This appeal is filed by the assessee against the order of CIT(A)-2, Nashik, dated 29-12-2014 for the Assessment Year 2008-09.
2. Grounds raised by the assessee in the appeal are extracted as under :
"The following grounds are taken without prejudice to each other-
On facts and in law,
1. The learned CIT(A) erred in confirming the validity of reasst. proceedings without appreciating that the reopening u/s 148 was bad in law and consequently, the reasst. u/s 147 be declared null and void.
2. The learned CIT(A) erred in holding that the amount received of Rs.21,52,73,777/- at the of retirement from the firm is taxable as income from other sources u/s 56(2)(vi).2 ITA No.161/PUN/2015
Smt. Vasumati Prafullachand Sanghavi
3. The learned CIT(A) erred in holding that the amount received of Rs.21,52,73,777/- by the assessee at the time of her retirement from the partnership firm M/s. Deepak Foods was without consideration and accordingly, the said amount ought to have been taxed as income from other sources u/s 56(2)(vi).
4. The learned CIT(A) failed to appreciate that the amount received by the assessee was in consideration of her retirement from the partnership firm M/s. Deepak Foods and therefore, it was incorrect to hold that the amount of Rs.21,52,73,777/- was received by the assessee without consideration and hence, there was no question of making any addition of the said amount u/s 56(2)(vi).
5. The learned CIT(A) ought to have appreciated that the partnership firm M/s, Deepak Foods had created goodwill in its balance sheet and the corresponding amount of the goodwill created was credited to the account of the assessee and other partner and therefore, the conclusion of the learned CIT(A) that the amount received by the assessee was without consideration is totally incorrect and the addition confirmed u/s 56(2)(vi) may kindly be deleted.
6. The learned CIT(A) erred in not following the decision of Hon'ble ITAT in the case of M/s. Shakuntala S. Sanghavi wherein on identical set of facts, Hon'ble ITAT had held that the amount received by the assessee at the time of her retirement from the partnership firm M/s. Deepak Foods was not taxable as an income of the assessee.
7. The learned CIT(A) erred in confirming the addition of Rs.21,52,73,777/- without appreciating the correct facts of the case and the addition may kindly be deleted.
8. The learned CIT(A) erred in confirming the levy of interest u/s 234A without appreciating that the assessee had filed her original return of income and hence, there was no reason to levy the interest u/s. 234A.
9. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal."
3. Briefly stated relevant facts of the case are that the assessee is an individual and an ex-partner in M/s. Deepak Foods, a partnership firm of Jalgaon. Assessee filed the return of income on 30-09-2008 declaring total income of Rs.88,330/-. AO noticed that the amount of received by the assessee from M/s. Deepak Foods on account of relinquishing her share in favour of Sanghavi Foods Pvt. Ltd. has escaped assessment within the meaning of section 147 of the I.T. Act. In the reassessment, the AO determined the assessed income at Rs.21,52,73,777/-.
3ITA No.161/PUN/2015
Smt. Vasumati Prafullachand Sanghavi
4. At the relevant point of time, the assessee has capital balance of Rs.13,78,223/- with the said M/s. Deepak Foods and on the eve of retirement, assessee and another partner (Smt. Shakuntala S. Sanghavi), received an equal amounts of Rs.21,53,73,777/- each for relinquishing their rights in the firm. The taxation of the said amount received by the assessee is the subject matter of the present dispute. AO held the same as taxable under the 'income from capital gains'. Alternatively, the said amount was taxed as 'income from other sources'. Contents of Para Nos. 8 to 16 of the assessment order are relevant.
5. Similar addition was made in the assessment of Smt. Shakuntala S. Sanghavi, who is the other retiring partner of M/s. Deepak Foods in respect of her receipt of Rs.21,53,73,777/-. Other relevant facts relating to the taxation of the said amount in the hands of Smt. Shakuntala S. Sanghavi and the subsequent legal developments include that assessee is an individual and was a partner along with Smt. Shakuntala S. Sanghavi in M/s. Deepak Foods. In the return of income, both the partners furnished a note stating that the credit balance in capital account of the assessee includes share of Goodwill received from M/s. Deepak Foods on retirement from the firm. Assessment in the case of Smt. Shakuntala S. Sanghavi was completed. Subsequently, the assessment was set aside by the CIT-II, Nashik on 30-03-2013 by the revision proceedings u/s.263 of the Act; whereas in the case of the assessee, the proceedings u/s.148 of the Act were initiated by the AO for taxing the amount of Rs.21,53,62,107/-. AO reopened the assessment of the assessee on the ground that amount of Rs.21,52,73,777/- 4 ITA No.161/PUN/2015
Smt. Vasumati Prafullachand Sanghavi received by the assessee on her retirement as a partner from the partnership firm M/s. Deepak Foods is taxable as capital gains.
