Sri.M.Ahammedkutty, Malappuram V. The ITO, Tirur

ITA 59/COCH/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7216 (ITAT-COCHIN)
• Duration Of Justice: 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2014
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 15-11-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 10-02-2014
• Court: TRIBUNAL
• Department Lawyers: LATHA V KUMAR
• Assessee Lawyers: K B MOHAMMED KUTTY SR
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Business income; Depreciation; Principle of natural justice; Fair market value
• Section: 2(14); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND CHANDRA POOJ ARI, AM I.T.A. NO.59/COCH/2014 ASSESSMENT YEAR : 2007-08 M. AHAMMEDKUTTY, S/O MOIDEEN, AGED 73 YEARS, RESIDING AT U.P. 3/75, MALIYEKKAL HOUSE, VENGARA POST, MALAPPURAM DISTRICT, MANAGING PARTNER OF DISSOLVED FIRM, M/S. MALIYEKKAL AUDITORIUM, CHELARI, THENHIPALAM, MALAPPURAM. [PAN: AAJFM 8550C] VS. THE INCOME TAX OFFICER, WARD-3, TRIRUR. (ASSESSEE -APPELLANT) (REVENUE-RESPONDEN T) ASSESSEE BY SHRI K.B. MOHAMMED KUTTY, SR. COUNSEL REVENUE BY SMT. LATHA V. KUMAR, JR. DR DATE OF HEARING 14/08/2014 DATE OF PRONOUNCEMENT 19/09/2014 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 19-11-2013 PASSED BY THE LD. CIT(A), KOZHIKOD E FOR THE ASSESSMENT YEAR 2007-08. I.T.A. NO.59 /COCH/2014 2 2. THE FIRST GROUND IS WITH REGARD TO TREATMENT OF INCOME OF RS.18,565/- AS BUSINESS INCOME THOUGH THE ASSESSEE HAD DECLARED THE INCOME AS AGRICULTURAL INCOME. 3. BEFORE US, THE LD. AR SUBMITTED THAT THE ABOVE I NCOME WAS EARNED FROM AGRICULTURAL ACTIVITIES AND HENCE TO BE TREATED AS AGRICULTURAL INCOME. 4. ON THE OTHER HAND, THE LD. DR POINTED OUT THAT B EFORE THE CIT(A), ASSESSEE HAD NOT PRESSED THIS GROUND, AS SU CH IT WAS TO BE DISMISSED. 5. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. A DMITTEDLY, AS SEEN FROM THE ORDER OF THE CIT(A), THE ASSESSEE HAS NOT PRESSED THIS GROUND BEFORE THE CIT(A). BEING SO, THE ASSESSEE C ANNOT HAVE GRIEVANCE ON THIS ISSUE AND ACCORDINGLY, THIS GROUN D IS DISMISSED AS NOT PRESSED. 6. THE NEXT GROUND IS WITH REGARD TO SUSTAINING THE ADDITION OF RS.38,43,623/- AS SHORT TERM CAPITAL GAIN IN THE H ANDS OF THE ASSESSEE. I.T.A. NO.59 /COCH/2014 3 7. THE LD. AR SUBMITTED THAT THE MAIN CONTENTION BE FORE THE AUTHORITIES WAS WITH REGARD TO THE ASSESSMENT OF TH E ASSESSEE FIRM ON ALLEGED CAPITAL GAIN IN RESPECT OF THE SALE OF IMMO VABLE PROPERTY OWNED BY SHRI MOOSAKUTTY P. AND SOLD BY HIM TEN DAYS PRIO R TO THE DISSOLUTION OF THE FIRM. SECTION 45(4) OF THE INCOME TAX ACT H AS NO APPLICATION IN THE MATTER, BECAUSE THE FIRM HAS NOT AT ANY TIME OW NED THE PROPERTY, BUT ONLY USED IT AS A LICENSEE FOR THE PURPOSE OF I TS LETTING OUT THE AUDITORIUM ON DAILY RENT BASIS. THE OWNERSHIP OF T HE LAND AS WELL AS THE BUILDING VESTED WITH THE OWNER OF THE LAND, NAMELY, SHRI MOOSAKUTTY AT ALL TIMES BOTH ON FACTS AND IN LAW. 8. THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER OBSERVED THAT THE LAND AND BUILDING UNDER THE OWNERSHIP OF SHRI MOOSA KUTTY TRANSFERRED TO THE FIRM ON A CONSIDERATION OF RS.6,00,000/- AT THE TIME OF FORMATION OF THE FIRM AND THE LAND IS TRANSFERRED BACK TO SHRI M OOSAKUTTY ON A CONSIDERATION OF RS.6,00,000/-. ACCORDING TO THE L D. AR, THIS WAS AN ADMISSION OF THE FACT THERE WAS BUILDING IN THE LAN D WHEN THE FIRM BEGAN AND THE LAND WAS GIVEN FOR USE. THE LD. AR SUBMITTE D THAT ACCORDING TO THE ASSESSING AUTHORITY, THE TRANSFER OF PROPERTY T O THE FIRM BY SHRI MOOSAKUTTY AT THE TIME OF FORMATION OF THE FIRM AND TRANSFERRED BACK TO SHRI MOOSAKUTTY BY THE FIRM AT THE TIME OF DISSOLUT ION WERE NOT RECORDED I.T.A. NO.59 /COCH/2014 4 ON THE BASIS OF ANY DOCUMENT. THE LD. AR SUBMITTED THAT THIS FINDING CLEARLY SHOWED THAT THE FIRM WAS ALLOWED TO USE THE LAND ONLY AS A LICENSEE FOR WHICH NO REGISTRATION WAS NEEDED. ON THE OTHER HAND, IF THERE WAS REAL TRANSFER OF IMMOVABLE PROPERTY, ACCO RDING TO THE LD. AR, REGISTRATION WAS AN IMPERATIVE LEGAL REQUIREMENT BO TH UNDER THE REGISTRATION ACT AS WELL AS UNDER THE TRANSFER OF P ROPERTY ACT. SO, THE LD. AR SUBMITTED THAT ON THE BASIS OF THIS FINDING ITSELF THE PROVISION U/S. 45(4) WAS NOT ATTRACTED. 9. THE LD. AR REFERRED TO THE DEPOSITION OF THE MAN AGING PARTNER OF THE FIRM AHMEDKUTTY BEFORE THE ASSESSING OFFICER WH ICH IS AS FOLLOWS: ANSWER NO. 10 REGARDING THE OWNERSHIP OF THE BUI LDING AND FROM WHOM THE BUILDING WAS PURCHASED AND THE OWNERSHIP P RIOR TO THE SALE, THE ASSESSEE STATED THAT MOOSAKUTTY WAS THE O WNER OF THE LAND IN WHICH THE SAID BUILDING WAS SITUATED. THEREAFTE R IN 1977 THERE WAS A BUILDING AT THE TIME OF STARTING THE PARTNERS HIP BUSINESS AND THEY HAVE MADE SOME DEVELOPMENTAL WORK FOR THE AUDI TORIUM. THEREFORE, IT WAS CLEAR THAT THERE WAS A BUILDING A S WELL WHEN THE PARTNERSHIP FIRM STARTED IN 1977. 