I.T.A.No.958/Mds./2014, I.T.A.No.990 /Mds. /2014

SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER

Mr.S.Sridhar,Advocate For The Assessee :
Mr.Debendra N.Kar, CIT, D.R For The Revenue :

ORDER

CHANDRA POOJARI, ACCOUNTANT MEMBER:-These are cross appeals are directed against the order of the Learned Commissioner of Income Tax(A)-II, Coimbatore dated 08.01.214 pertaining to the assessment year 2009-10.

2.1 The assessee challenged in its appeal with regard to the findings of the CIT(A) that the receipt of amount of Rs. 26.99 crores on retirement as a partner from the firm of M/s. S.J.M. Property Developers is taxable income in the hands of the assessee in view of the provisions of the section 45(4) of the Act.

2.2 The Revenue is in appeal before us for deletion of addition of Rs. 27 crores from book profit by placing reliance on the decision of the Hon’ble Apex Court in the case of Apollo TyresVs CIT 255 ITR 273(SC) by Ld.CIT(A).

3.1 The brief facts of the case are that the assessee company is involved in the business of manufacture of terry towels and weaving of yarn products. The assessee-company has made adjustments to the profit and loss account as per books by adding back inadmissible and deducting admissible items under the Income-tax Act, thereby claimed deduction u/s.10B in respect of Unit-2 (100% ECU) and Unit- 3 (weaving division-100% ECU) amounting to Rs. 49.27,77,765/- and arrived at a loss of Rs. 5,67,51,537/- in the computation statement. Hence the assessee-company filed the Return of Income under the provisions of section 115JB admitting total income of Rs. 56,75,15,374/- and paid tax accordingly. During the course of assessment proceedings, while examining the Balance Sheet of the assesseecompany, as per clause-17, (notes forming part of the balance sheet) it was noticed that the assessee had invested by way of capital in the partnership firm, M/s. SJM Property Developers in which the assessee-company held 99% of interest till 05/03/2009. It is further found that the assessee-company has received from the said partnership firm by relinquishing its right of 99% vides retirement deed dated 06/03/2009. On relinquishing, the company was compensated by a sum of Rs. 26.99 crores as a share in surplus in the said firm and this has been treated as capital receipt and taken to the capital reserve. After perusing a note filed by the assessee company dated 08/12/2011, the assessee company received compensation from the firm. It is found that apart from the share capital of Rs. 99,000/- contributed by the company in the firm SJM Property Developers, the company had invested further sum of Rs. 25 crores as loan to the partnership firm. These funds were utilized by the firm for purchase of land at Bangalore for Rs. 4 crores and the balance was advanced to another firm, M/s Metro Corp, Bangalore wherein two of the partners of M/s SJM Property Developers, Mr. Deepak Krishnappa and Mr. Uday Reddy are partners. Out of Rs. 25 crores advanced to M/s SJM Property Developers by the assessee-company, Rs. 10 crores was withdrawn during the financial year 2007-08. Further it was noticed by the AO that there had been no activities in the firm SJM Property Developers and no business or development had taken place till the date of retirement of the assessee company. The note dated 08/12/2011 also reveals that the firm had entered into joint venture agreement with Metro Corp, Bangalore for development of land purchased by M/s SJM Property Developers. Since Metro Corp, Bangalore did not undertake the development of the property due to financial problem, the assessee-company want to retire from the firm, M/s SJM property Developers and so as on 06/03/2009, the assets were revalued in the books of the firm and the increased value of the land as on the date of retirement was credited to the capital account of the assessee-company in the firm MIs SJM property Developers. A sum equal to company’s capital and current account balance outstanding as on the date of revaluation was repaid to it at the time of retirement and the remaining partners continued in the firm for the assets and liabilities. Further, it was found that the assessee has taken a stand on the basis of the above note that there is no transfer of any property by the assessee-company at the time of retirement from the firm and so, compensation amount received cannot be taxed as income of the assessee-company.

3.2 In order to verify the claim of the assessee, further details like development agreement copies, retirement deed copies, account copy of the assessee-company in the firm SJM Properties were called for and obtained from the assessee company. On going through the settlement deed dated 0910312009, it was seen that there was an agreement dated 06/02/2007 entered into between SJM Property Developers and MIs Metro Corp for relinquishment of 99% of shares of the assessee-company in the firm, M/s S,JM Property Developers in favour of Metro Corp., a third party (not a partner in MIs SJM Property Developers) for a consideration of Rs. 52 crores. The assessee-company was asked to file a note on this. In response, assessee filed letter dated 19/12/2011 enclosing the following documents:

i) Copy of property deed purchased on 06/02/2007 for SJM Property Developers for a consideration of Rs. 4 crores.

ii) Memorandum of Understanding dated 06/02/2007 between the assessee-company, A.Srinivasan, S.Srinivasan, referred to as first party of this agreement and another firm MIs Metro Corp. Bangalore (copy of this agreement is enclosed with the assessment order as Annexure-l).

iii) Copy of the retirement cum reconstituted partnership firm deed dated 31/01/2009 wherein Shri D.Srinivasan, Shri S.Srinivasan and Shri. Uday Reddy have retired from the firm. Shri. D M Devaraj was admitted as new partner. The amount payable was to the outgoing partners Shri. D.Srinivasan, Shri. S.Srinivasan and Shri. Uday Reddy was determined at nil, nil and Rs. 37/-, respectively. To support this, the balance sheet of the firm as on 06/03/2009 has been filed, as stated in the retirement deed.

iv) Copy of the bank account of SJM Property Developers with Vijaya Bank, R.S,Puram Branch, Coimbatore.

Further the AO observed that Partnership firm deed dated 01.02.2007 was formed wherein assessee contributed a sum of Rs. 98,998/- as capital and Shri D.Srinivasan has contributed Rs. 1/-, Shri S.Srinivasan has contributed Rs. 1/-, Shri Keepak Krishnappa has contributed Rs. 500/- and Shri Uday Reddy has contributed Rs. 500/- and net profit and losses shared in the proportion of capital contribution by the partners. Apart from this, a sum of Rs. 25 crores was deposited in the current account of M/s. S.J.M. Property Developers with Vijaya Bank, Coimbatore by the assessee company which has been shown as loan by the assessee company. Out of this, Rs. 21 crores was transferred to M/s Metro Corp, Bangalore and another Rs. 4 crores was given to M/s Metro Corp for purchase of land at Bangalore. As per Deed dated 06.02.2007 by partnership firm M/s. S.J.M. Property Developers, M/s. S.J.M. Property Developers has purchased property at Bangalore on 06.02.2007 for Rs. 4 crores measuring about 12 acre and 2 guntas. The said property was converted from agricultural to non-agricultural residential areas during the year 2005. The residential land owners entered into an agreement with M/s.Madhavi Assets Pvt. Ltd., on 19.05.2005 to develop residential township in the said land. Later, M/s.Madhavi Assets Pvt. Ltd., entered into an agreement with M/s Metro Corp on 05.08.2015 wherein M/s.Madhavi Assets Pvt. Ltd.,has assigned all the rights and authority pertaining to the development of the scheduled land in favour of M/s Metro Corp, Bangalore. There is one more joint venture agreement entered by M/s. S.J.M. Property Developers with M/s Metro Corp (Developers) for development of the said land on 06.02.2007. Later on 06.02.2007 assessee’s 99% share in the firm M/s. S.J.M. Property Developers was relinquished in favour of M/s Metro Corp, Bangalore. As per this agreement dated 06.02.2007, assessee transferred 99% of the share capital in M/s. S.J.M. Property Developers and for that assessee has to receive Rs. 99,000/-. In the same deed in clause-2 on page-4 of the agreement, the assessee company agreed to advance Rs. 25 crores to M/s. S.J.M. Property Developers. As per clause-3 of the agreement, M/s Metro Corp has agreed to compensate the assessee –company a sum of Rs. 27 crores and issued a post dated cheque. There is a Retirement cum Reconstituted partnership deed dated 31.01.2009 wherein shri D.Srinivasan, shri S.Srinivasan and Shri Uday Reddy were retired from the firm and shred M Devaraj was admitted a new partner. There was no revaluation of assets was done but the amount payable was to the outgoing partners shri D.Srinivasan, shri S.Srinivasan and Shri Uday Reddy were determined as Nil, Nil and Rs. 37/- respectively. Shri D.M. Devaraj was admitted to the partnership firm with a contribution of Rs. 500/-. Accordingly, the balance sheet was drawn on 31.01.2009. The assessee company was contributed a sum of Rs. 2/- towards capital. Thus lead o total share capital contribution of the assessee company in the partnership firm is Rs. 99,000/- (99% of the share holding). Thus, once again Deed of retirement dated 06.03.2009. As per which outgoing partners has received Rs. 27 crores towards the amount lying in capital account. Thus, the assessee has to receive Rs. 27 crores from M/s Metro Corp Developers. As per agreement dated 09.03.2009, out of a sum of Rs. 27 crores payable by M/s Metro Corp, the assessee received Rs. 22 crores along with another Rs. 15 crores as repayment of loan totaling to Rs. 37 crores by DD drawn on Vijaya Bank, Jalahalli Branch, Bangalore. Further a sum of Rs. 5 crores was adjusted by way of residential villa in the proposed residential township to be constructed by M/s Metro Corp. The assessee pleaded before the AO that compensation received at Rs. 27 crores as capital receipt and not liable for taxation. However, the AO considered it as a revenue receipt in the hands of assessee received in lieu of relinquishment right in partnership firm i.e. M/s. S.J.M. Property Developers in favour of M/s Metro Corp, Bangalore. Even otherwise, according to the AO the amount of compensation received to be taxed as short term capital gains as interest in partnership firm is a capital asset and transfer of the same in favour of the Third party is a transfer and liable for capital gains.

