Commissioner Of Income-Tax v. Moped And Machines

Dipak Misra, J.:— The present appeal;was admitted on the following substantial question of law:

“Whether the Tribunal was justified in holding that in the absence of any corresponding amendment in the definition of section 2(47), there does not arise any liability of capital gains on the firm on the death of one of the partners, thereby deleting the addition of Rs. 3,40,198 made by the Assessing Officer?”

2. The facts which are essential to be adumbrated are that the assessee was a partnership firm that consisted of two partners, namely, Ravinder Singh and Pritam Singh. Pritam Singh expired on April 19, 1990. After the death of one of the partners, for the assessment year 1991-92, the case of the assessee-firm was selected for scrutiny and a notice under section 143(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), was issued on February 27, 1992. The Assessing Officer referred to the order sheet dated August 13, 1993, whereby the assessee was asked that since the firm stood dissolved after the death of one of the partners why the tax on the capital gains should not be imposed on it. The assessee was also asked to furnish the valuation report in respect of the fixed assets as on April 19, 1990 with the firm. Eventually, the Assessing Officer determined the income at Rs. 7,23,920 and issued the demand notice. That apart, a direction was also issued for initiation of a penalty proceeding as there was concealment of income treating Rs. 3,40,198 as capital gain for the purpose of section 45(4) of the Act. Apart from other things, the Assessing Officer addressed himself with regard to the capital gains arising in favour of the assessee-firm on its dissolution. Being aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Jabalpur (in short “the appellate authority”). It was contended before the appellate authority that section 45(4) of the Income-tax Act would not apply unless the gain had arisen from the transfer of the capital asset within the meaning of section 2(47) of the Act. It was also contended that the Finance Act, 1987, by which sub-section (4) of section 45 was inserted, the definition of transfer as contained in clause (47) of section 2 stood amended including the capital asset on the firm's dissolution to the partners in it. It was also highlighted before the appellate authority that the distribution of assets of a dissolved firm to the partners do not constitute a sale, exchange, relinquishment of asset or the extinguishment of any right therein and, therefore, it does not fall within the definition of “transfer” and the amendment in the definition of “transfer”. so as to bring such distribution of profits of a dissolved firm amongst its partners within the concept of the term “transfer” as is envisaged under section 2(47) and hence, there would be no transfer as a consequence of which there would be no capital gain. The appellate authority appreciating the contentions raised by the assessee came to hold that levy of capital gain does not meet the test of the basic requirement, namely, transfer. It was also held by him that no capital gain can be levied on an entity which is non-existent. In view of the aforesaid exposition, the appellate authority deleted the sum of Rs. 3,40,198. The appellate authority directed deletion of addition of Rs. 5,60,382 which was made by the Assessing Officer on account of closing account. The first appellate authority has also directed deletion of addition of Rs. 1,21,370 which was made by the Assessing Officer due to trading results.

3. Being aggrieved, the Revenue preferred an appeal before the Tribunal. The Tribunal remitted the matter to the file of the Assessing Officer as far as the deletion of Rs. 5,60,382 is concerned. As far as deletion of Rs. 1,21,370 is concerned the Tribunal expressed the view that the assessee has not substantiated his claim of deadstock by producing any documentary evidence and accordingly disallowed the loss amounting to Rs. 69,627 shown by the assessee. That apart, the Tribunal directed that the Assessing Officer should disallow the loss and should not make any further addition of Rs. 51,743 as gross profit for the year under consideration. As far as deletion of Rs. 3,40,198 is concerned the Tribunal expressed the view as under:

“…That on April 19, 1990, Shri Pritam Singh Chhabra expired and, therefore, the firm got automatically dissolved. The accounting year relevant to the assessment year under consideration is consisting of the period of 19 days only, i.e, April 1, 1990 to April 19, 1990. The Assessing Officer opined that on dissolution of the firm there was transfer of the assets as per section 45(4) of the Income-tax Act. He accordingly made the addition of Rs. 3,40,198 as short-term capital gain under section 45(4) of the Act. We find that this issue is squarely covered in favour of the assessee by the decision of the Income-tax Appellate Tribunal, Jabalpur Bench, in the case of Asst. CIT v. Ther-moflics India, [1997] 60 ITD 554. Following the same, we hold that there was no transfer of the asset on the dissolution of the firm. Accordingly, we find no merit in ground No. 1 of the Revenue's appeal. The same is rejected.”

4. We have referred to the aforesaid facts to appreciate the case at hand though the question on which the appeal was admitted only related to liability of capital gains.

