Income Tax Appellate Tribunal - Jaipur
Ito, Alwar vs Kundan Lal Badshah, Alwar on 10 March, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 383/JP/2014
fu/kZkj.k o"kZ@Assessment Year : 2010-11
The Income Tax Officer, cuke Sh. Kundan Lal Badshah,
Ward-1(1), Vs. Plot No.-109, Anand Nagar,
Alwar. Khairthal, Alwar.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: ABOPB 2616 E
vihykFkhZ@Appellant izR;FkhZ@Respondent
jktLo dh vksj ls@Revenue by : Shri Prithivi Raj Meena (Addl. CIT)
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s Assessee by : Shri P.C. Parwal (C.A.)
lquokbZ dh rkjh[k@ Date of Hearing : 01/03/2017
mn?kks"k.kk dh rkjh[k@ Date of Pronouncement:10/03/2017
vkns'k@ ORDER
PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the Revenue against the order of ld. CIT(A), Alwar dated 14.03.2014 for A.Y. 2010-11. The sole ground of appeal taken by the Revenue is as under:-
"(i) The Commissioner of Income Tax (Appeals), Alwar has erred in law as well as on the facts and circumstances of the case in deleting the addition of Rs.1,18,75,507/- u/s 50C of the Act made by the AO on a/c of Short Term Capital Gain in the hands of the assessee." 2 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
2. The facts and the chronology of the events relevant for the issue under consideration are as under:
(i) Assessee has purchased agriculture land at Khasra no.230 (0.62 hectare) at village Naurangabad Tehsil Alwar on 23.06.2006 for Rs.210,800/-.
(ii) Thereafter, assessee formed a partnership firm on 19.07.2006 in the name of "M/s Swami Grit Udyog" in which he alongwith with Smt. Indu Bai were equal partners. As per clause 11 of the partnership deed, the assessee contributed the aforesaid agriculture land as his capital contribution in the Firm. As per the assessee, though the land remained in the name of the assessee in the revenue records, it became the property of the Firm and shown in the Firm's Balance Sheet.
(iii) The Firm has purchased another agriculture land at Khasra no.228 (0.12 hectare) for Rs.52000/- and Khasra no. 231 (0.27 hectare) for Rs.116100/- at village Naurangabad, Tehsil Alwar on 24.07.2006 in the name of one of its partners i.e, the assessee Sh. Kundan Lal Badshah.
The firm has debited this amount in Land A/c in its books of accounts. 3 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
(iv) Assessee has not reflected these three pieces of land in his balance sheet. It is only the firm which has shown all the three pieces of land in its Balance Sheet.
(v) The said Khasra No. 230 (0.62 hectare) was converted for industrial use vide order dated 24-02-2007 for which conversion charges of Rs.6200/- was paid on 14.02.2007. The conversion order is in the name of the assessee as in revenue records, the land stood in the name of the assessee but the expenditure on conversion was debited to land account in the firm's books of accounts because land was the property of the firm.
(vi) The firm was reconstituted on 19.12.2007 wherein Smt. Sharda Rani Agrawal w/o Shri Naresh Kumar Agrawal was introduced as partner. As per clause 15 of this deed, it was specified that all the lands and lease acquired at Naurangabad are the asset of the firm and the assessee has no individual right in the same.
(vii) The firm sold agriculture land at khasra no.228 (0.12 hectare) and khasra no.231 (0.27 hectare) for Rs.180000/- at village Naurangabad, Tehsil Alwar to the assessee through agreement to sell dated 02.01.2008. The firm has declared this transaction in the balance sheet by deducting 180000/- from land a/c in the fixed asset chart & debited 4 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar Kundan Lal Badshah partner's capital a/c. Simultaneously assessee reflected these two lands at Rs.180000/- in his balance sheet.
(viii) The constitution of the firm was again changed on 11-06-2008 whereby Smt. Indu bai and Smt. Sharda Devi Agrawal retired and Sh. Ramesh Chand and Sh. Ratan Singh were introduced as partner. The share of the assessee was reduced to 6% and the other two partners have share of 47% each. Alongwith this partnership deed, assessee executed a General Power of Attorney dated 11.06.2008 for land at Khasra No.230 in favour of one of the partner Sh. Ratan Singh. As per clause 5 of this deed, it is mentioned that the continuing partners have taken over all the rights over industrial converted lands at Khasra. No.230 and the retiring partner have released and relinquished all their right and claims in the assets of the firm.
