2011 (9) TMI 612 - HC - Income Tax

Registration as Partnership Firm - no partnership deed furnished - no application after dissolution - Held That - As per Sec 184 original partnership deed is must however on sufficient reason a copy of it is accepted. When no such formalities were complied AO was correct in assessing the same as Association of Person(AOP). Transfer - Capital Gains - Firm Dissolved - Asset Revalued - Individual took over the firms and asset sold to Smt Jaypradha - Tax assessed in the hands of Individuals - Protective assessments - Held That - Profits or Gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of 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. Further revenue couldn t bring any evidence to show that property was transferred . Decided in favour of assessee.

Issues Involved:
1. Registration of the firm under Section 184 of the Income Tax Act, 1961.
2. Treatment of the firm as an Association of Persons (AOP).
3. Liability for Capital Gains for the assessment year 1986-87.
4. Assessability of cash credits.

Detailed Analysis:

1. Registration of the Firm:
Issue: Whether the Income Tax Appellate Tribunal (ITAT) was justified in not granting registration to the appellant firm for the assessment year 1985-86, despite compliance with Sections 184(4) and 184(5).

Analysis: The ITAT upheld the Assessing Officer's (AO) view that the firm did not produce the original partnership deed or sufficient contemporaneous records to prove the existence of the partnership. The assessee claimed to have sent the original deed by post, but there was no evidence of receipt by the Department. The Tribunal found no material to substantiate the existence of a valid partnership deed, thereby rejecting the claim for registration and treating the firm as an AOP.

Conclusion: The Tribunal's decision to not grant registration was upheld, as the assessee failed to prove the existence of a valid partnership deed.

2. Treatment as an Association of Persons:
Issue: Whether the ITAT was justified in treating the appellant as an AOP and applying the provisions of Section 184(5) of the Income Tax Act, 1961.

Analysis: The Tribunal found that the partnership deed dated 23.04.1985 was executed on a stamp paper purchased on 24.07.1985, raising doubts about its genuineness. The Tribunal held that the firm was not validly constituted and thus treated it as an AOP. The Tribunal applied the decision in [1973] 87 ITR 695 (Imperial Automobiles Vs. Commissioner of Income Tax) to support its conclusion.

Conclusion: The Tribunal's decision to treat the firm as an AOP was upheld due to the lack of evidence supporting the existence of a genuine partnership.

3. Liability for Capital Gains:
Issue: Whether the appellant is liable for Capital Gains for the assessment year 1986-87, given the absence of any document of transfer as per the Transfer of Property Act.

Analysis: The Tribunal confirmed the AO's view that the firm was an AOP and that the distribution of assets on dissolution did not attract capital gains due to Section 47(ii) of the Income Tax Act, which excludes such transactions from being considered as transfers. The Tribunal found no evidence of a transfer by A.R.Srinivasan (HUF) and A.R.Srinivasan (individual) to Jayapradha, thus negating the applicability of capital gains tax.

Conclusion: The Tribunal's decision that the distribution of assets on dissolution did not attract capital gains was upheld, and the protective assessment on A.R.Srinivasan (HUF) and A.R.Srinivasan (individual) was set aside.

4. Assessability of Cash Credits:
Issue: Whether the Tribunal erred in not adjudicating the grounds relating to the assessability of cash credits.

Analysis: The Tribunal did not address the issue of cash credits in its order. The matter was remanded to the Tribunal for reconsideration.

Conclusion: The issue of cash credits was remanded to the Tribunal for fresh consideration and passing orders in accordance with law.

Summary:
The High Court upheld the ITAT's decision to treat the appellant firm as an AOP due to the lack of evidence supporting the existence of a genuine partnership. The court also upheld the Tribunal's decision that the distribution of assets on dissolution did not attract capital gains, setting aside the protective assessment on A.R.Srinivasan (HUF) and A.R.Srinivasan (individual). The issue of cash credits was remanded to the Tribunal for fresh consideration.

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