2018 (4) TMI 252 - AT - Income Tax

Reopening of assessment - proceedings to assess the capital gains in the hands of the assessee, in his individual capacity and not in the hands of the seller firm - Held that - Notice u/s 148 of the Act was issued to the purchaser firm M/s. Hotel Sea Weed on 31.07.2012. Notice was also issued on 31.07.2012u/s 148 to Shri Girish Chandra Rout, who is the respondent before me and a partner of the seller firm The AO had taken the cost of the asset as the WDV in the books of the seller partnership firm. Thus it is clear that the AO, prior to framing assessments on the purchaser firm and prior to framing assessments on the individual assessees, who are respondents in these appeals was fully aware that the asset in question belong to the seller partnership firm and not the individual assessee. It was the WDV of the asset in the Balance Sheet of the Seller Firm that the AO has taken for the purpose of computation of Capital Gains. Thus the argument of the ld. DR that the AO was misled as to whether the asset belonged to the firm or the individual in view of the recitals in the sale deed is devoid of merit. The notices u/s 148 of the Act were wrongly given as the reasons recorded were against the fact that, the asset belong to the firm which were in the knowledge of the A.O. No infirmity in the order of the First Appellate Authority wherein he held that u/s 189 of the Act, the assessments have to be made on the firm only, even if the business of the firm is discontinued. He rightly held that the capital gain in question could be brought to tax u/s 189 of the Act only in the hands of the seller firm with PAN AADFH 9221R. - Decided against revenue.

Summary

Issues:
1. Assessment of capital gains in individual capacity vs. firm
2. Validity of notice issued under section 148 of the Income Tax Act
3. Assessment jurisdiction under section 189 of the Act

Analysis:

Issue 1: Assessment of capital gains in individual capacity vs. firm
The case involved the sale of a property by a partnership firm, and the subsequent assessment of capital gains. The First Appellate Authority held that the Assessing Officer (AO) wrongly initiated proceedings to assess the capital gains in the hands of the individual partners instead of the partnership firm. The Authority emphasized that a partnership firm is a separate assessable entity, distinct from its partners. Referring to section 189 of the Act, it was established that even if the firm's business is discontinued, assessments must be made on the firm. The notice issued to the partners under section 148 was deemed void, and assessments framed for the partners in their individual capacity were quashed.

Issue 2: Validity of notice issued under section 148 of the Income Tax Act
The AO had issued notices under section 148 to the purchaser firm and the partners of the seller firm, alleging that capital gains had escaped assessment. However, it was found that the asset in question belonged to the seller partnership firm, as evidenced by the balance sheet and the WDV in the books of the firm. The AO was fully aware of this fact before initiating assessments. The First Appellate Authority held that the notices were wrongly given, as the asset belonged to the firm and not the individual partners.

Issue 3: Assessment jurisdiction under section 189 of the Act
The Tribunal upheld the First Appellate Authority's decision that assessments for capital gains could only be made on the seller firm under section 189 of the Act, even if the firm's business was discontinued. It was established that the capital gains in question should be taxed only in the hands of the seller firm with the specific PAN number. The Tribunal dismissed the revenue's appeals and upheld the Authority's order, emphasizing the correct jurisdiction for assessment under section 189.

In conclusion, the Tribunal affirmed that assessments for capital gains arising from the sale of the property should be made on the partnership firm, not on the individual partners, as per the provisions of the Income Tax Act. The notices issued under section 148 were deemed void, and the jurisdiction for assessment was clarified under section 189 of the Act. The decision of the First Appellate Authority was upheld, and both the revenue's appeals and the cross objection of the assessee were dismissed.