(ix) The constitution of the firm was again changed on 01.04.2009, where the assessee retired from the firm and Sh. Ratan Singh and Sh. Ramesh Chand continued the firm with equal share. As per clause 5 of this deed, the continuing partners have taken over all the rights over industrial converted land at Khasra. No.230 and the retiring partner i.e. the assessee has released and relinquished all his right and claims in the assets of the firm.
5 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
(x) After the retirement of assessee from the firm, Sh. Ratan Singh on the basis of power of attorney dated 11.06.2008, executed a sale deed dated 12.05.2009 in his own name though the property continued to be the property of the firm. As per assessee, this was done to safeguard the interest of the firm so that at any point of time, assessee may not make any claim over the said property by filing any civil suit.
3. The ld. Counsel for the assessee has submitted before the ld. CIT(A) and reiterated before us that in light of above facts, it can be noted that the various observations made by the AO are incorrect as explained hereunder:
(i) On 19.07.2006, the assessee was not owning any agriculture land at village Naurangabad except the land at Kh. No.230. This land was purchased by the assessee on 23.06.2006 for Rs.1,94,700/- and after considering the expenses on stamp duty and other expenses of Rs.16100/-, the total cost of the land to the assessee was Rs.2,10,800/-.
It is this land which is contributed by the assessee to the firm as its capital contribution. In clause 11 of partnership deed dated 19.07.2006 it is clearly stated that land and lease acquired by the assessee in June 2006 shall be deemed to be the asset of the firm w.e.f. 19.07.2006 and henceforth assessee shall have no individual right on the said land 6 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar except as a partner of the firm. This land is recorded in the books of the firm at Rs.2,10,800/- (194700+16100) by crediting the capital account of the assessee. Therefore it is incorrect on part of the AO to presume that it is not possible to ascertain that the land under consideration was the property which was introduced as capital contribution by the assessee in the firm.
(ii) The land at Kh. no.288 & Kh. no.231 were purchased by the firm on 24.07.2006 in the name of the assessee. The cost of these land including expenses was Rs.168100/- which were recorded in the books of the firm. Therefore these land are different than the land which was contributed by the assessee as his capital contribution in the firm.
(iii) In respect of land at Kh. No.230, the firm got it converted into industrial land on 14.02.2007. Conversion charges of Rs.6200/- was debited by the firm in the land account. Therefore only because the conversion order is in the name of the assessee and the Challan of Rs.6200/- was deposited in the name of the assessee would not make this land as individual property of the assessee when it has been contributed by him to the firm and recorded in the books of the firm as its own property.
7 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
(iv) In the reconstituted deed dated 19.12.2007, in clause 15 it has been stated that the land and lease acquired at Naurangabad in the name of first partner is deemed to be the asset of firm w.e.f. 19.07.2006 and all the partners shall have right on the same as per their profit sharing ratio. Again in the reconstituted deed dated 01.06.2008, in clause 5 it is stated that continuing partners have taken over all the rights over the industrial converted land at Kh. No.230 and the retiring partner have released and relinquish all their right and claim in the asset of the firm. Thus from these deeds it is clear that land at Kh. No.230 is the property of the firm and there is no ambiguity, as mentioned by the AO, regarding contribution of this land by the assessee to the firm as his capital contribution.
(v) In the power of attorney executed by the assessee on 11.06.2008 in favour of another partner Sh. Ratan Singh, of course, there is no mention in P/A that land at Kh. no.230 is the property of the firm, but this would not make any difference when it is clearly established that this land was contributed by the assessee to the firm as his capital contribution on 19.07.2006. In fact following clauses are mentioned in various partnership deed/retirement deed which are clearly showing that the subject land is the asset of the firm:
8 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
a) Partnership deed dated 19/07/2006- clause No.11- "The land and lease acquired at Naurangabad in June, 2006 in the name of first partner shall be deemed to be considered the assets of the firm with effect from 19/07/2006. Both the partners will have equal rights on such assets. The first partner shall have no individual right on the said lease and land except as a partner of the firm".
