AMAR KANAYALAL NAGPAL,MUMBAI vs. ITO WD 19(1)(3), MUMBAI

(i) The learned commissioner of income tax (Appeals) ought to have quashed the order of the A.O as the said order was against the principles of natural justice since no reasonable opportunity was given before passing the order and moreover the order was passed without considering the facts of the case in proper perspective.

(ii) The learned commissioner of income tax (Appeals) failed to consider the holding period of the asset from the date of dissolution and not from the original date of acquisition. In the income tax law a firm is treated as a separate assessable entity. However under the general law of partnership a firm name is a compendious mode of designate the partners. It is well settled that property of the firm is property of partners and the use by the firm is the use by the partners.

(iii) The learned commissioner of income tax (Appeals) failed to consider submission of the appellant even though referring the same in his body

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). of the order in para 3.4 pg. 7 regarding giving benefit of cost to the appellant on the date of dissolution.”

Still further, the assessee had vide its another application dated 10.12.2014, raised before us the following additional grounds of appeal : a) The learned Income Tax officer was not justified in passing the set aside order in accordance with the directions of Ld. CIT as per order under sec. 263 of the Act. The Ld. CIT had very categorically agreed with the reliance of the appellant on Guwhati High Court Judgment. The Ld. CIT only wanted the A.O to examine the figures of unabsorbed depreciation for its set off against short term capital gain. b) The appellant submits that the Ld. ITO never had the jurisdiction to travel further and frame the assessment totally afresh by raising certain new issues which were never the bone of contention before.”

2. We shall first advert to the additional grounds of appeal

raised by the assessee before us. The Learned Authorised Representative (for short „A.R‟) for the assessee at the very outset referring to the additional grounds of appeal dated 22.02.2013, submitted that he was not pressing the additional ground of appeal No.

1. The additional ground of appeal No. 1 is thus dismissed as not pressed. We shall now consider the admissibility of the remaining additional grounds of appeal raised by the assessee before us. The Ld. A.R. submitted that as the assessee by raising the additional grounds of appeal had sought adjudication of certain legal issues based on the facts available on record, thus the same may be admitted. Per Contra, the Learned Departmental Representative (for short „D.R.‟) objected to the admission of the additional grounds of appeal. We have perused the additional grounds of appeal raised by the assessee before us and are of the considered view that as our indulgence has been sought by the assessee for adjudication of certain issues involving question of law based on the facts available on record, therefore, in the backdrop of the judgment of the P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). Hon‟ble Supreme Court in the case of CIT Vs. National Thermal Power Co. Ltd. (1998) 229 ITR 383 (SC), the same are admitted.

3. Briefly stated, the facts of the case are that the assessee had filed his return of income on 31.08.2005, declaring total loss at Rs. 1,61,829/-. Assessment under Sec. 143(3) of the act was completed on 11.07.2007, determining total loss at Rs. 1,51,829/-. Subsequently, proceedings under Sec. 263 were initiated by the CIT-19, Mumbai and the latter vide his order dated 25.11.2009 set aside the order of the A.O and directed him to finalize the assessment afresh. The A.O while framing the assessment in compliance to the directions of the CIT made the following additions/disallowances:

(i) The A.O observed that the assessee was a partner in a registered partnership firm i.e. M/s Printpals. The said firm stood dissolved on the death of one of the two partners on 16.05.2003. The surviving partner, i.e the assessee, on the refusal of the legal heirs of the deceased partner to step into the shoes of the deceased partner, took over the assets of the firm and continued the business as a sole proprietor under the same name and style, viz. Printpals. In the backdrop of the aforesaid facts the A.O held a conviction that out of the total unabsorbed depreciation of Rs. 7,42,775/- only an amount of Rs. 27,422/- pertained to the period from 17.05.2003 to 31.03.2004. Hence, the A.O on the basis of his aforesaid deliberations restricted the entitlement of the assessee to set off of the unabsorbed depreciation of Rs. 27,422/- only as against its business income for the year under consideration.

(ii) The A.O observed that the assessee had taken over the assets of the aforementioned partnership firm, viz. M/s Printpals on 16.05.2003. The assessee had thereafter sold the assets, vide an agreement for sale dated 04.07.2004 and had claimed the profit/gain emerging therefrom as long term capital gain (for short „LTCG‟). As against the LTCG, the assessee claimed deduction

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). under Sec. 54EC by making investments in REC Bonds. The A.O being of the view that as the assessee had taken over the assets from the partnership firm on 16.05.2003 and had sold the same on 04.07.2004, therefore, keeping in view the period of holding of one year and two months, the same could not be held as a long term capital asset under Sec. 2(29A) of the Act. In the backdrop of the aforesaid deliberations, the A.O concluded that the assessee had wrongly claimed exemption under Sec. 54EC in respect of Short term capital gain (for short „STCG‟) arising on sale of depreciable assets under Sec. 50 of the Act.

