TMI Blog2014 (9) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... or acquired as a result of transfer - When the Fair Market Value of the asset as on date of dissolution of the firm is deemed to be the full value of consideration received or acquired as a result of transfer, the Fair Market Value shall be the cost of acquisition in the hands of the transferee/the partners who received the property/capital asset. The circular No. 495 dated 22nd September, 1987 issued by CBDT clarifies the doubt raised with regard to the computation of capital gain or profit & gains of the partnership firm on conversion of partnership asset into individual asset on dissolution of the firm - The Board has clarified that conversion of the partnership asset into individual asset on dissolution or otherwise also forms part of scheme of tax avoidance - Keeping in view the clarification given by the CBDT and the provisions of section 45(4) of the Act, it has been held that on dissolution of the firm, if the capital assets are distributed, the cost of acquisition of capital asset in the hands of the recipients or the partners, would be the Fair Market Value of the asset on the date of transfer, which was taken into account for computing the profit and gains of the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal shall be contributed by the parties to the deed. And in clause -5 that the capital of the partnership business shall be duly credited to their respective accounts of the parties as and when contributed by them and unless otherwise agreed upon no interest shall be allowed thereon. Shri Hari Ram Gupta and Shri Om Prakash Bansal contributed their capital by way of cash. The capital account of the respective partners were credited in the books of the firm and correspondingly, the same was debited to the property account. Later on the partnership firm M/s Hari Om Oil General Mills acquired another 202.03 sq. meters of the same premises for ₹ 50,000/- vide purchase deed 09/08/1985. Thus, the total area of the land aggregated to 3024.48 sq. meters. Thus, the property initially contributed by the partners and purchased thereafter became the business assets/property of the partnership firm namely Hari Om Oil General Mills. The contribution of the property in the partnership firm does not require registration nor execution of any title deed. 2.3 The business in partnership continued upto 30/06/1986. Thereafter Shri Hari Ram Gupta, Sanjiv Gupta, Rajiv Gupta and Sanjay Gupta r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... struction cost ₹ 25,76,046 =25,76,046x582/150 99,95,058/- (iv) Improvement during F.Y.93-94 =1,23,258x582/244 2,94,001/- (v) Improvement during F.Y.95-96 =1,52,770x582/281 3,16,413/- Total indexed cost of acquisition 1,42,01,189/- Net long term capital gain 1,60,98,811/- Assessee's share =1/3rd of ₹ 1,60,98,811 53,66,270.33 2.6 During the course of assessment proceedings the Assessing Officer has noted that this property was acquired by the assessee in 1985 and the assessee has shown the cost of acquisition as on 31/12/87 when the partnership firm was dissolved and the assessee acquired his share on dissolution of the firm. Accordingly, the assessee was asked to justify the capital gains accrued. In response thereto, it was submitted on behalf of the assessee that he became the owner of the property in December, 1987 when the partnership firm was dissolved and assets were distributed and it was onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputes between the retiring and continuing partners in respect of settlement of accounts were settled. The CIT(A) re-examined the issue in the light of the provisions of sections 45(4) and 49(iii)(b) of the Act and circular No. 495 dated 22 September, 1987. Being convinced with the explanation of the assessee, the CIT(A) accepted the computation of capital gain offered by the assessee and deleted the addition. For the sake of reference, relevant portion of the order of CIT(A) is extracted hereunder: I have considered the facts and circumstances of the case, gone through the assessment order, written submissions filed by the Ld. A.R. as well as perused the paper book and the case records. The AR has disputed the levy and computation of long term capital gains, on two counts namely market value of the assets as on the date of dissolution of the partnership firm on 31.12.1987 should be taken as the cost of acquisition and thereafter cost inflated index be applied to arrive at the cost of acquisition on the date of sale and secondly on the ground that the AO erred in not considering the Valuation Report of the Approved Valuer determining the cost of acquisition of the prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1,42,01,189/-. After deducting the cost of acquisition of ₹ 1,42,01,189/- as estimated by the Approved Valuer net capital gains of ₹ 1,60,98,811/- was computed and declared in the ratio of 1/3rd each by the respective co-owner. The AO after considering the Approved Valuer's Report dt. 12.12.2008, chose not to accept the cost of construction of ₹ 25,76,046/- incurred during the year 1986-87, for want of evidence of the expenditure having being actually incurred and consequently the indexed cost of acquisition thereof as estimated by the Approved