3.3 The assessee carried the appeal to the CIT(A). The CIT(A) observed that the extinguishment of right in the partnership firm by assessee resulted in transfer on retirement. Therefore, an amount of Rs. 26.99 crores received by assessee on retirement is liable to be taxed in term of sec.45(4) of the Act. Further, the AO also considered the said amount of Rs. 26.99 crores so as to determine the book profit u/s.115JB of the Act and added the same, though the assessee directly taken the same from General Reserve Account in balance sheet without routing through P&L A/c, the CIT(A) observed that in view of the Supreme Court decision in the case of Appollo Tyres reported in 255 TR 273, he allowed the claim and observed that the AO cannot consider this amount for the purpose of determining book profit. Against this Revenue is in appeal before us.

4. Before us, ld.A.R submitted that the assets of the firm are revalued and the increased value of land shown in the assets in the balance sheet of M/s. S.J.M. Property Developers as on 05.03.2009. As a result, the increased value of the land owned by the firm was settled to the extent of the share held by the assessee and this amount was credited to the capital account of the assessee in the books of account of M/s. S.J.M. Property Developers. Consequently, the Deed of Retirement was executed on 06.03.2009 and the account was settled on retirement and firm was continued by the remaining partners. According to the ld.A.R, the amount credited to the capital account of the assessee company being partner of M/s. S.J.M. Property Developers cannot be taxed in terms of sec.45(4) of the Act. 4(a)(i). He relied on the judgement of Kerala High Court in the case of Kunnamkulam Mills reported in 257 ITR 544 wherein it was held that:

“what is postulated under section 45(4) of the Income-tax Act, 1961, is that the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm would be chargeable to tax as the income of the firm. Ownership of property does not change with the change in the constitution of the firm. As long as there is no change in ownership of the firm and its properties, for the simple reason that the partnership of the firm stood reconstituted, there is no transfer of capital assets. Likewise, if a partner retires he does not transfer any right in the immovable property in favour of a surviving partner because he had no specific right with respect to the properties of the firm. What transpires is that 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. When a partnership is re-constituted by adding a new partner, there is no transfer of assets within the meaning of section 45(4) .”

4(a)(ii) He also relied on the judgement of Supreme Court in the case of CIT Vs. Lingamallu Raghukumar reported in 247 ITR 801(SC) wherein it was 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”.”

4.(a)(iii) Further, he relied on the judgement of Madras High Court in the case of V.Rangaswamy Naidu Vs.CIT reported in 31 ITR 711 wherein it was held that:

“the congress of rights which the assessee enjoyed under the partnership agreement of A&Co. and which he conveyed for a price to V.G.N. was a "capital asset" within the meaning of section 2(4A) of the Income-tax Act; (ii) what was payable under the managing agency agreement between A & Co. and the Coimbatore Spinning Co. was not mere remuneration for services rendered by each of the partners, but the managing agency itself was a transferable asset of A & Co.; (iii) that the transaction involved both an exchange and transfer of capital assets, and had all the elements of a sale, and the sum of Rs. 1,00,000 received by the assessee was, therefore, assessable to income-tax as capital gains under section 12B of the Income-tax Act.”

4.(b) According to the ld.A.R, the benefit derived by the assessee is a capital receipt and it cannot be liable to be taxed in the hands of assessee. According to the ld.A.R., Memorandum of Agreement on 06.02.2007 between the assessee, D.Srinivasan, S.Srinivasan and M/s Metro Corp, or agreement dated 07.03.2009 between M/s Metro Corp Infrastructure and the assessee to sell Villa in favour of Sharadha Terry Products Ltd., or Facility Agreement dated 07.03.2009 between M/s Metro Corp Infrastructure and assessee in favour of the assessee towards part of consideration of payment or Construction agreement dated 07.03.2009 between M/s Metro Corp Infrastructure and the assessee as part of consideration of payment or Settlement deed dated 09.03.2009 between the assessee and M/s Metro Corp, Deepak Krishnappa and Uday Reddy cannot have any bearing to hold that the amount received by the assessee is taxable amount. According to him on 06.02.2007 on the date of agreement with M/s Metro Corp, it is only a third party. The only relation between the assessee and M/S Metro Corp is that they were to act as developer of the property to be owned by the firm M/s. S.J.M. Property Developers. The said agreement was for a commitment by the developer and had nothing to do with any compensation as narrated by the AO. If he assessee proposed to retire from the partnership, as per the agreement cited, the AO has no basis for taking it as an evidence to hold that the amount received becomes taxable. The AO has to legally take into consideration only the evet that subsequently happened in February 2009. This agreement at best could only be called a proposal which was entered in abundant caution. The subsequent event that happens cannot be treated as an arrangement and it is for the purpose of avoiding any tax. The appreciation in value of assets and revaluing the same and crediting of the same to the capital account of the partners cannot be construed as capital gain in the hands of the assessee. According to him, neither Sec.28(va) or Sec.45 or Sec.46 or sec.56 are applicable to the facts of the case. Regarding non-valuation of assets when shri D.Srinivasan, Shri S.Srinivasan, and Shri Uday Reddy retired, to hold that the revaluation of assets when assessee retires is made believe story and ld.A.R submitted that revaluation of assets of the firm directly between partners and the AO cannot thrust upon the firm to revalue the assets on every time of retirement of the partners. Moreover, since revaluation cannot be done at the time of retirement of one partner, cannot be the reason for taxation of revaluation when subsequent partners who desire to retire, requires revaluation and accepted by other existing partners of assessee company, holding 99% in the partnership firm. When partners retired from the firm, it has every right to get its due share in the assets of the partnership firm and it cannot be questioned by the Revenue authorities to hold that it is colorable device adopted by the assessee to avoid tax. According to him, the transaction was in normal course of the business operation of the assessee firm and it is a capital receipt in the hands of the assessee, not liable to be taxed in terms of sec.45(4) of the Act. He relied on the following higher judiciary pronouncements:-

(i) Vana Silk Mills (P) Ltd., Vs. CIT reported in 191 ITR 647(SC)
(ii) Marybong Kyel Tea Industries reported in 224 ITR 589(SC)
(iii) CIT vs. Dynamic Enterprise reported in 359 ITR 83-FB (Karnataka High Court)

5. On the other hand, ld.D.R submitted that the transaction entered by the assessee with M/s. S.J.M. Property Developers as well as M/s.Metro Crop is a colorable device so as to reduce tax liability. According to him, all the agreements entered by the assessee to be seen collectively and truly in its perspective and it has to be treated as one common transaction entered through various separate agreements, but the common principle evolving is that it is the benefit derived by the assessee in the field of revenue account for investing Rs. 25 crores in M/s. S.J.M. Property Developers by way of loan and it is to be brought to tax. Further, he submited that the approach of assessee in revaluation of asset is not consistent and when on 31.01.2009 three partners were retired, there is no revaluation of assets. On 06.03.2009, only when the assessee was retired, there is revaluation of assets. He submited that if the provisions of the section 45(4) is not applicable, it should be assessed as an income in terms of Sec.28(iv) or Sec.28(v) or Sec.28(va) of the Act.