10. THE LD. AR SUBMITTED THAT THE BUILDING TAX RECE IPTS WERE REMITTED IN THE NAME OF SECOND PARTNER SHRI MALIYEKKAL AHMED KUTTY HAJI AND DURING THE PARTNERSHIP PERIOD THE REMITTANCE OF BUI LDING TAX WAS EFFECTED BY THE MANAGING PARTNER SHRI MALIYEKKAL AHAMEDKUTTY HAJI AND THE ISSUANCE OF BUILDING TAX RECEIPT WAS SOMETIMES DONE IN THE NAME OF THE I.T.A. NO.59 /COCH/2014 5 PERSON WHO REMITS THE SAME. ACCORDING TO THE LD. A R, THIS WAS NOT CONCLUSIVE PROOF FOR THE OWNERSHIP OF THE LAND. 11. THE LD. AR DREW OUR ATTENTION TO THE FOLLOWING COMMENTS OF THE CIT(A) IN THIS REGARD: THE AUDITORIUM BUILDING NOW RENAMED LIBERTY HALL HAS BEEN GIVEN A FRESH COST OF PAINT AND HAS NOT UNDERGONE ANY STRUCTURAL CHANGE AFTER TRANSFER. THIS SHOWS THAT THE THERE W AS A BUILDING AT THE TIME OF ENTERING INTO PARTNERSHIP. WHEN IT WAS STATED THAT THERE WAS NO STRUCTURAL CHANGE AFTER T RANSFER, IT WAS AN ADMISSION OF THE FACT THAT THERE WAS A STRUCTUR E ALREADY IN EXISTENCE. 12. THE LD. AR ALSO SUBMITTED THAT THE FOLLOWING OB SERVATION OF THE CIT(A) WAS CONTRARY TO THE PRINCIPLES OF LAW GOVERN ING OWNERSHIP OF LAND: NO PROOF WAS SUBMITTED TO ME DURING HEARING THAT AUDITORIUM WAS EXISTING ON LAND WHEN MOOSAKUTTY TRANSFERRED THE PROPERTY TO THE FIRM FOR RS.60,00,000/-. THIS IMPLIES THAT THE AUDITORIUM WAS BUILT BY THE FIRM AND MOOSAKUTTY CANNOT CLAIM OWNERSHIP OF THE LAND BECAUSE IT HAS SUBMERGED WITH THE AUD ITORIUM WHICH BELONGED TO THE FIRM. 13. ACCORDING TO THE LD. AR THE FIRST PART OF THE A BOVE OBSERVATION WAS CONTRARY TO THE FACTS AS EXPLAINED ABOVE AS IT WAS NOT KNOWN ON WHAT PRINCIPLES OF LAW THE APPELLATE AUTHORITY CAME TO THE CONCLUSION THAT THE OWNERSHIP OF THE LAND CANNOT BE CLAIMED BY SHRI MOOSAKUTTY BECAUSE THE LAND HAS SUBMERGED WITH THE AUDITORIUM WHICH BELONGED TO I.T.A. NO.59 /COCH/2014 6 THE FIRM. ACCORDING TO THE LD. AR, LOOKED UP FROM ANY ANGLE, THIS VIEW WAS INCORRECT. 14. THE LD. AR RELIED ON THE FOLLOWING DECISIONS: I) RATNA TRAYI REALITY SERVICE P. LTD. VS. ITO (20 13) 356 ITR 493(GUJ.) II) SANDEEP SHARMA AND OTHERS VS. SAI CHHAYA AUTO LINK (P) LTD. (2012 KHC 2533) (M.P.) 15. THE CIT(A) STATED THAT THE DISSOLUTION U/S. 40 OF THE INDIAN PARTNERSHIP ACT, THOUGH CAN BE WITH THE CONSENT OF THE PARTNERS OR IN ACCORDANCE WITH THE CONTRACT BETWEEN THE PARTNERS THE TERM ORALLY IS NOT USED. HOWEVER, THE LD. AR SUBMITTED THAT IT I S A WELL KNOWN PROPOSITION THAT BY VIRTUE OF SEC. 40 OF THE ACT TH AT A PARTNERSHIP OR ITS DISSOLUTION NEED NOT BE A REGISTERED ONE UNDER THE GENERAL LAW. 16. ACCORDING TO THE LD. AR, WITH REGARD TO THE NON -DISCLOSURE OF THE REPORT OF THE VILLAGE OFFICER DATED 15-12-2010 AND THE REPORT OF THE SUB- REGISTRAR DATED 08-12-2010, THE CIT(A) TOOK THE STA ND THAT THERE WAS NO WRITTEN REQUEST SEEKING FOR COPIES OF THE SAME WHIC H VIEW WAS NOT CORRECT. FURTHER, THE CIT(A) OBSERVED THAT THE ASS ESSEE WAS SERVED WITH NOTICE U/S. 148 TO FURNISH RETURN AND THEN SOUGHT T O KNOW THE REASONS WHICH NECESSITATED THE ISSUE OF NOTICE. ACCORDING TO THE LD. AR, THE ASSESSING OFFICER HAS STATED THAT ASSESSEE HAD REQU ESTED BY LETTER DATED I.T.A. NO.59 /COCH/2014 7 23-04-2010 TO TREAT THE RETURN ALREADY FILED AS ONE IN RESPONSE TO NOTICE U/S. 148 OF THE ACT. THE LD. AR SUBMITTED THAT AT A NY RATE IN THE NOTICE, THERE WAS NO REFERENCE TO THE REPORTS OF THE VILLAG E OFFICER OR SUB REGISTRAR AND THE ASSESSEE IS ENTITLED TO KNOW ALL MATTERS GATHERED BY WAY OF ENQUIRY IN THE PROCESS OF ASSESSMENT AS THE SAME WAS USED AGAINST HIM. THE LD. AR FURTHER SUBMITTED THAT WIT HOUT ANY REQUEST, MATERIALS GATHERED FROM OTHER SOURCES SHOULD HAVE B EEN DISCLOSED AS THE FAILURE TO DO SO VITIATES THE ASSESSMENT PROCEE DINGS IN THE LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF GULZAR SINGH VS. SUB-DIVISIONAL MAGISTRATE (1999 KHC 1719) (SC). THE LD. AR ALSO SUBMITTED THAT SINCE THE ASSESSEE CAME TO KNOW ABOU T THE RELIANCE OF SUCH REPORTS ONLY FROM THE ASSESSMENT ORDER, IT WAS NOT POSSIBLE FOR THE ASSESSEE TO MAKE A REQUEST OF COPIES THEREOF. 17. ACCORDING TO THE LD. AR THE ASSESSING OFFICER N OTICED THAT THE ASSESSEE DISCLOSED RENTAL INCOME FROM AUDITORIUM AS BUSINESS INCOME WHICH COMES TO RS.2,17,000/-. HOWEVER, ACCORDING T O THE LD. AR, THE ASSESSING OFFICER TREATED THE INCOME AS INCOME FROM HOUSE PROPERTY. FURTHER, IT WAS SUBMITTED THAT IN ALL THE PREVIOUS YEARS, THE ASSESSEE RETURNED THE INCOME FROM AUDITORIUM AS BUSINESS INC OME, BUT THE ASSESSING OFFICER HAD NOT RAISED ANY OBJECTION. AC CORDING TO THE LD. AR, THE AUDITORIUM WAS RENTED OUT ON DAILY BASIS TO DIF FERENT CUSTOMERS AND I.T.A. NO.59 /COCH/2014 8 THERE WAS NO LEASE AGREEMENT TO TREAT THE INCOME AS INCOME FROM HOUSE PROPERTY. HOWEVER, THIS CONTENTION OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER ACCORDING TO THE ASSESSING OFFICE R, THE DECISIONS RELIED ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE , WHERE THE AUDITORIUM WAS RENTED OUT ON DAILY BASIS WITH FURNITURE AND OT HER EQUIPMENTS. 18. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT TH E PRIME OBJECT OF THE ASSESSEE FIRM WAS TO LET OUT PROPERTY. THEREFO RE THE OBJECTION OF THE ASSESSEE IN THIS REGARD WAS WITHOUT MERIT. THE LD. DR RELIED ON THE FOLLOWING DECISIONS: I) SHAMBU INVESTMENTS (P) LTD. VS. CIT (263 ITR 14 3) (SC). II) CIT VS. CHENNAI PROPERTIES AND INVESTMENT LTD. (266 ITR 685)(MAD.) 20. THE LD. DR SUBMITTED THAT IN GROUND NO. 3, THE ASSESSEE HAD OBJECTED TO THE ASSESSMENT OF SHORT TERM CAPITAL GA INS AMOUNTING TO RS. 38,43,623/- ON DISSOLUTION OF THE FIRM, SINCE ACCOR DING TO THE ASSESSEE THE AUDITORIUM OWNED BY ONE OF THE PARTNERS SHRI MO OSAKUTTY HAJI WAS SOLD BY HIM AS HIS OWN PROPERTY TEN DAYS BEFORE THE DISSOLUTION OF THE PARTNERSHIP. HOWEVER, ACCORDING TO THE LD. DR, THI S ARGUMENT OF THE ASSESSEE WAS NOT CORRECT SINCE AS PER PAGE 3, SL. N O. 5, OF THE PARTNERSHIP DEED DATED 17/2/1997 EXECUTED BY SHRI P . MOOSAKUTTY, S/O MUHAMMED HAJI, PARANGODATH KAPPIL HOUSE, VENGARA P. O., MALAPPURAM DISTRICT, SHRI M. AHMMEDKUTTY HAJI (THE MANAGING PA RTNER) AND FOUR I.T.A. NO.59 /COCH/2014 9 OTHERS, THE LAND REQUIRED FOR THE AUDITORIUM WILL B E CONTRIBUTED BY THE PARTNER SHRI MOOSAKUTTY. ACCORDING TO THE LD. DR T HERE WAS NO MENTION ABOUT THE AUDITORIUM BUILDING IN THE PARTNERSHIP DE ED AND THE FIRM DISSOLVED WITHOUT ANY DOCUMENT OF DISSOLUTION DURIN G THE F.Y. 2006-07. THE LAND WITH BUILDING NO. MP-2/2A, WAS SOLD VIDE D OCUMENT NO. 2096 OF 2006 DATED 20-12-2006. IT WAS CLAIMED THAT THE BUILDING AND LAND WERE OWNED BY SHRI MOOSAKUTTY. ACCORDING TO THE LD . DR, THE ASSESSING OFFICER AND THE CIT(A) DID NOT ACCEPT THIS CLAIM AN D ASSESSED THE PROFIT ON SALE OF LAND AND BUILDING IN THE HANDS OF THE AS SESSEE FIRM. IN THE REMAND REPORT, IT WAS STATED THAT THE BUILDING TAX RECORDS OF MOONIYOOR PANCHAYATH SHOWS THAT THE BUILDING TAX RECEIPTS WER E REMITTED IN THE NAME OF 2 ND PARTNER SHRI MALIYEKKAL AHMEDKUTTY HAJI. AS PER T HE RECORDS OF MOONIYOOR GRAMA PANCHAYATH WHEREIN THE P ROPERTY IS SITUATED, THE BUILDING NO. MP-2/2A WAS IN THE OWNER SHIP OF MALIYEKKAL MOHAMMEDKUTTY, S/OF AHAMMEDKUTTY HAJI FROM 17/08/20 01 TO 20/03/2007. 21. FROM THE ABOVE DETAILS, THE LD. DR SUBMITTED TH AT IT WAS CLEAR THAT THE LAND OWNED BY SHRI MOOSAKUTTY WAS BROUGHT INTO THE FIRM AS HIS CAPITAL CONTRIBUTION AND THAT THE BUILDING MALIYEK KAL AUDITORIUM WHICH WAS SOLD VIDE DOCUMENT NO. 2096 OF 2006 DATED 20/12 /2006 WAS NOT OWNED BY SHRI MOOSAKUTTY. THE LD. DR FURTHER SUBMI TTED THAT THE LAND I.T.A. NO.59 /COCH/2014 10 AND BUILDING TOGETHER WAS THE PROPERTY OF THE FIRM, AND HENCE SHORT TERM CAPITAL GAINS HAS BEEN RIGHTLY ASSESSED IN THE HANDS OF THE FIRM. FOR THIS REASON, HE SUBMITTED THAT THIS GROUND OF T HE ASSESSEE IS DEVOID OF ANY MERIT. 22. REGARDING GROUND NOS. 5 & 6, WHEREIN IT WAS ST ATED THAT THE REFUSAL TO SUPPLY COPIES OF THE DOCUMENTS WAS A CLE AR VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AND THE MARKET VALUE OF THE PROPERTY REPORTED BY THE INCOME TAX INSPECTOR AS ARBITRARY A ND THE BASIS THEREOF NOT KNOWN TO THE ASSESSEE, THE LD. DR SUBMITTED THE ABOVE ARGUMENTS WERE NOT CORRECT SINCE THE ASSESSEE FAILED TO FURNI SH ANY RECORDS REGARDING THE TRANSFER OF ASSETS AT THE TIME OF DIS SOLUTION OF THE FIRM, THE VALUE OF LAND WAS ADOPTED ON THE BASIS OF REPORTS F ROM THE VILLAGE OFFICER AND THE SUB REGISTRAR. HOWEVER, THE LD. DR SUBMITT ED THAT SINCE THE FAIR VALUE OF THE AUDITORIUM BUILDING WAS NOT A SUB JECT MATTER COMING WITHIN THE PURVIEW OF THE VILLAGE OFFICER, THE VALU E OF THE BUILDING WAS ADOPTED ON THE BASIS OF INSPECTORS REPORT, SINCE T HE ASSESSEE DID NOT FURNISH ANY DETAILS THEREOF. IN VIEW OF THE ABOVE FACTS, THE LD. DR SUBMITTED THAT THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) MAY BE UPHELD. I.T.A. NO.59 /COCH/2014 11 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. IN THIS CASE, AS SEEN FROM THE RECORD, ORIGINALLY THE LAND WAS OWNED BY ONE OF THE PARTNERS SHRI MOOSAKUTTY HAJI AND WAS USED BY T HE FIRM AS HIS CAPITAL. LATER THE FIRM HAS CONSTRUCTED THE BUILDI NG WHICH IS EVIDENT FROM THE APPEARING OF THE BUILDING AS AN ASSET IN T HE BALANCE SHEET, A COPY OF WHICH WAS FILED BY THE LD. DR WHICH IS KEPT ON RECORD AND ON THE SAID BUILDING, THE ASSESSEE CLAIMED DEPRECIATIO N. THE MAIN CONTENTION OF THE ASSESSEE IS THAT LAND AND BUILDIN G BELONGED TO SHRI MOOSAKUTTY AND BEING SO, THERE IS NO QUESTION OF TR ANSFER OF LAND AND BUILDING BACK TO THE PARTNER, SHRI MOOSAKUTTY AND H E IS THE OWNER OF LAND AND BUILDING. HOWEVER THE ARGUMENT OF THE ASS ESSEES COUNSEL IS CONTRARY TO THE FACTS BROUGHT ON RECORD. 