Ita/1622/2009 Of The Commissioner Of Income Tax v. Dr.p.n.bhaskaran

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT:- THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY, THE 12TH DAY OF JUNE 2018 / 22ND JYAISHTA, 1940 I.T.A.No.1622 of 2009 ------------------------------ AGAINST THE ORDER IN I.T.A.NO.364/COCH/2005 DATED 11.11.2008 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN.---------------------------- APPELLANT(S)/ RESPONDENT:--------------------------------------------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. BY STANDING COUNSEL FOR GOVERNMENT OF INDIA (TAXES) SRI.JOSE JOSEPH. RESPONDENT(S)/ APPELLANT:- ---------------------------------------------- DR.P.N.BHASKARAN, UPASANA, VADAYATTUKOTTA,, KOLLAM. BY ADVS. SRI.E.K.NANDAKUMAR SRI.P.BENNY THOMAS SRI.K.JOHN MATHAI THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12-06-2018,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:- I.T.A.NO.1622 OF 2009 APPENDIX APPELLANT'S ANNEXURES:- ------------------------------------------- ANNEXURE-A TRUE COPY OF THE ORDER UNDER SECTION 143(3) R.W.S.147 OF THE ASSESSING OFFICER DATED 17.01.2003. ANNEXURE-B TRUE COPY OF THE ORDER U/S.263 OF THE COMMISSIONER OF INCOME TAX DATED 28.01.2005. INCOME TAX DATED 28.01.2005. ANNEXURE-C TRUE COPY OF THE ORDER UNDER SECTION 143(3) R.W.S.147/263 OF THE ASSESSING OFFICER DATED 20.03.2006. OF THE ASSESSING OFFICER DATED 20.03.2006. ANNEXURE-D TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 26.09.2006. (APPEALS) DATED 26.09.2006. ANNEXURE-E TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATETRIBUNAL DATED 11.11.2008.TRIBUNAL DATED 11.11.2008. RESPONDENT'S ANNEXURES:- ---------------------------------------------- NIL. vku/- [ true copy ] “C.R.” K. Vinod Chandran & Ashok Menon, JJ. ------------------------------------------------------- I.T.A.No.1622 of 2009 ------------------------------------------------------- Dated, this the 12[th] day of June, 2018JUDGMENT Vinod Chandran, J: The only question of law arising from the order of the Tribunal is, whether, in the facts and circumstances of the case,there could have been a suo motu revision by the Commissioner ofIncome Tax under Section 263 of the Income Tax Act, 1961 [forbrevity “IT Act”]. The facts coming to the fore are simple but posequite complex questions of law on partnership necessitatingreference to the Partnership Act, 1932, the precedents thereunderand the provisions of the IT Act, which we are obliged to answerin view of the arguments raised by both sides. 2. On facts, the assessee, who is the respondentherein, was a partner of a firm which commenced on 05.04.1979.The partnership firm was engaged in running a hospital. The firmwas reconstituted several times, over a period of time with differentpartners and eventually the assessee and his daughter alone werethe partners. At the outset we have to notice that there is no definiteness as to the exact share of each of these partners for wantof sufficient material. Any way, on 31.03.1997, the firm, consisting oftwo partners, i.e., the assessee and his daughter, was dissolved andthe daughter released her share in the firm to the exclusive share ofthe father, the assessee herein. The assessee also took his share ofthe assets of the firm and the hospital belonged exclusively to himon such dissolution of the firm. It thus became a proprietorship andlater it was sold on 18.03.1999 for Rupees Five Crores. definiteness as to the exact share of each of these partners for wantof sufficient material. Any way, on 31.03.1997, the firm, consisting oftwo partners, i.e., the assessee and his daughter, was dissolved andthe daughter released her share in the firm to the exclusive share ofthe father, the assessee herein. The assessee also took his share ofthe assets of the firm and the hospital belonged exclusively to himon such dissolution of the firm. It thus became a proprietorship andlater it was sold on 18.03.1999 for Rupees Five Crores. 3. The assessee filed a return for the year 1999-2000,showing the apportionment of the consideration relating to building,furniture, electric and sanitary fittings, equipments and machinery,land, goodwill and trademark of the hospital and nursing home. Withrespect to the building, the assessee offered short term capital gainsfor assessment. Consideration obtained for land, goodwill andtrademark, which come to Rs.3,75,00,000/-, was offered for taxationas long term capital gains; but, however, claimed exemption insofaras having invested in UTI as per Section 54EA. The AssessingOfficer allowed the claim of exemption from long term capital gains,which was sought to be suo motu revised under Section 263. 