TMI Blog2006 (7) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration all the facts and circumstances and the explanation of revenue we permit it to challenge the order of the ld. CIT(A) on both the issues. 3. Now we take up the dispute in seriatim as raised in the grounds of appeal. The first three grounds of appeal are inter connected with each other and primarily involved a single issue. The ground of appeal as raised by the revenue read as under : "1. On the facts and in the circumstances of the case the CIT(A) erred in deleting the addition of Rs. 13,92,81,280 made on account of distribution of assets of the firm amongst its partners without appreciating the provisions of section 45(4) of the Income-tax Act. 2. On the facts and in the circumstances of the case and in law the ld. CIT(A) erred in holding that there was no distribution of assets on dissolution of the firm and in deleting the above addition without considering the provisions of section 45(4) of the Income-tax Act. 3. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in holding the value of the asset known as Kimatrai Bldg. valued by the D.V.O. was unreasonable and incorrect." 4. The brief facts of the case are that assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly for the purpose of section 48 the fair market value of the assets on the date of transfer can be taken as the full value of consider-ation received or accrued as a result of transfer in place of apparent consideration shown by the assessee. The second question according to the Assessing Officer is whether the contention of the assessee that the assets in question had been sold to its partners by the assessee-firm and the resultant long-term capital loss at Rs. 1,45,99,982 is covered under section 45(1) of the Income-tax Act is correct ? The next question formulated by the Assessing Officer is whether the contention of family settlement made by the assessee as reflected in the revised return is applicable to the facts and circumstances of the instant case. 7. The ld. Assessing Officer was of the opinion that section 45(4) of the Act is applicable on the facts of the assessee s case because according to him there was a dispute amongst the partners to the point of no return. As a result of bitter dispute all the partners of the firm entered into a Memorandum of Understanding dated 30-4-1995 and 25-8-1995 for the purpose of distribution of the assets of the firm and other conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess of distribution of assets. h. The MOU dated 30-4-1995 was clearly prepared to distribute the assets of the firm on dissolution, because the MOU states that the partners of the firm agreed to dissolve the following firms, and that, it also mentioned the fact that the following assets, firm companies will be given to the following groups. i. Even if, the individual firms did not ultimately get dissolved, the fact is that it was a distribution of assets on dissolution of firm or otherwise, which is very clear. j. Finally, a perusal of all the registered sale deeds, clearly reveals that the clause of payment of the agreed consideration, was conspicuously absent, which goes to prove that it is not a transaction of sale by the firm to its partners, but distribution of assets of the firm amongst the partners. k. Finally, the Assessing Officer was convinced about the fact that the firm has distributed the assets to the partners without consideration on dissolution or otherwise of the firm." On the basis of the above reasonings the ld. Assessing Officer made a reference to the DVO for determining the fair market value of the assets transferred by the assessee. The DVO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redited with the same figure, thereby reducing the value of Kimat Rai Building in the books of the firm. On the strength of such details it was submitted before the ld. CIT(A) that finding of the Assessing Officer regarding doubting the payment is factually incorrect. 11. With regard to the interpretation of section 45(4) of the Act as adopted by the Assessing Officer the assessee had relied upon the judgment of ITAT rendered in the case of Burlington Exports v. Asstt. CIT [1993] 45 ITD 424. On the strength of this decision it was contended that debiting partners capital account in the books of the firm would a deemed payment. It was further submitted that while considering the issue of distribution of assets as contemplated in section 45(4) of the Act the Tribunal has observed that in distribution no consideration is involved and the partners have to share the withdrawals in their prescribed profit share ratio agreed in the partnership deed. If such withdrawal is for a consideration it would be a case of sale by the firm to the partners and not distribution. In this way it was contended that capital account of the partners has duly been debited in the firm book and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale deed on the second floor was made on 26-6-1995. It was also pointed out that sale consideration has been fixed on the basis of the value determined by the State Government for the purpose of stamp duty purposes. Hence it is in the line of Government authorities. 14. The ld. first appellate authority has gone through all the contentions of the assessee and in a reasoned order held that section 45(4) is not applicable in the present case. The property sold by the assessee comes within the ambit of section 45(1) of the Act. The ld. CIT(A) put emphasis on the aspect that the area sold to each partner was not in proportion to their profit sharing ratio. The ld. first appellate authority has duly noticed the facts in this connection on page 22 of the impugned order. With regard to the valuation of the property ld. first appellate authority found that the market value disclosed by the assessee in the sale deed is in the line of the sale price of the area earlier sold by the assessee to Saraswat Bank and other occupants. 