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TMI Blog2011 (10) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment. Since the common facts are involved, therefore, for the facility of reference, we would take facts from assessment year 2002-03, however, if we find any variation of facts in any assessment year which required specific reference for the just decision of appeals then we would refer those facts from those assessment years. 3. The brief facts in assessment year 2002-03 are that assessee has filed a return of income on 30.7.2002 declaring an income of Rs. 12,23,340. This return was processed under sec. 143(1)(a) on 25.2.2003 on retuned income. Assessing Officer, thereafter passed an order under sec. 154 read with section 143(1) on 31.3.2003 and determined the taxable income of assessee at Rs. 79,89,490 after disallowing property tax of Rs. 61,00,190. He also disallowed interest on borrowed capital at Rs. 24,96,015. Dissatisfied with this adjustment, assessee carried the matter in appeal before the learned CIT(Appeals). Learned CIT(Appeals) decided the appeal on 14.8.2003 and Assessing Officer gave the effect to Learned CIT(Appeals)'s order on 27.2.2004. He recomputed the income of the assessee at Rs. 12,63,018. The assessee again moved an application under sec. 154. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. The assessee's only source of income is rental income. On going through the inspection report of Hon'ble CIT-X and the assessment records, I am satisfied that the income chargeable to tax has escaped assessment for the AY.2002-03 as per the reasons given below:- "That during the A.Y. 2002-03, the assessee firm was sanctioned loan of Rs. 4 Crores by Vyshya Bank Ltd. on 12-05-2001 for the purpose of construction of commercial Complex/repayment of existing loan with Canera Bank. The building was completed in the F.Y. 2000-01 and the firm started getting rent in the F.Y. 2000-01 relevant to the A.Y .2001-02. The borrowed funds were not used for the purpose of construction as there was no addition to the commercial complex during the year, except repayment of outstanding loan of Rs. 1.66 Cr. payable to Canara Bank. The assessee has claimed deduction u/s 24 on account of interest for current year at Rs. 53.61,464/- which has been allowed. Since Vyshya Bank Ltd. duly certified that the loan of Rs. 4 Cr. is being sanctioned for the purpose of construction of commercial complex/repayment of existing loan with Canara Bank and the Interest payable on that loan for the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the capital introduced by the incoming partners was repaid out of the loan so sanctioned from SBI. Thereafter on the 30.09.2003 another instrument of retirement deed was executed between the retiring partners i.e. M/s. Daisy Estates Pvt. Ltd. and M/s. Raksha Properties Ltd. and the continuing partners. In para 5 & 8 of this partnership deed, it was mentioned that the continuing partners will take over all the assets and liabilities of the business carried on by the parties hereto in the name and style of the firm M/s. Delhi Industries and Enterprises going concern w.e.f. 20.9.2003. Thus, the firm was dissolved on 30.09.2003 and a new partnership deed was executed on 01.10.2003 with the following remaining partners: 1. Bal Kishan Gupta 2. Krishna Gupta 3. Ankit Gupta 4. Ashish Gupta The transfer of the capital assets on dissolution of the firm falls within the ambit of section 45(4) of the I.T. Act and the assessee firm has not shown any capital gains on the transfer of assets of the dissolved firm. The capital gains arising after ascertaining the fair market value of the assets on the date of such transfer has escaped assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, unless some information came to the possession of the Assessing Officer afresh, after the filing of the return. For buttressing his contention, he made reference to a large number of decisions but we would like to refer the decision of jurisdictional High Court in the cases of Jay Bharat Maruti Ltd. v. CIT [2010] 324 ITR 289/[2009] 180 Taxman 192 (Delhi) and in the case of Shipra Srivastava v. Asstt. CIT [2009] 319 ITR 221/184 Taxman 210 (Delhi), CIT v. Batra Bhatta Co. [2008] 174 Taxman 444 (Delhi) and United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317/125 Taxman 775 (Delhi). He also referred the decision of Madras High Court in the case of Bapalal & Co. Exports v. Jt. CIT (OSD) [2007] 289 ITR 37/[2008] 170 Taxman 131. He further submitted that in assessment years 2002-03 and 2003-04, a notice under sec. 148 of the Act was issued on the basis of incorrect facts. He pointed out that the Assessing Officer in the reasons has referred that assessee took a loan of Rs. 4 crores from Vysya Bank which was alleged to have been used for repayment of loan from Canara Bank. But only a sum of Rs. 1.66 crores was used for making repayment of loan, meaning thereby the amounts to this e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 285. He also relied upon the decision of Bombay High Court in the case of Hindustan Unilever Ltd. v. Dy. CIT [2010] 325 ITR 102/191 Taxman 119. 8. The learned counsel for the assessee further submitted that in assessment years 2004-05 and 2005-06, facts are little different and the case of assessee is on a more sound footing. He pointed out that in these assessment years, assessments were framed under sec. 143(3) meaning thereby the Assessing Officer has scrutinized the return filed by the assessee. Assessing Officer in the reasons recorded by him has pointed out that the firm M/s. Delhi Industries & Enterprises was reconstituted on 2nd September 2003. He further observed that the firm was again reconstituted on 30th September 2003 and, therefore, the transfer of the capital assets on dissolution of the firm falls within the ambit of sec. 45(4) of the Act. He pointed out that the assessee has already submitted copies of the partnership deed exhibiting the retirement of two partners. Only two partners were retired on 30th September, 2003. The copy exhibiting the retirement was duly submitted to the Assessing Officer before scrutinizing return and thus there is no new information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). The decision of Hon'ble Delhi High Court was specifically brought to the notice of Learned CIT(Appeals) and she should have not given preference to the decision of a Division Bench of an Hon'ble Guj. Court which did not match with the view of full bench of Hon'ble jurisdictional High Court. He prayed that notice issued under sec. 148 of the Act in both the assessment years be quashed. 