24. THE LD. COUNSEL OF THE ASSESSEE HAS GONE THROUG H THE ORDER OF THE LOWER AUTHORITIES TO SUGGEST THAT THE DEPARTMEN T HAD ACCEPTED THE BUILDING AS OWNED BY THE PARTNER SHRI MOOSAKUTTY. THIS ARGUMENT OF THE ASSESSEES COUNSEL IS TOTALLY CONTRARY TO THE FACTS . THE LOWER AUTHORITIES CATEGORICALLY MENTIONED THAT THE ASSESSEE HAS NOT P LACED ANY EVIDENCE TO SUGGEST THAT THE BUILDING WAS CONSTRUCTED BY SHR I MOOSAKUTTY AND NOT BY THE FIRM. FURTHER, IT IS ALSO BROUGHT ON RECORD BY THE LOWER AUTHORITIES THAT THE BUILDING TAX WAS PAID BY ONE O F THE PARTNERS, SHRI MALIYEKKAL AHMEDKUTTY HAJI. IT IS ALSO EVIDENT FRO M THE REMAND REPORT I.T.A. NO.59 /COCH/2014 12 FURNISHED BY THE ASSESSING OFFICER TO THE CIT(A) TH AT THE BUILDING NO. MP-2/2A WHICH IS SITUATED IN MOONNIYUR GRAMA PANCHA YATH, WAS IN THE OWNERSHIP OF MALIYEKKAL MOHAMMEDKUTTY, S/O AHAMEDKU TTY HAJI, FROM 17/08/2001 TO 20/03/2007. BEFORE US ALSO, THE ASS ESSEE FAILED TO SUBSTANTIATE THE FACT THAT THE BUILDING DOES NOT BE LONG TO THE ASSESSEE FIRM. WE FIND THAT THERE IS NO IOTA OF EVIDENCE TO SUGGEST THAT THE BUILDING WAS OWNED BY SHRI MOOSAKUTTY. BEING SO, WE ARE NOT IN A POSITION TO HOLD THAT THE BUILDING BELONGED TO SHRI MOOSAKUTTY. 25. THE OTHER ARGUMENT OF THE ASSESSEE IS THAT THE PROVISIONS OF SECTION 45(4) CANNOT BE INVOKED. 26. WE HAVE HEARD THE RIVAL SUBMISSIONS. TO APPRE CIATE THE RIVAL CONTENTIONS WE HAVE TO REFER TO CERTAIN PROVISIONS OF THE IT ACT, 1961. SEC. 45(1) OF THE ACT BRINGS TO TAX ANY CAPITAL GAI N THAT ACCRUES OR ARISES ON TRANSFER OF A CAPITAL ASSET. THE CAPITAL GAIN IS CHARGED TO TAX IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TAKES PLACE. SE C. 2(47) DEFINES WHAT IS TRANSFER AND IT READS AS FOLLOWS : (47) 'TRANSFER', IN RELATION TO A CAPITAL ASSET, I NCLUDES, (I) THE SALE, EXCHANGE OR RELINQUISHMENT OF THE ASS ET; OR (II) THE EXTINGUISHMENT OF ANY RIGHTS THEREIN; OR (III) THE COMPULSORY ACQUISITION THEREOF UNDER ANY LAW; OR I.T.A. NO.59 /COCH/2014 13 (IV) IN A CASE WHERE THE ASSET IS CONVERTED BY THE OWNER THEREOF INTO, OR IS TREATED BY HIM AS, STOCK-IN-TRA DE OF A BUSINESS CARRIED ON BY HIM, SUCH CONVERSION OR TREA TMENT; (V) ANY TRANSACTION INVOLVING THE ALLOWING OF THE P OSSESSION OF ANY IMMOVABLE PROPERTY TO BE TAKEN OR RETAINED I N PART PERFORMANCE OF A CONTRACT OF THE NATURE REFERRED TO IN S. 53A OF THE TRANSFER OF PROPERTY ACT, 1882 (4 OF 188 2); OR (VI) ANY TRANSACTION (WHETHER BY WAY OF BECOMING A MEMBER OF OR ACQUIRING SHARES IN, A COOPERATIVE SOC IETY, COMPANY OR OTHER AOP OR BY WAY OF ANY AGREEMENT OR ANY ARRANGEMENT OR IN ANY OTHER MANNER WHATSOEVER) WHIC H HAS THE EFFECT OF TRANSFERRING, OR ENABLING THE ENJ OYMENT OF, ANY IMMOVABLE PROPERTY. EXPLANATION : FOR THE PURPOSES OF SUB-CLS. (V) AND ( VI), 'IMMOVABLE PROPERTY' SHALL HAVE THE SAME MEANING AS IN CL. (D) OF S.269UA. 27. CAPITAL ASSET HAS BEEN DEFINED IN S. 2(14) O F THE ACT, AS MEANING 'PROPERTY' OF ANY KIND HELD BY THE ASSESSEE, WHETHE R OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION. THE ABOVE EXHAUSTI VE DEFINITION IS SUBJECT TO THE FOLLOWING EXCLUSIONS LIKE STOCK-IN-T RADE, CONSUMABLE STORES OR RAW MATERIAL HELD FOR THE PURPOSE OF BUSINESS OR PROFESSION, PERSONAL EFFECTS, AGRICULTURAL LAND IN INDIA, CERTAIN GOLD B ONDS, SPECIAL BEARER BONDS AND GOLD DEPOSIT BONDS. 28. THE SHARE OR INTEREST OF A PARTNER IN THE PAR TNERSHIP AND ITS ASSETS WOULD BE PROPERTY AND, THEREFORE, A CAPITAL ASSET W ITHIN THE MEANING OF THE AFORESAID DEFINITION. TO THIS EXTENT, THERE CAN BE NO DOUBT. THE NEXT I.T.A. NO.59 /COCH/2014 14 QUESTION IS AS TO WHETHER IT CAN BE SAID THAT THERE WAS A TRANSFER OF CAPITAL ASSET ON DISSOLUTION OF THE FIRM IN FAVOUR OF THE PARTNER SO AS TO ATTRACT A CHARGE UNDER S. 45 OF THE ACT. 29. A LOOK AT HOW FORMATION AND DISSOLUTION OF P ARTNERSHIP WAS USED AS A DEVICE TO EVADE TAX ON CAPITAL GAINS TO CONVER T AN ASSET HELD INDIVIDUALLY INTO AN ASSET OF THE FIRM IN WHICH THE INDIVIDUAL IS A PARTNER AND CONVERSION OF CAPITAL ASSETS INTO INDIVIDUAL AS SETS ON DISSOLUTION OR OTHERWISE, IS NECESSARY. 30. PARTNERSHIP AS A FORM OF CARRYING ON BUSINESS EVOLVED SO THAT TWO OR MORE PERSONS CAN TO JOIN TOGETHER BY POOLING RES OURCES IN THE FORM OF CAPITAL AND EXPERTISE. ONE OF THE DEVICES USED BY A SSESSEE TO EVADE TAX ON CAPITAL GAIN WAS TO CONVERT IN ASSET HELD INDIVI DUALLY INTO ASSET OF THE FIRM IN WHICH THE INDIVIDUAL IS A PARTNER. SIMILARL Y, PARTNERSHIP ASSETS WERE CONVERTED INTO INDIVIDUAL ASSETS ON DISSOLUTIO N OR OTHERWISE. 