M/S. GURU KRIPA AGRO FOODS,HARYANA vs. ITO, KARNAL

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

This appeal filed by the assessee is directed against the

order of the CIT(A), Karnal, dated 02/01/2013 for A.Y 2011-12

passed in first appeal No. IT/91/KNL/CIT(A)/KNL/2011-12.

“1. On the facts and in the circumstances of the case Ld. CIT(A) has erred in law while confirming the order of the Ld. AO. The Ld. AO has completed the assessment proceedings without providing proper opportunity of being heard to the

2 ITA No. 2188/Del/2013 assessee, the same is against the principle of natural justice and as such the upholding of order of Ld. AO by CIT (A) is unjustified under law and may please be set aside.

3 ITA No. 2188/Del/2013

Ground No. 1

have carefully perused the relevant material on record of the Tribunal

inter alia the assessment order, impugned order, written submissions

of the appellant and paper book filed by the assessee spread over 42

pages. The ld. AR submitted that the ld. CIT(A) has erred on facts

and in law in confirming the order of the A.O as the A.O did not

provide due opportunity of being heard to the assessee. The ld.

counsel of the Revenue contended that the A.O has shown his interest

about the issue by issuing show cause notice dated 20.12.2011 and

assessee also filed his reply on 23.12.2011 in this regard after

considering the reply of the assessee and allowing opportunity of

being heard the A.O decided the issue. Thus there was no violation of

principle of natural justice.

we are of the view that the AO issued notice to the assessee and

the same was replied by the assessee and after considering the

entire reply and hearing, the ld. AR Shri M.L. Aneja, Advocate of

4 ITA No. 2188/Del/2013 the assessee and Shri Nate Singh, Accountant of the assessee, the

AO passed the impugned assessment order which is not violative

of principles of natural justice.

appellate authority considered the submissions dated 20.6.2012 of

the assessee and called for remand report from the AO and also

provided opportunity to the assessee to submit rejoinder on

31.12.2012 to the said remand report dated 14.12.2012. The

CIT(A) drew his conclusion after providing due opportunity of

being heard to the assessee. Thus we are unable to agree with

the contentions of the assessee that it was not provided due

opportunity of being heard. Consequently, Ground No. 1 of the

assessee being devoid of merit is dismissed.

Ground Nos. 2 to 5

have carefully perused the relevant material on record of the Tribunal

inter alia the assessment order, impugned order, written submissions

of the appellant and paper book filed by the assessee spread over 42

pages and the decision of the Hon'ble Kerala High Court in the case of

CIT Vs. Southern Tubes reported at 306 ITR 216 [Ker] as relied by the

ld. AR. The ld. AR reiterated the written submissions dated 25.7.2016

5 ITA No. 2188/Del/2013 and submitted that the dissolution deed dated 31.3.2008 clearly

reveals that the provisions of section 45(4) of the Income-tax Act,

1961 [hereinafter referred to as 'the Act' for short] are attracted on

31.3.2008 only and therefore, the capital gains on the assets

transferred to the outgoing partners should be taxed in A.Y 2008-09

only and not in A.Y 2009-10. Drawing our attention towards the

decision of the Hon'ble Kerala High Court in the case of Southern

Tubes [supra], the ld. AR pointed out that the A.O in his remand

report para 2(vi) has placed his reliance on the decision of the Hon'ble

Madras High Court in the case of CIT Vs. Vijayalakshmi Metal

Industries reported at 256 ITR 540 [Mds] and after considering the

ratio of this decision, the Hon'ble High Court of Kerala in the case of

Southern Tubes [supra] observed held that dissolution deed is an

agreement and if the provisions of such deed provide for

relinquishment of right of one partner on the assets, namely,

immovable property in favour of another partner, then the latter

becomes absolute owner of the property.

said order, which is being reproduced herein below for ready

reference:

6 ITA No. 2188/Del/2013 “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 two provisions 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 any law; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in- trade of a business carried on by him, such conversion or treatment; or,

(v) any transaction involving the allowing of the possession of any imovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other associastion of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Explanation.-- For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA.

