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M/s. Vikas Academy Versus Income Tax Officer, Ward II (4) , Madurai.

2015 (9) TMI 321 - ITAT CHENNAI

Validity of the re-assessment proceedings u/s.147 - Commissioner of Income Tax (Appeals) sustaining the order of the Assessing Officer who had made addition by invoking the provisions of section 45(4) and treating the settlement of an asset in favour of the retiring partner as capital gain - CIT(A) confirmed re-assessment order and additions thereon - Held that:- It is pertinent to mention here that the transfer of the asset is by the firm which is a “legal entity” to the retiring partner anothe .....

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n taken by the assessee firm for purchase of the asset which is transferred cannot be factored because the loan does not alter the cost of the assets purchased or the value of the asset transferred to the transferee. Therefore we do not have any hesitation to confirm the order of the Ld. CIT (A) as well as the order of the Ld. Assessing Officer. - Decided against assessee. - I.T.A. No.2323/Mds. /2014 - Dated:- 12-6-2015 - SHRI N.R.S.GANESAN AND SHRI A.MOHAN ALANKAMONY, JJ. For The Appellant : Mr .....

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(Appeals) had erred in sustaining the validity of the re-assessment proceedings u/s.147 of the Act as it is beyond the scope of the powers conferred by Sec.148 of the Act. (2) The Commissioner of Income Tax (Appeals) had erred in sustaining the order of the Assessing Officer who had made addition by invoking the provisions of section 45(4) of the Act and treating the settlement of an asset in favour of the retiring partner as capital gain amounting to ₹ 6,16,67,531/-. (3) The Commissioner .....

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inally assessment was completed U/s. 143(3) of the Act on 28.3.2013 wherein the Ld. Assessing Officer determined the long term capital gain of the assessee at ₹ 6,16,67,531/- for transferring the immovable property of assessee to the outgoing partner Mrs. Aruna ₹ 9,04,10,000/- invoking the provisions of section 45(4) of the Act. 4. On the issue of reopening, the Ld. A. R. did not advance any argument to substantiate the claim of the assessee that reopening was bad in the case of the .....

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ion, it was observed by the Ld. Assessing Officer that the assessee had transferred its immovable property to the outgoing partner, the value of which was stated as ₹ 9,04,10,000/- in the partition deed entered between the firm and the outgoing partner. The Ld. Assessing Officer opined that in the case of the assessee section 45(4) of the Act would be applicable and by invoking the aforesaid provisions of the Act computed the capital gain at ₹ 6,16,67,531/- being the difference betwe .....

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ll; Only when there is a transfer of capital asset by way of distribution on the dissolution of a firm or otherwise, can the provisions of section 45(4) be invoked. • In the present case there is no distribution as envisaged by the section 45(4), since there has been no cessation of business as the other partners continue the business as a going concern after the retirement of one of them, • There can be no distribution where a running business as a going concern is taken over as point .....

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on 45(4). Where some partners exist from the firm with other partners continuing the business as a going concern with accounts indicating settlement of account by credit to partners for goodwill, there can be no interference of any transfer by the firm or the exiting partners to the continuing partners there can be no liability. o Dy. Ld. CIT vs. G. K. Enterprises (2001) 79 TTJ (Mad.) 82, wherein it was held by the Tribunal that the transactions as evidenced by the documents filed did not show a .....

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ad an effect of allocation of exclusive interest in any capital asset to the retiring partners. In these circumstances, FAA was justified in holding that conditions of Section 45(4) were not fulfilled. In our opinion the firm or the continuing partners were not liable to be taxed under the head capital gain , as held by the FAA. Retiring partners had relinquished their rights in the assets of the firm and in lieu of that firm had paid the retiring partners money lying in their capital account. O .....

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een stated. 5. However the Ld. Assessing Officer rejected arguments of the Ld. A. R. for the following reasons:- _The case laws quoted are not at all relevant and therefore not acceptable as under: Case law quoted Held/Discussed Reasons for rejection Sakthi trading Co. V. CIT in (2001) 250 ITR 871 The ruling of the apex court is relating to reconstitution of firm on the death of one of the partners and relating valuation of closing stock. There is no transfer of capital asset and the case law ir .....

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in CIT Vs. Mohanbhai Pamabai (1973) 91 ITR 393 Case law relates to retirement of partners and with regard to share of goodwill. Both the points in question are not relevant in the instant case. ITO Vs. Fine Developers in ITA No.4630(Mum.) Discussion is relating to question of whether there is any transfer due to introduction of a new partner in a firm. Totally irrelevant to the instant case and totally misquoted. On going through the case laws quoted by the assessee, it is found that either they .....

