TMI Blog2005 (10) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... s, eggs, chicken, firewoods, etc. These items are supplied to various departments of the Ministry of Defence. The assessee-firm had purchased two plots of land bearing GLR Nos. 51 and 53 admeasuring 43,220 sq.ft. and 661 sq.ft. respectively on 10-5-1978 for a consideration of Rs. 2,19,550 from the F Director of Defence, Ahmednagar. The value of this land was shown in the balance sheet of the financial year 1986-87 at Rs. 3,08,743. The land continued to be shown in subsequent balance sheets at the same figure. However, on 31-3-1988, this land was not shown in the books of account of the firm as the firm was dissolved and the land was distributed amongst the partners. The valuation of this land was referred to the valuation officer, who valued the fair market value of the land at Rs. 39,49,300. In view thereof, the assessee was required to show cause why the capital gains arising out of distribution of the aforesaid capital asset on dissolution of the firm, amounting to Rs. 36,40,557, should not be brought to lax under the provisions of section 45(4). No satisfactory reply was furnished, however, it was clarified that as on 31-3-1988, there was no asset of land reflected in the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and not to the firm, it was pointed that three partners, namely, S/Shri S.D. Thapar, N.J. Dhupad and Smt. P.T. Dhupad, having shares of 15 per cent, 9 per cent and 9 per cent respectively had retired from the firm on 1-4-1987. These partners retained their co-ownership of the land to the extent of their shares mentioned above. It was further pointed out that at the time of dissolution, there were 9 partners and these partners actually held 62 per cent share in the aforesaid plots of land and the remaining land belonged to the partners who had retired before the dissolution of the firm. The land belonging to the retired partners was not inadvertently credited to their capital accounts and this failure should not be taken as estoppel against the assessee's stand that only 62 per cent of the land belonged to the nine partners of the firm. The learned CIT(A) considered various facts brought to his notice and the submissions made before him. He pointed out that provisions of section 45(4) were inserted in the Income-tax Act with a view to nullify the effect of number of pre-existing case laws including that of Hon'ble Supreme Court in the case of Malabar Fisheries Co., in which it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drew our attention to pages 5 to 11 of the paper book-1, which is the deed of dissolution dated 1-4-1988. In particular, our attention was drawn to page 5 of the dissolution deed which contains the narration to the effect that though the last balance sheet has not yet been prepared and signed but the firm owns only furniture of Rs. 26,665, stock of Rs. 1 lakh and loans, liabilities, debtors, creditors, etc. The case of the learned counsel was that the firm did not own the land on the date of dissolution. He drew our attention to page 13 of the paper book, which shows the distribution of land and shed to various persons, i.e., ex-partners and the partners. The case of the learned counsel was that the land and shed had been distributed to erstwhile partners also. However, we find that no date has been put on the aforesaid document in the sense that the date of execution has been left blank though purportedly the distribution was made as per the distribution list dated 1-4-1988. The learned counsel drew our attention to the sale deed of the land placed in paper book from pages 15 to 113. It was, inter alia, pointed out that parties at Sl. Nos. 1,4,7 8 were not the partners of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fested by an express or implied agreement. However, whatever has been thrown into the partnership stock, at the commencement of the business of the partnership, or added thereto, or obtained by means thereof, from time to time, during the continuance of the partnership, whether by purchase or by employment in the business, becomes partnership property, unless the contrary is established. The case of the learned counsel was that the conduct of the partner, in particular, the will of late Shri Mohansingh Dhupad and distribution of land to the ex-partners and partners showed that they treated the land to be belonging to the partners. However, the land had been purchased with the funds of the firm and had been used continuously for the purpose of the business of the firm. The land was shown in the balance sheet of the firm. Therefore, it has to be clearly established that the land did not belong to the firm as per the proper interpretation, which can be placed in section 14 of the Indian Partnership Act. 3.3 Coming to the applicability of section 45(4), the learned counsel clearly conceded that the ratio of the decision in the case of Malabar Fisheries Co. was not applicable in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 45(4) were clearly applicable in respect of distribution of the whole of the land and, accordingly, urged that the orders of the authorities below ought to be fully sustained on the facts and in the circumstances of the case. 3.5 In the rejoinder, the learned counsel pointed out that even prior to the sale and even during the subsistence of the partnership firm, the partners had dealt with the land as belonging to them, which will be clear from the will of late Shri Mohansingh Dhupad. 4.1 We have considered the facts of the case and rival submissions. The first question to be decided in this case is whether the land belonged to the individual partners or to the firm. It has been pointed out that the land was purchased with the funds of the firm. It was shown in the balance sheet of the assessee from year to year till it was distributed in connection with the dissolution of the firm. Section 14 of the Indian Partnership Act, clearly provides that any property obtained by the means of partnership from time to time during its continuation, whether by way of purchase or by employment in the business, is the partnership property unless contrary is established. The land had been pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the transaction is caught within the mischief of the provisions contained in section 45(4). 4.3 The third question to be decided is whether full value of the lands is to be taken into account for computing the capital gains or only 62 per cent of the full value of land is to be taken into account for computing capital gains. The case of the learned counsel was that four partners had retired much before the event of dissolution and they had 38 per cent share in the lands. Therefore, this portion of the full value could not have been taken into account for computing the capital gains. We have considered this matter also. From the facts mentioned in the order of learned CIT(A), it is clear that the partners, who retired earlier, had 38 per cent share in the lands. The case of the assessee is that the entries were not passed in the books of account to transfer the land to them through oversight and such oversight should not act as estoppel against the assessee's rightful claim that only 62 per cent of the value of the land should be brought to tax. It is an accepted principle of law that entries in the books of account are not conclusive of legal issues involved therein. So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise or fall, depending upon the market conditions. There is no evidence on record that the value of the lands had increased in the next two years. The assessee also had not obtained any valuation report from the Registered Valuer to show that the valuation made by the valuation officer was on the higher side. But, it is also felt that valuation is a matter of art and not science and, therefore, there is no arithmetical formula for the valuation of the land. Therefore, looking to overall facts of the case, the ends of justice would be met if the value of the lands on the date of dissolution is adopted at a round sum of Rs. 39 lakh. 5. In view of the aforesaid discussion, various grounds of appeal are decided as under: (i) Ground No. 1(i) regarding ownership of the lands is decided against the assessee. Ground No.1 (ii) regarding non-user of lands by the firm is dismissed as not pressed. Ground No. 1 (iii) is allowed to the extent that only 62 per cent of the value of the land shall be taken as full value of the consideration received or accruing for the purpose of computation of capital gains, (ii) Ground Nos. 2 3 regarding transfer of lands on dissolution, and is taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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