Ita/160/2009 Of The Commissioner Of Income Tax v. M/S.kumbazha Tourist Home (Disselved)

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN FRIDAY, THE 4TH DECEMBER 2009 / 13TH AGRAHAYANA 1931 ITA.No. 160 of 2009() --------------------- ITA.286/COCH/2003 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT ------------------------ M/S.KUMBAZHA TOURIST HOME (DISSOLVED) PATHANAMTHITTA ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04/12/2009, ALONG WITH ITA NO.180 OF 2009,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &V.K.MOHANAN, JJ. .................................................................... I.T. Appeal Nos.160 & 180 of 2009 ....................................................................Dated this the 4th day of December, 2009. JUDGMENT Ramachandran Nair, J. The question raised in the connected appeals is whether theTribunal was justified in holding that respondent-assessee is not liablefor payment of tax on capital gains on the distribution of assets on thedissolution of the firm. We have heard Senior Standing Counselappearing for the appellant and Adv. Sri.P.Balakrishnan appearing forthe respondent. 2. A firm was constituted with four partners to take over 14.25cents of land and a building thereon for running lodging business bythe assessee-firm. The firm was constituted on 1.7.1979 and continuedit's business upto the assessment for 1993-94 and dissolved with effectfrom 1.4.1993. Under the dissolution, the land and buildings broughtas capital of the partners went back to the same partners. Even thoughthe firm did not file return for the assessment year 1994-95 declaring ITA 160&180/09 capital gains on the dissolution of the firm, the Assessing Officer ongetting information initiated proceedings for assessment for capitalgains under Section 45(4) of the Income Tax Act. The assessee raisedobjection stating that there can be no capital gain on the dissolution ofthe firm as the land and respective portion of the building brought bythe partners, on dissolution went back to the same partners and thetransfer to the partners itself is accounted at the depreciated value ofthe building. The assessee raised objection against assessment forcapital gains under Section 45 of the act by saying that transfer if any isof depreciable asset. The Assessing Officer substantially acceptedthe contentions of the assessee and limited the levy of capital gains tothe extent of 14.25 cents of land involved. Since the building was soldat the book value i.e. depreciated value, the Assessing Officer acceptedthe transaction as one falling under Section 50(1) of the Act which doesnot attract any capital gains because the transfer was at the book value.Against this assessment, assessee filed appeal contending thatassessment of capital gains on land value is not tenable. TheCommissioner of Income Tax issued suo moto revisional orders under ITA 160&180/09 Section 263 holding that the entire transaction attracts tax on capitalgains under Section 45(4) of the Act. The assessee's appeal on thelevy of capital gains on land value was allowed by the C.I.T.(Appeals)and therefore, Revenue filed second appeal against the said order.Against the order issued by the Commissioner under Section 263,assessee also filed appeal before the Tribunal. The Tribunal afterhearing both the appeals and the Cross Objection filed by the assessee,decided the appeals in favour of the assessee holding that the referenceto valuation was not justified and therefore, assessment for capitalgains does not arise. ITA 160&180/09 Section 263 holding that the entire transaction attracts tax on capitalgains under Section 45(4) of the Act. The assessee's appeal on thelevy of capital gains on land value was allowed by the C.I.T.(Appeals)and therefore, Revenue filed second appeal against the said order.Against the order issued by the Commissioner under Section 263,assessee also filed appeal before the Tribunal. The Tribunal afterhearing both the appeals and the Cross Objection filed by the assessee,decided the appeals in favour of the assessee holding that the referenceto valuation was not justified and therefore, assessment for capitalgains does not arise. 3. After hearing both sides and after going through the Tribunal'sorder, we are unable to uphold the order of the Tribunal for more thanone reason. In the first place, the Tribunal has not considered theapplicability of Section 45(4) of the Act for the purpose of assessmenton dissolution of the firm and distribution of the assets. In fact, theclearcut finding of the C.I.T.(Appeals) in the appeal filed by theassessee itself is that Section 45(4) is squarely applicable. It is anundisputed fact that at the time of constitution of the firm the partners ITA 160&180/09 brought the land and the respective portion of the building thereontowards their share capital and the firm for several years claimedownership of the building and based on the same, depreciation wasclaimed in respect of the building for all the assessment years until1993-94 which is the last year of assessment of the firm. Admittedlyon dissolution the properties were reverted back to the partners in thesame way it was brought by them to the firm as their capital. Under thepartnership law as well as under Section 45(4), the transactions involvea transfer of the properties to the firm and retransfer to the partners ondissolution of the firm. In fact, Section 45(4) is intended to levy tax oncapital gains on the distribution of assets on dissolution of the firmamong partners. We do not find the Tribunal has considered the realquestion involved in this case. 4. The finding of the Tribunal that Section 55A has noapplication, in our view, is also not correct. In fact, Section 55Aauthorises the Assessing Officer to refer any capital asset for valuationto find out it's fair market value for the purpose of assessment of capitalgains under Chapter IV E of the Act. We notice that the decision of the ITA 160&180/09 Supreme Court relied on by the Tribunal is not applicable on the factsof the case. Further, in our view, in order to make an assessment underSection 45(4), the Assessing Officer is free to refer any asset forvaluation because when transfer value shown is book value, necessarilyfair market value has to be determined for the purpose of determinationof capital gains. Even though assessee again contended that thedepreciated value is the fair market value, the same is not acceptablebecause depreciation itself is granted at the rate prescribed under theAct and not on the actual erosion in value and in fact in the course oftime land and building only appreciates, no matter the building earnsdepreciation and in the course of time book value may become low.The finding of the Assessing Officer confirmed by the Tribunal that thetransfer of building in the course of dissolution of the firm can besubjected to short term capital gain assessment under Section 50(1) andsince the transfer is at book value, there is no gain justifyingassessment, is not sustainable. What is contemplated under Section50(1) is sale of depreciated assets by the assessee, whereas what iscovered by Section 45(4) is distribution of assets in the course of ITA 160&180/09 ITA 160&180/09 dissolution of the firm. Therefore, in our view, the distribution ofdepreciated asset among the partners in the course of dissolution of afirm is not covered by Section 50(1), but is to be assessed underSection 45(4) of the Act. The clearcut finding in the assessment is thatthe land and building was brought to the firm as capital by the partnersand based on the ownership claimed by the firm, it claimeddepreciation for all the years it was carrying on the lodging business byusing the said assets namely, land and building. Admittedly ondissolution the land and building were distributed among the partnersof the dissolved firm. In our view, this is a clear case falling underSection 45(4) attracting liability for capital gains. We, therefore,uphold the reference of the asset for valuation under Section 55A aswithin the powers of the officer. Consequently we allow the appeals byreversing the orders of the Tribunal and restore the order of theCommissioner issued under Section 263 of the Income Tax Act.However, since there is a controversy on valuation, we remand thematter to the Tribunal for restoring the appeals and the Cross Objectionand to decide the appeals on the valuation issue. The Tribunal is ITA 160&180/09 directed to decide the matter afresh within four months from date ofreceipt of copy of this judgment, after issuing notice to both sides. C.N.RAMACHANDRAN NAIRJudge pms V.K.MOHANANJudge