ITO, Davangere V. M/s Prashanth Rice Industries, Davangere

ITA 121/BANG/2009

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9435 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 18-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Principle of natural justice; Question of law; Fair market value; Capital Gains
• Section: 143(3)

Judgement Text

PAGE 1 OF 17 ITA NOS.156 & 121/BANG/2009 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A' BEFORE SHRI SHAILENDRA KUMAR YADAV, J.M. AND SHRI N L KALRA, A.M. ITA NOS.156/BANG/09 (ASST. YEAR 2005-06) PRASHANT RICE INDUSTRIES, P B ROAD, DAVANGERE. - APPELLANT VS THE INCOME TAX OFFICER, WARD-2, DAVANGERE. . - RESPONDENT ITA NO.121/BANG/09 (ASST. YEAR 2005-06) (BY REVENUE) ASSESSEE BY : SHRI H N KHINCHA REVENUE BY : SMT. JACINTA ZIMIK VASHAI O R D E R PER N L KALRA : THE ASSESSEE AS WELL AS REVENUE HAVE FILED APPEAL S AGAINST THE ORDER OF LEARNED CIT(A), HUBLI DATED 21 ST OCTOBER, 2008. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS UNDER:- I) THE ASSESSMENT ORDER PASSED U/S 143(3) OF THE I T ACT, 1961 BY ASSESSING OFFICER WAS AGAINST THE PRINCIPLES OF LAW, PAGE 2 OF 17 ITA NOS.156 & 121/BANG/2009 2 PRINCIPLES OF EQUITY, NATURAL JUSTICE AND BAD IN LAW AND IS LIABLE TO BE QUASHED. THE LEARNED CIT(A) HAS INSTEAD OF QUASHING THE ORDER, ERRED IN PARTY CONFIRMING THE SAME. II) IN ANY CASE AND WITHOUT PREJUDICE THE LOWER AUTHORITY HAD ERRED IN INVOKING THE PROVISIONS OF SECTION 45(4) R.W.S. 2(47) OF THE I T ACT, 1961. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE LAW APPLICABLE, THE PROVISIONS OF SECTION 45(4) ARE NOT APPLICABLE AND HENCE, THE COMPUTATION OF CAPITAL GAINS AS MADE BY THE AO BEING WRONG IS TO BE DELETED. III) IN ANY CASE WITHOUT PREJUDICE THE CORRECT MARKET VALUE BE ADOPTED AND ARRIVE AT THE CAPITAL GAIN. IV) THE APPELLANT ALSO DENIES THE LIABILITY TO PAY INTEREST U/S 234A, 234B, 234D AND 220(2) OF THE I T ACT, 1961. THE INTEREST HAVING BEEN WRONGLY LEVIED IS TO BE DELETED. 2.1 THE ASSESSEE FIRM CONSISTED OF TWO PARTNERS, N AMELY, I S PRASANNA AND I S PRASHANTH. THE ASSESSEE ALSO ENCLOSED A DISSOLUTION DEED DATED 1ST NOVEMBER, 2004 EVIDENCIN G THE DISSOLUTION OF THE FIRM AS ON 31ST OCTOBER, 2004. ON DISSOLUTION OF THE FIRM, ONE OF THE PARTNERS SHRI I S PRASHANTH OPTED FOR RETIREMENT AND THE ASSETS AND LIABILITIES OF THE FI RM AS AT THE END OF 31ST OCTOBER, 2004 WERE TAKEN OVER BY SHRI I S P RASANNA. MR. I S PRASANNA ENTITLED TO CARRY ON THE BUSINESS. T HE AO FURTHER NOTICED THAT THE PARTNER WHO RETIRED WAS PAID THE A MOUNT STANDING TO HIS CREDIT BEFORE 30TH NOVEMBER, 2004 W ITHOUT PAGE 3 OF 17 ITA NOS.156 & 121/BANG/2009 3 INTEREST. THE AO REQUIRED THE ASSESSEE FIRM TO EXP LAIN AS TO WHY THE PROVISIONS OF SECTION 45(4) SHOULD NOT BE APPLI ED. BEFORE THE AO IT WAS CONTENDED THAT THERE SHOULD BE DISTRIBUTI ON OF ASSETS FOR INVOKING THE PROVISIONS OF SECTION 45(4). SIN CE ALL THE ASSETS AND LIABILITIES OF THE FIRM WERE TAKEN OVER AS A GO ING CONCERN BY ONE OF THE PARTNERS, THEREFORE, THE REQUIREMENT OF