The A.O on the basis of his aforesaid observations assessed the income of the assessee under Sec. 143(3) r.w.s. 263 of the Act at an amount of Rs. 17,87,707/-.

3. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating at length on the contentions advanced by the assessee before him, was however not persuaded to subscribe to the same. The CIT(A) found himself to be in agreement with the view taken by the A.O that the entitlement of the assessee towards claim of unabsorbed depreciation stood restricted to Rs. 27,422/- i.e. for the period 17.05.2003 to 31.03.2004. Still further, the CIT(A) concluded that as the assessee had acquired the assets only after the dissolution of the firm on 16.05.2003, which thereafter were sold on 04.07.2004, therefore, the assessee had held the same only for a period of one year and two months. The CIT(A) on the basis of his aforesaid observations concluded that as the sale of the aforesaid assets resulted into STCG in the hands of the assessee, thus the A.O had rightly held that the assessee was not entitled for exemption under Sec. 54EC in respect of the said amount of STCG. The CIT(A) on the basis of his aforesaid deliberations dismissed the appeal.

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3).

6. We shall now advert to the additional grounds of appeal no. (ii) & (iii) raised by the assessee before us on 22.02.2013. We find that it is the claim of the assessee that as under the general law of partnership a firm is a compendious mode to designate the partners, and the property of the firm and its use is to be construed as the property of the partners being used by them, therefore, the CIT(A) had erred in considering the holding period of asset in the hand of the assessee from the date of dissolution of the firm and not from the original date of acquisition of the same by the partnership firm. To be brief and explicit, the claim of the assessee is that the period of holding of the Industrial unit No. 307, 3rd Floor of Wadala Udyog Bhawan, 8, Naigaum Cross Road, Wadala, Bombay, which was acquired by the assessee on the dissolution of the firm on 16.05.2003 on the death of the other partner, was not to be construed from the said date, but rather from 04.05.1984 i.e. the date on which the said asset was acquired by the firm,

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). viz. M/s Printpals in which the assessee at the relevant time was a partner. The assessee had tried to impress upon us that the date of holding of the aforesaid property in his hands was to be reckoned from 04.05.1984, as a result whereof on the sale of the same on 04.07.2004, it would clearly be in the nature of sale of a Long Term Capital asset by the assessee.

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). of the High Court of Madras in the case of CIT Vs. M.K Chandrakanth & Ors (2002) 258 ITR 14 (Mad) is absolutely misconceived. The case law relied upon by the ld. A.R pertained to A.Y 1978-79, i.e a period prior to A.Y 1986- 87. Upto the A.Y 1986-87, Sec. 2(42A), Explanation 1(b) r.w Sec. 49(1)(iii)(b) provided that where a capital asset had became a property of the assessee on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987, the period for which the asset was held by the previous owner would be included for working out the period of holding of the asset by the assessee. At this stage, we may herein observe that the amendment made available to the statute, vide the Finance Act, 1987, w.e.f 01.04.1988 to Sec. 49(1)(iii)(b), pursuant whereto the period of holding of an asset by an erstwhile partner of a dissolved firm was no more to include the period of holding of such asset by the firm, can be appreciated in the backdrop of a corresponding omission of Sec. 47(ii) from the statute, vide the Finance Act, 1987 w.e.f 01.04.1988. Before the introduction of Sec. 45(4), there was cl. (ii) of s. 47, which provided that the distribution of capital assets on the dissolution of a firm, etc. was not to be regarded as "transfer". It was thus during the subsistence of Sec. 47(ii), as there would be no transfer of an asset on the dissolution of a firm, hence Sec. 2(42A) r.w Sec. 49(1)(iii)(b) contemplated that the period of holding of the asset in the hands of an erstwhile partner of a dissolved firm was to include the period for which the asset was held by the firm prior to dissolution. However, with the striking off of Sec. 47(ii) from the statute by the legislature, and making available Sec. 45(4) on the statute, which contemplates that distribution of assets on dissolution of a firm is to be construed as a „transfer‟, the applicability of Sec. 2(42A) r.w Sec. 49(1)(iii)(b) having been rendered as unworkable, was restricted by the legislature till A.Y 1987-88. Thus, to be brief and explicit, with the striking off of Sec. 47(ii) and making available of Sec. 45(4) on the statute, vide the Finance Act, 1987, w.e.f A.Y 1988-89, the working of Sec. 2(42A) r.w Sec. 49(1)(iii)(b) subsequent to A.Y 1987-88 stands jeopardised. We find that our aforesaid view stands fortified by the P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. A.N Naik Associates (2004) 265 ITR 346 (Bom). The High Court in its aforesaid judgment had observed that the result of the amendment carried out by the Finance Act, 1987 by omitting Sec. 47(ii), was that distribution of capital assets on dissolution of a firm would be regarded as a “transfer”.

