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2015 (8) TMI 1090 - ITAT AMRITSAR

2015 (8) TMI 1090 - ITAT AMRITSAR - TMI - Penalty under section 271(1)(c) - Held that:- What is really required to be seen by the authorities below was there was an explanation offered by the assessee which could be acceptable to a fact finding body and whether such an explanation could be said to be a bonafide explanation. We find that the explanation of the assessee is supported by the decisions of the Tribunal in Thermoflic's case (1996 (9) TMI 182 - ITAT JABALPUR) and Moped and Machine's cas .....

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hould not deincentivized. We disapprove this approach in the penalty proceedings.

In any case, so far as the penalty proceedings are concerned, all that is to be seen is whether explanation of the assessee is a reasonable explanation or not. In our considered view, for the detailed reasons set out the explanation of the assessee so far as non taxability of capital gains, even if that be so, on dissolution of partnership firm was a reasonable explanation which ought to have been accep .....

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was not a fit case for imposition of penalty on this count either. Thus it is a fit case for deletion for the impugned penalty - Decided in favour of assessee. - ITA No. 285/Asr/2012 - Dated:- 2-6-2015 - Pramod Kumar, AM And A. D. Jain, JM,JJ. For the Petitioner : Tarun Bansal For the Respondent : Tarsem Lal ORDER Per Pramod Kumar, AM. 1. BY WAY OF THIS appeal, the Assessing Officer has challenged correctness of the CIT(A)'s order dated 26th March 2012, in the matter of the penalty under sec .....

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y Smt Neelam Ralhan, Shri O P Ralhan and Shri Sumit Raalhan. On 19th February, 2006, i.e. during the relevant previous year, one of the partners, namely Shri Om Prakash Ralhan, passed away and another partner, namely Shri Sumit Ralhan, retired from partnership on that date. The business of the firm was thus taken over by Smt Neelam Ralhan. On these facts, during the course of the scrutiny assessment proceedings, the Assessing Officer required the assessee to show cause as to why the capital gain .....

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elying upon decision of this Tribunal, in the case of Dhingra Cold Storage & Ice Factory Vs ITO [ITA No. 128(2002) of 2002; order dated 19th October 2007], he rejected the plea of the assessee and brought to tax capital gains of ₹ 31,01,639. The Assessing Officer also disallowed, on estimate basis and for want of full supporting evidence, an amount of ₹ 11,534 out of vehicle repairs, miscellaneous, printing and stationery expenses. 3. The assessee did not raise any grievances aga .....

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sold by Smt. Neelam Ralhan on 24.01.2007 for a sum of ₹ 33,13,50/- against the book value of ₹ 42,628/-. Being a clear cut case where the provision of section 45(4) were attracted, during the assessment proceedings, the assessee firm was called upon to explain as to why the long term capital gain arising on the date of dissolution i.e., 19.02.2006 should not be charged to tax in the hands of the firm. The stand of the assessee that it was case of change of constitution and not disso .....

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n during the course of penalty proceedings, the explanation furnished by assessee as discussed in preceding paras, has not been found to be satisfactory. Rather by not contesting this addition, the assessee has admitted to have concealed the capital gain liable to tax. Therefore, I am convinced that the firm was liable to declare capital gain on the dissolution of firm u/s. 45(4) of the Income Tax Act by taking the fair market value of the capital assets transferred to Smt. Neelam Ralhan who sub .....

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at ₹ 31,01,639/- arising out of the transfer of assets at the time of dissolution of the firm as on 19.02.2006 and disallowance of unvouched expenses for ₹ 11,534/- as discussed above. 4. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without any success. While confirming the action of the Assessing the Officer, the CIT(A) concluded as follows: I have considered the submissions carefully. The return of income by h .....

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that the capital gain, if any, would arise during the F.Y. 2006-07. The fact that capital gains u/s. 45(4) arose to the assessee is well supported by the decision of the Hon'ble Jurisdictional Tribunal in the case of Dhingra Cold Storage vs. ITO (supra). In his judgment it has been held that by virtue of the provisions of section 45(4) of the Act capital gains arose in the case of firm on the dissolution of the partnership. However, in the case of CIT vs. Moped & Machines (supra), relie .....

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were disclosed by the appellant upfront. It is seen that section 45(4) of the Act brings to tax the capital gins arising from the transfer of the capital asset by way of distribution of capital assets on the dissolution of the firm or other body as income of the previous year in which the transfer takes places. Thus, the requirements for attracting section 45(4) are there should be dissolution of firm and there should be distribution of the asset of the firm on dissolution. In the present case, .....

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ome for the AY. 2007-08 when the land was sold by her. Thus, while the firm disputed liability u/s. 45(4), the partner also did not accept the liability to pay tax on the sale of the land. In my opinion, this shows that there was a clear attempt to evade tax on the distribution of land to the partners on dissolution of the firm. Under these circumstances, the decision in the case of CIT vs. Reliance Petro Products Ltd. (supra) will not assist the assessee, since this is a clear case of attempt t .....

