1985 (4) TMI 89 - AT - Income Tax

Summary

Issues Involved:
1. Limitation and validity of the assessment.
2. Jurisdiction of the Income Tax Officer (ITO) to include new items of income in a reassessment.
3. Genuineness of the partnership firm and applicability of Section 47(ii) of the Income-tax Act, 1961.
4. Computation of capital gains.

Issue-wise Detailed Analysis:

1. Limitation and Validity of the Assessment:
The assessee argued that the assessment made by the ITO was time-barred as it was completed beyond the period specified under Section 153(2A) of the Income-tax Act, 1961. The original assessment was made on 19-8-1977, and the Appellate Assistant Commissioner (AAC) set aside the assessment on 30-2-1978. The reassessment should have been completed by 31-3-1980. The Tribunal held that Section 153(2A) sets an absolute time limit for completing such an assessment, and no extension under Section 144B or any other provision is permissible. Therefore, the assessment completed after 31-3-1980 was time-barred.

2. Jurisdiction of the ITO to Include New Items of Income in a Reassessment:
The Tribunal held that the ITO, while making a reassessment pursuant to an appellate direction, cannot include any new item of income not considered in the original assessment. The scope of reassessment is limited to the directions given by the AAC. The Tribunal cited various judicial decisions to support this view, including CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC), which restricts the powers of the AAC and, by extension, the ITO in reassessment proceedings. Thus, the inclusion of capital gains in the reassessment was beyond the jurisdiction of the ITO.

3. Genuineness of the Partnership Firm and Applicability of Section 47(ii):
The assessee contended that the partnership firm formed on 1-7-1973 and dissolved on 1-1-1974 was genuine, and the dissolution resulted in the distribution of assets, thereby attracting the provisions of Section 47(ii), which exempts such transactions from capital gains tax. The Tribunal noted that the firm was granted registration and assessed as a genuine firm, and no fresh evidence was provided by the department to challenge its genuineness. The Tribunal concluded that the formation and dissolution of the firm were genuine transactions, and the assessee was entitled to the benefit of Section 47(ii).

4. Computation of Capital Gains:
On the merits of the computation of capital gains, the Tribunal observed that the business assets, including goodwill, were revalued at the time of dissolution. However, the goodwill developed by the assessee over the years had no original cost, and as per the Supreme Court decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, no capital gains tax was leviable on such goodwill. The Tribunal also noted that the transfer of the business to the limited company, owned by the assessee and his wife, did not result in any real consideration being received by the assessee. Therefore, there was no capital gain exigible to tax.

Conclusion:
The Tribunal dismissed the department's appeal, holding that the assessment was time-barred, the ITO had no jurisdiction to include new items of income in the reassessment, the partnership firm was genuine, and the assessee was entitled to the benefit of Section 47(ii). The Tribunal also found no evidence of capital gains arising from the transactions in question.