2023 (4) TMI 235 - AT - Income Tax

Revision u/s 263 - short-term capital gain arose to a partnership firm as taxable either in the hands of the firm or in the hands of the partner on its dissolution/discontinuation - whether any gain is available or not? - HELD THAT - The assessee has specifically pointed out that purchaser took responsibility of the loan required to be paid by the assessee on these assets and such low liability - CIT only took into consideration the Written Down Value of the assets in the books of account and failed to recognize the loan liability. This transaction is not to be examined in isolation. The assessee has disposed of its assets and the purchaser has discharged the liability. No short-term capital gain has arisen to the assessee and if arisen, then it is to be set off with the ultimate loss going to be suffered by the assessee on account of loan liability, thus in practicality, no gain to the assessee. Commissioner has not recorded any factual finding when assessee has brought all these details to its notice. He simply set aside the assessment for de novo enquiry. The section does not contemplate so, Commissioner has to demonstrate as to how the order is erroneous and only thereafter for verification purposes, he can set aside. In the present case, when the assessee brought it to the notice of the ld. Commissioner that block of assets have been sold and which does not give rise to any capital gain, then he should have recorded specific finding as to how this claim of the assessee is factually incorrect and only thereafter the issue can be set aside to the ld. Assessing Officer for verification of those details and re-adjudication. It is to be appreciated that both the authorities were aware about the fact that block of assets have been sold. AO has specifically took into cognizance this fact and thereafter disallowed the depreciation. Thus it cannot be said that AO has not conducted inquiry and has not gone through the complete details before accepting the claim of assessee. AO has made reference to these facts as also the balance-sheet. The impugned order is not sustainable, it is quashed. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Whether the CIT erred in taking cognizance under section 263 of the Income Tax Act.
2. Whether the assessment order passed under section 147 read with 143(3) was erroneous and prejudicial to the interest of Revenue.

Summary:

Issue 1: Cognizance under Section 263 of the Income Tax Act
The assessee appealed against the order of the Principal Commissioner of Income Tax (CIT) under section 263, which set aside the assessment order passed under section 147 read with 143(3). The CIT issued a show-cause notice stating that the assessment order was erroneous and prejudicial to the interest of Revenue because it failed to account for the short-term capital gain arising from the sale of the entire block of fixed assets.

Issue 2: Erroneous and Prejudicial Assessment Order
The CIT observed that the written down value (WDV) of the block of fixed assets was Rs. 65,33,297/-, and the assets were sold for Rs. 2,04,48,979/-, resulting in a short-term capital gain of Rs. 1,39,15,682/-. The CIT noted that this gain was not considered in the assessment order. The assessee argued that the rice mill was owned by the partners, not the firm, and the sale proceeds were used to repay bank liabilities, leaving no taxable capital gain. The CIT rejected this argument, stating that the firm, Ganapati Agro Product, was the legal owner and liable for the tax.

Tribunal's Analysis and Conclusion
The Tribunal examined the facts and legal provisions, noting that the CIT failed to appreciate the transaction correctly. The purchaser assumed the loan liability of Rs. 1,76,00,000/-, which should have been considered in determining the capital gain. The Tribunal found that the Assessing Officer (AO) had indeed considered the sale of the block of assets and disallowed depreciation, indicating that the AO had conducted a proper inquiry. The Tribunal concluded that the CIT did not demonstrate how the assessment order was erroneous and merely set it aside for a de novo inquiry, which is not the purpose of section 263. Therefore, the Tribunal quashed the CIT's order and allowed the assessee's appeal.

Order Pronouncement
The appeal of the assessee was allowed, and the order was pronounced in the open Court on 27th March, 2023.