6. During the reassessment proceedings, the assessee made his submissions before the AO stating that reopening of the assessee is bad in law. Assessee relied on the Apex Court's judgment in the case of ACIT Vs. Mohanbhai Pamabhai and others 165 ITR 166 for the legal proposition that when a partner retires from the partnership firm and is paid an amount, such payment is towards settlement of his interest in the partnership firm and is not towards transfer of any capital asset. However, AO rejected the submissions made by the assessee.
7. During the year under consideration, assessee retired as a partner from M/s. Deepak Foods and undisputedly received an amount of Rs.21,66,52,000/-. The said amount was claimed in the return of income and the claim was accepted by the AO in the regular assessment as exempt. However, in the reassessment proceedings u/s.147 of the Act, the AO taxed the amount of Rs.21,52,73,777/- as income from long term capital gains. AO relied upon the decision of Pune Bench of the Tribunal in the case of Shevantibhai C.Mehta S. ITO (2004) 83 TTJ 542. Further, the AO alternatively assessed the said amount of Rs.21,52,73,777/- as income from other sources. AO computed the amount of goodwill amounting to Rs.16,13,514/- and taxed the same as income from capital gains.
8. Meanwhile, in the context of the revision order of the CIT in the case of Smt. Shakuntala S. Sanghavi, the said order passed u/s.263 was quashed by the Hon'ble Tribunal both on facts and merits of the case. Further, consequential order passed by the AO u/s.143(3)(ii) 5 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi r.w.s. 263 of the Act was also dismissed and the original order of the AO was restored by the decision of the Tribunal in the case of Smt. Shakuntala S. Sanghavi.
9. Thus, as the things stand, the receipts received by the retiring partner, Smt. Shakuntala S. Sanghavi was the subject matter of revision proceedings by the CIT as well as the fresh assessment proceedings and the Tribunal decided the issue against the Revenue. The decision of the Tribunal in the case of Smt. Shakuntala S. Sanghavi Vs. ACIT in ITA No. 956/PN/2013 relating to A.Y. 2008-09, order dated 21-03-2014 is relevant. Further, Ld. Counsel for the assessee submitted that the said order of the Tribunal was not available at the time of reassessment proceedings in the case of the present assessee.
10. During the First Appellate proceedings, on the appeal against the reassessment order in the present assessee's case, the facts about the finality of the issue by the Tribunal on the taxability of the said receipts was placed before the First Appellate authority. The CIT(A) considered the said decision of the Tribunal in the case of Smt. Shakuntala S. Sanghavi Vs. ACIT (supra) and observed that the Tribunal did not go into various aspects relating to the application of provisions of section 56(2)(vi) of the Act. Accordingly, the CIT(A) held that the amount received by the assessee from M/s. Deepak Foods constitutes a gift taxable under the above said provisions of section 56 of the Act. Contents of Para 9 to 9.3 of the order of the CIT(A) are relevant. For the sake of completeness, relevant lines from Para 9.1 to 9.3 are reproduced hereunder :
"9.1 . . . . . . . . .This being the case, the Hon'ble Tribunal also has not examined the applicability of section 56(2)(vi) of the Act as the CIT has not argued from the point of view of section 56(2)(vi). Therefore, with 6 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi due respect, it can be said that this issue has not been considered by the Hon'ble Tribunal with reference to the new facts and to section 56(2)(vi) of the I.T. Act.
9.2 In my considered view, the said amounts received by the retired partners are without consideration and therefore, the provisions of section 56(2)(vi) of the Act are attracted.
9.3 To sum up, the amount of Rs.21,52,73,777/- cannot be taxed as long term capital gains. However, the amount of Rs.21,52,73,777/- [Rs.21,66,52,000/- - Rs.13,78,223/- (capital account balance)] is to be taxed as income from other sources u/s.56(2)(vi) of the I.T. Act. The AO is directed accordingly."