b) Partnership deed dated 19/12/2007 clause No.15 "All land and lease acquired at Naurangabad in the name of first partner shall deemed to be considered the assets of the firm with effect from 19/12/2007. The first partner shall have no individual right on the said lease and land except as a partner of the firm. All the partners shall have right on such assets on the basis of profit sharing ratio mentioned in point No.7 of this deed in case of any dispute or dissolution of the firm".
c) Partnership deed dated 11/06/2008- clause No. 5- "That the rest of the parties have taken over all the rights over industrial converted Land at Khasra no.230 area 6200 sq. mtr at gram Naurangabad, Alwar and Buildings, Plant & Machinery, Security, Deposits. They will be liable to repay loans and other liabilities from 12/06/2008. Thus the fourth & fifth party has released and relinquished all their rights and claims in the assets of the firm and also free of liabilities."9 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
d) Retirement deed dated 01/04/2009- clause No.5- "That the rest of the parties have taken over all the rights over industrial converted Land at Khasra No.230 area 6200 Sq. mtr at gram Naurangabad, Alwar and Buildings, Plant & machinery, Security, Deposits. They will be liable to repay loans and other liabilities from 01/04/2009. This the third party has released and relinquished all their rights and claims in the assets of the firm and also free of liabilities."
e) Retirement deed dated 01.04.2009 by which assessee retired from the firm, in clause 5 it is specifically mentioned that the continuing partners have taken over all the rights over the industrial converted land at Kh. No.230 and the retiring partner have released and relinquished all this right and claim in the asset of the firm. The same fact is also mentioned in the retirement deed dated 11.06.2008 specifically. This makes it abundantly clear that the land under consideration is not the property of the assessee but is the property of the firm.
Accordingly observation of the Ld. AO in para no. 2, P. No. 5 that "it is not specified that which Khasra no. at Naurangabad was declared to be the property of the firm as assessee was having more than one property at Naurangabad and therefore it is not possible to ascertain that the property under question was introduced as capital contribution 10 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar in the firm," is baseless and arbitrary because every where it is clear that the subject land is the assets of the firm.
(vi) On the basis of the above power of attorney, Sh. Ratan Singh, after the assessee retired from the firm, executed the sale deed in his favour. The execution of this sale deed does not imply that assessee has sold the land at Kh. no.230 to Sh. Ratan Singh more particularly when the land in question is property of the firm and assessee after retirement from the firm has released and relinquish all this right and claim in the asset of the firm. The sale deed was executed by Sh. Ratan Singh in his name only to avoid any legal/civil consequences in future since in the revenue records the land stood in the name of the assessee who was no longer a partner in the firm from 01.04.2009. Therefore on the basis of this sale deed no inference can be drawn that assessee has sold land at Kh. no.230 to Sh. Ratan Singh particularly when he has no right in it and the land continues to be the property of the firm as per its Balance sheet as on 31.03.2012.
3. It may be noted that as per section 14 of Indian Partnership Act, 1932, the property of the firm includes all property and rights and interest in property originally brought into the stock of firm, or acquired, by purchase or otherwise, by or for the firm or for the purpose and in 11 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar course of business of firm, and includes also the goodwill of the business. Therefore any individual property owned by a partner and contributed to the firm becomes the firm's property and individual goes not remain the excusive owner of such property. In case of Addl. CIT Vs. Manjee Engineering Industries [154 ITR 509] (Del.) and in case of CIT vs. A.V. Bhanoji Rao [142 ITR 706] (AP) it is held that no particular mode or form is provided for bringing in a separate property into the stock of the firm by a partner and no deed whatsoever, registered or otherwise is required to be executed by the partner for doing so. It may be noted that after the land under consideration became the property of the firm, it constructed a factory building by incurring expenditure of 11.95 lacs upto 31.03.2008 (P.B.78-81) and also installed plant and machinery to carry on the business of manufacturing of grit. All these assets were the property of the firm. Therefore the sale deed dated 12.05.2009 executed by Sh. Ratan Singh as power of attorney holder of the assessee in his favour comprising of the land and construction thereon is only to avoid any probable dispute in future. This cannot be construed as sale by the assessee to Sh. Ratan Singh when the property continues with the firm. No consideration as mentioned in the sale deed has passed from Sh. Ratan Singh to the assessee. In fact the assessee was paid his capital balance in the firm of Rs.24,59,001/- before 12 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar 31.03.2009 itself. Therefore when assessee is neither the actual owner nor the beneficial owner of the said property, the question of assessing the capital gain in his hand does not arise for consideration.