10. Learned DR on the other hand relied upon the orders of learned revenue authorities below. He pointed out that in assessment years 2002-03 and 2003-04, there is no scrutiny assessment. The information collected by the Assessing Officer should not have an external source only. According to him, there are different mechanism in the department for analyzing the details. Some information must have come to the possession of learned CIT who inspected the record. He prepared a report and transmitted it to the Assessing Officer for examination. It is the Assessing Officer who on analysis of the report, formed an opinion that income has escaped assessment. Learned CIT has not given any direction to the Assessing Officer for issuance of notice under sec. 148 of the Act. Assessing Officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist in the purchase of Tobacco from India and its sales outside. The tobacco is sold directly on the assessee's own account and for commission on behalf of the others. The purchase of tobaccos were effected through British India Corporation Ltd. Guntor who, were appointed agents of the assessee under sec. 43 of the Income-tax Act, 1922. For assessment years 1959-60 and 1960-61, the agents filed the returns of the income on behalf of the assessee. Assessing Officer after examining the balance sheet, completed the assessment under sec. 23(3) of the Indian Income-tax Act, 1922. For the year 1958, the gp on the sale of Indian tobacco, including commission, was shown in the balance sheet and profit and loss account of the assessee at 11108 pounds. As the assessee carried on business, not only in India but in other places also, the ITO worked out the proportionate overhead expenses of the assessee for its business in India. Subsequently, in the course of assessment proceedings for assessment years 1962-63, the ITO appears to have noticed that a mistake had been committed in the computation of the overhead expenditure. He issued a notice under sec. 148 of the Act. Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: Provided further that the Assessing Officer may assess or reassess such income, other than the income Involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of income would enable him to harbour the belief that income has escaped assessment and he would be authorized to issue notice under sec. 148 of the Act. However, if an assessment under sec. 143(3) was passed and 4 years have expired from the end of relevant assessment year, if Assessing Officer wants to reopen the assessment then interdiction provided in the proviso would come in his way, in that case, he can reopen the assessment, if he has reason to believe that income has escaped assessment by reason of the failure on the part of the assessee to make return under sec. 139 or in response to a notice under sec. 142(1) or under sec. 148 of the Act and the assessee failed to disclose all material facts fully and truly for the assessment of that year. In the present appeals, notice under sec. 148 has been issued within four years, therefore, the proviso appended to section 147 has no application on the dispute in hands. Thus, we do not wish to make any elaborate discussion on this issue. The first proposition canvassed by the assessee before us is that after expiry of limitation for issue of notice under se. 143(2), Assessing Officer cannot issue notice under sec. 148, unless a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with sec. 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words, if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of proviso to sec. 147. The case at hand is covered by the main provision and not the proviso. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under sec. 147 and failure to take steps under sec. 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when the intimation under sec. 143(1) had been issued." 13. We could appreciate the contention of the assessee that had there been any change of opinion but in these two years, there is no opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Raymond Woollen Mills Ltd. (supra) as well as to the decision of the Hon'ble Delhi High Court in the case of Jindal Photo Films Ltd. (supra). The next proposition raised by the assessee is that reopening is based on mere suspicion. However, the learned counsel for the assessee was unable to substantiate this proposition from the fact. On reading of the reasons, prima facie, it is discernible that the Assessing Officer has the information in respect of his opinion. He has not issued the notice under section 148 on suspicion. The next proposition raised by the assessee is that notice under sec. 148 was issued under the direction of the learned CIT, however, we do not find any force in this submissions also, because nowhere learned CIT has directed the Assessing Officer to reopen the assessment. He has only transmitted the information which has been analysized by the Assessing Officer and he had formed his independent opinion. The next proposition raised by the assessee is that Assessing Officer has formed his opinion on the basis of incorrect facts. We have seen the balance