11. Aggrieved with the above order of the CIT(A), the assessee is in appeal before us with the grounds extracted above.
12. Ld. Counsel for the assessee explained the above facts of the case and the fact relating to the surrendering of all rights in the firm by the assessee in order to receive the said receipts of Rs.21,52,73,777/- from the firm. As per the Ld. Counsel, considering the decision of the Tribunal in the case of Smt. Shakuntala S. Sanghavi (supra) the present grounds stand covered in favour of the assessee. Further, as per Ld. Counsel for the assessee, the issue of taxation of the said receipt under the head 'income from other sources' also covers the taxability of the receipts under the provisions of section 56(2)(vi) of the Act. Ld. Counsel argued that the said provisions of section 56(2)(vi) of the Act are pressed into service only when the said service is received without consideration. However, in the present case, the assessee surrendered all rights in the firm and the same constitutes consideration.
13. Referring to above points, Ld. Counsel for the assessee submitted that assessee received Rs.21,52,73,777/- from M/s. Deepak Foods. Similar amount was received from the said company by Smt. Shakuntala S. Sanghavi. This issue of taxation of the said amount u/s. 48 and alternatively u/s.56 of the Act was subject 7 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi matter of the proceedings u/s.263 r.w.s. 143(3) of the Act and the Tribunal deleted the addition. Therefore, attempting to tax the similar amount in the hands of the present assessee is duplication of the same futile exercise by the Revenue. In this regard, Ld. Counsel for the assessee brought our attention to the decision of the Tribunal in the case of Smt. Shakuntala S. Sanghavi (supra) in general and the contents of Para Nos. 6.5 and 6.8 in particular for demonstrating the reasons for not taxing the said amount in the said section 48 and 56 of the Act respectively. For the sake of completeness, we proceed to extract the said paragraphs as under :
"6.5 With regard to the issue whether the amount received is taxable as long term capital gains. We find that ITAT, Pune in the case of Rajnish Bhandari [ITA No. 469/PN/11] has held that the amount received over and above the capital account balance at the time of retirement is not taxable. While arriving at above decision, ITAT had relied upon another decision of ITAT, Pune in the case of Riyaz Shaikh [ITA No.352/PN/06]. The relevant portion of the Rajnish Bhandari is as under:
"2. The issue raised by the Revenue in this appeal is as to whether the amount of Rs 54,59,083/- received by the assessee on retirement from the partnership firm is liable to be taxed as long term capital gain arising on transfer of partnership rights. The facts, in brief, are that the assessee, a partner in various partnership firms , retired from the partnership firm M/s Raviraj Associates w.e.f. 31.3.2007, relevant to the assessment year 2007-08, vide deed of retirement of the same date. He was a partner to the extent of 37.5% of the shares and was paid Rs 54,59,083/- over and above the balance in his capital account. The assessee claimed this amount as capital receipts not liable to tax. The Assessing Officer, however, taxed the said amount as long term capital gain. The Assessing Officer derived support from a decision of the Pune Bench of the Tribunal in the case of Shevantibhai C. Mehta v. ITO 83 TTJ 542 (Pune). The assessee took up the matter in appeal before the Commissioner of Income- tax (Appeals).
3. Before the Commissioner of Income-tax (Appeals), assessee relied on a subsequent decision of our co-ordinate Bench in the case of Mr Riyaz A Shaikh v. ITO vide ITA No 352/PN/06 dated 29.10.2010, wherein the Tribunal held that amounts received by the partner on his retirement are exempt from capital gains tax. The Commissioner of Income-tax (Appeals) has since deleted the impugned addition and against this decision, the Revenue is in appeal before us.
4. The learned departmental Representative supported the order of the Assessing Officer. According to the learned Departmental Representative, the additional consideration received by the assessee was on account of relinquishment of 8 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi his pre existing rights in the partnership firm, and therefore, the same was in the nature of capital gain liable to tax as per the provisions of sections 45 read with section 2 (47) ft) & (ii) of the Act.
5. On the other hand, the learned Counsel for the respondent- assessee defended the order of the Commissioner of Income-tax (Appeals) and filed a copy of the order of our co- ordinate Bench in the case of Mr Riyaz A Shaikh (supra) in support of the stand of the assessee.
