1992 (11) TMI 119 - AT - Income Tax

Assessing Officer, Business Income, Capital Asset, Capital Gains, Dissolution Of Firm, Financial Year, Firm Assessment, In Part, Previous Year, Written Down Value

Issues Involved:

1. Assessment of Rs. 1,47,80,403 as short-term capital gains under section 45(4) of the Income-tax Act, 1961.
2. Applicability of Rule 1BB of the Wealth-tax Rules for determining the market value.
3. Deduction under section 32AB of the Income-tax Act, 1961.
4. Allocation of the firm's income to the partners.

Issue-wise Detailed Analysis:

1. Assessment of Rs. 1,47,80,403 as Short-term Capital Gains:

The primary issue revolves around the assessment of Rs. 1,47,80,403 as short-term capital gains under section 45(4) of the Income-tax Act, 1961. The Assessing Officer (AO) noticed that the assessee transferred two properties to its partners, which he deemed as a dissolution of the firm. The AO applied section 45(4), considering the transaction as covered under "or otherwise," even without dissolution. The AO calculated the market value of the properties and determined the capital gains by subtracting the written down value from the market value.

The CIT (Appeals) upheld the AO's decision, stating that the properties belonged to the firm, and their withdrawal by the partners constituted a transfer. The CIT (Appeals) disagreed with the assessee's submissions, noting that the properties were shown in the firm's balance sheet, and depreciation was being charged by the firm.

The Tribunal, however, found that the properties were taken out of the firm's coffers by entries made on 7-10-1986, and the transfer was complete on that date. The Tribunal held that section 45(4) did not apply as there was no dissolution on 7-10-1986, and the transfer was not on retirement. The Tribunal concluded that the provisions of section 45(4) were not applicable to the facts of the case.

2. Applicability of Rule 1BB of the Wealth-tax Rules for Determining the Market Value:

The AO rejected the assessee's claim for applying Rule 1BB of the Wealth-tax Rules for determining the market value, stating that the partners could not be lessees of the firm. The CIT (Appeals) agreed, stating that Rule 1BB was a concession under wealth-tax and estate duty, not applicable to income-tax proceedings.

The Tribunal noted that the properties were transferred at written down value, and there was no evidence of underhand transactions or receipt of money over and above the agreed price. The Tribunal found that the market value should be determined based on the actual transaction and not hypothetical values.

3. Deduction under Section 32AB of the Income-tax Act, 1961:

The AO allowed a deduction under section 32AB but added it back while allocating the firm's income to the partners. The CIT (Appeals) upheld this, citing the first proviso to section 32AB, which prohibits deduction in the computation of income of any partner.

The Tribunal disagreed, stating that the proviso only prohibits allowance of deduction to the partners if the firm has already claimed it. The Tribunal held that the allocation of the firm's income to the partners should be as per section 67 of the Act, without adding back the section 32AB deduction.

4. Allocation of the Firm's Income to the Partners:

The Tribunal emphasized that the allocation of the firm's income to the partners should be as per section 67 of the Act. The Tribunal noted that the first proviso to section 32AB does not provide for withdrawal of the deduction while allocating the firm's income to the partners. The Tribunal directed the AO not to add the deduction allowed under section 32AB while making the allocation of the firm's income in the hands of the partners.

Conclusion:

The Tribunal concluded that the assessment of Rs. 1,47,80,403 as short-term capital gains under section 45(4) was not justified, as there was no dissolution or retirement on 7-10-1986. The Tribunal also held that Rule 1BB of the Wealth-tax Rules was not applicable for determining the market value in this case. The Tribunal further directed that the deduction under section 32AB should not be added back while allocating the firm's income to the partners, and the allocation should be as per section 67 of the Act.

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