TMI Blog2018 (6) TMI 1323X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible option available to the assessee. On the correct law applied to the peculiar facts, do not agree with the Tribunal on the acceptance of the claim raised by the assessee for long term capital gains to be a permissible view at least to the extent of the value of the assets released in his favour by the other partner on dissolution. To that extent, the finding of the Assessing Officer in the original order was an erroneous finding, which was also prejudicial to the interest of the revenue. Commissioner was perfectly justified in invoking the powers under Section 263. To the extent of the share the assessee had prior to dissolution and the valuation of that share, which was allotted to his share on dissolution; we concur with the order of the Tribunal insofar as allowing the exemption available from long term capital gains for reason of compliance with Section 54EA. There is no ground for a suo motu revision to that extent since the Assessing Officer's finding on that count is not erroneous. The provision only enables assessment at the hands of the firm and does not deem the allotment of capital assets in proportion to the share on dissolution or otherwise as a transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm and the hospital belonged exclusively to him on such dissolution of the firm. It thus became a proprietorship and later it was sold on 18.03.1999 for Rupees Five Crores. 3. The assessee filed a return for the year 1999-2000, showing the apportionment of the consideration relating to building, furniture, electric and sanitary fittings, equipments and machinery, land, goodwill and trademark of the hospital and nursing home. With respect to the building, the assessee offered short term capital gains for assessment. Consideration obtained for land, goodwill and trademark, which come to ₹ 3,75,00,000/-, was offered for taxation as long term capital gains; but, however, claimed exemption insofar as having invested in UTI as per Section 54EA. The Assessing Officer allowed the claim of exemption from long term capital gains, which was sought to be suo motu revised under Section 263. 4. The Assessing Officer in the meanwhile initiated proceedings under Section 147 read with Section 148 for escapement of income. Then the Commissioner dropped the proceedings initiated under Section 263 for reason only of the reassessment attempted. The Assessing Officer however, dropped t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the courses permitted by law? (ii) Whether, in the facts and circumstances of the case, the Tribunal was correct in affirming the view of the Assessing Officer that with respect to land, goodwill and trademark the assessee can return long term capital gains and claim exemption under Section 54AE, on the presumption that there is no transfer effected on dissolution of the firm? (iii) Whether, in the facts and circumstances of the case, ought not the Tribunal have found that the entire property of the firm having been transferred to the assessee by way of allotment of share as also release of share of the other partner the assessee was entitled to claim only short term capital gains relatable to the date of dissolution of the partnership firm? 7. The learned Standing Counsel for Government of India (Taxes) submitted that there was a dissolution of the firm and the properties came to the exclusive possession of the assessee only on 31.03.1997. On sale effected on 18.03.1999 the assessee was in possession of the properties as its exclusive owner only for less than 36 months, which makes the asset a 'short term capital asset' under Section 2(42A). It is also pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s attempted under Section 263, directing the Assessing Officer to value the closing stock at the time of dissolution at the market price. The Hon'ble Supreme Court held that valuation on the cost price was permissible especially when the business had not come to a stop by the dissolution of the firm and was continued by one among the two persons; the other having expired. In these circumstances, it was held that when there are two options available, both permissible in law, then the adoption of one of such options by the Assessing Officer cannot be interfered with under Section 263. We specifically notice and extract from paragraph 7 of the judgment: As is clear from the language of the provision, there has to be a proper application of mind by the Commissioner to come to a firm conclusion that the order of the assessing officer is erroneous and prejudicial to the interests of the Revenue. Thus, two conditions need to be satisfied for invoking such a power by the Commissioner, which are: ( i) the order of the assessing officer sought to be revised is erroneous; and ( ii) it is prejudicial to the interests of the Revenue . Both these conditions have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his personal assets into the partnership firm as his contribution to the capital, the exclusive rights as held by the said partner would be extinguished in favour of the common rights of the other partners. Hence, there was a transfer effected; quite contrary to the situation of allotment of shares on dissolution. However, the individual interest cannot be evaluated immediately and would be subject to the operation of future transactions of the partnership firm even resulting in diminution in value depending on accumulated liabilities and losses in the event of fall in prosperity of a firm. When such an evaluation of partner's interest takes place at the time of realisation, what is realised is the interest which the partner enjoys in the assets when the partnership subsists and on dissolution, there is no transfer. Relying on Malabar fisheries Co. v. CIT [(1979) 4 SCC 766], it was held: ... that the distribution of the assets on dissolution does not amount to a transfer to the erstwhile partners. What the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest (sic) (page 529). The allotment of assets of the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er it can be claimed only from the date of release and if subsequent sale falls within the 36 month period, necessarily the assets are to be assessed as short term capital gains to that extent. 13. The Tribunal has not gone into the facts and has proceeded on the basis that the allotment of shares on dissolution would not result in a transfer, which, according to the Tribunal, is a legally permissible option available to the assessee. We, on the correct law applied to the peculiar facts, do not agree with the Tribunal on the acceptance of the claim raised by the assessee for long term capital gains to be a permissible view at least to the extent of the value of the assets released in his favour by the other partner on dissolution. To that extent, the finding of the Assessing Officer in the original order was an erroneous finding, which was also prejudicial to the interest of the revenue. Hence, we are of the opinion that the Commissioner was perfectly justified in invoking the powers under Section 263. To the extent of the share the assessee had prior to dissolution and the valuation of that share, which was allotted to his share on dissolution; we concur with the order of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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