2012 (12) TMI 686 - AT - Income Tax

Tribunal affirms tax treatment of asset distribution as capital gains under

The Income Tax Officer, Ward 3(1), Srinagar Versus M/s. Ali Shah

The Income Tax Officer, Ward 3(1), Srinagar Versus M/s. Ali Shah - TMI Issues Involved:1. Valuation of land in addition to house building at Kathi Darwaza.2. Existence of asset on the date of transfer for land at Gulmarg.3. Existence of asset on the date of transfer for Gulmarg Hut.Issue-Wise Detailed Analysis:1. Valuation of Land in Addition to House Building at Kathi Darwaza:The Revenue questioned whether the CIT(A) was correct in taking the value of land in addition to the house building at Kathi Darwaza when the book value of the land was not separately accounted for by the assessee while distributing the asset among its partners. The Assessing Officer (AO) found that the assessee distributed certain fixed assets to its partners, including a residential house valued at Rs.18,00,000/-. The AO argued that the entire value of the fixed assets was equally distributed among the partners, crediting their current capital accounts. The AO believed this distribution fell under section 45(4) of the Income Tax Act, which pertains to the transfer of capital assets by way of distribution. The CIT(A) initially dismissed the assessee's claim, agreeing with the AO that land could not be segregated from the residence and both should be valued together. The Tribunal upheld the AO's view that the valuation of Rs.18,00,000/- was correct as the assessee did not object to this value during the assessment proceedings.2. Existence of Asset on the Date of Transfer for Land at Gulmarg:The Revenue contended that the CIT(A) erred in treating that no asset existed on the date of transfer for the land at Gulmarg, which had a book value of Rs.35,304/-. The AO noted that the land at Gulmarg was taken on lease and subsequently transferred to the firm, making the firm a deemed owner under section 269UA(f) of the Income Tax Act. The AO treated this as a transfer of capital assets under section 45(4). However, the CIT(A) found that the land at Gulmarg was on lease from the Development Authority, similar to the shop at Bund, which was not considered an asset transfer by the AO. The Tribunal agreed with the AO's view that the land at Gulmarg, being on lease for more than 12 years, made the assessee a deemed owner, thus supporting the AO's inclusion of this land in the capital gains computation.3. Existence of Asset on the Date of Transfer for Gulmarg Hut:The Revenue challenged the CIT(A)'s decision that no asset existed on the date of transfer for the Gulmarg Hut, which had a book value of Rs.61,834/-. The AO observed that the Gulmarg Hut was dismantled, and a new building was being constructed over the land. The AO included the value of the Gulmarg Hut in the capital gains computation, considering it a transfer of capital assets under section 45(4). The CIT(A) allowed the assessee's claim that no asset existed for transfer as the hut was being reconstructed, supported by the remand report indicating ongoing construction work. The Tribunal, however, found that the CIT(A)'s order was not a speaking order and upheld the AO's decision to include the value of the Gulmarg Hut in the capital gains computation, as the dismantling and reconstruction did not negate the existence of an asset at the time of transfer.Conclusion:The Tribunal concluded that the AO correctly applied section 45(4) of the Income Tax Act in treating the distribution of assets as a transfer of capital assets. The Tribunal found no infirmity in the AO's computation of long-term capital gains and allowed the Revenue's appeal, reversing the CIT(A)'s relief to the assessee.