5. Assailing the aforesaid judgment of the Tribunal, it is submitted by Mr. Rohit Arya, learned counsel for the appellant, that the Tribunal and the first appellate authority have fallen into error by holding that there had been no transfer in the case at hand and the definition clause does not cover it. It is his further submission that the first appellate authority has absolutely erred in law by expressing the view that no capital gain can be levied on the entity which is non-existent. Learned senior counsel for the Revenue commenting on the order passed by the Tribunal has propounded that the Tribunal has reiterated its earlier view though it was incumbent on the part of the Tribunal to ascribe cogent reasons for the same. To bolster his contention, Mr. Rohit Arya has referred to sections 2(47) and 45(4) of the Act and also commended us to the decision rendered in the case of CIT v. Mrs. Grace Collis, [2001] 248 ITR 323 (SC).

6. Mr. A.P Shrivastava, learned counsel for the assessee, contended that section 45(4) of the Act envisages certain conditions for attracting the concept of tax and the said conditions are not satisfied in the case at hand and, therefore, the conclusion arrived at by the first appellate authority as well as by the Tribunal that the said section is not attracted, cannot be found fault with. Learned counsel has further canvassed that in view of the decision rendered in the case of Commissioner Of Income Tax, Madhya Pradesh v. Dewas Cine Corporation, [1968] 68 ITR 240 (SC) on a dissolution of partnership there is no sale and, therefore, there is no transfer. Learned counsel further submitted that the Tribunal relied on its previous decision wherein reliance was placed on the decision of the apex court rendered in the case of Malabar Fisheries Co., Calicut v. Commissioner Of Income Tax, Kerala, [1979] 120 ITR 49, wherein their Lordships have expressed the view after scanning section 2(47) of the Act that there was no transfer of asset within the meaning of section 2(47) on dissolution of the firm. It is urged by Mr. Shrivastava that though section 45(4) was inserted subsequently in the statute book with effect from April 1, 1988 there having been no consequential amendment in section 2(47), the decision rendered in Malabar Fisheries Co., Calicut v. Commissioner Of Income Tax, Kerala, [1979] 120 ITR 49 (SC) would hold the field and there cannot be charge on the head of capital gain. Learned counsel has also commended us to the decision rendered in the case of Sakthi Trading Co. v. Commissioner Of Income Tax, Coimbatore, [2001] 250 ITR 871 (SC) to pyramid the contention that even if the firm is dissolved, the stock should not be valued at the market price but should be valued at the cost price. It is his further submission that if the business continues and there was no distribution of assets, the concept of capital gain under section 45(4) would not be attracted. To bolster his submission he has placed reliance on the decision rendered in the case of Commissioner Of Income-Tax v. Vijayalakshmi Metal Industries, [2002] 256 ITR 540 (Mad). It was further highlighted by Mr. Shrivastava that in the case at hand there cannot be any distribution inasmuch as there were only two partners and one of them having died the other partner would be the only singular surviving partner, therefore, there would be no distribution. Lastly, it was urged by him that the firm had ceased to exist because of the death of its partner and, therefore, there can be no capital gains in respect of an entity which is nonexistent.

7. To appreciate the rivalised submissions raised at the Bar it is appropriate to refer to section 2(47) of the Act. It reads as under:

“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 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:

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

8. In this context, it would also be proper to reproduce section 45(4) of the Act:

“45.(4) The profits or gains arising from the transfer of a capital set by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individual (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 occruing as a result of the transfer.”

9. At this juncture we shall refer to the decision cited at the Bar. In the case of Dewas Cine Corporation, [1968] 68 ITR 240, the apex court held that under the Partnership Act, 1932, the property which is brought into the partnership by the partners when it is formed or which may be acquired in the course of the business becomes the property of the partnership and a partner is, subject to any special agreement between the partners, entitled upon dissolution to a share in the money representing the value of the property of the partnership. In the said case two persons had entered into an agreement to carry on business in partnership as exhibitors of cinematograph films and each partner was the owner of cinematograph theatre. In that context while dealing with the dissolution of the partnership, the apex court expressed the view as under (page 243):

“On dissolution of the partnership, each theatre must be deemed to be returned to the original owner, in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue. The expressions ‘sale’ and ‘sold’ are not defined in the Income-tax Act; those expressions are used in section 10(2)(vii) in their ordinary meaning. ‘Sale’, according to its ordinary meaning, is a transfer of property for a price, and adjustment of the rights of the partners in a dissolved firm is not a transfer, nor is it for a price.”

10. In the case of Cit, Up v. Sh. Bankey Lal Vaidya (Dead) By Lawyers† , [1971] 79 ITR 594, their Lord-ships of the apex court expressed that the property allotted to a partner in satisfaction of his claims to his share cannot be deemed in law to be a transfer to him. In the case of Malabar Fisheries Co., [1979] 120 ITR 49, the apex court after referring to the decision rendered in the cases of Dewas Cine Corpn., [1968] 68 ITR 240 (SC) and Bankey Lal Vaidya, [1971] 79 ITR 594 (SC) expressed the view as under (page 59):

“It seems to us clear that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution…. Further, it is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person. It is not possible to accept the view of the High Court that the distribution of assets effected by a deed takes place eo instanti with the dissolution or that it is effected by the dissolved firm.”

