1997 (1) TMI 154 - AT - Income Tax

A Partner, Assessing Officer, Assessment Year, Dissolution Of Firm, Dissolved Firm, Profits And Gains

Summary

Issues:
1. Addition of capital gain under section 45(4) in the hands of a partner.
2. Assessment of partner's share of profit in a firm without assessing the firm.
3. Interpretation of provisions of section 45(4) and section 67 of the Income-tax Act, 1961.
4. Applicability of previous court decisions under different tax laws.

Analysis:

The judgment by the Appellate Tribunal ITAT Pune dealt with an appeal against the addition of Rs. 1,89,900 made by the Assessing Officer under section 45(4) of the Income-tax Act, pertaining to the assessment year 1991-92. The case involved the dissolution of a partnership firm, where the business was taken over by the appellant. The Assessing Officer computed the capital gain arising from the distribution of assets on dissolution, leading to the addition in the appellant's income. The CIT(A) upheld the addition partially, leading to the appeal before the Tribunal.

The appellant argued that under section 45(4), only the firm is liable to tax on capital gains, not the partner. The departmental representative contended that partners can be directly assessed for their share of profit without assessing the firm. The Tribunal examined the provisions of section 45(4) and concluded that the income under this section can only be assessed in the hands of the firm, not the individual partners. The Tribunal found the assessment of income in the appellant's hands to be illegal.

Regarding the contention that partners can be directly assessed for their share of profit, the Tribunal analyzed the charging section of the Income-tax Act, which provides for the assessment of both firms and partners. However, the Tribunal emphasized that the income or loss of the firm must be determined first, followed by the determination of the partner's share. The Tribunal rejected the departmental representative's argument, stating that the firm had not been assessed for the alleged income under section 45(4), thereby dismissing the addition to the partner's income.

The Tribunal distinguished the case relied upon by the departmental representative, which arose under the Indian Income-tax Act, 1922, where the Assessing Officer had the option to assess either the firm or the partner. The Tribunal highlighted that under the current Act, the Assessing Officer must tax the right person according to the law. Citing a Supreme Court decision, the Tribunal emphasized the importance of taxing the correct person liable for the income.

In conclusion, the Tribunal set aside the CIT(A)'s order and deleted the addition of Rs. 1,89,900 from the appellant's income, allowing the appeal based on the technical ground. The Tribunal refrained from expressing a view on the applicability of section 45(4) to the case, focusing on the legal interpretation of assessing income in the hands of partners in a partnership firm.