4. Under the Income tax Act, 1961 no tax can be imposed on a person unless the transaction falls in the four corners of taxability. In present case AO has considered the sale deed executed by Sh. Ratan Singh as chargeable to tax as capital gain ignoring the fact that on the date the sale deed is executed, the assessee has no right or claim in the said property which is the property of the firm. There is no transfer of property by the assessee to anybody since he has already contributed the land at Khasra. no. 230 to the firm on 19.07.2006 as his capital contribution and by this act it has become the property of the firm. Assessee has filed an affidavit dated 11.02.2013 before the AO explaining this position which is not controverted by the AO. Therefore on execution of the sale deed, in the above peculiar fact of the case, there is not transfer by the assessee of any capital asset and therefore no capital gain is chargeable to tax u/s 45 of the Income tax Act.
4. We now refer to the findings of the ld CIT(A)which are under challenge before us. The ld. CIT(A) while deleting the addition has observed as under:
13 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
"5.12 Having considered the submissions made and the material available on record, I find that main issue for consideration is whether transfer deed executed for land i.e. Khasra No. 230, Village- Naurangabad, Teh. Alwar by the GPA holder of the appellant (Sh. Ratan Singh) would constitute a transfer by the assessee in his individual capacity or as a partner of the firm M/s Swami Grit."
"5.18 However, the Income Tax Act recognizes the firm as a distinct assessable legal entity apart from its partners. Sub-sections (3) and (4) of section 45 were introduced by Finance Act, 1987, which came into effect from 01.04.1988. In sub-section (3) what is sought to be taxed is the profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals. After such transfer, he is or becomes a partner or member, by way of capital contribution or otherwise. Then the said capital contribution shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. When a partner brings in his personal asset into a 14 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar partnership firm as his contribution to its capital, an asset which was originally exclusively belonging to him, becomes the trading asset of the firm, in which all partners acquire interest in proportion to their respective share in the firm. His right during the subsistence of the partnership is to get his share of profits from time to time as regard upon among the partners."
"5.19 Sub-section (4) of Section 45 deals with a distribution of capital assets on the dissolution of a firm or other association of persons or body individuals or otherwise. If in the course of such distribution of capital asset there is a transfer of a capital asset by the firm in favour of a person and it results in profits or gains to the firm, then the said profits or gains shall be chargeable to tax as income of the firm and again for computing such income, Section 48 is attracted. In other words, in the process of dissolution of a firm, if a capital asset is transferred to a partner which results in profits or gains, then that income is chargeable at the hands of the firm under this provision. In order to attract sub-section (4) of Section 45, the condition precedent is, (1) There should be a distribution of capital assets of firm; (2) Such distribution should result in transfer of a capital asset by firm in favour of the partner; and 15 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar (3) On account of the transfer there should be a profit or gain derived by the firm.
(4) Such distribution should be on dissolution of the firm or otherwise."
"5.20 In the instant case, the partner had purchased the property under a registered sale deed in his name and the property was subsequently transferred in the firm as his capital contribution. The other partner brought in cash by way of capital when the firm was constituted on 19.07.2006. The firm was reconstituted on 19.12.2007 with the induction of a new partner Mrs. Sharda Rani Agarwal. Again, the firm was reconstituted on 11.06.2008 by way of retirement of the erstwhile two partners Mrs. Indu Bai and Mrs. Sharda Rani Agarwal who took their share in the partnership and went out of the partnership. After the retirement of two partners, the partnership continued to exist with the introduction of two new partners Sh. Ramesh Chand and Sh. Ratan Singh and the business was carried on by the remaining three partners. What was given to the retiring partners is cash representing the value of their share in the partnership. No capital asset was transferred on the date of retirement under the deed of retirement deed dated 11.06.2008. Further, there was a reconstitution of the firm on 01.04.2009, when Sh. 16 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar Kundan Lal Badshah retired from the firm and Sh. Ratan Singh and Sh. Ramesh Chand continued as partners of the firm with equal shares in the profits/losses. As per this deed the continuing partners have taken over all the rights over the industrial land at Khasra No.230 and the retiring partner has released and relinquished all his rights/claims in the assets of the firm. After, the retirement of the assessee from the firm, Sh. Ratan Singh on the basis of GPA dated 11.06.2008 executed a sale deed on 12.05.2009 in his own name, though the property continued to be the property of the firm. This was done to secure and safe guard the rights of the firm so that at any point of time the assessee may not make any claim over the said property by filing any suit in the court of law."
