The Hindustan Lungi Company, CHENNAI V. ACIT, Vellore

ITA 618/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8052 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 11-01-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 16-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: A.S.SRIRAMAN
• Keywords: Capital asset; Fair market value; Capital Gains
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 22

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B (SMC) BENCH : CHENNAI . , ! [BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT M EMBER ] ./I.T.A. NO. 618/MDS/2016 / ASSESSMENT YEAR : 2007-2008 M/S. THE HINDUSTAN LUNGI COMPANY, 104,GANGADARASWAMY MADALAYA STREET, PICHANOOR, GUDIYATHAM. [PAN AAAFH 2361P] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I, VELLORE ( '# / APPELLANT) ( $%'# /RESPONDENT) / APPELLANT BY : SHRI. A.S. SRIRAMAN, ADVOCATE /RESPONDENT BY : SHRI.ASHISH TRIPATHI, IRS, JCIT. /DATE OF HEARING : 11-01-2017 ! /DATE OF PRONOUNCEMENT : 25-01-2017 & / O R D E R IN THIS APPEAL FILED BY THE ASSESSEE, IT HAS ALTO GETHER RAISED EIGHT GROUNDS OF WHICH GROUNDS NO.1, 7 & 8 ARE GEN ERAL IN NATURE NEEDING NO SPECIFIC ADJUDICATION. ITA NO.618/MDS/2016. :- 2 -: 2. VIDE ITS GROUNDS 2 TO 5, ASSESSEE IS AGGRIEVED ON A N ADDITION OF RS.10,78,576/- MADE UNDER THE HEAD INCOME FROM C APITAL GAINS APPLYING U/S.45(4) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 3. FACTS APROPOS ARE THAT ASSESSEE A FIRM HAD FILED RE TURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR DECLARING I NCOME OF E18,14,131/-. ASSESSEE FIRM CONSISTED OF TWO PARTNE RS AND WERE DOING THE BUSINESS OF MANUFACTURING AND SELLING OF LUNGIE S. ON 21.12.2006, THE FIRM WAS DISSOLVED. ONE OF ITS PARTNER SHRI. S. TAMILSEVAN TOOK OVER THE BUSINESS OF THE FIRM ALONGWITH ITS ASSETS AND L IABILITIES AS APPEARING IN THE BOOKS OF THE FIRM, ON THE DATE OF DISSOLUTIO N. LD. ASSESSING OFFICER NOTED THAT ASSESSEE WAS HAVING TWO VACANT I MMOVABLE PROPERTY SITES AND ON DISSOLUTION SHRI. S. TAMILSEV AN HAD TAKEN OVER THESE PROPERTIES ALSO. AS PER LD. ASSESSING OFFICE R SEC.45(4) OF THE ACT STOOD ATTRACTED. PROPERTIES MEASURED 2919 SQ.FT AN D 2851 SQ.FT AND WERE ASSIGNED A FAIR MARKET VALUE E12,57,860/- AT T HE RATE OF RS.218 PER SQ.FT. AFTER DEDUCTING COST OF E1,79,284/- SHOW N IN THE BOOKS CAPITAL GAINS OF E10,78,576/- WAS WORKED OUT AND TA XED. 4. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE LD. COMMISSIONER OF INCOME TAX (APPEALS). ARGUMENT OF T HE ASSESSEE WAS ITA NO.618/MDS/2016. :- 3 -: THAT DISSOLUTION OF THE PARTNERSHIP WAS A RESULT OF A FAMILY ARRANGEMENT. AS PER THE ASSESSEE ITS PARTNERS WER E BROTHERS. RELYING ON THE JUDGMENT OF JURISDICTIONAL HIGH COUR T IN THE CASE OF CIT VS. KAY ARR ENTERPRISES & ORS. 299 ITR 348 , ASSESSEE SUBMITTED THAT A FAMILY ARRANGEMENT IN THE FORM OF A DISSOLUTION WO ULD NOT RESULT IN TRANSFER. FURTHER AS PER THE