TMI Blog2010 (11) TMI 661X X X X Extracts X X X X X X X X Extracts X X X X ..... ady been considered as part of WIP, is genuine or not - Appeal is allowed for statistical purpose - IT Appeal No. 3053 (Mum.) of 2008, - - - Dated:- 10-11-2010 - N.V. Vasudevan, Rajendra Singh, JJ. T.T. Jaccob for the Appellant D.C. Jain for the Respondent ORDER N.V. Vasudevan, Judicial Member 1. This is an appeal by the revenue against the order dated 28-2-2008 of the Commissioner of Income-tax (Appeals)-XXI, Mumbai, relating to the assessment year 2005-06. 2. The first ground of appeal of the Revenue reads as follows: "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs.62,13,027 made by the Assessing Officer being the difference the estimated fair market value and book value of the stock I trade and other assets of the firm as there is dissolution of the partnership firm." 3. The assessee is a partnership firm. It was constituted by a deed of partnership dated 1-4-2001. It consisted of two partners Shri Ramesh R. Parekh and Shri Rajendra Arora. The business of the firm was that of builders, developers, contractors, real estate consultants. The firm commenced development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said partnership, if any, and the continuing partner shall be entitled to get in and receive the partnership assets and properties. 6. The Retiring Partners do and each of them doth hereby assign and release up to the Continuing Partner, their respective share and interest in the said business and goodwill of the firm, together with the benefit, right, title and interest along with the stock in trade, moneys, credits all movables, immovables and effects. TO HOLD the same unto the Continuing Partners absolutely, together with the benefits of all outstanding contracts. 7. In the consideration of the premises herein stated, the Retiring Partners do and each of them doth hereby release the Continuing Partner and the Continuing Partner do doth hereby release the Retiring Partners, of and from all their respective covenants and provisions contained in the said Deed of Partnership dated the 20-5-2004 and dated 1-4-2001, and all actions claims and demands in relation to the said partnership." 5. The assessee filed return of income for assessment year 2005-06, declaring Nil income. The Assessing Officer issued a show-cause notice dated 20-12-2007 calling upon the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh R. Parekh and the legal heirs of Late Shri Rajendra P. Arora, belonged exclusively to Shri Ramesh R. Parekh with effect from 1-8-2004. Thus, the firm seized to exist on 31-7-2004 and the business was carried on by Ramesh R. Parekh as proprietor. Since there was transfer of stock in trade and other assets from the firm to Mr. Ramesh R. Parekh the difference between the fair market value of the work in progress with regard to the incomplete project and its cost in the books of account would become taxable as business profits of the firm for the relevant assessment year. The Assessing Officer was also of the view that if the project which was in progress had been sold by the firm to some other party then the same would not have been sold at book value but at the Fair Market Value. He also observed that that there has been a boom in the construction industry in past 3 to 4 year and the price of the properties have soared up significantly more than 100 to 300 per cent during the said period. The Assessing Officer held that the firm and the partners are different assessee. The beneficial interest in the profit of the firm which was belonging to the partners of the firm up to 31-7-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business, closing stock had to be valued at cost or market price, whichever was lower. It is an established rule of commercial practice and accountancy that there is no discontinuance of business the closing stock is to be valued at cost or market price, whichever is lower. There is no authority directly in point dealing with this question, where a partnership concern dissolves its business in the course of the accounting year, what is the basis on which the stock-in-trade has to be valued as on the date of dissolution. We have accordingly to deal with the matter on first principles." 8. The CIT(A) held as follows: "I have gone through the submissions and I find that the appellant's case is squarely covered by the judgment of Hon'ble Supreme Court in the case of Sakthi Trading Co. v. CIT [2001] 250 ITR 871. In the present case although there was dissolution of firm but there was neither discontinuation of business of firm nor distribution of the assets of the firm. Rather the stock in trade of the firm comprising of work in progress of the Real Estate Project without any disturbance, continued as a part of the business on "as is where is" basis in the hands of Mr. Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Act. Further, it is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Rangavi Realtors [2004] 265 ITR 3463 was dealing with a case of Reconstitution of firm and allotment of assets to retiring partners. The reconstitution had taken place pursuant to a family arrangement. The chargeability to capital gain tax in such circumstances was in issue before the Hon'ble Court. The Court dealt with the issue as to what would be the effect of partners of a subsisting partnership distributing assets to partners who retire from the partnership. Does the asset of the partnership, on being allotted to the retired partner/partners fall within the expression "otherwise"? The Court held that the purpose and object of the Act of 1987 was to bring to charge of tax arising on distribution of capital assets of firms which otherwise was not subject to taxation. If the language of sub-section (4) is construed to mean that the expression "otherwise" has to partake of the nature of dissolution or deemed dissolution, then the very object of the amendment could be defeated by the partners, by distributing the assets to some partners who may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the Amending Act. The Court noticed that the pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of consideration received on transfer". The fair market value of the assets of the firm as on the date of transfer (in this case the date of dissolution) has to be arrived at. The value of the assets as per the books of account of the firm will be its cost of acquisition. The difference between the fair market value on the date of transfer and the cost of acquisition will be the capital gain to the firm. The manner of computation as done by the Assessing Officer is not in accordance with law. The issue of computation of capital gain is therefore remanded to the Assessing Officer for fresh consideration as per directions given above. 15. We will now deal with the case laws that were relied upon by the learned counsel for the assessee before us. In Sakthi Trading Co.'s case (supra), the facts were that the assessee which was a registered firm. As a result of the death of one out of its six partners, on 6-2-1984, the firm was dissolved. It was, however, reconstituted with effect from the next day, that is, 7-2-1984, with the remaining five partners. Two orders of assessments were made, one for the period up to 6-2-1984, and the other for the period from 7-2-1984 to 31-3-1984. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where there was both "dissolution and also discontinuance of the business of the firm", in that the two groups of partners started their own individual businesses with assets and liabilities taken over by them. But in the case before it, the Supreme Court pointed out that the Tribunal had found that the business was continued by the five surviving partners of the firm from the next day, after the death of one of the six partners, without any break or dis-continuance, which is an unchallenged finding taking the case out of the rule in A.L.A. Firm's case (supra). 16. In the present case, however the firm stood dissolved from 1-7-2004. Though the deed dated 11-9-2004 is styled as a "Retirement Deed", in effect it is a deed of dissolution because when all except one partner retire from the firm there cannot in law be a partnership in existence, because for a valid partnership to be in existence there must be at least two partners. Thus as on 1-7-2004 the partnership ceased to exist and the business of the erstwhile partnership was continued by Mr. Ramesh R. Parekh, in his individual capacity. It cannot be therefore said that the business of the firm continued to be carried on by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by takeover of the firm's running business with all assets and liabilities by a company subject to certain conditions. In Rajlaxmi Trading Co. v. CIT [2001] 250 ITR 5819 (AP) it was held that section 45(4) prescribes the sale value to be adopted at market value of the assets on the date of transfer, so that the adoption of book value by the parties would be wrong in computation of the firm's income. It also observed that the position of law could not have been different for determination of the quantum of income even without specific reference to market value under section 45(4), because it is on the basis of the market value that the remaining assets of the firm are divided between the partners. It was so observed in A.L.A. Firm's case (supra), when it reasoned (headnote): "There can be no manner of doubt that, in taking accounts for purposes of dissolution, the firm and the partners, being commercial men, would value the assets only on a real basis and not at cost or at their other value appearing in the books. The real rights of the partners cannot be mutually adjusted on any other basis." 17. Thus the case laws relied upon by the learned counsel for the assessee does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manding the matter because there is no need to deal with the issue of genuineness of labour charges in the year under consideration. The same needs to be looked into in the year when there is revenue from the project and the deduction of cost of construction is claimed by the assessee for computation of its income. With the above findings, I am inclined to delete the addition of Rs.9,55,879 from the income of assessee for the year under consideration because the project has not been completed during the year. In view of above the appeal under reference is allowed. The Assessing Officer may verify the labour charges while dealing with the matter when the appellant shows the profit based on project completion. It has been stated during the appellate proceedings that they are showing part completion during assessment year 2009-10, which may be verified. For that year, labour charges among all other expenses will be subject to verification. Under the circumstances, addition of Rs.9,55,879 on account non-valuable labour charges is deleted." 22. Aggrieved by the order of the CIT(A), the revenue has raised ground No. 1(ii). 23. We have heard the submissions of the learned Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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