1995 (9) TMI 101 - AT - Income Tax

Summary

Issues Involved:
1. Justification of CIT's invocation of sections 45(2) and 45(3) of the Income-tax Act.
2. Legality of revising assessments completed under section 143(1) via section 263.
3. Taxability of unaccounted monies received by the firm in the hands of the partners.
4. Validity of the CIT's direction for fresh investigation and enquiry by the ITO.

Issue-Wise Detailed Analysis:

1. Justification of CIT's Invocation of Sections 45(2) and 45(3) of the Income-tax Act:
The CIT invoked sections 45(2) and 45(3) to bring to tax the alleged capital gains arising from the contribution of land by the partners to the firm. However, the Tribunal found that section 45(3) could not apply as it was introduced only with effect from 1-4-1988, and the transfer in question took place on 1-7-1980. The Tribunal also noted that section 45(2) read with section 2(47)(iv) was inapplicable since these provisions were introduced to prevent avoidance of tax on capital gains through conversion of capital assets into stock-in-trade by the same assessee, whereas in this case, the partners contributed their capital assets to the firm, making the firm the owner of the property. The Tribunal concluded that neither section 45(2) nor section 45(3) applied to the facts of the present case, and the CIT's orders on this ground were unsustainable.

2. Legality of Revising Assessments Completed Under Section 143(1) via Section 263:
The assessees contended that since the assessments were completed under section 143(1), they could not be revised under section 263. They relied on the order of the Calcutta Bench of the Tribunal in Puranmall Narayan Prasad Kedia (HUF) v. Asstt. CIT [1994] 48 ITD 439. The Tribunal, after considering the rival contentions, held that the orders of the CIT could not be sustained. The Tribunal reasoned that the CIT had not reached any firm conclusion but had only set aside the assessments for fresh investigation and enquiries, causing no prejudice to the assessees.

3. Taxability of Unaccounted Monies Received by the Firm in the Hands of the Partners:
The CIT directed the ITO to investigate whether any part of the unaccounted monies received by the firm was taxable in the hands of the partners. The Tribunal found that the firm had already been assessed under section 143(3) for the assessment year 1986-87, including the unaccounted monies as business income. Since the amount had already been assessed in the firm's hands, no second assessment of the proportionate share of the partners in those monies was permissible. The Tribunal concluded that the CIT erred in directing the ITO to enquire and include the proportionate share of the partners in the unaccounted monies received by the firm.

4. Validity of the CIT's Direction for Fresh Investigation and Enquiry by the ITO:
The CIT set aside the assessments with a direction to the ITO to complete them afresh after making necessary enquiries and investigations. The Tribunal held that the CIT's orders were unsustainable on merits. The Tribunal noted that the firm was recognized as genuine, granted registration, and assessed in respect of the sale of the building constructed by it. The Tribunal found no evidence or material to support the contention that the firm was created merely to avoid capital gains tax. Consequently, the Tribunal set aside the CIT's orders and allowed the appeals.

Conclusion:
The Tribunal held that the CIT's orders under section 263 were unsustainable on merits. The Tribunal set aside the CIT's orders and allowed the appeals, concluding that neither section 45(2) nor section 45(3) applied to the facts of the case, and the unaccounted monies received by the firm could not be assessed in the hands of the partners. The Tribunal also found that the CIT's direction for fresh investigation and enquiry by the ITO was erroneous.