2016 (10) TMI 688 - AT - Income Tax

Capital gain - distribution of capital assets on the dissolution of firm - whether capital gain arose to the assessee firm on transfer of assets to the outgoing partners cannot be taxed? - Held that - The transfer of capital assets to the outgoing partners was made by way of book entries to the respective accounts of the outgoing partners and other formalities as required under the Registration Act was carried on from the period starting from 1.4.2008 to 31.3.2009 pertaining to A.Y 2009-10. Therefore capital gain accrued to the firm on transfer of assets to the outgoing partners has to be taxed u/s 43(4) of the Act in A.Y 2008-09 and thus we cannot uphold the action of the AO as well as the impugned order. We are thus unable to see any valid reason to interfere with the assessment order wherein it has been held that capital gains accrued to the firm on transfer of capital gains assets to the outgoing partners is taxable in A.Y 2009-10. We are therefore inclined to hold that the grounds raised by the assessee are devoid of merits and hence we dismiss the same. Calculating the full value of consideration in respect of land and building transferred on dissolution in an arbitrary manner without referring the matter to the valuation officer u/s 55A r.w.s 142A - Held that - AO by way of issuing show cause notice to the assessee showed his intention to calculate capital gains for A.Y 2009-10 and the assessee did not object to the applicability of the Collector rate in calculation of capital gains and the assessee only stressed upon to take collector prevailing market rate on or before 31.3.2008 which could have been applied to the case of A.Y 2008-09 and this action of the AO was correct and as per provisions of the Act. There was no need to refer the matter to the valuation officer u/s 55A of the assessee Act as such. Accordingly Ground being devoid of merits is dismissed. Capital gain on the shellar building - Held that - CIT(A) upheld the addition merely by observing that the assessee had failed to cooperate in furnishing details as called by the AO therefore addition of 2 lakhs as capital gain on the shellar building is considered reasonable. From the orders of the authorities below and conclusion drawn by them as noted above we are of the considered opinion that this estimated adhoc addition has been made on the Nilokheri building for which addition on account of capital gain was estimated at 46, 74, 280/- as per para 4 of the assessment order. From para 5 we further note that the AO made addition of 2 lakhs by alleging that the assessee should have furnished details of measurement of the building and the assessee has failed to disclose the detai ls of value of construction which cannot be basis for making addition of 2 lakhs treating the same as capital gain on transfer of building for which capital gain has already been assessed in para 4 of the assessment order. Thus addition made by the AO is directed to be deleted

Issues Involved:
1. Violation of the principle of natural justice.
2. Incorrect assessment year for capital gains under Section 45(4) of the Income Tax Act, 1961.
3. Rejection of the circle rate of land and construction rate.
4. Arbitrary calculation of full value of consideration without referring to the Valuation Officer.
5. Adhoc addition of ?2,00,000 under Section 45(4) for the transfer of a building.

Issue-Wise Detailed Analysis:

Ground No. 1: Violation of the Principle of Natural Justice
The assessee contended that the CIT(A) erred in law by confirming the AO's order without providing a proper opportunity of being heard, thus violating the principle of natural justice. However, the tribunal found that the AO issued a show-cause notice and considered the assessee's reply before passing the assessment order. The CIT(A) also provided the assessee with opportunities to submit rejoinders. Consequently, the tribunal concluded that there was no violation of the principle of natural justice and dismissed Ground No. 1.

Ground Nos. 2 to 5: Incorrect Assessment Year for Capital Gains
The assessee argued that the capital gains arising from the transfer of capital assets on dissolution should be taxed in A.Y 2008-09 and not in A.Y 2009-10. The tribunal examined the dissolution deed, submissions, and relevant legal provisions. The tribunal noted that the dissolution deed, although dated 31.03.2008, was notarized on 02.09.2008, and the transfer of assets was recorded in F.Y 2008-09. The tribunal referred to the provisions of Section 45(4) and Section 2(47) of the Income Tax Act, which state that capital gains arising from the transfer of capital assets on dissolution are chargeable to tax in the previous year in which the transfer takes place. The tribunal concluded that the transfer took place in F.Y 2008-09, making the capital gains taxable in A.Y 2009-10. Thus, Ground Nos. 2 to 5 were dismissed.

Ground No. 4: Arbitrary Calculation of Full Value of Consideration
The assessee contended that the AO arbitrarily calculated the full value of consideration for the land and building transferred on dissolution without referring the matter to the Valuation Officer under Section 55A r.w.s 142A of the Income Tax Act. The tribunal found that the AO issued a show-cause notice and the assessee did not object to the market rates certified by the Collector, Karnal. There was no request from the assessee to refer the matter to the Valuation Officer. Therefore, the tribunal dismissed Ground No. 4, finding no merit in the contention.

Ground No. 5: Adhoc Addition of ?2,00,000
The assessee argued that the CIT(A) erred in confirming the adhoc addition of ?2,00,000 made by the AO under Section 45(4) for the transfer of a building constructed on land belonging to a third party. The tribunal observed that the AO made the addition based on the assessee's failure to furnish complete details of the building's value. However, the tribunal found that this estimated adhoc addition was not justified, as the capital gains on the building had already been assessed. Consequently, Ground No. 5 was allowed, and the addition of ?2,00,000 was directed to be deleted.

Conclusion:
The appeal of the assessee was partly allowed, with Ground No. 5 being accepted and the addition of ?2,00,000 being deleted, while all other grounds were dismissed. The order was pronounced in the open court on 29.08.2016.

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