TMI Blog1992 (11) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... pectively. These two properties were claimed to have been transferred on 7-10-1986 to the respective occupant partners. The Assessing Officer asked the assessee to show cause why the provisions of section 45(4) of the Income-tax Act, 1961, be not applied. The assessee submitted that this section applies only when there is a dissolution of partnership and in the present case, there was neither dissolution nor transfer, inasmuch as the properties stood in the respective names of the two partners and it was a case of simple withdrawal. The Assessing Officer held that the transaction was covered by the words "or otherwise" appearing in section 45(4) of the Act, even if there was no dissolution of the firm. He also observed that originally the firm was consisting of these two partners since 20-12-1979. Sri N.R. Kapur retired from the firm on 30-3-1987 but before that the wife of Sri R.K.A. Kapur, the other partner, namely. Mrs. Sunita was introduced as partner on 7-3-1987. Referring to clause 8 of the partnership deed, the Assessing Officer noted that to retire, a partner was to give three months' notice. Sri N.R. Kapur retired on 30-3-1987 which, according to him, showed that all these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of valuation was an attempt to defraud the revenue. Applying the principles laid down by the Supreme Court in the case of R.C. Coopar, (sic) the market value was determined by him as if it were a vacant property occupied by the owner without any protection of the Tenancy Act. 3. In appeal, the CIT (Appeals) upheld the order of the Assessing Officer. Firstly, he noted that the two properties were purchased in the names of the individual partners and from the very beginning, the assessee-firm used to pay society and other charges and also used to charge each of the partners a monthly compensation of Rs. 1,950 and Rs. 900 respectively. He also noted the fact that Vijaya Bank has treated these properties as owned by the partners while giving loan to the assessee-firm on security thereof. After the withdrawal of these flats, the assessee-firm stopped charging rent and paying society and other charges and thereafter, the partners started paying these charges directly. Then, he narrated the assessee's submissions, (i) that the provisions of section 45(4) of the Act did not apply to the transactions occurring prior to 31-3-1987 ; (ii) that there was no transfer either on d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and Naveen Roy Kapur were found to be not material. These were also not admitted by him as they were not filed before the Assessing Officer even though they existed with the assessee-firm. As regards the previous year, he held that the assessee itself has not shown this source of income in the return and, therefore, it was presumed to have no separate previous year than the previous year adopted for income from business. On valuation aspect, the CIT (Appeals) held that Rule 1BB of the Wealth-tax Rules could not be applied to income-tax proceedings as the proceedings under wealth-tax and estate duty were altogether different. The provisions of Rule 1BB were a sort of concession given to the tax-payers like the provisions contained in section 7(4) of the Wealth-tax Act and, therefore, he held, could not be equated with the principles determining the market value. He demonstrated the absurd results by adopting the provisions of Rule 1 BB : the cost of the bungalow at Grand Paradi was Rs. 5 lacs in 1976 whereas the value computed as per Rule 1BB was worked out at Rs. 62,687 only. Aggrieved by the orders of the CIT (Appeals), the assessee is in appeal before us. 4. Sri S.E. Dastur, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude the "distribution of assets on dissolution or retirement" in its ambit as it includes the "transfer by way of conversion of capital asset into stock-in-trade" brought similarly to tax under section 45(2) of the Act. Referring to the Budget proposals for introducing section 45(4) of the Act, reported in 152 ITR 29 at 34 St., he submitted that the intention might be clear for inserting the provisions to tax the difference between the market value and the cost of the property, but, if the language is not made clear, no effect thereof could be given to such a misfired provision. In this connection, he relied upon the decision of the Bombay High Court in Elphinstone Spg. Wvg. Mills Co. Ltd. v. CIT [1955] 28 ITR 811, approved by the Supreme Court in CIT v. Elphinstone Spg. Wvg. Mills Co. Ltd. [1960] 40 ITR 142, the decision of the Supreme Court in the case of CIT v. Khatau Makanji Spg. Wvg. Co. Ltd. [1960] 40 ITR 189 ; the decision of the Supreme Court in CIT v. Ajax Products Ltd. [1965] 55 ITR 741 and in the case of CIT