2009 (12) TMI 549 - HC - Income Tax

Capital gains - on the distribution of assets on the dissolution of the firm - assessed under section 45(4) of the Act Reference to valuation officer Held that - this is a clear case falling under section 45(4) attracting liability for capital gains. We therefore uphold the reference of the asset for valuation under section 55A as within the powers of the officer. Consequently we allow the appeals by reversing the orders of the Tribunal and restore the order of the Commissioner issued under section 263 of the Income-tax Act - remand the matter to the Tribunal -on the valuation issue.

Summary

Issues:
1. Whether the Tribunal was justified in holding that the respondent-assessee is not liable for payment of tax on capital gains on the distribution of assets on the dissolution of the firm.

Analysis:
The case involved a firm constituted with four partners for running a lodging business, which was dissolved with the land and building going back to the partners. The Assessing Officer initiated proceedings for assessment of capital gains, but the assessee argued against it, stating that the transfer of assets on dissolution did not attract capital gains as the assets went back to the same partners at depreciated value. The Commissioner of Income-tax issued revisional orders holding the transaction liable for capital gains. The Tribunal decided in favor of the assessee, stating that no assessment of capital gains was justified. However, the High Court disagreed, emphasizing that section 45(4) of the Income-tax Act applied to levy tax on capital gains on the distribution of assets on the dissolution of the firm among partners.

The High Court criticized the Tribunal for not considering the applicability of section 45(4) and highlighted that the transfer of assets to the firm and retransfer to the partners on dissolution attracted tax on capital gains. The Court also addressed the Tribunal's dismissal of section 55A, noting that it authorizes the Assessing Officer to refer assets for valuation to determine fair market value for capital gains assessment. The Court rejected the assessee's argument that depreciated value equated fair market value, emphasizing the need to determine actual fair market value for capital gains assessment. The Court clarified that while section 50(1) applies to the sale of depreciated assets, section 45(4) covers the distribution of assets on firm dissolution, making the assessee liable for capital gains.

In conclusion, the High Court reversed the Tribunal's decision, restoring the Commissioner's order under section 263 of the Income-tax Act. The Court remanded the matter to the Tribunal for a fresh decision on valuation, emphasizing the applicability of section 55A for determining fair market value and directing a resolution within four months.