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TMI Blog2006 (5) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant to the assessment year on 5-1-1996, the tenancy was revalued in the books of account of the appellant-firm pursuant to valuation of a Registered Valuer and the reserve created on account of such revaluation has been credited to the accounts of the partners. On 31-3-1996, there was a change in the constitution of the firm, pursuant to which some new partners were admitted and some existing partners retired. Appellant filed return of income declaring "Nil" income, after setting off income from business of Rs. 50,03,816 against brought forward loss from business and after setting off the short-term capital gains under section 50(1) against brought forward unabsorbed depreciation. The return of income filed on 18-10-1996 was processed vide intimation passed under section 143(1)(a) dated 17-9-1997 accepting the returned Nil income. 3. We firstly consider the issue challenging validity of proceedings initiated under section 147 vide notice dated 26-3-2003 issued under section 148 of the Income-tax Act, urged under ground Nos. 1 to 4. In response to the notice issued under section 148, Appellant filed a letter dated 5-5-2003 requesting to furnish copy of the reasons recorded in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year under appeal, to Assessing Officer of the appellant-firm for the assessment year under appeal. (c)CIT's approval dated 26-3-2003 for issue of notice of reopening. Appellant in response to the above letters furnished to it, vide letter dated 7-7-2004 requested Assessing Officer to furnish copy of the letter dated 12-6-2001 written by the DCIT, Cir. 28(2) which has been referred to in the letter furnished to it. Assessing Officer refused to furnish the same, holding that as per the Hon'ble High Court's judgment, the requirement is only to furnish the letter(s) containing reasons for re-opening the assessment under section 148, which has already been furnished. However, contentions of the letter dated 12-6-2001 were furnished to the assessee later. This letter has been written by the Assessing Officer, having jurisdiction over the appellant-firm, to the Assessing Officer having jurisdiction over the partner of the appellant-firm, informing that reopening and taxability of the amount received is not appropriate in the hands of the firm and that it is proper to consider reopening in the hands of the partners. Assessing Officer completed the assessment rejecting appellant's o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reopening assessment proceedings under section 148 sanction is to be obtained from the Joint Commissioner, whereas in its case the sanction has been obtained from the Commissioner. 9. CIT(A) rejected the claims made by the appellant and held that reopening is valid as Assessing Officer had complied with the directions of the Hon'ble jurisdictional Bombay High Court and furnished the reasons for reopening and that as per the provisions of section 147 as amended with effect from 1-4-1989, the scope for reopening is wider in the case of an intimation passed under section 143(1)(a). Under the above facts, emanating from the long drawn process before the lower authorities, following are the arguments of the AR : Action of the CIT(A) in holding that reopening is valid is factually and legally incorrect. It is evident from perusal of the correspondence bet-ween the Assessing Officer of the appellant and Assessing Officer of a partner of the firm, that there was conflict of opinion over the issue of reopening in the hands of the firm v. partners. It is clearly evident that initially the Assessing Officer, having jurisdiction over the appellant-firm for the assessment years other than th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (b) Parshuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) 11. DR argued at length the facts of the case and submitted that Assessing Officer not having power to make any adjustment except a prima facie adjustment while passing the intimation under section 143(1)(a), cannot be expected to consider an issue for addition which requires examination of facts and question of law. DR urged that in view of the same, Assessing Officer is justified in invoking the provisions of section 147. DR relied on the following decisions: (a) S. Srinivasan v. CIT [1975] 101 ITR 94 (Mad.) (b) Badri Prasad Rameshwar Prasad v. CIT [1996] 219 ITR 441 (MP) (c) N. Sandeep Reddy v. Asstt. CIT [2005] 95 ITD 33 (Hyd.) 12. We have considered the orders of the lower authorities, arguments of the AR and DR and the material placed before us in the paper books filed by the AR. The short facts in assessee's case are that reopening of assessment has been made under the provisions of section 147 in respect of an intimation passed under section 143(1)(a) dated 17-9-1997 for the assessment year 1996-97 vide notice issued under section 148 dated 26-3-2003 i.e., within a period of six years from the end of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue was not specifically examined by the Assessing Officer in the original assessment proceedings. This is a case applicable to the pre-amended provisions of section 147 and is not relevant to the case before us. (b) Badri Prasad Rameshwar Prasad v. CIT [1996] 219 ITR 441 (MP) : In this judgment, it has been held that loose papers found at the business premises of assessee, though before ITO on the date of making assessment for assessment year 1974-75 on 30th October, 1975, but as full investigation in regard thereto was made in 1978 and full facts discovered on receipt of report of Inspector in that year, assessment was rightly reopened under section 147(b). This judgment also being in respect of pre-amended provisions of section 147, is not relevant to the case before us. (c) N. Sandeep Reddy v. Asstt. CIT [2005] 95 ITD 33 (Hyd.) : In this decision, it has been held that processing of a return under section 143(1)(a) cannot be equated with an assessment and it cannot be said that the Assessing Officer who had processed the return under section 