2006 (7) TMI 535 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of an addition made under section 45(4) of the Income-tax Act.
2. Disallowance of bad debts.

Detailed Analysis:

1. Deletion of an Addition Made Under Section 45(4) of the Income-tax Act:

The revenue challenged the deletion of an addition of Rs. 13,92,81,280 made on account of the distribution of assets of a firm among its partners, invoking section 45(4) of the Income-tax Act. The primary contention was whether the transfer of assets to the partners constituted a distribution of assets on the dissolution of the firm or otherwise, thereby attracting the provisions of section 45(4).

The firm, a partnership with four partners, had disputes leading to the cessation of its primary business activities. The firm sold portions of a building (Kimatrai Building) to its partners, which the Assessing Officer (AO) considered as a distribution of assets, invoking section 45(4). The AO formulated three questions: the applicability of section 45(4), whether the sale was covered under section 45(1), and the relevance of family settlement.

The AO concluded that the transactions were distributions of assets, not sales, citing the Memorandums of Understanding (MOUs) between the partners and the absence of actual consideration. The AO referred the valuation to the District Valuation Officer (DVO), who valued the property at Rs. 18,04,94,300, leading to the addition.

The CIT(A) disagreed, emphasizing that the transactions were sales under section 45(1), not distributions under section 45(4), noting that the areas sold were not proportional to the partners' profit-sharing ratios. The CIT(A) also found the valuation by the DVO unreasonable, as the sale prices were consistent with previous sales to other parties.

The Tribunal upheld the CIT(A)'s decision, agreeing that section 45(4) was not applicable as the firm was not dissolved and continued to be assessed as a registered firm. The Tribunal referenced the case of Burlington Exports, which clarified that "otherwise" in section 45(4) must be read in conjunction with dissolution, and without dissolution, the section does not apply. The Tribunal also found the valuation by the DVO unnecessary, as the sale prices were consistent with market rates and no evidence suggested higher consideration was received.

2. Disallowance of Bad Debts:

The assessee claimed bad debts of Rs. 2,90,42,437, with Rs. 2,28,88,454 related to N.S. Silk Mills, a sister concern undergoing liquidation. The AO disallowed the claim, arguing that the assessee failed to prove the debts were irrecoverable.

The CIT(A) allowed the claim, accepting the assessee's contention that the debts were written off in good faith due to the liquidation of N.S. Silk Mills and other debts being similarly uncollectible.

The Tribunal upheld the CIT(A)'s decision, referencing the Special Bench decision in Oman International Bank, which held that post-amendment to section 36(1)(vii), an assessee need not prove the debts have become bad, only that they were written off in good faith. The Tribunal found the assessee's claims consistent with this interpretation, as the debts were genuinely uncollectible and duly written off in the books.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decisions on both issues. The transactions were deemed sales under section 45(1), not distributions under section 45(4), and the bad debts were correctly written off in accordance with the amended provisions of section 36(1)(vii).