COMMISSIONER OF INCOME TAX Vs. KUMBAZHA TOURIST HOME

JUDGEMENT

(1.) The question raised in the connected appeals is whether the Tribunal was justified in holding at respondent-assessee is not liable for payment of tax on capital gains on the distribution of assets on the dissolution of the firm. We have heard Senior Standing Counsel appearing for the appellant and Adv. Sri. P. Balakrishnan appearing for the respondent.

(2.) A firm was constituted with four partners to take over 14.25 cents of land and a building thereon for running lodging business by the assessee-firm. The firm was constituted on 1.7.1979 and continued it's business upto the assessment for 1993-94 and dissolved with effect from 1.4.1993. Under the dissolution, the land and buildings brought as capital of the partners went back to the same partners. Even though the firm did not file return for the assessment year 1994-95 declaring capital gains on the dissolution of the firm, the Assessing Officer on getting information initiated proceedings for assessment for capital gains under Section 45(4) of the Income Tax Act. The assessee raised objection stating that there can be no capital gain on the dissolution of the firm as the land and respective portion of the building brought by the partners, on dissolution went back to the same partners and the transfer to the partners itself is accounted at the depreciated value of the building. The assessee raised objection against assessment for capital gains under Section 45 of the Act by saying that transfer if any is of depreciable asset. The Assessing Officer substantially accepted the contentions of the assessee and limited the levy of capital gains to the extent of 14.25 cents of land involved. Since the building was sold at the book value i.e. depreciated value, the Assessing Officer accepted the transaction as one falling under Section 50(1) of the Act which does not attract any capital gains because the transfer was at the book value. Against this assessment, assessee filed appeal contending that assessment of capital gains on land value is not tenable. The Commissioner of Income Tax issued suo moto revisional orders under Section 263 holding that the entire transaction attracts tax oh capital gains under Section 45(4) of the Act. The assessee's appeal on the levy of capital gains on land value was allowed by the C.I.T.(Appeals) and therefore. Revenue filed second appeal against the said order. Against the order issued by the Commissioner under Section 263, assessee also filed appeal before the Tribunal. The Tribunal after hearing both the appeals and the Cross Objection filed by the assessee, decided the appeals in favour of the assessee holding that the reference to valuation was not justified and therefore, assessment for capital gains does not arise.

(3.) After hearing both sides and after going through the Tribunal's order, we are unable to uphold the order of the Tribunal for more than one reason. In the first place, the Tribunal has not considered the applicability of Section 45(4) of the Act for the purpose of assessment on dissolution of the firm and distribution of the assets. In fact, the clearcut finding of the C.I.T.(Appeals) in the appeal filed by the assessee itself is that Section 45(4) is squarely applicable. It is an undisputed fact that at the time of constitution of the firm the partners brought the land and the respective portion of the building thereon towards their share capital and the firm for several years claimed ownership of the building and based on the same, depreciation was claimed in respect of the building for all the assessment years until 1993-94 which is the last year of assessment of the firm. Admittedly on dissolution the properties were reverted back to the partners in the same way it was brought by them to the firm as their capital. Under the partnership law as well as under Section 45(4), the transactions involve a transfer of the properties to the firm and retransfer to the partners on dissolution of the firm. In fact, Section 45(4) is intended to levy tax on capital gains on the distribution of assets on dissolution of the firm among partners. We do not find the Tribunal has considered the real question involved in this case.