v. Amarchand N. Shroff [ 1963] 48 ITR 59 ; the Calcutta High Court decision in the case of CIT v. Justice R.M. Datta [1989] 180 ITR 86 ; and the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the paper book. The adoption of land and building method for arriving at the market value, he submitted, is not justified. He also invited our attention to two decisions of the jurisdictional High Court, namely, Madhusudan Dwarkadas Vora v. Superintendent of Stamps [1983] 141 ITR 802, a case under Probate Duty Act, and Jehangir Mahomedali Chagla v. M. V. Subrahmanian, Addl. First ACED [1985] 155 ITR 637 (Bom.), a case under the Estate Duty Act. where the provisions of Rule 1BB of the Wealth-tax Rules were held applicable for arriving at the market value for the levy of Probate Duty and Estate Duty. 9. The learned Departmental Representative, Sri Keshav Prasad, on the other hand, submitted that section 45(4) of the Act is clearly applicable in the instant case. Section 45(4) of the Act, according to him, covers not only the transfers "by way of distribution of assets on dissolution of firm" but transfers "otherwise" as well. Withdrawal of assets, by whatever name called, from the firm, was a transfer even under section 2(47)(vi). The firm has allowed the possession of the assets to the partners as is evident from page 168 of paper book, which is a letter by the firm addressed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The fact that the case laws on previous year were rendered under the 1922 Act, he submitted, does not make any difference as under both the Acts, the previous year is financial year unless opted otherwise. 11. We have heard the parties and considered their rival submissions. On perusal of the books of accounts produced and copies of accounts of the partners and the immovable properties, we find that the two impugned properties were taken out of the firm's coffers by entries made on 7-10-1986. The two properties were in the respective names of the partners who have taken over them. It is a settled law that the firm is not a legal entity. It is a compendious name of the partners and, therefore, whenever a property is brought in or taken out, no formal document, much less a registered document, is necessary. The entries in the books and the surrounding circumstances are sufficient to complete the sale and purchase inter-se between the firm and the partners. The entries in the books of the firm appear thus : "Oct. 86 7 JV-7/86-87 Mr. R.K.A. Kapur--Current A/c. 1,36,867.00 Mr. N.R. Kapur--Current A/c. 3,90,230.78 Depreciation Reserve A/ c. 2,06,684.01 Beach Candy Apts. 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -- 9,20,616.66 9,20.616.66 ----------------------- ----------------------- 01-07-87 To Balance b/fd. 2,73,063.07 " ----------------------- Besides the above, we find a letter dated 27-10-1986 written by Grand Paradi Co-operative Housing Society Ltd. to the following effect (p. 168 of paper book) : " To M/s. Burlingtons Exports, 84, Anjali. Arthur Bunder Road, Bombay - 400005. Sub : Your letter dated 7-10-1986. Dear Sir, With reference to your letter dated 7-10-1986 requesting deletion of Burlington's Export name from the Share Certificate No. 162, we confirm having done the same and issued the Share Certificate to Mr. N. R. Kapur. Thanking you, Yours faithfully, for GRAND PARADI CO-OPERATIVE HOUSING SOCIETY LTD. sd. Accountant. " The share certificate No. 162, a copy of which appears on page 169 of the compilation, was originally in the name of "Shri Naveen Roy Kapur of M/s. Burlingtons' Exports" issued on 30-6-1979. Thereafter, it stands in the name of "Shri Naveen Roy Kapur" and the words "of M/ s. Burlingtons' Exports' were deleted. The share certificate No. 51 of New Beach Candy Co-operative Housing Society Limited is dated 14-11-1968. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court in the case of Provident Fund Investment Co. Ltd. in this connection : " It is worthy of note that 'capital gains' were charged for the first time by the Income-tax and Excess Profits Tax (Amendment) Act, 1947, which inserted section 12B in the Act. It taxed 'capital gains' arising after the 31st March, 1946 and the levy was virtually abolished by the Indian Finance Act, 1949, which confined the operation of the section to 'capital gains' arising before the 1st April, 1948. The Finance (No. 3) Act, 1956 (77 of 1956) re-introduced the section in wider terms so as to bring within 'capital gains' 'any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after 31-3-1956 etc.' We are not, however, concerned with the question whether the transaction under our consideration, which took place in 1946, resulted in capital gains within the meaning of section 12B as it stands after the enactment of the Finance (No. 3) Act, 1956 (77 of 1956). The