The Income Tax Appellate Tribunal (ITAT), Mumbai Bench held that the amount paid to partner upon retirement towards his share in assets not liable to capital gain.
The assessee, Dr. Vithal V. Kamat, became a partner in the partnership firm called M/s. Sports Field Construction vide deed of partnership. The details of other partners who joined the partnership. So in all, there were six partners in the firm.
The first four partners namely Smt. Amrabai Malsi, Smt. Velbai Devsi Shah, Bipin Talakshi Shah and Smt. Hirbai Nanji Sojpal brought into the partnership firm a land measuring 15,250 sq. yards situated at Mumbai as their capital contribution which was valued at Rs.1.5 crores. The other two partners namely Samir P. Shah and Vittal V. Kamat was to bring in Rs.1.5 crores as capital contribution in the firm.
The sole objective of the firm was to develop the said plot of land. As per the terms of the partnership deed, the said plot was to be brought into the partnership firm and other partners also to contribute their respective contribution.
Thereafter, Hirbai Nanji Sojpal died leaving behind her will and testament under which Bipin Talakshi Shah as executor and trustee and nominated him in her place in the partnership firm and accordingly the share of the said person increased to 7.16% from 3.58%.
The dispute arose between Samir T. Shah and the assessee and the firm filed a suit in Bombay High Court seeking the dissolution of the firm, however, the same was resolved by filing Consent Terms under which Samir P. Shah retired from the said firm vide deed of retirement and his share in terms of the Consent Terms was transferred to the assessee and thus assessee’s share in the firm increased to 50% in terms of a deed of retirement.
Finally, in between the firm also entered into an MOU with M/s. Runwal Developers Pvt. Ltd. for the development of the plot on certain terms and conditions which could not materialize. Thereafter, a deed of admission cum retirement was executed retiring all the existing partners and inducting four new partners namely M/s. Runwal Developers Pvt. Ltd. and the three nominees.
Upon said retirement of Vithal V. Kamat he received a consideration of Rs.48.15 crore as share in the assets of the firm as full and final settlement of his account in the firm.
The AO added Rs.47,13,14,000 as long term capital gain in the hands of the assessee by holding that the said amount was received in consideration of the transfer of an interest of the assessee in the said assets of the firm and after deducting Rs.1,01,86,000 from the total consideration of Rs.48.15 crores, added the same to the income of the assessee as long term capital gain under section 45 of the Act.
The CIT(A) allowed the appeal of the assessee on this issue by holding that the compensation received by the assessee upon retirement from the partnership firm as his share in the assets of the partnership firm is not liable to tax as there is no transfer of assets involved.
The Coram of Mahavir Singh and Rajesh Kumar after taking into consideration the decision of the Supreme Court in the case of CIT v. Tribhuvandas G. Patel wherein it was held that any amount paid to the partner upon his retirement towards his share in assets is not a transfer within the meaning of section 47(ii) of the Act and not liable to capital gain.
The Tribunal while upholding the order of the CIT(A) said that if the computational provision of capital gain as provided under section 48 of the Act breaks down then the charging provision as provided under section 45 of the Act would also fail as held by the Hon’ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty.
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