ASSESSEE, DISSOLUTIO N DEED DATED 21.12.2006 CLEARLY INDICATED THAT THERE WAS NO DIST RIBUTION OF CAPITAL ASSETS. AS PER THE ASSESSEE, THERE WAS ONLY SETTLE MENT OF ACCOUNTS AND THERE WAS NO TRANSFER OF CAPITAL ASSETS. FURTH ER, AS PER THE ASSESSEE, A DISSOLUTION BY OPERATION OF LAW WOULD N OT RESULT IN A NOTIONAL TRANSFER OF CAPITAL ASSET. FOR THIS ARGUM ENT RELIANCE WAS PLACED ON THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS VIJAYALAKSHMI METAL INDUSTRIES 256 ITR 540 . FURTHER, AS PER ASSESSEE THERE WAS SPECIFIC CLAUSE IN THE DISSOLUTI ON DEED WHEREBY PARTNERS AGREED NOT TO REVALUE THE ASSETS. RELIANC E WAS PLACED BY THE ASSESSEE ON THE JUDGMENT OF HONBLE PUNJAB AND HARY ANA HIGH COURT IN THE CASE OF RAMAN LAL KHANNA VS. CIT 84 ITR 217 AND THAT OF JUDGMENT OF HONBLE ANDHRA PRADESH HIGH COURT IN TH E CASE OF CHALASANI VENKATESWARA RAO VS. ITO 349 ITR 423 . ITA NO.618/MDS/2016. :- 4 -: 5. HOWEVER, LD. COMMISSIONER OF INCOME TAX (APPEALS) W AS NOT IMPRESSED BY THE ABOVE ARGUMENTS. ACCORDING TO HIM BY VIRTUE OF JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. A.N. NAIK ASSOCIATES 265 ITR 346, THE WORD OTHERWISE USED IN SEC. 45(4) OF THE ACT TOOK INTO ITS SWEEP, NOT ONLY CASES OF D ISSOLUTION BUT ALSO RECONSTITUTION OF A PARTNERSHIP RESULTING IN TRANS FER OF ASSET TO A RETIRING PARTNER. HE HELD THAT SEC. 45(4) OF THE A CT WAS CORRECTLY APPLIED BY THE LD. ASSESSING OFFICER AND CONFIRMED THE ADDITION. 6. NOW BEFORE ME, LD. AUTHORISED REPRESENTATIVE STRONG LY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES SUBMI TTED THAT WHEN A DISSOLUTION WAS EFFECTED BY THE OPERATION OF LAW, SEC. 45(4) OF THE ACT WOULD NOT BE ATTRACTED. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF C IT VS. MOPED & MACHINES 281 IT 52 . FURTHER AS PER LD. AUTHORISED REPRESENTATIVE DISSOLUTION IN THE CASE OF THE ASSESSEE WAS ON ACC OUNT OF FAMILY SETTLEMENT BETWEEN TWO BROTHERS. RELIANCE WAS PLAC ED ON THE JUDGMENT OF KAY ARR ENTERPRISES & ORS (SUPRA). IN ANY CASE, ACCORDING TO HIM THERE WAS A SPECIFIC CLAUSE IN THE DISSOLUTI ON DEED WHICH EXCLUDED REVALUATION OF ASSETS. THUS ACCORDING TO HIM, LOWER AUTHORITIES FELL IN ERROR IN APPLYING SEC. 45(4) OF THE ACT. ITA NO.618/MDS/2016. :- 5 -: 7. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 8. I HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE O RDERS OF THE AUTHORITIES BELOW. SEC.45(4) OF THE ACT IS REP RODUCED HEREUNDER:- (4) THE PROFITS OR GAINS ARISING FROM THE TRANSF ER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITA L ASSETS ON THE DISSOLUTION OF A FIRM OR OTHER ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGEABLE TO TAX AS 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 TH E CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. IT IS NOT DISPUTED THAT ASSESSEE FIRM WAS DISSOLVE D ON 21.12.2006. CLAIM OF THE ASSESSEE IS THAT THIS DISSOLUTION WAS A RESULT OF FAMILY ARRANGEMENT WAS