THE ITO 21(1)(3), MUMBAI V. SHRI OM NAMAH SHIVAY BUILDERS & DEVELOPERS, MUMBAI

ITA 3053/MUM/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3736 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 27-10-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 05-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T T JACCOB
• Assessee Lawyers: D C JAIN
• Keywords: Capital asset; Business income; Cost of acquisition; Fair market value
• Section: 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C, MUMBAI BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER I.T.A.NO. 3053/MUM/2008 ASSESSMENT YEAR : 2005-06 INCOME-TAX OFFICER-21(1)(3), C-10, 6 TH FLOOR, R.NO. 605, PRATYAKSHAKAR BHAVAN, BKC, BANDRA(E), MUMBAI 400 051. VS. M/S. OM NAMAH SHIVAY BUILDERS & DEVELOPERS, JAY APARTMENT, PLOT NO. 199, DIXIT ROAD, VILE PARLE (E), MUMBAI 400 057. PAN: AAAFP 6175 E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T.T. JACCOB RESPONDENT BY : SHRI D.C. JAIN O R D E R PER N.V. VASUDEVAN, JM: THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 28.02.2008 OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-XXI, MUMBAI, R ELATING TO THE ASSESSMENT YEAR 2005-06. 2. THE FIRST GROUND OF APPEAL OF THE REVENUE READS AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF RS. 62,13, 027/- MADE BY THE A.O. BEING THE DIFFERENCE THE ESTIMATED FAIR MARKET VALU E AND BOOK VALUE OF THE STOCK I TRADE AND OTHER ASSETS OF THE FIRM AS THERE IS DISSOLUTION OF THE PARTNERSHIP FIRM. 3. THE ASSESSEE IS A PARTNERSHIP FIRM. IT WAS CONS TITUTED BY A DEED OF PARTNERSHIP DATED 1-4-2001. IT CONSISTED OF TWO PA RTNERS SHRI RAMESH R.PAREKH AND SHRI RAJENDRA ARORA. THE BUSINESS OF THE FIRM WAS THAT OF BUILDERS, DEVELOPERS, CONTRACTORS, REAL ESTATE CONSULTANTS. THE FIRM COMMENCED DEVELOPMENT OF A PROJECT AND ALL COSTS INCURRED IN CONNECTION WITH THE SAME WERE SHOWN AS WORK-IN-PROGRESS. ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 2 4. ON 20-5-2004 RAJENDRA ARORA DIED. ON 28-7-2004, THE LEGAL HEIRS OF MR.RAJENDRA ARORA, (THE DECEASED PARTNER) AND MR.RA MESH R.PAREKH, THE SURVIVING PARTNER DECIDED TO CONTINUE THE PARTNERSHIP BUSINES S AND ENTERED INTO THE TERMS OF SUCH PARTNERSHIP AS CONTAINED IN A DEED OF PARTNERS HIP DATED 28-7-2004. ON 31-7- 2004, THE LEGAL HEIRS OF THE DECEASED PARTNER RETIR ED FROM THE FIRM. THE LEGAL EFFECT OF WHICH WAS THAT THE FIRM STOOD DISSOLVED. MR.RAMESH R.PAREKH TOOK OVER ALL THE ASSETS AND LIABILITIES OF THE PARTNERSHIP F IRM AND SETTLED THE ACCOUNTS WITH THE LEGAL HEIRS OF THE DECEASED PARTNER AND IN THIS REGARD A DEED OF RETIREMENT DATED 11-9-04 WAS ENTERED INTO BETWEEN MR.RAMESH R. PAREKH AND THE LEGAL HEIRS OF THE DECEASED PARTNER. THE FOLLOWING WERE THE RE LEVANT CLAUSES OF THE DEED OF RETIREMENT DATED 11-9-2004: 1. THE RETIRING PARTNERS HAVE VOLUNTARILY RETIRED FROM PARTNERSHIP ON AND FROM AND WITH EFFECT FROM 31.07.2004. 2. THE RETIRING PARTNERS CONFIRM HOWEVER SEPARATELY RECEIVED ALL THEIR SHARES IN THE PROFIT/LOSS AND CAPITAL OF THE SAID P ARTNERSHIP AS DETERMINED ON THE VALUATION OF THE ASSETS AND LIABILITIES OF T HE PARTNERSHIP INCLUDING THE AMOUNT STANDING TO HIS CREDIT AS THE SAID DATE, IN FULL SETTLEMENT OF HIS CLAIM IN THE CAPITAL, PROFITS AND ASSETS OF THE PAR TNERSHIP AND GOODWILL ETC. AND HAVE RELINQUISHED ALL THEIR CLAIMS RELATING TO THE SAID PARTNERSHIP OR ANY PROPERTY AND ASSETS THEREOF. 3. THAT THE CONTINUING PARTNER HAS AGREED TO TAKE U PON HIMSELF THE DEBTS AND LIABILITIES OF THE FIRM IN FULL WHICH SHALL BE PAID AND DISCHARGED BY THE SAID CONTINUING PARTNER. KEEPING THE OUTGOING PARTN ER INDEMNIFIED AT ALL TIMES THEREFROM. 4. ACCOUNTS OF THE SAID PARTNERSHIP FOR THE PERIOD UPTO THE CLOSE OF BUSINESS OF 31.07.2004 HAVE BEEN MUTUALLY MADE UP, ADJUSTED AND SETTLED BETWEEN THE PARTIES. THE RETIRING PARTNERS CONFIRMED HAVING SEEN AND VERIFIED THE ACCOUNTS OF THE PARTNERSHIP FIRM F ULLY AND HAVE ACCEPTED THE SAME AS IT STANDS AND AGREES NOT TO RAISE ANY C LAIM HEREINAFTER. 5. THAT THE CONTINUING PARTNER SHALL BE THE SOLE OW NER OF THE SAID BUSINESS OF THE PARTNERSHIP AND ALL THE PROPERTY, A SSETS, CREDITS, EFFECTS, QUOTA RIGHTS, LICENSE PERMITS AND GOODWILL THEREOF INCLUDING THE TENANCY RIGHTS IN RESPECT OF THE BUSINESS PREMISES OF THE S AID PARTNERSHIP, IF ANY, AND THE CONTINUING PARTNER SHALL BE ENTITLED TO GET IN AND RECEIVE THE PARTNERSHIP ASSETS AND PROPERTIES. 