TMI Blog2008 (4) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... see firm sold all its assets and liabilities to a company M/s Aum Adhesive (P) Ltd. for a consideration of Rs. 7,79,310. The said consideration was distributed between the partners as under: Name of the partner Amount (Rs.) 1. Shri Vivek M. Punatar 4,58,376 2. Shri Viren M. Mehta 3,20,934 -------- 7,79,310 -------- 5. As per the agreement, the said amount was to be paid to the partners of the dissolved firm at their option by allotment of 4,000 fully paid equity shares of Rs. 100 each and partly in case for further allotment of shares to them. It was also noticed by the AO that coming to s. 45(4) from asst. yr. 1988-89 onwards, distribution of capital assets on dissolution of the firm is chargeable to tax as 'short-term capital gain'. Thus, according to AO, the sum of Rs. 7,79,310 was liable to tax as 'short-term capital gain' for the asst. yr. 1998-99. The notice under s. 148 dt. 20th Feb., 2002 was issued as amount of Rs. 7,79,310 was to be assessed as 'short-term capital gain'. The AO calculated total income of the assessee firm treating the said amount as 'short-term capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile arguing the matter on merit submitted that the assessee firm sold its entire business as a going concern to Aum Adhesive (P) Ltd. vide agreement dt. 1st April, 1997. This was basically conversion of partnership firm into a private limited company. The learned counsel for the assessee submitted that this fact is mentioned in assessment order made under s. 144 r/w s. 147 dt. 18th Nov., 2002. The assessee firm was then dissolved vide dissolution deed dt. 4th April, 1997. The learned counsel for the assessee submitted that the assessee has filed appeal against the AO's order dt. 18th Nov., 2002 before the learned CIT(A). The learned CIT(A) deleted the addition of Rs. 7,79,310 made by AO invoking the provisions of s. 45(4). The learned counsel for the assessee submitted that the learned CIT(A) while deleting the said addition held that assets and liabilities of the assessee firm were transferred to Aum Adhesive (P) Ltd. w.e.f. 1st April, 1997 and the firm was dissolved subsequently. All the assets and liabilities of the firm were transferred at book value. The learned counsel for the assessee submitted that as per s. 45(4) profits or gains arising from transfer of a capital assets b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case are that second time reopening is beyond four years, thus, proviso to s. 147 is relevant and same is required to be examined whether assessee's case falls within that proviso or not. The proviso and s. 147 of IT Act read as under: "147. Income escaping assessment.-If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153, assess or reassess such income and also any other income chargeable to tax 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 ss. 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-s. (3) of s. 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the assessee to fully disclose the material facts was established by the Revenue. It was not open for the Revenue to exercise its right to reopen the assessment beyond the period of four years. The notices were not valid and were liable to be quashed." In the light of above judgments of jurisdictional High Court if we consider the facts of the case under consideration, we find that at the first time of reopening of assessment, the AO noticed following facts and reasons of reopening: "During the course of verification/inspection of assessment record for asst. yr. 1997-98 and a copy of dissolution deed and agreement dt. 1st April, 1997, it was revealed that the assessee firm sold all its fixed assets and intangible assets and liabilities to a company M/s Aum Adhesive (P) Ltd. from 1st April, 1997 for net consideration of Rs. 7,79,310 as worked out in the manner specified under para 3 of the article of agreement dt. 1st April, 1997 as all the fixed assets being depreciable assets and their fair market value as on 1st April, 1997 being the lesser than shown in balance sheet in absence of revaluation of such assets. The above consideration was distributed between two partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of the assessee as under: "I have gone through the assessment order and the submissions made during the appellant proceedings. I have also gone through the balance sheet of the appellant firm for the asst. yr. 1996-97 and the agreement dt. 1st April, 1997. I have also gone through the balance sheet of M/s Aum Adhesive (P) Ltd. for financial year 1997-98. It is seen that assets and liabilities of the appellant firm were transferred to M/s Aum Adhesive (P) Ltd. w.e.f. 1st April, 1997. The appellant firm was dissolved consequently. As on 31st March, 1997, the credit balance in the capital account of the partners was as under: Name of the partner Amount 1. Shri Vivek M. Punatar 4,58,376 2. Shri Viren M. Mehta 3,20,934 -------- 7,79,310 -------- From the perusal of the balance sheet of the appellant firm for the financial year 1996-97, it is seen that the value of asset less liabilities was at Rs. 7,79,310 which is the total of credit balance of the partners as on 31st March, 1997. Assessment for asst. yr. 1997-98 has already been completed under s. 143(3). The credit bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (P) Ltd. took place on 1st April, 1997 and the person who signed the deed of transfer of business on behalf of the firm M/s Aum Chemicals and on behalf of the company M/s Aum Adhesive (P) Ltd. was Shri V.M. Punatar. It is a settled law under the Evidence Act, that no person can enter a contract with himself. Same person has signed the transfer deed in two capacities, and hence, entire agreement is void. Further, assessee's factory is on a piece of land. The land value is not shown in the balance sheet but has shown only shed value. Thus, inadvertently, depreciation was granted on land also. Whenever, the business of an assessee comes to a stand still or is dissolved, the stock-in-trade should have been valued at market price for working out the real value of the stock for calculating the interest of the partners of the firm. In the said case, stock was valued at cost instead of market price for working out the interest of the partners of the firm. Further, when conversion of a firm to a company takes place the income arising to the said firm on such transfer has to be taxed in the status of BOI which was not done." From above facts, we notice that the AO has reopened the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of such transfer is deemed to be the value of the consideration received or approved as a result of the transfer. For invoking s. 45(4) two conditions are required, namely, transfer by way of distribution of capital assets and secondly, such transfer should be on the dissolution of the firm or otherwise. Once these two conditions are satisfied, then in that event, for the purpose of computation of capital gains, the market value, on the date of transfer shall be deemed to be full value of consideration. As regards the word "otherwise" of s. 45(4), the Hon'ble Bombay High Court in the case of CIT vs. A.N. Naik Associates (2004) 187 CTR (Bom) 162 : (2004) 265 ITR 346 (Bom), after considering object of insertion of s. 45(4), held that the said section was inserted with a purpose to avoid mischief whereby assets were brought into firm or taken out from the firm. The expression "otherwise" has not to be read "ejusdem genrus" with the expression "dissolution of a firm". The expression "otherwise" has to be read with the words "transfer of capital assets by way of distribution of capital assets". In the light of above discussions if we consider the facts of the case, we notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of s. 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution." "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 s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constituted as having a reference to the market value of the assets transferred and that said expression only means the full value of things received by the transferor in exchange of the capital assets transferred by him. The firm can be assessed only if the value of the consideration is received by the firm. In the case under consideration, the assets and liabilities of the firm have been transferred to the company at book value that means the full consideration received by the firm is amount of book value of the assets. The AO did not dispute these facts that all capital assets transferred on book value have full value of consideration. The company had allotted shares to the partners of the firm that too in proportionate to the capital of the partners. That allocation of shares had no correlation of vesting of properties in the company. Thus, the AO was not correct in computing capital gain on the amount of credit, balances of partners' capital accounts, because after deducting cost of capital assets which is equal to book value; in other words, full consideration received and cost of asset are same, calculation of capital gain comes to nil. In the light of above discussion we ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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