2010 (3) TMI 903 - AT - Income Tax

Transfer of business of partnership firm to company - closing stock and some asset taken over by the partner - capital gain - deduction of interest valuation of closing stock - held that - Not only addition in the fixed assets there is repayment of unsecured loans also which has come down to Rs. 5 lakhs as on 17-9-1991 as against the opening balance of Rs. 10 lakhs. If the assets and liabilities are not taken over by the assessee-firm how deduction on account of interest payment on loan is claimed in the profit and loss account. Value of asset transferred to partner after dissolution of partnership firm - held that - the assets were transferred by the partner to the assessee-firm and on this date no income is chargeable in the hands of Shri MM Goel who has transferred these assets to the assessee-firm as his capital contribution because such transfer was recorded in the books of the firm at book value only. But on 17-9-1991 when on dissolution of the firm there is distribution of assets to the second partner i.e. M/s. PSPPL market value has to be considered for the purpose of capital gain. Closing stock taken over by the partner - Assessing Officer to compute the business profit after including the difference in market value in closing stock as on 17-9-1991 and book value of closing stock as shown by the assessee in profit and loss account and such difference should be added in business income of the assessee. Allowability of deduction to the assessee under section 80-I - industrial undertaking whetehr benefit of section 80-I were attached to the undertaking and not to the owner thereof and the assessee having taken over the running under taking which was otherwise entitled to the benefit of section 80-I Held that - Assessee-firm was formed by the reconstruction of a business already in existence as a sole proprietory concern of Shri M.M. Goel and hence the assessee does not fulfill the conditions laid out in section 80-I(2)(i) and therefore the assessee is not entitled for deduction under section 80-I of the Act - ground of the revenue is also allowed - appeal of the revenue is allowed

Summary

Issues Involved:
1. Deletion of the addition of Rs. 7,56,478 on account of capital gain by the CIT(A).
2. Direction by the CIT(A) to allow the claim of the assessee under section 80-I.

Issue-wise Detailed Analysis:

1. Deletion of the Addition of Rs. 7,56,478 on Account of Capital Gain:
The revenue contended that the CIT(A) erred in deleting the addition made by the Assessing Officer (AO) on account of capital gain, which was based on the market value of assets (closing stock, land, and plant and machinery) being higher than the book value on the date of dissolution. The AO had applied section 45(4) of the Income-tax Act, 1961, and calculated the capital gain on the transfer of closing stock, land, and plant and machinery. The CIT(A) had initially deleted these additions, considering that the assets were owned exclusively by Shri Man Mohan Goel and not the firm. However, the Tribunal remanded the matter back to CIT(A) to reconsider in light of the Supreme Court's judgment in ALA Firm v. CIT [1991] 189 ITR 285 and other relevant judgments. The CIT(A) again ruled in favor of the assessee without addressing these judgments.

The Tribunal found that the assets were indeed shown in the balance sheet of the assessee-firm and that the business was transferred to M/s. PSPPL at book value. The Tribunal emphasized the provisions of section 45(4), which requires the fair market value of the assets on the date of transfer to be considered for capital gain calculation. The Tribunal rejected the assessee's argument that the business was transferred as a going concern and should be valued at book value, citing that section 45(4) mandates market value consideration. The Tribunal also noted that the CIT(A) failed to address the relevant judgments and directed the AO to compute the business profit by including the difference between the market value and book value of the closing stock as business income, and the excess market value over book value of other assets as capital gain.

2. Direction to Allow the Claim of the Assessee under Section 80-I:
The revenue argued that the CIT(A) erred in directing the AO to allow the assessee's claim under section 80-I without considering the conditions laid down under section 80-I(2) and 80-I(1)(a). The Tribunal noted that the CIT(A) had relied on a previous Tribunal decision in the case of PSPPL, which concluded that section 80-I benefits were attached to the undertaking, not the owner. However, the Tribunal found that the legal provisions of section 80-I(2) were not considered in that decision.

The Tribunal highlighted that for an industrial undertaking to be eligible for deduction under section 80-I, it must fulfill all conditions specified in section 80-I(2). In this case, the assessee-firm was formed by reconstructing an existing sole proprietorship, thus not meeting the condition that it should not be formed by the reconstruction of a business already in existence. Consequently, the Tribunal concluded that the assessee-firm did not qualify for the deduction under section 80-I and allowed the revenue's ground.

Conclusion:
The Tribunal allowed the revenue's appeal, reinstating the addition of Rs. 7,56,478 on account of capital gain and denying the assessee's claim for deduction under section 80-I.