6.8 The CIT on an alternate basis held that the amount of ₹ 21.52 Crs. is taxable as income from other sources, simply in case the amount received on retirement is not taxable as capital gain. The amount received could not be taxed as income from other sources, simply because a receipt is not a capital gain chargeable to tax u/s.45. One should not jump to the conclusion that the receipt in question is not a capital receipt at all. There can be capital receipts which are not chargeable to tax u/s.45 of Act. Merely because the receipt in question is not taxable as a capital gain it could not be concluded that the impugned receipt is a revenue receipt chargeable to tax as income from other sources. This view is fortified by the decisions Mumbai Bench in the case of Niyati B Yodh [4 SOT 941 (Mum)], wherein, the payment received by legal heir of tenant under a tripartite agreement between such legal heirs, landlord and purchaser for handing over peaceful possession to the purchaser being capital receipt could not be brought to tax as income from other sources. The similar view has been expressed in the case of CIT Vs. Smt. T.P. Sidhwa (1982) 133 ITR 840 (Bom), wherein it was held that the income from house property earned by one who was not owner was held not assessable under the head income from other sources. The mere fact that rent received in the absence of ownership could not be brought to charge u/s.9 would not enable the revenue to bring it under the residuary head i.e. "income from other sources."
14. On perusal of the said para 6.5, we find the Tribunal relied heavily on the decision of Coordinate Bench of the Tribunal in the case of Rajnish Bhandari in ITA No.469/PN/11 and another decision of the Tribunal in the case of Riyaz Shaikh in ITA No.352/PN/2006. We find the decision of the Tribunal in the case of Riyaz Shaikh (supra) has been confirmed by the jurisdictional High Court wherein inter alia it is held that the amount received at the time of retirement is exempt from tax. Contents of relevant lines are extracted here as under :
"6. We have carefully considered the rival contentions. We find that the Commissioner of Income-tax (Appeals) has decided the issue in favour of the assessee by following the order of our co- ordinate Bench in the case of Mr Riyaz A Shaikh (supra), wherein on identical issue, the Tribunal has held as under:9 ITA No.161/PUN/2015
Smt. Vasumati Prafullachand Sanghavi We have carefully considered the rival submissions and perused the orders of the authorities below. As noted earlier, the short point involved in this appeal relates to taxability of amount received by the assessee on retirement from partnership firm. The Hon 'ble Supreme court in the case of Mohanbhai Pamabhai (supra) following its judgment in the case of Sunil Siddharthbhai v. CIT156ITR 509 (SC) held that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there is no transfer of interest of the partner in the goodwill, and no part of the amount received is assessable as capital gain under section 45 of the Act. The judgment of the Humble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) reported as 91 ITR 393 (Guj) was affirmed. Subsequently, in the case of CIT v R Lingmallu Raghukumar, 247 ITR 801 (SC), the Supreme Court held, while affirming the principle laid down in the case of Mohanbhai Pamabhai (supra) that when a partner retires from the partnership firm and the amount of his share in net partnership assets after deduction of liabilities is determined, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners and the amount received by the retiring partner is not 'capital gain' under section 45 of the Act. Further, the learned counsel for the appellant has correctly pointed out that the decision of the Hon'ble Bombay High Court in Tribhuvandas G Patil (supra) followed in the case of NA Mody (supra) has been reversed by the Hon 'ble Supreme court in the case of Tribhuvandas G Patel reported in 236 ITR 515 (SC) on this aspect of the matter. In fact, the Hon'ble Bombay High Court in a recent decision in the case of Prashant S Joshi (supra) has noted the aforesaid legal position. In this circumstances the reliance placed by the authorities below on the judgment of the Hon 'ble Bombay High Court in the case of Prashant S Joshi (supra) has also noted the omission of section 47(ii) of the Act and insertion of section 45(4) of the Act with effect from 1.4.1988. Considering the entirety of the legal position, it has been affirmed by the Hon'ble High Court that amounts received by the partner on his retirement, are exempt from capital gains tax. In this view of the matter, we find it appropriate to allow the claim of the assessee and accordingly the order of the CIT(A) is set aside. The AO is directed to delete the impugned addition. Thus, in Ground Nos 2 & 3, assessee succeeds as above."
