1987 (11) TMI 103 - AT - Income Tax

A Partner, Assessment Year, Capital Gains, Immovable Property, Income From House Property, Movable Property, Partnership Deed, Retirement Of Partner

Summary

Issues Involved:

1. Applicability of Section 45 to the transaction of retirement.
2. Appropriateness of substituting the fair market value as per Section 52(2).
3. Determination of whether the transaction constituted a "transfer" under Section 2(47).
4. Determination of the value of the asset for capital gains computation.

Detailed Analysis:

1. Applicability of Section 45 to the Transaction of Retirement:

The primary issue in the appeal by the assessee was the addition made as "Income from short-term capital gains" due to the transfer of thirteen godowns to Surendra Industries (Bombay) Pvt. Ltd. The CIT(A) had previously set aside the original assessment and directed the ITO to redo it after ascertaining the cost of acquisition of the transferred asset. Upon reassessment, the ITO relied on the DVO's valuation, which led to a significant capital gains charge. The CIT(A) rejected the application of Section 45 based on the decision in CIT v. H.R. Aslot, but the firm contested this, arguing that the transaction did not constitute a "transfer" under Section 2(47).

2. Appropriateness of Substituting the Fair Market Value as per Section 52(2):

The CIT(A) found in favor of the firm on the second point, holding that the ITO was wrong in applying Section 52(2). Supported by the Supreme Court decision in K.P. Varghese v. ITO, the CIT(A) held that substituting the fair market value of Rs. 40,18,500 in place of Rs. 23,97,361 was incorrect because Section 52(2) was inapplicable. The ITO had not brought any material on record to show that the firm had received anything more than the amount shown in the document, which was essential for the application of Section 52(1).

3. Determination of Whether the Transaction Constituted a "Transfer" Under Section 2(47):

The key argument from the assessee's counsel, Sri Y.P. Trivedi, was whether the mode of retirement adopted by the partners, whereby Surendra Industries (Bombay) Pvt. Ltd. was given the godowns, involved an element of "transfer" as meant in Section 2(47). The firm relied on the precedent set by CIT v. Mohanbhai Pamabhai, affirmed by the Supreme Court, which held that when a partner retires and receives his share in the net partnership assets, it does not constitute a "transfer" of any capital asset. The revenue, represented by Sri Makhija, countered by citing CIT v. Tribhuvandas G. Patel and H.R. Aslot's case, arguing that the retirement resulted in relinquishment of rights in the firm's asset, falling within Section 2(47).

The Tribunal reflected on the distinction between retirement and dissolution of a firm. It noted that while relinquishment of capital assets and extinguishment of any right would not constitute "transfer" in the traditional sense, they are included in Section 2(47) by the definition's enlargement. However, the Tribunal found the facts of Mohanbhai Pamabhai's case more comparable and persuasive, concluding that the transaction did not amount to a "transfer" within the meaning of Section 2(47).

4. Determination of the Value of the Asset for Capital Gains Computation:

The ITO had taken the value of the asset at Rs. 40,18,500 based on the DVO's report, while the firm had shown the value at Rs. 23,97,361. The CIT(A) directed the ITO to recompute the capital gains at Rs. 23,95,861, rejecting the higher valuation. The Tribunal upheld this decision, emphasizing that the ITO had not provided any evidence that the firm received more than the declared amount, thus making Section 52(1) inapplicable.

Conclusion:

The Tribunal concluded that the transaction did not result in capital gains chargeable to tax under Section 45, as it did not constitute a "transfer" under Section 2(47). The assessee's appeal was allowed, and the revenue's objections regarding the application of Section 52(2) and the valuation of the asset were dismissed. The firm succeeded in its appeal, and the Tribunal directed the ITO to recompute the capital gains based on the originally declared value.