DISTRIBUTION OF CAPITAL ASSETS IS NOT COMPLIED. RELIANCE WAS PLACE D ON THE DECISION OF THE MADRAS HIGH COURT IN THE CASE OF M/S VIJAYALA KSHMI METALS INDUSTRY 256 ITR 540. IN THE CASE BEFORE THE HON'B LE MADRAS HIGH COURT, THE FIRM GOT DISSOLVED DUE TO OPERATION OF LAW AS ONE OF THE PARTNERS DIED. THERE WAS NO TRANSFER OF C APITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLU TION OF THE FIRM. THE HON'BLE HIGH COURT HELD THAT UNTIL SUCH TIME SU CH CAPITAL ASSET IS TRANSFERRED BY WAY OF DISTRIBUTION OF THE AS SETS ON THE DISSOLUTION OF THE FIRM, NO OCCASION ARISES FOR BRI NGING T6O TAX ANY CAPITAL GAIN ON A TRANSFER WHICH HAS NOT TAKEN PLAC E. IN THE INSTANT CASE, ONE OF THE PARTNERS HAS WILLINGLY RETI RED FROM THE FIRM AND TOOK HIS CAPITAL BALANCE AND ALLOWED THE O THER PARTNER TO CONTINUE THE BUSINESS OF THE FIRM. THUS, THE RETIR ING PARTNER HAS RELINQUISHED HIS RIGHT OVER THE PROPERTIES OF THE F IRM RESULTING IN DEEMED TRANSFER AS PER SEC.2(47)(II). THE AO HAS R EPRODUCED CLAUSE 3, 5 & 6 OF THE DISSOLUTION DEED. FROM THE ABOVE REFERRED CLAUSES OF THE DISSOLUTION DEED, THE AO CONCLUDED T HAT THERE WAS DISTRIBUTION OF ASSETS ON THE DAY OF DISSOLUTION. THE AO THEREFORE HELD THAT SECTION 45(4) IS APPLICABLE AND ACCORDINGLY COMPUTED THE CAPITAL GAIN. PAGE 4 OF 17 ITA NOS.156 & 121/BANG/2009 4 2.2 BEFORE THE LEARNED CIT(A), THE CONTENTION OF T HE ASSESSEE WAS THAT SECTION 45(4) IS NOT APPLICABLE I N THIS CASE BECAUSE THE ASSETS HAVE NOT BEEN DISTRIBUTED. FOR THIS PROPOSITION, THE LEARNED AR RELIED ON THE FOLLOWING DECISIONS:- I) CIT V VIJAYALAKSHMI METAL INDUSTRIES 256 ITR 540 (MAD.); II) CIT V G K ENTERPRISES 131 TAXMAN 181 (MAGAZINE); III) CIT V SOHRABJI KHANNA & CO. 133 TAXMAN 112 (MAGAZINE); IV) CIT V MANGALORE GANESH BEEDI WORKS 265 ITR 658 (KAR.); V) PLASON CONSTRUCTION V CIT 181 ITR 476 (KER.); VI) CIT V KUNNAKULAM MILLS BOARD 257 ITR 544 (KER.). 2.3 BEFORE THE LEARNED CIT(A) IT WAS SUBMITTED THA T AN ADDENDUM TO DISSOLUTION DEED WAS PASSED ON 1ST NOVE MBER, 2004 AND THE SAME WAS FILED IN DEPARTMENT ON 5TH DECEMBE R, 2005. THE LEARNED AR FURTHER SUBMITTED THAT AMENDMENT DATED 1 8TH MAY, 1992 TO ORIGINAL PARTNERSHIP DEED DATED 6/9/1990 SU GGEST THAT DISSOLUTION IS IN FACT NOT A DISSOLUTION BUT DEED O F RETIREMENT. THE LEARNED CIT(A) EXAMINED THE DEED OF PARTNERSHIP DAT ED 6TH SEPTEMBER, 1990. IN THIS IT IS STATED THAT AN ORAL AGREEMENT WAS REACHED BETWEEN PARTNERS M/S PRASHANT RICE INDUSTRY TO CARRY ON BUSINESS OF RICE MILL BY INTRODUCING CAPITAL OF RS.3 0,000/- BY SRI I S PRASHANT AND RS.20,000/- BY SRI I S PRASANNA. IN 3RD PARA, IT IS STATED THAT SRI I S PRASANNA OWNING INDUSTRIAL LAND BEARING SURVEY PAGE 5 OF 17 ITA NOS.156 & 121/BANG/2009 5 NO.64/1A, 64/A1 AND 1, A-2 WHICH WERE PURCHASED IN THE NAME OF SHRI I S PRASANNA HAS BEEN UTILIZED FOR CONSTRUCTIO N OF FACTORY BUILDING FOR RICE MILL FOR RUNNING FIRM'S RICE MILL . IT IS MENTIONED IN THAT THAT THE LAND AND BUILDING ARE OWNED BY SRI I S PRASANNA HAVE BEEN TAKEN IN BALANCE SHEET OF FIRM TO AVAIL CREDIT FACILITY AND WORKING CAPITAL AND PARTNERSHIP AT WILL. IT IS ALS O STATED THAT IF ANYBODY DESIRES TO RETIRE LAND AND BUILDING WILL GO T O SRI I S PRASANNA. 