Therefore, we do not find any error in the order of the Commissioner of Income-tax (Appeals) and accordingly, affirm his order. The revenue fails on this Ground of appeal." Nothing contrary was brought to our knowledge on behalf of revenue with regard to above legal preposition. The assessee further clarified that the decision of ITAT, Pune in the case of Riyaz Shaikh has been confirmed by Hon'ble Jurisdictional of Bombay High Court, inter alia held that the amount received at the time of retirement is exempt from tax. The relevant operative para of the said order is as under:
"2. We find that by the impugned order, the Tribunal while holding that amounts received by a partner on his retirement from partnership firm are exempt from capital gains tax relied upon the decision of this Court in the matter of Prashant S. Joshi V/s. Income Tax Officer & Anr. reported in [2010] 324 ITR 154 (Bom). Counsel for the revenue is unable to point out as to 10 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi how the decision in the matter of Prashant S. Joshi (supra) inter alia holding that no capital gains are payable by an erstwhile partner on amounts received on retirement would not be applicable to the present case. The only submission on behalf of the revenue is that there was an earlier decision of this Court in the matter of N.A. Mody V/s. CIT reported in [1986] 162 ITR 420 and it has not been considered in the decision rendered in the matter of Prashant S. Johsi (supra).
3. In the impugned order, the Tribunal does refer to the decision of this Court in the matter of N.A. Mody (supra) and states that it follows the decision of this Court in the matter of CIT V/s. Tribhuvandas G. Patel reported in 115 ITR 95 and the same has been reversed by the Apex Court in Tribhuvandas G. Patel V/s. CIT reported in 263 ITR 515. This Court in the matter of Prashant S. Joshi (supra) has also referred to the decision of Tribuvandas G. Patel (supra) rendered by this Court and its reversal by the Apex Court. Moreover, the decision of this Court in the case of Prashant S. Joshi (supra) placed reliance upon the decision of the Supreme Court in the case of CIT V/s. R. Lingamallu Rajkumar reported in [2001] 247 ITR 801, wherein it has been held that amounts received on retirement by a parnter is not subject to capital gains tax. In the above circumstances, we see no reason to entertain the proposed question of law'' Again, nothing contrary was brought to our knowledge on behalf of revenue with regard to development on the issue. We find that the claim made by the assessee is correct. The CIT has relied upon the decision in the case of Shevantibhai C. Mehta (supra) which was considered in the case of Rajnish Bhandari (supra) inter alia held that the amount received on retirement from partnership is not taxable. Secondly, the Hon'ble Bombay High Court in the case of Riyaz Shaikh (supra) has also affirmed that the amount received by a partner at the time of retirement is not taxable. Thus, considering the recent decisions of Jurisdictional Bombay High Court and ITAT, Pune as discussed above, the order of Assessing Officer cannot be said to be erroneous as to be prejudicial to the interest of revenue to invoke the provisions of section 263 of Act.
6.7 Regarding the contention of CIT that the entire transaction was an arranged transaction. According to him, the amount received by the assessee as goodwill was not correct since the goodwill of M/s. Deepak Foods was much less. The copy of the balance sheet of Deepak Foods for F.Y. 2007-08 has been placed on pages 123 to 129 of the Paper Book filed by assessee reveals that the total revenue was ₹ 9.19 Crs. and the net profit was Rs.85.49 lakhs. The concerned CIT in his order has considered the turnover and profit of M/s. Deepak Foods for the earlier years and has held that the goodwill should be computed as per the super profit method. According to the CIT, the goodwill as per the super profit method would be worked out at a much lower figure. In this regard, we find that the CIT has not appreciated the fact that Lesma Ltd. had acquired ₹ 1.33 Crs. share capital in M/s. Sanghavi Foods Pvt. Ltd. at a premium of Rs.67.09 Crs and the Sanghavi Foods is a related concern. Now, for F.Y. 2007-08, the turnover of Sanghavi Foods was ₹ 6.02 crs and it had incurred a loss of ₹ 55 lacs. Thus, going by the logic of the CIT, there was no reason as to why Lesma Ltd. paid ₹ 67.04 Crs. for acquisition of shares of Sanghavi Foods when its goodwill as per the super profit method worked out to much lower a figure. This demonstrates that in the commercial world, the sale and purchase transactions are not entered into as per the book results but they are entered into considering the future potential of a business which a purchaser 11 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi anticipates. In its facts and circumstances, M/s. Deepak Foods had a much stronger financial potential as compared to M/s. Sanghavi Foods. The CIT has not appreciated that M/s. Deepak Foods had a brand name and its product was having good market at the relevant point of time. Thus, the amount invested in M/s. Deepak Foods and M/s. Sanghavi Foods is on account of the brand name 'Nilons', dealer network, customer loyalty, etc. The CIT has not adopted practical approach while determining goodwill. He failed to appreciate the other factors like brand name and customer base, which play a very vital role in determining the quantum of goodwill. Considering these factors, the amount received is reasonable. The CIT has not properly appreciated the under current factors in its commercial background, which is not justified. In view of above legal discussion, the amount received by assessee is exempt from tax."