5(a)(i) According to DR the Tribunal can give such direction, being the final fact-finding authority in view of the judgement of Supreme Court in the case of Kapur Chand Shrimal Vs. CIT reported in 131 ITR 451(SC) wherein held that:

“it is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute” .

5(a)(ii) Further, he placed reliance in the case of CIT Vs.Manohar Glass Works reported in 232 ITR 302(All) wherein held that:

“the Appellate Tribunal being the final fact-finding body is under a legal obligation to record a correct finding of fact and as and when it feels some difficulty in recording a finding of fact on account of contradictions in the factual position, it may remand the matter to the lower authority to state the correct facts”.

He also relied on the order of Tribunal reported in the case of M/s.Tecumseh India Private Limited Vs. Additional.CIT,New Delhi [2010] 127 ITD 1(Del.)(SB). Further the ld.D.R submitted that the amount received by the assessee being a retired partner represents the market value of the assets of M/s. S.J.M. Property Developers, the assessee’s rights and interest including its share in the firm by retiring from the firm was surrendered al its rights therein, which were later to be enjoyed by the continuing partners. Its rights over the assets of the firm are not transferred free of cost, but for the consideration received from firm at Rs. 26.99 crores from the firm. Thus, the surrender of rights for consideration is a transfer within the meaning of Sec.2(14) of the Act.

5(a)(iii) He relied on the judgement of Bombay High Court in the case of CIT Vs. A. N. Naik Associates And Another reported in [2004] 265 ITR 346 (Bom) wherein it was held that

“the documents would clearly show that before the continuing partners retired there was an induction of a new partner in the morning of the said day and outgoing partners retired at the closing of business hours on that day. In other words, the partnership subsisted but with two partners and the business also continued. That would, therefore, not amount to dissolution of the firm. There was no denial that there were family disputes amongst the partners and the genesis of the family arrangement was not disputed. The arrangement by way of division of the assets and business interests was clearly defined and was not an isolated transaction in respect of the firms. The finding by the Income-tax Appellate Tribunal that the deed of reconstitution by inducting a partner in the assessee-firm was not a device to avoid tax had to be upheld. However, the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature of capital gains and business profits which were chargeable to tax under section 45(4)” .

5(a)(iv) Further, he relied on the judgement of Delhi High Court in the case of Bishan Lal Kanodia Vs. CIT reported in [2002] 257 ITR 449 (Del) wherein it was held that:

“whether it was held to be a case of dissolution of the partnership or of retirement, having regard to the provisions contained in section 47(ii) of the Act, as it stood prior to 1988, the assessee was entitled to the benefit thereof only with respect to the assets, he derived from the partnership firm and not to the excess amount. The excess amount was liable to tax as capital gains”.

6.1 We have heard both the parties and carefully gone through the orders of the lower authorities and perused the Paper Book filed by the assesee before us including following documents :

6.2 At this point of time, it is appropriate to refer to certain provisions of the Act relevant to the facts of the presentcase.

6.2.1 Section 2(47) defines what is transfer and it reads as follows :
'(47) "transfer", in relation to a capital asset, includes,
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in s. 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of or acquiring shares in, a cooperative society, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.'

Explanation : For the purposes of sub-cls. (v) and (vi), "immovable property" shall have the same meaning as in cl. (d) of s. 269UA.'

6.2.2 Section 2(14) defines Capital asset, 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. 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 this extent, there can be no doubt. The next question is as to whether it can 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 s. 45 of the Act.

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.

6.2.2.1 Partnership is 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 in asset held individually into asset of the firm in which the individual is a partner. Similarly, partnership assets were converted into individual assets on dissolution or otherwise.

6.2.2.2 Such introduction of capital asset as capital contribution by a partner up to 1st April, 1988 did not result in incidence of capital gain. It was so held by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The Hon'ble Supreme Court held that under the IT Act, 1961, 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 s. 45 of the Act, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest. On such introduction of capital the partner's capital account is credited with the market value of the property. Such entry does not represent the true value of 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 before hand 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 when 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 even arisen yet. 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 s. 48 of the Act. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in s. 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. In coming to the above conclusion the Hon'ble Court relied on the decision of the Hon'ble Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. The Hon'ble Supreme Court in the said decision explained the nature of partnership and the right of the partners over the assets of the partnership as follows (p. 1303 of AIR) :

".... 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 realisation 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 no legal existence, the partnership property will vest in, all the partners, and in that sense every partner was 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 L share in the assets of the firm which remain after satisfying the liabilities set out in cl. (a) and sub cls. (i), (ii) and (iii) of cl. (b) of s. 48."

6.2.3 The position was later explained in the same judgment as follows (p. 1304) :

"The whole concept of partnership is to entry 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. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the 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."

6.2.4 Parliament with the avowed object of blocking this escape route for avoiding capital gains tax by the Finance Act, 1987, introduced sub-s. (3) to s. 45 w.e.f. 1st April, 1988. The effect of this was that the profits and gains arising from the transfer of a capital asset by a partner to a firm are 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, shall be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset.

6.2.5 In the case of dissolution where partners are allotted capital assets of the firm, it was held that there was no transfer. In Malabar Fisheries Co. v. CIT [1979] 120 ITR 49/ 2 Taxman 409, the Hon'ble Supreme Court has explained the nature of distribution of assets of a partnership on dissolution amongst its partners and as to whether such distribution of assets would constitute transfer within the meaning of s. 2(47) of the IT Act as follows :

"A partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly by or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of s. 2(47) of the Act. Further, it is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person."

6.2.6 To plug this loophole the Finance Act, 1987, brought on the statute book a new sub-s. (4) in s. 45 of the Act, w.e.f. 1st April, 1988, which reads as follows :

"The 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 and, for the purposes of s. 48, the fair market value of the asset 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."

6.2.7 Before the introduction of sub-s. (4) to s. 45, there was cl. (ii) of s. 47 which read as under :
"Any distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons."

Section 47 of the Act lays down which are the transactions not regarded as transfer for the purpose of s. 45 of the Act.

6.2.8 The Finance Act, 1987, w.e.f. 1st April, 1988, omitted this clause, the effect of which was that distribution of capital assets on the dissolution of a firm would w.e.f. 1st April, 1988 be regarded as "transfer". Therefore, instead of amending s. 2(47), the amendment was carried out by the Finance Act, 1987, by omitting s. 47(ii), the result of which was that distribution of 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.

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

6.2.10 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.