2.4 PARTNERSHIP DEED WAS AMENDED VIDE AMENDMENT DE ED DATED 18TH MAY, 1992. IN THIS IT WAS MENTIONED THAT THE PARTNERSHIP IS AT WILL. IN THAT AMENDMENT, IT IS M ENTIONED THAT IF BOTH THE PARTNERS AGREE THEN THE ASSETS AND LIABILI TIES ARE TO BE DISTRIBUTED TO THE PARTNERS IN THEIR PROFIT SHARING RATIO. IN CASE ONE OF THE PARTNER WISHES TO RETIRE AND THE OTHER P ARTNER WANTS TO CONTINUE WITH THE BUSINESS, THEN IT IS TO BE TERMED AS RETIREMENT OF PARTNERSHIP AND RETIRING PARTNER SHALL BE PAID H IS CAPITAL BALANCE AFTER CLOSING THE BOOKS OF ACCOUNT. THE CONTINUING PARTNER SHALL CONTINUE THE BUSINESS EITHER INDIVIDUALLY OR BY ADMIT TING ANY ONE AS A PARTNER AND RUN IT AS A GOING CONCERN. 2.5 THE LEARNED CIT(A) HAS MENTIONED THAT SIGNATUR ES OF ISSUING AUTHORITY ARE MISSING IN THE AMENDMENT DEED DATED 18.5.1992. THE AMENDMENT DEED DOES NOT SPEAK CLEAR LY ABOUT THE NAME AND ADDRESSES OF PARTNERS OF ORIGINAL DEED. T HE LEARNED CIT(A) THEREFORE HELD THAT THE AMENDMENT DEED CANNO T BE PAGE 6 OF 17 ITA NOS.156 & 121/BANG/2009 6 CONSIDERED AS CONNECTED WITH THE ASSESSEE. THE PUR POSE OF AMENDMENT WAS TO CLARIFY PARTNERSHIP AT WILL. IF AM ENDMENT DEED IS READ AS DEED DATED 29TH OCTOBER, 2004 OF RESOLUT ION, IT IS CLEAR THAT THERE IS A TOTAL DISSOLUTION. 2.6 THEREAFTER THE LEARNED CIT(A) HAS RE FERRED TO THE DEED OF DISSOLUTION DATED 29TH OCTOBER, 2004. SUCH DEED IS EXECUTED ON RS.100 STAMP PAPER. DEED OF AMENDMENT DATED 18TH MAY, 1992 IS ON RS.5 STAMP PAPER WITHOUT SIGNATURE O F ISSUING AUTHORITY AND WITHOUT MENTIONING NAME AND CLAUSE. I T APPEARS TO BE AN AFTER THOUGHT AND AMENDMENT DEED WAS INSERTED . AS PER LEARNED CIT(A), THE ADDENDUM DOES NOT BEAR THE FOLL OWING AND THEREFORE, IS LIABLE TO BE REJECTED:- I) IT IS EXECUTED IN RS.2 STAMP PAPER WHICH IS INSUFFICIENT AND NOT MEANT FOR EXECUTING PARTNERSHIP DEEDS AND AMENDMENT. II) ADDENDUM DOES NOT CONTAIN CLAUSES OR EARLIER DEED, EARLIER BUSINESS AND EARLIER PARTNERS ALONG WITH PURPOSE OF ADDENDUM. III) ADDENDUM STRAIGHTWAY SAYS THAT DEED OF DISSOLUTION SHOULD BE READ AS DEED OF RETIREMENT BUT THERE IS NO REFERENCE TO DATE AND WHICH DISSOLUTION DEED. IV) ADDENDUM SPEAKS ABOUT WHAT IS SHARE OF SR I S PRASHANT, PARTNER AND WHAT IS SHARE OF SRI I S PRASANNA WHO IS DESIRES TO CONTINUE BUSINESS BUT NOT AS PARTNERSHIP FIRM. BUT IT ALSO MENTIONS ABOUT THERE IS NO DISSOLUTION TO BUSINESS PAGE 7 OF 17 ITA NOS.156 & 121/BANG/2009 7 BUT IT IS AN AMENDMENT TO PARTNERSHIP DEED DT.06.09.1990 AND SUBSEQUENT AMENDMENT DT.18.05.92. V) ADDENDUM ALSO SPEAKS ABOUT FACT THAT IT WAS NOT MENTIONED IN EARLIER DEED AND ITS AMENDMENT ABOUT WHAT HAPPENS WHEN ONE OF PARTNERS DIES OR RETIRES FROM FIRM. INTERESTINGLY IT IS ALREADY MENTIONED IN DEED DT.06.09.90 AND ALSO IN AMENDMENT DT.18.05.92. VI) DEED DOES NOT CONTAIN NAMES AND ADDRESS. VII) DEED DOES NOT CONTAIN DATE ON WHICH STAMP PAPER IS PURCHASED. VIII) DEED DOES NOT CONTAIN DATE ON WHICH ADDENDUM WILL COME INTO FORCE I.E. EFFECTIVE CLAUSE. 