Itxa/1620/2016 Of Principal Commissioner Of Income Tax-31 v. M/S. S.c. Brothers

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1620 OF 2016 Pr. Commissioner of Income Tax-31 .. Appellant v/s. M/s. S.C. Brothers .. Respondent Mr. Arvind Pinto for the appellant None for the respondent CORAM : AKIL KURESHI & M.S. SANKLECHA, J.J. P.C. DATED : 23[rd] JANUARY, 2019 1.The Revenue is in appeal against the order of the Income TaxAppellate Tribunal (“the Tribunal” for short), raising following question for our consideration :- “Whether in law and on the facts of the instant case, was theTribunal correct in holding that income from the transfer ofproperty by way of distribution of assets on retirement of the twopartners to be long term capital gains ass per Section 45(4) ofthe I.T. Act instead of short term capital gain as held by the AO? 2.The issue arises in following background. 3.The respondent assessee is a partnership firm. In the return of income filed for Assessment Year 2007-08, the assessee had offered certain receipts to tax as long term capital gain. The Assessing Officer,however, was of the opinion that the gain would give rise to short termcapital gain. 4.The assessee had acquired a plot of land at Jogeshwari in theyear 1960 for a consideration of Rs.70,000/-. During the periodrelevant to the Assessment Year 2006-07, the assessee entered into adevelopment agreement on 28.11.2005 with one M/s K. RehejaUniversal Pvt. Ltd. (“M/s. K. Raheja” for short) for development of suchland. As per the terms of the development agreement, the assesseewould receive 50% of the developed property and cash of Rs.4.80 crores(rounded of). The development agreement was registered withRegistering Authorities, which was valued at Rs.10.62 crores (roundedof) for the purposes of stamp duty. The assessee firm also offeredcapital gain tax on such valuation of Rs.10.62 crores after claimingindexed cost of 50% of the land. According to the assessee, aftertransfer of land pursuant to said development agreement, the assesseewould remain owner of the 50% of the land with FSI available on suchland and would have a right to claim 50% of the developed propertyfrom M/s. K. Raheja. 5.On 31.12.2006, two partners of the firm Shri. Yogendra Sanghaviand Shri. Somin Sanghavi having 34% and 16% share in the property ofthe firm retired. These partners were also entitled to receive share inthe property of the firm in the ratio of share of profit in the partnershipfirm. Accordingly, the assessee firm distributed 50% of the land andthe FSI and right to develop the property to the retiring partners. Interms of the provisions contained in Section 45 of the Income Tax Act,1961, the assessee offered long term capital gain on account ofdistribution of the assets of the firm to the retiring partners, considering50% of the capital asset having been distributed. 6.The Assessing Officer raised several disputes with thiscomputation and the treatment to tax offered by the assessee firm.However, in the present appeal, the Revenue has pressed only one suchobjection namely that the assessee was incorrectly treating the capitalgain as long term instead of offering to short term capital gain tax. 7.The assessee carried the matter in appeal. The Commissioner ofIncome Tax [CIT(A)] allowed the assessee's appeal accepting theassessee's contention that there was no conversion of the land with FSIavailable thereon vide development agreement dated 28.11.2005. The CIT(A) held that the transfer by way of distribution on retirement of thepartners was 50% of the assets of the firm. The same was, therefore,transfer of long term capital asset. 6.The Assessing Officer raised several disputes with thiscomputation and the treatment to tax offered by the assessee firm.However, in the present appeal, the Revenue has pressed only one suchobjection namely that the assessee was incorrectly treating the capitalgain as long term instead of offering to short term capital gain tax. 7.The assessee carried the matter in appeal. The Commissioner ofIncome Tax [CIT(A)] allowed the assessee's appeal accepting theassessee's contention that there was no conversion of the land with FSIavailable thereon vide development agreement dated 28.11.2005. The CIT(A) held that the transfer by way of distribution on retirement of thepartners was 50% of the assets of the firm. The same was, therefore,transfer of long term capital asset. 8.The Tribunal, in appeal filed by the Revenue, confirmed the viewof the CIT(A) observing that at the time of execution of thedevelopment agreement, the assessee had offered the full value ofconsideration of Rs.10.62 crores to long term capital gain. The assesseehad retained the remaining 50% of the land with available FSI and,therefore, the assessee was correct in considering the distribution ofsuch retained asset, upon retirement of the partners as giving rise tolong term capital gain. 9.We are in agreement of the view taken by the CIT(A) and theTribunal. The Revenue is not justified in holding a belief that thecapital asset in question can be said to have been acquired by thepartnership firm only on 28.11.2005, which was the date on which thedevelopment agreement was executed. As noted, what happened underthe development agreement between the assessee and M/s. K. Rahejawas transfer of certain rights in the property, namely 50% of the landwith development of available FSI thereon on certain terms and conditions. Under the said agreement, the assessee would receive aportion of the developed property as well as cash amount of Rs.4.80crores to be paid. The assessee on assessed total consideration arisingout of the development agreement at Rs.10.62 crores for the purposesof stamp duty valuation and offered the entire amount to capital gaintax, after claiming indexation of only 50% of the land. This formula isobviously accepted by the Revenue. 10.In any case, in view of the development agreement, the assesseeretained remaining 50% of the land with use of FSI available on suchland. Under the development agreement, therefore, the assessee canbe seen to have divested itself of a portion of the land with the rightsattached to such land and having retained the remaining portion. Thisdevelopment agreement under no circumstances, can be seen to havegiven rise to acquisition of the land or rights therein by the assessee onthe date of agreement. Consequently, therefore, when two partnersrepresenting 50% share in the profit as well as the assets of the firmretired, the assessee distributed 50% of the rights in land whichremained with the assessee upon execution of the developmentagreement and offered the notional value to long term capital gain,which the Tribunal correctly approved. No question of law, therefore arises. 11.The appeal is dismissed. (M.S. SANKLECHA, J.) (AKIL KURESHI, J.)