15. The above extracts from the order of the Pune Bench of the Tribunal in the case of Smt. Shakuntala S. Sanghavi (supra), and the order of the Tribunal in the case of ITO Vs. Shri Rajnish M. Bhandari in ITA No.469/PN/11, order dated 17-07-2012 and the judgment of Hon'ble Bombay High Court CIT Vs. Mr. Riyaz Sheikh vide Income Tax Appeal No.1909 of 2011 judgment dated 26-02-2013 goes to suggest that the receipts of this kind are not to be taxed under the head 'income from capital gains' as well as under the head 'income from other sources' in general.
16. So far we have discussed the background facts by which assessee as well as Smt. Shakuntala S. Sanghavi received identical amounts of Rs.21,52,73,777/-. The facts relating to taxation of the same in the hands of Smt. Shakuntala S. Sanghavi by virtue of the provisions of section 263 r.w.s. 143(3) of the Act were also discussed. The said orders of the Revenue were not approved by the order of the Tribunal which is evident from the orders of the Tribunal in the case of Smt. Shakuntala S. Sanghavi (supra). Thus, the non-taxability of the said receipt under the head 'capital gains' as well as under the provisions of section 56 of the Act, i.e. under the head 'income from other sources' has also reached finality.
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Smt. Vasumati Prafullachand Sanghavi
17. That leaves, another aspect of taxability of the said receipt under the specific provisions of section 56(2)(vi) of the Act which came up for the first time in this case, as raised by the CIT(A). Aggrieved with this specific issue which is centric to section 56(2)(vi) of the Act, assessee raised various grounds in the appeal (Ground Nos. 2 to 7 in the appeal of the assessee). We need to adjudicate this aspect. The ground-wise adjudication is given in the following paragraphs.
18. Ground No. 1 raised by the assessee relates to reopening of the assessment u/s.148 r.w.s. 147 of the Act.
19. Before us, Ld. Counsel for the assessee submitted that the same is not pressed in view of the covered nature of the issue on merits. On hearing both the parties on this legal issue and considering the concession given by the Ld. Counsel for the assessee, we dismiss the same as 'not pressed'.
20. Ground No.2 relates to the decision of the CIT(A) in holding that the amount received of Rs.21,52,73,777/- on the retirement of the partner from the firm is taxable u/s.56(2)(vi) of the Act. Ground Nos. 3 to 7 supports the above issue raised in Ground No.2 of the appeal of the assessee.
21. In the said Grounds No. 3 to 7, it is the argument of the assessee that the CIT(A) ignored the fact that the said amount was received by the assessee from the firm without consideration and therefore, the provisions of section 56(2)(vi) are not to be invoked on the facts of the case. Otherwise, the CIT(A) held that the said amount received by the assessee at the time of retirement from the firm was without any consideration. Therefore, we have to now adjudicate 13 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi here if the said amount was received by the assessee and other co- partner Smt. Shakuntala S. Sanghavi 'without any consideration' or 'with consideration'.
22. On this issue, parties have made their submissions. Written submissions by the Ld. Counsel for the assessee in this regard in the form of NOTE are extracted as under :
"1. This is an appeal passed against the order passed by the learned CIT (A). The assessee was a partner in the firm M/s. Deepak Foods which was engaged in the business of producing Tutifruti. M/s. Deepak Foods used to sell the product under the brand name Nilons. The assessee retired as a partner in M/s. Deepak Foods on 17.03.2008. At the time of retirement, the assessee received total amount of Rs.21,66,52,000/-. In the return filed by the assessee for A.Y. 2008 - 09, the assessee did not offer any amount to tax which was received by her at the time of retirement from the partnership firm.
