THE ASSTT. CIT, ANAND Circle, ANAND V. M/S ARBUSH ESTATE CORPORATION, ANAND

ITA 354/AHD/2003

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0411 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 27-10-2009
• Assessment Year: 1998-1999
• Appeal Filed On: 24-01-2003
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJEEV AGARWAL
• Keywords: Capital asset; Capital Gains
• Section: 2(14)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD A BENCH (BEFORE S/SHRI R.V.EASWAR, VICE-PRESIDENT AND P.K. BANSAL, ACCOUNTANT MEMBER) ITA NO.354/AHD/2003 [ASSTT.YEAR : 1998-1999] ACIT, ANAND CIRCLE ANAND. VS. ARBUDA ESTATE CORPORATION KASHIDHAM, MAYFAIR ROAD ANAND. REVENUE BY : SHRI RAJEEV AGARWAL ASSESSEE BY : SHRI ASEEM THAKKAR O R D E R PER R.V.EASWAR, VICE-PRESIDENT : THE ONLY GROUND TAKEN BY THE DEPARTMENT IN THIS APPEAL IS AS FOLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,79 ,49,012/- MADE BY THE AO BEING LONG TERM CAPITAL GAIN U/S.45 OF THE IT AC T EVEN THOUGH THE ASSESSEES CASE CLEARLY FALLS WITHIN THE AMBIT OF P ROVISIONS OF SECTION 45(4) OF THE INCOME-TAX ACT SINCE THE ASSESSEE FIRM HAS DISTRIBUTED THE REVALUATION RESERVE TO THE EXITING AND RETIRING PAR TNERS DURING THE YEAR UNDER CONSIDERATION. 2. THE ASSESSEE IS A PARTNERSHIP FIRM. WE ARE CONCE RNED WITH THE AY 1998- 99. WHILE COMPLETING THE ASSESSMENT THE ASSESSING O FFICER OBSERVED THAT THE LAND AND BUILDING BELONGING TO THE FIRM WERE REVALU ED AND A REVALUATION RESERVE ACCOUNT HAD BEEN CREATED WHICH WAS SHOWN IN THE LIA BILITIES SIDE OF THE BALANCE SHEET IN THE FINANCIAL YEAR ENDING 31-3-1996. IN TH E FINANCIAL YEAR RELEVANT FOR THE AY 1998-99 THE REVALUATION RESERVE WAS CREDITED TO THE PARTNERS CAPITAL ACCOUNTS. FROM THE ACCOUNTS, THE ASSESSING OFFICER FURTHER NOTED THAT REVALUATION RESERVE OF RS.1,79,47,012 HAD BEEN DIST RIBUTED TO THE PARTNERS IN THE FOLLOWING MANNER: SIDDARTH D. PATEL : 43,07,283 DAXABEN D. PATEL : 43,07,283 PAGE - 2 ITA NO.354/AHD/2003 -2- DILIPBHAI S. PATEL : 86,14,566/- M.F.PATEL : 1,79,940/- V.M.PATEL : 1,79,940/- B.M.PATEL : 1,79,940/- V.B.PATEL : 1,79,940/- THE ASSESSING OFFICER ON THE ABOVE FACTS PROPOSED T O INVOKE SECTION 45(4) OF THE INCOME TAX ACT AND TAX THE ASSESSEE-FIRM ON THE CAPITAL GAINS OF RS.1,79,47,012. THE OBJECTIONS OF THE ASSESSEE BASE D ON SEVERAL AUTHORITIES WERE REJECTED AND IT WAS HELD THAT CAPITAL GAINS OF RS.1,79,47,012 WERE ASSESSABLE U/S.45(4). 3. ON APPEAL, THE CIT(A) DELETED THE CAPITAL GAINS FROM THE ASSESSMENT HOLDING THAT SECTION 45(4) WAS NOT ATTRACTED TO THE CASE. HENCE THE PRESENT APPEAL BY THE REVENUE. 