.........................

(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co- operative society) or otherwise, shall be chargeable to tax as the income of

7 ITA No. 2188/Del/2013 the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

While counsel for the revenue relied on the decisions of the Andhra Pradesh, 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 appearing for the assessees relied on the unreported decision of this Court in I.T.R. 235 and 236 of 1997 dated 29.2.2002 and that of the Madras High Court in CIT v. VIJAYALAKSHMI METAL INDUSTRIES, 243 I.T.R. 540. The Tribunal decided the issue in favour of the assessee following the decision of other Tribunals. The Tribunal has taken the view that Section 2(47)defining "transfer" does not take in the case of dissolution of a firm and since section 45(4) is not a self-contained code for assessment of capital gains arising from the transfer of capital assets by way of distribution of capital assets on the dissolution of the firm, no assessment is permissible in the case of the assessee. We are unable to agree with the view taken by the Tribunal that Section 2(47) does not cover dissolution and distribution of assets of a firm because sub- clause (vi) ofSection 2(47) covers every agreement or arrangement in whatever manner which has the effect of transferring or enabling enjoyment of any immovable property. In fact the transactions referred to in the latter part of clause (vi) are exhaustive and in our view the scope of the Section is such that if the result of arrangement or agreement of a transaction is a transfer of assets or enabling enjoyment of any immovable property, then the transaction which led to such result is a transfer. In this case the dissolution deed provides that land and factory building on dissolution will devolve upon one of the partners who wanted to continue business as a proprietor. Dissolution deed is an agreement and if the provisions of such deed provide for relinquishment of right of one partner on the assets, namely, immovable property in favour of another partner, then the latter becomes absolute owner of the property. 7

8 ITA No. 2188/Del/2013 4. In the case of assessee in I.T.A. No. 219 of 2002 also, even though there is simultaneous reconstitution of the firm, it is clear that reconstitution took place after dissolution of the firm wherein one partner assigned his right in the assets in favour of the other partners on taking consideration in cash.

capital gains u/s 45(4) of the Act which has been wrongly applied in

A.Y 2009-10 may kindly be deleted as same may be charged in A.Y

9 ITA No. 2188/Del/2013 2008-09 only, for which the assessee has no objection if the same is

calculated as legally permissible.

as well as the first appellate order and took us through the submission

of the assessee before the CIT(A) dated 4.12.2012 and submitted that

the assessee itself has not calculated and offered to tax any capital

gains on the assets transferred to the outgoing partners during 2008-

08 and all transactions and transfer of assets including accounting

entries have been made during F.Y. 2008-09 i.e. on or after 1.4.2008

pertaining to A.Y 2009-10. The ld. DR drew our attention towards

letter of the assessee dated 4.12.2012, available at pages 37 & 38 of

the assessee’s paper book [APB for short] and vehemently contended

that the assessee fairly admitted that ITR for A.Y 2008-09 does not

have any inclusion of capital gain in the computation of income. The

ld. DR further contended that the assessee neither offered capital

gain for A.Y 2008-09 in its return of income nor ready to include

capital gains in A.Y 2009-10, then the object of varying upto the

Tribunal level is very clear that the assessee is not willing to pay any

tax on the capital gain accrued to it on transfer of assets to the

outgoing partners. The ld. DR also pointed out that the copy of

dissolution deed, available at pages 3 to 6 of APB have been notarized

on 2.9.2008 showing the date of dissolution as31.3.2008 and the

10 ITA No. 2188/Del/2013 purpose of showing the date of dissolution as 31.3.2008 is not

bonafide as all the subsequent acts including transfer of the firm’s

assets to the outgoing partners have been made during F.Y. 2009-10

i.e. during the financial period commencing 1.4.2008 to 31.3.2009.