2. The assessee and Mrs. Shakuntala Sanghavi were partners in M/s. Deepak Foods having share of 49.8% each in the profits and losses of the firm. One foreign company called Lesma Ltd. acquired 50% of the interest in Sanghavi Group which is manufacturing pickles, sauces, Tutifruti, etc. under the brand name "Nilon". Accordingly, M/s. Lesma Ltd., invested Rs.67.09 Crs. in a company of the assessee group called Sanghavi Foods Pvt. Ltd. with the understanding that they would have 50% of the share in the assessee group. Later on, Sanghavi Foods Pvt. Ltd. invested Rs.52.42 Crs. in Deepak Foods and out of the said amount Rs.21.52 Crs. was paid to the assessee on her retirement from M/s. Deepak Foods. Similarly, an equal amount was paid to Mrs. Shakuntala Sanghavi and she also retired from the firm. Thus, Lesma acquired 50% interest in Sanghavi businesses.
3. The A.O. taxed the amount received by the assessee of Rs.16,13,514/- on her retirement as long term capital gains on the ground that the same could pertain to the actual good will of the firm. He taxed the balance amount of Rs.21.36 Crs. as income from other sources in the hands of the assessee.
4. The assessee went in appeal to CIT(A) and submitted that on identical facts ITAT, Pune in the case of Mrs. Shakuntala Sanghavi (page 43 to 58 of Paper Book) has held that in view of Bombay H.C. decision in the case of Riyaz Shaikh and ITAT Pune decisions in the cases of Rajanish Bhandari and Riyaz Shaikh, the additional amount receivable by a partner on retirement from a firm is not to be taxed as capital gains. Further, in paras 6.8 to 6.10 of its order, ITAT, Pune has held that such a receipt cannot be taxed as income from other sources.
5. The CIT(A) held that in view of the ITAT order the additional amount received by the assessee on her retirement cannot be taxed as capital gains but he held that the amount can be taxed u/s 56(2)(vi) as income from other sources in her hands. This section is applicable in a case where an assessee receives a sum of money without any consideration. According to him, this provision was not considered by ITA T, Pune in the case of Shakuntala Sanghavi and hence, that decision is not applicable in this context. Accordingly, he taxed this 14 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi compensation of Rs.21.52 Crs. as income from other sources u/s 56(2)(vi) in the hands of the assessee.
6. The assessee submits that the issue in this case is fully covered by ITAT decision in the case of Shakuntala Sanghavi. As the CIT(A) himself agrees, ITAT has clearly held that the additional amount received by Shakuntala Sanghavi on her retirement as a partner from Deepak Foods is not taxable as capital gains in view of Bombay H.C. decision. Further, it also held very clearly in para 6.8 that such a capital receipt cannot be taxed as income from other sources also. In this context, it followed Bombay H.C. decision in the case of T.P. Sidhva [133 ITR 840] and ITAT, Mumbai Bench decision in the case of Niyati Yodh [4 SOT 941]. These decisions are placed on pages 9 to 45 of legal compilation. In these cases, it is held that simply because a particular receipt is not taxable under a particular head of income, it cannot be brought to tax under the residuary head as income from other sources. Once, the nature of income is classified under a particular head, one had to look only to the corresponding computing section for the purposes of chargeability to tax. Accordingly, the assessee submits that Hon'ble Tribunal in the case of Shakuntala Sanghavi has considered the aspects as to whether the income could be taxed as income from other sources or not and the CIT(A) has clearly erred in holding that ITAT has not considered this aspect.
7. After all, the addition u/s 56(2)(vi) would come within the purview of income from other sources only. ITAT in the case of Shakuntala Sanghavi has clearly held that the additional amount on retirement cannot be taxed as income from other sources. Thus, it has considered the various clauses of section 56 and then only it has given the above decision. Just because, ITAT has not referred to the specific sub section i.e. section 56(2)(vi), it does not mean that ITAT has not considered it. Accordingly, CIT(A) is not justified in holding that ITAT has not considered the taxability of u/s 56(2)(vi).