4. THE CONTENTIONS OF BOTH THE SIDES HAVE BEEN CONS IDERED. UNDER SECTION 45(4) WHICH WAS INTRODUCED BY THE FINANCE ACT, 1987 W.E.F. 1-4-1988, THE DISTRIBUTION OF CAPITAL ASSETS BY A FIRM ON DISSOLU TION OR OTHERWISE WILL BE TREATED AS A TRANSFER BY THE FIRM AND THE FAIR MARK ET VALUE OF THE ASSETS AS ON THE DATE OF TRANSFER SHALL BE DEEMED TO BE THE FULL VAL UE OF THE CONSIDERATION RECEIVED BY THE FIRM FOR PURPOSES OF COMPUTING THE CAPITAL GAINS IN ACCORDANCE WITH SECTION 48. THE FIRST QUESTION TO BE CONSIDERE D IS: WAS THERE A DISTRIBUTION OF CAPITAL ASSETS? THE SUB-SECTION REFERS TO CAPIT AL ASSETS AND NOT TO THE APPRECIATED MARKET VALUE OF THE CAPITAL ASSETS WHIC H IS TAKEN TO THE REVALUATION RESERVE ACCOUNT. THERE HAS TO BE A DISTRIBUTION OF CAPITAL ASSETS IN SPECIE IN ORDER THAT THE SUB-SECTION IS ATTRACTED. IN THE PRE SENT CASE, THERE IS NO DISTRIBUTION OF CAPITAL ASSETS IN SPECIE. THE LAND AND BUILDING CONTINUED TO REMAIN WITH THE FIRM EVEN AFTER THE CREDITING OF TH E REVALUATION RESERVE TO THE CAPITAL ACCOUNTS OF THE PARTNERS. THIS IS PROVED BY PAGE 28 OF THE PAPER BOOK WHICH IS THE FIXED ASSETS SCHEDULE OF THE FIRM AS O N 31-3-1998. THE LAND AND BUILDING ARE SHOWN THEREIN AS THE FIRST TWO ITEMS. THUS THERE IS NO DISTRIBUTION OF ANY CAPITAL ASSET. IT IS ONLY THE APPRECIATION I N THE MARKET VALUE OF THE LAND PAGE - 3 ITA NO.354/AHD/2003 -3- AND BUILDING THAT WAS CREDITED TO A REVALUATION RES ERVE ACCOUNT AND WAS THEN TRANSFERRED TO THE PARTNERS CAPITAL ACCOUNT. THE R EVALUATION RESERVE ACCOUNT WAS CREATED IN THE PREVIOUS YEAR RELEVANT TO THE AY 1996-97 (Y.E. 31-3-1996). THAT WAS CREDITED TO THE ACCOUNTS OF THE PARTNERS D URING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. THE R ESERVE ACCOUNT IS NOT A CAPITAL ASSET WITHIN THE MEANING OF SECTION 2(14) O F THE ACT. IT APPEARS IN THE LIABILITIES SIDE OF THE BALANCE SHEET. WHAT ACTUALL Y HAPPENS WHEN AN ASSET IS REVALUED ON THE BASIS OF THE CURRENT MARKET VALUE I S THAT THE ASSET ACCOUNT IS DEBITED WITH THE INCREASE IN THE VALUE AND THE REVA LUATION RESERVE ACCOUNT IS CREDITED. THE ASSET AS WELL AS THE APPRECIATION IN ITS MARKET VALUE BELONG TO THE PARTNERS SINCE UNDER THE LAW OF PARTNERSHIP THE FIR M IS ONLY A COMPENDIOUS NAME TO DESCRIBE THE PARTNERS AND THEY ARE THE REAL OWNERS OF THE ASSETS BELONGING TO THE FIRM. WHEN THE APPRECIATED VALUE O F THE ASSET IS CREDITED TO THE ACCOUNT OF THE PARTNER, HE ONLY GETS HIS SHARE IN T HE ASSETS WHICH HE IS ENTITLED TO IN LAW. THE POSITION HOWEVER WOULD BE DIFFERENT UNDER SECTION 45(4) WHEN A CAPITAL ASSET IN SPECIE IS GIVEN TO THE PARTNER BY WAY OF DISTRIBUTION ON DISSOLUTION OR OTHERWISE BECAUSE THE ACT TREATS THE FIRM AND THE PARTNERS AS DIFFERENT TAXABLE ENTITIES. 