143(1)(a), had formed an opinion. Hence, as no opinion has been formed, it cannot be said that there is a change in opinion. This decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation available on the record there is basis for forming the opinion that, income might have escaped assessment. We have considered the judgments relied upon by the AR which are in respect of the provisions of section 147 as applicable prior to 1-4-1989 but not for the assessment year in appeal before us. According to us, assessee's case being initiation of proceedings under section 147 within the period of six years from the end of the assessment year, ratio of judgment of Hon'ble Delhi High Court in the case of Mahanagar Telephone Nigam Ltd. (supra) would be squarely applicable and the case-law relied upon by the AR is not relevant. Regarding the case law relied upon by the DR, ratio of the decision of the Hyderabad Bench of ITAT in the case of N. Sandeep Reddy v. Asstt. CIT [2005] 95 ITD 33 squarely applies to the case before us. We hold that merely because there is correspondence between the Assessing Officers of the firm and partners, it cannot be said that there is formation of opinion by the Assessing Officer and therefore, when the reopening has been made under section 147, it cannot be termed as reopening after the change of opinion. According to us, the issue is whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the facts of the case of the Appellant Firm. It was further submitted that provisions of section 45(4) are deeming provisions under the Income-tax Act, which deem taxability of capital gains on transfer of capital asset by way of distribution of capital asset on the dissolution of a firm or otherwise and that to fall within the ambit of these deeming provisions, following conditions have to be complied with: (a)There should be a dissolution/change in constitution of the firm. (b)There must be distribution of a capital asset, on dissolution or otherwise, to the partners. (c)Then only arises the question of transfer of assets by the firm to the partners as a result of such distribution of assets. 17. For the reasons mentioned below, it was submitted that the above conditions are not attracted in the Appellant's case: (a)Section 45(4) is applicable only when there is "distribution of capital assets" on dissolution of the firm or otherwise, in respect of profit arising from the transfer of capital assets by way of distribution. Thus, section 45(4) is applicable to retirement of partners only when there is distribution of capital assets on dissolution of the firm or otherwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "The expression 'otherwise' has to be read with the words 'transfer of capital assets'. If so read it becomes clear that even when a firm is in existence and there is a transfer of capital assets, it comes within the expression 'otherwise'. The word 'otherwise' takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets to a retiring partner. Before the introduction of sub-section (4), there was clause (ii) of section 47 which read : 'any distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons'. Considering this clause as earlier contained in section 47, it meant that the distribution of capital assets on the dissolution of firm etc., was not regarded as transfer. The Finance Act, 1987, with effect from April 1, 1988, omitted this clause, instead of amending section 2(47), the effect of which is that distribution of capital assets on the dissolution of a firm would be regarded as transfer. It is now clear that when the asset is transferred to a partner, that falls within the expression 'otherwise' and the rights of the other partners in that asset of the partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 45(4) seems to have been introduced with a view to overcome the judgment of the Apex Court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 and other judgments which took a view that the firm on its own has no right but it is the partners who own jointly or in common the asset and thereby remedy the mischief occasioned. Distribution of capital assets on dissolution now is subject to capital gains tax unless it does not fall within the definition of transfer under section 2(47). What would be the effect of partners of a subsisting partnership distribution assets to partners who retire from the partnership. Does the asset of the partnership, on being allotted to the retired partner/partners fall within the expression 'otherwise.' Therefore, if the object of the Act is seen and the mischief it seeks to avoid. It would be clear that the intention of Parliament was to bring into the tax net transactions whereby assets were brought into a firm or taken out of the firm." 20. AR submitted that even though the CIT(A) referred to the above submissions, did not agree to the contention of the assessee. CIT(A) held that since there was revaluation of assets, new partners have come in, old ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts as between the old partners and new partners and that applying the ratio of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 , that the orders of lower authorities be confirmed. DR submitted that the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. A.N. Naik Associates [2004] 265 ITR 346 (Bom.) squarely applies, in which case it was held that, word "otherwise" in section 45(4) takes within its sweep not only cases of dissolution but also cases of a partnership firm transferring assets in the favour of a retiring partner and therefore, transfer of assets of the partnership firm to the retiring partners would amount to transfer of capital assets chargeable to the tax under section 45(4). 24. We have considered the orders of lower authorities, arguments of AR and DR and the material before us. The issue is solely applicability of the provisions of section 45(4) to the facts in assessee's case. Provisions of section 45(4) are as follows : "Capital Gains. 