question before us is whether the transaction under consideration resulted in capital gains within the meaning of section 12B as it originally stood. Two other points must b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the provisions in the Finance Bill, 1987, states in paragraph 36 as under : " 36. As per the existing provisions of section 45 of the Income-tax Act, profits or gains arising from the transfer of a capital asset are chargeable to income-tax as capital gains in the year in which the transfer takes place. With a view to preventing misuse of entities such as partnership firms, etc., as escape routes for avoiding capital gains tax, the Bill by inserting a new sub-section (3) in section 45 seeks to provide for charging to tax of the profits or gains arising from the transfer of a capital asset by a partner to a firm or by a member to an association of persons or body of individuals, or vice versa. In view of the practical difficulties in evaluating the consideration for transfer in such cases, the Bill seeks to provide certain deeming provisions as well. Thus, in a case of transfer of a capital asset by a partner to a firm, or by a member to an association of persons, or body of individuals, the amount recorded in the books of account of the firm, association or body as the value of the capital asset, shall be deemed to be the full value of the consideration as a result of such tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her by way of becoming a member of or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property. " 15. Section 47(ii) hitherto exempting distribution of capital assets on the dissolution of the firm, association of persons, body of individuals, by not treating the distribution as transfer has been deleted consequent upon the amendments being made to section 45 of the Act, as aforesaid. Similarly, section 49(1)(iii)(b) was amended with regard to the deemed cost of acquisition under the existing provisions where the capital asset becomes the property of the firm on any distribution of assets on the dissolution of a firm, body of individuals or association of persons. The cost of acquisition of assets is deemed to be the cost for which the previous owner of the property acquired it, subject to certain adjustments regarding improvements, etc. Upon the amendments, the provisions film apply only if the dissolution takes place any time before 1st April, 1987. 16. With this background, let u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A similar type of wordings were used in section 10(10A) of the Act, excluding from the total income of an assessee, the payment received from an employer as cash equivalent to leave salary, "on his retirement on superannuation or otherwise". The words "or otherwise" were susceptible of an unrestricted meaning to include the cash equivalent to leave salary even when the employee was in the service and, therefore, the phraseology was later modified to "on his retirement whether on superannuation or otherwise" to have the restricted meaning of nature or the colour of retirement on superannuation. 18. We, however, find force in the contention of the learned counsel for the assessee, Sri Dastur, that in that case also, there should be a distribution of assets by the firm to the partners so as to invoke the provisions of section 45(4) of the Act. The words "or otherwise" are used as an alternate to the words "on dissolution" and, therefore, in both the situations, i.e. on dissolution or otherwise, the distribution of a capital asset is a must. What is distribution of capital asset is not defined in the Act. Generally, it is the allocation of the assets by the firm given to the partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r time, side by side. Such an interpretation giving rise to an overlapping of one provision over the other has to be avoided. Even if such an overlapping is permitted or possible, the law favourable to the assessee should prevail. In this case, as we have held, there was a transfer on 7-10-1986 and, therefore, it would fall under section 45(1) of the Act, which brings to tax only that capital gains which arises to the assessee on transfer. The written down value of the two properties was the consideration that has arisen to the assessee. Amount which is over and above the stated or agreed consideration cannot be brought to tax even though the market value of the two properties was much higher to the stated or agreed consideration. It is not the case of the learned Departmental Representative that the assessee had received the market value of these properties and, therefore, as held by Their Lordships of the Supreme Court in the case of K.P. Varghese, nothing more than what has been agreed to and actually received or recorded, could be brought to tax as capital