5. THE REVENUE HAS DRAWN OUR ATTENTION TO THE JUDGM ENT OF THE BOMBAY HIGH COURT IN CIT V A.N. NAIK ASSOCIATES (2004) 265 ITR 346. THAT WAS A CASE OF DISTRIBUTION OF PARTNERSHIP ASSETS THEMSELVES IN ACCORDANCE WITH THE FAMILY ARRANGEMENT, AND NOT A CASE OF CREDITING THE ACCOUN TS OF THE PARTNERS WITH THE APPRECIATION IN THE MARKET VALUE OF THE ASSETS. THI S JUDGMENT IS THEREFORE NOT AN AUTHORITY FOR WHAT THE REVENUE CONTENDS IN THE CASE BEFORE US. IN CIT V SOUTHERN TUBES (2008) 306 ITR 216, A JUDGMENT OF TH E KERALA HIGH COURT CITED BY THE REVENUE, ONE OF THE PARTNERS TOOK OVER THE LAND AND FACTORY BUILDING ON DISSOLUTION OF THE FIRM AND CONTINUED THE BUSINE SS AND THIS WAS HELD TO BE A TRANSFER IN TERMS OF SECTION 45(4). AGAIN THIS IS N OT A CASE OF CREDITING THE PARTNERS ACCOUNT WITH THE APPRECIATED VALUE OF THE CAPITAL ASSET BUT WAS A CASE OF HANDING OVER THE ASSET IN SPECIE TO THE CONTINUI NG PARTNER. A CASE OF PAGE - 4 ITA NO.354/AHD/2003 -4- CREDITING THE ACCOUNT OF THE PARTNER WITH THE REVAL UATION RESERVE ACCOUNT CAME UP BEFORE THE MUMBAI BENCH OF THE TRIBUNAL IN GIRIS H TEXTILE INDUSTRIES V ACIT (2006) 10 SOT 474. HEREIN, THE FIRM HELD TENAN CY RIGHTS OF THE PREMISES AND THE SAME WAS REVALUED AND A REVALUATION RESERVE ACCOUNT WAS CREATED, WHICH WAS THEN CREDITED TO THE PARTNERS ACCOUNT. I T WAS HELD THAT NO CAPITAL GAINS AROSE TO THE FIRM U/S.45(4) ON THE FOOTING, I NTER ALIA, THAT THERE WAS NO PHYSICAL DISTRIBUTION OF A CAPITAL ASSET (TENANCY R IGHT). ON SIMILAR FACTS, IT WAS HELD BY THE MUMBAI BENCH OF THE TRIBUNAL IN ITO V S MT. PARU D. DAVE (2008) 110 ITD 410 THAT CREDITING THE PARTNERS ACCOUNTS WITH THE REVALUATION RESERVE, WITHOUT ACTUAL DISTRIBUTION OF THE ASSETS, DOES NOT GIVE RISE TO CAPITAL GAINS U/S.45(4). 6. RESPECTFULLY FOLLOWING THE ABOVE ORDERS OF THE T RIBUNAL AND HAVING REGARD TO THE FACTS OF THE PRESENT CASE WHERE THERE WAS NO DISTRIBUTION OF ANY CAPITAL ASSET IN SPECIE TO THE PARTNERS, WE UPHOLD THE DECISION OF THE CIT(A) THAT SECTION 45(4) IS NOT ATTRACTED AND DISMISS THE APPE AL FILED BY THE REVENUE WITH NO ORDER AS TO COSTS. ORDER PRONOUNCED IN THE OPEN COURT 20 TH NOVEMBER, 2009. SD/- SD/- (P.K. BANSAL) ACCOUNTANT MEMBER (R.V.EASWAR) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 20-11-2009 COPY OF THE ORDER FORWARDED TO: 1) : ASSESSEE 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR, ITAT, AHMEDABAD