TMI Blog2006 (11) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... med by the learned CIT (Appeals) are very excessive. 3. That the learned Assessing Officer and the learned CIT (Appeals) are not justified in not accepting and allowing assessee s claim for depreciation, which be kindly allowed. 4. That the several additions/disallowances have been made on contradictory grounds and even over-lap each other. The assessee s contentions have not been properly appreciated by the learned authorities below and the inferences as drawn and observations as made by them are misconceived, erroneous, untenable, unwarranted and uncalled for. 5. That the Penal Interest of Rs. 49,678 under section 234B has been wrongly charged, which be kindly held as not chargeable. 6. That the resulting demand is a disputed demand which be kindly stayed till decision in this appeal." 2. The ground Nos. 1 to 4 of the appeal are interconnected and are being disposed of together for the sake of convenience. 3. The brief facts of the case are that the assessee-firm carried on hotel business at Abu Lane, Meerut. It comprised of two partners namely, Shri Suresh Kumar and Shri Balraj Singh with equal shares in the profits. The firm came into existence by an instrument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gain balance stood converted into a loan and the running business of the dissolved firm was taken over by the other partner Shri Suresh Kumar with all its assets and liabilities including the balance owned to the retired partners at the book value. Even his own amount was paid in cash without allotment of any asset and that too not by the assessee-firm but by Shri Suresh Kumar out of the cash funds of the running business taken over by him in the following year. It was submitted that there was no distribution of assets of the firm and its dissolution which is a condition precedent for applicability of section 45(4). It was also the argument of the assessee that distribution of assets on dissolution of firm pre-supposes/contemplates the winding of the business of the firm and by no stretch of imagination it covered a case of succession of a running business as is the case of the assessee. From this angle also there is no capital gains tax liability in the case of the assessee in terms of provisions of section 45(4). 6. The assessee also submitted that the purpose of insertion of section 45(3) and section 45(4) has been explained in the CBDT explanatory circular No. 495, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x". Thus the intention of the Legislature is clear from the wordings of the sub-section and it is not required for amending definition of transfer contained in section 2( 47 ) of the Act. The Assessing Officer was also of the view that it was not necessary that all assets should be divided between the partners in order bring it within the meaning of distribution of capital assets. The Hon ble Supreme Court had the occasion to interpret what amounted to distribution of assets of a firm on dissolution in the judgment in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 (SC). It was held that in the course of dissolution, the assets of the firm may be valued and divided between the partners according to their respective shares either by allotting individual assets or by paying the money value thereof. This is a recognized method of dividing the gains of a dissolved firm. In the instant case, the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm. The Assessing Officer was also of the view that in view of the clear provisions contained in section 45(4) the fair market value of the assets shall be deemed to be the full value of conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as under : Assessment year Salary per month (In Rs.) 1992-93 3,000 1991-92 2,500 1990-91 2,000 1989-90 2,000 1988-89 2,000 10. The book profit of the assessee-firm was also adjusted by the amount of interest payable or chargeable on accrued or debit balances of partners. He noted that in the assessment years 1990-91 to 1992-93 capital balances of the two partners were in debit, therefore, during these years the interest was chargeable from them whereas in assessment years 1988-89 to 1989-90 sum total of the capital of the partners was not accrued, hence interest was payable to them. Accordingly amount of interest was adjusted as per details in Annexure A-3. As per this Annexure the converted adjusted book profit per year came to Rs. 61,035. Looking to the part of continuation of business and other facts value of goodwill was multiplied by four times of average adjusted book profit of Rs. 61,035. Accordingly, the value of the goodwill was determined at Rs. 2,44,140. He further observed that since the goodwill was acquired by the assessee-firm during continuation of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all determine represents and comprises the same value of net assets i.e. , all assets less liabilities of the business whether shown in the balance sheet or not. 13. It was also submitted that in the course of the assessment it as argued that the business did not enjoy any goodwill having regard to deduction for salaries to two partners at the rate of Rs. 6,000 per month to each partner and other heads "nominal rent for building for which only nominal rent was paid", though such other heads were not deleted, added as even the amount of salaries to partners was more than enough to completely set off the book profits. 14. It was also submitted that the Assessing Officer determined value of goodwill by adopting taxable income instead of book income as base, and allowing deduction for salary of only one partner instead of two at reduced rate of Rs. 2,000 per month to Rs. 3,000 per month as against Rs. 6,000 per month for each of the two partners claimed by the assessee and adding besides deducting interest on credit balance in capital account, interest on debit balances in the capital account of the partners and further without allowing deduction for any other account (such as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed building. The further submission of the assessee is that it is paying handsome commission to rickshaw wallahs and taxi drivers to bring customers to the hotel which fact is evident from the assessment order. Thus these facts go to show that the assessee was not having any goodwill. After considering the entire facts and circumstances of the case, we are of the considered opinion that the Assessing Officer has determined the value of goodwill after adjusting the profits for the last five years shown by the assessee in the profit loss account. In doing so, he has ignored or disregarded the circumstantial evidence which would go to show that the assessee-firm was having any goodwill. The fact that the assessee was earning book profit which was not sufficient even to pay salary to the partners coupled with the fact that in order to procure business it had to make payment of handsome commission to rickshaw wallahs and taxi drivers goes to show that the assessee-firm was not enjoying any goodwill. In our considered opinion the firm enjoys goodwill where it has the capacity to earn super profit i.e. , profit over and above the normal profits. Further a firm has goodwill where it has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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