Therefore, the capital gains arising to the assessee u/s 45(4) of the

Act is leviable in A.Y 2009-10 only. The ld. DR also drew our attention

towards the conclusive para 5.2 of the first appellate order and

pointed out that as per section 2(47) of the Act, the meaning of the

term ‘transfer’ has been defined and with prevailing practices in the

market, the scope of section 2(47) of the Act has been so widened so

as to include all kinds of arrangements which confer the rights of

enjoyment of property without there being any need for registration.

The ld. DR lastly pointed out that the accounts of the assessee clearly

indicate transfer of the assets to the retiring partners took place

during F.Y. 2008-09 and under the provisions of the statute 45(4) r.w.s

24(7) of the Act, such a transfer attracts capital gains of the previous

year in which the said transfer takes place meaning thereby that

profits or gains arising from capital assets by way of distribution of

capital assets on dissolution of firm, shall be leviable to tax as income

of the firm of the previous year in which the transfer takes place.

The ld. DR further contended that in the present case, transfer of

capital assets took place during A.Y 2009-10 and merely because the

partners agreed to dissolve the firm retrospectively, w.e.f. 31.3.2008,

11 ITA No. 2188/Del/2013 it cannot be presumed that the capital assets were transferred to the

outgoing partners on the very same date without any further steps,

such as, entries in the respective capital accounts of the outgoing

partners and transfer of capital assets which was immovable in the

name of outgoing partners. The ld. DR also pointed out that as per

the dissolution deed para 5 running upto page 2, the parties of the

second, namely, Shri Gian Sagar and party of the third part Smt Raj

Rani had to pay Rs. 10,92,446/- and Rs. 24,90,856/- respectively to

first part on account of balance payment payable by them after

adjusting their capital account against properties to be given/assigned

to them within a period of four months from the date of dissolution

and these obligations and accounting entries and transfer of

immovable assets took place during F.Y. 2008-09 starting w.e.f

1.4.2008. Therefore, capital gains were rightly treated as income of

the firm for A.Y 2009-10. Therefore, the appeal of the assessee being

devoid of merits may be dismissed.

reliance on the decision of the Hon'ble Kerala High Court in the case

of CIT Vs. Southern Tubes [supra] and submitted that when the firm

was dissolves on 31.3.2008 during the F.Y. 2007-08 pertaining to A.Y

2008-08, then the capital gains cannot be taxed in A.Y 2009-10. The

ld. AR vehemently contended that as per the decision of the Hon'ble

12 ITA No. 2188/Del/2013 Gujarat High Court in the case of CIT Vs. R.M. Am [1971] 82 ITR 194

wherein it was held that the transaction, in order to attract the

charge of tax as capital gains, must be such that consideration is

received by the assessee or accrues to the assessee as a result of the

extinguishment of the rights in the capital asset. In the present case,

the assessee firm extinguished its rights from capital assets given to

the outgoing partner on 31.3.2008 when the firm was dissolved.

Therefore, capital gain cannot be taxed in A.Y 2009-10.

reference, we find it appropriate to reproduce the provisions of

section 45(4) and 2(47) of the Act as follows:

“(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

2(47) "transfer", in relation to a capital asset, includes,— (i) the sale, exchange or relinquishment of the asset ; or

13 ITA No. 2188/Del/2013 (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.”

14 ITA No. 2188/Del/2013 on 31.3.2008 within F.Y. 2007-08 pertaining to A.Y 2008-09. Therefore, capital gain arose to the assessee firm on transfer of assets to the outgoing partners cannot be taxed in A.Y 2009-10. First of all, we may point out that as per the assessee’s reply to the CIT(A) dated 4.12.2012, the assessee, in para 2 submitted as follows:

“It is further stated that at the time of filing the ITR for the AY 2008-09, the applicability of section 45(4) of the Act when there is dissolution, reconstitution and continuity in business as a going concern, was not clear. It was only in the course of Assessment Proceedings u/s 143)(3) of the Act before the A.O for the AY 2009-10, an extensive study of the Capital Gain provisions was undertaken which suggested that Capital Gains do accrue at the time when Dissolution takes place although the business is continued as a going concern. In view of the above factual position, the ITR for the AY 2008-09 does not have any inclusion of Capital Gains in the computation of income although the assessee reiterates its commitment to pay the due taxes, if any applicable for the correct and relevant Assessment Years as statutorily liable under the Act.”