45(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of transfer of tenancy rights is as follows, as per the preliminary and concluding portion of the order : Preliminary Portion : "A notice under section 148 of the Income-tax Act, was issued to the assessee, as the capital gain as per section 45(4) of the Income-tax Act, 1961, amounting to Rs. 2,60,000 arising from the distribution of capital asset [tenancy rights] to the partners remained to be taxed in the hands of the assessee." Concluding Portion : "For going discussion make its very clear that there was transfer of capital assets to the partners of the firm on reconstitution of the firm. In the light of the position of law as discussed in foregoing paragraphs it is clear that provisions of section 45(4) of the Income-tax Act, 1961, is attracted in this case." From the above observations of Assessing Officer, it is clearly evident that the finding is that there is transfer of tenancy rights from the firm to the partners. Whereas, there is no dispute on the issue that the tenancy rights remained only in the hands of the firm; before revaluation, after revaluation and before and after change in the constitution of the firm. Thus, it would be evident that the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion whereas around 8% of the property is still owned by 2 members of the Kothi family who continued to be partners of the reconstituted firm. The presence of the old partners in the firm, was perhaps dictated by the fact that if they had not continued, it would amount to dissolution of the firm. The firm is only the vehicle which has been used to carry out the transactions so that the transaction does appear as an outright sale. 29. From the above observations of the CIT(A), according to us, the only reason for which he had upheld Assessing Officer's action is, according to him, there is an effective transfer of part of the tenancy rights between the outgoing partners of the firm and the incoming partners, which is beyond doubt, as per his following observations: "In effect, by the above chain of transactions, the property which was owned by Shri D.R. Kothi and the tenancy rights which was owned by the Kothi family through the firm has effectively gone into the hands of the Jain family who are 90% partners in the reconstituted firm. After purchase of ownership rights, in the next year, the Jain family owns actually 90% of the property in question whereas around 8% of the property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain on the transfer of a capital asset. In the facts before us, the contention of the department effectively is that the transfer is allegedly between the Kothi family and the Jain family. In case this is the department's stand, in such a case the capital gains arise only in the hands of the partners who have transferred their share of tenancy rights to the other partners who have acquired the same. Even according to the department, this is not the case for levying the capital gains to tax in the hands of the firm, as the transaction in the hands of the firm did not result in any change over ownership. In fact, re-assessment proceedings under section 147, were also initiated in the hands of the partners for assessment of capital gains in their hands and the same have been dropped. It is a settled proposition of law, that the liability to capital gains can be assessed only in the hands of the assessee in which there is a transfer, but not in the hands of an assessee in whose hands there is no transfer. This dictum is clear; from the following judgments: (i) CIT v. United Trading Co. [1995] 212 ITR 532 (Raj.) - In this case, the firm discontinued business. The issue was the power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BOI. (iv) Vimalbhai Nagindas Shah v. CIT [1983] 140 ITR 29 (Guj.) - The facts were that, HUF underwent partial partition in respect of a property and property was jointly taken over by certain members of the HUF. Remaining members were paid cash and property ceased to be HUF property. It was held that Capital gains arising on sale of property is not assessable in hands of HUF, once there is a partial partition of an HUF in respect of a certain assets, such asset ceases to be the property of the HUF, and therefore, capital gain arising on sale of such property is not assessable in the hands of the HUF. 31. From the above judgments, it is clear that assessment of capital gains can only be in the hands of an assessee in whose hands there is a transfer. As per the provision of section 45, any profits or gains arising from the transfer of a capital asset effected in the previous year shall, be chargeable to income-tax under the head "Capital gains". 32. The argument of the DR that applying the ratio of the judgment of the Hon'ble Apex Court in the case of McDowell & Co. Ltd. (supra), assessee-firm should be subjected to capital gains, according to us, does not stand, as there being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently does not arise. (iii)In order that there is capital gains liable to tax under the provisions of section 45(4), there has to be transfer of asset by way of distribution of assets between the firm and its partners and in the case before us, even according to department, it is not the case that the appellant firm had transferred its rights in any capital asset to the retiring partners. 34. Under the above facts, we hold that it being clearly evident that there being no transfer in the ownership over the tenancy rights belonging to the firm, the question of holding that the appellant-firm is liable to capital gains under the provisions of section 45(4) does not arise at all and that it is clear that the department's stand is not applicable to the facts before us. 35. In view of the above, we do not agree with the views of the Assessing Officer and CIT(A) that there is distribution of capital assets on the reconstitution of the firm under the provisions of section 45(4) and delete the addition made by the Assessing Officer which had been confirmed by the CIT(A). Accordingly, under Ground Nos. 5 to 10, the issue urged that there is no capital gains liable to tax in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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