31. SUCH INTRODUCTION OF CAPITAL ASSET AS CAPITAL CONTRIBUTION BY A PARTNER UP TO 1ST APRIL, 1988 DID NOT RESULT IN INC IDENCE OF CAPITAL GAIN. IT WAS SO HELD BY THE HONBLE SUPREME COURT IN THE CAS E OF SUNIL SIDDHARTHBHAI VS. CIT (1985) 49 CTR (SC) 172 : (198 5) 156 ITR 509 (SC). THE HONBLE SUPREME COURT HELD THAT UNDER THE IT ACT, 1961, I.T.A. NO.59 /COCH/2014 15 WHERE A PARTNER OF A FIRM MAKES OVER CAPITAL ASSETS WHICH ARE HELD BY HIM TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPITAL, THERE IS A TRANSFER OF A CAPITAL ASSET WITHIN THE TERMS OF S. 45 OF THE ACT, BECAUSE AN EXCLUSIVE INTEREST OF THE PARTNER IN PERSONAL ASSETS IS REDUC ED, ON THEIR ENTRY INTO THE FIRM, INTO A SHARE INTEREST. ON SUCH INTRODUCTI ON OF CAPITAL THE PARTNERS CAPITAL ACCOUNT IS CREDITED WITH THE MARK ET VALUE OF THE PROPERTY. SUCH ENTRY DOES NOT REPRESENT THE TRUE VA LUE OF CONSIDERATION. IT IS A NOTIONAL VALUE ONLY, INTENDED TO BE TAKEN I NTO ACCOUNT AT THE TIME OF DETERMINING THE VALUE OF THE PARTNERS SHARE IN THE NET PARTNERSHIP ASSETS ON THE DATE OF DISSOLUTION OR ON HIS RETIREM ENT, A SHARE WHICH WILL DEPEND UPON DEDUCTION OF THE LIABILITIES AND PRIOR CHARGES EXISTING ON THE DATE OF DISSOLUTION OR RETIREMENT. IT IS NOT PO SSIBLE TO PREDICATE BEFORE HAND WHAT WILL BE THE POSITION IN TERMS OF M ONETARY VALUE OF A PARTNERS SHARE ON THAT DATE. AT THAT TIME WHEN THE PARTNER TRANSFERS HIS PERSONAL ASSET TO THE PARTNERSHIP FIRM, THERE CAN B E NO RECKONING OF THE LIABILITIES AND LOSSES WHICH THE FIRM MAY SUFFER IN THE YEARS TO COME. ALL THAT LIES WITHIN THE WOMB OF THE FUTURE. IT IS IMPO SSIBLE TO CONCEIVE OF EVALUATING THE CONSIDERATION ACQUIRED BY THE PARTNE R WHEN HE BRINGS HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM WHEN NEITH ER CAN THE DATE OF DISSOLUTION OR RETIREMENT BE ENVISAGED NOR CAN THER E BE ANY ASCERTAINMENT OF LIABILITIES AND PRIOR CHARGES WHIC H MAY NOT HAVE EVEN ARISEN YET. THEREFORE, THE CONSIDERATION WHICH A PA RTNER ACQUIRES ON I.T.A. NO.59 /COCH/2014 16 MAKING OVER HIS PERSONAL ASSET TO THE FIRM AS HIS C ONTRIBUTION TO ITS CAPITAL CANNOT FALL WITHIN THE TERMS OF S. 48 OF TH E ACT. AND AS THAT PROVISION IS FUNDAMENTAL TO THE COMPUTATION MACHINE RY INCORPORATED IN THE SCHEME RELATING TO THE DETERMINATION OF THE CHA RGE PROVIDED IN S. 45, SUCH A CASE MUST BE REGARDED AS FALLING OUTSIDE THE SCOPE OF CAPITAL GAINS TAXATION ALTOGETHER. IN COMING TO THE ABOVE C ONCLUSION THE HONBLE COURT RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN ADDANKI NARAYANAPPA VS. BHASKARA KRISHNAPPA AIR 1966 SC 130 0. THE HONBLE SUPREME COURT IN THE SAID DECISION EXPLAINED THE NA TURE OF PARTNERSHIP AND THE RIGHT OF THE PARTNERS OVER THE ASSETS OF TH E PARTNERSHIP AS FOLLOWS (P. 1303 OF AIR) : '.....WHATEVER MAY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY THE PARTNERS WHEN THE PARTNERSHIP IS FORMED O R WHICH MAY BE ACQUIRED IN THE COURSE OF THE BUSINESS OF THE PARTN ERSHIP IT BECOMES THE PROPERTY OF THE FIRM AND WHAT A PARTNER IS ENTI TLED TO IS HIS SHARE OF PROFITS, IF ANY, ACCRUING TO THE PARTNERSHIP FRO M THE REALISATION OF THIS PROPERTY, AND UPON DISSOLUTION OF THE PARTNERS HIP TO A SHARE IN THE MONEY REPRESENTING THE VALUE OF THE PROPERTY. N O DOUBT, SINCE A FIRM HAS NO LEGAL EXISTENCE, THE PARTNERSHIP PROPER TY WILL VEST IN, ALL THE PARTNERS, AND IN THAT SENSE EVERY PARTNER WAS A N INTEREST IN THE PROPERTY OF THE PARTNERSHIP. DURING THE SUBSISTENCE OF THE PARTNERSHIP, HOWEVER, NO PARTNER CAN DEAL WITH ANY PORTION OF THE PROPERTY AS HIS OWN. NOR CAN HE ASSIGN HIS INTEREST IN A SPECIFIC ITEM OF THE PARTNERSHIP PROPERTY TO ANYONE. HIS RIGHT IS TO OBTAIN SUCH PROFITS, IF ANY, AS FALL TO HIS SHARE FROM TIME TO TIME AND UPON THE DISSOLUTION OF THE FIRM TO L SHARE IN THE ASSETS OF THE FIRM WHICH REMAIN AFTER SATISFYING THE LIABILITIES SET OUT IN CL. (A) AND SUB CLS. (I), (II) AND (III) OF CL. (B) OF S. 48.' THE POSITION WAS LATER EXPLAINED IN THE SAME JUDGME NT AS FOLLOWS: (P. 1304) : I.T.A. NO.59 /COCH/2014 17 'THE WHOLE CONCEPT OF PARTNERSHIP IS TO ENTRY UPON A JOINT VENTURE AND FOR THAT PURPOSE TO BRING IN AS CAPITAL MONEY OR EV EN PROPERTY INCLUDING IMMOVABLE PROPERTY. ONCE THAT IS DONE WH ATEVER IS BROUGHT IN WOULD CEASE TO BE THE EXCLUSIVE PROPERTY OF THE PERSON WHO BROUGHT IT IN. IT WOULD BE THE TRADING ASSET OF THE PARTNER SHIP IN WHICH ALL THE PARTNERS WOULD HAVE INTEREST IN PROPORTION TO THEIR SHARE IN THE JOINT VENTURE OF THE BUSINESS OF PARTNERSHIP. THE PERSON WHO BROUGHT IT IN WOULD, THEREFORE, NOT BE ABLE TO CLAIM OR EXERCISE ANY EXCLUSIVE RIGHT OVER ANY PROPERTY WHICH HE HAS BROUGHT IN, MUCH LES S OVER ANY OTHER PARTNERSHIP PROPERTY. HE WOULD NOT BE ABLE TO EXERC ISE HIS RIGHT EVEN TO THE EXTENT OF HIS SHARE IN THE BUSINESS OF THE P ARTNERSHIP. AS ALREADY STATED, HIS RIGHT DURING THE SUBSISTENCE OF THE PAR TNERSHIP IS TO GET HIS SHARE OF PROFITS FROM TIME TO TIME AS MAY BE AGREED UPON AMONG THE PARTNERS AND AFTER THE DISSOLUTION OF THE PARTNERSH IP OR WITH HIS RETIREMENT FROM PARTNERSHIP OF THE, OF HIS SHARE IN THE NET PARTNERSHIP ASSETS AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER A DEDUCTION OF LIABILITIES AND PRIOR CHARGES.' 