M/S PATEL MARIGOWDA AND BROS., vs. THE COMMISSIONER OF INCOME TAX

1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 16TH DAY OF JULY, 2012 PRESENT THE HON'BLE MR. JUSTICE K.SREEDHAR RAO AND THE HON'BLE MR. JUSTICE B.MANOHAR I.T.A. No. 490 OF 2006 BETWEEN:- M/s.Patel Marigowda and Bros., Sree Talkies, Mandi Mohalla, Mysore-570001. Appellant (By Sri Ashok Kulkarni, Advocate for M/s.Sri K.R.rasad, Advocate) AND:- 1. The Commissioner of Income Tax, Bangalore, C.R.Building, Queens Road, Bangalore – 560 001. 2. The Income Tax Officer, Ward – 3, Mysore. Respondents (By Sri E.R. Indrakumar, Sr. Counsel a/w. SriE.I. Sanmathi Indrakumar, Advocate) This I.T.A. is filed u/s.260-A of I.T. Act, 1961 arising out of order dated 22-09-2005 passed in ITA No.865/Bang/2003 for the Assessment Year 1996-97,

2 praying that this Hon’ble Court may be pleased to: (i) formulate the substantial questions of law stated therein and (ii) allow the appeal and set aside the order passed by the ITAT in ITA No.865/Bang/2003 dated 22-09-2005 and modify the order of the Commissioner of Income Tax (Appeals), Mysore vide Appeal No.ITA No.121/Mys/CIT(A)/99-2000 dated 28-03-2003 and cancel the assessment order passed by the Income Tax Officer, Ward-3, Mysore vide order dated 29-12-1999, in the interest of justice and equity. This appeal is coming on for hearing this day, SREEDHAR RAO, J., delivered the following: J U D G M E N T M/s.Patel Marigowda and Brothers is a registered firm and is an assessee running a cinema theatre. The firm was dissolved by notarized document. 2. It is the contention of the assessee that the firm was dissolved with effect from 1.4.1996 and the distribution of assets have been taken place after 01.04.96. It is the contention of the revenue that the firm stood dissolved as on 31.3.96 and that the distribution of the assets have taken place by 31.3.96 amongst the partners. The assessee had filed returns for the year 1996-97 on 23.07.1997 wherein it

3 mentions that the assets of the firm continued to be with the firm as on 31.3.1996. 3. The assessing authority passed an order accepting the returns filed. The Assessing Authority later on has issued notice U/s.148 of the Income Tax Act to reopen the assessment on the ground that the value of the assets of the firm have to be assessed on 31.3.1996 and accordingly the said market value should have been reflected in the return for the year 1996-97. The assessee submitted his objections and explanation to the assessing authority with documentary material. The Assessing Authority has found that the deed of dissolution is dated 31.3.1996 and distribution of assets between partners is also dated 31.3.1996. It is found that disclosing the distribution of assets and sale of assets after 1.4.96 is incorrect and accordingly, whatever the market value of the assets as on 31.3.1996 is to be included for the period 1996-97. Accordingly, the difference in value was assessed to tax. The Commissioner of Income Tax (hereinafter called as ‘CIT’) in

4 appeal confirmed the order of the Assessing Authority. The Asssesse filed an appeal before the Appellate Tribunal. 4. In the appeal before the Tribunal, it was contended that U/s.148 of the Act, the Assessing Authority should exercise jurisdiction of reopening only on the basis of existence of prima facie material. In the instant case, it is submitted that the Assessing Authority has not recorded an order indicating that there exists prima facie material for reopening. It is argued that neither the CIT nor the Appellate Tribunal can assume the jurisdiction of Assessing Authority to scrutinize as to whether there is prima facie material or not for reopening of assessment. In the absence of such opinion on the part of the Assessing Authority, it was argued that the matter should have been remanded to the Assessing Authority for fresh consideration. The Appellate Tribunal rejected the contention and confirmed the order of CIT. The assessee aggrieved by the said order, filed this appeal. 5. This court admitted the appeal to consider the following questions of law arising in this case:

5 “Whether, on the facts and circumstances of the case the notice issued u/s 148 of the Act met the requirements of law and the assessment made in the status of a partnership firm on the basis of such notice is sustainable in law? Whether the finding of the Appellate Tribunal that the appellate firm was dissolved and distribution took place on 31.3.1996 is perverse and has been arrived at without taking into account the relevant material placed before it? In the absence of a fiction under the Act treating the dissolution of a firm and distribution by way of mutual adjustment thereon of pre-existing rights of partners as a transfer, section 45(4) can apply to levy capital gains on such distribution? Without prejudice whether on the facts and in the circumstances of the case the appellate Tribunal was justified in holding that the provisions of section 45(4) are applicable to the assessee firm for the assessment year 96- 97? Whether on the facts and in the circumstances of the case the capital gains in respect of property in question was liable for tax under the Act for the assessment year 1996-97? 6. In the first place, the technical plea is raised that the notice issued to the assessee-which is a extinct firm, is illegal and does not constitute a valid notice. When the firm has been dissolved, it was incumbent upon the assessing authority to issue notice to erstwhile partners and also disclosing the fact that they would be liable as erstwhile

