1992 (1) TMI 155 - AT - Income Tax

Tribunal rules on cost of acquisition for capital gains computation, firm classified as new partnership

The Tribunal ruled that Section 49(1)(iii)(b) of the Income-tax Act did not apply, determining that the cost of acquisition for computing capital gains ... Assessment Order, Cost Of Acquisition Issues Involved:1. Applicability of Section 49(1)(iii)(b) of the Income-tax Act.2. Determination of the cost of acquisition for computing capital gains.3. Classification of the firm as a reconstituted firm or a new partnership firm.Detailed Analysis:1. Applicability of Section 49(1)(iii)(b) of the Income-tax Act:The primary issue in this case revolves around whether the provisions of Section 49(1)(iii)(b) of the Income-tax Act apply to the assessee's scenario. The Income-tax Officer (ITO) applied this section, asserting that the cost of acquisition should be the cost for which the previous owner acquired it, leading to a higher capital gain computation of Rs. 2,91,369. The assessee argued that the cost of acquisition should be the revalued cost at the time of the firm's dissolution, which was Rs. 3,45,895, resulting in a capital gain of Rs. 10,295.The CIT (Appeals) sided with the assessee, referencing decisions from the Madras High Court and the Supreme Court, concluding that Section 49(1)(iii)(b) did not apply. The Tribunal upheld this view, emphasizing that the firm was dissolved upon completion of its project, and a new firm was constituted, making the cost of acquisition the revalued cost at dissolution.2. Determination of the Cost of Acquisition for Computing Capital Gains:The Tribunal examined whether the cost of acquisition should be the historical cost (as argued by the ITO) or the revalued cost at the time of dissolution (as argued by the assessee). The Tribunal noted that the firm was constituted for a specific project, which was completed in 1979, leading to its dissolution. The revalued cost at dissolution was considered real and not notional, supported by the dissolution deed, entries in the books, and settlement of accounts among partners.The Tribunal referenced the Supreme Court's decision in Kalooram Govindram, which stated that the cost of an asset to a member at the time of partition should be the value given for allotment, provided it was real. This principle was applied to the present case, affirming that the cost of acquisition should be the revalued cost at dissolution.3. Classification of the Firm as a Reconstituted Firm or a New Partnership Firm:The Tribunal addressed whether the firm constituted on 17-3-1979 was a reconstituted firm or a new partnership firm. The Tribunal concluded that the firm constituted in 1970 was dissolved in 1979 upon project completion. The new firm formed on the same date was distinct from the dissolved firm, as evidenced by the dissolution deed, new partnership deed, and settlement of accounts.The Tribunal emphasized that a firm constituted for a specific project dissolves upon project completion, as per the Partnership Act and Supreme Court rulings. The new firm, therefore, had a different cost of acquisition for the assets, which was the revalued cost at dissolution.Conclusion:The Tribunal concluded that Section 49(1)(iii)(b) did not apply, and the cost of acquisition should be the revalued cost at dissolution. The capital gain computation by the assessee was correct, and the department's appeal was dismissed. The Tribunal's decision was based on legal precedents and the specific facts of the case, affirming the CIT (Appeals) order.