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passed away. The question arose whether in such circumstances, the assets of the firm can be said to have been transferred to the surviving partner who thus became sole proprietor of the partnership firm. On these facts, the Assessing Officer brought to tax the capital gains on transfer of partnership firm's assets to the surviving partner. Aggrieved, assessee carried the matter in appeal before the CIT(A) but, as noted by Hon'ble High Court, CIT(A) deleted the addition on the ground tha .....

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heir Lordships confirmed the stand so taken by the Tribunal and put the seal of approval on the school of thought that there could not be a taxation of capital gain even on dissolution of a partnership firm as the partnership firm ceases to exist. Learned CIT(A) was thus clearly in error when he rejected assessee's reliance on Moped & Machines (supra) decision on the ground that "when surviving partners were aware of the dissolution, and accepting it in writing, the reliance on&hell .....

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The decision of Thermoflics (supra), which was relied upon by the Tribunal in this case, was also a case in which dissolution had taken place and yet it was held that capital gains cannot be brought to tax in the hands of the partnership firm. In this case, a coordinate bench of the Tribunal had, inter alia, observed as follows: 11. One may be tempted to argue that sub-s. (4) of s. 45 is a separate code by itself and it by way of deeming provision provided for levy the capital gains tax on the .....

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in sub-s. (47) of s. 2, i.e., (Definition of word "Transfer") and cl. (iv) was inserted therein, so as to include, the conversion of any asset by owner thereof as stockin- trade, within the definition of word "Transfer". Thus, the legislature was aware that s. 45 is not a complete code in itself and to charge assessees under s. 45(2) for conversion of capital asset into stockin- trade, simultaneous amendment in the definition of word "Transfer" under s. 2(47) is ess .....

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the definition of word "Transfer" to cover the cases of distribution of assets on the dissolution of firm. We have already mentioned that for chargeability of capital gains tax as per the newly inserted sub-s. (4) of s. 45, "Transfer" of capital asset is essential. Unless there is "Transfer" of capital assets, the assessee cannot be charged to capital gains tax. Therefore, the decisions of Hon'ble Supreme Court in the cases of Dewas Cine Corpn. (supra), Bankey .....

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ital gains tax. Therefore, when the assessee is not liable to capital gains tax, there is no necessity for claiming any exemption under s. 47(2). 8. Let us, in this light, take a look at the scheme of Section 271(1)(c). The scheme of s. 271(1)(c visualizes imposition of penalty when the assessee has concealed income or when the assessee has furnished inaccurate particulars of income. In addition to these two situations, penalty can also be imposed, inter alia, when assessee is deemed to have con .....

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ve that the explanation was bona fide and that all the facts necessary for the same and material for computation of income have been duly disclosed by the assessee. In the light of this legal position, coming to the facts of this case, we find that it is not even Assessing Officer's case, nor can it be his case, that the assessee was under a statutory obligation to disclose that the assessee could possibly be held liable to be taxed in respect of capital gains on dissolution of firm and yet .....

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or in respect of which bonafides are not proved, in addition, of course to a situation in which there is a failure to disclose facts necessary of computation of income. Non disclosure of facts necessary for computation of income, as we have noted above, is not even alleged in this case. Coming to the existence of explanation of the assessee, and its bonafdides, we find that in the case of CIT vs. Nathulal Agarwala & Sons [(1985) 153 ITR 292 (Pat)(FB)] Full Bench of Hon'ble Patna High Cou .....

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alty must be an acceptable explanation. He may not prove what he asserts to the hilt positively but as a matter of fact materials must be brought on the record to show that what he says is reasonably valid." 9. The above views were approved by the Hon'ble Supreme Court in the case of CIT vs. Mussadilal Ram Bharose [(1987) 165 ITR 14 (SC)] wherein Their Lordships, inter alia, observed that "The Patna High Court emphasised that as to the nature of the explanation to be rendered by th .....

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ered by the assessee which could be acceptable to a fact finding body and whether such an explanation could be said to be a bonafide explanation. We find that the explanation of the assessee is supported by the decisions of the Tribunal in Thermoflic's case (supra) and by Hon'ble Delhi High Court in Moped and Machine's case (supra). The explanation is not only an acceptable explanation but it has been indeed accepted, on merits, by a coordinate bench of this Tribunal as also by Hon&# .....

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t only the bonafides of the assessee's conduct in taking a particular stand about taxability. Such a stand may be incorrect but it cannot be said to be not bonafide and that is all that matters to us in the present context. The fact that the assessee did not pursue the matter against this quantum addition, on merits, cannot be put against the assessee in the penalty proceedings, but then that is precisely what the authorities below have ended up doing. Quite to the contrary, the fact that th .....

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