8. Further, the CIT(A) has grossly erred in holding that the receipt on retirement from the firm in the hands of the assessee can be taxed as income u/s 56(2)(vi). This section applies to a case wherein the assessee receives sum of money without consideration then such a receipt is taxable as an income. For example, a gift would constitute income. In our case, assessee on her retirement has surrendered her right as a partner in the firm. She surrendered her right, title, interest in the firm, M/s. Deepak Foods on her retirement and therefore, she got this compensation. Hence, it cannot be held that she received the compensation without any consideration. Accordingly, the CIT(A) has clearly erred in invoking this section and taxed the amount as income from other sources in the hands of the assessee.
9. As already clarified, the assessee submits that her case is fully covered by the ITAT decision in the case of Shakuntala Sanghavi and the amount received on her retirement from the firm cannot be taxed as income from other sources in her hands. Accordingly, the assessee's appeal may kindly be allowed."
23. From the above, it is the case of the assessee that the said amount was received by the assessee in response to surrender of her right as a partner in the firm. She surrendered her right, title, interest in the firm M/s. Deepak Foods on her retirement. In return, 15 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi she got this compensation of Rs.21,66,32,000/-. Hence, it cannot be held that she received the compensation without any consideration.
24. This being the undisputed facts of the case, we have to examine whether the provisions of section 56(2)(vi) of the Act apply to the facts of the present case. For this purpose, the said clause (vi) of section 56(2) is extracted as under :
"(vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons, on or after the 1st day of April, 2006 [but before the 1st day of October, 2009], the whole of the aggregate value of such sum:
......
.......
25. The above clause (vi) indicates the requirements of receiving of any sum and without consideration. In other words, the provisions are very specific and that the said clause (vi) will press into service only when any sum is received/and received without consideration. These two conditions need to be fulfilled if the above provisions are applied validly.
26. In the light of the above facts as well as the legal position, we heard the Ld. DR for the Revenue as well on this specific issue relating to the applicability of provisions of section 56(2)(vi) of the Act qua the 'without consideration'. It is the case of the Ld. DR for the Revenue that the order of the CIT(A) is heavily relied, i.e. the operational paras (Para No.9.1 to 9.3 of the order) which are already extracted in Para No.10 of this order. Further, it is the case of the CIT(A) that assessee received the said amount of Rs.21,52,73,777/-, as is the case with Smt. Shakuntala S. Sanghavi and the same is received without consideration. As such, the order of the CIT(A) is 16 ITA No.161/PUN/2015 Smt. Vasumati Prafullachand Sanghavi deficient on reasons for not treating the rights surrendered by the partners, i.e. assessee and Smt. Shakuntala S. Sanghavi to the firm, as the adequate consideration for receiving the said amount. Therefore, in our view, the said finding of the CIT(A) as given in Para Nos. 9.1 to 9.3 suffers from major setback on this issue of surrender of rights/share in the firm for receipt of said consideration by the partners. As such, it is not the case of the Revenue that the assessee continues to be the partner of the firm even after the receipt of the consideration and the assessee has not surrendered the rights of every kind in the firm. From this perspective, the order of the CIT(A) which decided the issue against the assessee relying on the said provisions of section 56(2)(vi) of the Act, is erroneous and therefore, the said order of CIT(A) is required to be reversed and the same is in favour of the assessee. Accordingly, Ground Nos. 2 to 7 by the assessee are allowed.
27. Ground No.8 raised by the assessee is consequential in nature and Ground No.9 is general in nature. Therefore, the said grounds are dismissed as such.
28. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on this 13th day of December, 2017.
Sd/- Sd/-
(VIKAS AWASTHY) (D. KARUNAKARA RAO)
याियक सद य /JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 13th December, 2017.
सतीश
17
ITA No.161/PUN/2015
Smt. Vasumati Prafullachand Sanghavi
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT(A)-2, Nashik
4. CIT-2, Nashik
5. िवभागीय %ितिनिध, आयकर अपीलीय अिधकरण, "A Bench"
Pune;
6. गाड फाईल / Guard file.
आदेशानुसार/ BY ORDER,स
स यािपत ित //True Copy//
//True Copy// Senior Private Secretary
आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune