Commissioner of Income Tax vs Southern Tubes and Another

C.N. Ramachandran Nair, J.—The common question raised by the Department in these appeals filed in the case of two assessees is whether the Tribunal was justified in holding that there was no "transfer" within the meaning of that term contained in Section 2(47) of the IT Act to attract tax on capital asset u/s 45(4) of the Act. We have heard senior standing counsel appearing for the IT Department and separate counsel appearing for the two assessees.

The common assessee in IT Appeal Nos. 146 and 168 of 2002 is a partnership firm that consisted of two partners. During the previous year, relevant for the asst. yr. 1990-91, the assessee firm was dissolved and under the deed of dissolution one partner took over the land and factory building. After the dissolution, the partner who got the land and factory building continued the business as a proprietorship one. The capital gains on transfer of land and building on the dissolution of the firm and distribution of assets was assessed by the AO. The valuation was challenged by the assessee in appeal and during the pendency of the appeal, the CIT suo motu set aside the assessment u/s 263 of the Act on the ground that valuation made by the AO ignoring the valuation report prepared by the approved valuer of the Department is incorrect. In view of Section 263 order directing revision of original assessment, first appeal filed against the original assessment was closed against which the assessee filed second appeal. Besides this, the assessee filed separate appeals against Section 263 order issued by the CIT and another appeal against CIT(A)''s order confirming the revised assessment issued based on Section 263 order of the CIT. Before the Tribunal the assessee raised an additional ground stating that there was no transfer in the distribution of assets of the firm on the dissolution of the firm and consequently computation of capital gains was unauthorised. The Tribunal permitted the assessee to raise this additional ground and after hearing the parties, all the appeals were disposed of holding that the dissolution of the firm with two partners and taking over of land and factory building by one partner did not involve any "transfer" as defined in Section 2(47) of the Act. Consequently, the Tribunal cancelled all the impugned orders pertaining to assessment on capital gains. In view of this decision, the Tribunal did not go into the dispute on valuation which was the issue originally raised in all the three appeals. So far as ITA No. 219 of 2002 is concerned, the position is the same inasmuch as the Tribunal has considered only whether there is capital gains arising on the dissolution and reconstitution of the firm during the relevant previous year.

Since the question raised pertains to interpretation of Section 2(47) and Section 45(4) of the IT 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 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 AOP 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.

Capital gains....

(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 AOP or BOI (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.

While counsel for the Revenue relied on the decisions of the Andhra Pradesh, Bombay and Karnataka High Courts reported in Rajlaxmi Trading Co. Vs. Commissioner of Income Tax and Another, , Commissioner of Income Tax Vs. A.N. Naik Associates and Another and Rangavi Realtors and Another, and Suvardhan v. CIT (2006) 206 CTR (Kar) 226 : (2006) 287 ITR 404 respectively, counsel appearing for the assessees relied on the unreported decision of this Court in IT Ref. Nos. 235 and 236 of 1997, dt. 29th Feb., 2002 and that of the Madras High Court in Commissioner of Income Tax Vs. Vijayalakshmi Metal Industries, . 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) of Section 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.

In the case of assessee in IT Appeal 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.

In short, the transactions in both the cases have resulted in dissolution of the firm and partner or partners getting rights over the immovable property. Subsequent reconstitution of the firm does not affect the liability u/s 45(4) which is a liability of the dissolved firm to be assessed for capital gains in terms of Section 45(4). Of course, dissolved firm can be assessed for capital gains u/s 45(4) by virtue of provisions contained in Section 189(1) of the IT Act. Decisions of various High Courts referred above on the side of counsel appearing for the Department are in support of this view taken by us. The unreported decision referred to by counsel for the assessees pertains to retirement of a partner, but retention of assets of the firm. Similarly, the Madras High Court''s decision relied on by the assessees pertains to death of a partner which did not have the effect of conferring exclusive right on the properties of the firm on the remaining partners. Since we hold that the transactions in both the cases are transfer within the meaning of Section 2(47)(vi) of the Act, we have to necessarily interfere with the orders of the Tribunal.

Consequently, we allow the appeals filed by the Department by setting aside the orders of the Tribunal on this issue. However, we find that the Tribunal has not considered other issues raised in the appeals which pertain to valuation. We direct the Tribunal to hear the parties on the remaining issues and dispose of the appeals at the earliest.