gains. The difference, if any, could at best be a deemed gift which is excluded from the ambit of capital gains tax by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing with the date of the setting up of the business or profession and ending with that period, as the case may be ; or (f) where the assessee is a partner in a firm and the flrm has been assessed as such, then, in respect of the assessee's share in the income of the flrm, the period determined as the previous year for the assessment of the income of the firm ; or (g) in respect of profits and gains from life insurance business, the year immediately preceding the assessment year for which annual accounts are required to be prepared under the Insurance Act. 1938 (4 of 1938), or under that Act, read with section 43 of the Life Insurance Corporation Act, 1956 (31 of 1956). " On a bare reading of these provisions, one could say that the previous year is generally the financial year preceding the assessment year. In exceptional circumstances, the previous year can be a period of twelve months ending on any day within such financial year. These exceptions are : (i) if the assessee's accounts are made up to that day and the assessee opts that period as his previous year ; (ii) as a period prescribed by the CBDT in cases other than those assessees who adopt financial year or the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. Once the assessee has opted for a particular previous year for a particular source or it has been assessed for that source by the Assessing Officer, the assessee cannot vary the same. If the assessee has not given his option, then the previous year has to have the general meaning, i.e. the financial year immediately preceding the assessment year, as held by the two decisions of the Bombay High Court in the case of Brihan Maharashtra Sugar Syndicate Ltd. and in the case of Vishnudayal Dwarkadas. We do not see any merit in the argument of the learned Departmental Representative, Sri Keshav Prasad that the said decisions were rendered under 1922 Act and, therefore, have no application under the Income-tax Act, 1961. The basic provisions under both the enactments for determining the previous year are pari materia. It is the financial year immediately preceding the assessment year under both the enactments which has to be taken as the previous year for the purposes of assessment under the Income-tax Act. That being so, the transfer having taken place on 7-10-1986 falls in the financial year 1-4-1986 to 31-3-1987, for which the assessment year would be 1987-88 and not the impugned as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act ; and that the first proviso to section 32AB comes into play only when the partners claim the deduction independently by bringing his plant and machinery. He, therefore, objected to add back of section 32AB deduction while allocating the income of the firm to the partners. The learned Departmental Representative, Sri Keshav Prasad, on the other hand, supporting the order of the CIT(A), submitted that the proviso to section 32AB, clearly prohibits deduction to a partner and in case it is not added back to the income of the firm, while allocating the firm's income to the partners, it would amount to an allowance of deduction to the partners as what, according to him, would be allocated, was the gross income and allowance of section 32AB deduction. Section 67(2) of the Act, in this connection, was relied upon by him, wherein it is provided that allocation of the firm's income is to be computed under the same heads in the hands of the partners in which it was computed in firm's assessment. 24. We have heard the parties and considered their rival submissions. Section 32AB of the Act provides a deduction called "Investment Deposit Allowance" to an assessee, including a firm, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount, and the result shall be treated as partner's share in the income of the firm. (2) The share of a partner in the income or loss of the firm, as computed under sub-section (1) shall, for the purposes of assessment be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income. (3) Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head 'profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share. (4) If the share of a partner in the income of a registered firm or an unregistered flrm assessed as a registered firm under clause (b) of section 183, as computed under this section, is a loss, such loss may be set off, or carried forward and set off. in accordance with the provisions of this Chapter. Explanation : In this section "paid" has the same meaning as is assigned to it in clause (2) of section 43. " This ..... X X X X Extracts X X X X X X X X Extracts X X X X
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