TaxTMI 
TaxTMI 
2025 (2) TMI 1344
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....see raised 6 grounds of appeal amongst which, the only issue emanates for our consideration as to whether the ld. PCIT is justified in setting aside the assessment order passed under section 143(3) r.w.s. 147 r.w.s. 144B of the Act in the given facts and circumstances of the case. 4. Brief facts relating to the case are that the assessee is an individual and filed her return of income for the A.Y. 2017-18 on 31.07.2017 admitting returned income of Rs..9,49,240/- and claimed refund of Rs..4,683/-. The return of income was processed on 29.08.2017 resulting in refund of Rs.. 4,680/-. As per the information available with the department, the Assessing Officer noted that during the F.Y. 2016-17, vide sale deed in Doc. No.7223/2016-17 executed on 02.03.2017, the firm M/s. Baliga Lighting Company had sold factory building at Bengaluru for total consideration of Rs.. 5,30,00,000/-. The firm M/s. Baliga Lighting Company had two partners viz. Shri Ramesh Baliga and Shri Mahesh Baliga. Shri Mahesh Baliga expired on 14.12.2015 and accordingly, as per deed of the firm on that date i.e. on 14.12.2015, the assessee firm ceased to exist. However, the transfer of above property happened on 02.03....
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.... order, the ld. PCIT partly set aside the assessment order and directed the Assessing Officer to make necessary enquiries as per the discussions contains in para 7 to 9 of the impugned order and pass a fresh order within the stipulated time after providing due opportunity to the assessee of being heard. 6. On being aggrieved, the assessee preferred an appeal before the Tribunal. The ld. AR Shri Ravi Kannan, Advocate filed paper book and also filed detailed written submissions. The ld. AR submits that the assessment of the assessee was reopened for the reasons stated in Page No. 2 of the assessment order under section 147 r.w. 143(3), dated 30.03.2022 and argued that the reason stated for reopening was escapement of the Income in the form of Capital Gains arising out of the sale of Land relating to M/s Baliga Lighting Company- a Partnership Firm, in which the assessee was the legal heir to the deceased partner- Shri Mahesh Baliga. It is also not in dispute that the capital gains arising out of the sale of land was paid by the firm M/s. Baliga Lighting Company in the Assessment Year 2017-18 and drew our attention to the acknowledgement of return of income and computation of total ....
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....ed to section 47 of the Partnership Act, 1932. Section 47 "CONTINUING AUTHORITY OF PARTNERS FOR PURPOSES OF WINDING UP After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise Provided that the firm is in no case bound by the acts of a partner who had been adjudicated insolvent, but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent." 8. The ld. AR referred to the decisions in the case of Narendra Bahadhur Singh v. Chief Inspector of Stamps (AIR 1972 All 1) (at Page 79, Paragraph 22 of the ADP), in the case of Chaturbhuj Durga Das Factory v. Damodar Jamndas Zawar and OtheRs. (AIR 1960 Bom 424) (at Page 60, Paragraph 8 of the ADP) and in the case of Motilal Chimanram and Anr v. Sarupchand Prithiraj and others (AIR 1937 Bom 81) (....
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....tled to the surplus which remains after the payment of debts and liabilities of the firm and this proposition is supported by the decisions in the case of Sunder Devi v. Brij Lal and ORs. ILR (1981) 1 Delhi (Ref: Page 131 paragraph 16 of the ADP) and in the case of Manohar Das and Others v. Board of Revenue U.P (AIR 1971 All 523) (Ref: Page 71 Paragraph 16 of the ADP). He submits that the assessee (the legal heir of the deceased) only acquires the surplus amount after all the liabilities of the firm have been paid, which includes the tax liability of capital gains also and the assessee cannot be taxed for the liability of the capital gains arising out of the sale of the immovable property of the firm because it is only the residue after the payment of tax liability. 10. The ld. AR further submits that the settled principles of Partnership Law, even under the Income Tax Act, 1961, section 45(4) r.w. section 189, lays down the same proposition that the capital gains must be taxed in the hands of the firm. He referred to section 45(4) as amended by Finance Act 2017 on 01/04/2017 and also section 189 of the Act. (4) The profits or gains arising from the transfer of a capita....
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....ccordingly. (5) Nothing in this section shall affect the provisions of sub-section (6) of section 159. 11. He argued that even as per section 45(4) r.w.s 189, the capital gains are liable to be assessed only under section 45(4) r.w. section 189 of the Income Tax Act, 1961. Assuming the view of the PCIT is accepted that the firm ceased to exist and the tax liability must be assessed in the hands of the legal heirs of the deceased partner, then section 45(4) and section 189 would be rendered otiose. He referred to decision in the case of Joint Receivers of United Film Exhibitors v. CIT (1989) 177 ITR 518 (Kerala) (at paragraphs: 5 & 6) and in the case of Paulson Constructions v. CIT (1990) 181 ITR 476 (Kerala) (at Paragraphs: 5, 6 & 13) and argued that the firm continues to exist for the purpose of winding up was also raised before the PCIT vide Response dated 28/12/2024 which has been extracted in Pages No. 4 and 5 of the PCIT Order as internal Paragraphs 2 and 7, wherein the assessee has inter alia contended that the partnership firm continues for the purpose of winding up and further stated the firm was a party in the sale, that the sale consideration was only deposite....
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....the copy of the decision was submitted during the Assessment proceedings (at Page 150 of ADP) as response to the notice under section 142(1) of the Act and this response has also been acknowledged in Paragraph 3 of the assessment order in Page 3 of the assessment order. It is only considering this submission; the Assessing officer has come to the conclusion that the assessee is not liable to pay capital gains as it has already been assessed in the hands of the firm. Therefore, the Contention of the PCIT in Paragraph 9 of the Order that the assessing officer had not made any enquiries with respect to capital gains for the assessee's share does not have any merit. Further, the question of invoking the provisions of Section 50C (determination of the value of the property) would not even arise as the capital gains is not even chargeable in the hands of the assessee. If at all the question, the question of valuation of the property arises, it must be dealt with in the assessment of the firm, if the same is otherwise permissible within the law and prayed to quash the order under section 263 of the Act passed by the ld. PCIT, as the same is without Jurisdiction. 14. Against the abo....
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....ly one of contract and no heir of a deceased partner can claim to have become a partner without the consent ex pressed or implied of the other Further, under the provisions of section 46 of the Indian Partnership Act, 1932, on the dissolution of a firm, every partner or his representative as against the other partners or their representatives, has the right to have the property of the firm applied in payment of the debts and liabilities of the firm and to have a distribution of the surplus amongst the partners or their representatives, according to their rights. The right, therefore, of a legal representative of a deceased partner in a partnership consisting of two partners which is dissolved on the death of one of them, would only normally be the right conferred by section 46 of the Indian Partnership Act, 1932, referred to earlier. (i) And now we notice a few decisions on the aforesaid facets of the matter. M. T Sughra v Babu considered the effect of death of one of two partners in a partnership. The position in such cases was summed up by Justice Agarwala at page 507 thus: "The general rule is that a partnership is dissolved after the death of a party. This rul....
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....n of the assessee as a partner was only as a result of entering into of a new partnership between R and the assessee. Partnership was not a matter of heritable status but purely one of contract." 26. In the light of aforementioned case, it is clear that when there are only two partners constituting the partnership firm, on the death of one of them, the firm is deemed to be dissolved despite the existence of a clause which says otherwise. A partnership is a contract between the partners. There cannot be any contract unilaterally without the acceptance by the other partner. The Appellants, the legal representatives of original plaintiff (since deceased) was not at all interested in continuing the firm or constitute a fresh firm and they cannot be asked to continue the partnership, as there is no legal obligation upon them to do so as partnership is not a matter of heritable status but purely one of contract, which is also clear from the definition of partnership under Section 4. Therefore, the trial court was justified in holding that the firm dissolved by virtue of death of one of the partners and the first appellate court as well as the High Court have taken the correct vi....
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.... 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. 18. Thus, he submits that section 45(4) creates a deeming fiction by treating with distribution of capital assets on dissolution of a firm among the erstwhile partners and it is not a proposition that capital gains arising out of transfer of a capital asset belonging to the firm will be taxable in the hands of the firm post dissolution of the same. He further submits that the learned PCIT in his order has correctly pointed out that the proceeds of the capital gains on transfer of the land and building is taxable in the hands of the legal heirs and the assessment order passed by the Assessing Officer by accepting the view point of the assessee was an order which is erroneous in so far it is prejudicial to the revenue. The ld. PCIT has pointed out that the Assessing Off....
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....essee replied another letter dated 29.01.2024, which are reproduced from para 7 to 9 of the impugned order. We find the submissions as made by the assessee before the ld. PCIT are similar to the submissions made before us by the ld. AR. We find the ld. PCIT acknowledged offering of long term capital gains in the hands of the partnership firm and held that the said capital gains were required to be taxed in the hands of surviving partner and the legal heirs of the deceased partner, but, not in the hands of the partnership firm, which ceased to exist from 14.12.2015. The ld. AR vehemently contested before us, that if the said view of the ld. PCIT is accepted, then there will be double taxation in the hands of the assessee, which is not justified. We note that the ld. PCIT's case is that the long term capital gain is to be taxed in the correct hands, i.e., in the hands of surviving partner and the legal heirs of the deceased partner. Further, we note from the impugned order that the assessment order was passed by making addition on account of capital gains in the hands of two other legal heirs i.e., Mrs. Premalatha U Baliga and Ms. Gayathri Baliga of their respective shares of decease....
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...., 1932 in support of the same. On plain reading of the provisions of section 47 of the Partnership Act, 1932, yes it is correct that the mutual rights and obligations of partners would continue notwithstanding the dissolution to wind up the affairs of the firm only to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. Coming to the facts of the case in hand, we note that there was no transaction exists and remains unfinished affairs at the time of dissolution i.e. on the date of death of one of the partners and therefore, in our considered opinion, the provisions under section 47 of the Act are not applicable to the facts on hand only for the reason that the transaction of sale of factory building of the partnership firm is a subsequent event was caused effected in subsequent financial year, but not, in the previous year relating to the year under consideration. Therefore, the case law as relied on by the ld. AR in the case of Narendra Bahadhur Singh v. Chief Inspector of Stamps (supra), Chaturbhuj Durgadas Factory v. Damodar Jamndas Zawar and Others (supra) and Motilal Chimanram and Anr. V. Sarupchand Prithiraj and others (supra) for the ....
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....e of them, would only normally be the right conferred by section 46 of the Indian Partnership Act, 1932, referred to earlier. (i) And now we notice a few decisions on the aforesaid facets of the matter. M. T Sughra v Babu considered the effect of death of one of two partners in a partnership. The position in such cases was summed up by Justice Agarwala at page 507 thus: "The general rule is that a partnership is dissolved after the death of a party. This rule is, however, subject to a contract to the contrary. When it is said that a partnership will not be dissolved by the death of one party, what is meant is that the partnership will continue between the surviving partners, even after the death of a partner. It follows that in order that the exception to the general rule may apply, the original partnership must consist of more than two partners. In the case of a partnership consisting of only two partners, no partnership remains on the death of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between the two partners to the effect that on the death of one of them, the partnership will not be dissolved, but will contin....
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....s: "A partnership normally dissolves on the death of the partner unless there was an agreement in the original partnership deed. Even assuming that there was such an agreement in a partnership consisting of two partners on the death of one of them the partnership automatically comes to an end and there is no partnership which survives and into which a third party can be introduced. Hence on the death of S, the original partnership was dissolved. The subsequent taking in of the assessee as a partner was only as a result of entering into of a new partnership between R and the assessee. Partnership was not a matter of heritable status but purely one of contract." 24. On careful reading of the said decision dated 05.10.2010, we note that the Hon'ble Supreme Court was pleased to affirm the principle laid by the Hon'ble High Court of Madras in the case of Smt. S. Parvathammal v. CIT (supra). The Hon'ble Supreme Court was pleased to observe that on the death of one of the partners, the original partnership was dissolved and the subsequent taking in of the assessee therein as a partner was only as a result of entering into a new partnership between the surviving partner and the assessee....
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....ates the contingency of dissolution of the firm and under section 42(c), the firm stands dissolved by death of a partner. The provision of section 189 has been made for the limited purpose that any firm which is dissolved may not escape the liability to tax after its dissolution. It is not the power of recovery of tax which is to be examined, but as to whether there could have been any assessment of tax by invoking the provisions of section 189 when the firm had not carried on any business and was not in existence (because it was dissolved). Section 2(31) of the Act defines "person" and a firm has been included in the definition of person. It has not been brought on record as to who are the persons on behalf of the deceased partners who have inherited the property of such deceased partners. If the firm is not in existence then assessment could be made of the persons who are the legal heirs. The fact that the firm was not in existence during the assessment year 1982-83 has not been stressed and the finding which has been recorded by the Tribunal is that "the undisputed fact in the instant case is that the remaining two partners who comprised the firm from 1953 also died about 5-10 y....