4. The Assessing Officer in the meanwhile initiatedproceedings under Section 147 read with Section 148 forescapement of income. Then the Commissioner dropped theproceedings initiated under Section 263 for reason only of thereassessment attempted. The Assessing Officer however, droppedthe proceedings under Section 148, upon which again theCommissioner invoked the power of suo motu revision underSection 263, which order is seen at Annexure-D. On furtherreassessment based on suo motu revision, the Assessing Officer, byAnnexure-C order, rejected the claim of long term capital gains forland, trade mark and goodwill and assessed the entire capital gainsin the hands of the assessee, being the exclusive owner from thedate of dissolution of firm, as short term capital gains. An appealwas filed, which was rejected by Annexure-D order. A further appealto the Tribunal went in favour of the assessee; the Tribunal havingfound the order under Section 263 to be not sustainable. 5. The Tribunal found, on a reading of the order oforiginal assessment that the Assessing Officer had considered thequestion of long term capital gains and allowed it. The Tribunal also found that the assessee had given all the details and particulars andextensive computation of income before the Assessing Officer. Themere fact that there was no elaborate consideration is irrelevant,was the Tribunal's finding. It was categorically found that it cannotbe said that the Assessing Officer had not applied his mind. TheTribunal referred to the decision in N.Khadervalli Saheb & Anr. v.N.Gudu Sahib (Decd.) & Ors. [(2003) 261 ITR 1 (SC)], which heldthat a firm is not an independent entity and its partners are the realowners of the assets of the firm. Relying on the binding declarationthat on dissolution of the firm there is no separate assignment ofownership to the partners and there is only allotment of theproperties in proportion to the shares, it was found that there wasnothing to show that the view of the Assessing Officer waserroneous. CIT v. Max India Limited [295 ITR 282 (SC)] was alsorelied on to find that the view adopted by the Assessing Officer ispermissible in law and when the Assessing Officer adopts one of thetwo courses of law, merely for the reason it has resulted in loss ofrevenue, invocation of Section 263 of the IT Act is not enabled. ITA.No.1622 of 2009 6. Essentially the following three questions of law arise from the order of the Tribunal: (i)Whether, in the facts and circumstances of the case, itcan be said that the invocation of Section 263 of IT Act isbad in law for reason of the view taken by the AssessingOfficer being one of the courses permitted by law? ITA.No.1622 of 2009 6. Essentially the following three questions of law arise from the order of the Tribunal: (i)Whether, in the facts and circumstances of the case, itcan be said that the invocation of Section 263 of IT Act isbad in law for reason of the view taken by the AssessingOfficer being one of the courses permitted by law? (ii)Whether, in the facts and circumstances of the case, theTribunal was correct in affirming the view of theAssessing Officer that with respect to land, goodwill andtrademark the assessee can return long term capitalgains and claim exemption under Section 54AE, on thepresumption that there is no transfer effected ondissolution of the firm? (iii)Whether, in the facts and circumstances of the case,ought not the Tribunal have found that the entire propertyof the firm having been transferred to the assessee byway of allotment of share as also release of share of theother partner the assessee was entitled to claim onlyshort term capital gains relatable to the date ofdissolution of the partnership firm? 7. The learned Standing Counsel for Government of India (Taxes) submitted that there was a dissolution of the firm andthe properties came to the exclusive possession of the assessee only on 31.03.1997. On sale effected on 18.03.1999 the assesseewas in possession of the properties as its exclusive owner only forless than 36 months, which makes the asset a 'short term capitalasset' under Section 2(42A). It is also pointed out that with respectto the buildings, the assessee had claimed only short term capitalgains and there could not be any different claim made for the land orfor goodwill and trademark. Sub-section (4) of Section 45 isspecifically pointed out to indicate that on dissolution of the firmthough under the general law of partnership there is only allotmentof the assets in proportion of the share of the partners, under the ITAct there is a specific liability to tax. Section 45(4) treats the profit orgains arising from the transfer of a capital asset by way ofdissolution of a firm chargeable to tax, as the income of the firm ofthe previous year in which the said transfer takes place. Hence,under the IT Act there is a transfer effected, which view is furtherfortified by a decision of a Full Bench of this Court inK.I.Viswambharan & Brothers v. CIT [(1973) 91 ITR 588]. Specificreliance is also placed on the decision in Addanki Narayanappa