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TMI Blog2007 (9) TMI 320X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, contended that the notice under s. 148, in the name of the firm was illegal and against such illegal notice the return was filed by Shri Madan Lal Agarwal showing nil income in his individual capacity. It was also informed to the AO that the assessee firm had intimated the fact of, discontinuance of the firm to the AO under s. 176 and hence there was no obligation to furnish the return of income for the relevant assessment year. However, during the course of assessment proceedings, a return was furnished on 21st Jan., 2002 in respect of notice under s. 148 declaring nil income in the name of the firm M/s Joy Exhibitors, Bhilwara, though the issuance of notice under s. 148 was challenged. The assessee was called upon to show as to why the value of assets as on the date of dissolution, i.e., 1st Sept., 1989, be not estimated and the capital gain be taxed. It was replied on behalf of the assessee that the firm was not in existence as it was dissolved on 1st Sept., 1989 on the basis of dissolution deed executed on 26th Dec, 1989 and the name of the firm was allowed to be used to Shri Madan Lal Agarwal. In the light of these facts, the AO opined that the assets of the firm w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue was to be taken with reference to the dissolution deed which was indicated at Rs. 20 lakhs. He further held that the land was purchased by both Shri Madan Lal Agarwal and Shri Badri Lal Sharma in their individual capacity and hence they were co-owners and computation of capital gain under s. 45(4) in the hands of the assessee firm was not justified. He, therefore, deleted the addition. The Revenue has come up in appeal against the said decision. 3. We have heard both the sides and perused the relevant material on record in the light of the precedents cited before us. Several contentions have been raised by the rival parties, which we would deal one by one. (A) No firm in existence The learned counsel for the assessee contended that no firm had come into existence at any point of time and hence the question of invoking the provisions of s. 45(4) on the distribution of the capital assets at the time of dissolution of firm, does not arise. While referring to s. 4 of the Indian Partnership Act, 1932, it was contended that the carrying on the business by the firm was a condition precedent. He argued that since no business was carried on by the assessee hence it would be wrong t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s partners. He further referred to the lease deed, a copy of which is placed at p. 13 of the paper book, to show that it was granted in favour of M/s Joy Exhibitors and the partner Shri Badri Lal Sharma. It was, therefore, argued that a valid partnership firm was brought into existence and it would be inappropriate to contend that there was no partnership firm at all, simply because the construction of cinema house could not be done. 4. From the facts noted above, it is discernible that a partnership firm was brought into existence vide indenture of partnership dt. 20th Oct., 1979, a copy 6f which is placed a p. 1 of the paper book; On going through this partnership deed, it becomes obvious that the said partnership firm consisted of two partners Shri Badri Lal Sharma and Shri Madan Lal Agarwal and they were "desirous to start the cinema business in the partnership under the name and style of M/s Joy Exhibitors at Bhilwara". Having made the intention clear, a piece of land was, thereafter, purchased, a copy of registered sale deed is available at p. 6 of the paper book, from which it is clear that Shri Shoba Lal, sold it to the following three : (1) M/s Joy Exhibitors, Bhilwara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership firm comes into existence. The indenture of partnership firm is the mode of expressing the intention to share the profits of the business into black and white. It is ostensible that before any business is actually embarked upon, several stages are involved in it. To put it in simple words, if a manufacturing unit is agreed to be established in partnership, a land would be purchased or taken on hire, building would be constructed, then machinery would be installed and it is only thereafter that the production would commence. Can we say that a partnership firm has not come into existence till the goods produced are sold and the profit is realized. The answer is clearly in the negative. The activities listed above are various stages towards the commencement of business. The learned Authorised Representative has given too narrow a meaning to the concept of the partnership firm, which is incapable of acceptance. All the decisions relied upon by him are on the subject of grant of registration to the firm and have absolutely no bearing to the point before us. It is simple and plain that a partnership firm was created with the intention to start a cinema business. With a view to pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee could not be said to be in the possession of any capital asset on this count. Once there was no capital asset, the learned Authorised Representative stated that, there was no question of its distribution on the dissolution. On the other hand, the learned Departmental Representative stated that the assessee firm had challenged the order of the State Government acquiring the land and the said possession was restored vide later order dt. 4th May, 1991. He further submitted that the Tehsildar had duly confirmed that the possession of the land was never taken back by the State Government and it very much remained with the assessee firm throughout. 6. Insofar as the contention of the learned Authorised Representative regarding the non-applicability of the provisions of s. 45(4) on the ground that no partnership firm was in existence, is concerned, the same has been discarded by us in an earlier para. The other point raised by the learned Authorised Representative is that no asset was in existence capable of distribution on the date of dissolution of the firm, as the said land was ordered to be resumed by the State Government and its possession rested with the tenant with whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55 ITR 681 (Kar) where the business undertaking of the assessee company carrying on banking business was acquired by the Government and compensation was paid, it was held that the same attracted capital gain as it was a 'capital asset'. Their Lordships further explained the meaning of 'capital asset' in the following words : "We will first consider the first part of the question. Capital asset has been defined under s. 2(14) of the IT Act, 1961. 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;" Similarly, in the case of CIT v. Tata Services Ltd. [1979] 13 CTR (Bom) 227 : [1980] 122 ITR 594 (Bom) the assessee entered into a contract with the vendor for purchase of land and also paid earnest money deposit towards part of the purchase price. Permission was not granted by the municipal corporation for sub-division of the plot. The vendor refunded the earnest money deposit along with Rs. 5 lakhs for assigning the right for contract in accordance with tripartite agreement. The ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rma would have no objection. As per cl. 4, Shri Madan Lal Agarwal, who will continue with the firm name could repossess the land from the State Government on which Shri Badri Lai Sharma would have no right, if such land is restored by the State Government. Clause 6, which is very crucial for our purpose states that Shri Madan Lal Agarwal would give Rs. 10 lakhs to Shri Badri Lal Sharma by 31st Dec, 1992 in view of this irrespective of the fact whether the land is restored to Shri Madan Lal Agarwal for construction of cinema or otherwise or not. From the reading of the above clauses of the dissolution deed, it is clearly borne out that the partners of the firm had valued this land at Rs. 20 lakhs, half of which share comes to Rs. 10 lakhs which was payable by Shri Madan Lai Agarwal to Shri Badri Lal Sharma, since it was the only asset with the assessee firm. 10. If We peruse the language of s. 2(14), it becomes clear that the capital asset has been defined to mean "property of any kind held by an assessee". It nowhere states that property, which the assessee holds must be his own. The necessary condition for ringing an asset within the purview of s. 2(14) is that it should be held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it as an agricultural land. He further pointed out that no agricultural operations were carried on and moreover the assessee had also purchased the land with a view to construct a cinema house. 12. Having heard both the sides and perused the relevant material on record, it is seen that it has been described as agricultural land in the registered sale deed. The surroundings of the land are mentioned in the said sale deed : On the east of this land there is a Government land, on its west side there is a road which goes towards Maharani Talkies. On the north side of this land there is a Government way which goes to the post office and the Government quarters and on the south side there is a road which goes to the veterinary hospital. It is also noted that this land was in the possession of Mahalaxmi Saw Mills at monthly rent of Rs. 225, who were doing sawing business thereon, in these circumstances, we have to decide whether the said land can be characterized as agricultural land or not. The answer to this question can be easily obtained from the judgment of the Hon'ble Supreme Court in the case of Smt Sarifabibi Mohmed Ibrahim Ors. v. CIT [1993] 114 CTR (SC) 467 : [1993] 204 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regard cannot be accepted and the piece of land cannot be held to be agricultural land. (D) Relevance of proceedings in asst. yr. 1993-94 13. The learned counsel for the assessee contended that the AO issued notice under s. 148 to M/s Joy Exhibitors in the status of AOP in asst. yr. 1993-94 and charged to tax a sum of Rs. 20 lakhs towards the valuation of land on dissolution as payment of Rs. 10 lakhs was made by Shri Madan Lal Agarwal to Shri Badri Lal Sharma in two instalments of Rs. 5 lakhs each on 1st Dec, 1992 and 15th Dec, 1992. It was submitted that an appeal was filed against this order and the learned CIT(A) annulled the assessment on the ground that the firm, M/s Joy Exhibitors stood dissolved w.e.f. 1st Sept., 1989 and hence the later notice issued in the name of the firm for making reassessment was invalid, in the background of these facts, the learned Authorised Representative contended that since no second appeal has been preferred either by the assessee or by the Revenue against that order of the learned CIT(A) for asst. yr. 1993-94 hence the finding contained therein has become final and accordingly the act of the AO in charging to tax the capital gain on dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of capital asset in the shape of transfer of interest in land to the continuing partner for a consideration of Rs. 10 lakhs. The proceedings in asst. yr. 1993-94 were rightly quashed by the learned CIT(A) on the premise that the subject-matter already stood decided in asst. yr. 1990-91. The learned CIT(A) in the impugned order has given a finding in para 5.5 that the assessment was open in the case of retiring partner in asst. yr. 1993-94 and the amount was assessed as capital gain on receipt basis. Though the order of the learned CIT(A) for asst. yr. 1993-94 was passed on 3rd Nov., 2000 but the learned CIT(A) in the impugned order dt. 18th Oct., 2002 observed conspicuous silence as regards the fate of the assessment order in asst. yr. 1993-94 and thought it prudent to use only that part of the proceedings for asst. yr. 1993-94 which supported his view without even bothering to discuss the material fact that the said order was quashed. 15. We further note that the learned Authorised Representative has argued that the land was purchased by both the partners in individual capacity and hence they were co-owners and the said land did not vest with the assessee firm. He has relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of S.P. Jaiswal v. CIT [1997] 139 CTR (SC) 436 : [1997] 224 ITR 619 (SC) by holding that the Revenue must charge the right person and the fact that the wrong person has already been charged is irrelevant. For the foregoing reasons, we are satisfied that the correct year for the charge of capital gains is asst. yr. 1990-91 and hence the proceedings in 1993-94 are totally irrelevant. (E) Valuation 17. The learned counsel for the assessee argued that the Revenue authorities had erred in adopting the value of this land at such a substantial figure. While referring to the report of the DVO, copy placed at p. 64 onwards of the paper book, it was stated that the rate of Rs. 167 per sq. ft. was taken on the strength of sale instances, which were of some nearby shops. It was further explained that the DVO had erred in treating this land as freehold land as mentioned in cl. 6.1 of his report, whereas in fact, it was leasehold land. It was still further submitted on behalf of the assessee that even if the interest in the land was taken to be capital asset, then its value be taken at nil. He relied on certain decisions led by the case of the Hon'ble Calcutta High Court in CWT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of CWT v. Smt Shirinbanoo [1976] 102 ITR 735 (Guj) considered a case in which there was a mortgage debt on the property whose valuation was disputed. It was held that such mortgage debt was to be deducted for valuing the property for levy of additional wealth-tax. From the above decisions it becomes obvious that the factors which weigh against the assessee are required to be properly reflected in the process of determination of the fair market value. As these factors have not been taken into consideration while valuing the interest of the assessee in the land by the DVO and further no registered valuer's report has been made available on behalf of the assessee, in our considered opinion, the question of valuation cannot be decided at our end. We, therefore, set aside the impugned order and restore the matter to the file of the AO for determination of proper fair market value of the assessee's interest in the land in accordance with our abovereferred observations. It is on the basis of such fresh value determined by the DVO and after considering the assessee's objection, the amount of capital gain in terms of s. 45(4) would be calculated in the present year. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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