TMI Blog2007 (10) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... the partnership firm in the name of M/s. Marketers was constituted by two partners viz. Shri Mohinder Pal Shoor and his brother Shri Ved Parkash Shoor. The Assessing Officer noticed that the assessee firm had been dissolved vide dissolution deed dated 19-12-2001, with effect from the same date. This dissolution deed was made between Shri Mohinder Pal Shoor and Shri Ved Pakash Shoor. A fresh partnership deed dated 21-12-2001 was executed, whereby Shri Mohinder Pal Shoor entered into a partnership with effect from 21-12-2001 with his son, Shri Gaurav Shoor. The Assessing Officer observed that on 2012-2001, Shri Mohinder Pal Shoor was the sole proprietor of the concern M/s. Marketers, after taking over the assets and liabilities of the erstwhile firm, including lands under factory building and the land appurtenant thereto, the building of the factory, machinery, stocks, etc., and this fact was evident as per clause 1 of the partnership deed dated 21-12-2001. The Assessing Officer accordingly asked the assessee as to why capital gain may not be levied on the gains arising out of the transfer of the land and buildings under section 45(4) of the Income-tax Act. In response thereto, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous of reducing the terms and conditions of dissolution in writing, this indenture witnesseth as follows : The firm M/s. Marketers is dissolved on 19-12-2001 and the party on the 1st part or continuing party has taken over the running business of the firm. 2. The party on the first part or the continuing party has taken over and continued the running business of the said firm along with all the movable and immovable properties and all the assets and liabilities, past, present or future, accrued or accruing, contingent or otherwise along with the trade name of the firm and its products and rights in the telephones. The party on the second part shall not carry on the business in the name of M/s. Marketers or hold out himself to be a partner of the said firm after 19-12-2001." The Assessing Officer observed as follows : "3.0 As the firm has been dissolved and Shri Mohinder Pal Shoor erstwhile partner of the firm has taken over the running business of the concern with all its assets and liabilities, including land, buildings, machinery stock, furniture etc. remained individual proprietorship concern on 20-12-2001 and again the proprietorship concern was converted into par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t bank accounts were continued as it were in the same name in the same premises and in the same products. ( g )That para 3 of the partnership deed provided that running business of the firm has been continued. ( h )That accounts of the suppliers were settled at the year end and not separately for the old firm and the alleged new firm. ( i )That accounts with buyers were settled at the year end and not separately for the old firm and the alleged new firm. ( j )That supplies to foreign customers were made as per orders received without differentiating order received by old firm and alleged new firm. ( k )That registrations with Government authorities such as Sales-tax Department, Excise and Taxation Department, Small Scale Industries Department, Pollution Department, P.F. Department, Electricity Department etc., remained the same and no change effected. ( l )That staff and labour employed by the firm remained the same. ( m )The accounts of staff and labour were not settled at the time of retirement of Shri Ved Parkash Shoor. ( n )That one Income-tax return was filed for the both periods." 6. The assessee further contended before the learned CIT(A) that it was thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitution of the firm. Assessing Officer has mentioned in the order that the partnership deed dated 21-12-2001 was to commence from 21-12-2001 and on 20-12-2001 it was sole proprietary of Shri Mohinder Pal Shoor whereas as seen from the deed the new partner was inducted with effect from 20-12-2001. On the closing of 19-12-2001 all the transactions were accounted and on the very next day i.e., 20-12-2001 the new partner joined and books of accounts were written from the period 20-12-2001 to 31-3-2002. The Assessing Officer has not found merits in the contentions of the appellant that 20-12-2001 being weekly holiday the deed was made effective from 21-12-2001 when fact of weekly holiday was supported by appellant before the Assessing Officer in form of certificate of the Asstt. Engineer of the concerned department. The Assessing Officer thus concluded that the firm was dissolved but hot withstanding the provisions under Partnership Act governing similar situation the provisions of Income-tax Act have to be given effect to. The facts regarding continuation of the business have not been commented upon by Assessing Officer as per points A to N ( supra ) taken by the appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is transferred and so, the transfer of the capital assets of the partnership to the retiring partners would amount to transfer of the capital assets in the nature of capital gains and business profits chargeable to tax under section 45(4); that the Assessing Officer had wrongly relied on the decision of the Hon ble Andhra Pradesh High Court in the case of Rajlaxmi Trading Co. v. CIT [2001] 250 ITR 581 that in that case, there was a dissolution and transfer of assets, which were not the facts in the present case; that section 45(4) is attracted when the assets are distributed amongst the partners and are also registered in their names, which was also not so in the present case; and that thus, the provisions of section 45(4) of the Act are attracted when the assets are taken out of the firm. 11. The learned CIT(A) held as follows : "I have considered the rival contentions in the light of details on record and the concerned provisions of law i.e., section 45(4) of Income-tax Act. It stands already adjudicated vide ground No. 6 that it was a case of change in constitution of the firm than dissolution of firm. Assessing Officer has invoked section 45(4) of Income-tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of the assets and the said is not the case here as all the assets became the assets of the reconstituted firm and there being no transfer, therefore, section 45(4) does not get attracted. Accordingly, grounds taken by appellant are allowed." 