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-firm. In the instant case, there is a clear transfer of Schedule A property as per the partition deed by the continuing two partners of the firm and relinquishment of Schedule B property by the outgoing partner. Therefore, as far as the transfer of the Schedule A property, the firm has to be taxed U/s.45(4) of the IT Act. During the course of the above discussed written submission on 20.02.2013 it was explained to the assessee s representative about the basis for the arrival of the deemed valu .....

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ue. 8. In the instant case, there is distribution of capital asset, namely, the land and building as visible from the partition deed. Further, it is held by the Hon ble Bombay High Court in the case of CIT Vs. A. N. Naik Associates (2004) 265 ITR 346 as under:- Word otherwise used in section 45(4) takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. The expression otherwise has not to be re .....

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. Therefore, when the asset of the partnership is transferred to a retiring partner, the partnership which is assessable to tax ceases to have a right or its right in the property stands extinguished in favour of the partner to whom it is transferred. If so read, it will further the object and purpose and intent of the amendment of section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature .....

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eet submitted along with return of income for the assessment year 2009-10). This needs to be considered at the time of capital gain calculation if the Assessing Officer intends to tax the partition done between Mr. Biju Sundarshan and Mr. Beboy John on the one side and Mrs. Aruna Visveswar on the other side. • The loan has been agreed to be settled by the continuing partners and hence the sacrifice by the continuing partners need to be factored to the extent of loan outstanding, since the l .....

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the cost of acquisition and cost of improvement which should be taken into account after the indexation, if any. Any such liability would become deductible in cases of inheritance/will, with a specific condition in it, only. But in the case of assessee firm, it is only partition of firm s assets. As discussed supra, the share of the outgoing partner would have been more had there been no liability. Therefore, the claim of the assessee is not acceptable and rejected. 11. Therefore, in view of the .....

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tically in a very detailed manner discussing and considering the statement of objects of Finance Act 1987 for introducing the section 45(4) taking into consideration whether partnership assets are converted to individual assets holding that provisions of section 45(4) are applicable. The case laws cited by the Appellant, discussed earlier, are not on identical facts and also they ignored the statement of objects of Finance Act 1987 for introducing the section 45(4). In my view the decision of Hi .....

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e rejected. 6. What is the consideration to be adopted: The next objection relates adopting ₹ 9,04,10,000/- as the consideration while computing capital gains. As discussed by the A. O a partition deed was entered in which the value of land and building allotted to M. Aruna Vishweshwar was recorded as ₹ 9,04,10,000. The Assessing Officer has also written to the sub registrar about the value which was not received. He chose to adopt this value. 6.1. Appellant objected as under: Merely .....

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et value. Hence the Ld. Assessing Officer failed to compute the capital gain as envisaged in section 48 of the Income tax and since the computation fails the assessment order needs be quashed. The prop consists of land and building and the same was depreciated in the books of account and hence the computation of land and building needs to be separate and cannot be taken as a consolidated figure. Hence in the instant case the computation of the capital gain is incorrect and is liable to be recomp .....

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than this? Of course the only other option is that Assessing Officer has written to the Joint Sub-registrar-4, Madurai about the value of the property the reply to make sure that this is not less than the market value as per the sub registrar. The value was not received at the time of conclusion of assessment and hence A. O adopted the value which is scientific and backed by evidence filed by the appellant. There is no merit in appellant s arguments and are rejected. 7. Moreover on the issue wi .....

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in 126 ITD 131 which was confirmed by the Hon ble Jurisdictional Madras High Court vide order dated 20.8.2013 in Tax Appeal No.222 of 2013, 84 of 2009 & 88 of 2010. However, we find the decision of the Goyal Dresses not applicable to the case of the assessee because that case relates to family arrangement which is not the case of the assessee before us. Ld. D. R on the other hand relied on the orders of the Revenue. 9. We have heard both the parties and carefully perused the materials avail .....

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The question that arises before us is whether the transfer of land belonging to the firm to the retiring partner is liable to be taxed under the head capital gains and if so in whose hands. It is pertinent to mention here that the transfer of the asset is by the firm which is a legal entity to the retiring partner another distinct legal entity being an individual . Therefore, it is crystal clear that capital gain will arise in the hands of the transferor viz. the assessee firm and not the transf .....

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in which the said transfer takes place, and for the purpose of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. The words OR OTHERWISE have been elaborately explained in the following decisions:- i) ACIT V. D. D. International (Global) [2009]125 TTJ (Asr.) 112 The word otherwise , used in section 45(4) is not to be read ejusdem generis with dissolution of firm or .....

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uation, where the capital asset of the firm is distributed to its partners otherwise than on dissolution of the firm. (iii) CIT Vs. A. N. Naik Associates [2004] 136 Taxman 107/265 ITR 346(Bom.) The expression otherwise has not to be read ejusdem generis with the expression dissolution of a firm or body of individuals or association of persons. The expression otherwise has to be read with the words transfer of capital assets by way of distribution of capital assets. If so read, it becomes clear t .....

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