2004 (2) TMI 28 - HC - Income Tax

Capital gain - Mode of settlement of accounts between partners - 1. Whether, the assets recovered by virtue of the decree of the High Court, was in satisfaction of the loan inclusive of interest allegedly due to the assessee from the partnership and it became a part of the stock-in-trade of the assessee? 2. Whether, the assessee was entitled to set off the liabilities of partnership in the computation of the capital gain and if so, to what extent? - it is clear that where the capital asset became the property of the assessee on dissolution of a firm then the cost of acquisition is deemed to be the cost for which the previous owner of the property acquired it. In the instant case the property was acquired by the partnership firm and hence cost of acquisition by firm is to be considered. The written down value as per balance-sheet is required to be taken into consideration which in the instant case has been taken into consideration. There is no provision for entitlement to set off the liability of the partnership in the computation of capital gain Hence both questions are answered in favour of the Revenue

Summary

Issues:
1. Interpretation of a decree regarding assets recovered by virtue of a High Court order in satisfaction of a loan and its treatment as stock-in-trade.
2. Entitlement to set off partnership liabilities in the computation of capital gain.

Interpretation of Decree & Treatment of Assets:
The case involved the interpretation of a decree from the High Court regarding assets recovered in satisfaction of a loan and their treatment as stock-in-trade. The High Court examined the nature of the decree, emphasizing that it was a dissolution of partnership by the court, not a creditor-debtor matter. The Tribunal found that the decree was a consequence of partnership dissolution, not a debt recovery action. The court referred to Section 48 of the Partnership Act, stating that assets should be applied as per the rules after firm dissolution. As the decree did not indicate any sum paid as an advance, the court ruled in favor of the Revenue, stating that the assets were not to be considered stock-in-trade.

Entitlement to Set Off Partnership Liabilities:
Regarding the entitlement to set off partnership liabilities in capital gain computation, the Assessing Officer determined the capital gain figure after detailed examination. The court referred to relevant sections of the Income-tax Act, emphasizing that only specific expenditures related to asset transfer could be deducted for capital gain computation. The court highlighted Section 49(1)(iii)(b), stating that the cost of acquisition is based on the previous owner's cost. As there was no provision for setting off partnership liabilities in capital gain computation, the court ruled in favor of the Revenue. Consequently, the reference was disposed of, affirming the decisions made by the Assessing Officer and the Tribunal.