6. THE RETIRING PARTNERS DO AND EACH OF THEM DOTH H EREBY ASSIGN AND RELEASE UPTO THE CONTINUING PARTNER, THEIR RESPECTI VE SHARE AND INTEREST IN THE SAID BUSINESS AND GOODWILL OF THE FIRM, TOGETHE R WITH THE BENEFIT, RIGHT, TITLE AND INTEREST ALONG WITH THE STOCK IN T RADE, MONEYS, CREDITS ALL MOVEABLES, IMMOVABLES AND EFFECTS. TO HOLD THE SAME UNTO THE CONTINUING PARTNERS ABSOLUTELY, TOGETHER WITH THE B ENEFITS OF ALL OUTSTANDING CONTRACTS. ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 3 7. IN THE CONSIDERATION OF THE PREMISES HEREIN STAT ED, THE RETIRING PARTNERS DO AND EACH OF THEM DOTH HEREBY RELEASE TH E CONTINUING PARTNER AND THE CONTINUING PARTNER DO DOTH HEREBY RELEASE T HE RETIRING PARTNERS, OF AND FROM ALL THEIR RESPECTIVE COVENANTS AND PROV ISIONS CONTAINED IN THE SAID DEED OF PARTNERSHIP DATED THE 20/5/2004 AND DA TED 1/4/2001, AND ALL ACTIONS CLAIMS AND DEMANDS IN RELATION TO THE S AID PARTNERSHIP. 5. THE ASSESSEE FILED RETURN OF INCOME FOR AY 05-06 , DECLARING NIL INCOME. THE AO ISSUED A SHOW CAUSE NOTICE DATED 20/12/2007 CALLING UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE CAPITAL GAIN ON TRANSFER O F THE PROPERTIES BY THE FIRM TO ONE OF ITS PARTNERS ON DISSOLUTION OF THE FIRM BE N OT BROUGHT TO TAX UNDER THE HEAD CAPITAL GAINS. ACCORDING TO THE AO FROM A PERUSAL OF DETAIL SUBMITTED BY THE ASSESSEE, IT WAS CLEAR THAT THE FIRM WAS ACTUALLY D ISSOLVED ON 31.7.2004 AS ALL THE PARTNERS HAVE RETIRED EXCEPT MR. RAMESH PAREKH. THE AO ALSO NOTICED FROM THE RETURN OF RAMESH PAREKH FILED FOR THE AY 05-06 THAT THAT THE BUSINESS OF THE FIRM WAS TAKEN OVER BY HIM AS A PROPRIETOR. THE AO THER EFORE WAS OF THE VIEW THAT AS PER THE PROVISIONS OF THE INCOME TAX ACT, 1961, DIS TRIBUTION OF ASSETS AMONGST THE PARTNERS ON DISSOLUTION OF THE FIRM AMOUNTED TO A T RANSFER. THEREFORE, HE WAS OF THE VIEW THAT THERE WILL BE A LIABILITY TO TAX ON T RANSFER OF THE ASSET OF THE FIRM TO PARTNERS ON THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF THE ASSETS TRANSFERRED ON DATE OF DISSOLUTION AND BOOK VALUE EITHER AS BUS INESS INCOME OR CAPITAL GAINS DEPENDING ON THE FACT WHETHER THE ASSET IS STOCK IN TRADE OR CAPITAL ASSET. THE AO CALLED UPON THE ASSESSEE TO FURNISH COPY OF CAPITAL ACCOUNT OF ALL THE PARTNERS, DETAILS OF ASSETS TRANSFERRED TO PARTNERS AGAINST T HEIR CAPITAL BALANCES AS ALSO FMV OF THE VARIOUS ASSETS DISTRIBUTED TO PARTNERS ON DI SSOLUTION, THE % OF COMPLETION OF THE PROJECT ON DATE OF DISSOLUTION, DATE OF ACTUAL COMPLETION OF PROJECT AND ANY OTHER INFORMATION OR EXPLANATION THAT THE ASSESSEE MIGHT LIKE TO RELY ON IN THIS CONNECTION. 6. IN REPLY THE ASSESSEE SUBMITTED THAT ON DISSOLUT ION OF THE FIRM AND MR.RAMESH R.PAREKH TAKING OVER THE ASSETS AND LIABI LITIES OF THE FIRM, THERE WAS NO TRANSFER AND THEREFORE THERE WAS NO INCIDENCE GIVIN G RAISE TO COMPUTING CAPITAL GAIN. THE AO HOWEVER HELD THAT THERE WAS DISSOLUTI ON OF THE FIRM WHEN THE LEGAL HEIRS OF THE DECEASED PARTNER RETIRED ON 31.07.2004 LEAVING ONLY SHRI RAMESH R. PAREKH TO CONTINUED THE BUSINESS IN HIS INDIVIDUAL CAPACITY. THE AO ALSO HELD THAT THERE WAS A TRANSFER OF BUSINESS FROM THE PARTNERSH IP FIRM M/S.OM NAMAH SHIVAY BUILDERS AND DEVELOPERS (A PARTNERSHIP FIRM) TO MR. RAMESH R. PAREKH ( AS PROPRIETOR) BECAUSE THE BUSINESS, WHICH BELONGED TO RAMESH R. PAREKH & MR. RAJENDRA P. ARORA UPTO 20.05.2004 & THEREAFTER TILL 31.07.2004 TO THE SAID RAMESH ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 4 R. PAREKH & THE LEGAL HEIRS OF LATE SHRI RAJENDRA P . ARORA, BELONGED EXCLUSIVELY TO SHRI RAMESH R. PAREKH W.E.F. 01.08.2004. THUS, THE FIRM SEIZED TO EXIST ON 31.07.2004 AND THE BUSINESS WAS CARRIED ON BY RAMES H R. PAREKH AS PROPRIETOR. SINCE THERE WAS TRANSFER OF STOCK IN TRADE AND OTHE R ASSETS FROM THE FIRM TO MR. RAMESH R. PAREKH THE DIFFERENCE BETWEEN THE FAIR MA RKET VALUE OF THE WORK IN PROGRESS WITH REGARD TO THE INCOMPLETE PROJECT AND ITS COST IN THE BOOKS OF ACCOUNTS WOULD BECOME TAXABLE AS BUSINESS PROFITS O F THE FIRM FOR THE RELEVANT ASSESSMENT YEAR. THE AO WAS ALSO OF THE VIEW THAT IF THE PROJECT WHICH WAS IN PROGRESS HAD BEEN SOLD BY THE FIRM TO SOME OTHER PA RTY THEN THE SAME WOULD NOT HAVE BEEN SOLD AT BOOK VALUE BUT AT THE FAIR MARKET VALUE. HE ALSO OBSERVED THAT THAT THERE HAS BEEN A BOOM IN THE CONSTRUCTION INDU STRY IN PAST 3 TO 4 YEAR AND THE PRICE OF THE PROPERTIES HAVE SOARED UP SIGNIFICANTL Y MORE THAN 100 TO 300% DURING THE SAID PERIOD. THE AO HELD THAT THE FIRM AND THE PARTNERS ARE DIFFERENT ASSESSEE. THE BENEFICIAL INTEREST IN THE PROFIT