2009 (6) TMI 645
X X X X Extracts X X X X
X X X X Extracts X X X X
....set even when the business of the assessee firm had come to a close. 4. That on the facts and in the circumstances of the case the learned CIT(A) is in error while holding that it was a case of slump sale. thus the closing stock was not to be valued at market value. 5. That on the facts and in the circumstances of the case, while examining the issue of valuation of closing stock at market value, the learned CIT(A) has failed to take notice of ratio laid down by various Courts in following judgments relied upon by the AO in favour of the Department. (i) A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC); (ii) Naveen Hardware & Electrical Stores vs. CIT (2004) 188 CTR (Gau) 19 : (2004) 266 ITR 308 (Gau); (iii) G.R. Ramachari & Co. vs. CIT (1961) 41 ITR 142 (Mad). 6. That in view of the facts and circumstances of the case, the order dt. 29th Jan., 2008 of the learned CIT(A) may be vacated and that of the AO be restored. 7. That the appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed of." 3. The crux of the ground No. 2 in the Revenue's appeal is that the learned CIT(A) has erred in holding that the condition la....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s purpose, the fair market value of the assets on the date of such transfer was treated as full consideration received or accrued as a result of the transfer. The AO valued the plant and machinery at market value and brought the difference between market value of the plant and machinery and the value declared by the assessee into tax. Further, the AO valued the closing stock at market price on the dissolution of the firm and brought the difference between the book value declared by the assessee and the market value of the stock into the taxation. 7. The assessee went in appeal before the CIT(A). The CIT(A) observed that for applying the provisions of s. 45(4) there are two conditions to be fulfilled: (i) There should be dissolution of the firm on the retirement of the partners. (ii) There should be distribution of capital assets on such dissolution. Accordingly, he observed that in the present case there was dissolution of firm, however, there was no distribution of assets among the partners. Further, he held that all assets and liabilities of the firm taken over by M/s D.D. International (P) Ltd. and the balance standing to the credit of capital account of the partners has also....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the present case, even if it is agreed that there was dissolution of firm even then the provisions of s. 45(4) do not come into play since second condition is not satisfied regarding the distribution of assets on dissolution. 7.4 He further submitted that there is no distribution of assets amongst the retiring partners which is an essential requirement for applicability of s. 45(4). The word distribution is not defined in the Act. The general meaning of word "distribution" is "the act of dividing or making apportionment". In assessee's case there is neither any division nor any apportionment of assets amongst the partners of the firm. 8. We have heard both the parties and perused the material available on the record. In our opinion, s. 45 of the IT Act gets attracted in the case of transfer of capital asset by way of distribution of capital assets, inter alia, on the dissolution of a firm. In the present case, all the assets and liabilities including capital assets were taken over by M/s D.D. International (P) Ltd. as sole proprietor as a going concern on the dissolution of the firm. There was, thus, a transfer of capital assets. We have also gone through s. 47 of the IT Act, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....09 (SC) took a view that this would not amount to transfer and, therefore, fell outside the scope of the capital gain. The rationale being that the consideration for the transfer of the personal asset was indeterminate, being the right which arose or accrued to the partner during the subsistence of the partnership to get his share of profit from time-to-time and on dissolution of the partnership to get the value of his share from the net partnership asset. Parliament with the avowed object of blocking this escape route for avoiding capital gains tax by the Finance Act, 1987, has introduced sub-s. (3) to s. 45. The effect of this was that the profits and gains arising from the transfer of a capital asset by a partner to a firm are chargeable as the partner's income of the previous year in which the transfer took place. On a conversion of the partnership assets into individual assets on dissolution or otherwise also formed part of the same scheme of tax avoidance. To plug this loophole the Finance Act, 1987, brought on the statute book a new sub-s. (4) in s. 45 of the Act. The effect is that the profits or gains arising from the transfer of a capital asset by a firm to a partner on d....