2016 (2) TMI 626 - AT - Income Tax

Addition u/s 68 - Held that - The assessee not only gave the confirmation but also furnished the balance sheet of the creditors and also the acknowledgement of the filing of income tax return by the creditors. Therefore, if the Revenue was not satisfied about the creditworthiness of the creditors, it could have examined the creditors as they were assessed to income tax and all particulars relating to them were with the Assessing Officer. Addition deleted - Decided in favour of assessee Addition on account of long term capital gain - applicability of 45(4) - Held that - Section 45(4) of the Act would be applicable if there is transfer of capital asset by way of distribution of capital asset on dissolution of firm or otherwise. Such profit and gain would be chargeable to tax as income of the firm in the previous year in which said transfer took place and, for the purpose of Section 48, the fair market value of the asset on the date of such transfer shall be deemed to be full value of the consideration received or accrued as a result of such transfer. However, the sine qua non of the applicability of this Section is the transfer of capital asset by way of distribution of capital asset. In the case under appeal before us, it has not been pointed out by the Assessing Officer or the learned DR whether there was any distribution of capital asset. The Assessing Officer levied the capital gain tax in respect of land but the land was owned by the partnership firm before and after the change in the constitution of the firm. Admittedly, land was not distributed amongst the three partners who retired from the partnership firm. When there was no distribution of the capital asset viz., land, Section 45(4) would not be applicable. Though both the parties have relied upon some judicial pronouncements in support of their arguments but, in our opinion, when the basic facts with regard to transfer of capital asset by way of distribution of capital asset is not fulfilled, Section 45(4) is not applicable. - Decided in favour of assessee

Summary

Issues:
1. Addition u/s 68 of the Income Tax Act - Deletion of addition of Rs. 38.60 lacs by CIT(A).
2. Long term capital gain - Deletion of addition of Rs. 36.93 lacs by CIT(A).

Issue 1: Addition u/s 68 of the Income Tax Act
The Revenue appealed against the deletion of the addition of Rs. 38.60 lacs made u/s 68 of the Income Tax Act by the CIT(A). The Revenue contended that the CIT(A) erred in law by not appreciating the facts of the case and the reasons given by the Assessing Officer. The Revenue argued that no satisfactory explanation was provided for cash deposits in the bank account of the creditor, and the creditor was not produced for examination. However, the counsel for the assessee argued that all creditors were assessed to income tax, submitted confirmations, balance sheets, and returns, thus discharging the burden to prove the cash credit. The CIT(A) found that the creditors had sufficient creditworthiness and transactions were genuine. The ITAT upheld the CIT(A)'s decision, citing precedents and emphasizing that the creditors' creditworthiness was established, leading to the deletion of the addition.

Issue 2: Long term capital gain
The Revenue contested the deletion of the addition of Rs. 36.93 lacs on account of long term capital gain by the CIT(A), claiming that the assessee's case fell under section 45(4) of the IT Act. The Assessing Officer noted a reconstitution of the partnership firm with partners retiring and a new partner joining, applying Section 45(4). However, the ITAT found that Section 45(4) would apply only if there was a transfer of capital asset by way of distribution on dissolution of the firm or otherwise. As the land in question was not distributed among retiring partners, Section 45(4) did not apply. The ITAT upheld the CIT(A)'s decision, rejecting the Revenue's appeal on this ground as well.

In conclusion, the ITAT Delhi dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the additions under both issues. The judgment provides a detailed analysis of the legal provisions and precedents applied to reach the decision, emphasizing the importance of establishing creditworthiness and meeting the requirements of relevant tax laws.