v.Bhaskara Krishnappa to urge that when the partnership subsists, neither of the partners can claim a right on thepartnership assets even to the extent of his share in the business.Only on dissolution and the exclusive rights coming into thepossession of the partner could there be such exclusive rightclaimed, which, again, indicates that the partner so acquiring therights on dissolution could only claim exemptions relatable to thedate of dissolution of the firm. 8. The learned Counsel for the assessee relies on the decision in Sunil Siddharthbhai v. CIT [(1985) 4 SCC 519] toargue that on dissolution of a partnership firm there cannot be founda transfer, as held by the Hon'ble Supreme Court. (2003) 261 ITR 1(SC) according to the revenue fortifies their stand. CIT v. KwalitySteel Suppliers Complex [(2017) 14 SCC 548] was placed, to putin proper perspective the powers conferred under Section 263 andthe situations in which such power could be invoked. 9. We will first look at the scope and ambit of Section 263, as has been dilated upon in Kwality Steel SuppliersComplex. Therein, a mother and son were the partners of a firmand on the demise of the former, the business was continued by the 8. The learned Counsel for the assessee relies on the decision in Sunil Siddharthbhai v. CIT [(1985) 4 SCC 519] toargue that on dissolution of a partnership firm there cannot be founda transfer, as held by the Hon'ble Supreme Court. (2003) 261 ITR 1(SC) according to the revenue fortifies their stand. CIT v. KwalitySteel Suppliers Complex [(2017) 14 SCC 548] was placed, to putin proper perspective the powers conferred under Section 263 andthe situations in which such power could be invoked. 9. We will first look at the scope and ambit of Section 263, as has been dilated upon in Kwality Steel SuppliersComplex. Therein, a mother and son were the partners of a firmand on the demise of the former, the business was continued by the latter. At the time of dissolution, the firm had valued the closing stockat stock price, which was accepted by the Assessing Officer.Subsequently, a suo motu revision was attempted under Section263, directing the Assessing Officer to value the closing stock at thetime of dissolution at the market price. The Hon'ble Supreme Courtheld that valuation on the cost price was permissible especiallywhen the business had not come to a stop by the dissolution of thefirm and was continued by one among the two persons; the otherhaving expired. In these circumstances, it was held that when thereare two options available, both permissible in law, then the adoptionof one of such options by the Assessing Officer cannot be interferedwith under Section 263. We specifically notice and extract fromparagraph 7 of the judgment: “As is clear from the language of the provision, there has to bea proper application of mind by the Commissioner to come to afirm conclusion that the order of the assessing officer iserroneous and prejudicial to the interests of the Revenue. Thus,two conditions need to be satisfied for invoking such a power bythe Commissioner, which are: (i) the order of the assessing officer sought to be revised iserroneous; and erroneous; and (ii) it is prejudicial to the interests of the Revenue”. Both these conditions have to be satisfied; for the Commissioner toinvoke Section 263 and simply because the order of the AssessingOfficer was prejudicial to the revenue, it cannot be a reason for suomotu revision under Section 263. The question raised as to whetherthe Tribunal could have faulted the invocation of Section 263, in thiscase is inextricably linked with the other questions of law raised fromthe order as to whether, in the facts and circumstances of the case,on dissolution of the firm there is only allotment of shares or whetherthere existed a transfer inter-vivos. 10. Addanki Narayanappa was concerned with theissue of whether a document styled as an 'agreement' wasregistrable or not, since the recitals indicated one of the partnershaving given up the right with respect to certain assets of the firmand another party having given up their right in a machine. Thelearned Judges found that the document itself does not create anytransfer and it only spoke of a transfer which was effected earlier intime. The learned Judges, found that the partners would not be ableto exercise their rights individually on the assets of a partnership firmwhen the partnership subsists even to the extent of their share in the ITA.No.1622 of 2009 10. Addanki Narayanappa was concerned with theissue of whether a document styled as an 'agreement' wasregistrable or not, since the recitals indicated one of the partnershaving given up the right with respect to certain assets of the firmand another party having given up their right in a machine. Thelearned Judges found that the document itself does not create anytransfer and it