TMI Blog1995 (7) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... rived at net capital gain of Rs. 4,45,000 which was offered for taxation. The return of income was filed by the assessee in pursuant to the deeming provision of section 45(4) of the Act. 3. Before the Assessing Officer, the assessee claimed the status of a registered firm. It was pleaded that the long-term capital gains on distribution of assets accrued or arose to the firm as a deeming provision of section 45(4) of the Act. Since the said provision deemed the income on distribution of assets amongst the partners, it also deemed that the firm should be accorded the status of a registered firm. For the purpose of claiming the benefit of registration, the assessee also filed Form No. 12 which was, however, delayed beyond the time prescribed by the Income-tax Act. The Assessing Officer was of the view that the assessee was not entitled to avail the benefit of registration. He further held that the provisions of section 45(4) apply at the time of distribution of capital asset on the dissolution of the firm. Obliquely, the Assessing Officer made a reference that the income was taxable for the assessment year 1990-91. However, since the assessee had filed the return of income for asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said decision, he pointed out that the partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or the firm's assets an that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the I.T. Act, 1961. There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us of a registered firm. This is clear from the fact that the first part of sub-section (4) of section 45 mentions the word " a firm " and latter part " the firm ". The plain reading of the section, in the opinion of the learned counsel, clearly suggests that in case of a dissolved firm, the capital gains arising out of distribution of assets to the partners should be assessed in the status of a registered firm only. He also pointed out that the assessee had also filed Form No. 12 for continuation of registration. The firm was granted registration in the previous years and therefore, its continuation for the assessment year under appeal was legally warranted. The Assessing Officer, he argued, has not taken into account a declaration under section 184(7) filed by the assessee. 8. The learned counsel continued and argued that the Assessing Officer has no legal power to change the status of an assessee. The assessee had filed a return in the status of the registered firm and, therefore, the assessment should have been completed in the same status. Under the Income-tax Act, 1961, a firm and an Association of Persons are two different persons and independent units of assessments. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer in this regard. 11. The learned Senior Departmental Representative, Dr. Sunil Pathak, on (he other hand, stoutely def ended the order of the CIT(A).He pointed out that the provisions of sub-section (4) of section 45 were brought on the statute book with effect from 1-4-1988 mainly with a view to nullify the decision of the Supreme Court in the case of Malabar Fisheries Co. He argued that the arguments of the learned counsel for the assessee, if accepted, will render section 45(4) nugatory and the purpose of enactment by legislature will be nullified. In his view, the learned counsel for the assessee is not legally justified in advancing the plea that the decision of the Supreme Court in the case of Malabar Fisheries Co. still holds good. Section 45, the learned departmental representative contended, is a charging section and is the complete code within itself. The capital gains arising on distribution of capital asset on dissolution can be computed and subjected to tax under section 45 itself. There was no legislative necessity either to amend section 2(47) or section 2(24) to enlarge the definition of ' transfer ' and ' income '. In view of the amendment to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Assessing Officer. However, in the present case, the Assessing Officer vide his letter dated 9-2-1993 had pointed out to the assessee that there was no firm in existence and there was no declaration in Form No. 12 in the requisite form and, therefore, the Assessing Officer proposed to complete the assessment in the status of AOP. In such circumstances, the decision of the Bombay High Court in the case of Associated Cement Steel Agencies was inapplicable. Moreover, the learned departmental representative continued, there is no provision either in the Income-tax Act, 1961 or in the rules made thereunder providing that where the ITO proposed to make assessment in a status different from the one in which the return is filed, a notice or a fresh notice, as the case may be, should be issued. Such a requirement cannot also be inferred from the principles of natural justice. In this regard, the learned departmental representative placed reliance on the decision of the Andhra Pradesh High Court in the case of CIT v. D. Seshagiri Rao [1990] 182 ITR 24. 15. The learned departmental representative further contended that in the year under consideration, the benefit of registration can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the status of an unregistered firm. On a reference : Held that on the adjudication of the firm as insolvent, it stood dissolved under section 41(a) of the Partnership Act, 1932, in the year 1971. Thereafter, the business was carried on by the receiver. It could not, therefore, be said that the disputed income arose to the firm. The income was assessable in the hands of the erstwhile partners as an association of persons. 