NOT SUBSTANTIATED THROUGH ANY EVIDE NCE. LD. AUTHORISED REPRESENTATIVE COULD NOT BRING TO OUR NO TICE ANY CLAUSE IN THE DISSOLUTION DEED DATED 21.12.2006, WHICH WOULD CORROBORATE HIS ARGUMENT THAT THE DISSOLUTION WAS A RESULT OF ANY FAMILY ARRANGEMENT. JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF KAY ARR ENTERPRISES & ORS (SUPRA) WOULD APPLY ONLY WHERE RECONSTITUTION WAS ON ACCOUNT OF FAMILY ARRANGEMENT SO AS TO AVOID POS SIBLE LITIGATION. HENCE THIS CASE WOULD NOT COME TO THE AID OF THE AS SESSEE. THE ITA NO.618/MDS/2016. :- 6 -: DISSOLUTION WAS ALSO NOT ON ACCOUNT OF OPERATION OF LAW SINCE THERE WAS NO DEATH OR INSOLVENCY OF ANY PARTNER. IT WAS A VO LUNTARY DISSOLUTION. HENCE THE JUDGMENT OF HONBLE MADHYA PRADESH HIGH C OURT IN THE CASE OF MOPED & MACHINES (SUPRA ) WOULD ALSO NOT COME TO THE AID OF THE ASSESSEE. COMING TO THE JUDGMENT OF HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CHALASANI VENKATESWARA RAO (SUPRA) WHAT WAS HELD IN PARA 22 OF THE JUDGMENT IS REPRODUCED HEREU NDER:- 22 IN THE LIGHT OF THE ABOVE DECISIONS, WHICH ARE BINDING ON US, WE HOLD THAT THE INCOME-TAX APPELLAT E TRIBUNAL WAS NOT CORRECT IN CONFIRMING THE ORDERS PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THE RESPONDENT. WHEN THE APPELLANT WAS PAID RS. 15 LAKHS BY Y. KALYANA SUNDARAM IN FULL AND FINAL SETTLEMENT TOWARDS HIS 50 PER CENT. SHARE ON THE DISSOLUTION OF THE FIRM, THERE WAS NO 'TRANSFER' AS UNDERSTOOD IN LAW AND, CONSEQUENTLY, THERE CANNOT B E TAX ON ALLEGED CAPITAL GAIN. THE APPELLANT WAS CORR ECT IN LAW IN CONTENDING THAT THE AMOUNT HE RECEIVED FROM Y. KALYANA SUNDARAM IS TOWARDS THE FULL AND FINAL SETTLEMENT OF HIS SHARE AND SUCH ADJUSTMENT OF HIS RIGHT IS NOT A 'TRANSFER' IN THE EYE OF LAW. IT IS A RECO GNIZED METHOD OF MAKING UP THE ACCOUNTS OF THE DISSOLVED F IRM AND THE RECEIPT OF MONEY BY HIM IS NOTHING BUT A RECEIPT OF HIS SHARE IN THE DISTRIBUTED ASSET OF TH E FIRM. THE APPELLANT RECEIVED THE MONEY VALUE OF HIS SHARE IN THE ASSETS OF THE FIRM. HE DID NOT AGREE TO SELL, EXCHANGE OR TRANSFER HIS SHARE IN THE ASSETS OF THE FIRM. PAYMENT OF THE AMOUNT AGREED TO BE PAID TO THE APPELLANT UNDER THE COMPROMISE WAS NOT IN CONSEQUENCE OF ANY SALE, EXCHANGE OR TRANSFER OF AS SETS TO Y. KALYANA SUNDARAM. MOREOVER, AS RIGHTLY CONTENDED BY THE ASSESSEE, UP TO THE ASSESSMENT YEA R 1987-88, SECTION 47(II) OF THE INCOME- TAX ACT, 196 1, EXCLUDED THESE TRANSACTIONS. FROM ASSESSMENT YEAR 1988-89, IN THE CASE OF DISSOLUTION OF A FIRM, ONLY THE FIRM IS TAXABLE ON CAPITAL GAINS ON DISSOLUTION UND ER ITA NO.618/MDS/2016. :- 7 -: SECTION 45(4) OF THE INCOME-TAX ACT, 1961, AND NOT THE PARTNER. SECTION 45(4) STATES AS FOLLOWS : ' 45.