sheet as well as the reasons recorded by the Assessing Officer. In the understanding of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record copy of the computation of income and the documents attached with it. On page 19 of the paper book, copy of Form No. 2D for assessment year 2004-05 is available. Alongwith the return, assessee has filed copy of partnership deed, TDS details and other details. In the reasons recorded by the Assessing Officer, he assigned two reasons, namely, that on 30th of September, 2003, assessee firm was dissolved and thus the transfer of capital assets on dissolution of the firm falls within the ambit of sec. 45(4) of the Act and a capital gain required to be computed. The second reason assigned by the Assessing Officer is that assessee claimed excess deduction in respect of interest paid under sec. 24 of the Act. The details in respect of interest expenses was also filed by the assessee. Both these issues were before the Assessing Officer, when he passed the scrutiny assessment, though no discussion on these issues is discernible but in view of the Full Bench decision of the Hon'ble Delhi High Court in the case of Kelvinator of India Ltd. (supra), it is to be construed that these must have been looked into. Learned CIT(Appeals) has upheld the reopening of assessment basically fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer to initiate a proceeding under sec. 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of sec. 143 or sub-section (3) of sec. 143. When a regular order of assessment is passed in terms of the said sub-section (3) of sec. 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong. For the reasons aforementioned, we are of the opinion that the answer to the question raised before this Bench must be rendered in the affirmative, i.e., in favour of the assessee and against the Revenue. No order as to costs". 18. Both the reasoning assigned by the Learned First App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to creditors for building/construction 17,25,713 5 Repayment of loan to partners. 83,15,420 Total 4,17,63,169 20. Learned First Appellate Authority has allowed the appeal partly. She observed that interest expenses to be actually allowed as deduction under sec. 24(b) out of the current year interest expenses claimed by the assessee at Rs. 53,61,484 will be the interest of Rs. 11,99,972 payable to Canara Bank and the interest worked out on loan of Rs. 2,26,82,244 payable to Vyasya Bank. Learned First Appellate Authority has accepted the contentions of the assessee that liability to pay Canara Bank was at Rs. 1.89 crores and Assessing Officer has wrongly construed it at Rs. 1.66 crores. Similarly, she accepted the utilization of Rs. 20,62,512 towards addition to the building and Rs. 17,25,713 for construction activity of the building. Her conclusion in paragraph No.7.5.3 reads as under: "7.5.3 The sum and substance of the findings made above is that the deduction u/s.24(b) in respect of interest payable to Vyasya Bank, will be allowable on the loan amount of Rs. 2,26,82,244 (Rs. 1,89,08,019 utilized to repay the outstanding old loan of Canara Bank + Rs. 20,62, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om Canara Bank. This loan has been shown at Rs. 1.89 crores on the assets side. The only fixed asset with the assessee is the plot of loan and building. It has been valued at Rs. 4.20 crores. Apart from this main asset, there are certain current assets i.e. cash in hand, bank deposit, deposits with Delhi Vidyut Board etc. In the balance sheet of the partners, M/s. Raksha Properties Pvt. Ltd. has shown a liability of Rs. 1.14 crores in the previous year. At the close of 31.3.2002, it reduced to Rs. 30,90,881. Thus, the liability has been reduced roughly by a sum of Rs. 83 lacs. This loan of Rs. 83 lacs was shown as investment in the assessee M/s. Delhi Industries and Enterprises. The investment as on 31.3.2002 was Rs. 1,12,19,330. He pointed out that the only asset with the partner is the capital investment in the assessee's firm and the corresponding liability is the loan amount representing this asset which clearly indicates that the funds borrowed by the partners were invested in the assessee's firm and which was used for the purpose of repayment of loan. On the strength of these details, he pointed out that Learned First Appellate Authority has erred in not appreciating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds provide the external aid for the above object. The idea under both the methods to arrive at just conclusion, which is admissible in law. On due consideration of this logic, we are of the view that had these details were available then that would be an ideal situation and there may not be any controversy but can the department put the assessee under tax liability on the ground that why it used the funds borrowed by the partners for the construction purposes or whether the partners as well as the assessee must have used this amount for some other activities. The revenue is unable to collect any evidence demonstrating the other activities. As far as other aspects are concerned, there is no dispute between the department and the assessee. The interest expenses incurred by the assessee on the borrowed funds if used for the purpose of construction then deduction of such expenses will be admissible to the assessee under sec. 24(b) of the Income-tax Act, 1961. The only dispute between the parties relates to the quantification of amounts used for the purpose of construction. On an analysis of the balance sheet, we are of the view that the assessee is able to demonstrate, utilization of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the meaning of expression "on dissolution of firm or otherwise" employed in sec. 45(4) read with sec. 2(47) of the Act. 26. As per the Assessing Officer, it is the distribution of assets within the meaning of