6 partners along with the firm as on 31.03.1996 to be accountable for reopening of the assessment. It is argued that the notice issued is in a printed form. Mechanically and without application of mind, the notice is issued to M/s.Patel Marigowda and Brothers which is extinct firm. Hence further consequence of notice would be bad in law. 7. After thorough submissions made at the Bar and the notice issued U/s.148 of the Income Tax Act, we find that certain columns relating to the accounts of money that has escaped tax is kept blank. However the assessment year is mentioned as 1996-97. It is also mentioned that in the said assessment year, there is escaped assessment within the meaning U/s.147 of the Income Tax Act. Hence, issued show cause notice as to why reopening should not be made and 30 days time is granted for giving explanation. 8. The notice issued to M/s.Patel Marigowda and Brothers which is partnership firm which existed till 31.03.1996 for the assessment year 1996-97, it cannot be said that M/s.Patel Marigowda and Brothers was extinct.

7 The firm may be extinct from 1.4.1996. When the partnership concern is continued to be in existence till 31.03.1996, all the partners would be liable to account for acts and omissions of the firm. In the return the notice is given to the address which is shown in the return filed in the year 1996-97. Therefore, there does not appear to be legal or technical defects in issuing notice U/s.148 of the Income Tax Act. 9. It is the contention that the reasons for reopening does not disclose the satisfaction as to the prime facie material for reopening of the assessment. The reasons recorded by the A.O. are as follows: “See folder relating to issue 230A certificates in the case of partners Sri Patil Marigowda, K.J.Javaragowda, Sri Chikka Javarappa & Smt.Pankaja. From the sale deed it is seen that the firm was dissolved w.e.f. 31.3.1996. The firm’s assets consists mainly of Building and Plant & Machinery (Cinema Theatre). As per decision in the case of ALA Firm in the event of dissolution of firm the fixed & plant & machinery should have been valued at market price. It is seen from the 230A certificate filed by the partners in their individual/HUF/names that the theatre has been sold for Rs.35,00,000/- which is much higher than the value adopted as on 31.3.1996.

8 There is therefore escapement of income in so far as the assessee has failed to offer the difference in the value of assets as income for the AY 96-97 within the meaning of section 147. Please issue notice u/s.148.” 10. On thorough scrutiny of the said reasonings, it categorically implies the market value of the assets should be considered as on 1.3.96 and the same should have been reflected in the assessment year 1996-97. The reasons if read carefully, the there does not appear to be any ambiguity and the contents clearly suggest that there is escapement of assessment of income for the year 1996-97 with regard to market value of the assets as on 31.03.1996. Therefore, the contents of notice clearly indicate that there is prima facie material for reopening of the assessment. 11. With regard to the deed of dissolution, the partnership dissolution deed is riddled with inconsistent averments. At one stretch the dissolution deed reads that partnership is dissolved with effect from 31.3.96 but the succeeding clause state that assets have been distributed between the partners by 31.3.96. In the penultimate

9 paragraph of the deed, it is mentioned that the dissolution shall come into effect from 1.7.1996. The assessee had filed copy of the sale deed where the assets of the partnership firm is sold. In the said sale deed, it is stated that the firm is dissolved on 1.4.96. Form No.34-A issued by the department shows that the dissolution of the firm is on 1.4.96. With reference to the returns filed for the year 1996-97, it is mentioned that the assets of the firm continued to be with the firm on 31.03.1996. Therefore, distribution of assets of the firm have not been taken place on 31.3.96. In view of the above material, it is strenuously argued that the finding given by the Appellate Tribunal that the firm is dissolved and the distribution of assets have been made on 31.03.1996 is incorrect and contrary to the record. 12. Heard Sri Indrakumar, learned counsel for the partners. 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 all documents coming into existence subsequent to the dissolution deed. The statement made by the assessee in the said document cannot be considered as a credible material

10 vis-à-vis the contents of the dissolution deed. The covenants in the dissolution deed categorically makes an averment that the partnership firm was dissolved with effect from 31.3.96 and distribution of assets have also taken place on 31.3.96. In the penultimate paragraph of the deed, it is stated that the dissolution shall come into effect from 1.4.96. When the document has got two inconsistent averments, which of the averments shall prevail is a mixed question of fact and law and the answer depends upon the interpretation of the document in question to consider as to the real intention of the partners. In that view, if the said dissolution deed is considered, the document categorically states that the dissolution takes place on 31.3.96 and distribution of assets have also taken place on that date. Later on, the averment that the dissolution is with effect from 1.4.96 can only be considered as the wish and opinion of the parties to document. But, however, the said intention of parties cannot overwrite the legal effect of document which cannot upset the dissolution which will be effective from 31.3.96 as per the terms of the deed.

11 13. With regard to sale deed and the return subsequently presented, it would only suggest that the said documents are an after thought to over come the drawbacks in the dissolution deed. In that context the recitals in the sale deed and the return filed, cannot have any credible value. On totality of the consideration of the facts and submissions made at the Bar, we find that we are satisfied that the findings recorded by the Appellate Tribunal is sound and proper and the questions of law are answered in favour of the revenue. Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE NM*