TaxTMI 
TaxTMI 
2010 (12) TMI 754
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....ns. These appeals along with the other five appeals filed by the Revenue against the order of the Tribunal were disposed of by a common order dated December 19, 2002. Being aggrieved by the said order of the Division Bench of this court dated December 19, 2002, B. Raghurama Prabhu Estate v. Joint CIT [2003] 264 ITR 124 (Karn), Civil Appeals Nos. 4232, 4242, 4234, 4233, 4235, 4236 and 5322 of 2003 M. Janardhana Rao v. Joint CIT [2005] 273 ITR 50 (SC) were filed. Similarly, I. T. A. Nos. 69-70 of 2001 are filed by the Revenue being aggrieved by the order passed by the Income-tax Appellate Tribunal in Appeals Nos. 946, 952 to 957 and 959/Bang/1998, dated July 31, 2000, for the assessment year 1995-96. The hon'ble Supreme Court has passed a common order on January 28, 2005, Mangalore Ganesh Beedi Works v. CIT [2005] 273 ITR 56 (SC), along with other appeals filed against the income-tax appeals by setting aside the order passed by this court in I.T.A. Nos. 134 to 140 of 2000 and remitted the matter to this court for fresh disposal in accordance with law for framing the substantial questions of law. In obedience to the direction of the hon'ble Supreme Court dated January 28, 2005....
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....s. Mangalore Ganesha Beedi Works (for short "MGBW"), the firm, came into existence with effect from March 28, 1940. Thereafter, the said firm was reconstituted from time to time. The last reconstitution of the firm was evidenced by a partnership deed dated June 30, 1982, and, according to the averments made in the deed, the last reconstitution of the firm became effective from June 6, 1982, and, according to the deed of partnership, the firm comprised the following 13 partners : Sl. No. Name of the partners % of share 1. B. Raghurama Prabhu 14.50 2. M. Janardhana Rao 7.65 3. M. Ananda Rao 7.65 4. M. Vinoda Rao 7.50 5. M. Pushpalatha w/o Subraya Baliga 12.50 6. Hemalatha w/o Raghunath Shenoy 12.50 7. M. Suresh Rao 7.55 8. M. Vishwanath Rao 7.55 9. M. Ramanatha Rao 2.50 10. Jaganath Shenoy 2.50 11. Vatsala Shenoy D/o M. Janardhana Rao 7.55 12. M. Gopinath Shenoy 2.50 13. Arathi Shenoy D/o M. Janardhana Rao 7.55 4. Clause 3 of the partnership deed provided for the duration of the firm. This clause reads as under : "3 The duration of the partnership....
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....affairs of the firm could not be wound up. Therefore, two of the partners of the firm filed a petition before this court under the provisions of Part X of the Companies Act, 1956, for winding up of the affairs of the firm in terms of section 583(4)(a) thereof. The petition was registered as Company Petition. No. 1 of 1988. In the said petition by order dated November 5, 1988, this court permitted the group of partners (7) having the controlling interest to continue the business as an interim arrangement till the completion of winding up proceedings. However, subsequently by order dated June 14, 1991, in modification of the earlier order the court framed the scheme for winding up of the affairs of the firm by selling its assets as a going concern. Paragraph 29 of the order contains the scheme. Clauses (i), (iii) and (v) of this scheme are reproduced hereunder : "(i) The dissolved partnership firm, Mangalore Ganesh Beedi Works, as a going concern shall be sold to such of its partner/s, who makes an offer of the highest price, the same not being less than the minimum (reserved) price of Rs. 30 crores (rupees thirty crores) within July 11, 1991, accepting further liability to....
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....mount of ninetytwo crores together with actual profits earned from December 6, 1987, till March 31, 1994, and the propor-tionate profit from April 1, 1994, till the date of deposit in terms of the orders of this court earlier issued in Civil Appeal No. 313 of 1994." 8. At the instance of the three partners offering the highest bid, clause (1) of the order dated September 21, 1994, was amended by a subsequent order dated September 19, 1994. The modified clause (1) of the order dated September 21, 1994, reads as under : "The highest bid amount of rupees ninety-two crores is accepted and the group of partners offering the said amount are directed to deposit that part of the bid amount of rupees ninety-two crores which is proportionate to the shares held by the outgoing partners together with profits on the same basis from December 6, 1987, till the date of deposit, within a period of 60 days from September 29, 1994, in any of the nationalised banks in the name of the official liquidator. The rest of our order dated September 21, 1994, remains intact." 9. Pursuant to the above order, the AOP-3 deposited the bid amount of Rs. 92 crores on November 17, 1994,....
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....Nos. 144 of 2000, 147 of 2000 and 146 of 2000. 10. We have heard the learned counsel appearing for the appellants in I.T.A. Nos. 134-140 of 2000 and the learned counsel appearing for the Revenue/appellants in I. T. A. Nos. 144 of 2000, 147 of 2000 and 146 of 2000 and reply arguments of the assessee and the Revenue in these appeals. 11. Learned counsel appearing for the appellants in I. T. A. Nos. 134 to 140 of 2000 submitted that these appeals raised the question relating to the issue of taxability on capital gains directly in the hands of the individual appellants who are erstwhile partners/members in the dissolved firm of MGBW and the AOP-13 which carried on the business of MGBW as a going concern since the date of dissolution December 6, 1987, until November 20, 1994. Seven appellants have been taxed as if they have transferred their respective interests in the same business and what took place on November 20, 1994, was not the sale as a going concern of the entire business as ordered by this court in the company petition. It is submitted that the AOP-12 is distinct and separate from an AOP of 3. It was this AOP of 12 which was taxed since the firm was d....
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....siness organisation, the structure of the business, etc., of the going concern and, therefore, in view of the decision of the apex court in PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC), the reference to the transfer as a going concern has specifically observed that a business undertaking consists not only of tangible items and goodwill but also manpower, tenancy rights and any licences, etc., held by the business and in the instant case, there were about 1,50,000 workers direct/indirect number of tenanted premises, values of trade marks and copyrights amounting to licences. These factors were not considered by the chartered accountants. Learned counsel further submitted that there was no valuation done of the business as a going concern as on the date of auction, namely, November 20, 1994, which was the date of sale/transfer. It was not as if there were contracting parties, it was not as if any such contracting parties entered into an agreement where the different assets of a going concern were got valued by them for the purpose of bringing about the transfer and there was no identity of minds necessary for an agreement, etc. It is only when there is such an agreement between the....
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.... the assessee in the present case and the order passed by this court in the company petition is clear that the sale must be deemed to have been made as assets of a going concern were auctioned among the group of partners and, therefore, appropriate orders have been passed for dissolution of the firm and payments have also been made to the appellants/every partner. Learned counsel further submitted that the decision relied on by the learned counsel appearing for the asses-see does not apply to the present case having regard to the facts of the case. Clause 16 of the partnership deed provides that in case of dissolution, the business concern of MGBW as a whole should be sold among the partners and, therefore, there is transfer of capital asset as defined in section 2(14) of the 1961 Act and transfer as defined under section 2(47) of the 1961 Act and, therefore, the order passed by the Tribunal is justified. Learned counsel further submitted that I. T. A. Nos. 144, 146 and 147 of 2000 are filed by the Revenue being aggrieved by the directions given by the Vice-President of the Tribunal regarding computation of capital gains which were wholly unnecessary having regard to the facts of t....
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....revious year in which the transfer took place." In the year 1964, by section 12 of the Finance Act, 1964, the following new sub-sections were inserted as under : "(2) Notwithstanding anything contained in sub-section (1), every equity shareholder to whom any shares are allotted by the company by way of bonus shall, unless such shares are issued wholly out of the share premium account, be chargeable to income-tax under the head 'Capital gains' in respect of such shares on an amount equal to the fair market value of such shares on the date next following the expiry of the period of thirty days from the date of such allotment and such amount shall be deemed to be the income of the previous year in which the date next following the aforesaid period of the thirty days falls : Provided that income-tax shall not be chargeable under this subsection if such shares are included in the stock-in-trade of the asses- see or if such shares were allotted before the 1st day of April, 1964 : Provided further that nothing contained in section 48 shall apply to the income chargeable under the head 'Capital gains' under this subsection. Explanatio....
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.... ITR 509 (SC) has set at rest the controversy as to whether such a conversion amounts to transfer. The court held that such conversion fell outside the scope of capital gain taxation. The rationale advanced by the court is, that the consideration for the transfer of the personal asset is indeterminate, being the right which arises or accrues to the partner during the sub- sistence of the partnership to get his share of the profits from time to time and on dissolution of the partnership to get the value of his share from the net partnership assets. 24.2 With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987, has inserted new sub-section (3) in section 45. The effect of this amendment is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner's income of the previous year in which the transfer took place. For purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset. &n....
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....vable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him but excludes- (a) jewellery ; (b) archaeological collections ; (c) drawings ; (d) paintings ; (e) sculptures ; or (f) any work of art. Explanation.-For the purposes of this sub-clause, 'jewellery' includes- (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel ; (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel ; (iii) agricultural land in India, not being land situate- (a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not ....
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....capital asset" is defined in section 2(14) of the Income-tax Act. Such transfer must be effected in the previous year and some profit or gain must arise from such transfer. If these conditions are fulfilled, section 45 provides that such profit or gain is chargeable to income-tax under the head "Capital gains" and the same shall be deemed income of the previous year in which the transfer has taken place. Since the section creates an item of "artificial income" its provisions should be strictly construed. Thus, section 45 brings to charge capital gains and its ingredients are : (i) the existence of a capital asset owned by the assessee ; (ii) the transfer of such asset during the previous year ; (iii) arisal of profits and gains from transfer of such assets ; and (iv) such profits and gains must accrue and arise to the assessee. 22. In a recent decision in CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC); [2009] 8 SCC 412, the hon'ble Supreme Court had an occasion to consider the scope and ambit of provisions of section 45 wherein capital gain is taxed and the hon'ble Supreme Court has observed as follows (page 9) : "Th....
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....as per clause 16 of the partnership deed and in the said Company Petition No. 1 of 1988, this court directed that in the interest of more than 1,50,000 employees who were employed throughout the State, the business should be continued till the actual winding up proceedings would come to an end and, therefore, the business continued as per the direction of the company court in the interest of the employees and in view of clause 16 of the partnership deed and after 1987, the assessments were filed by the AOP up to 1994-95 showing the profits and claiming depreciation in respect of the assets of the firm. It may also be noted at this stage that after the winding up of the partnership and dissolution process started, one of the partners, Mr. Vinod Rao, assigned his shares in favour of 7 other partners by assignment dated July 3, 1993. Thereafter, assessment was being filed by the AOP-12. The fact that this court passed various orders including the valuation of the assets of the firm and ordered that the partners or association of partners shall submit their bid and the highest bid would be accepted and on the basis of the valuation made by the chartered accountant, the basic price was ....
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....artnership firm and by the order of this court dated June 14, 1991, and November 20, 1994, they also undertook by filing an undertaking before this court as per the order passed by this court on November 20, 1994, that they would not interfere with the running of the business by the successful bidders, namely, 3 partners who have paid the value of the highest bid offered by them and from thereafter as per order dated June 14, 1991, the erstwhile partners who purchased the business of the old firm succeeded to it and constituted a new firm in the same name "MGBW" and thereafter the official liquidator has distributed the amount amongst the 9 partners including the appellants herein after deducting the liability of each of the partners and, therefore, what is received by the partners is the value of the net assets of the firm is established and, there- fore, the capital gain is attracted as observed by the hon'ble Supreme Court in CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC) ; [2009] 8 SCC 412 as referred to above. The decisions rendered prior to April 1, 1988, have to be considered in the light of the amendment of the provisions of section 45 with effect from April 1, 1988, and ....
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....al gain under section 45 of the Act and these are not helpful to the appellants in the present case. 25. Similarly, the decision of the Supreme Court in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 (SC) wherein there were two partners in the firm and the same was dissolved, one partner receiving from the other the value of his share in assets, the sale or transfer of capital asset held to attract capital gain under section 12B of the Indian Income-tax Act in view of the amended provisions of section 45(3) and (4) inserted by the Finance Act, 1987, with effect from April 1, 1988. The said decision is also not helpful to the appellants in the present case. 26. It is clear from the close scrutiny and consideration of the material on record and in the light of the decisions of the apex court after the amendment of section 45 with effect from April 1, 1988, that in the present case, the partnership firm-MGBW has been dissolved with effect from December 6, 1987, and the same has been accepted by the Revenue and thereafter no assessment has been made on the firm. After dissolution of the firm, the firm has ceased to hold assets of the firm and the assets of the firm were....
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.... official liquidator has distributed the amount as per the statement prepared by the outgoing partners who were the erstwhile partners by deducting their liability in the firm and value of the net asset has been distributed to them as per the statement annexed to the company application as follows : Details of shares of partners of MGBW in the sale, notional profit accumulated profit-following sale of the firm as a going concern in February, 1995 Sl. No. Name of member Ratio Share of bid amount Share of -notional -profit Share of profit in pending distribution account Net amount due as per court order Interest paid by the bank for two months Amount actually paid (4 + 5) 1 2 3 4 5 6 7 8 9 1. B.Raghuram Prabhu Estate 16.059 14,77,42,800 1,53,77,630 10,14,85,033 23,75,97,191 17,81,979 23,93,79,170 2. M. Janardhan Rao 8.472 7,79,42,400 81,12,533 5,35,38,900 12,43,60,259 9,32,702 12,52,92,961 3. M. Pushpalatha 13.843 12,73,55,600 1,32,55,641 8,74,80,995 20,31,95,506 15,23,966 20,47,19,427 4. M. Hemalatha 13.843 12,73,55,600 1,32,....
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....l bid was accepted and they should not interfere with the said 3 erstwhile partners carrying on business of the firm in consideration of the amount deposited by them as per the order of this court and in view of confirmation of sale of the assets of the firm in favour of the said 3 persons. Therefore, it is clear that the contention of the appellants that the value of the assets could not be ascertained and, therefore, tax on capital gains could not be imposed cannot be accepted as valuation has been given by the group of partners by assessing the value of the assets and the assets had already been valued by the chartered accountant. Similarly, there is no merit in the contention of the learned counsel for the appellants that since the transaction was only adjustment of shares by the partners and there was no sale as such the appellants were not parties to the same and the same was conducted by the official receiver attached to the High Court and, therefore, the individual partners, the appellants herein who are the erstwhile partners and received the value of the assets cannot be taxed for capital gains. 28. The nature of interest of the partners in the firm during subsi....
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....be only that which is permitted by clause 29(1), that is to say, the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners. Lindley on Partnership, 12th Edn. p.375, Ref. to English and Indian Case Law Discussed. [1947] AIR 1947 Lahore 13 [FB] approved ; AIR 1959 AP 380 [FB] affirmed." 29. In Dilip Chinubhai Shah v. CIT [2002] 253 ITR 680 (Guj), a Division Bench of the Gujarat High Court had an occasion to consider the question as to whether on the facts and circumstances of the case, the capital gain of Rs. 34,425 was liable to be included in the income of the assessee. In the said case, Chinubhai Motilal Shah died intestate on February 20, 1965, and was survived by his three daughters, four sons and widow. After his death, one of his properties, a residential house, devolved upon his four sons. By executing a memorandum deed dated March 27, 1973, the said property was given to the HUFs of the four sons. Though the residential house was not partitioned by metes and bounds under the said memorandum, with effect from March 26, 1973, the HUFs of the four sons had acquired equal shares in the said property and the fo....
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....n July 7, 1978, and, therefore, the Revenue had rightly taxed the amount which was earned by the assessee by way of capital gains. Let us look at the issue from a different angle. It is the case of the assessee that there was an AOP and the said AOP was the owner of the property and on July 7, 1978, there was a dissolution of the said AOP and the share in respect of each individual had devolved upon different individuals. Had it been so, one-fourth share of the said property would have devolved upon each brother or the HUF of each brother. That is not the case here. In the instant case, by virtue of the deed dated July 7, 1978, only two HUFs had remained the owners of the said property because two HUFs, including that of the assessee, had sold their shares to the remaining two HUFs, who had continued to remain not only owners of their respective share, but they also had become owners of the shares of the two HUFs which had disposed of, by way of sale, their shares in favour of the two remaining HUFs. Thus, the submission of the learned advocate appearing for the asses-see is not correct, even if we view the issue from this angle." 30. In view of the provisions o....
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.... offer and pay the highest price therefor as a single group at a sale to be then held as among the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise aid him/her or them for the registration of his/her name or their names of all the said trade marks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee, partner or partners. The final order passed by this court to wind up the affairs of the firm would clearly show that the property of the firm is purchased by the association of 3 partners who submitted their highest bid and that the other partners had to give an under- taking that they may not interfere with the carrying on business which is vested in the name of MGBW and all the trade marks used in the course of the said business and, therefore, it is clear that the appellants who are the erstwhile partners were not successful bidders for continuation of business in the individual capacity of MGBW and in view of clause 16, all tangible and intangible assets vested w....