"5.21. AO has confirmed in the remand report that said property has been declared by the firm in its ITR filed (for the last more than five years) as its fixed asset and depreciation thereon has also been claimed consistently over all these years. Further, it is not denied that land and building continues to exist in the books of the firm. The appellant has also been examined by the AO in the course of remand proceedings and the same factual position has been reiterated by the appellant. The appellant has taken back his share in the firm amounting to Rs.24.95 17 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar lacs and this fact has been duly recorded in the books of accounts of the firm and in the returns of income filed by the firm."
"5.22 After considering the facts as stated above, it is found that AO has invoked the provisions of section 50C of the IT Act for the purposes of levy of capital gains tax in the hands of the appellant, whereas the fact that the asset was shown by the firm since inception in the returns filed has remained uncontroverted and is not denied. This is the substance of the transaction which emerges out of the examination carried out during the remand proceedings even though on the face of it a transfer deed has been executed by the new partner (as GPA holder of the retiring partner) in favour of himself. Further, no consideration is stated to have been passed as he could not have paid the same to himself. It would be relevant at this stage to refer to the decision of the Hon'ble Supreme Court wherein the application of doctrine of 'Substance over Form' in the case of Vodafone International Holdings vs. UOI-341 ITR 1 (SC) and in the case of McDowell Co. Ltd. vs. CTO-154 ITR 148 (SC) has been upheld. The appellant has received his share of money standing to the credit of capital account from the firm at the time of his retirement and the asset has remained with the firm. The appellant has admitted on oath these facts and ratified again before the AO in the course of 18 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar remand proceedings. Therefore, I hold that the liability to pay tax on capital gains, if any, arises in the hands of the appellant, when the property (purchased by the appellant) was transferred to the books of the partnership firm. Thus, the capital gains, if any, in the hands of the appellant would arise in FY 2006-07 under the provisions of section 45(3) of the IT Act i.e. in the year when such property is transferred to the books of the firm as capital contribution. The issue which may arise is than in whose hands the gains on transfer of property, if any are taxable. Under the provisions of section 45(4) of the IT Act, in the case of dissolution of a firm the liability to pay tax arises in the hands of the firm. Hon'ble Supreme Court has held in the case of A.L.A. Firm reported in 189 ITR 285 that market value of assets has to be adopted for the purposes of computing capital gains arising in the hands of the Firm. However, this issue has to be examined by the AO concerned (having jurisdiction over the case of the firm).
5.23. In view of the above discussion, I do not find any justification in the action of the AO in invoking the provisions of section 50C of the IT Act and therefore, delete the addition of Rs.1,18,75,507 on account of Short Term Capital Gains made by the AO in the hands of the appellant. 19 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
5. The Ld. AR has further relied upon the decision of Coordinate Bench in case of Shri Ratan Singh in ITA No.388 & 352/JP/2014 dated 11.08.2016 wherein Shri Ratan Singh who has acquired the subject land from the assessee Sh Kundan lal Badshah has subsequently sold a part of the said land to the incoming partners under similar circumstances though the land continued in the books of the Firm. In that case, this Bench has confirmed the finding of the Ld. CIT(A) with the following observations:
"On the above finding, it is evident that ld. CIT(A) has verified the fact that the capital asset remained in the books of account of the firm. It is also a fact that the capital asset was introduced into the firm by the partners. The ld. CIT(A) has relied upon the judgment of the Hon'ble Supreme Court rendered in the case of Sunil Siddharthbhai Vs. CIT, 156 ITR 509 (SC). The revenue has not submitted any contrary binding precedent. Therefore, we do not find any infirmity in the order of ld. CIT(A), which is hereby affirmed. The ground raised by the revenue is rejected".
