TMI Blog2007 (5) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... i s, the other two partners, each getting Rs. 75 lakhs. The firm was dissolved on 25-11-1993 and thereafter accounts of the firm were drawn up to give effect to the consent terms. To carry out the same, the assets of the firm appearing in the books of account at Rs. 51,16,093 were revalued at Rs. 3,02,87,432 and the surplus of Rs. 2,51,71,339 ( sic ) [Rs. 3,02,87,432 minus Rs. 51,19,063 ( sic )] was credited to the account of the partners in such a manner that the account of each of the Bhavnani s showed a credit balance of Rs. 75 lakhs and the balance was credited to the account of Mrs. Bhatt i.e. an amount of Rs. 63,54,692.67 was credited to each of the Bhavnani s and an amount of Rs. 1,24,41,953 was credited to the account of Mrs. Bhatt. 3. During the course of assessment proceedings, Assessing Officer noticed that the assessee did not offer any profit on account of revaluation of the assets and their distribution amongst the partners. The assessee submitted that the distribution of assets on dissolution of firm was not a transfer defined under section 2(47) of the Income-tax Act and that as held by the Hon ble Supreme Court in the case of Malabar Fisheries Co. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f short term capital gain on fair market value on the transfer of these assets the revenue has filed this appeal before us and the grounds of appeal raised by the revenue are as under: 1.On the facts and in the circumstances of the case and in law, the learned CIT(A) II, Mumbai erred in directing the Assessing Officer to compute long term capital gain on building as per para 6 of his order without appreciating the fact that section 50 was applicable to the asset as depreciation was allowable on assets although not claimed. 2.On the facts and in the circumstances of the case and in law, the learned CIT(A) II Mumbai erred in observing that depreciated assets like Furniture, Electrical Installation have no enhanced value thereby giving relief of short-term capital gain on their Fair Market Value on the transfer of these assets. 3.On the facts and in the circumstances of the case and in law, the learned CIT(A) II Mumbai erred in not considering the fair market value of depreciated assets like Furniture, Electrical Installation etc. included in the valuation of assets appearing in the Balance Sheet. 5. Aggrieved by the finding of the CIT(A) that the dissolution of the firm an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. counsel fairly submitted that the Bombay High Court in the case of CIT v. A.N. Naik Associates [2004] 265 ITR 346 1 has held that in view of omission of section 47( ii ) by the Finance Act, 1987, the effect of which is that distribution of capital assets on the dissolution of a firm would be regarded as transfer, no amendment is required in the definition of transfer in section 2(47) of the Income-tax Act. 9. The ld. Sr. Counsel further submitted that capital gains can be levied in the hands of the owner on profits and gains arising from the transfer of a capital asset. According to him, it is a settled position in law as held by the Apex Court in the case of N. Khadervali Saheb ( supra ), that there is no separate legal entity like a partnership firm and the partners are the real owners of the assets of the partnership firm. Hence, capital gains cannot be taxed in the hands of the partnership firm, who is not the owner of the assets which have allegedly been transferred. 10. The further submission of the ld. Sr. Counsel has been that capital gains can be taxed/levied only if the assessee i.e., partnership firm is in existence on the alleged date of tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the dates in respect of the same, the computation machinery fails and there cannot be any liability to capital gains tax. In support of these contentions he relied upon the decision of the Tribunal in the case of Coromondel Fertilisers Ltd. v. Dy. CIT [2004] 90 ITD 344 (Hyd.) and Industrial Machinery Associates v. CIT [2002] 81 ITD 482 (Ahd.). 13. The last alternative submission made by the ld. Sr. Counsel was that the Assessing Officer may be directed to take the fair market value of the land as on 1-4-1981 at Rs. 21,39,700 as opined by the registered valuer as against Rs. 16 lakhs which has been directed to be taken by the CIT(A). 14. The ld. DR supported the order of the Assessing Officer and submitted that section 45(4) is the charging section for the levy of capital gains and sub-section (4) provides for levy of capital gains on distribution of capital assets on dissolution of the firm. He submitted that the law prior to the amendment of section 45 of the Act was that the distribution of capital assets on dissolution of the firm was not to be regarded as transfer under clause ( ii ) of section 47; but the Finance Act, 1987 with effect from 1-4-1988 omitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue taking a stand that the revenue has filed the summary of arguments after the conclusion of hearing on 26-5-2006 without seeking the leave of the court and that filing of the submissions after the conclusion, of the hearing is not proper and only serves to delay in proceedings. 