2007 (9) TMI 320 - AT - Income Tax

Partnership Firm Validity Confirmed for Cinema Business; Land Distribution Ruled Capital Asset

The Tribunal concluded that the partnership firm was validly constituted and existed from 1979 to 1989 for the purpose of starting a cinema business. The ... Capital Gains Issues Involved:1. Existence of the firm.2. Applicability of Section 45(4) of the Income Tax Act.3. Nature of the land (agricultural or non-agricultural).4. Relevance of proceedings in the assessment year 1993-94.5. Valuation of the land.6. Validity of the notice under Section 148.Issue-wise Detailed Analysis:(A) Existence of the Firm:The assessee contended that no firm had come into existence as no business was carried out. The Revenue argued that a valid partnership firm was brought into existence by a partnership deed dated 20th Oct., 1979. The Tribunal found that a partnership firm was indeed brought into existence with the intention to start a cinema business and purchased land for this purpose. The firm applied for conversion of the land for cinema construction, which was granted by the Collector. The firm was dissolved on 1st Sept., 1989. Thus, the Tribunal concluded that the firm was validly constituted and existed from 1979 to 1989.(B) Applicability of Section 45(4):The assessee argued that Section 45(4) was not applicable as no firm existed and no capital assets were distributed. The Revenue countered that the land was a capital asset and its distribution among partners on dissolution attracted Section 45(4). The Tribunal noted that the land was purchased by the firm and leased back for cinema construction. Despite the Collector's order to resume the land, the possession remained with the assessee. The Tribunal held that the firm had an interest in the land, which was a capital asset distributed on dissolution, satisfying the conditions of Section 45(4).(C) Nature of the Land:The assessee claimed the land was agricultural and thus outside the scope of 'capital asset' under Section 2(14). The Revenue argued that the land was used for non-agricultural purposes and intended for cinema construction. The Tribunal referred to the Supreme Court's judgment in Smt. Sarifabibi Mohmed Ibrahim & Ors. v. CIT, which emphasized the factual determination of land's nature. Considering the land's use for sawing business and intended cinema construction, the Tribunal concluded that the land was not agricultural.(D) Relevance of Proceedings in AY 1993-94:The assessee contended that the AO had issued a notice under Section 148 for AY 1993-94, charging Rs. 20 lakhs towards land valuation on dissolution. The CIT(A) annulled the assessment for AY 1993-94, stating the firm was dissolved on 1st Sept., 1989. The Tribunal noted that the assessee claimed the firm's dissolution in 1989 in AY 1993-94 but argued otherwise for AY 1990-91. The Tribunal held that the correct year for capital gains was AY 1990-91, rendering AY 1993-94 proceedings irrelevant.(E) Valuation of the Land:The assessee argued that the land's valuation by the DVO was erroneous and should be nil. The Tribunal found that the DVO's valuation treated the land as freehold and did not consider ongoing disputes. The Tribunal set aside the valuation and directed the AO to determine the fair market value considering the disputes and other relevant factors.(F) Validity of the Notice under Section 148:The assessee challenged the validity of the notice under Section 148, arguing that the firm was not in existence and no capital asset was held. The Tribunal upheld the notice's validity, noting that the firm existed and dissolved in 1989, with capital asset distribution. The Tribunal cited Explanation 2(a) to Section 147, which deems income escaping assessment if no return is filed despite taxable income.Conclusion:The Tribunal allowed the Revenue's appeal for statistical purposes, directing a fresh determination of the land's fair market value by the AO. The assessee's cross-objection was partly allowed for statistical purposes, with the Tribunal upholding the validity of the notice under Section 148 and the existence of the firm and capital assets.