(4) THE PROFITS OR GAINS ARISING FROM THE TRANSF ER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITA L ASSETS ON THE DISSOLUTION OF A FIRM OR OTHER ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGE ABLE TO TAX AS THE INCOM E OF THE FIRM, ASSOCIATION OR BODY, OF THE PRE VIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND, FOR THE PURPOSE 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 THE TRANSFER.' THUS, IT IS CLEAR THAT THE LEGISLATURE, EVEN THOUGH IT WAS AWARE OF THE ABOVE DECISIONS, DID NOT CHOOSE TO AME ND THE LAW BY MAKING THE PARTNER LIABLE WHEN IT AMENDE D THE INCOME-TAX ACT, 1961, BY INTRODUCING CLAUSE (4) TO SECTION 45 BY THE FINANCE ACT, 1987, WITH EFFECT FR OM APRIL 1, 1988, AND MADE ONLY THE FIRM LIABLE. THERE FORE, THE CONTENTION OF THE ASSESSEE HAS TO BE ACCEPTED A ND THAT OF THE REVENUE IS LIABLE TO BE REJECTED. THE ABOVE CASE DOES NOT AID THE ASSESSEE, BUT IN FA CTS HELPS THE CASE OF THE REVENUE THAT SEC. 45(4) OF THE ACT STOOD ATT RACTED. AS NOTED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF A.N.NAIK ASSOCIATES (SUPRA) THE EXPRESSION OTHERWISE APPEARING IN SECTION 45(4) OF THE ACT TAKES WITHIN ITS PERIMETERS, EVEN A RECONSTITUTION WHEREB Y A RIGHT OR RIGHTS IN THE PROPERTY OF THE FIRM STOOD EXTINGUISHED IN FAVO R OF THE PARTNERS. I AM THEREFORE OF THE OPINION THAT SEC. 45(4) OF THE ACT WAS RIGHTLY ITA NO.618/MDS/2016. :- 8 -: APPLIED BY THE LOWER AUTHORITIES. GROUNDS NO. 2 TO 5 STAND DISMISSED. 9. VIDE GROUND NO.6, GRIEVANCE OF THE ASSESSEE IS THAT A DISALLOWANCE OF RS. 5,00,000/- MADE BY THE LD. ASSE SSING OFFICER WAS CONFIRMED BY THE LD. COMMISSIONER OF INCOME TAX (AP PEALS). 10. ASSESSEE HAD IN ITS TRADING ACCOUNT CHARGED CERTAIN EXPENDITURE UNDER THE HEAD PRODUCTION WAGES. OBSERVATION OF THE LD. ASSESSING OFFICER WAS THAT ASSESSEE COULD NOT T HE SUPPORT THE EXPENDITURE WITH ANY EVIDENCE. AN ADHOC DISALLOWANC E OF RS.5,00,000/- WAS MADE. 11. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE LD. COMMISSIONER OF INCOME TAX (APPEALS) BUT DID NOT ME ET WITH ANY SUCCESS. LD. COMMISSIONER OF INCOME TAX (APPEALS) SPECIFICALLY NOTED THAT LD. AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAD AGREED FOR THE DISALLOWANCE BEFORE THE ASSESSING OFFICER. 12. NOW BEFORE ME, LD AUTHORISED REPRESENTATIVE SUBMIT TED THAT CONSIDERING THE VOLUME OF TRANSACTIONS OF THE ASSESSEE PRODUCTION WAGES CLAIMED WAS REASONABLE. HOWEVER, N O EVIDENCE WAS PRODUCED BEFORE ME IN SUPPORT OF SUCH CLAIM. DETAI LS OF THE TOTAL WAGE COST AND THE TOTAL REVENUE EARNED BY THE ASSES SEE FROM ITS ITA NO.618/MDS/2016. :- 9 -: OPERATIONS WERE ALSO NOT MADE AVAILABLE. IN THESE CIRCUMSTANCES, I DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDERS OF THE LOWER AUTHORITIES. GROUND NO.6 IS DISMISSED. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS DI SMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 25TH DAY OF JANUARY, 2017, AT CHENNAI. SD/- ( . ) (ABRAHAM P. GEORGE) / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED:25TH JANUARY, 2017 KV %& '()( / COPY TO: 1 . / APPELLANT 3. *+, / CIT(A) 5. (-. / / DR 2. / RESPONDENT 4. * / CIT 6. .01 / GF