2.7 THE LEARNED CIT(A) OBSERVED THAT THE FACTS IN THE CASE OF CIT V S SHIVAPRAKASH MUDALIAR 144 ITR 285 A RE DISTINGUISHABLE AND HENCE THE DECISION OF THE HON'B LE MADRAS HIGH COURT IN THIS CASE IS NOT APPLICABLE. BEFORE INSER TION OF SECTION 45(4), IT HAS BEEN HELD BY THE HON'BLE APEX COURT IN THE CASE OF ADDL. CIT V MOHANBHAI PAMABHAI 165 ITR 166 THAT THE RE IS NO TRANSFER WHEN THERE IS DISSOLUTION OF FIRM OR WHEN PARTNER RETIRES. THE LEARNED CIT(A) OBSERVED THAT THE HON'BLE JURISD ICTIONAL HIGH COURT IN THE CASE OF CIT V MANGALORE GANESH BEEDI W ORKS (SUPRA) HELD THAT VALUATION ON DATE OF DISSOLUTION OF FIRM IN RESPECT OF STOCK SHOULD BE TAKEN AT COST INSTEAD OF MARKET PRI CE. THE LEARNED CIT(A) THEREFORE UPHELD THAT IN VIEW OF THE DECISIO N OF THE HON'BLE APEX COURT IN THE CASE OF ALA FIRM, THE MAR KET VALUE OF PAGE 8 OF 17 ITA NOS.156 & 121/BANG/2009 8 THE ASSETS SHOULD BE TAKEN AND THE ASSESSEE IS LIAB LE TO CAPITAL GAIN. 2.8 BEFORE US, THE LEARNED AR SUBMITTED THAT THERE HAS BEEN NO DISTRIBUTION OF ASSETS AND THEREFORE CAPITA L GAIN IS NOT CHARGEABLE. THE LEARNED AR DREW OUR ATTENTION TO T HE AMENDMENT TO PARTNERSHIP DEED DATED 18TH MAY, 1992. AS PER TH IS AMENDMENT TO PARTNERSHIP DEED, IT IS CLEAR THAT IF ANY ONE OF THE PARTNERS WISHES TO RETIRE AND THE OTHER PARTNER WANTS TO CO NTINUE WITH THE BUSINESS THEN SUCH ACTION IS TO BE TERMED AS RETIRE MENT OF PARTNERSHIP AND THE RETIRING PARTNER SHALL BE PAID HIS CAPITAL BALANCE AFTER CLOSING THE BOOKS OF ACCOUNT, AND ARR IVING AT THE PROFIT OR LOSS UP TO THE DATE OF RETIREMENT. THE L EARNED AR DREW OUR ATTENTION TO ADDENDUM TO THE DISSOLUTION DEED. AS PER THIS ADDENDUM, IT IS MENTIONED THAT THE DEED OF DISSOLUT ION SHOULD BE READ AS DEED OF RETIREMENT. SUCH ADDENDUM WAS MENT IONED TO HAVE BEEN EXECUTED ON 9TH DAY OF NOVEMBER, 2004. TH IS HAS BEEN DRAWN ON STAMP PAPER OF RS.2. THE LEARNED AR FURTH ER SUBMITTED THAT THE DECISION OF THE HON'BLE JURISDICTIONAL HIG H COURT IN THE CASE OF SUVARDHAN V CIT 287 ITR 404 IS DISTINGUISHA BLE. THE QUESTION BEFORE THE HON'BLE JURISDICTIONAL HIGH COU RT WAS WHETHER THERE WAS TRANSFER OR DISTRIBUTION OF CAPITAL ASSET ON THE DISSOLUTION OF PARTNERSHIP FIRM FOR INVOKING SECTIO N 45(4) OF THE I T ACT. THE ISSUE IN THE INSTANT CASE IS AS TO WH ETHER SECTION 45(4) CAN BE APPLICABLE WHEN THERE IS NO DISTRIBUTI ON OF CAPITAL ASSETS. PAGE 9 OF 17 ITA NOS.156 & 121/BANG/2009 9 2.9 ON THE OTHER HAND, THE LEARNED DR RELIED ON TH E DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT I N THE CASE OF SUVARDHAN (SUPRA). THE LEARNED DR ALSO DREW OUR AT TENTION TO THE DECISION OF THE HON'BLE KERALA HIGH COURT IN THE CA SE OF CIT V SOUTHERN TUBES 306 ITR 216. IN THAT CASE, THE HON' BLE KERALA HIGH COURT WAS CONSIDERING A CASE IN WHICH THERE WA S DISSOLUTION OF FIRM CONSISTING OF TWO PARTNERS. ONE OF THE PARTNE R TOOK OVER THE LAND AND FACTORY BUILDING AND CONTINUED BUSINESS. T HE HON'BLE KERALA HIGH COURT HELD THAT TRANSACTION IS TRANSFER RED WITHIN THE MEANING OF SECTION 2(47)(VI)L HENCE, SECTION 45(4) IS ATTRACTED. THE LEARNED DR SUBMITTED THAT THE FACTS IN THE INST ANT CASE ARE SIMILAR TO THE FACTS IN THE CASE DECIDED BY THE HON 'BLE KERALA HIGH COURT. 