15 ITA No. 2188/Del/2013 presume that the assessee did not offer capital gains accrued to

it on transfer of capital gains to the outgoing partners in the

return for A.Y 2008-09. Further, from the copy of dissolution

deed available at pages 3 to 6 of the APB, it is clear that the

deed mentions dissolution of firm on 31.3.2008, but it was

notarized only on 2.9.2008 during A.Y 2009-10. From the copies

of the capital accounts of the assessee, retiring partners

available at pages 29 – 30 APB, it is also vivid that the transfer

of assets was recorded in the books of accounts during F.Y. 2008-

09 pertaining to A.Y 2009-10, which action supports the stand of

the A.O.

when the dissolution of the partnership firm has been made on

31.3.2008, then it has to be presumed that the transfer of assets

in favour of the outgoing partners took place immediately on the

very same date when the partnership firm was dissolved. To

support this contention, the ld. AR has mainly relied on the

decision of the Hon'ble Kerala High Court in the case of CIT Vs.

Southern Tubes [supra] and decision of the Hon'ble Gujarat High

Court in the case of R.M. Am [supra]. From a vigilant reading of

the decision of the Hon'ble Kerala High Court in the case of

Southern Tubes [supra], we observe that their Lordships,

16 ITA No. 2188/Del/2013 allowing the appeal of the Revenue, categorically held that since

the transaction has resulted in dissolution of firm and partner

getting rates of immovable transaction was transferred within

the meaning of section 2(47)(vi) of the Act and the assessee firm

was liable to be assessed on capital gains in terms of section

45(4) of the Act. In this judgment, in our humble understanding,

their Lordships have accepted the stand of the Revenue by

observing that the assessee firm, having two partners, were

dissolved under the deed of dissolution, one partner took over

the land and factory building of the assessee after dissolution of

firm while the second partner continued business as

proprietorship, therefore, the transaction which resulted on the

occasion of dissolution of the partnership firm was transferred

within the meaning of section 2(47)(vi) of the Act. We

respectfully agree with this proposition and in the present case,

from the facts emerging from the documentary evidence and

material available on record, it is amply clear that the transfer

of capital assets on dissolution of firm took place within F.Y.

2008-09 relevant to A.Y 2009-10. From a vigilant reading of the

Hon'ble Gujarat High Court judgment in the case of R.M. AM

[supra] we observe that it is a case of liquidation of a company

and the ratio of this judgment cannot be applied to the case of a

partnership firm where capital gains arose to the assessee from

17 ITA No. 2188/Del/2013 transfer of assets to the outgoing partners. In view of the

above, we are of the humble opinion that in these decisions, as

relied by the assessee, does not mandate that the date of

dissolution of the firm, by way of a document which was

notarised after a lapse of five months took place retrospectively

i.e. on the date on which the partners agreed to effect

dissolution of the firm. In the present case, as we have noted

above, that the transfer of capital assets to the outgoing

partners was made by way of book entries to the respective

accounts of the outgoing partners and other formalities as

required under the Registration Act was carried on from the

period starting from 1.4.2008 to 31.3.2009 pertaining to A.Y

2009-10. Therefore, capital gain accrued to the firm on transfer

of assets to the outgoing partners has to be taxed u/s 43(4) of

the Act in A.Y 2008-09 and thus we cannot uphold the action of

the AO as well as the impugned order. We are thus unable to see

any valid reason to interfere with the assessment order wherein

it has been held that capital gains accrued to the firm on

transfer of capital gains assets to the outgoing partners is

taxable in A.Y 2009-10. We are, therefore, inclined to hold that

the grounds raised by the assessee are devoid of merits and

hence we dismiss the same. Accordingly Ground Nos. 2 to 5 of

the assessee are dismissed.