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

6.2.12 In the first situation i.e., retirement of a partner from the firm and the firm continuing its existence and the retiring partner is given assets in lieu of amounts payable to him on retirement, it has been held by the Hon'ble Bombay High Court to be covered by the provisions of s. 45(4) of the Act viz., a transfer giving rise to a capital gain. The Hon'ble Bombay High Court in the case of CIT Vs.,A.N.Naik Associates (265 ITR 346)(bom.). In the case of A.N. Naik Associates (supra) was dealing with a case of reconstitution of firm and allotment of assets to retiring partners. The reconstitution had taken place pursuant to a family arrangement. The chargeability to capital gain tax in such circumstances was in issue before the Hon'ble Court. The Court dealt with the issue as to what would be the effect of partners of a subsisting partnership distributing assets to partners who retire from the partnership. Does the asset of the partnership, on being allotted to the retired partner/partners fall within the expression "otherwise" ? The Court held that the purpose and object of the Act of 1987 was to bring to charge of tax arising on distribution of capital assets of firms which otherwise was not subject to taxation. If the language of sub-s. (4) is construed to mean that the expression "otherwise" has to partake of the nature of dissolution or deemed dissolution, then the very object of the amendment could be defeated by the partners by distributing the assets to some partners who may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the amending Act. The Court noticed that the position prior to the amendment by introduction of s. 45(4) by the Finance Act, 1987, was that there was no transfer of assets by the firm to the partners on dissolution or transfer of assets to the retiring partner on retirement. 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 would be deemed to be the full value of the consideration received or accrued as a result of the transfer. Therefore, if the object of the Act is seen and the mischief it seeks to avoid, it would be clear that the intention of Parliament was to bring into the tax net transactions whereby assets were brought into a firm or taken out of the firm.

6.2.13 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 assessees took a stand that retirement is also one form of dissolution of the firm because distribution of assets on retirement was not regarded as a transfer under s. 47(ii) of the Act. This was not accepted by Hon'ble Bombay High Court and they held in thecase of N.A. Modi v. CIT [1986] 162 ITR 420/ 24 Taxman 219 that a clear distinction exists between retirement of a partner from a firm and dissolution of the firm. In the case of retirement of a partner from the firm it is only that 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 of the firm the firm as such no more exists and the dissolution is between all the partners of the firm. The above decision in the case of A.N. Naik Associates (supra) however, treats distribution of assets of the firm to partners on dissolution or on retirement as falling within the ambit of s. 45(4).

6.2.14 The situation with which, we are concerned in this appeal is a case where the retiring partner is paid consideration in cash and he gives up his rights as partner including his rights over the assets of the partnership. There is divergence of view on the question as to whether there is any transfer at all in such situation by the firm in favour of the retiring partner or by the retiring partner in favour of the firm and its continuing partners.

6.2.15 In CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 the question before the Hon'ble Gujarat High Court was as to whether on retirement of a partner from a firm whether there is relinquishment of interest in partnership assets amounting to a transfer. The Hon'ble Gujarat High Court held :

"The interest of a partner in a partnership is not an interest in any specific item of the partnership property. It is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or on his retirement from the partnership to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. 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 in the relevant provisions of the partnership law and it is this, 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 partner.

The transfer of a capital asset in order to attract capital gains tax must be one as a result of which consideration is received by the assessee or accrues to the assessee. When a partner retires from a partnership what he receives is his share in the partnership which is worked out and realized and does not represent consideration received by him as a result of the extinguishment of his interest in partnership assets.

Hence, when an assessee retires from a firm and receives an amount in respect of his share in the partnership there is no transfer of interest of the assessee in the goodwill of the firm and no part of the amount received by him would be assessable to capital gains tax under s. 45."

The Hon'ble Court held that the extended definition of the term 'transfer' under s. 2(47) of the Act, by which relinquishment and extinguishment of any right in a capital asset is considered as transfer would also not apply when a partner retires from the partnership and there would be no transfer of interest in the partnership assets. The Hon'ble Supreme Court confirmed the decision of the Hon'ble Gujarat High Court in Mohanbhai Pamabhai's case (supra). Similar view was also expressed by the Hon'ble Supreme Court in thecase of R. Lingmallu Raghukuma following its decision in the case of Mohanbhai Pamabhai. In CIT v. Kunnamkulam Mill Board [2002] 257 ITR 544/ 125 Taxman 802, the Hon'ble Kerala High Court also expressed the view that where there is revaluation of assets of the firm on reconstitution of a firm consequent to retirement of some of the partners, it cannot be said that there was any transfer of any right in immovable property in favour of continuing partners and therefore there can be no capital gain which can be brought to tax. However, the Hon'ble Bombay High Court in the following cases:

(a) Tribuvandas G. Patel's case (supra );
(b) CIT v. H.R. Aslot [1978] 115 ITR 255(Bom);
(c) N.A. Modi's case [1986] (162 ITR 420).
6.2.16 After considering the decision in the case of Mohanbhai Pamabhai held as follows in the case of Tribhuvandas G. Patel (supra):

"A couple of things emerge clearly from the aforesaid passages. In the first place, a retiring partner while going out and while receiving what is due to him in respect of his share, may assign his interest by a deed or he may instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he had no more claim on his co-partners. The former type of transaction will be regarded as sale or release or assignment of his interest by a deed attracting stamp duty while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what 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 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 s. 2(47) of the Act."

6.2.17 The above decision was followed by the Hon'ble Bombay High Court in the other two cases of N.A. Modi ( supra) and H.R. Aslot ( supra). The Pune Bench of the Tribunal in the case of Shevantibhai C. Mehta(83 TTJ 542)(Pune) had considered the aforesaid decision of Hon'ble Bombay High Court and other decisions relied upon by learned counsel for the assessee before us and has reiterated that the question of taxability of an amount received by a partner on retirement from firm would depend upon mode in which retirement is effected as laid down by the Hon'ble Bombay High Court in the cases of Tribhuvandas G. Patel (supra) and N.A. Modi's case ( supra). Before the Pune Bench, the assessee had argued that the decision of the Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) has since been reversed by the Hon'ble Supreme Court in Tribhuvandas G. Patel's case (supra). The Pune Bench after analyzing all aspects and the various decisions on the issue held that neither the Hon'ble Supreme Court nor other High Courts have disapproved the proposition laid down by the Hon'ble Bombay High Court having regard to the particular mode of retirement. The Pune Bench further found that on the contrary, the Hon'ble Delhi High Court in the case of Bishan Lal Kanodia's case (supra) had concurred with the said proposition propounded by the Hon'ble Bombay High Court in the case of N.A. Modi (supra). Thus the question whether a transaction would amount to an assignment or release of interest by the continuing partner in favour of the continuing partners or not would depend upon what 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 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 s. 2(47) of the Act.

6.2.18 We shall therefore examine the mode of retirement in the case of the assessee, to see if the same can be said to be a transfer or not on the principle laid down by the Hon'ble Bombay High Court in the caseof N.A. Modi (supra).

6.2.19 In the case of Tribhuvandas G. Patel (supra), the assessee was a partner in the firm of KEW. The assessee had served on the other two partners a notice of dissolution of the firm w.e.f. 31st Dec., 1960, which was not accepted by the other partners. The assessee, therefore, filed a suit for dissolution and accounts, but, ultimately, the disputes between the parties were amicably settled out of Court and under a deed dt. 19th Jan., 1962, the assessee retired from the firm w.e.f. 31st Aug., 1961, and the remaining partners continued to carry on the business of the firm. On the occasion of such retirement, the assessee was paid : (1) Rs. 1 lakh as his share of profits of the firm for the broken period ended 31st Aug., 1961, (2) Rs. 50,000 as his share of the value of the goodwill, and (3) Rs. 4,77,941 as his share in the remaining assets of the firm. The issue relevant for our purpose is the liability of the sum of Rs. 4,77,941 or any part thereof to capital gains tax. The Hon'ble Court took up for consideration as to what is the real nature of the transaction when a partner retires from the partnership. Does the transaction amount to any relinquishment of his share or interest in the partnership in favour of the continuing partners, or does it stand on the same footing as an adjustment of his rights that results upon dissolution of the partnership. On behalf of the assessee it was contended that retirement of a partner and quantification of his share and payment thereof to him stands on the same footing as adjustment of rights that results upon dissolution of a firm and, therefore, since there was no transfer of any capital asset in the instant case, the sum of Rs. 4,77,941 or any part thereof was not liable to be charged under the head "Capital gains". This was not accepted by Hon'ble Bombay High Court and they held that a clear distinction exists between retirement of a partner from a firm and dissolution of the firm. In the case of retirement of a partner from the firm it is only that 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 of the firm as such no more exists and the dissolution is between all the partners of the firm. Thereafter the Hon'ble Court held that where accounts are taken and the partner is paid the amount standing to the credit of his capital account there would be no transfer. If, on the other hand, the partner is paid a lump sum consideration for transferring or releasing his interest in the partnership assets to the continuing partners then there would be an element of transfer. This aspect we have already examined in the earlier paras. What we have to see now is whether the terms of the deed of retirement constitutes release of any assets of the firm in favour of the continuing partners. Thereafter the Court referred to the deed between the parties and the following clauses : (at pp. 117 and 118) "And whereas the said sums of Rs. 1,00,000, Rs. 50,000 and Rs. 7,50,000 in all aggregating to a total sum of Rs. 9,00,000 thus became payable by the continuing partners to the retiring partner in full and final satisfaction of all his claims in respect of his undivided half share in the business of the said partnership firm of M/s Kumar Engineering Works and all assets thereof and whereas the continuing partners have taken over the said business carried on by the said old firm of M/s Kumar Engineering Works constituted up to 31st Aug., 1961, as the entire business as a going concern together with all its assets, liabilities and goodwill, benefits of trade name, tenancy rights, import licences and/or quota rights .....