32. PARLIAMENT WITH THE AVOWED OBJECT OF BLOCKI NG THIS ESCAPE ROUTE FOR AVOIDING CAPITAL GAINS TAX BY THE FINANCE ACT, 1987, INTRODUCED SUB-S. (3) TO S. 45 W.E.F. 1ST APRIL, 1988. THE EFFECT OF THIS WAS THAT THE PROFITS AND GAINS ARISING FROM THE TRANSFER OF A CAPITAL AS SET BY A PARTNER TO A FIRM ARE CHARGEABLE AS THE PARTNERS INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND THE AMOUNT RECORD ED IN THE BOOKS OF ACCOUNT OF THE FIRM, SHALL BE DEEMED TO BE THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER OF THE CAPITAL ASSET. 33. IN THE CASE OF DISSOLUTION WHERE PARTNERS AR E ALLOTTED CAPITAL ASSETS OF THE FIRM, IT WAS HELD THAT THERE WAS NO TRANSFER . IN MALABAR FISHERIES CO. VS. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC), THE HONBLE SUPREME COURT HAS EXPLAINED THE NATURE OF D ISTRIBUTION OF ASSETS I.T.A. NO.59 /COCH/2014 18 OF A PARTNERSHIP ON DISSOLUTION AMONGST ITS PARTNER S AND AS TO WHETHER SUCH DISTRIBUTION OF ASSETS WOULD CONSTITUTE TRANSF ER WITHIN THE MEANING OF S. 2(47) OF THE IT ACT AS FOLLOWS : 'A PARTNERSHIP FIRM UNDER THE INDIAN PARTNERSHIP AC T, 1932 IS NOT A DISTINCT LEGAL ENTITY APART FROM THE PARTNERS CONST ITUTING IT AND EQUALLY IN LAW THE FIRM AS SUCH HAS NO SEPARATE RIG HTS OF ITS OWN IN THE PARTNERSHIP ASSETS AND WHEN ONE TALKS OF THE FI RMS PROPERTY OR FIRMS ASSETS ALL THAT IS MEANT IS PROPERTY OR ASSE TS IN WHICH ALL PARTNERS HAVE A JOINT OR COMMON INTEREST. IF THAT B E THE POSITION IT IS DIFFICULT TO ACCEPT THE CONTENTION THAT UPON DIS SOLUTION THE FIRMS RIGHTS IN THE PARTNERSHIP ASSETS ARE EXTINGUISHED. THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN THE PARTNERSHI P ASSETS BUT IT IS THE PARTNERS WHO OWN JOINTLY BY OR IN COMMON THE AS SETS OF THE PARTNERSHIP AND, THEREFORE, THE CONSEQUENCE OF THE DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TO THE PARTNERS WHI CH FLOWS UPON DISSOLUTION AFTER DISCHARGE OF LIABILITIES IS NOTHI NG BUT A MUTUAL ADJUSTMENT OF RIGHTS BETWEEN THE PARTNERS AND THERE IS NO QUESTION OF ANY EXTINGUISHMENT OF THE FIRMS RIGHTS IN THE P ARTNERSHIP ASSETS AMOUNTING TO A TRANSFER OF ASSETS WITHIN THE MEANIN G OF S. 2(47) OF THE ACT. FURTHER, IT IS NECESSARY THAT THE SALE OR TRANSFER OF ASSETS MUST BE BY THE ASSESSEE TO A PERSON. NOW EVERY DISS OLUTION MUST IN POINT OF TIME BE ANTERIOR TO THE ACTUAL DISTRIBU TION, DIVISION OR ALLOTMENT OF THE ASSETS THAT TAKES PLACE AFTER MAKI NG UP ACCOUNTS AND DISCHARGING THE DEBTS AND LIABILITIES DUE BY TH E FIRM. UPON DISSOLUTION THE FIRM CEASES TO EXIST, THEN FOLLOWS THE MAKING UP OF ACCOUNTS, THEN THE DISCHARGE OF DEBTS AND LIABILITI ES AND THEREUPON DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TAKES PLACE INTER SE BETWEEN THE ERSTWHILE PARTNERS BY WAY OF MUTUAL ADJ USTMENT OF RIGHTS BETWEEN THEM. THE DISTRIBUTION, DIVISION OR ALLOTMENT OF ASSETS TO THE ERSTWHILE PARTNERS, IS NOT DONE BY TH E DISSOLVED FIRM. IN THIS SENSE THERE IS NO TRANSFER OF ASSETS BY THE ASSESSEE (DISSOLVED FIRM) TO ANY PERSON.' 34. TO PLUG THIS LOOPHOLE THE FINANCE ACT, 1987, BROUGHT ON THE STATUTE BOOK A NEW SUB-S. (4) IN S. 45 OF THE ACT, W.E.F. 1 ST APRIL, 1988, WHICH READS AS FOLLOWS : I.T.A. NO.59 /COCH/2014 19 'THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOL UTION OF A FIRM OR OTHER AOP OR BOI (NOT BEING A COMPANY OR A CO-OPERA TIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGEABLE TO TAX AS THE INC OME OF THE FIRM, ASSOCIATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND, FOR THE PURPOSES OF S. 48, THE FAI R MARKET VALUE OF THE ASSET ON THE DATE OF SUCH TRANSFER SHALL BE DEE MED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUIN G AS A RESULT OF THE TRANSFER.' 35. BEFORE THE INTRODUCTION OF SUB-S. (4) TO S. 4 5, THERE WAS CL. (II) OF S. 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 TRANSACT IONS NOT REGARDED AS TRANSFER FOR THE PURPOSE OF S. 45 OF THE ACT. 36. THE FINANCE ACT, 1987, W.E.F. 1ST APRIL, 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. 1ST APRIL, 1988 BE REGARDED AS 'TRANSFER'. THEREFORE, INSTEAD OF AMENDING S. 2(47) , THE AMENDMENT WAS CARRIED OUT BY THE FINANCE ACT, 1987, BY OMITTING S . 47(II), THE RESULT OF WHICH WAS THAT DISTRIBUTION OF CAPITAL ASSETS ON TH E DISSOLUTION OF A FIRM WAS REGARDED AS 'TRANSFER'. THE EFFECT WAS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A F IRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRMS INCOME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND FOR THE PURPOSES OF I.T.A. NO.59 /COCH/2014 20 COMPUTATION OF CAPITAL GAINS, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER WAS DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. 37. THUS PARLIAMENT BROUGHT INTO THE TAX NET TRANS ACTIONS WHEREBY ASSETS WERE BROUGHT INTO A FIRM OR TAKEN OUT OF THE FIRM. THUS S. 45(4) COVERS CASES WHERE THERE IS DISSOLUTI ON OF THE FIRM AND DISTRIBUTION OF ASSETS OF THE FIRM BY THE FIRM TO I TS PARTNERS. 