18. To the assertion of the learned counsel for the assessee regarding deeming provisions contained in section 45(4) regarding registration, the learned departmental representative pointed out that there is no deeming provision as far as determination of status is concerned. The provision is very clear and, therefore, cannot be extended so as to read that the firm is entitled for registration. The interpretation of the provision should be such that it should bring out the intention of the Legislature. The beneficial interpretation does not apply where the provisions of the Act is clear and unambiguous. In this regard, the learned departmental representative placed reliance on the decision of the Bombay High Court in the case of CIT v. New Shorrock Spg. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umed as that of a registered firm. The learned counsel, therefore, reiterates that the status of registered firm should be accorded to the assessee-firm. 23. We have heard the rival submissions in the light of judicial decisions brought to our notice. For the sake of convenience, we reproduce sub-section (4) of section 45 of the Act as under : "45(4) : The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer." 24. This amendment to section 45, by way of insertion of sub-section (4) was brought on the statute book with effect from 1-4-1988. The said amendment explains that the profits or gains arising from the transfer of a capital asset by way of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the transfer took place and for the purposes of computation of capital gains, the fair market value of the asset on the date of transfer would be deemed to be the full value of the consideration received or accrued as a result of transfer. Thus, in our view, the Supreme Court and various above High Court decisions, were successfully nullified by insertion of sub-section (3) and (4) to section 45 of the Act. We are only concerned here with sub-section (4) of the said section. 26. As already mentioned above, sub-section (4) of the said section is a deeming provision where the profits or gains arising from the transfer of a capital asset by way of distribution of capital asset on dissolution of a firm has been made liable to tax in the year of distribution. This deeming provision mentions the words " dissolution of a firm " and " shall be chargeable to tax as the income of the firm ". The question to be considered is that on the deemed income where the expression " a firm " or " the firm " occur, entitles the assessee for the registration. In our view, these two expressions mentioned in sub-section (4) is to identify the assessable entity prior to the dissolution. The fiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that the learned counsel for the assessee was not judicially correct in stating that the assessee was still governed by the principles laid down in the case of Malabar Fisheries Co. We do not find any necessity for the corresponding amendment to section 2(47) and section 2(24) of the Act. Section 45 is a charging section and the complete code in itself. The said section provides that the profits and gains arising from the transfer of a capital asset by way of distribution of capital asset on dissolution of a firm are chargeable to tax in the previous year in which the distribution took place. We therefore, need not go to section 2(47) or section 2(24) to decide whether the distribution of capital asset on dissolution is chargeable to tax or not. For this purpose, section 45 is enough to bring to tax the capital gains on distribution of capital asset on dissolution of a firm. The fiction created in section 45(4) to bring to tax the capital gain on distribution, of capital asset on dissolution was for a limited purpose of bringing to tax the capital gains. This fiction, in our view, cannot be extended so as to treat the dissolved firm as a registered firm in the year in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no partnership deed and also there was no application for registration or its continuation. The fiction of section 45(4) does not permit us to extend the benefit of registration under the other provisions, viz., 182, 183, 184 and 185, etc., of the Income-tax Act, 1961. The assessee has neither been evidenced by the instrument of a partnership nor there is an application for registration and therefore, the registration or continuation thereof is legally impossibility. We also consider pertinent to mention that the deeming provision of section 45(4) do not override the provisions contained in sections 182 to 185. In order to claim the registration, the assessee has to fulfil the conditions laid down in sections 182 to 185 of the Act. Unless these conditions are fulfilled, the benefit of registration cannot be allowed to the assessee. 28A. As per additional grounds of appeal, the assessee has also pleaded that the Assessing Officer as well as the CIT(A) were of the opinion that the capital gains on distribution of capital asset was liable to be taxed in assessment year 1990-91. We have heard the parties to the dispute and we find that there is no substance in the contentions ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
