TMI Blog2005 (8) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the partners, thereby deleting the addition of Rs. 3,40,198 made by the Assessing Officer?" The facts which are essential to be adumbrated are that the assessee was a partnership firm that consisted of two partners, namely, Ravinder Singh and Pritam Singh. Pritam Singh expired on April 19, 1990. After the death of one of the partners, for the assessment year 1991-92, the case of the assessee-firm was selected for scrutiny and a notice under section 143(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), was issued on February 27, 1992. The Assessing Officer referred to the order sheet dated August 13, 1993, whereby the assessee was asked that since the firm stood dissolved after the death of one of the partners why the tax on the capital gains should not be imposed on it. The assessee was also asked to furnish the valuation report in respect of the fixed assets as on April 19, 1990 with the firm. Eventually, the Assessing Officer determined the income at Rs. 7,23,920 and issued the demand notice. That apart, a direction was also issued for initiation of a penalty proceeding as there was concealment of income treating Rs. 3,40,198 as capital gain for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted his claim of deadstock by producing any documentary evidence and accordingly disallowed the loss amounting to Rs. 69,627 shown by the assessee. That apart, the Tribunal directed that the Assessing Officer should disallow the loss and should not make any further addition of Rs. 51,743 as gross profit for the year under consideration. As far as deletion of Rs. 3,40,198 is concerned the Tribunal expressed the view as under: ".... That on April 19, 1990, Shri Pritam Singh Chhabra expired and, therefore, the firm got automatically dissolved. The accounting year relevant to the assessment year under consideration is consisting of the period of 19 days only, i.e., April 1, 1990 to April 19, 1990. The Assessing Officer opined that on dissolution of the firm there was transfer of the assets as per section 45(4) of the Income-tax Act. He accordingly made the addition of Rs. 3,40,198 as short-term capital gain under section 45(4) of the Act. We find that this issue is squarely covered in favour of the assessee by the decision of the Income-tax Appellate Tribunal, Jabalpur Bench, in the case of Asst. CIT v. Thermoflics India [1997] 60 ITD 554. Following the same, we hold that there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect from April 1, 1988 there having been no consequential amendment in section 2(47), the decision rendered in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC) would hold the field and there cannot be charge on the head of capital gain. Learned counsel has also commended us to the decision rendered in the case of Sakthi Trading Co. v. CIT [2001] 250 ITR 871 (SC) to pyramid the contention that even if the firm is dissolved, the stock should not be valued at the market price but should be valued at the cost price. It is his further submission that if the business continues and there was no distribution of assets, the concept of capital gain under section 45(4) would not be attracted. To bolster his submission he has placed reliance on the decision rendered in the case of CIT v. Vijayalakshmi Metal Industries [2002] 256 ITR 540 (Mad). It was further highlighted by Mr. Shrivastava that in the case at hand there cannot be any distribution inasmuch as there were only two partners and one of them having died the other partner would be the only singular surviving partner, therefore, there would be no distribution. Lastly, it was urged by him that the firm had ceased to exist because o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes the property of the partnership and a partner is, subject to any special agreement between the partners, entitled upon dissolution to a share in the money representing the value of the property of the partnership. In the said case two persons had entered into an agreement to carry on business in partnership as exhibitors of cinematograph films and each partner was the owner of cinematograph theatre. In that context while dealing with the dissolution of the partnership, the apex court expressed the view as under: "On dissolution of the partnership, each theatre must be deemed to be returned to the original owner, in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue. The expressions 'sale' and 'sold' are not denned in the Income-tax Act; those expressions are used in section 10(2)(vii) in their ordinary meaning. 'Sale', according to its ordinary meaning, is a transfer of property for a price, and adjustment of the rights of the partners in a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person. It is not possible to accept the view of the High Court that the distribution of assets effected by a deed takes place eo instanti with the dissolution or that it is effected by the dissolved firm." In the said case their Lordships further proceeded to state as under: "There is yet another reason for rejecting the contention of the counsel for the Revenue and that is that the second condition required to be satisfied for attracting section 34(3)(b) cannot be said to have been satisfied in the case. 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal gains arising from transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm. The section does not deem the date of dissolution as the date on which the transfer takes place. Dissolution by operation of law as in this case may take place on the demise of one of the two partners. That however does not imply that on that day there is a notional transfer of capital assets and that any one or more of the capital assets owned by the erstwhile firm stands transferred to the other partner or to other persons entitled to claim the share of the deceased partner. The relevant date for ascertaining the year in which the tax is to be levied is the year in which the transfer takes place. That year may or may not be the year in which the dissolution of the firm takes place. Until such time such capital asset is transferred by way of distribution of the assets on the dissolution of the firm no occasion arises for bringing to tax any capital gain on a transfer which has not taken place. The section itself gives no room for doubt as the year in which the capital gain is to be brought to tax is, the previous year in which the said transfer takes place. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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