OF THE FIRM W HICH WAS BELONGING TO THE PARTNERS OF THE FIRM UPTO 31.07.2004 NOW EXCLUSIVELY BELONGS TO MR. RAMESH R. PAREKH AND THEREFORE THE DIFFERENCE BETWEEN THE FMV OF THE INC OMPLETE PROJECT AS ON 31.07.2004 AND ITS COST AS PER BOOKS OF ACCOUNTS IS TAXABLE AS THE BUSINESS PROFITS OF THE FIRM. THEREAFTER THE AO QUANTIFIED THE AMOUN T OF PROFIT BY OBSERVING THAT THE ASSESSEE FAILED TO PROVIDE THE PERCENTAGE OF CO MPLETION OF THE PROJECT AT THE DATE OF DISSOLUTION AND THEREFORE IN THE ABSENCE OF THE RELEVANT DATA, HE WAS LEFT WITH NO OPTION BUT TO ESTIMATE BY TAKING 20% OF THE WIP WHICH AMOUNTS TO RS. 62,13,027/- (20% OF 3,10,655,136/-) AS THE PROFITS OF THE FIRM FOR THE PERIOD 01.04.2004 TO 31.07.2004 BEING DIFFERENCE BETWEEN T HE FMV & COST OF WIP AS ON 31.07.2004 AND ADD THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. THUS THE AO MADE AN ADDITION OF RS.62,13,027 TO THE TOTAL INCOM E OF THE ASSESSEE. 7. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT THE FIRM GOT DISSOLVED BY OPERATION OF LAW, WHEN THE NUMBER OF PERSONS WHO WE RE PARTNERS OF THE FIRM GOT REDUCED TO ONE ON 31.07.2004 UPON RETIREMENT OF LEG AL HEIRS OF THE DECEASED PARTNER. THUS THE REAL ESTATE DEVELOPMENT BUSINESS AS WELL AS THE PROJECT WHICH WAS HITHERTO OWNED BY THE PARTNERSHIP FIRM, CAME TO BE OWNED BY MR. RAMESH R. PAREKH ON AND FROM 31.07.2004. HOWEVER, NEITHER THE BUSINESS OF THE ERSTWHILE FIRM WAS DISCONTINUED NOR THE NAME OF THE CONCERN W AS CHANGED NOR THE CAPITAL ASSETS OF THE PARTNERSHIP FIRM WERE DISTRIBUTED ON SUCH DISSOLUTION OF THE FIRM. RATHER, MR. RAMESH R. PAREKH CONTINUED THE BUSINESS OF THE FIRM ON AS IS WHERE IS BASIS AND AS A GOING CONCERN IN ORDER TO COMPLE TE THE DEVELOPMENT OF REAL ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 5 ESTATE PROJECT UNDER DEVELOPMENT IN THE HANDS OF TH E FIRM. THE STOCK IN TRADE OF THE FIRM COMPRISED OF WORK IN PROGRESS OF THE PROJE CT UNDER DEVELOPMENT. NO REVALUATION OF STOCK IN TRADE HAS BEEN CARRIED OUT IN THE BOOKS OF ACCOUNT AND THE PROJECT CONTINUED WITHOUT ANY DISTURBANCE ON AS IS WHERE IS BASIS. IN VIEW OF THE ABOVE THE ASSESSEE SUBMITTED THAT WHERE THERE I S DISSOLUTION WITHOUT DISCONTINUANCE OF BUSINESS, THE CLOSING STOCK OF TH E FIRM WAS NOT REQUIRED TO BE VALUED AT THE MARKET PRICE UNDER ANY PROVISIONS OF THE INCOME-TAX ACT, 1961. THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF SAKTHI TRADING CO. VS. CIT REPORTED AT (2001) 250 ITR 871( SC) WHEREIN IT WAS HELD AS FOLLOWS: SINCE THERE WAS NO CESSATION OF BUSINESS, CLOSING TOCK HAD TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER WAS LOWER . IT IS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNT ANCY THAT THERE IS NO DISCONTINUANCE OF BUSINESS THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. THERE IS NO AUTHORITY DIRECTLY IN POINT DEALING WI TH THIS QUESTION, WHERE A PARTNERSHIP CONCERN DISSOLVES ITS BUSINESS IN THE COURSE OF THE ACCOUNTING YEAR, WHAT IS THE BASIS ON WHICH THE STOCK-IN-TRADE HAS TO BE VALUED AS ON THE DATE OF DISSOLUTION. WE HAVE ACCORDINGLY TO DEAL WITH THE MATTER ON FIRST PRINCIPLES. 8. THE CIT(A) HELD AS FOLLOWS: I HAVE GONE THROUGH THE SUBMISSIONS AND I FIND THA T THE APPELLANTS CASE IS SQUARELY COVERED BY THE JUDGMENT OF HONBLE SUPR EME COURT IN THE CASE OF SAKTHI TRADING CO. V. CIT REPORTED AT (2001 ) 250ITR 871 (SC). IN THE PRESENT CASE ALTHOUGH THERE WAS DISSOLUTION OF FIRM BUT THERE WAS NEITHER DISCONTINUATION OF BUSINESS OF FIRM NOR DIS TRIBUTION OF THE ASSETS OF THE FIRM. RATHER THE STOCK IN TRADE OF THE FIRM COM PRISING OF WORK IN PROGRESS OF THE REAL ESTATE PROJECT WITHOUT ANY DIS TURBANCE, CONTINUED AS A PART OF THE BUSINESS SON AS IS WHERE IS BASIS I N THE HANDS OF MR. RAMESH R. PAREKH. THERE IS NO DISPUTE ABOUT THESE FACTS AND THEREFORE IT IS NOT JUSTIFIED TO NOTIONALLY VALUE THE STOCK IN T RADE OF THE PARTNERSHIP FIRM AS MARKET PRICE. I AM, THEREFORE, OF THE VIEW THAT THE ADDITION MADE BY THE LD. ASSESSING OFFICER WAS CONTRARY TO THE PR INCIPLES LAID DOWN BY THE HONBLE APEX COURT AND THIS ADDITION OF RS. 62 ,13,027/- MADE AS RS.63,13,027/-( APPEARS TO BE MISTAKE APPARENT ON RECORD) IS ORDER TO BE DELETED. ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 6 9. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE HA S RAISED GROUND NO.1 BEFORE THE TRIBUNAL. THE LEARNED D.R. RELIED ON TH E ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE STAND AS WA S TAKEN BEFORE THE REVENUE AUTHORITIES BESIDES RELYING ON CERTAIN JUDICIAL PRO NOUNCEMENTS. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT T HE OUTSET, WE OBSERVE THAT THE AO HAS TREATED THE DIFFERENCE BETWEEN THE FMV O F THE WORK-IN-PROGRESS OF THE PROJECT UNDERTAKEN BY THE FIRM AND THE VALUE OF WOR K-IN-PROGRESS OF THE PROJECT AS PER THE BOOKS OF ACCOUNTS OF THE ASSESSEE AS PROFIT OF THE FIRM ASSESSABLE AS BUSINESS INCOME. WE ARE OF THE VIEW THAT THE SAID ASSESSMENT HAS TO BE MADE UNDER THE HEAD CAPITAL GAIN. THE FACTS OF THE ASSE SSEES CASE JUSTIFIES INVOKING THE PROVISIONS OF SEC.45(4) OF THE INCOME TAX ACT, 1961 (ACT). THE LAW WITH REGARD TO DISTRIBUTION OF ASSETS TO PARTNERS ON DISSOLUTIO N OF A FIRM, AS IT ORIGINALLY PREVAILED AND SUBSEQUENT LEGISLATIVE AMENDMENTS ARE AS FOLLOWS. IN THE CASE OF DISSOLUTION WHERE PARTNERS ARE ALLOTTED CAPITAL ASS ETS OF THE FIRM, IT WAS HELD THAT THERE WAS NO TRANSFER. IN MALABAR FISHERIES VS. CI T 120 ITR 49 (SC), THE HONBLE SUPREME COURT HAS EXPLAINED THE NATURE OF DISTRIBUT ION OF ASSETS OF A PARTNERSHIP ON DISSOLUTION AMONGST ITS PARTNERS AND AS TO WHETH ER SUCH DISTRIBUTION OF ASSETS WOULD CONSTITUTE TRANSFER WITHIN THE MEANING OF SEC TION 2 (47) OF THE INCOME TAX ACT AS FOLLOWS: A PARTNERSHIP FIRM UNDER THE INDIAN PARTNERSHIP AC T, 1932, IS NOT A DISTINCT LEGAL ENTITY APART FROM THE PARTNERS CONSTITUTING I T AND EQUALLY IN LAW THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN T HE PARTNERSHIP ASSETS AND WHEN ONE TALKS OF THE FIRM'S PROPERTY OR FIRM'S ASS ETS ALL THAT IS MEANT IS PROPERTY OR ASSETS IN WHICH ALL PARTNERS HAVE A JOI NT OR COMMON INTEREST. IF THAT BE THE POSITION, IT IS DIFFICULT TO ACCEPT THE CONTENTION THAT UPON DISSOLUTION THE FIRM'S RIGHTS IN THE PARTNERSHIP AS SETS ARE EXTINGUISHED. THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN T HE PARTNERSHIP ASSETS BUT IT IS THE PARTNERS WHO OWN JOINTLY OR IN COMMON THE ASSETS OF THE PARTNERSHIP AND, THEREFORE, THE CONSEQUENCE OF THE DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TO THE PARTNERS WHICH FLOWS UPO N DISSOLUTION AFTER DISCHARGE OF LIABILITIES IS NOTHING BUT A MUTUAL AD JUSTMENT OF RIGHTS BETWEEN THE PARTNERS AND THERE IS NO QUESTION OF ANY EXTING UISHMENT OF THE FIRM'S RIGHTS IN THE PARTNERSHIP ASSETS AMOUNTING TO A TRA NSFER OF ASSETS WITHIN THE MEANING OF S. 2(47) OF THE ACT. FURTHER, IT IS NECE SSARY THAT THE SALE OR TRANSFER OF ASSETS MUST BE BY THE ASSESSEE TO A PER SON. NOW EVERY DISSOLUTION MUST IN POINT OF TIME BE ANTERIOR TO TH E ACTUAL DISTRIBUTION, DIVISION OR ALLOTMENT OF THE ASSETS THAT TAKES PLAC E 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 DISCHARGE OF DEBTS AND LIABILITIES AND THE REUPON DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TAKES PLACE INTER S E BETWEEN THE ERSTWHILE PARTNERS BY WAY OF MUTUAL ADJUSTMENT OF RIGHTS BETW EEN THEM. THE ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 7 DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TO TH E ERSTWHILE PARTNERS, IS NOT DONE BY THE DISSOLVED FIRM. IN THIS SENSE THERE IS NO TRANSFER OF ASSETS BY THE ASSESSEE (DISSOLVED FIRM) TO ANY PERSON. 11. TO PLUG THIS LOOPHOLE THE FINANCE ACT, 1987, BR OUGHT ON THE STATUTE BOOK A NEW SUB-SECTION (4) IN SECTION 45 OF THE ACT, W.E.F. 1.4.1988, WHICH READS AS FOLLOWS: 'THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION O F A FIRM OR OTHER ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMP ANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGEABLE TO TAX A S THE INCOME OF THE FIRM, ASSOCIATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND, FOR THE PURPOSES OF SECTION 48 , THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER.' BEFORE THE INTRODUCTION OF SUB-SECTION (4) TO SECTI ON 45, THERE WAS CLAUSE (II) OF SECTION 47 WHICH READ AS UNDER : 'ANY DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUT ION OF A FIRM, BODY OF INDIVIDUALS OR OTHER ASSOCIATION OF PERSONS.' SEC.47 OF THE ACT LAYS DOWN WHICH ARE THE TRANSACTI ONS NOT REGARDED AS TRANSFER FOR THE PURPOSE OF SEC.45 OF THE ACT. 12. THE FINANCE ACT, 1987, WITH EFFECT FROM APRIL 1 , 1988, OMITTED THIS CLAUSE, THE EFFECT OF WHICH WAS THAT DISTRIBUTION OF CAPITA L ASSETS ON THE DISSOLUTION OF A FIRM WOULD W.E.F. 1-4-1988 BE REGARDED AS 'TRANSFER '. THEREFORE, INSTEAD OF AMENDING SECTION 2(47) , THE AMENDMENT WAS CARRIED OUT BY THE FINANCE ACT, 1987, BY OMITTING SECTION 47(II) , THE RESULT OF WHICH WAS THAT DISTRIBUTION OF CAPI TAL ASSETS ON THE DISSOLUTION OF A FIRM WAS REGARDED AS 'TRANS FER'. THE EFFECT WAS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAP ITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRM'S INCOME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND FOR THE P URPOSES OF COMPUTATION OF CAPITAL GAINS, THE FAIR MARKET VALUE OF THE ASSET O N THE DATE OF TRANSFER WAS DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. 13. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CO MMISSIONER OF INCOME- TAX V. A. N. NAIK ASSOCIATES AND ANOTHER AND RANGAV I REALTORS AND ANOTHER. 265 ITR 346 (BOM) WAS DEALING WITH A CASE OF RECONSTITU TION OF FIRM AND ALLOTMENT OF ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 8 ASSETS TO RETIRING PARTNERS. THE RECONSTITUTION HA D TAKEN PLACE PURSUANT TO A FAMILY ARRANGEMENT. THE CHARGEABILITY TO CAPITAL GAIN TAX IN SUCH CIRCUMSTANCES WAS IN ISSUE BEFORE THE HONBLE COURT. THE COURT DEALT WI TH THE ISSUE AS TO WHAT WOULD BE THE EFFECT OF PARTNERS OF A SUBSISTING PARTNERSH IP DISTRIBUTING ASSETS TO PARTNERS WHO RETIRE FROM THE PARTNERSHIP. DOES THE ASSET OF THE PARTNERSHIP, ON BEING ALLOTTED TO THE RETIRED PARTNER/PARTNERS FALL WITHI N THE EXPRESSION 'OTHERWISE'? THE COURT HELD THAT THE PURPOSE AND OBJECT OF THE ACT O F 1987 WAS TO BRING TO CHARGE OF TAX ARISING ON DISTRIBUTION OF CAPITAL ASSETS OF FIRMS WHICH OTHERWISE WAS NOT SUBJECT TO TAXATION. IF THE LANGUAGE OF SUB-SECTION (4) IS CONSTRUED TO MEAN THAT THE EXPRESSION 'OTHERWISE' HAS TO PARTAKE OF THE NA TURE OF DISSOLUTION OR DEEMED DISSOLUTION, THEN THE VERY OBJECT OF THE AMENDMENT COULD BE DEFEATED BY THE PARTNERS, BY DISTRIBUTING THE ASSETS TO SOME PARTNE RS WHO MAY RETIRE. THE FIRM THEN WOULD NOT BE LIABLE TO BE TAXED THUS DEFEATING THE VERY PURPOSE OF THE AMENDING ACT. THE COURT NOTICED THAT THE POSITION PRIOR TO THE AMENDMENT BY INTRODUCTION OF SEC.45(4) BY THE FINANCE ACT, 1987, WAS THAT THE RE WAS NO TRANSFER OF ASSETS BY THE FIRM TO THE PARTNERS ON DISSOLUTION OR TRANSFER OF ASSETS TO THE RETIRING PARTNER ON RETIREMENT. THE EFFECT WAS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTI ON OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRM'S INCOME IN THE PREVIOUS YEA R IN WHICH THE TRANSFER TOOK PLACE AND FOR THE PURPOSES OF COMPUTATION OF CAPITA L GAINS, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER WOULD BE DEEMED T O BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUED AS A RESULT OF TH E TRANSFER. THEREFORE, IF THE OBJECT OF THE ACT IS SEEN AND THE MISCHIEF IT SEEKS TO AVOID, IT WOULD BE CLEAR THAT THE INTENTION OF PARLIAMENT WAS TO BRING INTO THE T AX NET TRANSACTIONS WHEREBY ASSETS WERE BROUGHT INTO A FIRM OR TAKEN OUT OF THE FIRM. THE ABOVE DECISION IN THE CASE OF COMMISSIONER OF INCOME-TAX V. A. N. NAIK AS SOCIATES AND ANOTHER AND RANGAVI REALTORS AND ANOTHER. 265 ITR 346 (BOM) HOW EVER TREATS DISTRIBUTION OF ASSETS OF THE FIRM TO PARTNERS ON DISSOLUTION OR ON RETIREMENT AS FALLING WITHIN THE AMBIT OF SEC.45(4). 14. IN THE PRESENT CASE, THE ASSESSEE TOOK OVER THE PROJECT WHICH THE FIRM WAS CONSTRUCTING IN HIS INDIVIDUAL CAPACITY. THERE FORE THERE WAS A TRANSFER OF CAPITAL ASSET OF THE FIRM VIZ., WORK-IN-PROGRESS OF THE PROJECT WHICH THE FIRM WAS CARRYING ON. THE TRANSFER TOOK PLACE ON 31.7.2004 AS THE PROJECT WAS TAKEN OVER BY RAMESH R.PARKEH AS ON 31.7.2004. THIS FACT IS A DMITTED BY MR.RAMESH R.PAREKH. THEREFORE, THERE WAS A TRANSFER OF ASSET S BY THE FIRM(DISTRIBUTION OF ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 9 ASSETS OF THE FIRM TO MR.RAMESH R.PAREKH) TO THE PA RTNER ON DISSOLUTION. THE CIT(A) IN OUR VIEW MISDIRECTED HIMSELF BY APPLYING THE RATIO OF THE HONBLE SUPREME COURT IN THE CASE OF SAKTHI TRADING CO. (SU PRA), WHICH DECISION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AT ALL. WE WILL EXPLAIN THIS ASPECT A LITTLE LATER. THE ORDER OF CIT(A) IS THEREFORE REVERSED A ND IT IS HELD THAT THERE WAS A TRANSFER OF A CAPITAL ASSET ON DISSOLUTION OF THE F IRM BY THE FIRM TO ONE OF ITS PARTNERS AND THEREFORE THE CAPITAL GAIN TO THE FIRM ON SUCH TRANSFER HAS TO BE BROUGHT TO TAX. THE MANNER IN WHICH THE CAPITAL GA IN HAS TO BE COMPUTED IS LAID DOWN BY SEC.45(4) OF THE ACT AND IT SAYS THAT THE F AIR MARKET VALUE OF THE CAPITAL ASSET AS ON THE DATE OF TRANSFER WILL BE DEEMED TO BE FULL VALUE OF CONSIDERATION RECEIVED ON TRANSFER. THE FAIR MARKET VALUE OF THE ASSETS OF THE FIRM AS ON THE DATE OF TRANSFER (IN THIS CASE THE DATE OF DISSOLUT ION) HAS TO BE ARRIVED AT. THE VALUE OF THE ASSETS AS PER THE BOOKS OF ACCOUNTS OF THE FIRM WILL BE ITS COST OF ACQUISITION. THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE ON THE DATE OF TRANSFER AND THE COST OF ACQUISITION WILL BE THE CAPITAL GAI N TO THE FIRM. THE MANNER OF COMPUTATION AS DONE BY THE AO IS NOT IN ACCORDANCE WITH LAW. THE ISSUE OF COMPUTATION OF CAPITAL GAIN IS THEREFORE REMANDED T O THE AO FOR FRESH CONSIDERATION AS PER DIRECTIONS GIVEN ABOVE. 