50C provisions not apply to transfer of right in partnership firm. Sale deed of property executed in favour of incoming partners by retiring partners-ITAT

50C provisions not apply to transfer of right in partnership firm. Sale deed was executed in favour of incoming partners for transferring retiring partner’s right in the property belonging to the partnership firm-ITAT

ABCAUS Case Law Citation:
ABCAUS 1070 (2016) (12) ITAT

Assessment Year: 2011-12
Date/Month of Judgment/Order: November. 2016

Brief Facts of the Case:

Two appeals were filed against the order of the CIT u/s 263 of the Income Tax Act, 1963. The appellant assessees were husband and wife and partners of a firm. Both the appeals were heard together and disposed of by a common order by the ITAT

The both the assessees were deriving income from a partnership firm. During the relevant financial year, the assessees filed their returns of income and the same was processed u/s 143(1).  Thereafter, the Assessing Officer (AO) noticed that the assessees have sold a property for a consideration but have not filed their income tax returns. Treating it as escaped assessment, AO issued notice u/s 148 and re-opened the assessments for scrutiny. In response to the notice, the assessees appeared and also furnished the information called for. The AO observed that subsequent to the issuance of notice u/s 148 of the Act, the assessees have filed their returns admitting income which included the sale consideration on sale of land and also paid taxes thereon. The AO therefore, examined the returned income and accepted the returned income.

Thereafter, the CIT, u/s 263, verified the assessment records and found that the value of the property sold as per the Sub Registrar Office is more than the sale consideration admitted. Therefore, the CIT was of the opinion that provisions of deeming fiction u/s 50C were applicable.

In response to notice u/s 263, the assessees filed their explanations stating that the asset sold was not a fixed asset but their interest in the partnership firm. It was submitted that the assessees were the partners of the partnership firm along with other partners and have purchased the property in the names of all the Partners and since the assessees retired from the partnership firm, the other partners had agreed that the assessees would have to transfer their rights in the partnership to the incoming partners. Therefore, the sale deed was executed and therefore, it was only a transfer of interest in the partnership and not the asset and therefore, the provisions of section 50C were not applicable.

The CIT was, however, not convinced with the said contention held that the AO had failed to examine the issue at the time of assessment proceedings and therefore, the assessment order has become erroneous and prejudicial to the interest of the Revenue. He therefore, set aside the assessments and directed the AO to redo the assessments.

Against this order of the CIT u/s 263, both the assessees were in appeal before the ITAT.

Observations made by the Tribunal:
The Tribunal noted that both the appellant assessees were the owners of the property along with other partners of the firm and the sale deed has been executed in favour of the incoming partners for transferring their right in the property belonging to the partnership firm. Thus, it can be seen that the transfer is not to a person in the open market but is to the partners who are inducted to the partnership firm.

The ITAT also agreed with the contention of the assessee that the sale was subject to the approval of the other partners and therefore, the sale consideration could not be equalized to the market value or the registered value. It was subject to the agreement between the partnership firm and also the incoming partners.

The Tribunal was convinced that the transfer was only of a right in the partnership firm and not the capital asset and CIT should have examined the assessee’s contentions that it was only a business right and not a capital right which has been transferred.

Regarding the contention of the Revenue that the assessment order was both erroneous and prejudicial to the interest of the Revenue, the ITAT noticed that the AO, during the assessment proceedings u/s 147 had considered the issue of the transfer of the capital asset and has accepted the business income returned by the assessee u/s 50.  Thus the AO had accepted one of the possible views and therefore, it could not be said that the assessment order was erroneous.

The Tribunal observed that the CIT had not brought out the reasons for rejecting the assessee’s contentions and for coming to the conclusion that the assessment order is prejudicial to the interest of the Revenue.

Held:
Revision order u/s 263 was set aside and the appeals of both the assessees were allowed