2.10 WE HAVE HEARD BOTH THE PARTIES. THE FIRM WAS CONSTITUTED BY THE PARTNERSHIP DEED DATED 6TH SEPTEM BER, 1990. IN THAT DEED, IT IS MENTIONED THAT THE PARTNERSHIP SHALL BE AT WILL. THE CASE OF THE ASSESSEE IS THAT THIS PARTNERSHIP D EED WAS AMENDED VIDE DEED DATED 18TH MAY, 1992. THE LEARNED CIT(A) HAS DOUBTED THE GENUINENESS OF SUCH AMENDMENT. SUCH AM ENDMENT HAS BEEN DRAWN ON STAMP PAPER OF RS.5. SUCH AMENDMENT WAS NOT BROUGHT TO THE NOTICE OF THE DEPARTMENT. MOREOVER, THE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE TO SHOW THE GENUINENES S OF SUCH AMENDMENT. IF ONE COMPARES THE SIGNATURE OF SHRI I S PRASHANT AS APPEARING ON THE AMENDMENT DEED WITH THE SIGNATURE AS AVAILABLE ON THE PARTNERSHIP DEED DATED 6TH SEPTEMBER, 1990, IT IS APPARENT PAGE 10 OF 17 ITA NOS.156 & 121/BANG/2009 10 THAT BOTH THE SIGNATURES DO NOT TALLY. WE HAVE ALSO GONE THROUGH THE DEED OF DISSOLUTION. IN THIS DEED, IT IS CLEAR LY MENTIONED THAT IT IS A DEED OF DISSOLUTION. SUBSEQUENTLY, AN ADDE NDUM HAS BEEN DRAWN TO SHOW THAT IT IS A DEED OF RETIREMENT. 2.11 PARTNERSHIP IS DEFINED IN SECTION 4 OF THE PA RTNERSHIP ACT. PARTNERSHIP IS A CONTRACT OF TWO OR MORE COMP ETENT PERSONS TO PLACE THEIR MONEY, EFFECTS, LABOUR, SKILL OR ALL OF THEM IN LAWFUL COMMERCE OR BUSINESS AND TO DIVIDE THE PROFIT AND T O BEAR LOSS IN CERTAIN PROPORTION. HENCE, FOR THE EXISTENCE OF A PARTNERSHIP FIRM, IT IS NECESSARY THAT THERE SHOULD BE CONTRACT BETWEEN TWO OR MORE PERSONS. A PARTNERSHIP FIRM CANNOT EXIST WITH ONE PARTNER. IN THE INSTANT CASE, THE PARTNERSHIP WAS CONSTITUTE D BETWEEN TWO PARTNERS AND ONE OF THE PARTNERS WENT OUT OF THE FI RM AND SUCH TRANSACTION WAS REFERRED AS DEED OF DISSOLUTION. T HERE IS A DIFFERENCE BETWEEN THE RETIREMENT OF PARTNER AND DI SSOLUTION OF THE FIRM. IN THE CASE OF A PARTNERSHIP CONSISTING O F TWO PARTNERS, WHEN ONE PARTNER SEVERS HIS CONNECTION WITH THE FIR M THERE IS A DISSOLUTION OF THE FIRM AND NOT MERELY THE RETIREME NT OF THE PARTNERSHIP. RETIREMENT OCCURS ONLY WHEN ONE PARTNE R SEVERS HIS CONNECTION AND THE BUSINESS IS CARRYING ON BY THE REM AINING PARTNER. M O VEDICHELLA MADERIARE V S RANGARAJU AI R 1960 MADRAS 457. 2.12 THERE IS COMPULSORY DISSOLUTION IN CASE OF DE ATH OF ONE OF THE PARTNERS UNLESS THERE IS A CONTRACT OTHE RWISE. THE PAGE 11 OF 17 ITA NOS.156 & 121/BANG/2009 11 HON'BLE APEX COURT IN THE CASE OF CIT V SETH GOVIND RAM SUGAR MILLS 57 ITR 510 HAD AN OCCASION TO CONSIDER A CASE OF A FIRM CARRIED ON BY TWO PARTNERS IN WHICH ONE PARTNER DIED ON DECEMBER 9, 1945. THERE WAS A CLAUSE IN THE PARTNERSHIP DEE D THAT DEATH OF ANY ONE OF THE PARTNERS SHALL NOT DISSOLVE THE PARTN ERSHIP AND THE LEGAL HEIR OR A NOMINEE OF THE DECEASED PARTNER WIL L TAKE THE PLACE OF THE DECEASED PARTNER. SON OF THE DECEASED PARTN ER BECAME MAJOR ON DECEMBER 13, 1949. THE HON'BLE