TaxTMI 
TaxTMI 
2010 (11) TMI 137
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....ltants. The firm commenced development of a project and all costs incurred in connection with the same were shown as work-in-progress. 4. On20-5-2004 Rajendra Arora died. On28-7-2004, the legal heirs of Mr. Rajendra Arora (the deceased partner) and Mr. Ramesh R. Parekh, the surviving partner decided to continue the partnership business and entered into the terms of such partnership as contained in a deed of partnership dated28-7-2004. On31-7-2004, the legal heirs of the deceased partner retired from the firm. The legal effect of which was that the firm stood dissolved. Mr. Ramesh R. Parekh took over all the assets and liabilities of the partnership firm and settled the accounts with the legal heirs of the deceased partner and in this regard a deed of retirement dated11-9-2004 was entered into between Mr. Ramesh R. Parekh and the legal heirs of the deceased partner. The following were the relevant clauses of the deed of retirement dated11-9-2004 : "1. The retiring Partners have voluntarily retired from Partnership on and from and with effect from31-7-2004. 2. The Retiring Partners confirm however separately received all their shares in the Profit/Loss and Capital of the said Part....
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....ssee to show cause as to why the capital gain on transfer of the properties by the firm to one of its partners on dissolution of the firm be not brought to tax under the head 'capital gains'. According to the Assessing Officer from a perusal of detail submitted by the assessee, it was clear that the firm was actually dissolved on31-7-2004 as all the partners have retired except Mr. Ramesh Parekh. The Assessing Officer also noticed from the return of Ramesh Parekh filed for the assessment year 2005-06 that that the business of the firm was taken over by him as a proprietor. The Assessing Officer therefore was of the view that as per the provisions of the Income-tax Act, 1961, distribution of assets amongst the partners on dissolution of the firm amounted to a transfer. Therefore, he was of the view that there will be a liability to tax on transfer of the asset of the firm to partners on the difference between the Fair Market Value of the assets transferred on date of dissolution and Book Value either as business income or capital gains depending on the fact whether the asset is stock in trade or capital asset. The Assessing Officer called upon the assessee to furnish Copy of capital....
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....now exclusively belongs to Mr. Ramesh R. Parekh and therefore the difference between the FMV of the incomplete project as on 31-7-2004 and its cost as per books of account is taxable as the business profits of the firm. Thereafter the Assessing Officer quantified the amount of profit by observing that the assessee failed to provide the percentage of completion of the project at the date of dissolution and therefore in the absence of the relevant data, he was left with no option but to estimate by taking 20 per cent of the WIP which amounts to Rs. 62,13,027 (20 per cent of 3,10,655,136) as the profits of the firm for the period 1-4-2004 to 31-7-2004 being difference between the FMV & Cost of WIP as on 31-7-2004 and add the same to the total income of the assessee. Thus the Assessing Officer made an addition of Rs. 62,13,027 to the total income of the assessee. 7. Before CIT(A), the Assessee submitted that the firm got dissolved by operation of law, when the number of persons who were partners of the firm got reduced to one on 31-7-2004 upon retirement of legal heirs of the deceased partner. Thus the real estate development business as well as the project which was hitherto owned by....
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....here is no dispute about these facts and therefore it is not justified to notionally value the stock in trade of the partnership firm as Market price. I am, therefore, of the view that the addition made by the ld. Assessing Officer was contrary to the principles laid down by the Hon'ble Apex Court and this addition of Rs. 62,13,027 made as Rs. 63,13,027 (appears to be mistake apparent on record) is order to be deleted." 9. Aggrieved by the order of CIT(A), the revenue has raised ground No. 1 before the Tribunal. The learned D.R. relied on the order of the Assessing Officer. The learned counsel for the assessee reiterated the stand as was taken before the revenue authorities besides relying on certain judicial pronouncements. 10. We have considered the rival submissions. At the outset, we observe that the Assessing Officer has treated the difference between the FMV of the work-in-progress of the project undertaken by the firm and the value of work-in-progress of the project as per the books of account of the assessee as profit of the firm assessable as business income. We are of the view that the said assessment has to be made under the head 'capital gain'. The facts of the assess....