11. In the said case their Lordships further proceeded to state as under (page 60):

“There is yet another reason for rejecting the contention of the counsel for the Revenue and that is that the second condition required to be satisfied for attracting section 34(3)(b) cannot be said to have been satisfied in the case. It is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person. It is not possible to accept the view of the High Court that the distribution of assets effected by a deed takes place eo instanti with the dissolution or that it is effected by the dissolved firm.”

12. In the case of Sakthi Trading Co., [2001] 250 ITR 871 the apex court was dealing with the concept of dissolution of the firm on the death of one partner. In this case the question posed was whether on the facts and circumstances of the case where on dissolution of the firm the business is taken by the partner without discontinuing it and the valuation of the closing stock determined under the regular mode of accountancy is accepted by the partners in the settlement of account for the dissolution purpose, the Income-tax Officer can substitute the market value in respect of the closing stock alone for the purpose of determination of the income of the firm up to the date of dissolution. Their Lordships came to hold as under (page 878):

“In the present case, however, though there was dissolution on account of the death of one of the partners, there was no discontinuance of the business. The unchallenged finding recorded by the Tribunal is that there was no discontinuance of business. Even as per principles laid down in A.L.A Firm's case, [1991] 189 ITR 285 (SC) in such a case the closing stock is to be valued at the cost or market price, whichever is lower. That is an established rule of commercial practice and accountancy. The High Court was clearly in error in relying upon the decisions of the Madras High Court in the cases of G.R Ramachari and Co.'s case, [1961] 41 ITR 142 and A.L.A Firm's case, [1976] 102 ITR 622 for coming to the conclusion that assets had to be valued at market value. As already noticed, in the present case, there was no cessation of business and, therefore, the closing stock could not be directed to be valued at the market rate.”

13. In the case of Vijayalakshmi Metal Industries, [2002] 256 ITR 540 (Mad) it has been held as under (page 541):

“The section is concerned with the capital gains arising from transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm.

The section does not deem the date of dissolution as the date on which the transfer takes place. Dissolution by operation of law as in this case may take place on the demise of one of the two partners. That however does not imply that on that day there is a notional transfer of capital assets and that any one or more of the capital assets owned by the erstwhile firm stands transferred to the other partner or to other persons entitled to claim the share of the deceased partner. The relevant date for ascertaining the year in which the tax is to be levied is the year in which the transfer takes place. That year may or may not be the year in which the dissolution of the firm takes place. Until such time such capital asset is transferred by way of distribution of the assets on the dissolution of the firm no occasion arises for bringing to tax any capital gain on a transfer which has not taken place. The section itself gives no room for doubt as the year in which the capital gain is to be brought to tax is, the previous year in which the said transfer takes place.

As it is the finding of the Tribunal that no transfer had taken place in this year, the occasion for levying tax on any capital gain did not arise. The question referred to us as to whether the Tribunal was right in law in holding that capital gain did not arise in this case is answered in favour of the assessee and against the Revenue.”

14. In view of the aforesaid pronouncement of law we are inclined to think that there was no transfer of assets as per section 45(4) of the Act. We may refer to the decision rendered in the case of Mrs. Grace Collis, [2001] 248 ITR 323 wherein the apex court while dealing with the concept of transfer under sections 45, 2(47) and 49(2) has held that the definition of transfer in section 2(47) clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof and it is not possible to approve of the limitation of the expression “extinguishment of any rights therein” to such extinguishment on account of transfer or of the view that the said expression cannot be extended to mean the extinguishment of rights independent of or otherwise than on account of transfer. It was further held that to so read the expression is to render it ineffective and its use meaningless and the expression does include the extinguishment of rights in a capital asset independent of, and otherwise than on account of transfer. Their Lordships further held that the rights of the assessee in the capital asset, viz., their shares in the amalgamating company, stood extinguished upon the amalgamation of the amalgamating company with the amalgamated company and there was, therefore, a transfer of the shares in the amalgamating company within the meaning of section 2(47). In that context the apex court expressed the view that it was a transaction to which section 47(vii) applied and consequently the cost to the assessee of the acquisition of the shares of the amalgamated company had to be determined in accordance with the provision of section 49(2). On a perusal of the facts of the said case we are of the considered opinion that their Lordships were dealing with a different factual matrix which related to the amalgamation of assets of the amalgamating company with the amalgamated company and the rights of the assessee in the amalgamating company and the status of such share when amalgamation of the amalgamating company took place with the amalgamated company. In that context their Lordships held that there was a transfer within the meaning of section 2(47) of the Act. But the present factual matrix is absolutely different as here the question of dissolution of the partnership firm arises on the death of another partner. Hence, it is difficult to conceive that there could be a transfer as contemplated under section 2(47) of the Act.

15. In view of the aforesaid analysis we are of the considered opinion that the order passed by the Tribunal is absolutely impeccable and there is no infirmity in the same warranting interference. Consequently, the appeal, being sans merit, stands dismissed without any order as to costs.