Valuer in his report. The AO computed the capital gains at ₹ 2,36,81,376/- and the proportionate share of each co-owner at ₹ 87,93,792/-; after deducting the capital gains as declared, made an addition of ₹ 34,27,520/-. The AR has argued that the AO is not justified in rejecting the cost of acquisition as determined by the Approved Valuer by partly accepting the same and partly rejecting the same. The A.R. has relied upon several decisions for the proposition that the AO was not justified at all in calling for evidence in respect of an expenditure incurred specially considering the factor of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also true, that suspicion howsoever grave cannot form part of proof. In such kind of matters, the Valuer's Report is the only evidence which has to be relied upon. I fail to understand as to how the AO can accept the Valuation Report in part and decline to accept the remaining part. Once if a valuation report is filed in evidence, the same has to be accepted in toto or has to be rejected in limine. Before rejecting any evidence, the AO has to record reasons as to why the said evidence is not acceptable. In this case, the AO has merely observed that the assessee has not been able to furnish any evidence with reference to the cost of construction of ₹ 25,76,046/- incurred during the year 86-87. In the peculiar facts of the present case the best evidence is the Valuer's Report alone. The assessee has also filed the balance sheets of Messrs Hari Om Oil General Mills as on 30.06.1986, 30.06.1987 and 31.12.1987, wherein the value of the property has been shown at ₹ 33,61,450/- on 30-06-1987 and ₹ 35,46,165/- on 31-12-1987. The assessee on his part furnished all the necessary evidences as was within his control. Considering the fact that the Approved Valuer& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transfer. Since the assessee received the property on dissolution of the partnership firm in December 1987, the FMV of the property as on the date of dissolution itself is to be taken as the cost of acquisition of the property to the assessee. The reason for inserting clause iii(b) in Section 49 has been explained by the CBDT in its circular No 495 dated September 22, 1987 as under: Capital gains on transfer of firms' asset to partners and vice versa: 24.3 Conversion of partnership assets into individual assets on dissolution or otherwise also forms part of the same scheme of tax avoidance. Accordingly the Finance Act 1987, has inserted new sub-section (4) in section 45 of the Income-tax Act, 1961. The effect is that profits or gains arising from transfer of a capital asset by a firm to a partner on dissolution or otherwise shall be chargeable as the firms' income in the previous year in which the transfer took place and for the purposes of computation of capital gains the fair market value of the asset on the date of transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f all the three assessees as it became the capital or the property of the partnership firm. On the dissolution of the partnership firm through dissolution deed dated 31/12/1987, the assets of the firm were distributed and all the three assessees got their respective 1/3rd share each in the said property. The said property was later on sold through sale deed dated 18/11/2008 to M/s My Car Pvt. Ltd. for a total sale consideration of ₹ 3,03,00,000/- on which the long term capital gain are required to be computed. Therefore, the controversy before us only with regard to cost of acquisition of the property and the cost of improvement made thereafter. For computing the capital gain, our attention was invited to the provision of section 45(4) of the Act where Fair Market Value of the asset on the date of dissolution or transfer of capital asset shall be deemed to be the full value of consideration received or acquired as a result of transfer in the hands of the firm. Therefore, the said Fair Market Value should be the cost of acquisition in the hands of the partner. For the sake of reference, we extract the provisions of section 45(4) of the Act as under: The profits or gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the previous owner or the assessee, as the case may be. Explanation. In this sub-section the expression previous owner of the property in relation any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub-section. 5.3 In the instant case the distribution of assets on dissolution of firm admittedly took place on 31st April, 1987. Therefore, the provisions of this section could not apply to the present case and the cost of acquisition shall not be the cost for which the previous owner of the property acquired it. Again we have to revert back to the provisions of section 45(4) of the Act, according to which the profit or gains arising from transfer of capital asset by way of distribution of capital asset on dissolution of a firm or other association of persons, shall be chargeable to tax as income of the firm of the previous year for which the said transfer took place and for the purpose of section 48 of the Act, the Fair Market Value of the asset on the date of such transfer shall be deemed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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