16. We find that the summary of arguments filed by the revenue only relates to the case law referred to by the ld. DR during the course of hearing and, therefore, the objection of the assessee on the said summary is rejected. In the said letter the assessee has also made the following submissions ( a )The Bombay High Court in the case of A.N Naik Associates ( supra ), has not dealt with the further issues as raised by the assessee in para 6A to of its note handed over in the course of the hearing held on 26-5-2006. ( b )That there can be no doubt that money is part of an asset of the firm but is not a capital asset and thus there is no distribution of capital receipts for application of section 45(4) of the Income-tax Act. ( c )Section 45(4) provides that the fair market value of the assets on the date of transfer shall be deemed to be the full value of the consideration received or accruin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm, the assets which heretofore belonged to the partners jointly, will after dissolution belong to the partners individually. Thus there is no transfer or of assignment of ownership in the assets. Further in the case of Malabar Fisheries ( supra ) , it was also held that dissolution of a firm must, in point of time, be anterior to the actual distribution, division or allotment of the assets that takes place after making accounts and discharging the debts and liabilities due by the firm. Thus the distribution, division or allotment of assets is not done by the dissolved firm and therefore there is no transfer of assets by the (dissolved firm) to any firm. 20. But the above decisions were rendered on an entirely different set of facts. In the case of Malabar Fisheries ( supra ) , the Apex Court was dealing with a situation where a firm consisting of four partners carried on six different businesses and it was allowed rebate under section 33 in respect of machinery installed during the relevant period. The firm was dissolved on March, 1963 and under the deed of dissolution, one of the firm s business was taken over by one of the partners and the remaining five by two of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the jurisdictional High Court, we answer these questions against the assessee. 24. As regards question No. ( ii ), section 45(4) refers to "the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of the firm.......". Thus, the reference here is to the capital asset. The Income-tax Act defines the capital asset under section 2(14) of the Act. It is defined that the capital assets means property of any kind held by an assessee, whether or not connected with his business or profession but does not include ( a )Any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; ( b )Personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him. Thus, capital asset means property of any kind. The words "any kind" qualify and include both movable and immovable property as well as tangible or intangible property. The Apex Court in the case of Dwarka Dass Srinivas of Bombay v. Sholapur Spg. Wvg. Co. Ltd. AIR 1954 (SC), 119 has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is where is basis. But, in the case on hand, the assets of the firm were revalued to give effect to the consent terms. Therefore, in our view, the above decision does not apply to the facts of this case and it cannot be termed as slump sale. 27. The next question No. ( vii ) relates to the computation machinery in the absence of cost of acquisition or cost of improvements and the dates in respect of the same. The argument of the assessee has been that the cost of acquisition of the assets and the dates in respect of the same are not available and therefore the computation of the capital gain machinery fails. The Andhra Pradesh High Court in the case of Rajlaxmi Trading Co. ( supra ), was dealing with the computation of capital gains of the firm on dissolution of the firm and transfer of assets. It was held that the provisions of section 45(4) clearly shows that on distribution of capital assets as a result of dissolution of the firm for the purpose of section 48, the fair market value of the asset on the date of transfer should be taken as a full value of the consideration received or accruing as a result of transfer. It was a case where the assets were taken over at book va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed as income from long-term capital gains. With regard to the actual computation of income from long-term capital gains, the CIT(A) held that the land having been acquired prior to 1-4-1981, its fair market value as on 1-4-1981 has to be determined and that has to be indexed. He further observed that the registered valuer in his report has valued the land keeping in view its actual utilization on a later date i.e., after erection of structures during 1985-89. Thus, he came to the conclusion that the actual areas actually used for construction of shops or for commercial use have been valued at a higher figure than the area utilized for canteen and kitchen. He therefore estimated the valuation of the land at Rs. 16 lakhs as on 1-2-1981 and directed the Assessing Officer to calculate the index cost. As regards the fair market value of the land and building as on the date of dissolution, the CIT(A) held that the market value of the land and building mutually agreed between the partners should be adopted as a fair market value of the assets and there was no need to embark upon the estimation of other value. Aggrieved, assessee is before us. 30. Having considered the rival co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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