12. Before us, the learned Departmental Representative has impugned the order under appeal while supporting that passed by the Assessing Officer. Written submissions running into twenty-eight pages have been submitted on behalf of the assessee, as well as verbal arguments have been made. The crux of the written submissions of the assessee is that order passed by the learned CIT(A) is well versed and requires no interference; that section 45(4) of the Act is attracted only when the assets are distributed amongst the partners and are also actually registered/transferred in their names, which is not the case herein; that reliance by the Assessing Officer on Rajlaxmi Trading Co. case ( supra ) was misconceived; and that the Assessing Officer erred in invoking the provisions of section 45(4), which action has correctly been set right by the learned CIT(A). 13. The Department has filed counter submissions to the written submissions f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the "first part" or "continuing party" has taken over the running business of the firm: "Whereas the party of the first part and party of the second part were carrying on the business of manufacturers and exporters of hand tools, machine tools and machinery parts at Basti Danishmandan Road, Jalandhar City under the name and style of M/s. Marketers under the terms and conditions of partnership deed dated 4-7-1981 and have carried on the said business in partnership with each other under the same name and style upto 19-12-2001 and Whereas the parties to this deed have after negotiations amongst themselves have decided to dissolve the said partnership and accordingly have dissolved the above said firm as from the 19-12-2001 and have settled the accounts amongst themselves and the party on the first part has continued and taken over the running business of the firm along with all the movable and immovable properties and assets, liabilities, past, present, future. Contingent or otherwise in connection with and relating to the said business along with the trade name of the firm and its products and rights, titles and interests in quotas, permits, licences, concessions, allotments, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf to be a partner of the said firm after 19-12-2001." [Emphasis Supplied] 18. It is clear from the above quoted preamble to the dissolution deed, that thereby, Shri Ved Parkash Shoor relinquished all his rights in the erstwhile partnership firm in favour of Shri Mohinder Pal Shoor, who took over the running business of the dissolved firm, as sole proprietor thereof. The rights" of Shri Ved Parkash Shoor in the erstwhile partnership firm thus got extinguished. Such extinguishment was the extinguishment of his rights in the capital assets of the firm. 19. Section 45(4) of the Act gets attracted in the case of transfer of a capital asset by way of distribution of capital assets, inter alia, on the dissolution of a firm. In the present case, as discussed above, on the dissolution of the firm, its capital assets were taken over by the sole proprietor, Shri Mohinder Pal Shoor, as a running business. There was, thus, a transfer of such capital assets within the meaning of section 45(4), inviting invocation of that section, which was correctly done by the Assessing Officer. 20. Further, section 47 of the Act enumerates certain specific transactions which are not to be regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 45(4), which was rightly done by the Assessing Officer. 23. The learned CIT(A) has given much weightage to the fact that the books of account were written starting from 20-12-2001. This, however, cannot and does not detract from the clear intention of the parties, as manifestly available from the dissolution deed as well as from the partnership deed, as discussed above. To reiterate, had the intention been as the assessee would like us to believe, there was nothing stopping the assessee from mentioning in the fresh partnership deed the factum of induction of Shri Gaurav Shoor, as a partner, with effect from 20-12-2001. While holding that the Assessing Officer did not agree with the assessee s contention that 20-12-2001 being a weekly holiday, the deed was made effective from 21-12-2001, the learned CIT(A) did not deem it appropriate to go into this question himself. Moreover, as discussed, if it had been the intention of the assessee to make the fresh partnership effective with effect from 20-12-2001, there was nothing stopping him from mentioning this fact in the fresh partnership deed. 24. The learned CIT(A) has gone wrong in observing that it was not a case of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm. The facts that the registration with the Government authority remained unchanged; that the staff and labour employed by the firm remained the same; that the accounts of the staff and labour were not settled at the time of retirement of Shri Ved Paul Shoor; that one Income-tax return was filed for both the periods; that the balance sheets and P L accounts of both the firms were drawn in continuity from 19-12-2001 to 20-12-2001; and that the fixed assets were taken at the book value, also meet the same fate in view of the express, specific and intentional use of the word his in the partnership deed, as discussed above. 26. Reference by the assessee to the various provisions of the Partnership Act is also of no aid to the assessee. Section 45(4) of the Income-tax Act specifically deals with transfer of capital asset by way of distribution of capital assets on the dissolution of a firm. The coming into force of section 45(4) brought about the omission of section 47( ii ), whereunder, any distribution of capital assets on the dissolution of a firm was not to be regarded as a transfer for the purposes of section 45. The Income-tax law gives the Assessing Officer a power to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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