6. The ld DR is heard who has relied on the provisions of section 50C and has stated that the AO was correct in invoking the provisions of section 50C as there is a transfer through a registered deed by the 20 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar assessee (through its power of attorney holder) in favour of Shri Ratan Singh.
7. We have heard the rival contentions and perused the material available on record. The land under consideration is an agricultural land at village Naurangabad (Khasra No.230) which was purchased by the assessee in his individual capacity and thereafter contributed by the assessee to the firm as his capital contribution. The same is evident from Clause-11 of the partnership deed dated 19.07.2006 wherein it is stated that "the land and lease acquired at Naurangabad in June, 2006 in the name of first partner (the assessee) shall be deem to be considered as the assets of the firm w.e.f. 19.07.2006 and both the partners will have equal rights on such land. The first partner shall have no individual right on the said lease and land except as a partner of the firm." Thereafter, the firm was reconstituted on 19.12.2007 and thereafter on 11.06.2008. Each of these reconstitution of the firm is reflected through the reconstituted partnership deed which contain a similar clause in respect of land at Khasra No.230 as the asset which continue to remain as that of the firm and the fact that retiring partners have released and relinquished all the rights and claims in the said asset of the firm. At a time when the Firm was reconstituted on 11.06.2008 wherein the share 21 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar of the assessee was reduced to 6%, the assessee also executed a general power of attorney dated 11.06.2008 in favour of one of the partners of the firm, Shri Ratan Singh who was newly introduced as partner of the reconstituted firm effective 11.06.2008 whereby Shri Ratan Singh was authorized to deal with the land Khasra No.230. In our view, the contents of the general power of attorney dated 11.06.2008 have to be read alongwith the contents of the reconstituted partnership deed dated 11.06.2008 even though in the power of attorney, there is no specific mention that land at Khasra No.230 is the property of the firm. As per Clause V of the reconstituted partnership deed dated 11.06.2008, it is mentioned that "rest of the partners (existing as well as new partners) have taken over all the rights over industrial converted land at Khasra No.230, area 6200 sqm at Gram Naurangabad, Alwar and building plant & machinery, security deposits. They will be liable to repay loans and other liabilities from 12.06.2008. Thus the 4th & 5th party (retiring partners) have released and relinquished all the rights and claims in the assets of the firm and also free of liability". It therefore transpires that the power of attorney has been granted by the assessee in favour of Shri Ratan Singh not in his individual capacity but as one of the working partners of the firm and to deal with the said land not in an individual capacity but as representative of the firm. Both the 22 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar documents, reconstituted partnership deed dated 11.06.2008 and power of attorney dated 11.6.2008 have to be read together and not on stand alone basis and also taking into consideration the treatment of the said property and acceptance thereof by the assessee, the firm, the incoming and the retiring partners. There is one common thread which is emerging and which is that, the subject land has been contributed as capital contribution by the assessee to the Firm and the said land continues to remain as property of the firm all along over the years and been shown and reflected in the books of accounts of the firm.
8. Proceeding further, it is noted that the constitution of the firm was again changed on 01.04.2009 where the assessee retired from the firm and the other two partners namely, Shri Ratan Singh and Shri Ramesh Chand continued the firm with the equal share and the property continued in the name of the firm and the retiring partner not having any rights and claims in the assets of the firm. All these facts clearly demonstrate that before the execution of sale deed dated 12.05.2009 (which is a subject matter of dispute before us), the land at village Naurangabad, Khasra No.230 was a property of the firm and no individual partner have any individual right over the said property and 23 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar the said property continued to be reflected in the books of accounts of the partnership firm.
9. Here, it would be relevant to refer to the findings of the ld CIT(A) wherein he has stated that "the appellant has taken back his share in the firm amounting to Rs.24.95 lacs and this fact has been duly recorded in the books of accounts of the firm and in the returns of income filed by the firm." and thereafter, he has stated that "The appellant has received his share of money standing to the credit of capital account from the firm at the time of his retirement and the asset has remained with the firm. The Revenue has not challenged the said findings in terms of valuation of assessee's share in the firm at the time of retirement as to whether the same reflects the appropriate value taking into consideration the valuation of the underlying assets or not. In any case, the undisputed fact remains is that the said property continued to be reflected in the books of accounts of the partnership firm.
