2018 (6) TMI 1323

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....irm which commenced on 05.04.1979. The partnership firm was engaged in running a hospital. The firm was reconstituted several times, over a period of time with different partners and eventually the assessee and his daughter alone were the partners. At the outset we have to notice that there is no definiteness as to the exact share of each of these partners for want of sufficient material. Any way, on 31.03.1997, the firm, consisting of two partners, i.e., the assessee and his daughter, was dissolved and the daughter released her share in the firm to the exclusive share of the father, the assessee herein. The assessee also took his share of the assets of the firm and the hospital belonged exclusively to him on such dissolution of the firm. It thus became a proprietorship and later it was sold on 18.03.1999 for Rupees Five Crores. 3. The assessee filed a return for the year 1999-2000, showing the apportionment of the consideration relating to building, furniture, electric and sanitary fittings, equipments and machinery, land, goodwill and trademark of the hospital and nursing home. With respect to the building, the assessee offered short term capital gains for assessment. Consider....

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....ssing Officer was erroneous. CIT v. Max India Limited [295 ITR 282 (SC)] was also relied on to find that the view adopted by the Assessing Officer is permissible in law and when the Assessing Officer adopts one of the two courses of law, merely for the reason it has resulted in loss of revenue, invocation of Section 263 of the IT Act is not enabled. 6. Essentially the following three questions of law arise from the order of the Tribunal: (i) Whether, in the facts and circumstances of the case, it can be said that the invocation of Section 263 of IT Act is bad in law for reason of the view taken by the Assessing Officer being one of the courses permitted by law? (ii) Whether, in the facts and circumstances of the case, the Tribunal was correct in affirming the view of the Assessing Officer that with respect to land, goodwill and trademark the assessee can return long term capital gains and claim exemption under Section 54AE, on the presumption that there is no transfer effected on dissolution of the firm? (iii) Whether, in the facts and circumstances of the case, ought not the Tribunal have found that the entire property of the firm having been transfer....

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....rtifies their stand. CIT v. Kwality Steel Suppliers Complex [(2017) 14 SCC 548] was placed, to put in proper perspective the powers conferred under Section 263 and the situations in which such power could be invoked. 9. We will first look at the scope and ambit of Section 263, as has been dilated upon in Kwality Steel Suppliers Complex. Therein, a mother and son were the partners of a firm and on the demise of the former, the business was continued by the latter. At the time of dissolution, the firm had valued the closing stock at stock price, which was accepted by the Assessing Officer. Subsequently, a suo motu revision was attempted under Section 263, directing the Assessing Officer to value the closing stock at the time of dissolution at the market price. The Hon'ble Supreme Court held that valuation on the cost price was permissible especially when the business had not come to a stop by the dissolution of the firm and was continued by one among the two persons; the other having expired. In these circumstances, it was held that when there are two options available, both permissible in law, then the adoption of one of such options by the Assessing Officer cannot be interfe....

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....n brought into the common share of the partnership firm; there could be capital gains assessed on the basis of the value as shown in the books of the partnership firm. Two issues were framed by the Hon'ble Supreme Court. Whether there was a transfer on such shares being brought into the common interest of the firm and whether it could be assessed under Section 48 as profits and gains arising from the business. Addanki Narayanappa was specifically referred to and the legal position with respect to allotment of assets in proportion to the shares, on dissolution was noticed. It was held that when a partner brings his personal assets into the partnership firm as his contribution to the capital, the exclusive rights as held by the said partner would be extinguished in favour of the common rights of the other partners. Hence, there was a transfer effected; quite contrary to the situation of allotment of shares on dissolution. However, the individual interest cannot be evaluated immediately and would be subject to the operation of future transactions of the partnership firm even resulting in diminution in value depending on accumulated liabilities and losses in the event of fall in pr....

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....fer occasioned and the rights over that property accrues to the assessee, only on such release being effected by the other partner. On facts, we find that the share of the assessee which he received exclusively on dissolution being relatable to a pre-existing right he had, as one of the partners; to the extent of such share, the assessee's claim for exemption from long term capital gains for reason of the deposit made to UTI under Section 54EA has to be allowed. However, on the value of the shares in which the other partner had a pre-existing right; which was released in favour of the assessee, the right over it can be claimed only from the date of release and if subsequent sale falls within the 36 month period, necessarily the assets are to be assessed as short term capital gains to that extent. 13. The Tribunal has not gone into the facts and has proceeded on the basis that the allotment of shares on dissolution would not result in a transfer, which, according to the Tribunal, is a legally permissible option available to the assessee. We, on the correct law applied to the peculiar facts, do not agree with the Tribunal on the acceptance of the claim raised by the assessee f....