TMI Blog2008 (2) TMI 487X X X X Extracts X X X X X X X X Extracts X X X X ..... res and execution of real estate project at Chennai into an independent business unit to be managed by a group of the existing partners. 5. As per the terms of the MoU another partnership under the same name (with a different address) was formed comprising of a group of partners. According to the terms of the MoU all the assets and liabilities of the above businesses as existing in the books of the assessee firm as on 31st March, 2002 were transferred to the new firm w.e.f. 1st April, 2002. 6. While making assessment AO after appreciating the factual details, concluded that the assessee firm was dissolved on 31st March, 2002 and two new firms evolved out of such dissolution w.e.f. 1st April, 2002. Applying the ratio of the decision of the Hon'ble apex Court rendered in the case of A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133, : (1991) 189 ITR 285 (SC), he valued the closing work-in-progress as on 31st March, 2002 at market value and added a sum of Rs. 6,43,43,000 to the income returned. Further by deeming distribution of assets among the partners at the time of dissolution, the AO invoked the provisions of s. 45(4) of the IT Act, 1961 (hereinafter referred to as 'the Act') and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usted on any other basis. 9. Adverting to the decision of ALA Firm, learned Departmental Representative invited our attention on the following paras at pp. 306 and 307 of the report: "We, however, find substance in the second consideration that prevailed with the High Court. The decision in Muhammad Ussain Sahib vs. S.N. Abdul Gaffoor Sahib AIR 1950 Mad 758 : (1950) 1 MLJ 81 correctly sets out the mode of taking accounts regarding the assets of a firm. While the valuation of assets during the subsistence of the partnership would be immaterial and could even be notional. the position at the point of dissolution is totally different: 'But the situation is totally different when the firm is dissolved or when a partner retires. The settlement of his account must be not on a notional basis but on a real basis, that is every asset of the partnership should be converted into money and the account of each partner settled on that basis..... The assets have to be valued, of course, on the basis of the market value on the date of the dissolution.......' This applies equally well to assets which constitute stock-in-trade. There can be no manner of doubt that, in taking accounts for pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Guj). In this case Hon'ble High Court has held that for the purpose of valuation of closing stock in a case where there is a dissolution, the market value has to be adopted where the dissolution is accompanied by discontinuance of the business and not otherwise. The established rule of commercial practice and accountancy is that closing stock has to be valued at cost or market price, whichever is lower. 12. It was vehemently argued that demerger/division of businesses does not mean discontinuance of business. In the present case the original business of the firm continued with the existing firm and Additional businesses hived off to the retiring partners. 13. Reference was also placed on the decision of Sakthi Trading Co. vs. CIT (2001) 169 CTR (SC) 297 : (2001) 250 ITR 871 (SC) In this case apex Court considered the decision rendered in the case of A.L.A. Firm's, and took note of the fact that in A.L.A. Firm's case after dissolution, two groups were carrying on separate business with the assets and liabilities which fell to their shares from the dissolution of the firm. In the case of Sakthi Trading Co. there was dissolution on account of death of one of the partners. There wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) 500 : (1971) 82 ITR 540 (SC) it was held that taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into surrounding circumstances to find out the reality of the recitals made in those documents. 17. Further reliance was placed on the decision of the apex Court rendered in the case of Suman Dayal vs. CIT (1995) 125 CTR (SC) 124 : (1995) 214 ITR 801 (SC). In this case Hon'ble Supreme Court applied the test of human probabilities and concluded that the claim of the assessee about the amount being her winnings from races was not genuine. 18. In the case of CIT vs. Panipat Woollen General Mills Co. Ltd. 1976 CTR (SC) 317 : (1976) 103 ITR 66 (SC) it was held that the party cannot escape the consequences of law merely by describing an agreement in a particular form though in essence and in substance, it may be a different transaction. 19. In the opinion of the CIT(A) the intention and subsequent conduct of all the partners did not indicate dissolution of the firm. Three partners continued with the civil construction business. A part of the business of the firm was continued by the reconstitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining at the end of the period. The partners being commercial men would value the assets only on real basis and not at cost or their other value appearing in the books. The real rights of the partners cannot be mutually adjusted on any other basis. Qua the old firm the business was discontinued in relation to real estate project and computer education centres. As such the ratio of the decision laid down in the case of ALA Firm supra, is fully applicable to the facts of the present case. In our opinion, AO was correct in adopting the market value of assets as on 31st March, 2002. We therefore reverse the order of the CIT(A) and restore the order of the AO on this count. 22. Next issue relates to the question whether capital gain is exigible to tax under s. 45(4) of the Act. CIT(A) held that there was no dissolution and as such recourse cannot be made to the provisions of s. 45(4). In the case of CIT vs. A.N. Naik Associates (2004) 187 CTR (Bom) 162 : (2004) 265 ITR 346 (Bom), it was held that in the event of distribution of assets on dissolution of partnership or otherwise, capital gain arises. In this case capital gains arose as on 31st March, 2002 when the assets were divided a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