38. DISSOLUTION AND RETIREMENT ARE TWO DIFFERENT CONCEPTS. IN THE CASE OF RETIREMENT, THE RETIRING PARTNER GOES OUT OF THE FIRM BUT THE REMAINING PARTNERS CONTINUE TO CARRY ON THE BUSINESS OF THE P ARTNERSHIP AS A FIRM. IN THE CASE OF DISSOLUTION, THE FIRM NO LONGER EXIS TS AND THE DISSOLUTION IS BETWEEN ALL THE PARTNERS OF THE FIRM. 39. IN THE CASE OF RETIREMENT OF A PARTNER THERE COULD BE TWO SITUATIONS. IN THE FIRST SITUATION THERE CAN BE A R ETIREMENT OF A PARTNER FROM THE FIRM AND THE FIRM MIGHT CONTINUE ITS EXIST ENCE AND THE RETIRING PARTNER MIGHT BE GIVEN ASSETS IN LIEU OF AMOUNTS PA YABLE TO HIM ON RETIREMENT. THIS COULD BE DONE EITHER ON THE BASIS OF SETTLING AMOUNTS STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT OR ON A LUMP SUM BASIS. THERE COULD BE A SECOND SITUATION WHERE THE RETIRING PARTNER IS PAID I.T.A. NO.59 /COCH/2014 21 CONSIDERATION IN CASH AND HE GIVES UP HIS RIGHTS AS PARTNER INCLUDING HIS RIGHTS OVER THE ASSETS OF THE PARTNERSHIP. THIS AGA IN CAN BE DONE EITHER ON THE BASIS OF SETTLING AMOUNTS STANDING TO THE CR EDIT OF HIS CAPITAL ACCOUNT OR ON A LUMP SUM BASIS. 40. IN THE FIRST SITUATION I.E., RETIREMENT OF A PARTNER FROM THE FIRM AND THE FIRM CONTINUING ITS EXISTENCE AND THE RETIRING PARTNER IS GIVEN ASSETS IN LIEU OF AMOUNTS PAYABLE TO HIM ON RETIREMENT, IT HAS BEEN HELD BY THE HONBLE BOMBAY HIGH COURT TO BE COVERED BY THE PROV ISIONS OF S. 45(4) OF THE ACT VIZ., A TRANSFER GIVING RISE TO A CAPITA L GAIN. THE HONBLE BOMBAY HIGH COURT, IN THE CASE OF CIT VS. A.N. NAIK ASSOCIATES (2004) 187 CTR (BOM) 162 : (2004) 265 ITR 346 (BOM) WAS DE ALING WITH A CASE OF RECONSTITUTION OF FIRM AND ALLOTMENT OF ASS ETS TO RETIRING PARTNERS. THE RECONSTITUTION HAD TAKEN PLACE PURSUANT TO A FA MILY ARRANGEMENT. THE CHARGEABILITY TO CAPITAL GAIN TAX IN SUCH CIRCU MSTANCES WAS IN ISSUE BEFORE THE HONBLE COURT. THE COURT DEALT WITH THE ISSUE AS TO WHAT WOULD BE THE EFFECT OF PARTNERS OF A SUBSISTING PAR TNERSHIP DISTRIBUTING ASSETS TO PARTNERS WHO RETIRE FROM THE PARTNERSHIP. DOES THE ASSET OF THE PARTNERSHIP, ON BEING ALLOTTED TO THE RETIRED PARTN ER/PARTNERS FALL WITHIN THE EXPRESSION 'OTHERWISE' ? THE COURT HELD THAT TH E PURPOSE AND OBJECT OF THE ACT OF 1987 WAS TO BRING TO CHARGE OF TAX AR ISING ON DISTRIBUTION OF CAPITAL ASSETS OF FIRMS WHICH OTHERWISE WAS NOT SUB JECT TO TAXATION. IF I.T.A. NO.59 /COCH/2014 22 THE LANGUAGE OF SUB-S. (4) IS CONSTRUED TO MEAN THA T THE EXPRESSION 'OTHERWISE' HAS TO PARTAKE OF THE NATURE OF DISSOLU TION OR DEEMED DISSOLUTION, THEN THE VERY OBJECT OF THE AMENDMENT COULD BE DEFEATED BY THE PARTNERS BY DISTRIBUTING THE ASSETS TO SOME PARTNERS WHO MAY RETIRE. THE FIRM THEN WOULD NOT BE LIABLE TO BE TAX ED THUS DEFEATING THE VERY PURPOSE OF THE AMENDING ACT. THE COURT NOTICED THAT THE POSITION PRIOR TO THE AMENDMENT BY INTRODUCTION OF S. 45(4) BY THE FINANCE ACT, 1987, WAS THAT THERE WAS NO TRANSFER OF ASSETS BY T HE FIRM TO THE PARTNERS ON DISSOLUTION OR TRANSFER OF ASSETS TO TH E RETIRING PARTNER ON RETIREMENT. THE EFFECT WAS THAT THE PROFITS OR GAIN S ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRMS INCOME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND FOR THE PURPOS ES OF COMPUTATION OF CAPITAL GAINS, THE FAIR MARKET VALUE OF THE ASSET O N THE DATE OF TRANSFER WOULD BE DEEMED TO BE THE FULL VALUE OF THE CONSIDE RATION RECEIVED OR ACCRUED AS A RESULT OF THE TRANSFER. THEREFORE, IF THE OBJECT OF THE ACT IS SEEN AND THE MISCHIEF IT SEEKS TO AVOID, IT WOULD B E CLEAR THAT THE INTENTION OF PARLIAMENT WAS TO BRING INTO THE TAX N ET TRANSACTIONS WHEREBY ASSETS WERE BROUGHT INTO A FIRM OR TAKEN OU T OF THE FIRM. 41. PRIOR TO THE AFORESAID DECISION, CASES WHERE ON RETIREMENT, PROPERTY WAS ALLOTTED TO A PARTNER BY THE FIRM IN LIEU OF AM OUNTS PAYABLE TO HIM I.T.A. NO.59 /COCH/2014 23 WERE NOT SUBJECTED TO CAPITAL GAINS TAX. IN THAT SC ENARIO THE ASSESSEES TOOK A STAND THAT RETIREMENT IS ALSO ONE FORM OF DI SSOLUTION OF THE FIRM BECAUSE DISTRIBUTION OF ASSETS ON RETIREMENT WAS NO T REGARDED AS A TRANSFER UNDER S. 47(II) OF THE ACT. THIS WAS NOT A CCEPTED BY HONBLE BOMBAY HIGH COURT AND THEY HELD IN THE CASE OF N.A. MODY (SUPRA)] THAT A CLEAR DISTINCTION EXISTS BETWEEN RETIREMENT OF A PARTNER FROM A FIRM AND DISSOLUTION OF THE FIRM. IN THE CASE OF RETIREM ENT OF A PARTNER FROM THE FIRM IT IS ONLY THAT PARTNER WHO GOES OUT OF TH E FIRM AND THE REMAINING PARTNERS CONTINUE TO CARRY ON THE BUSINES S OF THE PARTNERSHIP AS A FIRM, WHILE IN THE CASE OF DISSOLUTION OF THE FIRM THE FIRM AS SUCH NO MORE EXISTS AND THE DISSOLUTION IS BETWEEN ALL THE PARTNERS OF THE FIRM. THE ABOVE DECISION IN THE CASE OF A.N. NAIK ASSOCIA TES (SUPRA) HOWEVER, TREATS DISTRIBUTION OF ASSETS OF THE FIRM TO PARTNE RS ON DISSOLUTION OR ON RETIREMENT AS FALLING WITHIN THE AMBIT OF S. 45(4). 