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). necessary for completing the title. We are afraid that the said judgment also having been rendered in context of an issue not relevant to the case of the assessee before us, thus, would not assist its case. The additional grounds of appeal No. (ii) & (iii) raised by the assessee vide its application dated 22.02.2013 are dismissed in terms of our aforesaid observations.

7. We shall now advert to the contentions raised by the assessee before us on the basis of the original grounds of appeal. The Ld. A.R. had during the course of hearing of the appeal submitted that ground of appeal No. 4 was not being pressed. We thus dismiss the Ground of appeal No. 4 as not pressed.

8. We shall now advert to the ground of appeal No. 2 raised by the assessee before us. It is claimed by the assessee that the CIT(A) had upheld the additions made by the A.O without considering the facts of the case and ignoring the various documents produced and explanation offered by the assessee during the course of hearing of the appeal. However, the Ld. A.R had not drawn our attention to any such document which was produced by him before the CIT(A), but had remained omitted to be considered by him while passing the order. Still further, no reference to any such explanation which was furnished by the assessee during the course of the proceedings before the CIT(A), but had remained unaddressed by him was brought to our notice by the ld. A.R during the course of hearing of the appeal. We thus in terms of our aforesaid observations are constrained to dismiss the Ground of appeal no. 2.

9. We shall now take up the contention of the assessee that the CIT(A) had erred in not allowing exemption under Sec. 54EC in respect of LTCG of Rs. 9,00,000/- that had arisen on the sale of the property under consideration, viz. Industrial unit No. 307, 3rd Floor of Wadala Udyog Bhawan, 8, Naigaum Cross Road, Wadala, Bombay. The genesis of the issue under consideration is that the assessee had on the dissolution of the firm, viz. M/s Printpals, which took place on the death of the other partner on P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). 16.05.2003, had taken over the assets (including the aforementioned property which was acquired by the firm on 04.05.1984) and continued the business as a proprietor. The aforesaid assets acquired by the assessee were sold by him, vide agreement for sale dated 04.07.2004. The assessee thereafter made investments in certain specified bonds, viz. REC Bonds and claimed exemption under Sec. 54EC of the Act, as regards the capital gain arising on the sale of the aforesaid assets. The A.O being of the view that since the assessee had held the assets only for a period of 1 year and 2 months, hence the same not being a long term capital asset as defined under Sec. 2(29A) of the Act, did not qualify for exemption under Sec. 54EC of the Act. The A.O on the basis of his aforesaid observations declined the claim of exemption raised by the assessee under Sec. 54EC.

10. The claim of the assessee is that as the property under consideration was held by the firm M/s Printpals (in which the assessee was a partner) since 04.05.1984, therefore the subsequent changes in the constitution of the partnership firm and finally continuing of the business by him as a proprietary concern, in the absence of any transfer of the asset, would in no way affect the period of holding of the asset under consideration. Alternatively, it was averred by the assessee that even if it was assumed that a transfer of the capital asset took place on the dissolution of the firm on 16.05.2003, in that case the capital gain tax liability on such transfer would arise in the hands of the firm, while for the continuing partner, i.e. the assessee would only be liable for payment of capital gain tax to the extent of the difference between the Fair Market Value of the property under Sec. 50C on 16.05.2003 and that on the date of actual sale i.e. 03.07.2004. Per contra, the Ld. D.R. relied on the order of the CIT(A).