15. WE WILL NOW DEAL WITH THE CASE LAWS THAT WERE R ELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US. IN SAKTHI TRAD ING CO. VS. CIT 250 ITR 871 (SC), THE FACTS WERE THAT THE ASSESSEE WHICH WAS A REGISTERED FIRM. AS A RESULT OF THE DEATH OF ONE OUT OF ITS SIX PARTNERS, ON FEBRUA RY 6, 1984, THE FIRM WAS DISSOLVED. IT WAS, HOWEVER, RECONSTITUTED WITH EFFE CT FROM THE NEXT DAY, THAT IS, FEBRUARY 7, 1984, WITH THE REMAINING FIVE PARTNERS. TWO ORDERS OF ASSESSMENTS WERE MADE, ONE FOR THE PERIOD UP TO FEBRUARY 6, 198 4, AND THE OTHER FOR THE PERIOD FROM FEBRUARY 7, 1984 TO MARCH 31, 1984. THE COMMISSIONER OF INCOME-TAX MADE AN ORDER UNDER SECTION 263 OF THE INCOME-TAX A CT, 1961, AS ACCORDING TO HIM THE ASSESSMENT ORDER MADE BY THE INCOME-TAX OFFICER WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE IN VALU ING THE STOCK IN TRADE AS ON FEBRUARY 6, 1984 ON THE BASIS OF COST OR MARKET RAT E, WHICHEVER IS LOWER AS THAT WAS THE USUAL METHOD THE ASSESSEE USED TO ADOPT IN VALUING ITS STOCK. THE COMMISSIONER OF INCOME-TAX RELYING U PON THE DECISION OF THE MADRAS HIGH COURT IN A. L. A. FIRM V. CIT [1976] 10 2 ITR 622 CAME TO THE CONCLUSION THAT THE INCOME-TAX OFFICER OUGHT TO HAV E VALUED THE CLOSING STOCK AT ITS MARKET RATE AS ON FEBRUARY 6, 1984. THUS, SETTING A SIDE THE ASSESSMENT ORDER ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 10 DATED MAY 30, 1984, THE INCOME-TAX OFFICER WAS DIRE CTED TO PASS A FRESH ORDER. THE TRIBUNAL HELD THAT THE QUESTION OF VALUING THE CLOSING STOCK AT THE MARKET VALUE CAN ARISE ONLY ON DISCONTINUANCE OF THE BUSIN ESS AND AS THE BUSINESS OF THE FIRM WAS NEVER DISCONTINUED BUT WAS TAKEN OVER ON S UCCESSION BY ANOTHER FIRM, THE CLOSING STOCK WAS NOT REQUIRED TO BE REVALUED AT TH E MARKET VALUE. THE TRIBUNAL CAME TO THE CONCLUSION THAT IF THE BUSINESS ITSELF IS DISCONTINUED AND THE STOCKS ARE REALISED THEN THE VALUE REALISED WOULD HAVE TO BE S UBSTITUTED FOR THE VALUE GIVEN IN THE ACCOUNTS BUT WHERE THE BUSINESS WAS NOT DISCONT INUED THOUGH THE FIRM WAS DISSOLVED, THE QUESTION OF REALISING THE VALUE OF T HE GOODS DOES NOT ARISE AND THERE WAS NO NECESSITY FOR REVALUING THE CLOSING STOCK. A CCORDING TO THE TRIBUNAL, THERE WAS NO WARRANT FOR REVALUATION OF STOCK IN A CONTIN UING BUSINESS AND THE ORDER OF THE INCOME-TAX OFFICER ACCEPTING THE PROFIT SHOWN BY THE ASSESSEE, ON THE METHOD OF ACCOUNTING REGULARLY FOLLOWED, WAS NOT IN ANY WA Y ERRONEOUS AND DID NOT REQUIRE TO BE REVISED UNDER SECTION 263. ON APPEAL BY THE REVENUE THE HONBLE HIGH COURT REVERSED THE ORDER OF THE TRIBUNAL. ON FURTH ER APPEAL BY THE ASSESSEE THE HONBLE SUPREME COURT RESTORED THE ORDER OF THE TRI BUNAL. THE HONBLE SUPREME COURT IN THE DECISION IN THE CASE OF SAKTHI TRADING CO. (SUPRA) AFTER A REVIEW OF THE CASE-LAW ON VALUATION OF STOCK, FOUND THAT IT HAD E ARLIER DECIDED IN A NUMBER OF CASES THAT, WHAT IS REQUIRED IS CONSISTENCY OF METH OD OF VALUATION. IT HAD LITTLE DIFFICULTY IN DISTINGUISHING A. L. A. FIRM'S CASE [ 1991] 189 ITR 285 (SC), WHICH WAS CONSIDERING THE QUESTION OF VALUATION OF CLOSING ST OCK AT MARKET VALUE IN A CASE, WHERE THERE WAS BOTH 'DISSOLUTION AND ALSO DISCONTI NUANCE OF THE BUSINESS OF THE FIRM', IN THAT THE TWO GROUPS OF PARTNERS STARTED T HEIR OWN INDIVIDUAL BUSINESSES WITH ASSETS AND LIABILITIES TAKEN OVER BY THEM. BUT IN THE CASE BEFORE IT, THE SUPREME COURT POINTED OUT THAT THE TRIBUNAL HAD FOU ND THAT THE BUSINESS WAS CONTINUED BY THE FIVE SURVIVING PARTNERS OF THE FIR M FROM THE NEXT DAY, AFTER THE DEATH OF ONE OF THE SIX PARTNERS, WITHOUT ANY BREAK OR DIS-CONTINUANCE, WHICH IS AN UNCHALLENGED FINDING TAKING THE CASE OUT OF THE RUL E IN A. L. A. FIRM'S CASE [1991] 189 ITR 285 (SC). 