Ita/490/2006 Of M/S Patel Marigowda And Bros v. The Commissioner Of Income Tax

IN THE HIGH COURT OF KARNATAKA, BANGALORE DATEBD THIS THER DAY OF JULY, 2012 PRESENT THER HON BLE MR. JUSTICE K.SREEBEDHAR ANT THR HON'BLE MR. JUSTICK B.MANOHAR 1.T.A. No. 490 OF 2006BBRITIWE M/s.Patel Marigowda and Bros.,sree Talkies, Mandi Mohalla,Mysore-5/0001, (By Sri Ashok Kulkarni, Advocate forM/s.Sri K.R.rasad, Advocate) Appellant ANT) 1.The Commissioner of Income Tax,Bangalore,C.R.Building,Queens Road,Bangalore — 560 OO1, 2.The Income Tax Officer,Ward —- 3Mysore. (By Sri E.R. Indrakumar, Sr. Counsel a/w.sriE.I. Sanmathi Indrakumar, Advocate) Respondents This I.T.A. is filed u/s.260-A of I.T. Act, 1961 arisingOUTot Order|dated22-09-2005passed1n ITANo.860/Bang/2003 for the Assessment Year 1996-97, praying that this Hon’ble Court may be pleased to: (i)formulate the substantial questions of law stated therein and(11) allow the appeal and set aside the order passed by theITAT in ITA No.869/Bang/2003 dated 22-09-2005 andmodify the order of the Commissioner of Income Tax(Appeals),MysorevideAppealNo.ITANo.121/Mys/CIT(A)/99-2000 dated 28-03-2003 and cancelthe assessment order passed by the Income Tax Officer,Ward-3, Mysore vide order dated 29-12-1999, in the interestof justice and equity. This appeal is coming on for hearing this day,SREEDHAR RAO, J..,delivered the following: JU DGMENT M/s.Patel Marigowda and Brothers is a registered firmand is an assessee running a cinema theatre. The firm wasdissolved by notarized document. oDIt is the contention of the assessee that the firmwas dissolved with eftect from 1.4.1996 and the distributionof assets have been taken place after 01.04.96. It is thecontention of the revenue that the firm stood dissolved as on31.3.96 and that the distribution of the assets have takenplace by 31.3.96 amongst the partners. The assessee hadfiled returns for the year 1996-97 on 23.07.1997 wherein it mentions that the assets of the firm continued to be with thefirm as on 31.3.1996, 3.Theassessing.authoritypassedall*',%'accepting the returns filed. The Assessing Authority later onhas issued notice U/s.148 of the Income Tax Act to reopenthe assessment on the ground that the value of the assets ofthe firm have to be assessed on 31.3.1996 and accordinglythe said market value should have been reflected in thereturn for the year 1996-97. The assessee submitted hisobjections and explanation to the assessing authority withdocumentary material. The Assessing Authority has foundthat the deed oft dissolution is dated 31.3.1996 andistribution of assets between partners is also dated31.3.1996. It is found that disclosing the distribution ofassets and sale oft assets after 1.4.96 is incorrect anaccordingly, whatever the market value of the assets as on31.3.1996 is to be included for the period 1996-97.Accordingly, the difference in value was assessed to tax. TheCommissioner of Income Tax (hereinaiter called as “CIT’) in appeal confirmed the order of the Assessing Authority. TheAsssesse filed an appeal before the Appellate Tribunal. 4In the appeal before the Tribunal, it wascontended that U/s.148 of the Act, the Assessing Authorityshould exercise jurisdiction of reopening only on the basis ofexistence of prima facie material. In the instant case, it issubmitted that the Assessing Authority has not recorded anorder indicating that there exists prima facie material forreopening. It is argued that neither the CIT nor the AppellateTribunal can assume the jurisdiction of Assessing Authorityto scrutinize as to whether there is prima facie material ornot for reopening of assessment. In the absence of suchopinion on the part of the Assessing Authority, it was arguedthat the matter should have been remanded to the AssessingAuthority for fresh consideration. The Appellate Tribunalrejected the contention and confirmed the order of CIT. Theassessee aggrieved by the said order, filed this appeal. 5.This court admitted the appeal to consider thefollowing questions of law arising in this case: 5.This court admitted the appeal to consider thefollowing questions of law arising in this case: “Whether, on the facts and circumstancesof the case the notice issued u/s 148 of the Actmet the requirements of law and the assessmentmade in the status of a partnership firm on thebasis of such notice is sustainable in law? Whether the finding of the AppellateTribunal that the appellate firm was dissolvedand distribution took place on 31.3.1996 isperverse and has been arrived at without takinginto account the relevant material placed before($I In the absence of a fiction under the Acttreatingthe|dissolutionot afirm#-,distribution by way of mutual adjustmentthereon of pre-existing rights of partners as atransfer, section 45(4) can apply to levy capitalgains on such distribution?Without prejudice whether on the factsand in the circumstances otf the case thappellate Tribunal was justified in holding thatthe provisions of section 45(4) are applicable tothe assessee firm for the assessment year 96-?2I WhetherOT)thefactsand1nN$/%circumstances of the case the capital gains inrespect of property in question was liable for taxunder the Act for the assessment year 1996-97? 6,In the first place, the technical plea is raisedthat the notice issued to the assessee-which is a extinct firm,is illegal and does not constitute a valid notice. When thefirm has been dissolved, it was incumbent upon theassessing authority to issue notice to erstwhile partners andalso disclosing the fact that they would be liable as erstwhile partners along with the firm as on 31.03.1996 to beaccountable for reopening of the assessment. It is arguedthat the notice issued is in a printed form. Mechanically andwithout application of mind, the notice is issued to M/s.PatelMarigowda and Brothers which is extinct firm. Hence furtherconsequence of notice would be bad in law. T.After thorough submissions made at the Bar andthe notice issued U/s.148 of the Income Tax Act, we findthat certain columns relating to the accounts of money thathas escaped tax is kept blank. However the assessment yearis mentioned as 1996-97. It is also mentioned that in thesaid assessment year, there is escaped assessment withinthe meaning U/s.147 of the Income Tax Act. Hence, issuedshow cause notice as to why reopening should not be madeand 30 days time is granted for giving explanation. 8.The notice issued to M/s.Patel Marigowda andBrothers which is partnership firm which existed till31.03.1996 tor the assessment year 1996-97, it cannot besaid that M/s.Patel Marigowda and Brothers was extinct. The firm may be extinct from 1.4.1996. When thepartnership concern is continued to be in existence till31.03.1996, all the partners would be liable to account foracts and omissions oft the firm. In the return the notice igiven to the address which is shown in the return filed in theyear 1996-97. Therefore, there does not appear to be legal ortechnical defects in issuing notice U/s.148 of the Income TaxAct. Q.It is the contention that the reasons forreopening does not disclose the satisfaction as to the primefacie material for reopening of the assessment. The reasonsrecorded by the A.O. are as follows: “Seefolder.relatingToissueAZ30certificates in the case of partners Sri PatilMarigowda,K.J.Javaragowda,Sri.ChikkaJavarappa & Smt.Pankaja. From the sale deed itis seen that the firm was dissolved w.e.f.31.3.1996. The firm’s assets consists mainly ofBuilding and Plant & Machinery (CinemaTheatre). As per decision in the case of ALA Firmin the event of dissolution of firm the fixed &plant & machinery should have been valued atmarket price. It is seen from the 230A certificatefiledby|thepartnersin$/%('individual/HUF/names that the theatre hasbeen sold for Rs.35,00,000/- which is muchhigher than the value adopted as on 31.3.1996. There is therefore escapement of income in sofar as the assessee has tailed to offer thedifference in the value of assets as income forthe AY 96-97 within the meaning of section 147,Please issue notice u/s.148.” There is therefore escapement of income in sofar as the assessee has tailed to offer thedifference in the value of assets as income forthe AY 96-97 within the meaning of section 147,Please issue notice u/s.148.” 10.On thorough scrutiny of the said reasonings, itcategorically implies the market value of the assets shouldbe considered as on 1.3.96 and the same should have beenreflected in the assessment year 1996-97. The reasons ifread carefully, the there does not appear to be any ambiguityand the contents clearly suggest that there is escapement ofassessment of income for the year 1996-97 with regard tomarket value of the assets as on 31.03.1996. Therefore, thecontents of notice clearly indicate that there is prima faciematerial for reopening of the assessment. 11.With regard to the deed of dissolution, thepartnership dissolution deed is riddled with inconsistentaverments. At one stretch the dissolution deed reads thatpartnership is dissolved with effect from 31.3.96 but thesucceeding clause state that assets have been distributedbetween the partners by 31.3.96. In the penultimate paragraph of the deed, it is mentioned that the dissolutionshall come into effect from 1.7.1996. The assessee had filedcopy of the sale deed where the assets of the partnershipfirm is sold. In the said sale deed, it is stated that the firm isdissolved on 1.4.96. Form No.34-A issued by the departmentshows that the dissolution of the firm is on 1.4.96. Withreference to the returns filed for the year 1996-97, it ismentioned that the assets of the firm continued to be withthe firm on 31.03.1996. Therefore, distribution of assets ofthe firm have not been taken place on 31.3.96. In view of theabove material, it is strenuously argued that the findinggiven by the Appellate Tribunal that the firm is dissolved andthe distribution of assets have been made on 31.03.1996 isincorrect and contrary to the record. 12.Heard Sri Indrakumar, learned counsel for thepartners. The return filed by the assessee for the year 1996-97 is in 23.09.1997. The sale deed dated 1.7.96. They are alldocuments coming into existence subsequent to _ tdissolution deed. The statement made by the assessee in thesaid document cannot be considered as a credible material VviS-a-vis the contents of the dissolution deed. The covenantin the dissolution deed categorically makes an averment thatthe partnership firm was dissolved with effect from 31.3.96and distribution of assets have also taken place on 31.3.96.In the penultimate paragraph of the deed, it is stated thatthe dissolution shall come into eftect from 1.4.96. When thedocument has got two inconsistent averments, which of theaverments shall prevail is a mixed question of fact and lawand the answer depends upon the interpretation of thedocument in question to consider as to the real intention ofthe partners. In that view, if the said dissolution deed isconsidered, the document categorically states that thedissolution takes place on 31.3.96 and distribution of assetshave also taken place on that date. Later on, the avermentthat the dissolution is with effect from 1.4.96 can only beconsidered as the wish and opinion of the parties todocument. But, however, the said intention of parties cannotoverwrite the legal effect of document which cannot upsetthe dissolution which will be effective from 31.3.96 as perthe terms oft the deed 13.With regard to sale deed and the _ retusubsequently presented, it would only suggest that the saiddocuments are an after thought to over come the drawbacksin the dissolution deed. In that context the recitals in thesale deed and the return filed, cannot have any crediblevalue. On totality of the consideration of the facts andsubmissions made at the Bar, we find that we are satisfiedthat the findings recorded by the Appellate Tribunal is soundand proper and the questions of law are answered in favourof the revenue. Accordingly, the appeal is dismissed. NM* od/-JUDGEod/-JUDGE