Ita/146/2002 Of The Commissioner Of Income Tax,Cochin v. M/S.southern Tubes,T.d.road,Ernakulam

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR TUESDAY, THE 26TH FEBRUARY 2008 / 7TH PHALGUNA 1929 ITA.No. 146 of 2002() --------------------- ITA.211/COCH/1994 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: -------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENTS: RESPONDENT/APPELLANT: ---------------------------------- M/S. SOUTHERN TUBES, T.D. ROAD, ERNAKULAM. BY ADV. SRI.M.R.RAJENDRAN NAIR SRI.K.R.SUDHAKARAN PILLAI THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 26.2.2008, ALONG WITH ITA NO. 168 OF 2002 ITA NO. 219 OF 2002 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR &T.R. RAMACHANDRAN NAIR, JJ. --------------------------------------------I.T.A. No. 146, 168, & 219 OF 2002 -------------------------------------------- Dated this the 26th day of February, 2008 JUDGMENT C.R. C.N. Ramachandran Nair,J. The common question raised by the department in these appealsfiled in the case of two assessees is whether the Tribunal was justifiedin holding that there was no "transfer" within the meaning of that termcontained in Section 2(47) of the I.T. Act to attract tax on capital assetunder Section 45(4) of the Act. We have heard senior standing counselappearing for the Income-tax Department and separate counselappearing for the two assessees. 2. The common assessee in I.T.A.Nos. 146 and 168 of 2002 is apartnership firm that consisted of two partners. During the previousyear, relevant for the assessment year 1990-91, the assessee-firm wasdissolved and under the deed of dissolution one partner took over theland and factory building. After the dissolution, the partner who gotthe land and factory building continued the business as a proprietorship one. The capital gains on transfer of land and building on thedissolution of the firm and distribution of assets was assessed by theassessing officer. The valuation was challenged by the assessee inappeal and during the pendency of the appeal, the Commissioner suomotu set aside the assessment under Section 263 of the Act on theground that valuation made by the assessing officer ignoring thevaluation report prepared by the approved valuer of the Department isincorrect. In view of Section 263 order directing revision of originalassessment, first appeal filed against the original assessment was closedagainst which the assessee filed second appeal. Besides this, theassessee filed separate appeals against Section 263 order issued by thecommissioner and another appeal against CIT (Appeals)' orderconfirming the revised assessment issued based on Section 263 order ofthe Commissioner. Before the Tribunal the assessee raised anadditional ground stating that there was no transfer in the distributionof assets of the firm on the dissolution of the firm and consequentlycomputation of capital gains was unauthorised. The Tribunal permittedthe assessee to raise this additional ground and after hearing the parties , all the appeals were disposed of holding that the dissolution of the firm with two partners and taking over of land and factory buildingby one partner did not involve any "transfer" as defined in Section 2(47) of the Act. Consequently, the Tribunal cancelled all the impugnedorders pertaining to assessment on capital gains. In view of thisdecision, the Tribunal did not go into the dispute on valuation whichwas the issue originally raised in all the three appeals. So far asI.T.A.No.219 of 2002 is concerned, the position is the same in as muchas the Tribunal has considered only whether there is capital gainsarising on the dissolution and reconstitution of the firm during therelevant previous year. 3. Since the question raised pertains to interpretation of Section parties , all the appeals were disposed of holding that the dissolution of the firm with two partners and taking over of land and factory buildingby one partner did not involve any "transfer" as defined in Section 2(47) of the Act. Consequently, the Tribunal cancelled all the impugnedorders pertaining to assessment on capital gains. In view of thisdecision, the Tribunal did not go into the dispute on valuation whichwas the issue originally raised in all the three appeals. So far asI.T.A.No.219 of 2002 is concerned, the position is the same in as muchas the Tribunal has considered only whether there is capital gainsarising on the dissolution and reconstitution of the firm during therelevant previous year. 3. Since the question raised pertains to interpretation of Section 2(47) and Section 45(4) of the I.T. Act, we extract hereunder these twoprovisions for easy reference: 2(47) "transfer", in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under anylaw; or (iv) in a case where the asset is converted by theowner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, suchconversion or treatment; or, (v) any transaction involving the allowing of thepossession of any imovable property to be taken orretained in part performance of a contract of thenature referred to in Section 53A of the Transfer ofProperty Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming amember of, or acquiring shares in, a co-operativesociety, company or other associastion of persons orby way of any agreement or any arrangement or inany other manner whatsoever) which has the effect oftransferring, or enabling the enjoyment of, anyimmovable property. Explanation.