SUPREME CO URT HELD THAT ON THE FACTS AND IN VIEW OF THE CONCESSION THA T THERE WAS NO PARTNERSHIP BETWEEN DECEMBER 9, 1945 AND DECEMBER 1 3, 1949, THE HON'BLE APEX COURT ALSO HELD THAT SECTION 42(C) OF THE PARTNERSHIP ACT CAN APPROPRIATELY BE APPLIED TO A PA RTNERSHIP ONLY WHERE THERE ARE MORE THAN TWO PARTNERS. HENCE IN T HE CASE OF FIRM CONSISTING OF TWO PARTNERS, IF ONE OF THE PART NERS GOES OUT OF THE FIRM THEN IT IS A CASE OF THE DISSOLUTION AND I T CANNOT BE TERMED AS RETIREMENT. 2.13 THE HON'BLE MADRAS HIGH COURT IN THE CASE OF S PARVATHAMMAL V CIT 163 ITR 161 HAD AN OCCASION TO CONSIDER AS TO WHETHER THE FIRM CONTINUES WHEN ONE OF THE PARTN ERS OUT OF THE TWO PARTNERS DIES. THE HON'BLE MADRAS HIGH COURT HE LD IT IS DISSOLUTION EVEN IF THERE IS AN AGREEMENT FOR CONTI NUATION OF THE FIRM ON THE DEATH OF ONE OF THE PARTNERS. BUT IN TH E CASE WHEN THE FIRM CONSISTED OF TWO PARTNERS AND ONE OF THE PARTN ERS DIES THEN THE FIRM WILL STAND DISSOLVED. FOR READY REFERENCE, WE ARE PAGE 12 OF 17 ITA NOS.156 & 121/BANG/2009 12 REPRODUCING AS TO WHAT HAS BEEN HELD BY THE HON'BLE MADRAS HIGH COURT AND REPORTED IN THIS CASE:- 'HELD, THAT A PARTNERSHIP NORMALLY DISSOLVES ON THE DEATH OF A PARTNER UNLESS THERE WAS AN AGREEMENT TO THE CONTRARY. THERE WAS NO SUCH AGREEMENT IN THE ORIGINAL PARTNERSHIP DEED. EVEN ASSUMING THAT THERE WAS SUCH AN AGREEMENT, IN A PARTNERSHIP CONSISTING OF TWO PARTNERS, ON THE DEATH OF ONE OF THEM, THE PARTNERSHIP AUTOMATICALLY COMES TO AN END AND THERE IS NO PARTNERSHIP WHICH SURVIVES AND INTO WHICH A THIRD PARTY CAN BE INTRODUCED. HENCE, ON THE DEATH OF S, THE ORIGINAL PARTNERSHIP WAS DISSOLVED. THE SUBSEQUENT TAKING IN OF THE ASSESSEE AS A PARTNER WAS ONLY AS A RESULT OF THE ENTERING INTO OF A NEW PARTNERSHIP BETWEEN R AND THE ASSESSEE. PARTNERSHIP WAS NOT A MATTER OF HERITABLE STATUS BUT PURELY ONE OF CONTRACT. THERE WAS NO QUESTION OF THE ASSESSEE STEPPING INTO THE PLACE OF S AND ATTAINING THE STATUS OF A PARTNER, OR SUCCEEDING TO THE INTEREST OF S BY INHERITANCE. SHE WAS NOT ENTITLED TO CARRY FORWARD AND SET OFF THE LOSSES SUSTAINED BY HER HUSBAND'. 2.14 IN THE DISSOLUTION DEED, IT IS MENTIONED THAT THE ASSETS AND LIABILITIES OF THE FIRM HAS BEEN TAKEN O VER BY SHRI I S PRASANNA AND THE AMOUNT STANDING TO THE CREDIT OF T HE CAPITAL ACCOUNT OF SHRI I S PRASHANT IS TO BE PAID TO HIM O N OR BEFORE 30TH NOVEMBER, 2004 WITHOUT INTEREST. THE CONTENTION OF THE LEARNED AR IS THAT THERE IS NO DISTRIBUTION AND SECTION 45( 4) IS NOT APPLICABLE. THE DEED OF DISSOLUTION IS AN AGREEMEN T BETWEEN THE TWO PERSONS. THE DICTIONARY MEANING OF THE EXPRESSIO N PAGE 13 OF 17 ITA NOS.156 & 121/BANG/2009 13 'DISTRIBUTION' IS TO GIVE EACH SHARE. THE EXPRESSI ON 'DISTRIBUTION' CONNOTES SOMETHING ACTUAL AND NOT NOTIONAL. IT CAN BE PHYSICAL OR CAN BE CONSTRUCTIVE. ONE MAY DISTRIBUTE AMOUNTS BE TWEEN DIFFERENT PERSONS EITHER BY CREDITING THE AMOUNT DUE TO EACH ONE OF THEM OR BY ACTUALLY PAYING TO EACH ONE OF THEM THE AMOUNT DUE TO HIM. THUS, IN THE INSTANT CASE, THE SECOND PART Y, I.E. SHRI I S PRASHANTH, WAS GIVEN THE AMOUNT TO THE EXTENT OF HI S CREDIT IN THE CAPITAL ACCOUNT. THUS WE CANNOT SAY THAT IT IS NOT A CASE OF DISTRIBUTION. MOREOVER, THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF SUVARDHAN HAD AN OCCASION TO CONSIDER THE C ASE WHEN THE ASSETS AND LIABILITIES WERE TAKEN OVER BY ONE OF THE PARTNERS. THE QUESTION OF LAW REFERRED TO THE HON'BLE KARNATAKA H IGH COURT WAS AS UNDER:- 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS JUSTIFIED IN COMING TO THE CONCLUSION THAT THE ASSESSEE FIRM WAS LIABLE TO CAPITAL GAINS U/S 45(4) ON THE GROUND THAT THERE WAS TRANSFER OR DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION OF THE PARTNERSHIP FIRM? 2.15 THE HON'BLE JURISDICTIONAL HIGH COURT HAS REF ERRED TO THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF A N NAIK ASSOCIATES 265 ITR 346. THE HON'BLE BOMBAY HIGH COU RT HAS CONSIDERED THE MEANING OF THE EXPRESSION 'OTHERWISE ' AVAILABLE IN SECTION 45(4) OF THE I T ACT. THE WORD 'OTHERWISE' TAKES INTO ITS SWEEP NOT ONLY CASES OF DISSOLUTION BUT ALSO CASES O F SUBSISTING PAGE 14 OF 17 ITA NOS.156 & 121/BANG/2009 14 PARTNERS OF A PARTNERSHIP TRANSFERRING ASSETS TO A RETIRING PARTNER. THE HON'BLE JURISDICTIONAL HIGH COURT OBSERVED THAT THEY ARE IN RESPECTFUL AGREEMENT WITH THE JUDGMENT OF THE BOMBA Y HIGH COURT. HENCE, THE ISSUE BEFORE US IS SQUARELY COVER ED BY THE DECISION OF THE JURISDICTIONAL HIGH COURT. 2.16 MOREOVER, THE FACTS IN THE INSTANT CASE ARE S IMILAR TO THE FACTS CONSIDERED BY THE HON'BLE KERALA HIGH COUR T IN THE CASE OF SOUTHERN TUBES (SUPRA). 2.17 THE LEARNED CHENNAI BENCH IN THE CASE OF ACIT V G H REDDY AND ASSOCIATES 308 ITR 25 (AT) HELD THAT ONE H AS TO LOOK INTO THE SURROUNDING CIRCUMSTANCES TO KNOW THE REAL POSITION AND INTENT OF THE PARTIES. THE CONSEQUENCES OF LAW CAN NOT BE AVOIDED MERELY BY DESCRIBING THE AGREEMENT IN A PARTICULAR FO RM THOUGH IN ESSENCE AND IN SUBSTANCE IT MAY BE A DIFFERENT TRANS ACTION. INITIALLY, BOTH THE PARTNERS DREW A DISSOLUTION DEED . WHATEVER HAPPENED AT THAT RELEVANT TIME WAS MENTIONED IN THE DEED. SUBSEQUENT ADDENDUM WILL NOT CHANGE THE CHARACTER O F THE TRANSACTION. HENCE ON ACCOUNT OF SUBSEQUENT ADDEND UM, WE CANNOT CONSIDER THAT ONE OF THE PARTNERS RETIRES AND IT WA S NOT A CASE OF THE DISSOLUTION OF THE FIRM. HENCE, WE HOLD THAT S ECTION 45(4) IS APPLICABLE. PAGE 15 OF 17 ITA NOS.156 & 121/BANG/2009 15 3. THE APPELLANT IS AGGRIEVED AGAINST CHARGING OF INTEREST. CHARGING OF INTEREST IS MANDATORY AND THE APPELLANT WILL GET CONSEQUENTIAL RELIEF. 4. NOW WE SHALL TAKE THE APPEAL FILED BY THE REVENU E. THE ASSESSING OFFICER WHILE DETERMINING THE FAIR MA RKET VALUE OF THE LAND AND THE BUILDING, VALUED THE LAND AT RS.60 PER SQ FT BY GIVING 50% DISCOUNT OF THE TOTAL QUANTITY OF THE LAN D. THE BUILDING WAS VALUED AT RS.450 PER SQ FT. THE LEARNED CIT(A) DIRECTED TO ADOPT THE RATE OF 15 PER SQ FT FOR THE LAND AND RS. 150 PER SQ FT FOR THE BUILDING. 