15. The ld. D.R. while impugning the order of the ld. CIT(A) contended that books of account were not produced before the Assessing Officer depict-ing the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, 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." The circumstances which prompted the ld. Assessing Officer to consider the sale of Kimatrai building to its partners by the assessee as a transfer within the meaning of sub-section (4) of section 45 are that according to the Assessing Officer expression "otherwise" employed in sub-section (4) would cover this transaction. In the opinion of the Assessing Officer there should be a transfer of capital assets by way of distribution of capital assets on the dissolution of a firm or otherwise. He took the meaning of expression "otherwise" as if covering all transaction of capital by a firm in favour of its partners. Contrary to this construction of the clause the ld. counsel for the assessee pointed out that meaning of expression "otherwise" would go along with meaning of distribution of assets on dissolution of the firm. He emphasized on the point that the firm has not been dissolved it is assessed as a registered firm and that status of the firm is still in existence. 17. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettled by the two partners in any other way. The contention of the learned Departmental Representative, Sri Keshav Prasad, that the words "or otherwise" is an alternate to or disjunctive of "on dissolution" and, consequently, the transfer of capital assets otherwise than by way of distribution on dissolution can also be covered by section 45(4) of the Act, in our opinion, cannot be accepted. If that were the case, all transactions, whether by or between the firm, association of persons or body of individuals, would be covered by the provisions of section 45(4) of the Act, including those which are normally entered between outsiders and covered by the other provisions of section 45, such as sub-sections (1), (2), (3) and (5). A situation would emerge out in that case that the two provisions would exist simultaneously at particular time, side by side. Such an interpretation giving rise to overlapping of one provision over the other has to be avoided. Even if such an overlapping is permitted or possible, law favourable to the assessee should prevail. In this case, as we have held, there was a transfer on 7-10-1986 and, therefore it would fall under section 45(1) of the Act, which brin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deeds and observed that it is signed by all the partners as seller. In our opinion ld. first appellate authority has rightly appreciated the circumstances in this connection and has rightly observed that being partners they are supposed to sign the sale deed on behalf of the assessee. 20. The next reason assigned by the ld. Assessing Officer for disbelieving the sale was payment. According to him no payment was made by the purchaser. However, ld. CIT(A) has accepted that capital account of the partners have been debited in the books of account of the assessee. It is just equivalent to the payment made by any other purchaser. We find that this finding of the ld. CIT(A) is in the line of the Tribunal order relied upon by the assessee in the case of Burlington s Exports (supra) . 21. In view of the above discussion we are of the view that ld. first appellate authority has dealt with the issue in details and by a reasoned order has held that section 45(4) is not applicable in the present case. There is no distribution of assets on dissolution of the firm amongst its partners in the proportion of the profit sharing ratio, without consideration which attract the provisions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee is its sister concern and was working as sole selling agent for N.S. Mill. According to the agreement N.S. Mill would pay a commission at the rate of 3 per cent on the sales made by the assessee and a commission of 0.5 per cent to 1.0 per cent on the purchases made by the company. It was contended that N.S. Mill s financial health was not in good shape and right from financial years 1990-91 to 1994-95 assessee could not get the commission payment. Thereafter the Mill was closed and it approached the Hon ble Gujarat High Court for liquidation. By that time the balance dues from M/s. N.S. Mill was Rs. 2,28,88,454.60. The assessee had written off this debt and claimed the deduction. Similarly the details of other debts is being noticed by ld. Assessing Officer at page 40 of the assessment order. The ld. Assessing Officer disallowed the claim of assessee on the ground that assessee failed to bring any material on record which can demonstrate that debts have really become bad. In the opinion of Assessing Officer it was the duty of the assessee to prove that the debts are the proper debts, it was of a revenue nature and it has become irrecoverable, therefore, assessee has wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the revenue that this sort of write off will only result in good debts being written off as bad is unfounded. Whenever there is a recovery of the amounts so written off, the revenue has always be means to bring it to tax under section 41 of the Act, whereas the assessee were to loose the deduction if to follow the line of arguments of the revenue. This must be kept in mind before our conclusion. 48. Now coming to the expression "bad debt" in section 36(1)( vii ), it may be pointed out that strict proof of establishing the debt to have become bad is unnecessary if we were to look to the plain meaning of the term "bad debt". According to Chambers 20th Century Dictionary a bad debt means a debt that cannot be recovered. According to Mitra s Legal Commercial Dictionary a debt becomes bad when the creditor has no reasonable chance of recovering it from the debtor. In the Law Lexicon , the definition is that a debt that is not reasonably collected, a debt about which there is no reasonable expectation of recovery, a debt believed to be unrecoverable. It is within the personal knowledge of the businessman whether a debt has become bad or not. His decision as long as it is b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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