10. Now, coming to the execution of sale deed dated 12.05.2009, it is noted that after the retirement of the assessee from the firm, Shri Ratan Singh, on the basis of power of attorney dated 11.06.2008, executed a sale deed dated 12.05.2009 in his own name. It is here that the main issue for consideration arises as to whether the sale deed has been 24 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar executed by the assessee (through its power of attorney holder, Shri Ratan Singh) in whose name the property stand in the land records or the sale deed has been executed by the firm M/s Swami Grit Udyog, in whose name the property stands and all the rights remained vested as per the partnership deed and its books of accounts. As we have stated above, once the land has been contributed by the assessee as his share of capital contribution and acknowledged by the firm which is duly evident by the partnership deed dated 19.07.2006, the said property becomes the property of the firm and the transfer thereof is chargeable to tax in the hands of the assessee by virtue of provisions of Section 45(3) of the Act. In case of Add. CIT Vs. Manjeet Engineering Industries [154 ITR 509] (Del.) and in case of CIT vs. A.V. Bhanoji Rao [142 ITR 706] (AP), it is held that no particular mode or form is provided for bringing in a separate property into the stock of the firm by a partner and no deed whatsoever registered or otherwise is required to be executed by the partner for doing so. In the present case, the facts are on a stronger footing as the capital contribution is evidenced by a deed of partnership and the same would be considered as a transfer in relation to capital asset in terms of Section 2(47) read with section 45(3) of the Act. Therefore, we agree with the finding of the ld CIT(A) that the liability to pay tax on capital gains, if any, arises in the hands of the 25 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar appellant, when the property (purchased by the appellant) was transferred to the books of the partnership firm. Thus, the capital gains, if any, in the hands of the appellant would arise in FY 2006-07 under the provisions of section 45(3) of the IT Act i.e. in the year when such property is transferred to the books of the firm as capital contribution.
11. As per the Ld. CIT(A), as per the provisions of Section 45(4) of the Act, the taxability will arise on such transfer in terms of sale deed dt. 12.05.2009 in case of dissolution of the firm and the issue has to be examined by the concerned A.O having jurisdiction over the firm. It is here that we do not agree with the finding of the Ld. CIT(A). Here it would be relevant to refer to the decision of Hon'ble Bombay High Court in case of CIT vs. A.N. Naik Associates 136 Taxman 107 (Bombay) wherein the Hon'ble Court have examined the provisions of Section 45(4) of the Act. It held that the expression "otherwise" used in section 45(4) has to be read with the words transfer of capital assets by a distribution of capital assets, if so read, it becomes clear even when a firm is in existence and there is a transfer of capital assets, it comes within the expression "otherwise" as the object of the amending Act was to remove the loophole which existed whereby capital gain tax was not chargeable. In the instant case, the firm continue to exist and the 26 ITA No.383/JP/2014 ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar subject land has been transferred by the firm (as we have held above) in favour of one of the partners of the firm, Shri Ratan Singh. Therefore, it is for the Revenue to decide whether such transfer in favour of Ratan Singh is taxable in hands of the firm under section 45(4) of the Act or not. To that extent, the above findings of ld CIT(A) stand modified.
12. In light of above discussion taking into consideration the entirety of facts and circumstances of the case, it is the firm in whose name the asset stood prior to the date of the transfer which has transferred the asset (and not the assessee) vide the sale deed dated 12.05.2009. Therefore, it is clear that the assessee cannot be brought to tax in respect of such transfer.
In the result, appeal filed by the Revenue is disposed off with above directions.
Order pronounced in the open court on 10/03/2017.
Sd/- Sd/-
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(Kul Bharat) (Vikram Singh Yadav)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Tk;iqj@Jaipur
fnukad@Dated:- 10/03/2017.
*Sanjeev*.
vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- ITO, Ward-1(1), Alwar. 27 ITA No.383/JP/2014
ITO, Ward-1(1) Vs. Kundan Lal Badshah, Alwar
2. izR;FkhZ@ The Respondent- Sh. Kundan Lal Badshah, Plot No.-109, Anand Nagar, Khairthal, Alwar.
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr@ CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File {ITA No. 383/JP/2014}.
vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar