TMI Blog1995 (5) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... drawing up of a deed of dissolution. As per the said deed, the two erstwhile partners viz., Shri S. Nagaraja Setty and Shri S.N. Ramanath were allotted the land and building along with plant and machinery, furniture, equipments and also the goodwill in respect of Milan Theatre. A new firm was constituted with effect from 1-3-1985 with five partners in which Shri S. Nagaraja Setty and Shri S.N. Ramanath also became partners. In accordance with the partnership Deed drawn for the new partnership firm, the entire assets relating to Milan theatre including its land and building, plant and machinery, furniture, equipments etc., were contributed to the common fund of the new firm by way of capital contribution by the two erstwhile partners. It is required to be mentioned in this connection that at the time of dissolution of the earlier firm on 28-2-1985, the value of all the assets pertaining to the theatre including the land and building was taken at Rs. 35 lakhs instead of the depreciated value of the assets concerned. The accounts of the partners of the erstwhile firm were stated to have been settled on the basis of this enhanced value of the assets. So far as the new firm is again co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te. Thus, from 7-3-1985 onward, the capital contribution of the firm remained at the position of Rs. 1,75,000 being the net capital of S/Shri S. Nagaraja Setty and S.N. Ramanath, whereas the other new partners having the balance of capital at Rs. 10,50,000 each. The position corresponded to the profit sharing ratios of the different partners under the new partnership deed in accordance with which S/Shri S. Nagaraja Setty and S.N. Ramanath were entitled to the profit or loss of the firm at the rate of 5% each, whereas each of the other new partners shared in the profits and losses at the rate of 30% each. 4. The ITO also discussed the position of value of the different assets belonging to the theatre as shown in the books of the new firm as per revaluation and what had remained at the time of dissolution of the earlier firm, but before revaluation. He found out that huge enhancements had been made to the values of some of the items like building, machinery, and furniture. The ITO, thereafter stated in his order under section 185(1)(a) that since the new partnership firm was said to have been newly constituted with effect from 1-3-1985 retaining all the identity of the erstwhile f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, ultimately held that there was a continuance of the business and hence, a single assessment ought to have been made in accordance with the provisions of section 187(2). By comparing the facts in the above case with those of the present case, the CIT(A) finally came to the conclusion that the said decision of the Karnataka High Court was squarely applicable to the present one. He, therefore, held that the provisions of section 187 only were applicable to the present case and the ITO should have made a single assessment in respect of the income for both the periods before and after the reconstitution. For assessment year 1986-87, the ITO had, however, made a separate assessment for the period from 1-3-1985 to 30-6-1985. To enable the ITO to make a single assessment for the entire year, the CIT(A) set aside the assessment for assessment year 1986-87 for being made afresh in accordance with law. He, however, gave a clear direction that depreciation should be allowed only on the WDVs of the assets as per the books of the erstwhile firm. 6. For assessment year 1987-88, the ITO had allowed continuation of registration to the assessee-firm. Depreciation on the assets of the the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87 (SC), where a Bench of two learned judges of this court observed that a case where income had escaped assessment due to the 'oversight, inadvertence or mistake' of the ITO must fall within section 34(1)(b) of the Indian I.T.Act, 1922. It appears to us, with respect, that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on re-appraising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power..." It would thus appear that the second set of circumstances as enumerated by the Supreme Court in the case of Kalyanji Mavji Co. and as narrated above would not hold good for the purpose of initiation of reassessment proceedings under section 147(b). The earlier law, laid down by the Supreme Court in that case, may thus be considered to have been rendered ineffective and a bad law by the aforesaid later judgment of the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That would be a case where the Income-tax Officer derives information from the record on an investigation or enquiry into facts not originally undertaken. Again, suppose an Income-tax Officer accepts the plea of an assessee that a particular receipt is not income liable to tax. But, on further research into law, he finds that there was a direct decision holding that category of receipt to be an income receipt. He would be entitled to reopen the assessment under section 147(b) by virtue of proposition (4) of Kalyanji Mavji [1976] 102 ITR 287 (SC). The fact that the details of sales of house properties were already in the file or that the decision subsequently come across by him was already there, would not affect the position because the information that such facts or decision existed, comes to him only much later. What then is the difference between the situations envisaged in propositions (2) and (4) of Kalyanji Mavji [1976] 102 ITR 287 (SC). The difference, if one keeps in mind the trend of the judicial decisions, is this. Proposition (4) refers to a case where the Income-tax Officer initiates re-assessment proceedings in the light of 'information' obtained by him by an inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , came to the notice of the Income-tax Officer subsequent to the original assessment. If the Income-tax Officer had considered and formed an opinion on the said material in the original assessment itself, then he would be powerless to start the proceedings for the reassessment. Where, however, the Income-tax Officer had not considered the material and subsequently came by the material from the record itself, then such a case would fall within the scope of section 147(b) of the Act'." 12. It would thus appear that the Supreme Court, in either of the judgments as reported in Indian Eastern Newspaper Society's case or A.L.A. Firm's case, rendered applicability of the provisions of section 147(b) in a case covered by category (4) as enumerated in the judgment of Kalyanji Mavji Co. as valid. Thus, we may hold that it is possible for the ITO to initiate proceedings under section 147(b) on the basis of an information which may be obtained even from the record of the original assessment from an investigation of the materials on record or the facts disclosed thereby or from other inquiry or research into facts or law. What is, however, necessary for this purpose is that at the stage o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings. We are, therefore, of the opinion that the ITO could have formed the belief about escapement of income by virtue of the material on which he was able to lay hands at that stage. The learned counsel for the assessee has, however, placed reliance on the decision of the Calcutta High Court in the case of Allahabad Bank v. CIT [1993] 199 ITR 664 in which also, the said High Court had held, in similar circumstances relating to claim of depreciation at higher rate having been allowed in the original assessment, that inasmuch as the principles laid down in Kalyanji Mavji Co.'s case do not prevail after the pronouncement of the judgment of the Supreme Court in the case of Indian Eastern Newspaper Society, the re-assessment proceeding under section 147(b), being based merely on a change of opinion, was not a valid one. However, so far as the present case is concerned, the original assessments having been made under section 143(1), there was no scope for the ITO to form any opinion about allowability of depreciation. Hence, the present case cannot be considered to be one of mere change of opinion. We, therefore, hold on to our views as above, by distinguishing the present case from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 1922 Act, that in a case like that where the firm is dissolved and a new firm is formed, the provisions of section 188 should apply irrespective of whether some of the old partners continued in the business carried on by the new firm. 15. We would now like to refer to the decision of the Supreme Court in the case of Wazid Ali Abid Ali v. CIT [1988] 169 ITR 761. In the said decision, the Supreme Court approved the Delhi High Court decision in the case of Sant Lal Arvind Kumar. The Supreme Court, in the said judgment, quoted profusely from the abovementioned judgment of the Delhi High Court in the case of Sant Lal Arvind Kumar and finally accepted the reasoning of that direction. The detailed discussion of the Supreme Court about the aforesaid decision of the High Court as contained at pages 778 and 779 of the reported judgment are being reproduced below : " The Delhi High Court, however, held in the case of CIT v. Sant Lal Arvind Kumar [1982] 136 ITR 379, that section of the Income-tax Act came into operation and applied only when there was in the eye of law a firm with continued existence and not to a case where under the law, one firm had ceased to exist and another came ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the incomes. With respect, we agree that where in a case, there is a change in the constitution of the firm by taking of a new partner and the old firm is succeeded by a new firm then, in such a case, there might be succession and there could be two assessments as contemplated under section 188 of the Act. We accept the reasoning of that decision." 16. It would thus appear that in its aforesaid judgment in the case of Wazid Ali Abid Ali, Supreme Court had impliedly disapproved the majority judgment of the Karnataka High Court in the case of Shambulal Nathalal Co. on which the later judgment of the Karnataka High Court in the case of Sree Durga Enterprises is based. The Supreme Court has clearly held that in a case where the firm is actually dissolved, two separate assessments in accordance with the provisions of section 188 will have to be made for the two different periods corresponding to the old and the new firm in spite of the fact that some of the erstwhile partners of the old firm might have continued as partners in the new firm which in its turn continues to carry on the same business. We are thus of the opinion that the decision of the Karnataka High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain..." Supreme Court prescribed a number of factual considerations to be paid attention to in examining a matter like that. In the instant case, one of the partners viz. Shri S. Nagaraja Setty is found to have been able to withdraw a sum of Rs. 35 lakhs from the new firm by contributing capital in the form of assets pertaining to the theatre valued exorbitantly (as complained by the Department). There is nothing to show that Shri S. Nagaraja Setty has been assessed to capital gains on this manouvered transfer of the capital asset to the new firm. The Department could have, on the basis of the aforesaid decision of the Supreme Court in the case of Sunil Siddharthbhai tried to pierce the veil of the new partnership and challenged the genuineness thereof by trying to establish that the so-called formation of the new partnership was simply for the purpose of evading capital gains on the transactions. The Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed depreciation on the basis of the said price, unless it can be shown that that transaction was a bogus or a collusive one and that the price had not, in fact, been paid. The new firm is certainly a new entity inasmuch as it has come into existence after the dissolution of the old firm. As the records show, it has paid the price of Rs. 35 lakhs in respect of the assets under consideration and the genuineness of the said payment has not been challenged by the Department at all. Furthermore, the Department has also not taken any steps to consider the "actual cost" of the assets at the figure of the WDV of the same in the hands of the old firm, by taking recourse to the procedure as envisaged in Explanation 3 to section 43. We are, therefore, of the opinion that the Department has got no case in trying to refuse depreciation on the claim of the assessee at the enhanced value of the assets. We, therefore, reverse this portion of the direction of the CIT(A) also about allowing depreciation on the basis of the WDVs of the assets as in the hands of the old firm. On the other hand, we direct, by accepting the claim of the assessee on this issue that depreciation be allowed in the han ..... X X X X Extracts X X X X X X X X Extracts X X X X
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