TMI Blog2002 (4) TMI 222X X X X Extracts X X X X X X X X Extracts X X X X ..... ,110. While doing so he adopted the fair market value of land, building and machinery on the basis of the valuation report of the Valuation Officer and accordingly worked out the net capital gain at Rs.10,09,499 and also allowed therefrom the loss claimed by the assessee. While working out capital gain the Assessing Officer noted that on 15-9-1989 the assessee-firm consisting of two partners, namely, Sh. Patiram and Sh. Rai Binder, Karta of Rai Binder (HUF) having shares at 10% and 90% respectively was dissolved and the business carried on by it was taken over by Sh. Rai Binder as karta of HUF under the same name. The Assessing Officer opined that in view of the provisions of section 45(4) read with section 2(47) there was a transfer and the gain arising therefrom was liable to be taxed under the head "Capital gains". Aggrieved thereby the assessee came up in appeal. It was pointed out before the first appellate authority that on 15-9-1989 i.e. the date of dissolution of the assessee-firm there was no "transfer" of any capital asset within the meaning of section 2(47). It was further submitted that actually there was no dissolution of the firm and only Sh. Patiram voluntarily retir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended by the ld. DR that when one of the partners retired from a firm consisting of two partners, it was a clear cut case of dissolution of firm and the provisions of section 45(4) were clearly attracted. Reliance was placed on the case of Suvardhan v. Asstt. CIT [1998] 67 ITD 104 (Bang.) and Swamy Studio v. ITO [1998] 66 ITD 276 (Mad.) to contend that the facts involved in the present case were identical to those considered by these Benches of Tribunal wherein it was laid down that the provisions of section 45(4) were attracted. The ld. DR also relied on the decision of Summit Court in A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC) to point out that on dissolution of firm, stock in trade was liable to be valued at market price. In the final submissions the ld. DR contended that the ld. CIT(A) did not consider the factual and legal position in right perspective as a result of which there was a miscarriage of justice. 5. In the opposition the ld. counsel for the assessee strongly supported the order passed by CIT(A) and his submissions were reiteration of reasoning recorded by latter to delete the addition. It was contended that there was no mistake committed by CIT(A) warranting a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the firm the ld. counsel pleaded that the case was out of the ambit of section 45(4). A still further contention was raised that the continuing partner carried on the business as such and there was no discontinuance of business at any point of time. Relying on the decision of Apex Court in the case of Sakthi Trading Co. v. CIT [2001] 250 ITR 871 the ld. counsel pleaded that there was no dissolution of firm. A further contention was raised to the effect that the Assessing Officer had computed capital gain under section 45(4) on the basis of report obtained from valuation officer for which he was not competent. While taking us through the computation of capital gain as per page 6 of the assessment order, the ld. counsel pleaded that the Assessing Officer had applied provisions of section 50 for computing capital gain on land, building and machinery. As the land was a non-depreciable asset and did not constitute a block of asset in itself for this purpose, the ld. counsel pleaded that the Assessing Officer erred in resorting to section 50 for computing capital gain in respect of land. As regards the valuation of building and machinery, the ld. counsel pleaded that there were m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to by the Assessing Officer before finalising the assessment. 8. We have considered the rival submissions in the light of material placed before us and precedents relied upon, In order to decide the applicability of section 45(4) it is of paramount importance that the first question should be decided as to whether there was any distribution of capital assets on dissolution of firm. As regards the dissolution of the firm the case of the revenue is that that firm stood dissolved when one partner retired from the firm whereas the assessee is contending that there was no dissolution and the business continued as such. From the facts of the case it is noted that w.e.f.17-8-1985only two persons, namely, Sh. Patiram and Sh. Rai Binder (HUF) were left in the firm. As per the dissolution deed dated 16-9-1989 one of the partners, namely, Sh. Patiram stepped out of the firm as a result of which only Sh. Rai Binder (HUF) continued the business under the same name. When there are two partners in a firm and one of them steps out obviously no partnership firm remains into existence. The primary condition for formation or continuation of a partnership firm is that there should be two or more p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l assets on dissolution of firm would henceforth be regarded as 'transfer'. Therefore instead of incorporating the effect of section 45(4) in section 2(47) the suitable amendment was carried out by the same Finance Act in section 47 the result of which is that the distribution of capital assets on the dissolution of firm would be regarded as 'transfer'. Therefore the contention that since section 2(47) did not contemplate the transfer as noted in section 45(4) and hence no capital gain is chargeable, is bereft of any force. We therefore hold that the capital gain was liable to be charged on dissolution of firm on16-9-1989. 11. The ld. counsel has also raised a very interesting proposition by tendering that Sh. Rai Binder (HUF) was earlier having 90% share in the profit ratio which was subsequently converted into 100% share and therefore he became the additional owner only for 10% which was the share of retiring partner in the firm and hence at the most only 10% of the total capital gain could be charged. He also placed reliance on the decision of Malabar Fisheries Co.'s case to contend that the firm was not a distinct legal entity apart from partners. There is no dispute about th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrast it is noted that in the instant case there was no reconstitution of the firm and naturally it can't be because after the retirement of one out of two partners, the firm stood dissolved. We are therefore of the considered view that this, decision does not advance assessee's case any further. As regards reliance placed by the ld. counsel on the decision of Shahdara Aluminium Factory's case the same is also distinguishable because in that case also two partners retired from the firm comprising of five partners and the firm was continued by the remaining three partners. In contrast it is noted that the decision of Madras Bench in Swamy Studio's case relied upon by the ld. DR is clearly applicable to the facts of the present case as in that case also after dissolution of the assessee-firm its business was taken over by one of the partners and the difference between the market value of the properties and its cost was taken as capital gain. To similar effect is the order of Bangalore Bench Suvardhan's case where it was held that distribution of capital assets on dissolution of firm amounted to transfer and it was exigible to capital gain tax. If in the present case, the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Valuation Officer's report and by deducting the value shown in balance sheet determined capital gain under section 50 at Rs.3,77,326.50. In the like manner the capital gain was computed under section 50 on building and machinery also. The ld. counsel has raised a contention that the valuation report was not correct and the assessee had brought out various deficiencies in the report which were not considered by the Assessing Officer. From the order of the CIT(A) it is seen that he has not dealt with this issue. As such we are of the considered opinion that it would be in the interest of justice if the impugned order on the issue of determining the fair market value is restored to the file of Assessing Officer for deciding it afresh after meeting with assessee's objection. We order accordingly. 15. The ld. counsel has also raised a contention that if at all the matter is to be remitted to the Assessing Officer for redetermining the fair market value then the Assessing Officer should be precluded from considering the value of land because he had referred to the provisions of section 50 which were not applicable on land. From the assessment order it is noted that the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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