sec. 45(4) and thus a capital gain on transfer of capital assets deserve to be computed. On the other hand, case of the assessee is that the firm was not dissolved. It has not distributed its assets. It is continuing with the business and, therefore, on retirement of few partners, it cannot be construed that assessee has transferred the assets which can authorize the Assessing Officer to compute the capital gain. 27. With the assistance of learned representatives, we have gone through the record carefully. Learned DR relied upon the order of the Learned CIT(Appeals). He also brought to our notice the definition of transfer contained in sec. 2(47) of the Act as well as sec. 45(4) of the Act. Both these clauses read as under: "2(47) 'transfer', in relation to a capital asset, includes, - (i) the sale, exchange or relinquishment of the asset' or (ii) the extinguishments of any rights therein; or ... ... (iv) any transaction (whether by way of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mad.) delivered on 28.10.2010 in the case of CIT v. M.V. Narayanan [IT Appeal No. 474 of 2009] has observed that sec. 45(4) is not applicable on retirement of partners when the firm is continuing with the business. There is no distribution of assets of the firm. He placed on record copy of the judgment of Hon'ble Kerala High Court. Apart from this decision, he pointed out that there are decisions in favour of the assessee rendered by the Hon'ble Madhaya Pradesh High Court in the case of CIT v. Moped & Machines[2006] 281 ITR 52/150 Taxman 98, CIT v. Jayalakshmi Metal Industries [2002] 256 ITR 540/[2003] 132 Taxman 49 (Mad.). He further pointed out that there are number of decisions rendered by the ITAT on this issue which are in favour of the assessee. He mainly drew our attention towards the decision of the ITAT, Mumbai in the case of ITO v. Smt. Paru D. Dave[2008] 110 ITD 410. 29. On due consideration of the facts and circumstances, we find that Hon'ble Mumbai High Court in the case of A.N. Naik Associates (supra) has considered this aspect in details. Hon'ble High Court is of the opinion that by Finance Act, 1987, the Hon'ble Parliament brought on the statute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have divested themselves of valuable rights and an assets handed over the same to the new partners. On the basis of this observations of the Learned CIT(Appeals), the cases of the partners have been reopened and capital gain has been assessed. The ITAT has made an elaborate discussion whereby it took into consideration the decision of Hon'ble Kerala High Court in the case of CIT v. Kunnamkulam Mill Board[2002] 257 ITR 544/125 Taxman 802. This decision has been relied upon by the assessee before us also. The relevant discussion of the ITAT reads as under: "9. The issue for our adjudication is whether short-term capital gain arises on surrender of rights in the revalued partnership assets. Partnership firm constituted of its partners is governed by the provisions of Partnership Act. The partnership firm is not a legal entity and property of the partnership vests in its partners inasmuch as all the partners have an interest in the partnership property. The provisions of the Partnership Act clearly provide that a property which is brought in by the partners on the formation of partnership or acquired in the course of business of partnership, becomes the property of the firm. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assets of the partnership firm, there was no transfer of any right in the said property on reconstitution/retirement of a partner. Their Lordships of Hon'ble Supreme Court in Addl. CIT v. Mohanbhai Pamabhai[1987] 165 ITR 166 had held that when a partner retired from the firm and received a share of amount calculated on the value of net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill and no part of the amount received by him would be assessable as capital gains under section 45 of the Income-tax Act. Similar view was taken by the Hon'ble Supreme Court in CIT v. R. Lingamallu Raghukumar[2001] 247 ITR 801. In case any asset/property is allocated to a partner in proportion to his share in the profits of the firm, there is no partition or transfer taking place nor there is any relinquishment of interest of other partners in the allocated property, in the sense of transfer or extinguishment of interest as envisaged under section 17 of the Registration Act. Thus, when dissolution of partnership firm takes place and residue is distributed amongst the partners after settlement of amounts, there is no transfer or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tner retires, he does not transfer any right in the immovable property in favour of the surviving partner because he had no right with respect to the properties of the firm." 30. On an analysis of all these decisions and the details, we find that there is conflict of opinion between the various Hon'ble High Courts. The decision of Hon'ble Kerala High Court in the case of Kannamkulam Mill Board (supra) is in favour of the assessee. Learned DR brought to our notice the decision of Hon'ble Kerala High Court in the case of CIT v. Southern Tubes[2008] 306 ITR 216/171 Taxman 254 in favour of the revenue but we find in that case the firm was dissolved and assets were taken by one of the partners in his proprietaryship concern. The latest decision of Hon'ble Kerala High Court is again in favour of the assessee. Similarly, there are decisions at the end of the ITAT which are in favour of assessee. The decision of Hon'ble Madhaya Pradesh High Court is also in favour of the assessee. On the other hand, the decision of Hon'ble Karnataka High Court and Hon'ble Mumbai High Court are in favour of the revenue. Faced with this situation, we deem it appropriate to follow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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