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TMI Blog1988 (8) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... and the first three partners carried on the business with all the assets and liabilities. On that day of dissolution the following assets were revalued : (1) Office Furniture Equipments Rs. 4,50,000 (2) Library books Rs. 3,50,000 (3) Tenancy rights and Goodwill Rs. 2,00,000 ------------------------- Rs. 10,00,000 ------------------------- The appreciated value of the assets were distributed among the partners as follows : D.C. Gandhi Rs. 3,00,000 M.J. Sheth Rs. 2,30,000 S.E. Rangwala Rs. 1,92,500 B.B. Vakil Rs. 1,00,000 P.N. Sheth Rs. 95,000 U.C. Gandhi Rs. 82,500 --------------------------- Rs. 10,00,000 --------------------------- 3. The ITO in the course of the assessment proceedings issued a show-cause notice to the assessee whereby he proposed to bring to tax the aforesaid sum of Rs. 10,00,000 resulting out of the appreciation in the value of the various assets. It was however claimed by the assessee that the revaluation of the assets did not give rise to any income. For this proposition reliance was placed on the unreported decision of the Gujarat High Court in the case of Jayantilal Laxmichand [IT Reference No. 111 of 1974 dated 4-9-1975] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... themselves not merely with the genuineness of a transaction but with the intended effect of it on fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it.' Page 171 'Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes, honestly without resorting to subterfuges.' (2) Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industries Ltd. and Another reported in [1986] 157 ITR 77. In this case, their Lordships of the Supreme Court have followed the ratio laid down in McDowell Co's case noted supra. Their Lordships of the Supreme Court have held in the abovecited case, that colourable devices to avoid the tax liability cannot be encouraged or entertained. In the present case, with the discussion the foregoing paragraphs it is evident that the act of dissolution and paying Rs. 10,00,000 to partners under the shadow of revaluation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnitures are very old and naturally their market value cannot appreciate but rather depreciate. Regarding the books, they can also have depreciated value and not appreciated value since these books and law journals become outdated with the passage of time and old books do not fetch the same price if sold after 20-30 years. Regarding the valuation of the goodwill, it may be pointed out that the goodwill in the case of firm consisting of professionals, is personality oriented. If the eminent person upon whose eminence the professional firm has been built up, retires then the goodwill declines substantially. Thus, the goodwill in the case of professional firm is not a self-generating asset in the sense it is so in case of any business producing goods under a brand name. Thus the valuation of the above three assets is artificial and fictitious in my opinion. Secondly as pointed out by the ITO the goodwill has been apportioned to the retiring partners in violation of the original partnership deed of 1980. The appellant has not given the exact working of the apportionment of the assets. If it is pleaded that no goodwill was apportioned what was the necessary in valuing goodwill then ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11, that where a device has been adopted to evade tax the authority is entitled to unravel the device is definitely applicable in this case. Further, it appears palpably absurd that the retiring partners would be interested in taking their share of some depreciation and obsolete assets like books and furniture while leaving the real asset viz. the advances received from clients (which is nothing but unadjusted income) to the existing partners. In my opinion their real claim pertained to this asset and the transaction of revaluation of other assets was only a garb and colourable device to cover it up. Lastly, I may point out that the decision of the Gujarat High Court in the case of Jayantilal Laxmichand, relied on by the learned A.R. is not at all relevant. In my opinion since the question decided by the Gujarat High Court in that case was entirely different. In that case, the Hon'ble Gujarat High Court decided the question of taxability of the share received by the partners on dissolution of the firm in the hands of the partners. Since this is not the issue before us, the ratio of that case is of no use in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reflected amounts received in advance from various clients. That the aforesaid sum was transferred to the income account in various subsequent years viz. S.Y. 2040, S.Y. 2041 and S.Y. 2042 and that also after the cases had been concluded. That the expenditure incurred on behalf of the clients totalling Rs. 1,00,362 had also been debited to this account. (6) That whereas the ITO's case was that the provisions of section 28(iv) were attracted the CIT(A) was of the view, that this was a device to distribute the unadjusted income of the firm (Rs. 17,20,285) to the partners in their profit sharing ratio. (7) That the unreported decision of the Gujarat High Court supra squarely applied to the facts of the case specially when it followed another decision of the same High Court in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 subsequently confirmed by the Supreme Court in 165 ITR 116 (sic). The learned counsel for the assessee finally made an impassioned plea for the addition in question to be deleted as according to him no benefit had resulted to the assessee firm. In support of his arguments he also cited the following authorities : (i) CIT v. Dewas Cine Corpn. [1968] 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise. On every such occasion the accounts of the partners have to be settled and such settlement takes into account the market value of the various assets. 15. We would also like to mention that the case sought to be made out by the CIT(A) is far-fetched. The inference that the revaluation being undertaken for the purpose of "ascertaining the unadjusted income of the firm and thereafter distributing it to the partners", is not called for since it appears to be a figment of his imagination. The system of maintaining accounts adopted by the assessee is an accepted one and consistently followed all along in the past and in the future. There was even a suggestion aired by the assessee's counsel that if what had been brought to tax (Rs. 10 lakhs) was the unadjusted fees (as per the CIT(A), then the assessments of subsequent years be modified by excluding a similar sum since that would amount to "double taxation". 16. Before we part we would like to observe that the decision of the Supreme Court in the case of McDowell Go. Ltd. would not apply since we do not find any device in so far as the firm is concerned vis-a-vis the revaluation of the assets. We would repeat that it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the lower authorities. It appears that the ITO has been swayed by the fact that the flat in question belongs to the close relatives of the partners of the firm. He has also taken into account the fact that there is a debit balance outstanding against the owners of the flat in the books of the firm. And further no interest has been charged on such debit balance. He has also taken note of the fact that the flat admeasuring 105 sq. yds. had been purchased for Rs. 1,16,000 and the rent of Rs. 3500 p.m. was on the higher side. The assessee's case on the other hand is that the carpet area of the flat is 945 sq.ft. and in a commercial area a rate of Rs. 4 per sq.ft. is not unreasonable. After examining the viewpoints of the parties before us we are of the view that as far as the present assessment year is concerned, there is no basis for making any disallowance/addition under section 40A(2) since the ITO has proceeded merely on surmises and conjectures and has not cared to bring any contrary evidence on record. We do not find anything in the assessment order which could show that the I.T.O. made enquiries about the rates of commercial properties in the area concerned or even the adjo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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