9911796707
TMI Blog1981 (1) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... e partnership books at value mentioned in the schedule to the partnership deed. The value of the gross assets was Rs. 28,98,595.81, This includes the main item of Vijaya and Vauhini Studios valued at Rs. 24,64,259. There were liabilities including cash credit and loan accounts with India Overseas bank to the extent o therefore about Rs. 10 lakhs, besides other liabilities adding up to Rs. 22,78,691.81. The excess of assets over liabilities representing an amount of Rs. 6,19,904 was credited to Shri B. Nagi Reddy in the partnership. As for the assets and liabilities taken over from the company it was according to the balance-sheet already available as on 31st May 1972 at book values. Shri B. Nagi Reddy, the assessee was to be the Managing Partner with usual powers of borrowing, operation of Bank accounts etc. Since the partnership deed was executed on 29th May, 1972 relevant to the accounting year for asst. yr. 1973-74, the ITO sought to bring to tax the alleged profit under s. 41 (2) of the Act as well as capital gains on a the ground that there was a transfer of Vijaya and Vauhini Studios to the partnership by the assessee. The ITO had also estimated the market value as on that da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee continued to be the owner of the property, if there had been no transfer even as found by the AAC. In that case, he continues to be the owner. He ceases to be the owner the moment the company became the owner. It was in this view that he brought to tax an amount of Rs. 8,76,908 as profit under s. 41 (2) of the Act and further amount of Rs. 7,07,645 as deemed capital gains on adoption of "fair market value" as determined by the District Valuation Officer, who had valued the properties of the Studios at Rs. 25,52,100 as against the assessee's cost at Rs. 19,14,455. The assessee went up in appeal against this order. The CIT (Appeals) found that the decision of the Supreme Court in the case of the CIT vs. Bahkeylal Vaidya (1971) 79 ITR 594 (SC) certainly overrule the view of the authorities that there has been a transfer in a dissolution of a partnership. The allotment of the assets of the company to the partners did not mean that the firm transferred its assets to such partner. He was of the view that capital gains liabilities also cannot be foisted on the assessee, in view of the specific exemption granted to such transfers under s. 47(ii) of the Act, even if he were to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business belonging to the assessee on transfer of such business to a partnership consisting of himself and his son on the ground that s/2(47) of the IT Act, 1961 was sufficiently broad enough to make the surplus exigible for tax under s. 155 (5) of the Act. He pointed out that the decision of Addanki Narayanappa vs. Bhaskara Krihnappa (1966) AIR 1966 SC 1300, CIT vs. Bankey Lal Vaidya (1971) 79 ITR 594 SC and CIT vs. Dewas Cine Corporation (1968) 68 ITR 240 (SC) were all cited, discussed and distinguished in this case. He cautioned us against blindly following the earlier propositions of law emerging out of concepts under the old Act as being fully applicable for purposes of taxation under the present law. He claimed that the decision of the Supreme Court in the case of Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC) fully bears out his claim. Though the decision was in favour of the tax payer in the facts and circumstances of the particulate case in the context of withdrawal of development rebate, he contended that the Supreme Court did recognise the difference between the old and the new Acts in respect of the issue before us. He refereed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider cl. 2 of the deed of dissolution dt. 11th April, 1974 most carefully. It is reproduced as under: "2. All the Assets that belonged to either of the Partners and are appearing in the books of the partnership as at the date of dissolution shall hereafter belong to and become the absolute property of the company subject, however, to all subsisting mortgages whether created before or during the existence of the partnership and without in any manner affecting the same." According to him, the above clause shows that neither the company nor the partnership firm was the absolute owner of the properties now to be enjoyed by the company. According to him it could not be that there is no transfer of ownership when in law it has ceased to be the property of the assessee and had become the property of the company. If there was no transfer on the date of formation of the partnership on 29th May, 1972, there was certainly transfer on 11th April, 1974 at the time of dissolution. If we cannot uphold the entire addition, he claimed that atleast the addition attributable to the assessee on the basis that he was a co-owner along with the limited company should be confirmed. This was, of cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong to the assessee even prior to 29th May 1972. In view of all these facts, he contended that the arrangements were genuine and had been entered into at the relevant time independently without any tax considerations. As for the labourous arguments of the ld. Deptl. Rep. that the introduction of the word "extinguishment" under s. 2(47) of the IT Act, 1961 enlarges the scoop of taxation he contended that an answer for this doubt is easily found in the decision of the Supreme Court in the case of Malabar Fisheries vs. CIT (1979) 120 ITR 49 (SC) at 54 where after discussing all the words including the word "extinguishment" under s. 2(47), the Supreme Court posed the question" to put it pithily, the question is whether the dissolution of a firm extinguishes the firm's right in the assets of the partner so as to constitute a transfer of assets under s. 2(47)?" and then proceed to answer in the negative in the rest of the decision. He therefore contended that it is futile on the part of the ld. Deptl. Rep. to contend that there has been an extinguishment of the assessee's rights so as to make him liable for the additions made on him. The reasoning given by the Supreme Court in the case t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decisions of Madras High Court have not taken the same view and, according to the ld. counsel, such a decisions besides not being applicable for capital gains and for purposes of ascertaining profit under s. 41(2), is also not consistent with the law as laid down by the Supreme Court. 5. We have carefully considered the facts as well as the arguments presented in great detail by both the representatives of the CIT and the assessee. The facts are very clear. The properties in certain lands and Vijay & Vauhini Studios, which were owned by the assessee and leased out to Vijaya Productions Pvt. Ltd. became the properties of the partnership firm as a result of the partnership, agreement dt. 29th May 1972. The details of these properties and the valuations were annexed by way of a schedule to the partnership agreement. The net excess of assets over liabilities was taken as capital contribution by the assessee to the partnership firm. The assets and liabilities were taken over by the firm by proper entries in the books of accounts of the company and were continued to be exhibited as partnership assets. The dissolution entries made in pursuance of the deed of dissolution dt. 11th Apr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es brought into the firm's business. In fact, as noticed earlier, the firm's books show that these were incorporated as assets of the firm. Even the dissolution deed does not indicate any contrary position. We are of the opinion that the argument of the ld. Deptl. Rep. is argument in desparation and is not borne out from the records. In other words, we find that as matter of fact, the assets which are now the subject matter of Revenue's contention for tax purposes belong to the firm as from the date of formation to the date of dissolution. Since the firm is a taxable entity by itself, the question of taxing the profits on sale can arise, if at all, only in the case of the firm and not in the case of the assessee. Once we reject the ld. Deptl. Rep's argument that the assessee continued to own the property inspite of the intervention of the partnership, the entire case of the Revenue fails. No doubt, s. 47 (ii) exempts only the firm on distribution of capital assets on the dissolution of firm. But s. 49 clearly mentions that on subsequent sale by a partner of the assets received on dissolution the cost to the previous owner, i.e. the firm will be reckoned as cost to the assessee. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in broad agreement with the argument of the ld. Counsel that the attempt to broaden the concept of transfer cannot extend to adjustment of partnership rights inter-se, it is really not necessary for us to go into that question for the purpose of the present case. The assessee should succeed on the simple ground that the assets in question belong to the firm and not to the assessee. The ld. Deptl. Rep. deplored the consequences of having two different views, one for general law that the firm is not a separate legal entity and the taxation law holding it as such. He pointed out that Revenue loses both ways, in the sense that the tax payer succeeds by quoting one or other proposition and avoiding liability thereby. Probably it is so. Choksi Committee no doubt pointed out to the situation and wanted s. 47(ii) and s. 49(1)(iii)(b) to be suitably amended, but it is not for us to attempt to plung loopholes, if any, in law. The view we have taken is in consonance with established law and we have no doubt that the departmental appeal has to be dismissed. In the view we have taken, it is as not necessary to go into the further question to the right of the ITO to adopt a higher "fair market ..... X X X X Extracts X X X X X X X X Extracts X X X X
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