TMI Blog1991 (9) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... Its first assessment was made for the year 1977-78. The business of the firm was to develop a piece of land situated at Nashik and construct a shopping centre thereon and sell the premises so constructed which mostly consisted of shops and offices. Normally in the business of this type, there is always the question of how to determine the profits or gains ; whether such profits should be shown on completed contract basis or whether they should be assessed from year to year on the basis of receipts of the year. The system of accounting was broadly cash system. All expenses including construction cost were debited on actual disbursement. Amounts actually received on shops sold or agreed to be sold were accounted for on receipt basis ; closing stock disclosed shops which were under construction but which were not booked. This method of accounting was accepted by the Income-tax authorities for the assessment years 1977-78, 1978-79, 1979-80, 1980-81 and 1981-82. Copies of assessment orders for all these years have been filed and form part of the paper book No. 2. The same method of accounting was followed for the assessment year 1982-83. The business was continued upto 31-3-1982. On 1- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is agreed by the parties to distribute this asset. " The ITO concluded that if the shops were agreed to be sold as per various agreements, the unrealised amount totalling to Rs. 10,79,845 should have been declared at market value as the closing stock even if the assessee has been adopting cash basis for the purpose of maintaining books of account. Since the value of the assets including the closing stock at the end of 31st March, 1982 was shown at Rs. 56,500 and the balance sheet did not include any amount receivable in respect of sale of shops and other commercial premises, the ITO was of the view that the full value of the unrealised amount its and/or closing stock of the shops left with the assessee was not disclosed. He therefore, took action under section 147 by issue of notice under section 148 dated 4-2-1987. 4. Before the ITO a preliminary objection was taken by the assessee's representative challenging the initiation of re-assessment proceedings. It was stated that the firm was being assessed on receipt basis and that, therefore, the question of showing any amount receivable from the parties did not arise and therefore, such amounts were not disclosed. It was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meeting this point, Shri Inamdar pointed out that it was not necessary to give intimation of dissolution of the firm for the assessment year 1982-83 since the dissolution had taken place in the year relevant to the assessment year 1983-84 and notice of dissolution under section 176 need not have been given by the appellant for the assessment year 1982-83, although it could have been or should have been given for the assessment year 1983-84. The CIT(Appeals) observed that the assessee was in the knowledge of dissolution which fact should have been intimated or brought on record and this was a primary disclosure which was expected to be made by the assessee and this was not done. He has gone on to observe that the ITO who completed the assessment originally had no occasion to look into the closing stock which should have been shown at the market rate in the accounts for the assessment year 1982-83. Referring to these observations, Shri Inamdar pointed out that the fact that the firm was dissolved was clearly mentioned by the appellant in the return for the assessment year 1983-84 and while completing the assessment, normally the ITO was expected to look into the dissolution deed, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in value and that there was no justification for excluding the overhead expenditure in valuing the stock, and, if it was in the interest of the business to value stock solely with reference to cost of raw materials and without including overhead expenditure, such valuation was not appropriate to the computation of income chargeable under the Income-tax Act. The High Court, on a reference reversed the decision of the Tribunal holding that, having regard to the consistent practice of the respondent, the Tribunal was not justified in rejecting the respondent's method of valuation of its stock-in-trade. On appeal to the Supreme Court, held reversing the decision of the High Court that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the Income-tax Act, 1961 to consider whether the correct profits and gains could be deduced from the accounts so maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Income-tax Act, 1961. Relying on these observations, Shri Inamdar argued that if the ITO notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was not the case of the revenue that the dissolution had in fact taken place on 31st March, 1982. The revenue did not challenge the factum of dissolution on 1-4-1982. It had all along proceeded on the basis that the amounts which were realisable as per the dissolution deed represented the value or market value of closing stock not disclosed. This assumption itself was misconceived and incorrect on facts. Shri Inamdar was at pains to point out that the closing stock as per accounts disclosed the cost of flats which were not booked or which were not sold or in respect of which there were no agreements of sale entered. Therefore, there was no question of any comparison between what was shown as closing stock and what was described as recoverables or unrealised amounts in the dissolution deed. These were two different things altogether. The question, therefore, to be decided was whether there was an escapement of income. According to Shri Inamdar, there was no escapement of income on the part of the assessee so far as the assessment year 1982-83 was concerned having regard to the method of accounting that it had regularly followed. Assuming without admitting that there was such an es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the amounts should have been taken into account, if at all they were to be considered as value of the closing stock as on 31st March, 1982. This argument which was advanced before the CIT(Appeals) also was not considered or dealt with by the CIT(Appeals). Finally, Shri Inamdar pointed out that the ex-partners consistent with the stand that they had adopted had disclosed the amounts recovered by them as and when they were recovered in their returns of income filed consequent to the dissolution, i.e., from the assessment year 1983-84 onwards, but under a mistaken conception of law had claimed exemption in respect of the amounts so recovered under the impression that these amounts were capital receipts and, therefore, not liable to be taxed. The conduct of the partners established their bona fides and there was no intention whatsoever to withhold any material information from the department relating to the assessment year 1982-83. 