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... valued in terms of money only; it cannot be said that there is no transfer or distribution of capital assets and what is converted into money with the right to share in the partnership firm, which is a capital asset and as such dissolution of firm where the distribution of assets is liable to capital gain. 8.2 As per s. 45(4), on the distribution of capital assets as a result of dissolution of firm for the purposes of s. 45, the fair market value of the asset on the date of such transfer should be taken as full value of the consideration received or accrued as a result of transfer. 8.3 We make it clear that in the present case, there was distribution of capital assets on dissolution of firm. Since the firm stands dissolved and one of the partners accepts capital assets at book value and the other accepts the credit balance in capital account in full and final settlement, it clearly amounts to distribution of capital assets amongst the partners at their book value. As such, there was dissolution of firm and distribution of capital assets as well. 8.4 The other contention of the assessee's counsel is that there was no transfer as envisaged under s. 2(47) and as such the provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e regarding taking over assets or liabilities by transfree i.e. M/s D.D. International (P) Ltd. As such, in the assessment year under consideration, there is transfer of capital assets to the surviving partners i.e., M/s D.D. International (P) Ltd. Hence, there is transfer and capital gain shall be charged under s. 45(4) of the Act. The case laws relied upon by the learned CIT(A) do not support the case of the assessee. 8.6 Without prejudice to above, in our opinion, s. 45(4) is charging section since its provision clearly directs charging of the tax or profits and gains arising from the transfer of capital by way of distribution of capital assets and there is no need to take any aid of definition of transfer in s. 2(47). The distribution of assets on dissolution of firm is considered as transfer within the meaning of sub-s. (4) of s. 45 of the Act. It is clear from the expression profits and gains arising from the transfer of capital assets by way of distribution of capital assets on the dissolution of the firm or otherwise, shall be chargeable to tax as income of the firm used in s. 45(4) of the Act and for that purpose of charging of tax on the transfer of capital assets by way....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... way of distribution of the assets on the dissolution of the firm; no occasion arises for bringing to tax any capital gain on a transfer which has not taken place. The section itself gives no room for doubt as the year in which the capital gain is to be brought to tax is, the previous year in which the said transfer takes place. As it is the finding of the Tribunal that no transfer had taken place in this year, the occasion for levying tax on any capital gain did not arise. From that the conclusion is that the relevant date for ascertaining the year in which the capital gains are to be charged under s. 45(2) is the year in which the transfer took place. In the absence after dissolution of the firm by operation of law, the property which had belonged to the firm was transferred either to the surviving or to the legal heirs of the deceased partner. There was no transfer of capital gain under s. 45(4) in the relevant year. 9. We have also gone through this judgment of Hon'ble Madras High Court. In this judgment there is no reference to omission of cl. (ii) of s. 47 as it stood prior to 1st April, 1988. In the said judgment what was considered was s. 45(4) and s. 2(47) as it stood the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. ITO (2003) 182 CTR (Bom) 202 : (2003) 264 ITR 193 (Bom); (ii) Dy. CIT vs. Mahalasa Gases & Chemicals (P) Ltd. (2004) 84 TTJ (Bang) 992; (iii) Technomics vs. Asstt. CIT (2006) 103 TTJ (Pune) 998 : (2006) 100 ITD 324 (Pune). In the case of slump sale of stocks the rates fetched are generally 1 per cent to 15 per cent less than the normal market rates. and accordingly the value of stock on the date of dissolution can be determined by reducing at least 10 per cent from the market rate. 12.3 He further submitted that the stocks cannot be valued at the rate at which they are exported since for earning the export rates the assessee has to incur huge expenses debited in the P&L a/c. Only after incurring all these expenses the assessee is able to earn GP rate of 10 per cent. All such expenses are still to be incurred on the closing stock and hence only after considering all the expenses the amount of profit which would be earned can be worked out. 12.4 He further submitted that the assessee is mainly a merchant exporter as it mainly buys rice from the market and exports the same. That means whatever are his purchase rates they are the market rates since he buys the rice from market ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the High Court at para (f) p. 314 has stated that question would have all together been different had there been no distribution/division of assets and liabilities of firm between the partners. Accordingly, he submitted that the above judgment is not only distinguishable but it supports the assessee's case. (iii) G.R. Ramachari & Co. vs. CIT (1961) 41 ITR 142 (Mad); In this case also the business of the firm was discontinued on the dissolution of the firm and assets were distributed amongst the partners. Further, he mentioned that all the above case laws are not applicable to the facts of the present case. 12.6 He further drew our attention to the following decisions: (i) Kwality Steel Suppliers vs. CIT (2004) 191 CTR (Guj) 94 : (2004) 271 ITR 40 (Guj); (ii) CIT vs. Moped & Machines; (iii) Sakthi Trading Co. vs. CIT, pp. 16 and 17 (iv) CIT vs. Vijayalakshmi Metal Industries; (v) CIT vs. Texspin Engg. & Mfg. Works (2003) 180 CTR (Bom) 497 : (2003) 263 ITR 345 (Bom); (vi) CIT vs. Surendra Kumar Gupta (2004) 191 CTR (All) 538 : (2004) 270 ITR 325 (All), pp. 12 to 15. 12.7 He further drew our attention to the following decisions of different Benches of the Tribunal: (i) A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iness of the erstwhile firm is not discontinued but is carried on as a whole as single unit, the closing stock is required to be valued at regular method of valuation i.e., cost price or market price, whichever is less. It was further held as under: "It is evident that in A.L.A. Firm's case, this Court was considering the question of valuation of closing stock at market value in a case where there was dissolution and also discontinuance of the business of the firm. In that case after dissolution, two groups were carrying on separate businesses with the assets and liabilities which fell to their shares from the dissolution of the firm. In the present case, however, though there was dissolution on account of the death of one of the partners, there was no discontinuance of the business. The unchallenged finding recorded by the Tribunal is that there was no discontinuance of the business. Even as per principles laid down in A.L.A. Firm's case in such a case the closing stock is to be valued at the cost or market price, whichever is lower. That is an established rule of commercial practice and accountancy. The High Court was clearly in error in relying upon the decisions of the Madras ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....action of the AO in valuing the closing stock on dissolution of firm at fair market rate is justified. 14. The assessee in the C.O. No. 43/Asr/2008 for the asst. yr. 2000-01 raised the issue regarding valuation of the closing stock. The learned CIT(A) while adjudicating the alternative submissions of the assessee, has given certain findings regarding valuation of closing stock, which is inconsistent. Still, we adjudicate this cross-objection though it is academic only. The AO valued the closing stock at fair market value by adding 10.16 per cent to the stock declared by the assessee in its books of account. He applied GP rate @ 10.16 per cent because the assessee declared the GP rate at 10.16 per cent in the return filed for the assessment year under consideration. The learned CIT(A) computed the profit element in the sale of stock from assessee firm to M/s D.D. International (P) Ltd. at Rs. 7,48,048 on the reason that the total sale made by M/s D.D. International is at Rs. 32,62,94,763 and total profit made by M/s D.D. International (P) Ltd. on the sale is Rs. 25,00,260. He has taken proportionate profit on the sale of the stock taken over from assessee firm on Rs. 9,76,22,509 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... there is no mention of valuation of closing stock in the reasons recorded by the AO. There is nothing on record which came to the notice of AO during the course of reassessment proceedings to form his belief that other chargeable income has also escaped assessment besides that for which reopening proceedings were initiated. (ii) That AO was not justified in reopening such concluded matters and make additions. The value of closing stock is duly appearing in the balance sheet and P&L a/c filed with the AO. In the audit report under s. 44AB filed along with the balance sheet and P&L a/c. it is clearly stated that against para 13 in Form No. 3CD that "stocks have been valued at cost or market price whichever is lower". (iii) It is an established law that the AO can go beyond the reasons recorded only if something new comes to his notice during the course of reassessment proceedings and not otherwise. The value of stocks and the method of valuation were on record with the AO but he did not record in the reasons as to the undervaluation of the same. All the reasons recorded by the AO while initiating proceeding under s. 147 were picked up by him from the audit report under s. 44AB. Th....