42. THE SITUATION IN WHICH, WE ARE CONCERNED IN T HIS APPEAL IS A CASE WHERE ON DISSOLUTION, A PARTNER SHRI MOOSAKUTTY TOO K OVER THE CAPITAL ASSET OF THE ASSESSEE-FIRM AND THE FIRM WAS THE OWN ER OF THE BUILDING AS HELD IN THE EARLIER PARA. IT IS PERTINENT TO ME NTION HERE THAT THE LEGAL OWNERSHIP OF THE LANDED BUILDING WAS NOT TRAN SFERRED IN THE NAME OF THE ASSESSEE-FIRM BUT IT IS A SETTLED POSITION B Y NOW THAT SUCH A TRANSFER OF LEGAL TITLE IN THE NAME OF THE ASSESSEE -FIRM IS ESSENTIALLY TO HOLD THAT THE ASSESSEE-FIRM IS THE OWNER OF THOSE A SSETS IF SUCH ASSETS I.T.A. NO.59 /COCH/2014 24 ARE TRANSFERRED BY A PARTNER OF THE FIRM. MORE SO, THE LANDED BUILDING HAS ALREADY APPEARED IN THE BALANCE SHEET OF THE AS SESSEE-FIRM AND THE ASSESSEE HAS BEEN CLAMING DEPRECIATION ON THAT BUILDING. 43. AS PER THE PROVISIONS OF SEC. 45(4), THE PROFIT S AND GAINS ARISING FROM THE TRANSFER OF CAPITAL ASSET BY WAY OF DISTRI BUTION OF CAPITAL ASSETS ON DISSOLUTION OF THE FIRM, AND THE ASSESSEE -FIRM BEING THE OWNER OF THE CAPITAL ASSET AND THE BUILDING WAS TAK EN OVER BY ONE OF THE PARTNERS, SHRI MOOSAKUTTY, THIS TRANSACTION IS LIABLE FOR CAPITAL GAINS TAX AND THE LOWER AUTHORITIES ARE JUSTIFIED IN TREA TING THE TRANSACTION AS LIABLE FOR SHORT TERM CAPITAL GAINS TAX IN THE HAND S OF THE FIRM, M/S. MALIYEKKAL AUDITORIUM. HOWEVER, WE ARE NOT IN AGREE MENT WITH THE QUANTIFICATION OF THE CAPITAL GAINS BY THE ASSESSIN G OFFICER WHILE INVOKING THE PROVISIONS OF SEC. 45(4) R.W.S. 48 OF THE I.T. ACT. THUS, WHEN THE CAPITAL GAIN IS COMPUTED, 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 ACCRUED AS A RESULT OF TH E TRANSACTION. FROM THE READING OF THE PROVISIONS OF SEC. 45(4), IT IS CLEAR THAT IN CASE OF TRANSFER OF CAPITAL ASSETS ON DISSOLUTION OF FIRM, INCOME HAS TO BE WORKED OUT ON THE BASIS OF THE FAIR MARKET VALUE OF THE CAPITAL ASSET ON THE DATE OF TRANSFER. I.T.A. NO.59 /COCH/2014 25 44. IN THE LIGHT OF SUCH SPECIFIC PROVISION OF SEC. 45(4) OF THE I.T. ACT, THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE FAIR MARKET VALUE OF THE BUILDING WHICH WAS TRANSFERRED TO THE PARTNER, SHRI MOOSAKUTTY. THE ASSESSING OFFICER IN THIS CASE HAS CONSIDERED THE FAIR MARKET VALUE OF RS. 4.3 CRORES ON THE BASIS OF THE REPORT OF THE INSPECTOR OF INCOME TAX WHO IS NOT A TECHNICAL PER SON TO DETERMINE THE FAIR MARKET VALUE OF THE BUILDING. ACCORDINGLY , WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTI ON TO DETERMINE THE FAIR MARKET VALUE OF THE BUILDING ON THE BASIS OF THE RE PORT OF THE DVO AND DECIDE ACCORDINGLY. 45. REGARDING THE CLAIM OF THE ASSESSEE THAT RENT AL INCOME FROM AUDITORIUM IS TO BE ASSESSED AS BUSINESS INCOME INS TEAD OF INCOME FROM HOUSE PROPERTY, WE ARE OF THE OPINION THAT WHE N THE ASSESSEE EXPLOITED THE COMMERCIAL BUILDING BY LETTING OUT, T HEN THAT INCOME DERIVED FROM LETTING OUT IS TO BE ASSESSED AS INCOM E FROM HOUSE PROPERTY ONLY AS HELD BY THE SUPREME COURT IN THE C ASE OF SHAMBHU INVESTMENTS PVT. LTD., CITED SUPRA. BEING SO, WE D O NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND THE SAME I S CONFIRMED. 46. REGARDING CLAIM OF THE ASSESSEE THAT THE ASSESS EE HAS NOT GOT PROPER OPPORTUNITY OF HEARING BEFORE THE LOWER AUTH ORITIES, THE I.T.A. NO.59 /COCH/2014 26 ASSESSING OFFICER HAS GIVEN AMPLE OPPORTUNITY OF HE ARING TO THE ASSESSEE. AS SEEN FROM THE ORDER OF THE ASSESSING OFFICER, THE CASE WAS HEARD BY HIM ON 17-06-2010, 11/8/2010, 24/11/20 10, 13/12/2010 AND 17/12/2010 AND THE FINAL ORDER WAS PASSED ON 20 /12/2010. SIMILARLY, THE CIT(A) HEARD THE APPEAL ON 20-03-201 2, 24-08-2012, 21- 08-2013, 27-08-2013 AND 19-11-2013 AND THE FINAL O RDER WAS PASSED ON THE SAME DAY. IF THE ASSESSEE HAD ANY GRIEVANCE, IT SHOULD HAVE RAISED THE ISSUE BEFORE THE LOWER AUTHORITIES AT TH E APPROPRIATE TIME. FURTHER, EVEN THE CIT(A) CALLED FOR REMAND REPORT F ROM THE ASSESSING OFFICER AND THE COPY OF IT WAS GIVEN TO THE ASSESSE ES COUNSEL ON 21- 08-2013 AND THE WRITTEN COMMENT WAS FILED BY THE AS SESSEE ON 27-08- 2013. HAVING FAILED TO RAISE THE OBJECTION REGARDIN G DENIAL OF OPPORTUNITY, AT THIS STAGE, THE ASSESSEE CANNOT PLE AD BEFORE US. BEING SO, THE PLEA OF THE ASSESSEE IS WITHOUT ANY MERIT. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS DISMISSED. 47. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED ACCORDINGLY ON 19-09-20 14. SD/- SD/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACC OUNTANT MEMBER I.T.A. NO.59 /COCH/2014 27 PLACE: KOCHI DATED: 19TH SEPTEMBER, 2014 GJ COPY TO: 1. M. AHAMMEDKUTTY, S/O MOIDEEN, AGED 73 YEARS, RES IDING AT U.P. 3/75, MALIYEKKAL HOUSE, VENGARA POST, MALAPPURAM DI STRICT, MANAGING PARTNER OF DISSOLVED FIRM, M/S. MALIYEKKAL AUDITORI UM, CHELARI, THENHIPALAM, MALAPPURAM DISTRICT. 2. THE INCOME TAX OFFICER, WARD-3, TIRUR. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS), KOZHIKO DE. 4. THE COMMISSIONER OF INCOME-TAX, KOZHIKODE. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSSITANT REGISTRAR) I.T.A.T., COCHIN