4.1 ON THE ABOVE-REFERRED ISSUE, WE HAVE HEARD BOT H THE PARTIES. THE LEARNED DR HAS FILED THE WRITTEN SUBM ISSIONS AND HAS PLACED ON RECORD THE VALUE OF LAND BEING ADOPTED BY THE SUB- REGISTRAR. THE VALUE OF THE LAND BEING SHOWN IN RE SPECT OF RESIDENTIAL AND COMMERCIAL LANDS. THE LEARNED AR S UBMITTED THAT THE LAND IS AN INDUSTRIAL LAND AND THEY HAVE RELIED ON THE LAND BEING ADOPTED KIADB. THE LAND UNDER REFERENCE CONSISTED OF 4 ACRES. KIADB WAS ALLOTTING LAND IN THE YEAR 1999 AT RS.10 P ER SQ FT. IN THE INSTANT CASE, THERE IS NO DISPUTE THAT THE LAND IS AN INDUSTRIAL LAND. FOR ASCERTAINING THE FAIR MARKET VALUE, WE H AVE TO ASSUME THE HYPOTHETICAL MARKET. IF THE LAND IS AVAILABLE A T A PARTICULAR RATE FROM THE KIADB THEN THE RATE OF LAND OF THE AS SESSEE CANNOT EXCEED THAT. IT IS TRUE THAT THE LAND RATE OF KIAD B FOR THE YEAR UNDER REFERENCE HAS NOT BEEN OBTAINED. THE AO WHIL E MAKING PAGE 16 OF 17 ITA NOS.156 & 121/BANG/2009 16 ASSESSMENT HAS NOT GIVEN THE COMPARABLE RATE. HOWE VER, WHILE SUBMITTING THE REMAND REPORT, IT WAS SUBMITTED THAT THE AO HAS REASONABLY ADOPTED 50% OF THE SAID MARKET RATE FIXED BY THE SUB- REGISTRAR FOR VALUATION OF MARKET VALUE. THE MARKE T RATE AS SHOWN BY THE LEARNED DR IN HIS WRITTEN SUBMISSIONS ARE FOR RESIDENTIAL AND COMMERCIAL AREA. THE RATES FOR RESIDENTIAL ARE A IS 35 WHILE FOR COMMERCIAL IT IS 40. 50% DISCOUNT HAS ALREADY BEEN GIVEN BY THE AO AND THAT IS NOT IN DISPUTE BEFORE US. THE LAND RATE OF RESIDENTIAL AND COMMERCIAL AS POINTED OUT ABOVE ARE IN RESPECT OF SURVEY NO.57 TO 65 I.E. THE SURVEY WHICH ARE ADJACENT TO THE ASSESSEE FIRM. THEREFORE ADOPTION OF RATE OF RS.30 PER SQ FT FOR INDUSTRIAL LAND BY THE LEARNED CIT(A) IS APPROPRIATE AND THE LEARNED CIT(A) HAS UPHELD THE DISCOUNT AS GIVEN BY T HE AO. HENCE WE UPHOLD THE VALUE ADOPTED BY THE LEARNED CIT(A). SIMILARLY, IN RESPECT OF BUILDING, THE BUILDING WAS CONSTRUCTED I N 1994. THERE IS NO MENTION IN THE ASSESSMENT ORDER ABOUT THE TYPE OF CONSTRUCTION. DURING THE COURSE OF PROCEEDINGS BEFORE US, THE LEA RNED AR SUBMITTED THAT THE BUILDING IS NOT A RCC STRUCTURE. LIFE OF SUCH BUILDING CANNOT BE SUFFICIENTLY LONG. THE LEARNED A O HAS NOT GIVEN ANY COMPARABLE CASES. WHEN ONE HAS TO APPLY THE MARK ET RATE OF THE BUILDING ON THE DATE WHEN IT IS TO BE VALUED, O NE HAS TO GIVE THE DISCOUNTING FOR DEPRECIATION. THIS DISCOUNTING DEP ENDS UPON THE LIFE OF THE BUILDING. IF THE LIFE OF BUILDING IS LESS THEN DISCOUNTING IS MORE. WE THEREFORE FEEL THAT THE LEARNED CIT(A) HAS CORRECTLY ESTIMATED THE COST OF BUILDING AT RS.150 PER SQ FT. ACCORDINGLY WE UPHOLD THE ACTION OF THE LEARNED CIT(A). PAGE 17 OF 17 ITA NOS.156 & 121/BANG/2009 17 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE AS WE LL AS THE APPEAL OF THE REVENUE ARE DISMISISED. PRONOUNCED IN THE OPEN COURT ON 30TH SEPTEMBER, 200 9. SD/- SD/- (SHAILENDRA KUMAR YADAV) (N L KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DTD.30/9/2009 COPY TO : 1. THE ASSESSEE 2.THE REVENUE 3. THE CIT( A) CONCERNED.4. THE CIT CONCERNED. 5. THE DR 6. GUAR D FILE. 7. GF, ITAT, NEW DELHI. MSP/14.9. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.