18 ITA No. 2188/Del/2013 16. The second limb of question posed in Ground Nos. 4 and 5 is

as to whether the CIT(A) has erred in law while confirming the

action of the AO in calculating the full value of consideration in

respect of land and building transferred on dissolution in an

arbitrary manner without referring the matter to the valuation

officer u/s 55A r.w.s 142A of the Act.

confirming the addition of Rs. 2 lakhs made by the AO u/s 45(4)

of the Act in respect of transfer of building constructed in land

belonging to third party.

observe that the AO showed his intention to bring income on

capital gain to tax in A.Y 2009-10 by issuing show cause notice

dated 20.12.2011 which was replied to by the assessee on

23.12.2011 wherein the assessee contended that bringing market

rates as certified by the Collector Karnal @ Rs. 26,500/- per sq. Yd. For the period ending 31st March 2008 is to be adopted for

capital gains tax calculations after considering indexation cost

and no dispute was raised by the assessee regarding application

of prevailing market rates as certified by the Collector Karnal.

We may point out that in this letter also, the assessee did not

raise any objection taxing capital gains in A.Y 2009-10.

19 ITA No. 2188/Del/2013 However, he objected to the applicability of Collector’ market

rate prevailing upto 31.3.2009 and requesting to apply t market

rate prevailing on or before 31..32008. There was no request

from the assessee to refer the matter to the valuation officer u/s

55A of the Act. Therefore, the contention and allegation

contained in Ground No. 4 of the assessee cannot be held as

sustainable and accepted.

issuing show cause notice to the assessee showed his intention to

calculate capital gains for A.Y 2009-10 and the assessee did not

object to the applicability of the Collector rate in calculation of

capital gains and the assessee only stressed upon to take

collector’ prevailing market rate on or before 31.3.2008 which

could have been applied to the case of A.Y 2008-09 and this

action of the AO was correct and as per provisions of the Act.

There was no need to refer the matter to the valuation officer

u/s 55A of the assessee Act, as such. Accordingly, Ground No. 4

being devoid of merits is dismissed.

order, we observe that the AO added back Rs. 2 lakhs and

treated the same as capital gain on transfer of the building as

per provisions of section 45(4) of the Act. However, from the

20 ITA No. 2188/Del/2013 relevant operative para 5 of the assessment order, we note that

the AO has made addition by alleging that the assessee should

have furnished complete measurement of the building and must

have applied appropriate rates keeping in view the condition of

the building. The AO further alleged that the assessee has failed

to furnish the complete required details regarding the value of

construction. Therefore, he made estimated disallowance of Rs.

2 lakhs and treated the same as capital gain on transfer of

building.

appellate order, we observe that the CIT(A) upheld the addition

merely by observing that the assessee had failed to cooperate in

furnishing details as called by the AO, therefore, addition of Rs.

2 lakhs as capital gain on the shellar building is considered

reasonable. From the orders of the authorities below and

conclusion drawn by them, as noted above, we are of the

considered opinion that this estimated adhoc addition has been

made on the Nilokheri building for which addition on account of

capital gain was estimated at Rs. 46,74,280/- as per para 4 of

the assessment order. From para 5, we further note that the AO

made addition of Rs. 2 lakhs by alleging that the assessee should

have furnished details of measurement of the building and the

21 ITA No. 2188/Del/2013 assessee has failed to disclose the details of value of

construction which cannot be basis for making addition of Rs. 2

lakhs treating the same as capital gain on transfer of building for

which capital gain has already been assessed in para 4 of the

assessment order. Thus, Ground No. 5 of the assessee succeeds

and addition made by the AO is directed to be deleted.

allowed.

The order is pronounced in the open court on 29.08.2016.

Sd/- Sd/-

(S.V. MEHROTRA) (C.M. GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 29th August, 2016

VL/