And this indenture further witnesseth that in consideration of the premises aforesaid they the continuing partners do and each of them doth hereby release the retiring partner and the retiring partner doth hereby release the continuing partners and each of them from all covenants, agreements, matters and things in the here before recited partnership dated, the 8th Jan., 1951, and the supplementary agreement dt. 24th Aug., 1957, contained and in further pursuance of the said agreement and in consideration of the premises aforesaid and without making any further payment of any amount to him the retiring partner as beneficial owner doth hereby assign and release upto the continuing partners and each of them all that his right, title, interest and undivided half share in the said partnership firm and all his share and interest on the said pieces of land and premises, structures and buildings standing thereon ....... and machinery, plant, equipment, etc...To hold the same unto the continuing partners absolutely in equal shares as tenants-in-common ........ And this indenture further witnesseth that in pursuance of the said agreement and in consideration of the premises aforesaid the retiring partner doth hereby release, grant, convey and transfer and assure all that his individual half share in all the several pieces or parcels of land to have and to hold the said undivided half share and the premises hereby granted as expressed so as to be unto and to the use of the continuing partners absolutely as tenants-in- common in equal shares forever ....... "

6.2.20 Having regard to the particular mode employed by the assessee and the continuing partners to effect and bring about retirement of the assessee from the partnership, the Court held that the transaction will have to be regarded as amounting to "transfer" within the meaning of s. 2(47) of the IT Act, in as much as the assessee could be said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of the continuing partners and the transaction cannot be regarded as amounting to any distribution of capital assets upon dissolution of a firm.

6.2.21 In the case of N.A. Modi (supra) and H.R. Aslot's case (supra) the facts and manner of retirement and payment of consideration were identical.

6.3 Now, we are concerned with receipt of Rs. 26.99 crores by the assessee from M/s. S.J.M. Property Developers on 6th day of March, 2009 vide retirement deed 06.03.2009. As per this retirement deed, the continuing partners settled a sum of Rs. 27.00 crores towards current account balance and Rs. 99,000/- in capital account lying for its account as on 06.03.2009. Out of this amount, Rs. 26.99 crores has been emanated on 06.02.2007 between Sharadha Terry Products Ltd, D.Srinivasan, S. Srinivasan and Merocrop for clarity, we reproducing relevant conditions of the agreement.

“NOW THIS MEMORANDUM OF AGREEMENT WITNESSETH AS FOLLOWS:

The First Party opts to retire and Leave the Partnership entered Into between them before the Lapse of six months from the date of the registration of Landed properties (in favour of the firm S J M property developers) situated at IIlathore Village, Kasaba Hobli, Devanahalil Taluk, Bangalore Rural District, the Party of the First Part, hoLding 98% of the Share Capital in the Firm M/s S J M Property Developers, shaLt surrender to the Party of the Second Part the entire 98% of Its holding, In the Capital of S J M Property Devetoper5, being the Capital / contributed by them, amounting to Rs. 99,000.

2. The Party of the First Part holding 99% of Share in the Partnership has agreed to advance a Loan of Rs. 25, 00,00,000 (Rs. twenty Five Crores) to M/s S J M Property Developers. This amount will be reimbursed by the firm M/s SJM Property Developers out of the advance receipts bf the sale proceeds. in case there is a shortfall in the re-payment such shortfall shall be paid by the party of the second part .to MIs S J M Developers for repayment of the Loan at the• time of relinquishment of share of 99%of the parties of the First Part along with the original capital contributed by the party of the first part Rs. 99,000 (Rs ninety nine thousand). For ensuring and securing the aforeald repayments of the amounts to the Parties of the First Part, the Party of the Second Pasrt shall issue_post dated cheques for the requisite amount, from Vijaya Bank, Jatahatti Branch, Bangatore. The Party of the Second Part shall also issue a letter to Vijaya Bank, indicating that they will not issue a stop payrment instruction to the Bank, on the above mentioned cheques.

The Party of the Second Part shall..compensate the Party of the First Part with a sum of Rs. 27,00,00,000 (Rupees Twenty seven crores only), on relinquishment, as a consideration for the 99% share held by the party of the first part. The above figure is based on current income tax rate of 33.66 %. in case the tax rate is revised by the Government of India, the revised tax rate has to be taken Into account on the amount payable by the party of the second part. For ensuring and securing the 3foresald repayments of the amounts to the Parties of the First Part, the Party of the Second Part shall issue post / dated cheques for the requisite amount, from Vijaya Bank, Jatahlli Branch, Bangalore. The Party of the Second Part shall also Issue a Letter to Vijaya Bank, Indicating that they will not issue a stop payment instruction to the Bank, on the above mentioned cheques. compensation amount of Rs. 27,00,00,000. ... ....

4. The said compensation shall be paid by the party of the second part Irrespective of the profitability o the firm S J M Property Developers, during the above said six months period.

5. The re-payrnent of the loan amount and the compensation sum along with the income tax component would be paid to the party of the first part by way of post dated cheques with a comfort Letter from MIs. Vijaya bank. The payments of the above shall take place on or before the following days from the Land registration date

The party of the second part shall take alt efforts to repay earlier than the days Indicated above. When the amount is paid earlier than the final dates, the post dated cheques related to the earlier payments shall be returned to the party of the second part.

6. The PARTIES OF THE FIRST PART who are the partners along with Si Deepak Knshnappa and Sri Uday Reddy of the firm SJM Property Developers hereby assure, covenant and confirm with the PARTY OF THE SECOND PART that they will come forward either individually or correctively to register the deeds of absolute sale and conveyance for and on behalf of the aforesaid firm in favour of prospective purchasers of the sites in the layout to be formed on the Schedule Property to the extent of 70% of the total the first stage provided that the payments received from the Prospective purchasers for sale of the sites In respect of the 70% sital area are credited to the account of SJM Property Developers on a pro-rata basis from time to time. As far as the balance_30%: of the total sital area Is concerned, they will come forward either Individually or collectively to register the deeds of absolute sale and conveyance for and on behalf of the aforesaid firm, in favour of prospective purchasers of the sites in the Layout to be formed on the Schedule Property on thé receipt of the entire - consideration due from the PARTY OF THE SECOND PART under this agreement.

7. The Parties of the First Part and Second Part agree that they shall have the right to enforce specific Performance of this Agreement and the parties are bound by this Memorandum of Agreement.

8. It is hereby agreed by both the parties that a separate retirement deed shall be prepared on the date of retirement of the party of the first part. The terms of such retirement deed shall be in line with the terms agreed by this agreement as far as the compensation payable by the party of the second part for the relinquishment of the said 99% in favor of the party of the second part.

9. Time is the essence of this agreement.
10. This agreement is prepared in duplicate and each one of them shall be treated as original.