8. The last aspect of the matter concerns the chargeability of interest under section 139 and 217. It would appear that this ground was taken as an additional ground before the CIT(Appeals). It was argued that this was purely a legal ground and it shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued that full details regarding dissolution were not disclosed and the market value of the closing stock also had not been shown. Since the agreements were made earlier to 31-3-1982 in all such agreements the price of the shops agreed to be sold was fixed earlier. It was only in 1987 when one of the partners applied for tax clearance certificate under section 230A and when the copy of the dissolution deed was called for that the details of the unrealizable amounts came to the light. If the details of the agreements entered into had been disclosed in the assessment year 1982-83 indicating the amounts recoverable, perhaps the assessment that was made would have been different. According to the learned departmental representative, these profits embedded in the amounts recovered should have been shown on the dissolution of the firm which had, in effect, taken place on and from 31-3-1982. The difference between the closing stock disclosed in the books, namely, Rs. 56,500 and the amounts shown to have been recoverables of Rs. 10,79,845 which was not disclosed would amount to a ground for reopening the assessment. Shri A.K. Khaladkar, the learned departmental representative, adopted a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cument, it could not be treated as invalid. Both the ITO and the CIT(Appeals) have accepted the dissolution deed as a valid document and it was too late in the day to cast doubts on the validity of the document. Referring to clause 6 of the dissolution deed, Shri Inamdar pointed out that all the three partners were equally joint-owners of the mezzanine floor above the shops in the north-east corner which was the asset to which the learned departmental representative had referred as an asset not disclosed in the balance sheet. Shri Inamdar then drew our attention to the copies of accounts of the firm for the assessment year under appeal, pages 8 and 9 of the paper Book No. 2. He pointed out that the rent received of Rs. 36,046.80 shown in the profit and loss account was from out of let out premises which premises were included in the aforementioned clause 6. Replying to the argument about the closure of bank account before the date of dissolution, Shri Inamdar pointed out that the balance sheet of the firm as on 31st March, 1982 showed balances in two accounts of Dena Bank of Rs. 100 and Rs. 34,540 respectively and account in Federal Bank of Rs. 45,695. Therefore, it was not correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sides. The first question to be decided, in the circumnstances, is whether the reopening of assessment was justified on the facts. Apparently, it is not clear whether the assessment was reopened under section 147(a) or under section 147(b) of the Act. Whereas in para 4 of his order, the CIT(Appeals) had clearly stated that the ITO has referred to proceedings under section 147(b) and had stated that such proceedings would lie if the ITO had not considered the material originally available on record and which subsequently came to his notice after going through the records itself, while giving his finding, the CIT(Appeals) has stated that from the records it appears that the assessment has been reopened under section 147(a) and that such reopening is correct. It was argued before the CIT(Appeals) by the advocate who appeared before him that it was not clear whether the proceedings were reopened under section 147(a) or under section 147(b) and the reasons that were recorded for reopening the assessment were not communicated to the assessee. In the course of hearing before us, we asked the departmental representative to file a copy of the reasons recorded, but such copy has not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that neither the ITO nor the CIT(Appeals) has doubted the fact that the firm was in fact dissolved on 1-4-1982 and not at an earlier date. The ITO has acted on the facts which have come to light on the production of the dissolution deed, but has not doubted the genuineness of this deed nor has he indicated anywhere that the dissolution in fact had taken place earlier than 1-4-1982. The ITO's grievance is that the factum of dissolution was never disclosed and that notice as required under section 176(3) was not given, nor a copy of the dissolution deed was filed. All these would be true for the assessment year 1983-84, since the dissolution had in effect taken place on 1-4-1982 and had not taken place at any date failing in the accounting year relevant to the assessment year 1982-83. That is not the suggestion either of the ITO or the CIT(Appeals). In fact, the CIT(Appeals) has accepted that the firm was dissolved from 1-4-1982 as is clear from some of the observations made by him in para 7 (page 14 of his order). In this connection, we may only cite the following observations of the CIT(Appeals) at page 14 of his order in para 7 : " Though the firm is dissolved with effect from 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on 1-4-1982. It is pertinent to note that the