1996 (5) TMI 118 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reconstitution and dissolution of the partnership.
2. Computation of profit under section 41(2) of the Income-tax Act.
3. Assessment of capital gains on the transfer of assets.
4. Applicability of section 50 for computing capital gains on depreciable assets.

Issue-wise Detailed Analysis:

1. Validity of Reconstitution and Dissolution of the Partnership:
The assessees, three lady partners, reconstituted their firm on 3-1-1981 by bringing in eight new partners-four contributing land and four contributing cash. The firm was dissolved on 23-1-1981, and the business assets were taken over by the new partners who had contributed cash. The Assessing Officer (AO) concluded that these transactions were a device to transfer assets to the successors in business.

2. Computation of Profit under Section 41(2):
The AO assessed profit under section 41(2) on the transfer of factory building, shed, furniture, etc., at Rs. 1,96,434 and capital gains at Rs. 2,05,556. The CIT(A) held that the reconstitution aimed to transfer assets and thus, section 41(2) was not applicable as it involved the transfer of the whole undertaking, not individual assets. Consequently, no profit under section 41(2) was assessable.

3. Assessment of Capital Gains on the Transfer of Assets:
The CIT(A) agreed with the AO's assessment of capital gains but directed the computation by deducting the cost of assets (Rs. 4,29,444) from the sale consideration (Rs. 6.35 lakhs), resulting in capital gains of Rs. 2,05,556. The Revenue contended that the CIT(A) erred by not applying section 50, which mandates using the Written Down Value (WDV) for depreciable assets.

4. Applicability of Section 50 for Computing Capital Gains on Depreciable Assets:
The Department argued that section 50 should apply, requiring the WDV of depreciable assets as the cost of acquisition. The Tribunal agreed, noting that the CIT(A) failed to apply section 50 correctly. The Tribunal emphasized that the CIT(A) should have directed the computation of capital gains in accordance with section 50, which necessitates deducting the WDV of the assets from the sale consideration.

Conclusion:
The Tribunal concluded that the CIT(A) was incorrect in directing the computation of capital gains by deducting the actual cost of the assets instead of the WDV as required by section 50. The Tribunal modified the CIT(A)'s order, directing the AO to recompute the capital gains by applying section 50, thus allowing the Revenue's appeals.