2005 (10) TMI 271 - AT - Income Tax

Summary

Issues Involved:
1. Ownership of the land.
2. Applicability of Section 45(4) of the Income-tax Act.
3. Proportion of land value to be considered for capital gains.
4. Valuation of the land.

Detailed Analysis:

1. Ownership of the Land:
The first question to be decided was whether the land belonged to the individual partners or to the firm. The land was purchased with the funds of the firm and shown in its balance sheet from year to year until it was distributed in connection with the dissolution of the firm. Section 14 of the Indian Partnership Act provides that property obtained by means of partnership is the partnership property unless the contrary is established. The land was purchased from the firm's funds and used for the firm's business. The onus to prove that the land belonged to the partners lay on the assessee. The assessee failed to provide firm evidence showing that the land was treated as separate property by all partners since its acquisition. Thus, it was held that the land belonged to the firm.

2. Applicability of Section 45(4) of the Income-tax Act:
The second issue was whether the provisions of section 45(4) were applicable. The assessee argued that the firm dissolved on 1-4-1988, but the land was distributed to the partners on 31-3-1988. The court referred to the decision of the Bombay High Court in CIT v. A.N. Naik Associates, which clarified that section 45(4) applies to the transfer of a capital asset by a firm to a partner on dissolution or otherwise. Since the land was distributed in connection with the dissolution of the firm, it was held that the transaction fell within the provisions of section 45(4).

3. Proportion of Land Value to be Considered for Capital Gains:
The third issue was whether the full value of the land should be taken into account for computing capital gains or only 62% of the full value. The assessee argued that four partners had retired before the dissolution, holding a 38% share in the lands, which should not be taken into account for computing capital gains. The court noted that entries in the books of account are not conclusive of legal issues. The retired partners were entitled to their share in the assets on retirement. The distribution to ex-partners on 31-3-1988 was not qua-partners but as ex-partners. Therefore, the court held that only 62% of the land's value should be considered for computing capital gains.

4. Valuation of the Land:
The last issue was whether the valuation of Rs. 39,49,300 by the Valuation Officer as on 31-3-1988 was correct. The assessee argued that the land was sold for Rs. 40 lakh on 22-1-1992, suggesting the valuation was high. The court agreed with the Department that subsequent events should not be considered for fixing the land's value. The valuation is a matter of art, not science, and there is no arithmetical formula for it. Therefore, the court concluded that the value of the lands on the date of dissolution should be adopted at a round sum of Rs. 39 lakh.

Judgment:
1. Ownership of the land was decided against the assessee.
2. The applicability of section 45(4) was upheld, but only 62% of the land's value should be considered for capital gains.
3. The valuation of the land was fixed at Rs. 39 lakh.

Conclusion:
The appeal of the assessee was partly allowed.