16. IN THE PRESENT CASE, HOWEVER THE FIRM STOOD DIS SOLVED FROM 1/7/2004. THOUGH THE DEED DATED 11/9/2004 IS STYLED AS A RET IREMENT DEED, IN EFFECT IT IS A DEED OF DISSOLUTION BECAUSE WHEN ALL EXCEPT ONE PAR TNER RETIRE FROM THE FROM THERE CANNOT IN LAW BE A PARTNERSHIP IN EXISTENCE, BECAUS E FOR A VALID PARTNERSHIP TO BE IN EXISTENCE THERE MUST BE ATLEAST TWO PARTNERS. T HUS AS ON 1/7/2004 THE PARTNERSHIP CEASED TO EXIST AND THE BUSINESS OF THE ERSTWHILE PARTNERSHIP WAS ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 11 CONTINUED BY MR.RAMESH R.PAREKH, IN HIS INDIVIDUAL CAPACITY. IT CANNOT BE THEREFORE SAID THAT THE BUSINESS OF THE FIRM CONTIN UED TO BE CARRIED ON BY THE FIRM. FOR THIS REASON THE DECISION IN THE CASE OF SAKTHI TRADING CO. (SUPRA) WAS NOT APPLICABLE TO THE FACTS OF THE CASE. IN OUR VIEW T HE CIT(A) FELL INTO AN ERROR IN NOT APPRECIATING THE DISTINCTION BETWEEN INDIVIDUAL A ND A FIRM ESPECIALLY IN THE CONTEXT OF INCOME TAX ACT, 1961. AN INDIVIDUAL A ND A FIRM ARE TWO DIFFERENT PERSONS AS FAR AS INCOME TAX ACT, 1961 IS CONCERNED . FOR THE VERY SAME REASON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. MANAGALORE GANESH BEEDI WORKS 265 ITR 658 (KARN) IS ALSO HELD TO BE NOT RELEVANT TO THE PRESENT CASE BEFORE US. AS ALREADY STATED THE UNDI SPUTED FACT IN THE PRESENT CASE IS THAT THE FIRM STOOD DISSOLVED AND THE ASSETS WER E TAKEN OVER BY MR.RAMESH R.PAREKH, ONE OF THE PARTNER OF THE FIRM IN HIS IND IVIDUAL CAPACITY AND THEREFORE THERE WAS A TRANSFER OF CAPITAL ASSET BY THE FIRM T O THE PARTNER BY WAY OF DISTRIBUTION OF ASSETS OF THE FIRM ON DISSOLUTION. THE DECISION IN THE CASE OF CIT VS. MOPED AND MACHINES 281 ITR 52 (M.P.) IS CONTRARY TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF A.N.NAIK & ASSOCIA TES (SUPRA), WHICH IS THE JURISDICTIONAL HIGH COURT. IN THE DECISION IN THE CASE OF A.N.NAIK & ASSOCIATES (SUPRA), THE HONBLE BOMBAY HIGH COURT HAS EXPLAINE D THE REASONS FOR INTRODUCTION OF SEC.45(4) OF THE ACT AND AS TO HOW THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MALABAR FISHERIES (SUPRA) WOULD NO LONG ER BE GOOD LAW. THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. VIJAYALAKSHMI METAL INDUSTRIES 256 ITR 540 (MAD), IS A CASE WHERE THERE WAS NO DISTRIBUTION OF ASSETS OF THE FIRM TO A PARTNER ON DISSOLUTION. WE HAVE A LREADY SEEN THE TERMS OF THE DEED OF RETIREMENT (DISSOLUTION) WHICH CLEARLY PROV IDES FOR TRANSFER OF ASSETS OF THE FIRM TO ONE OF ITS PARTNERS. WE ARE THEREFORE OF T HE VIEW THAT THE SAID DECISION WILL NOT APPLY TO THE FACTS OF THE PRESENT CASE. THE DE CISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TEXSPIN ENGINEERI NG & MANUFACTURING WORKS 263 ITR 345 (BOM) WAS A CASE OF CONVERSION OF A PARTNER SHIP INTO A LIMITING COMPANY. THOSE CASES STAND ON A TOTALLY DIFFERENT FOOTING. WHERE CONVERSION OF A FIRM INTO A LIMITED COMPANY TAKES PLACE UNDER THE PROVISIONS OF COMPANY LAW, SUCH CONVERSION CAN BE CONSTRUED ONLY AS OCCASIONED BY OPERATION OF LAW. SECTION 47(XIII) OF THE INCOME-TAX ACT WOULD EXEMPT SUCH CONVERSION BY TAKE OVER OF THE FIRMS RUNNING BUSINESS WITH ALL ASSETS AND LIABILITIES BY A COMPA NY SUBJECT TO CERTAIN CONDITIONS. IN RAJLAXMI TRADING CO. V. CIT [2001] 250 ITR 581 ( AP) IT WAS HELD THAT SECTION 45(4) PRESCRIBES THE SALE VALUE TO BE ADOPTED AT MA RKET VALUE OF THE ASSETS ON THE DATE OF TRANSFER, SO THAT THE ADOPTION OF BOOK VALU E BY THE PARTIES WOULD BE WRONG ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 12 IN COMPUTATION OF THE FIRM'S INCOME. IT ALSO OBSERV ED THAT THE POSITION OF LAW COULD NOT HAVE BEEN DIFFERENT FOR DETERMINATION OF THE QU ANTUM OF INCOME EVEN WITHOUT SPECIFIC REFERENCE TO MARKET VALUE UNDER SECTION 45 (4), BECAUSE IT IS ON THE BASIS OF THE MARKET VALUE THAT THE REMAINING ASSETS OF TH E FIRM ARE DIVIDED BETWEEN THE PARTNERS. IT WAS SO OBSERVED IN A. L. A. FIRM V. CI T [1991] 189 ITR 285 (SC), WHEN IT REASONED (HEADNOTE) : 'THERE CAN BE NO MANNER OF DOUBT THAT, IN TAKING AC COUNTS FOR PURPOSES OF DISSOLUTION, THE FIRM AND THE PARTNERS, BEING COMME RCIAL MEN, WOULD VALUE THE ASSETS ONLY ON A REAL BASIS AND NOT AT COST OR AT THEIR OTHER VALUE APPEARING IN THE BOOKS. THE REAL RIGHTS OF THE PART NERS CANNOT BE MUTUALLY ADJUSTED ON ANY OTHER BASIS.' 17. THUS THE CASE LAWS RELIED UPON BY THE LEARNED C OUNSEL FOR THE ASSESSEE DOES NOT SUPPORT HIS PLEA. 18. FOR STATISTICAL PURPOSES, GROUND NO.1 IS ALLOWE D. 19. GROUND NO. 1(II) RAISED BY THE REVENUE READS AS FOLLOWS: ON THE FATS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCES OF R S. 9,55,879/- BEING AMOUNT PAID FOR LABOUR CHARGES. 20. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER CALLED UPON THE ASSESSEE TO FURNISH THE DETAILS OF LABOUR CHARGES PAID ALONG WITH THE NAMES AND ADDRESSES AND THE AMOUNT PAID. BASED ON THE DETAILS FURNISHED BY THE ASSESSEE, THE A.O. ISSUED NOTICES UNDER SECTION 133 (6) OF THE ACT, TO SHRI R.P. CHOUHAN (RS. 3,23,208/-) AND M/S. S.M. CONSTRUCTION (RS. 6,32,671/-) TO VERIFY THE GENUINENESS OF THE TRANSACTION. THE SAME WAS RETURN ED UNSERVED BY THE POSTAL AUTHORITIES AS UNCLAIMED. IN THE ABOVE CIRCUMSTANCE S, THE A.O. DISALLOWED A SUM OF RS. 9,55,879/- AND ADDED THE SAME TO THE TOTAL INCO ME OF THE ASSESSEE. 21. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT I T HAD FILED CONFIRMATION FROM THE CONTRACTOR AND THEREFORE, THE A.O. WAS NOT JUSTIFIED IN MAKING THE IMPUGNED DISALLOWANCE. THE ASSESSEE ALSO SUBMITTED THAT IT WAS FOLLOWING COMPLETED PROJECT COMPLETION METHOD OF ACCOUNTING A ND THE PROJECT IN QUESTION WAS NOT COMPLETED DURING THE PREVIOUS YEAR. IT WAS ALSO ARGUED THAT THE EFFECT OF ADDITION WILL ONLY RESULT IN INCREASE IN THE VALUE OF WIP AND IT IS ONLY WHEN THE INCOME IS OFFERED TO TAX IN THE YEAR IN WHICH THE P ROJECT IS COMPLETED, THE DISALLOWANCE OF EXPENSES HAS TO BE MADE. IT WAS SUB MITTED THAT IN THE PRESENT ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 13 ASSESSMENT YEAR, THERE WILL BE THE EFFECT ON THE IN COME OF THE ASSESSEE. THE CIT(A) ACCEPTED THE SUBMISSION MADE BY THE ASSESSEE OBSERVING AS FOLLOWS: HOWEVER I FIND THAT IT REMAINS ONLY ACADEMIC TO DE AL WITH THIS GROUND ON MERITS IN VIEW OF FACT THAT THE PROJECT HAS NOT BEE N COMPLETED DURING THE YEAR AND IS IN PROGRESS. THEREFORE ALL THE COSTS IN CLUDING LABOUR CHARGES INCURRED BY THE ASSESSEE FORMS PART OF THE VALUE OF CLOSING STOCK IN THE BOOKS OF ACCOUNTS. THEREFORE, EVEN IF SOME LABOUR C HARGES ARE HELD TO BE NOT VERIFIABLE, NO ADDITION CAN BE MADE IN THIS CAS E BECAUSE THE VALUATION OF THE CLOSING STOCK SHALL GO DOWN BY THE SAME AMO UNT. IN VIEW OF THIS I AM NOT EXPRESSING ANY OPINION ON GENUINENESS OR OTH ERWISE OF THE LABOUR CHARGES AMOUNTING TO RS. 9,55,879/- AND AM ALSO NOT REMANDING THE MATTER BECAUSE THERE IS NO NEED TO DEAL WITH THE I SSUE OF GENUINENESS OF LABOUR CHARGES IN THE YEAR UNDER CONSIDERATION. THE SAME NEEDS T BE LOOKED INTO IN THE YEAR WHEN THERE IS REVENUE FROM THE PROJECT AND THE DEDUCTION OF COST OF CONSTRUCTION IS CLAIMED BY THE ASSESSEE FOR COMPUTATION OF ITS INCOME. WITH THE ABOVE FINDINGS, I AM INCLINED TO DELETE THE ADDITION OF RS. 9,55,879/- FROM THE INCO ME OF ASSESSEE FOR THE YEAR UNDER CONSIDERATION BECAUSE THE PROJECT HAS NO T BEEN COMPLETED DURING THE YEAR. IN VIEW OF ABOVE THE APPEAL UNDER REFERENCE IS ALLOWED. THE A.O. MAY VERIFY THE LABOUR CHARGES WHILE DEALI NG WITH THE MATTER WHEN THE APPELLANT SHOWS THE PROFIT BASED ON PROJEC T COMPLETION. IT HAS BEEN STATED DURING THE APPELLATE PROCEEDINGS THAT T HEY ARE SHOWING PART COMPLETION DURING A.Y. 2009-10, WHICH MAY BE VERIFI ED. FOR THAT YEAR, LABOUR CHARGES AMONG ALL OTHER EXPENSES WILL BE SUB JECT TO VERIFICATION. UNDER THE CIRCUMSTANCES, ADDITION OF RS. 9,55,879/- ON ACCOUNT NON- VALUABLE LABOUR CHARGES IS DELETED. 22. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVE NUE HAS RAISED GROUND NO. 1(II). 23. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED DE PARTMENTAL REPRESENTATIVE, WHO SUBMITTED THAT THE CIT(A) OUGHT TO HAVE GONE INTO THE GENUINENESS OF THE LABOUR CHARGES. THE LEARNED COUN SEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A). 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN OU R VIEW THE CIT(A) OUGHT TO HAVE RENDERED A FINDING AS TO WHETHER THE LABOUR CHARGES CLAIMED BY THE ITA NO.3053/M/2008 OM NAMAH SHIVAY BUILDERS & DEVELOPERS 14 ASSESSEE WERE TRUE , GENUINE OR NOT. IN THE YEAR IN THE PROJECT IS COMPLETED, IT MAY NOT BE POSSIBLE FOR THE A.O. TO EMBARK UPON AN ENQU IRY AS TO WHETHER LABOUR CHARGES INCURRED FOR AN EARLIER ASSESSMENT YEAR WHI CH HAS ALREADY BEEN CONSIDERED AS PART OF WIP, IS GENUINE OR NOT. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND REMAND THE ISSUE TO THE FILE OF THE CIT(A) FOR FRESH CONSIDERATION TO GIVE A FINDING REGARDING THE GENUINENESS OF THE IMPUGNED E XPENSES. GROUND NO.1(II) IS ALLOWED FOR STATISTICAL PURPOSES. 25. IN THE RESULT, THE APPEAL BY THE REVENUE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF NOVEMBER, 2010. SD. SD. (RAJENDRA SINGH) (N.V. VASUDEAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED THE 10 TH NOVEMBER, 2010. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT, CITY -21, MUMBAI 4. THE CIT(A)-XXI, MUMBAI 5. THE DR C BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI