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- 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 27TH DAY OF NOVEMBER 2013 P R E S E N T THE HON’BLE MR. JUSTICE N. KUMAR A N D THE HON’BLE MRS. JUSTICE RATHNAKALA INCOME TAX APPEAL NO.331 OF 2007
BETWEEN:
1.THE COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE, C.R. BUILDING, QUEENS ROAD, BANGALORE.
2.THE ASSISTANT COMMISSIONER OF INCOME TAX WARD – 12(2), C.R. BUILDING, QUEENS ROAD, BANGALORE.
... APPELLANTS.
(BY SRI K V ARAVIND, ADV.)
AND:
M/S. SHASTHA PHARMA LABORATORIES, NO.16/2, OVH ROAD, BANGALORE.
...RESPONDENT.
(BY SRI S. PARTHASARATHI, ADV.)
THIS ITA IS FILED UNDER SEC.260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 22-09- 2006 PASSED IN ITA NO.1481/BNG/2003, FOR THE
- 2 - ASSESSMENT YEAR 1992-93, PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO:
I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN,
II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.1481/BNG/2003, DATED 22-09-2006 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, WARD- 12(2), BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY.
THIS ITA COMING ON FOR HEARING THIS DAY, N. KUMAR, J., DELIVERED THE FOLLOWING: -
JUDGMENT
The revenue has preferred this appeal against the order passed by the Tribunal holding that the transaction in question would not fall within Section 45(4) of the Income Tax Act, 1961, as such no capital gains is payable.
Assessee filed its return of loss of Rs.6,83,400/- on 28.12.1992. After considering assessment under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), an order came to be passed on 11.11.1994 treating the assesee as the unregistered firm and accepting the return filed. The assessment
- 3 - was reopened by issuing notice under Section 148 of the Act on 19.12.2000, after taking due approval from the Commissioner of Income Tax. The assessee in reply to the notice, filed a letter dated 06.01.2001 without enclosing the enclosures, contending that in the return filed earlier, it is clearly indicated that on 30.03.1992, the assets and liabilities have been taken over by the assessee after other partners retire and the firm has been advised that as there is no transaction of transfer under Section 2 (47) of the Act, there is no capital gains. They also contended that they have disclosed fully and truly all the material facts necessary for the purpose of the assessment for the relevant previous year. The assessment was duly completed under Section 143(3) of the Act and the order dated 11.11.1994, accepting the same should not have issued notice under Section 148 of the Act, which is barred by the first proviso to Section 147 and the proceedings now initiated is void-ab-initio. They also pointed out that the stand of the assessing authority that there has been a dissolution of the firm and there is a capital gain chargeable to tax under
- 4 - Section 45(4) of the Act could have been taken, based on the information available in the statement of income. It is open to the department to claim that the said information has been withheld. The stand now taken by the department is only a change of opinion and cannot be the basis for issue of notice under Section 148 read with Section 147 of the Act. After considering the aforesaid objections, the assessing authority after setting out the particulars furnished along with the return, held that the assessee has not furnished fully and truly all material facts necessary for working out capital gains even without considering the copies, statement and schedule furnished subsequently. The assessee has taken a stand that ‘it is a transaction of taking over a firm by the company as a going concern and therefore, it does not amount to transfer. The details of revaluation was never furnished. In the Schedule 4, there is no mention of revaluation’.
Explanation (1) to Section 147 of the Act, clearly says that mere production before the assessing officer of accounts books or other evidence from which material
- 5 - evidence could with due diligence have been discovered by the assessing officer will not necessarily amounts to disclosure within the meaning of foregoing proviso. Therefore, for the alleged statement with the note is not found along with the return. Even otherwise full details were not furnished and therefore, it held reopening is valid. It is not a case of change of opinion. At no point of time, on scrutiny of original proceedings, it was brought to the notice of the assessing authority, revaluation of assets was made and capital gains arising therefrom or otherwise. The assessing officer did not have relevant facts to apply Section 45 of the Act. It is only from the material furnished from the return of income, documents and other details furnished by the assessee and as there was no response to the queries for a certificate under Section 230A of the Act, the liability to pay capital gains under Section 45 of the Act, came to surface as the relevant details were only known during the above queries. At the time of original assessment, company and the firm were assessed by two different officers. In the first assessment the
- 6 - relevant details at the time of original assessment of the firm, the proviso to Section 147 was not applicable.
On merits it was held that inclusive definition of transfer includes any transaction in any manner whatsoever, which has the effect of transferring or enabling the enjoyment of any immovable property. The assessing officer further held that by revaluation of the assets, the value of the assets was increased before the transfer, because of which there is definitely a capital gain liability in the hands of the assessee. Though the firm was taken over as a going concern and as there was no dissolution of the firm it has no bearing under Section 45(4) of the Act, which clearly says ‘dissolution of a firm or otherwise’ and therefore, it was held that Section 45(4) of the Act is attracted and assessee is liable to pay capital gains.
Aggrieved by the said order of the assessing authority, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The appellate authority confirmed the assessment made but for
- 7 - statistical purpose the appeal was treated as dismissed, since despite the acceptance of one of the pleadings raised, the end result is the confirmation of the assessment order. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal held that the assessing authority who passed the original order, originally had accepted the return filed by the assessee. It is not open to the revenue to reopen the assessment and consequently, gave a finding, by addition in respect of the capital gains and the reassessment order. It is nothing but change of opinion and same cannot be done in the reassessment proceedings. As the assessee had taken the basic stand in the return itself that when the provisions of Section 2(47) of the Act are not attracted in view of the fact that the assessee firm was taken over by M/s.Shastha Pharma Laboratories Private Limited, with effect from 30.03.1992 and on merits also, after referring to the various judgments it was held that the transaction will not come under the provisions of Section 2(47) of the Act and therefore, the assessee is not liable to pay any
- 8 - capital gains. Accordingly, the order passed by the lower authorities were set aside. Aggrieved by the said order, the revenue is in appeal.
At the time of admission, the substantial question of law which was framed was:
“Whether the Tribunal was correct in holding that the transfer of Koramangala property held by the assessee M/s.Shasta Pharma Laboratories (unregistered firm) at Rs.63,892/- in favour of M/s.Shastra Pharma Laboratories Limited at a price of Rs.50.12/- lakhs did not amount to a transfer and consequently, no capital gains tax was liable to be paid.?”
However, before commencement of the arguments, learned Counsel for the revenue sought the permission of the Court to raise additional substantial question of law : “Whether the Tribunal was correct in holding the reopening of assessment under Sections 147 and 148 of the Act is bad in law as there was no failure on the part of the
- 9 - assessee disclosing fully and truly all the material facts necessary for assessment.”
As the said question of law arises for consideration but not framed at the time of admission, the said request of the revenue was granted.
Learned Counsel for the revenue assailing the impugned order of the Tribunal contended that though the assessee filed return and in the said return in the note column, he has mentioned about the assets and liabilities of firm being taken over by the assessee after the other partners retire and no capital gains is payable as there was no transfer which comes under the purview of Section 2(47) of the Act, but he did not disclose in the return the revaluation done immediately prior to the deed of retirement. The fact that the assessee had obtained a registered sale deed in his favour directly from the BDA was also not disclosed. Though a copy of the retirement deed was produced, it did not contain the requisite particulars such as, the value of the assets of the firm and the share to which
- 10 - each of the partner was entitled to and the value of the assests, which fell to the share of the assessee. Under those circumstances, as the assessee did not fully and truly set out all the material facts necessary for assessment, reopening of the assessment was legal and valid and the Tribunal committed a serious error in construing it as a change of opinion and in setting aside the order of the reassessment on that ground. Secondly, he contended that by the deed of retirement, the firm was dissolved. Two partners took money value and the assessee took over the entire assets which included the immovable property like land and building etc. Therefore, the case squarely falls under Section 45(4) of the Act and at any rate it falls within the words “otherwise” in Section 45(4) of the Act. The Tribunal committed a serious error in not construing this transaction in proper perspective and holding it otherwise.
Per contra, learned Counsel for the assessee supporting the impugned order contended that ‘the assessment order was issued under Section 143(3) of
- 11 - the Act. In the returns categorically it is mentioned that the assets and the liabilities of the firm were taken over by the assessee as a going concern, after the other partners retired and no capital gains is payable as there was no transfer which comes within the purview of Section 2(47) of the Act. Therefore, the initiation of proceedings under Section 148 of the Act is one without jurisdiction and it is a case of change of opinion on which ground, an assessment order cannot be reopened. Secondly he contended, under the terms of the dissolution deed, two partners took money which represented their shares in the partnership firm and not in the assets of the firm and the assessee took over the entire assets and liabilities of the firm. It is not a case of distribution of assets of the firm. It is a case of taking over of the assets and therefore, it is not a transfer under Section 2(47) of the Act’. He further contended that ‘when the assessee took over the entire assets and liabilities of the dissolved firm, it is not possible to compute capital gains and therefore, Section 45(4) of the Act is not at all attracted’. Lastly, he
- 12 - contended that ‘prior to the date of dissolution, the land and building had been sold and registered by way of a registered document in the name of the assessee/company. Therefore, on the date of the dissolution, the said property was not the property of the firm at all and therefore, it was not given to the assessee by way of the distribution and therefore, he submits that the order passed by the Tribunal is valid and legal and do not call for any interference’.
Scope of Proceedings U/s 147
Section 147 of the Act empowers the assessing officer to assess or reassess such income which is chargeable to tax as escaped assessment for any assessment year, if he has reason to believe that such income has escaped assessment. The proviso to Section 147 of the Act, however, provides that where an assessment under Section 143(3) has been made, no action shall be taken under Section 147 of the Act, after the expiry of 4 years from the end of the relevant assessment year. However, that 4 years period would not come in the way of such assessment or
- 13 - reassessment, if income chargeable to tax has escaped assessment by reason of their failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Section 142(1) or Section 148 of the Act or to disclose fully and truly all material facts necessary for assessment for that assessment year. Therefore, it is clear that in a case where the return is already filed, if that return does not disclose fully and truly all material facts necessary for the assessment, power is conferred under aforesaid sections to the assessing officer to assess or reassess. The words “to disclose fully and truly all material facts” was the subject matter of interpretation by the Apex Court in the case of Calcutta Discount Company Limited Vs. Income Tax Officer and Another reported in (1961) 41 ITR Page 191 (SC) “6. Before we proceed to consider the materials on record to see whether the appellant has succeeded in showing that the Income-tax Officer could have no reason, on the materials before him, to believe that there had been any omission to disclose material facts, as mentioned in the section, it is necessary to examine the precise scope of disclosure which the section demands. The words used are "omission or failure to
- 14 - disclose fully and truly all material facts necessary for his assessment for that year." It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts interred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable. Thus, when a question arises whether certain income received by an assessee is capital receipt, or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and, taking all these together, to decide what the legal inference should be. 7. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above. In view of the
- 15 - Explanation, it will not be open to the assessee to say, for example-"I have produced the account books and the documents: You, the assessing officer, examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account books and the documents." His omission to bring to the assessing authority's attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to "omission to disclose fully and truly all material facts necessary for his assessment." Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessee's duty to disclose all of them-including particular entries in account books, particular portions documents, and documents and other evidence which could have on discovered by the assessing authority, from the documents and other evidence disclosed.”
Therefore, it is clear that a duty is cast on every assessee to disclose fully and truly all material facts necessary for assessment. From the facts disclosed in such a return, the assessing authority has to draw inference to certain other facts and ultimately from the primary facts and further facts inferred the
- 16 - authority has to pass an assessment order. However, if from the facts disclosed i.e., the primary facts are not sufficient to draw such necessary inference while passing assessment order, it cannot be said that the assesee has disclosed fully and truly all material facts necessary for the assessment. What facts or material are necessary for assessement will differ from case to case. Therefore, in the background of the aforesaid law, we have to look into the facts of the case, whether the assessee has fully and truly disclosed all the material facts relating to the capital gains. In the return filed note No.2 reads as under: “2. The assets and liabilities of the firm were taken over by the limited company M/s.Shastha Pharma Laboratories Private Limited as a going concern with effect from 30.03.1992, after the other partners retired. The firm has been advised that there is no capital gains as there is no transfer which comes within the purview of Section 2(47) of the Act.”
In the schedule appended to that return, fixed assets are described and in schedule No.4 land, building, factory, plant and machinery and other assets are valued at Rs.62,50,000/- is mentioned. The revaluation
- 17 - of the fixed assets is also mentioned. An apportionment of the amounts to the partners is also mentioned. The copy of the partnership deed is also enclosed. The deed is described as the deed of retirement. There are 3 partners. The averments in the partnership deed gives an impression that two partners retire and the third partner continue the partnership firm, giving an impression that after retirement, the partnership continues and the capital assets continue with that partnership firm and therefore, there is no transfer of the capital assets. If that is the factual position, certainly the authority had no jurisdiction to reassess. The facts which are not in dispute are, that in substance the deed of retirement is a deed of dissolution. Under that deed, two partners took money representing their shares of interest in the partnership firm and the third partner took all the assets and liabilities towards his share which includes land and building. Therefore, it is a case of distribution of the assets of a firm on dissolution of the firm and this is the
- 18 - factor which was suppressed in the return by the assessee.
In that view of the matter, as the assessee did not disclose fully and truly all material facts necessary for the assessment and contended that the assets and liabilities of the firm were taken over by the assessee as a going concern with effect from 30.03.1992, after the other partners retired and therefore, there is no capital gains as there is no transfer. The assessing authority was misled. After issue of notice under Section 148 of the Act, when particulars were furnished, the authority has applied its mind and has realized that it is not a case of taking over of a going concern, but it is a case of dissolution of a partnership firm; one of the partner taking over the assets of the firm which falls under Section 45(4) of the Act. The assessing authority was fully justified in initiating the proceedings under Section 147 of the Act for reassessment. This aspect has been completely missed by the Tribunal and held that the reassessment is a change of opinion. The order passed by the Tribunal in the facts of this case, cannot be
- 19 - sustained and it is set aside. The substantial question of law is answered in favour of the revenue and against the assessee.
What Constitutes “Transfer” 14. Section 47 of the Act, deals with transaction not recorded as transfer. Section 47 (II) of the Act, prior to its deletion, it provides: 1. Nothing contained in Section 45 shall apply to the following provisions. 2. In distribution of the capital assets on the dissolution of the firm, the body of individuals or without associations of persons. This provision is omitted by Finance Act, 1997 with effect from 01.4.1998. In other words, prior to this omission, distribution of capital assets of the dissolution of the firm was not treated as a transfer. Section 2(47) of the Act defines asset as transfer in relation to a capital asset. It is inclusive definition. Simultaneously, on the deletion of the aforesaid provision, Section 45 of the Act was amended by insertion of Sub-section (3) and (4) which exclusively dealt with transfer of a capital asset by a person to a firm, by way of distribution of the capital assets on the
- 20 - dissolution of the firm. Section 45 (4) of the Act reads as under:- “Section 45 (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.”
The aforesaid provisions makes it clear that the profits or gains arising from the transfer of a capital asset by way of distribution of the capital asset on dissolution of a firm or otherwise, shall be chargeable to tax as the income of the firm. Therefore, for application of this provision, three conditions must exist. a. There should be dissolution of a firm. b. There should be a distribution of capital asset. c. By way of capital asset, there should be a transfer of asset in the said distribution,
- 21 - then this subsection is attracted. In the instant case, though the document is styled as ‘Deed of Retirement’, when the entire deed is read as a whole, it is a ‘Deed of Dissolution’, hence, the first condition is satisfied. The said deed on dissolution shows that two partners are paid in all, a sum of Rs.3,08,000/-. The documents further recites that the said amount is paid by the continuing partner but not by the firm. Further, the document recites that ‘in consideration of Rs.3,08,000/- paid to the retiring partners, the retiring partners assign all the shares, title and interests in the said dissolved partnership, goodwill, fixtures, fittings, book and other debts, benefits of contracts and all effects thereof TO HAVE AND TO HOLD the same unto and to the use of the Continuing Partner absolutely and forever’. It is to be noticed that there are only 3 partners, 2 partners are paid by the 3rd partner and the in the consideration, the 3rd partner gets the entire partnership assets. It is precisely what is covered under Section 45(4) of the Act. Therefore, the contention that there is no transfer and it is a case of taking over of an ongoing concern and the
- 22 - value of such going concern cannot be computed as capital gains, has no substance. Unfortunately, the Tribunal has not looked into these aspects of the matter in proper perspective and mostly, it is carried away by the judgments produced before it and thus, committed an error in holding that Section 45 (4) of the Act is not attracted. Therefore, the substantial question of law is answered in favour of the revenue and against the assessee. Accordingly, the appeal is dismissed.
Sd/- JUDGE
Sd/- JUDGE
nvj