Sd/-  
S J M PROPERTY DEVELOPERS  
Sd/-
For METROCORP
Sd/-
SHARADHA TERRY PRODUCTS LTD -
PARTNER”

6.4 The contention of the ld.D.R is that the assessee received the above amount of Rs. 26.99 cores on retirement, it should be taxed in the hands of assessee as a capital gain in terms of Sec.45(4) of the Act. The amount of Rs. 27.00 crores, though mentioned in the Retirement Deed of 6th March, 2009, this amount, Rs. 27 crores was accrued to the assessee account vide agreement dated 06.02.2009 as reproduced above and it cannot be said that the said amount was as a lump sum payment in consideration of the retiring partner relinquishing its share or right in the partnership and its assets in favour of the continuing partners. We are of the view that the receipt of this amount on retirement in this case cannot be regarded as relinquishment by the retiring partner of its share or in the partnership firm and its asset in favour of continuing partners.

6.5 Further in the case of CIT Vs.Dynamic Enterprise reported in 359 ITR 83(Kar.) held that when retiring partner takes only money, towards value of its share and when there is no distribution of capital asset among partners, there is no transfer of capital asset and consequently no profit or gain is payable u/s.45(4) of the Act.

6.6 The Hon’ble Andhra Pradesh High Court in the case of CIT Vs. United Fish nets ( 372 ITR 67) held that the distribution must result in some tangible act of physical transfer of properties or intangible act of conferring exclusive rights vis-a-vis an item of property on the erstwhile partner.

6.7 In the case of CIT Vs. Vijayalakshmi Metal Industries (256 ITR 540) wherein held that s.45. (4) is concerned that the capital gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm.

6.8 The learned AR submitted that the issue is covered in favour of the assessee by the decision of the Apex Court in Tribuvandas G. Patel v. CIT [1999] 236 ITR 515, wherein their Lordships held that any sum received by the assessee as his share of value of goodwill is not assessable as capital gains, wherein followed the decision in CIT v. B.C. Srinivas Setty [1981] 128 ITR 294(SC) and that even where a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (ii) of section 47 and accordingly, cannot be assessed as capital gains. In the subsequent decision in CIT v. R. Lingmallu Raghukumar [2001] 247 ITR 801(SC), 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 section 45 of the Income-tax Act, 1961. In this view of the matter, we do not find any substance in the argument of the D.R.

6.9 It is worthwhile to mention herein that the Tribunal ,Hyderabad Bench in case of Smt.Girija Reddy Vs. ITO (52 SOT 113) has taken a contrary view by holding that lump sum payment received by a retiring partner assigning or relinquishing his/her right in the partnership and its asset in favour of the continuing partners will attract capital gain tax. The Tribunal Hyderabad Bench while coming to such conclusion had mainly relied upon the following decisions:-

a) CIT Vs.Tribhuvan Das G.Patel (115 ITR 95)
b) CIT Vs. H.R.Ahot (115 ITR 255)
c) N.A.Mody Vs. CIT(162 ITR 420)
d) Mumbai Tribunal in the case of Sudhakar M.Shetty Vs. ACIT (130 ITD 197)
e) Shevanti Bhai Vs. ITO (4 SOT 94)

However, it appears that the decision of Tribunal ,Hyderabad in case of Doordana Khatoon Vs. ITO (52 SOT 113) was not placed before the Tribunal. That besides the aforesaid decision of Tribunal in the case of Smt.Girija Reddy was prior to the judgement of the Andhra Pradesh High Court in the case of Chalasani Venkateswara Rao Vs. ITO (25 Taxmann com.378). That apart, the amount received by the present assessee is on account of credit balance standing in capital account and current account and not for relinquishing or extinguishing his rights over any assets of the firm. Furthermore, the amount also not credited to his account on the date of retirement on signing the retirement of partnership deed to hold that there is capital gain in the hands of the assessee. Further, in the judgement of Supreme Court in the case of Additional CIT Vs. Mohanbhai Pamabhai (165 ITR 166), Tribhuvan Das G.Patel Vs. CIT ( 236 ITR 515) and CIT Vs.R.Lingamallu Raghu Kumar (247 ITR 801) and Hon’ble Bombay High Court in the case of CIT Vs.Riyaz A.Shikh in 1969 of 2011 dated 26.02.2013 held that amount received by the retiring partner standing to the credit of his account not chargeable to tax in the hands of the partners.

6.9.1 In the case of N.Prasad,Executive Chairman, Matrix Laboratories Ltd., in ITA No.1200/Hyd./ 2010 dated 27.01.2014 observed as under:

“13. We have considered the submissions of the parties and perused the materials on record. We have also carefully applied our mind to the decisions cited before us. Undisputed facts are, the assessee along with two others was carrying on business in partnership in the name and style of Square Projects Associates by virtue of a partnership deed dated 12-3-2003. Assessee vide letter dated 18-1-2005 expressed his intention of retiring from the partnership. On the basis of mutual agreement between the partners the assessee was allowed to retire from the partnership w.e.f. 20-4-2005 by virtue of a deed of retirement executed on 20- 4-2005 and the other partners continued to carry on the partnership business. As per the terms of the deed of retirement, the assessee was to be paid a lump sum amount of Rs. 1,25,00,000/-. The ITA no.l2oo of 2010 Shri N. Prasad ,Executive Chairman, Matrix Laboratories Limited. Relevant clause of the deed of retirement is extracted hereunder for convenience:

“it is agreed between the parties a that after taking into account the capital investment made by the retiring partner, the goodwill of the partnership business with regard to the immovable properties purchased by the partnership firm and efforts made and time given by the retiring partner of the partnership business, the party of first part is entitled to receive a sum of Rs. 1,25,00,000/- ( Rupees one crore twenty five lakhs only) from the continuing partners towards full and final settlement and payment of his shares, right, title and interest and the claims of the partnership business and its assets including goodwill”

14. While the Assessing Officer brought to tax the surplus amount of Rs. 25 Iakhs by treating it as a transfer of goodwill, the CIT (A) deleted the addition by holding that there is no ‘transfer’ when a partner received his share in the partnership business. Keeping in view the aforesaid basic facts we will now examine the legal issue whether there at all is a ‘transfer’ within the meaning of sec. 2(47) of the Act

15. The Hon’ble Supreme Court in case of CiT vs. R. Lingamallu Raghu Kumar (supra) while considering the issue of excess amount received by the assessee on retirement from partnership firm whether is assessable to capital gains upheld the view of the Hon’ble A.P. High Court and that of Gujarat High Court in case of CIT vs. Mohanbhai Pamabhai (91 ITR 393) wherein it was held that there was no transfer of any asset as contemplated by thision ‘transfer’ as defined in section 2(47) of IT Act. The Hon’ble Kerala High Court in caseof CIT vs. Kunnikulam Mill Board ITA no.1200 of 2010 Shri N. Prasad , Executive Chairman, Matrix Laboratories limited. (supra) held that where there is a reconstitution of the firm consequent to the retirement of some of the partners it cannot be said that there was any transfer of any right in immovable property in favour of continuing partner. The larger bench of Karnatalca High Court in case of CIT vs. Dynamic Enterprises (supra) while interpreting section 45(4) of the IT Act held that in case of distribution of capital assets on the dissolution of the firm, there is a transfer of capital asset by the firm in favnur of the person and resulting profits or gains shall be chargeable to tax as the income of the The larger bench further went on to hold that when cash representing the value of the share in the partnership is given to the retiring partners, no capital asset was transferred by the firm to the partner. The Hon’ble High Court held that to attract section 45(4) there should be a transfer of capital asset from the firm to the retiring partner by which the firm ceases to have any right in the property which is so transferred. In other words, its right to the property should stand extinguished and the retiring partner acquires absolute title to the property. If we apply the aforesaid tests to the facts of the present case, the assessee received a lump sum amount of Rs. 1,25,000 from the partnership firm towards his share in the partnership. The partnership firm did not transfer any capital asset to the assessee to the extent by which the firm ceased to have any right in the property. In the present case, according to the Assessing Officer there is transfer of goodwifi. The ITAT, Hyderabad Bench in case of Durdana Khatoon vs. ITO (supra) held that when a partner receives her/his share in the assets of the partnership firm or when hreceives anything in excess of her/his share in the assets of the partnership firm and even in a case a partner receives a share of profit either in case of retirement or in case of dissolution, the same cannot be brought to tax in view of the decision of Hon’ble Supreme Court in case Tribhuvan Das G. Patel vs. CIT (236 1TR 515) and in case of CIT vs. R. Lingamallu Raghu Kumar (supra). While doing so, the Tribunal, Hyderabad Bench also held that in view of the decisions of Hon’ble Supreme Court, judgments of Hon’ble Delhi High Court and Hon’ble Bombay High Court (supra) are not applicable. The Hon’ble jurisdictional High Court in case of Chalasani Venkateswara Rao vs. ITO (supra) held as under:

“20. In L Raghu Kumar (supra), a Division Bench of the Andhra Pradesh High Court followed the judgment of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [19731 91 1TR 393 (Guj.) and held that no transfer is involved when a retiring partner receives at the time of retirement from the firm, his share in the partnership assets either in cash or any other asset. It further held that for the purpose of Section 45 of the I.T. Act, no distinction can be drawn between an amount received by the partner on the dissolution of the firm and that received on his retirement, since both of them stand on the same footing.