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). by a continuing partner on the dissolution of the firm occasioned by the death of a partner, is to be reckoned from the date of acquisition of the said asset by the firm, which as observed by us hereinabove is a separate entity under the Income Tax Act, 1961, the claim of the assessee seeking relating of the period of holding of the property under consideration to 04.05.1984, cannot be accepted. We thus are of the considered view that in terms of our aforesaid observations, the claim of the assessee that the period of holding of the asset for adjudicating his entitlement under Sec. 54EC has to be worked out after considering the period for which the said asset was held by the partnership firm, cannot be accepted. The reliance placed by the ld. A.R on the judgment of the High Court of Guwahati in the case of CIT Vs. Assam Petroleum Industries (P) Ltd. (2003) 262 ITR 587 (Gau), being distinguishable on facts would thus not assist the case of the assessee before us. We find that the High Court in the aforementioned case had observed that where the building owned by the assessee was held for a period of more than thirty six months, then merely for the reason that the same formed part of the „block of assets‟ in respect of which depreciation was allowed to the assessee and the capital gain on sale of such depreciable asset was to be assessed as STCG, the said asset, viz. building in the backdrop of its period of holding of more than thirty six months would not loose its color and character as that of being a long term capital asset under Sec. 2(42A) for the purpose of entitlement of the assessee towards exemption under Sec. 54E of the Act. The High Court while concluding as hereinabove, had observed that Sec.54E is an independent provision which is not controlled by Sec. 50 of the Act. We are of the considered view that as in the case of the assessee before us, the property under consideration, viz. Industrial unit No. 307, 3rd Floor of Wadala Udyog Bhawan, 8, Naigaum Cross Road, Wadala, Bombay, was held by the assessee only for a period of 1 year and 2 months, thus the aforesaid judicial pronouncement would not assist the case of the assessee. We shall now advert to the alternative claim of the Ld. A.R that in case it was to be held that the takeover of the assets by the assessee on the dissolution of the firm on 16.05.2003 was to be P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). construed as a transfer, then the capital gain in his hands would be to the extent of difference between the sale consideration of the property on 03.07.2004 and the Fair Market Value of the same on 16.05.2003. We have given a thoughtful consideration to the said claim of the assessee and find substantial force in the same. We are of the considered view that after the dissolution of the firm on 16.05.2003 on the death of one of the two partners, the assessee on the declining by the legal heirs of the deceased partner to step into the shoes of the deceased, had continued the business as a sole proprietor. We are of the view that the continuing of the business by the assessee after the dissolution can safely or rather inescapably be taken as the distribution of the assets to him. Thus, in the backdrop of the aforesaid state of affairs, we are persuaded to subscribe to the claim of the ld. A.R that the „transfer‟ of the assets in terms of Sec. 45(4) had occasioned in the hands of the dissolved firm, viz M/s Printpals on 16.05.2003. As the „Fair Market Value‟ of the assets is to be deemed to be the full value of consideration received or accrued to the firm, hence the „Cost of acquisition‟ of the asset under consideration cannot be taken at a different figure, but as per our considered view, has to be adopted as the „Fair Market Value‟ of the same on the date of dissolution and distribution of the assets, i.e 16.05.2003. We thus, in terms of our aforesaid observations direct the A.O to recompute the „Capital gain‟ in the hands of the assessee by adopting the „Fair Market Value‟ of the property under consideration, viz. Industrial unit No. 307, 3rd Floor of Wadala Udyog Bhawan, 8, Naigaum Cross Road, Wadala, Bombay on 16.05.2003, as the „Cost of acquisition‟ in the hands of the assessee. We thus, are of the considered view that though the contentions advanced by the assessee as regards its entitlement towards exemption under Sec. 54EC has to fail, but those advanced in context of quantification of the capital gains in his hands merits acceptance, in terms of our aforesaid observations. The Ground of appeal No. 3 raised by the assessee is partly allowed.

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3). 12. The Ground of appeal No. 1 and Grounds of appeal No. 5 & 6 being general in nature are dismissed as not pressed.

13 The appeal of the assessee is partly allowed in terms of our aforesaid observations.

Order pronounced in the open court on 30.05.2018 Sd/- Sd/- (G.S. PANNU) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER भुंफई Mumbai; ददनांक 30.05.2018 Ps. Rohit आदेश की प्रनिलऱपि अग्रेपषि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A)- 3. आमकय आमुक्त / CIT 4. 5. ववबागीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai गार्ड पाईर / Guard file. 6. सत्मावऩत प्रतत //True Copy// आदेशधिुसधर/ BY ORDER, उि/सहधयक िंजीकधर (Dy./Asstt. Registrar) आयकर अिीऱीय अधर्करण, भुंफई / ITAT, Mumbai

P a g e | AMAR KANAYALAL NAGPAL Vs. ITO-19(1)(3).