TaxTMI 
TaxTMI 
TaxTMI 
2005 (8) TMI 49
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....ued on February 27, 1992. The Assessing Officer referred to the order sheet dated August 13, 1993, whereby the assessee was asked that since the firm stood dissolved after the death of one of the partners why the tax on the capital gains should not be imposed on it. The assessee was also asked to furnish the valuation report in respect of the fixed assets as on April 19, 1990 with the firm. Eventually, the Assessing Officer determined the income at Rs. 7,23,920 and issued the demand notice. That apart, a direction was also issued for initiation of a penalty proceeding as there was concealment of income treating Rs. 3,40,198 as capital gain for the purpose of section 45(4) of the Act. Apart from other things, the Assessing Officer addressed himself with regard to the capital gains arising in favour of the assessee-firm on its dissolution. Being aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Jabalpur (in short "the appellate authority"). It was contended before the appellate authority that section 45(4) of the Income-tax Act would not apply unless the gain had arisen from the transfer of the capital asset within the meaning of section 2(....
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.... The accounting year relevant to the assessment year under consideration is consisting of the period of 19 days only, i.e., April 1, 1990 to April 19, 1990. The Assessing Officer opined that on dissolution of the firm there was transfer of the assets as per section 45(4) of the Income-tax Act. He accordingly made the addition of Rs. 3,40,198 as short-term capital gain under section 45(4) of the Act. We find that this issue is squarely covered in favour of the assessee by the decision of the Income-tax Appellate Tribunal, Jabalpur Bench, in the case of Asst. CIT v. Thermoflics India [1997] 60 ITD 554. Following the same, we hold that there was no transfer of the asset on the dissolution of the firm. Accordingly, we find no merit in ground No. 1 of the Revenue's appeal. The same is rejected." We have referred to the aforesaid facts to appreciate the case at hand though the question on which the appeal was admitted only related to liability of capital gains. Assailing the aforesaid judgment of the Tribunal, it is submitted by Mr. Rohit Arya, learned counsel for the appellant, that the Tribunal and the first appellate authority have fallen into error by holding that there had been no....
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.... that if the business continues and there was no distribution of assets, the concept of capital gain under section 45(4) would not be attracted. To bolster his submission he has placed reliance on the decision rendered in the case of CIT v. Vijayalakshmi Metal Industries [2002] 256 ITR 540 (Mad). It was further highlighted by Mr. Shrivastava that in the case at hand there cannot be any distribution inasmuch as there were only two partners and one of them having died the other partner would be the only singular surviving partner, therefore, there would be no distribution. Lastly, it was urged by him that the firm had ceased to exist because of the death of its partner and, therefore, there can be no capital gains in respect of an entity which is nonexistent. To appreciate the rivalised submissions raised at the Bar it is appropriate to refer to section 2(47) of the Act. It reads as under: "2(47) 'transfer', in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof....
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.... theatre must be deemed to be returned to the original owner, in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue. The expressions 'sale' and 'sold' are not denned in the Income-tax Act; those expressions are used in section 10(2)(vii) in their ordinary meaning. 'Sale', according to its ordinary meaning, is a transfer of property for a price, and adjustment of the rights of the partners in a dissolved firm is not a transfer, nor is it for a price." In the case of CIT v. Bankey Lal Vaidya [1971] 79 ITR 594, their Lordships of the apex court expressed that the property allotted to a partner in satisfaction of his claims to his share cannot be deemed in law to be a transfer to him. In the case of Malabar Fisheries Co. [1979] 120 ITR 49, the apex court after referring to the decision rendered in the cases of Dewas Cine Corpn. [1968] 68 ITR 240 (SC) and Bankey Lal Vaidya [1971] 79 ITR 594 (SC) expressed the view as under: "It seems to us clear that ....
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....r reason for rejecting the contention of the counsel for the Revenue and that is that the second condition required to be satisfied for attracting section 34(3)(b) cannot be said to have been satisfied in the case. It is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between 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. It is not possible to accept the view of the High Court that the distribution of assets effected by a deed takes place eo instanti with the dissolution or that it is effected by t....
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.... share of the deceased partner. The relevant date for ascertaining the year in which the tax is to be levied is the year in which the transfer takes place. That year may or may not be the year in which the dissolution of the firm takes place. Until such time such capital asset is transferred by way of distribution of the assets on the dissolution of the firm no occasion arises for bringing to tax any capital gain on a transfer which has not taken place. The section itself gives no room for doubt as the year in which the capital gain is to be brought to tax is, the previous year in which the said transfer takes place. As it is the finding of the Tribunal that no transfer had taken place in this year, the occasion for levying tax on any capital gain did not arise. The question referred to us as to whether the Tribunal was right in law in holding that capital gain did not arise in this case is answered in favour of the assessee and against the Revenue." In view of the aforesaid pronouncement of law we are inclined to think that there was no transfer of assets as per section 45(4) of the Act. We may refer to the decision rendered in the case of Mrs. Grace Collis [2001] 248 ITR 323 wh....