21. In P.H. Patel (supra), a Division Bench of the AP High Court noticed that the judgment m Mohanbhai Pamabhai (supra) was app the Supreme Court in Addl. CiT v. Mhanbhai Pamabhai [1987] 165 ITR166 following the judgment in L Raghukumar (supra) held that when a paer retires from a partnership firm taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved.

22. In the light of the above decisions, which are binding on us, we hold that the I.T.A.T. was not correct in confirming the orders passed by the C.I.T. (Appeals) and the respondent. When the appellant was paid Rs. 15.00 lakhs by Y. Kalyana Sundaram in full and final settlement towards his 50% share on the dissolution of the firm, there was no “transfer” as understood in law and consequently there cannot be tax on alleged capital gain. The appellant was correct in law in contending that the amount he received from Y. Kalyana Sundaram is towards the fufl and final settlement of his share and such adjustment of his right is not a “transfer” in the eye of law. It is a recognized method of making up the accounts of the dissolved firm and the receipt of money by him is nothing but a receipt of his share in the distributed asset of the firm. The 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. Payment of the amount agreed to be paid to the appellant under the compromise was not in consequence of any share, exchange or transfer of assets to Y. Kalyana Sundaram. Moreover , as rightly contended by the assessee, up to the assessment year 1987-1988, Section 47(u) of the Income Tax Act, 1961 excluded these N.Prasad, Hyderabad vs Depaitnent Of Income Tax distribution of capital assets on the dlssution of a firm or other association of persons or body of individuals (not being a company or a co- operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purpose of section 48, the fair market value of the asset 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.”

Thus it is clear that the legislature, even though it was aware of the above decisions, did not choose to amend the law by making the partner liable when it amended the I.T Act,1961 by introducing clause (4) to s45 by the Finance Act,1987 w.e.f 14.1988 and made only the firm liable. Therefore the contention of the assessee has to be accepted and that of the Revenue is liable to be rejected.

16. A careful reading of the aforesaid decision of Hon’ble Jurisdictional High Court would make it clear that they approved the view of their earlier decision holding that the amount received by the partner on the dissolution of the firm or on his retirement stand on the same footing and no distinction can be drawn. The Hon’ble High Court further referred to the decision of jurisdictional High Court in case of CiT vs. P.H. Patel (171 1TR 128) wherein it was held that when a partner retires from a partnership taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved. The aforesaid ratio laid down by the jurisdictional High Court clearly apply to the facts of the assessee’s case. 1TA no.l200 of 2010 Shri N. Prasad , Executive Chairman, Matrix laboratories Limited.

However, we need to mention here that the Income-tax Appellate Tribunal, Hyderabad Bench in case of Smt. Girija Reddy vs. ITO (52 SOT113) has taken a contrary view by holding that lump sum payment received by a retiring partner assigning or relinquishing his/her right in the partnership and its asset in favour of the continuing partner will attract capital gain tax. The Income-tax Appellate Tribunal, Hyderabad Bench while coming to such conclusion had mainly relied upon the following decisions.

i) CIT vs. Tribhuvan Das G. Patel (115 ITR 95)
ii) CIT vs. H.R. Aslot
iii) N.A. Moody vs. CIT (supra)
iv) Mumbai Tribunal in the case of Sudhakar M. Shetty vs. ACIT (130 ITO 197)
v) Shevanti Bhai vs. ITO (4 SOT 94)

17. However, it appears the decision of Income-tax Appellate Thbunal , Hyderabad Bench in case of Doordana Khatoon vs. ITO (supra) was not placed before the Bench. That besides the aforesaid decision of the lncome-tax Appellate Tribunal in case of Smt. Girija Reddy was prior to the judgment of the Hon’ble jurisdictional High Court in case of Chalasii Venkateswara Rao vs. ITO(supra).’ That apart, a reading of clause 4 of the deed of retirement makes it clear that the amount of Rs. 1.25 cores was paid to the assessee towards his share capital and not for relinquishing or extinguishing his rights over any assets of the firm. The term ‘goodwill,’ in our view has been loosely used in the aforesaid clause. Furthermore, a plain reading of the clause 4 will not in any manner indicate that payment of Rs. 25 lakhs was towards transfer of goodwill as 1TA no.1200 of 2010 Shri N. Prasad, Executive Chairman, Matrix Laboratories Limited., suggested by the Assessing Officer. Therefore, considering totality of facts and the circumstances of the case and applying the ratio laid down by the Hon’ble jurisdictional High Court in the case of Chalasani Venkatesara Rao (supra), which is binding on us, we are of the view that the order passed by the CiT (A) needs to be upheld. Accordingly, we dismiss the grounds raised by the department.

18. In the result, the appeal filed by the department stands dismissed.”

6.9.2. Further, Bombay High Court in the case of CIT Vs.Riyaz A.Shikh reported in ITA No.1969 of 2011 dated 26.02.2013, there was a question before Bombay High Court whether Tribunal was correct in reversing this decision of CIT(A) and deleting the additions made by the AO towards long term capital gains on transfer of goodwill. Bombay High Court observed that Tribunal while holding that amount received by the partner on his retirement from partnership firm are exempt from capital gains tax, relied upon the decision in the case of Prashant S.Joshi Vs. ITO. In the case of N.A.Mody Vs. CIT(162 ITR 420) has followed the decision of the Tribhuvan Das G.Patel Vs. CIT (115 ITR 95) (Bom.) and the same has been reversed by the Supreme Court in the case of Tribhuvan Das G.Patel (236 ITR 515)(SC) and held that amounts paid to the partner towards his shares in the assets, it should be treated under clause (ii) of Section 47 of the Act and will not be included as capital gain. In Prashant S.Joshi Vs. ITO (324 ITR 504) Bombay High Court has referred to the decision of Tribhuvan Das G.Patel Vs. CIT (supra) and placed reliance on the decision of Supreme Court in the case of CIT Vs.R.Lingamallu Raghu Kumar(supra) and held that there is no capital gain tax on retirement. Further, in Additional CIT Vs. Mohanbhai Pamabhai (91 ITR 393)(Guj), it was held that when a partner retires from partnership what he receives is his share in the partnership, which is worked out and realized and does not represent consideration received by him as a result of the extinguishment of his interest in partnership assets.