-- For the purposes of sub-clauses (v)and (vi), "immovable property" shall have the samemeaning as in clause (d) of section 269UA. 45. Capital gains. ......................... (4) The profits or gains arising from the transfer of a capitalasset by way of distribution of capital assets on thedissolution of a firm or other association of persons or bodyof individuals (not being a company or a co-operativesociety) or otherwise, shall be chargeable to tax as theincome of the firm, association or body, of the previous year in which the said transfer takes place and, for thepurposes of section 48, the fair market value of the asset onthe date of such transfer shall be deemed to be the full valueof the consideration received or accruing as a result of thetransfer. While counsel for the revenue relied on the decisions of the AndhraPradesh, Bombay and Karnataka High Courts reported in 250 I.T.R.581, 265 I.T.R. 346 and 287 I.T.R. 404 respectively, counsel appearingfor the assessees relied on the unreported decision of this Court inI.T.R. 235 and 236 of 1997 dated 29.2.2002 and that of the MadrasHigh Court in CIT v. VIJAYALAKSHMI METAL INDUSTRIES, 243I.T.R. 540. The Tribunal decided the issue in favour of the assesseefollowing the decision of other Tribunals. The Tribunal has taken theview that Section 2(47) defining "transfer" does not take in the case ofdissolution of a firm and since section 45(4) is not a self-containedcode for assessment of capital gains arising from the transfer of capitalassets by way of distribution of capital assets on the dissolution of thefirm, no assessment is permissible in the case of the assessee. We areunable to agree with the view taken by the Tribunal that Section 2(47) does not cover dissolution and distribution of assets of a firm becausesub- clause (vi) of Section 2(47) covers every agreement orarrangement in whatever manner which has the effect of transferring orenabling enjoyment of any immovable property. In fact thetransactions referred to in the latter part of clause (vi) are exhaustiveand in our view the scope of the Section is such that if the result ofarrangement or agreement of a transaction is a transfer of assets orenabling enjoyment of any immovable property, then the transactionwhich led to such result is a transfer. In this case the dissolution deedprovides that land and factory building on dissolution will devolveupon one of the partners who wanted to continue business as aproprietor. Dissolution deed is an agreement and if the provisions ofsuch deed provide for relinquishment of right of one partner on theassets, namely, immovable property in favour of another partner, thenthe latter becomes absolute owner of the property. 4. In the case of assessee in I.T.A.No. 219 of 2002 also, eventhough there is simultaneous reconstitution of the firm, it is clear thatreconstitution took place after dissolution of the firm wherein one partner assigned his right in the assets in favour of the other partners ontaking consideration in cash. 5. In short, the transactions in both the cases have resulted indissolution of the firm and partner or partners getting rights over theimmovable property. Subsequent reconstitution of the firm does notaffect the liability under Section 45(4) which is a liability of thedissolved firm to be assessed for capital gains in terms of Section 45(4). Of course, dissolved firm can be assessed for capital gains underSection 45(4) by virtue of provisions contained in Section 189(1) of theI.T. Act. Decisions of various High Courts referred above on the sideof counsel appearing for the department are in support of this viewtaken by us. The unreported decision referred to by counsel for theassessees pertain to retirement of a partner, but retention of assets ofthe firm. Similarly, the Madras High Court's decision relied on by theassessees pertains to death of a partner which did not have the effect ofconferring exclusive right on the properties of the firm on theremaining partners. Since we hold that the transaction in both the casesis transfer within the meaning of Section 2(47)(vi) of the Act, we have to necessarily interfere with the orders of the Tribunal. Consequently,we allow the appeals filed by the department by setting aside the ordersof the Tribunal on this issue. However, we find that the Tribunal hasnot considered other issues raised in the appeals which pertain tovaluation. We direct the Tribunal to hear the parties on the remainingissues and dispose of the appeals at the earliest. (C.N.RAMACHANDRAN NAIR)Judge. (T.R.RAMACHANDRAN NAIR) Judge. kk