only spoke of a transfer which was effected earlier intime. The learned Judges, found that the partners would not be ableto exercise their rights individually on the assets of a partnership firmwhen the partnership subsists even to the extent of their share in the ITA.No.1622 of 2009 business of the firm. Their right, while the firm subsists is only toshare in the profits. After dissolution or on retirement, the partnergets an exclusive right to claim the assets to the extent of the valueof his share after deduction of liabilities and prior charges. When hetakes such share there is no transfer effected; the partner only takesexclusively what he held in common before dissolution or retirement.11. Sunil Siddharthbhai considered a different issue ofwhether the shares individually held by a partner when brought intothe common share of the partnership firm; there could be capitalgains assessed on the basis of the value as shown in the books ofthe partnership firm. Two issues were framed by the Hon'bleSupreme Court. Whether there was a transfer on such shares beingbrought into the common interest of the firm and whether it could beassessed under Section 48 as profits and gains arising from thebusiness. Addanki Narayanappa was specifically referred to andthe legal position with respect to allotment of assets in proportion tothe shares, on dissolution was noticed. It was held that when apartner brings his personal assets into the partnership firm as hiscontribution to the capital, the exclusive rights as held by the said partner would be extinguished in favour of the common rights of theother partners. Hence, there was a transfer effected; quite contraryto the situation of allotment of shares on dissolution. However, theindividual interest cannot be evaluated immediately and would besubject to the operation of future transactions of the partnership firmeven resulting in diminution in value depending on accumulatedliabilities and losses in the event of fall in prosperity of a firm. Whensuch an evaluation of partner's interest takes place at the time ofrealisation, what is realised is the interest which the partner enjoysin the assets when the partnership subsists and on dissolution, thereis no transfer. Relying on Malabar fisheries Co. v. CIT [(1979) 4SCC 766], it was held: “... that the distribution of the assets on dissolutiondoes not amount to a transfer to the erstwhile partners.What the partner gets upon dissolution or uponretirement is the realisation of a pre-existing right orinterest” (sic) (page 529). The allotment of assets of the partnership firm on dissolution beingthe realisation of a pre-existing right, it was found to be notamounting to a transfer of asset. However, with respect to the bringing in of assets of an individual partner into the common kitty, itwas held that there is necessarily a transfer, coming within themeaning of Section 56 of the IT Act. The assessment made was setaside finding that the mere statement of the valuation of the assets,brought in by the partner into the common kitty, in the books ofaccounts of the firm would not result in any assessment on groundsof capital gains. This was on the reasoning that the evaluation ofsuch assets do not occur till there is a dissolution effected. Hence inthe case of bringing in assets of an individual partner to that of thepartnership there is a transfer effected, which however cannot beassessed to capital gains, since there can be no evaluation ofassets in the hands of that partner who was the erstwhile owner. bringing in of assets of an individual partner into the common kitty, itwas held that there is necessarily a transfer, coming within themeaning of Section 56 of the IT Act. The assessment made was setaside finding that the mere statement of the valuation of the assets,brought in by the partner into the common kitty, in the books ofaccounts of the firm would not result in any assessment on groundsof capital gains. This was on the reasoning that the evaluation ofsuch assets do not occur till there is a dissolution effected. Hence inthe case of bringing in assets of an individual partner to that of thepartnership there is a transfer effected, which however cannot beassessed to capital gains, since there can be no evaluation ofassets in the hands of that partner who was the erstwhile owner. 