6.9.3 Further, it was held that the extended definition of the term “transfer” u/s.2(47) of the Act, by which relinquishment or extinguishment of any right in a capital asset is considered as transfer would also not apply when a partner retires from the partnership and there would be no transfer of interest in the partnership assets. Interest of a partner in a partnership firm is not an interest in a specific item of partnership property. It is his right to obtain his share of profit from time to time during the subsistence of partnership, or on dissolution of a partnership firm, or on his retirement from partnership to get the valuation of his interest in the partnership asset which remains after debts and liabilities of partnership. On retirement share is determined on taking accounts of notional sale of partnership assets and given to him what he received is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. No element of transfer of interest in partnership assets by the retiring partners to the continuing partner no extinguishment of his interest in partnership assets. No transfer of his interest in the goodwill of the firm. Thus, no capital gains is chargeable u/s.45 of the Act. This decision was confirmed by the Hon’ble Supreme Court in the case of Additional CIT Vs. Mohanbhai Pamabhai (165 ITR 166)

6.9.4 Now regarding the reliance placed by the ld.D.R in the judgement of Bombay High Court in the case of CIT Vs. A. N. Naik Associates And Another reported in [2004] 265 ITR 346 (Bom), in our opinion it cannot be applied to the facts of the present case. In that case, the asset of the partnership firm was transferred to retiring partner by way of Deed of Retirement, it is based on this document and subsequent deeds of retirement of partnership that the order of assessment was made holding that the assessees are liable for tax on capital gains, in that context the Bombay High Court held that when the assets of the partnership is transferred to retiring partner, the partnership which is assessable to tax ceased to have a right or it is a right in the properties stand extinguished in favour of the partner to whom it is transferred.

6.9.5 Regarding the applicability of provisions of the section 28(iv), there is no receipt of any value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession by present assessee. It is only by retirement from the partnership firm, the assessee received the impugned amount.

6.9.6 Regarding the application of Sec.28(v) as discussed in earlier, what the assessee has received on retirement is his share in the value of the business carried on by the firm. The share in the value of the business is a capital asset which include goodwill and as such, such receipts are capital receipts in their hands as held by the Hon’ble Supreme Court in the case of Additional CIT Vs. Mohanbhai Pamabhai (supra) and that cannot be considered as business income of assessee u/s.28(v) of the Act and Sec.28(v) confined to any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by, partner of the firm, from such firm and it should be in revenue field. The receipt which is in the capital field cannot be brought u/s.28(v) of the Act This contention of the ld.D.R cannot have any merit.

6.9.7 Regarding the applicability of Sec.28(va) of the Act, this issue came for consideration before this Co-ordinate Bench of Chennai in the case of ACIT Vs. P.Shivakumar(HUF) in ITA No.1584 to 1590/Mds./2013 reported in (2014) 63 SOT 0091(Chennai)(URO) wherein held as follows:-

“Now the question to be considered is whether the Assessing Officer is justified in invoking Section 28(va) so as to treat this additional payment as “business income” It was held that the Revenue contention that the amounts received by the respondent-assessees were for the purpose of not carrying out any activity in relation to any business cannot be accepted. There was no agreement entered into between the assessees with the business stating that they will not be carrying on any business activity. There was no agreement whatsoever including in the nature of non-competition. The assessees have received the amount not because of any particular agreement, but because of their retirement from the business. The retirement deeds executed by the parties were not in the nature of any agreement restraining the parties from carrying on business activities. Therefore, Section 28(va) is not applicable to the case of partners retiring from the business. That clause is more applicable to situations like non-competition agreement, etc. (Para 8, 9)

There is no element of profit in such additional payments to the assessees. This is because the profit till the date of retirement has been worked out by the firms and the shares of the retiring partners have already been credited to their capital accounts. The capital accounts of the retiring partners reflected the capital contributions made by them, along with their profit shares. When the capital accounts are settled by paying the amounts to retiring partners, the share of the profits also have been credited. Settlement of the capital accounts takes care of such things. Moreover, even if there is an element of profit, for the sake of argument, such profits are not taxable in the hands of the partners by virtue of provisions of Section 10(2A) of Income-tax Act, 1961. (Para 10)

The additional payments made to the retiring partners were not in the nature of any profit or income within the meaning of Section 28(va) and were non- taxable capital receipts. The CIT (A) was justified right in holding that the amounts are not taxable. (Para 12, 13)

Being so, in our opinion additional payment even if made to the retiring partner in excess of capital account is not in nature of any profit or income within the meaning of sec.28(va) of the Act and it cannot be brought to tax as business income.

7. The other contention of the ld.D.R is that the amount received by the assessee at Rs. 26,99,00,000/- is quantified vide Memorandum of Agreement on 06.02.2007 between the assessee,D.Srinivasan, S.Srinivasan and M/s Metro Corp, and further agreement made on 31.01.2009, (Retirement cum reconstitution of partnership deed) and Memorandum of agreement of retirement from partnership dated 06.03.2009 are only arrangement to come out of the tax net by entering into series of retirement and fresh partnership, but has to get over arrangement dated 06.02.2007 which were already in existence between the assessee company and Metro Crop Bangalore and the amount was actually received by the assessee from Metro Crop and not from firm M/s. S.J.M. Property Developers where the assessee is a partner. As seen from the argument of ld.D.R, this argument is totally contradictory to the earlier argument of the ld.D.R. There is a serious doubt in the minds of the AO as well as the ld.D.R regarding the taxability of the same in the hands of the assessee in terms of Sec.45(4) of the Act ,so that this argument has been addressed by the ld.D.R. In our opinion, when we have gone through the Memorandum of Agreement dated 06.02.2007, even if the amount of Rs. 27 crores is accrued to the assessee, it is not relating to the assessment year under consideration before us as the assessment year involved is 2008-09. How the transactions entered on 06.02.2007 would be brought to tax in the assessment year 2008-09, even it is admitted that income was accrued to the assessee on 06.02.2009 vide that Memorandum of agreement. More so, when the assessee is following Mercantile system of accounting as noted by the AO in its first page of assessment order at serial No.8, there is no force in the argument of the ld.D.R to hold that the said amount to be taxed in the assessment year 2008-09

8. The next ground in the assessee’s appeal is that the Ld.CIT(A) erred in sustaining the re-computation of the deduction u/s.10B of the Act by setting off the depreciation loss of non-eligible units against the income of eligible units involved in the activity of export in the computation of taxable total income without assigning proper reasons and justification.

9. The facts are that in this ground the assessee wants not to set off depreciation loss of other units against the income of the assessee from the export business, which runs several units. This issue is squarely covered by the Decision of Karnataka High Court in the case of CIT v. YOKOGAWA INDIA LTD. reported in [2012] 341 ITR 385 (Kar) held that exemption u/s.10A has to be allowed without setting off brought forward unabsorbed losses or depreciation from earlier assessment year or current assessment year either in the case of non STP or in the caseof from some other undertakings, being so depreciation loss of other units cannot be set off against the income fo the assessee from the export purpose. Thus, this ground of the assessee is allowed accordingly.

10. The last ground is that the CIT(A) erred in sustaining the reduction of Rs. 4,37,168/- being the miscellaneous receipts from the eligible profits in the computation of deduction u/s.10B of the Act without assigning proper reasons and justification.

11. The facts of the case are that the assessee’s claim that the said amount of receipts were earned in the course of carrying on the business of 100% EOU i.e receipts from the sale of scrap will also qualify for deduction is unacceptable. Sec.10B(4) clearly states that profits derived from export of articles should alone be considered. Needless to say that the income attributable to an activity is one step removed from the income derived. We are of the view that Ld.CIT(A) placing reliance on Supreme Court’s decision in the case of Liberty Liberty India Vs. CIT reported in 183 Taxman 349, rejected this ground. We do not find any infirmity in the order of the Ld.CIT(A). Hence this ground is not allowed.

Revenue’s appeal in ITA No.990/Mds./2014 (A.Y 2009-10)
12. The Revenue has raised the ground with regard to computation of book profit by treating the receipt of Rs. 27.99 crores as short term capital gain.

13. This amount is straight away taken to General Reserve account and not appearing in the P&L A/c and there is no allegation that brought on loss account was not prepared in accordance with Part-II & III Schedules VI of Companies Act. Hence, the AO is precluded from disturbing the audited Accounts which is duly filed before the ROC as held by the Supreme Court in the case of Apollo Tyres Vs.CIT (255 ITR 273) wherein held that:

“The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J . The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.”

Accordingly, we are in agreement with order of the CIT(A).

14. In the result, the appeal of assessee is partly allowed and appeal of Revenue is dismissed.