date of dissolution was indicated in this note made on the return of income for the assessment year 1983-84 which was filed on 12-8-1985. Even then, this return was accepted without demur by the ITO who made the assessment on 14-10-1985 on nil income under section 143(1) of the Act. No effort was made to call for the dissolution deed, even when a specific statement to the effect that the firm was dissolved on 1-4-1982 was made on the first page of the return of income (copy filed on pages 10 11 of the paper book No. 2). Therefore, in our opinion, there was no non-disclosure of material facts so far as the assessment year 1982-83 is concerned. The dissolution had taken place on 1-4-1982. This fact was not challenged or doubted either by the ITO or by the CIT(Appeals). This fact was disclosed in the return of income filed for the assessment year 1983-84. This fact was not relevant for the assessment year 1982-83 and therefore, it was not necessary for the firm to have given intimation of dissolution under section 176(3) of the Act so far as assessment year 1982-83 is concerned. The closing stock that was valued for this year was on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r opinion, there was in fact no escapement of income so far as the assessment year 1982-83 is concerned. Thirdly, we find that the recoverables of Rs. 10,79,845 of which details have been given at pages 47 to 49 of the paper book No. 2 were in respect of booked flats or shops. In respect of these shops, agreements of sales were entered into as early as in 1975. These shops were booked as early as in 1975, 1976, 1977 and 1978. The assessee used to account for the receipts in respect of such shops when it actually received the amounts out of these agreements. Since the appellant was following cash system of accounting, it was showing the receipts from business on actual receipt basis. There were certain agreements where the amount agreed upon was recovered by 31-3-1982. These agreements were entered into earlier and the amounts whenever received were accounted for in the books. There were, however, certain agreements where small recoveries in variant degrees were still outstandingas on 1-4-1982. Such recoveries together amounted to Rs. 10,79,845, which were ultimately shown when the firm was dissolved on 1-4-1982. We are, therefore, not prepared to accept the argument of the departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys that where any business or profession is discontinued in any assessment year, the income of the period from the expiry of the previous year for that assessment year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that assessment year. It is in the light of these provisions of section 176(1) that sub-section (3) provides that any person discontinuing any business or profession shall give to the Assessing Officer notice of such discontinuance within fifteen days thereof. Such notice should have been given by the assessee within 15 days of the date of dissolution, i.e., by 15th April, 1982 but it would have relevance for the assessment year 1983-84 and not for the assessment year 1982-83. We are, therefore, firmly of the view that having regard to the method of accounting followed by the assessee consistently over a period of years which was accepted by the Income-tax authorities after due examination of the books of account of the assessee, there was no failure on the part of the assessee to disclose material facts for the assessment year 1982-83 and therefore, re-assessment under section 147, assuming that it was under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Next, we have already pointed out that the sum of Rs. 10,79,845 was recovered by the erstwhile partners in the assessment years 1983-84 to 1989-90. Therefore, if at all such recoverables were to be treated as representing the market value of the closing stock of the firm, a proper discounting of the value of such stock, if it was to be treated as such, had to be done. This has not been done. We are informed that the partners had disclosed the amounts in their individual assessments whenever they have recovered them and had claimed exemption. Although initially such returns were accepted under section 143(1), the department has taken proceedings in the partners' cases under section 148 to bring to tax such recoveries which are justly taxable under section 176(3A) in the hands of the partners. When faced with the query in this behalf, the counsel for the assessee did not seriously dispute this fact. Having regard to this position of facts, we are of the view that even on merits, there is no case for bringing to tax an amount of Rs. 10,79,845 as income of one year, i.e., assessment year 1982-83. 14. The next issue that survives for consideration is the leviability of interest under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constructed and only the rights to construct the shops were agreed to be sold. A part of the amount for the agreed sale price had already been received and accounted for and the balance receivable was included in Rs. 10,79,845 indicated in the dissolution deed as well as the schedules attached thereto. It was not correct, therefore, for the ITO to assume that the sale of these shops was not disclosed by the appellant. Shri Sathe in this connection has drawn our attention to the plan showing the development of the Meghdoot Shopping Centre in which the shops No. 17 to 28 and 54 to 57 which were not constructed are shown in red, especially as open space. Such open space or right to develop such open space was sold on 18-10-1980 for Rs. 8,70,000. The figure of recoverable of such open space was Rs. 8,40,000 as on 1-4-1981 since the assessee had received and accounted for an amount of Rs. 30,000 received upto 31-3-1981. The appellant had recovered Rs. 3,04,000 as on 31-3-1982 and had accounted for the same on receipt basis. An amount of Rs. 5,66,000 was shown as outstanding and was included in the total figure of Rs. 10,79,845. We are, therefore, in full agreement with the CIT(Appeals)' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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