12. In the present case, we are not concerned with themere dissolution of a partnership and the partners taking the assetsof the firm in accordance with their individual shares. Admittedly thepartnership firm, at the time of dissolution, had two partners. Ondissolution, the daughter of the assessee, who was the otherpartner, had also released her share in favour of the assessee. Insuch circumstance, it cannot be said that the assessee had merely taken away a pre-existing right in the assets of the firm. There isabsolutely no dispute to the fact that the assessee was a partner inthe firm and on dissolution was entitled to the assets in proportion tohis share in the firm; in which he definitely had a pre-existing right.But, on the release of the share of the other partner, there is atransfer occasioned and the rights over that property accrues to theassessee, only on such release being effected by the other partner.On facts, we find that the share of the assessee which he receivedexclusively on dissolution being relatable to a pre-existing right hehad, as one of the partners; to the extent of such share, theassessee's claim for exemption from long term capital gains forreason of the deposit made to UTI under Section 54EA has to beallowed. However, on the value of the shares in which the otherpartner had a pre-existing right; which was released in favour of theassessee, the right over it can be claimed only from the date ofrelease and if subsequent sale falls within the 36 month period,necessarily the assets are to be assessed as short term capitalgains to that extent. 13. The Tribunal has not gone into the facts and hasproceeded on the basis that the allotment of shares on dissolutionwould not result in a transfer, which, according to the Tribunal, is alegally permissible option available to the assessee. We, on thecorrect law applied to the peculiar facts, do not agree with theTribunal on the acceptance of the claim raised by the assessee forlong term capital gains to be a permissible view at least to the extentof the value of the assets released in his favour by the other partneron dissolution. To that extent, the finding of the Assessing Officer inthe original order was an erroneous finding, which was alsoprejudicial to the interest of the revenue. Hence, we are of theopinion that the Commissioner was perfectly justified in invoking thepowers under Section 263. To the extent of the share the assesseehad prior to dissolution and the valuation of that share, which wasallotted to his share on dissolution; we concur with the order of theTribunal insofar as allowing the exemption available from long termcapital gains for reason of compliance with Section 54EA. There isno ground for a suo motu revision to that extent since the AssessingOfficer's finding on that count is not erroneous. 14. We still have to deal with the question raised by thelearned Standing Counsel with reference to sub-section (4) ofSection 45. The provision according to us enables assessment atthe hands of the firm, of the profits and gains arising inter alia fromthe dissolution of a firm. Which, on application of general principlesof partnership, cannot be assessed in the hands of the partners whotake away their pre-existing right over the capital assets, which hasbeen held by the various precedents to be not resulting in anytransfer of capital assets. The provision only enables assessment atthe hands of the firm and does not deem the allotment of capitalassets in proportion to the share on dissolution or otherwise as atransfer. Herein, we are not concerned with whether the firm wasassessed at the time of dissolution and are only concerned with theerstwhile partners assessment as an individual; that too of theconsideration received from the sale of the assets he heldexclusively after the dissolution of the firm, which sale was alsosubsequent to the dissolution. 15. We, on the findings above, answer the questions oflaw partly in favour of the Revenue and partly in favour of the assessee. As we noticed at the outset, the exact shares of thepartners are not placed before us and the valuation is also aquestion to be decided on facts. We hence remand the matter to theTribunal, before whom the assessee shall produce the deed ofdissolution and release executed in the year 1997-98. We set asidethe order of the Tribunal in I.T.A.No.364/Coch/2005, and restore theorder under Section 263. With respect to the other appeal[I.T.A.No.721/Coch/2006], the Tribunal has rejected the same asinfructuous, since the order under Section 263 was interfered with.The said appeal would stand revived, to be considered only to theextent we have directed above. The Tribunal shall, in accordancewith the law as laid down herein above, decide the quantum of longterm/short term capital gains, determining the same at the valuationas seen from the dissolution deed, and if lesser than the marketvalue as on the date of release of the share of the other partner inthe assets; on the market value. It is made clear the value of theassets to the extent the assessee obtained on allotment of his shareon dissolution, will be available to be claimed as long term capitalassets and would also be entitled exemption under Section 54AE. ITA.No.1622 of 2009 The appeal is partly allowed as indicated above. Parties are left to suffer their respective costs. Sd/-K.Vinod ChandranJudge vku/- Sd/- Ashok MenonJudge [ true copy ]