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....een them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person." 11. To plug this loophole the Finance Act, 1987, brought on the statute book a new sub-section (4) in section 45 of the Act, with effect from1-4-1988, which reads as follows : "The profits or gains arising from the transfer of a capital asset by way of distribution of capital 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 the consideration received or accruing as a result of the transfer." Before the introduction of sub-section (4) to section 45, there was clause (ii) of section 47 which read as under : "Any distribution of capital assets on the dissolution of a firm, body of individuals or ....
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....f section 45(4) by the Finance Act, 1987, was that there was no transfer of assets by the firm to the partners on dissolution or transfer of assets to the retiring partner on retirement. The effect was that the profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as the firm's income in the previous year in which the transfer took place and for the purposes of computation of capital gains, the fair market value of the asset on the date of transfer would be deemed to be the full value of the consideration 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 be clear that the intention of Parliament was to bring into the tax net transactions whereby assets were brought into a firm or taken out of the firm. The above decision in the case of A.N. Naik Associates (supra), however treats distribution of assets of the firm to partners on dissolution or on retirement as falling within the ambit of section 45(4). 14. In the present case, the assessee took over the project which the firm was constructing in his individual capaci....
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....tion 263 of the Income-tax Act, 1961, as according to him the assessment order made by the Income-tax Officer was erroneous and prejudicial to the interests of the revenue in valuing the stock in trade as on 6-2-1984 on the basis of cost or market rate, whichever is lower as that was the usual method the assessee used to adopt in valuing its stock. The Commissioner of Income-tax relying upon the decision of the Madras High Court in A.L.A. Firm v. CIT [1976] 102 ITR 622 came to the conclusion that the Income-tax Officer ought to have valued the closing stock at its market rate as on 6-2-1984. Thus, setting aside the assessment order dated 30-5-1984, the Income-tax Officer was directed to pass a fresh order. The Tribunal held that the question of valuing the closing stock at the market value can arise only on discontinuance of the business and as the business of the firm was never discontinued but was taken over on succession by another firm, the closing stock was not required to be revalued at the market value. The Tribunal came to the conclusion that if the business itself is discontinued and the stocks are realised then the value realised would have to be substituted for the value....
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....thi Trading Co. (supra) was not applicable to the facts of the case. In our view the CIT(A) fell into an error in not appreciating the distinction between "individual" and "a firm" especially in the context of Income-tax Act, 1961. An "individual" and a "firm" are two different persons as far as Income-tax Act, 1961 is concerned. For the very same reason the decision of the Hon'ble Karnataka High Court in the case of CIT v. Mangalore Ganesh Beedi Works [2004] 265 ITR 658 is also held to be not relevant to the present case before us. As already stated the undisputed fact in the present case is that the firm stood dissolved and the assets were taken over by Mr. Ramesh R. Parekh, one of the partner of the firm in his individual capacity and therefore there was a transfer of capital asset by the firm to the partner by way of distribution of assets of the firm on dissolution. The decision in the case of CIT v. Moped & Machines [2006] 281 ITR 52 (MP) is contrary to the decision of the Hon'ble Bombay High Court in the case of A.N. Naik & Associates (supra), which is the jurisdictional High Court. In the decision in the case of A.N. Naik & Associates (supra), the Hon'ble Bombay High Court ....
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....ed. 19. Ground No. 1(ii) raised by the revenue reads as follows : "On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowances of Rs. 9,55,879 being amount paid for labour charges." 20. In the course of assessment proceedings, the Assessing Officer called upon the assessee to furnish the details of labour charges paid along with the names and addresses and the amount paid. Based on the details furnished by the assessee, the Assessing Officer issued notices under section 133(6) of the Act, to Shri R.P. Chouhan (Rs. 3,23,208) and M/s. S.M. Construction (Rs. 6,32,671) to verify the genuineness of the transaction. The same was returned unserved by the postal authorities as unclaimed. In the above circumstances, the Assessing Officer disallowed a sum of Rs. 9,55,879 and added the same to the total income of the assessee. 21. Before the CIT(A) the assessee submitted that it had filed confirmation from the contractor and therefore, the Assessing Officer was not justified in making the impugned disallowance. The assessee also submitted that it was following completed project completion method of accounting and the project in ques....