2015 (12) TMI 96 - AT - Income Tax

Valuation of property - capital gain computation - whether fair market value as on the date of dissolution of the firm shall be taken into consideration - rectification of mistake - Held that - This Tribunal is of the considered opinion that when the partnership was dissolved, the asset of the firm has to be valued on real basis i.e at market value, and not at cost price. As observed in A.L.A Firm vs CIT 1991 (2) TMI 1 - SUPREME Court the value reflected in the books of account cannot reflect the fair market value. Therefore, the property has to be valued on the date of dissolution in view of this judgment of the Apex Court which was not brought to the notice at the time of hearing of the appeal. This Tribunal is of the considered opinion that there is an error in the order of this Tribunal dated 26.6.2015. Accordingly, in exercise of the jurisdiction conferred on this Tribunal u/s 254(2) of the Act, the order of this Tribunal dated 26.6.2015 is rectified as follows At page 6, para 7, the following shall be deleted Now coming to the valuation, the Assessing Officer has rightly taken the value as reflected in the balance sheet of the partnership firm and it was confirmed by the CIT(Appeals). Therefore, this Tribunal do not find any infirmity in the order of the lower authority and accordingly, the same is confirmed. Now the following shall be inserted as para 7 7. Now, coming to the valuation, admittedly, there was dissolution of the firm and the partnership firm ceased to exist. Therefore, as observed by the Apex Court in A.L.A Firm vs CIT, 1991 189 ITR 285, the value of the asset has to be revalued and the fair value on the date of dissolution has to be taken into consideration. As observed by the Apex Court, the partner of the firm being a commercial man, will value the asset only on real price and not at cost or at any other value. Therefore, this Tribunal is of the considered opinion that the Assessing Officer shall find out the fair value/market value of the property as on the date of dissolution of the firm i.e 20.2.2007 and thereafter compute the capital gains in accordance with law. In the result, the appeal of the assessee is partly allowed

Summary

Issues Involved: Valuation of property for computation of capital gains on dissolution of a partnership firm.

Analysis:
1. Valuation of Property - Assessee's Argument: The appellant contended that the property should be valued at the fair market value on the date of dissolution of the firm, as per section 45(4) of the Income-tax Act, 1961. Citing the judgment in A.L.A Firm vs CIT, it was argued that stock should be valued at market price at the time of dissolution, not as per the value in the books. The appellant claimed that the failure to consider this provision and the judgment constituted a mistake under section 254(2) of the Act.

2. Valuation of Property - Revenue's Argument: The Departmental Representative argued that section 45(4) of the Act applies to the firm's assessment, not individual partners. Referring to the A.L.A Firm case, it was highlighted that revaluation of stock-in-trade was crucial, which was not done in the present case. Consequently, the lower authority's decision was upheld by the Tribunal.

3. Judicial Analysis - Apex Court's Ruling: The Tribunal analyzed the Apex Court's judgment in A.L.A Firm, emphasizing the need to value assets at market price upon dissolution of a business. It was noted that the true trading result cannot be ascertained without considering the market value of stock-in-trade. The Court clarified that assets must be valued on a real basis at the time of dissolution, not at cost or book value. The Tribunal agreed that the property should have been valued at market value on the date of dissolution, as per the Apex Court's guidance.

4. Rectification of Tribunal's Order: Considering the above, the Tribunal rectified its earlier order, directing the Assessing Officer to determine the fair market value of the property as of the dissolution date. The Tribunal amended the order to reflect the correct valuation approach and partially allowed the appellant's appeal. The rectification was made under section 254(2) of the Act, acknowledging the error in the initial decision.

5. Conclusion: The Tribunal allowed the appellant's miscellaneous petition, emphasizing the importance of valuing assets at market value upon dissolution of a partnership firm. The rectification aimed to align the decision with the legal principles outlined by the Apex Court, ensuring proper computation of capital gains in accordance with the law.

6. Final Order: The Tribunal's rectification altered the valuation approach, highlighting the significance of determining the fair market value of assets at the time of dissolution for accurate computation of capital gains, thereby granting partial relief to the appellant.