1. This appeal of the assessee arises out of the order of CIT(A), Nashik, passed on 19-9-1997. The corresponding order of assessment was made by the ITO, Ward 1(5), Ahmednagar (hereinafter called the 'Assessing Officer'), on 15-3-1995, under the provisions of Section 143(3) read with Section 263 of the Income-tax Act, 1961.
2.1 In the assessment order, it is mentioned that original assessment under Section 143(3) was completed on 6-1-1992 determining the total income of the assessee at Rs. 1,68,460. This order was set aside by the CIT, Nashik, on 13-1-1993 to re-frame the assessment by bringing capital gains, arising or accruing to the assessee under Section 45(4) consequent upon the dissolution of the firm and distribution of its assets, to tax. It is further mentioned that the assessee is a partnership firm consisting of 9 partners. It is carrying on the business of trading in vegetables, potatoes, onion, fruits, eggs, chicken, firewoods, etc. These items are supplied to various departments of the Ministry of Defence. The assessee-firm had purchased two plots of land bearing GLR Nos. 51 and 53 admeasuring 43,220 sq.ft.
and 661 sq.ft. respectively on 10-5-1978 for a consideration of Rs. 2,19,550 from the Director of Defence, Ahmednagar. The value of this land was shown in the balance sheet of the financial year 1986-87 at Rs. 3,08,743. The land continued to be shown in subsequent balance sheets at the same figure. However, on 31-3-1988, this land was not shown in the books of account of the firm as the firm was dissolved and the land was distributed amongst the partners. The valuation of this land was referred to the valuation officer, who valued the fair market value of the land at Rs. 39,49,300. In view thereof, the assessee was required to show cause why the capital gains arising out of distribution of the aforesaid capital asset on dissolution of the firm, amounting to Rs. 36,40,557, should not be brought to tax under the provisions of Section 45(4). No satisfactory reply was furnished, however, it was clarified that as on 31-3-1988, there was no asset of land reflected in the balance sheet. Therefore, there is no question of levying capital gains tax under the provisions of Section 45(4). It was further clarified that the land was purchased by the firm in the year 1978 and at that point of time, the firm was constituted with eight partners. The names of the partners and their profit-sharing ratio are mentioned in paragraph 10 of the assessment order. It was also clarified that four partners retired from time to time and some other partners joined in the firm. At the time of dissolution of the firm, there were nine partners of the firm, while the land was distributed among the partners and the retired partners, leaving no such asset in the balance sheet. The land belonged to the individual members of the firm and not to the firm and, therefore, it was also clarified that there was no connection of the land with the firm. The learned Assessing Officer examined the capital account filed along with the return of income, which revealed that accounts of various partners were credited with the proportionate book value of the land and the land account was debited by equivalent amounts, leading to Nilvalue of the land in the balance sheet. He was of the view that the distribution of land took place on the dissolution of the partnership. Section 45(5) provides that such distribution would be deemed to be "transfer" within the meaning of Section 2(47) of the Income-tax Act and the capital gains arising on such distribution of assets will be taxed by taking the consideration of the transfer at the fair market value.
Accordingly, he computed the capital gains at Rs. 36,40,557. After granting deduction under Section 88, an amount of Rs. 18,25,279 was brought to lax in the hands of the assessee.
2.2 The assessee filed appeal against this order. It was claimed that as per the decision of Hon'ble Supreme Court in the ease of Malabar Fisheries Co. v. CIT , there was no transfer of assets when the assets of a firm are distributed to partners on its dissolution. It was contended that the firm was dissolved on 31-3-1988 and the assets were distributed as per the dissolution deed dated 1-4-1988. In view thereof, it was contended that for the purpose of computing any capital gain arising on transfer, book value of the asset should have been adopted in stead of fair market value. Coming to its stand that the land belonged to the partners and not to the firm, it was pointed that three partners, namely, S/Shri S.D. Thapar, N.J.Dhupad and Smt. P.T. Dhupad, having shares of 15 per cent, 9 per cent and 9 per cent respectively had retired from the firm on 1-4-1987.
These partners retained their co-ownership of the land to the extent of their shares mentioned above. It was further pointed out that at the time of dissolution, there were 9 partners and these partners actually held 62 per cent share in the aforesaid plots of land and the remaining land belonged to the partners who had retired before the dissolution of the firm. The land belonging to the retired partners was not inadvertently credited to their capital accounts and this failure should not be taken as estoppel against the assessee's stand that only 62 per cent of the land belonged to the nine partners of the firm. The learned CIT(A) considered various facts brought to his notice and the submissions made before him. He pointed out that provisions of Section 45(4) were inserted in the Income-tax Act with a view to nullify the effect of number of pre-existing case laws including that of Hon'ble Supreme Court in the case of Malabar Fisheries Co. (supra), in which it was held that what a partner gets on a dissolution of a firm is his own share in the assets of the firm and, therefore, no transfer is involved in distribution of such assets. This Sub-Section (4) was introduced with effect from 1-4-1988 and, therefore, it was applicable to the assessment of the assessee-firm for assessment year 1988-89. Coming to the facts of the case, it was pointed out that the accounts of the firm were prepared as on 31-3-1988 and assets and liabilities were distributed amongst partners in their profit-sharing ratio mentioned in partnership deed dated 3-4-1981. The dissolution was evidenced by dissolution deed dated 1-4-1988. In view of the aforesaid facts, he held that provisions of Section 45(4) were clearly applicable. Coming to the alternative argument that capital gains arising on distribution of 62 per cent share only was liable to tax, it was mentioned that even on 31-3-1988, the valuation of the land was shows at Rs. 3,08,743, which was the total value of the land and it was carried forward in the balance sheets from year to year. The land had not been distributed to the retired partners on their retirement. In view thereof, the alternate plea of the assessee that only remaining 62 per cent of the land should be considered for the purpose of levy of capital gains was not accepted. The assessee had also taken up certain objections in the valuation of land and in particular it was pointed out that the comparative sale figure relied upon by the valuation officer was in respect of plot of land admeasuring 135 sq. ft. only whereas the area of the assessee's land was 43,220 sq. ft. This ground of appeal was decided against the assessee by stating that the ground in this behalf was not taken up with the original appeal papers and this ground was raised by way of an additional ground of appeal. The assessee had all along accepted the valuation report and, therefore, the aforesaid ground of appeal could not have been raised before him at the time of hearing of the appeal. Thus, the appeal of the assessee was dismissed by him.
3.1 Before us, the assessee filed a paper book in June, 2004 (Paper book-1) consisting of 179 pages. Another paper book (Paper book-2) was also filed in the course of hearing before us which clarifies the issues. It also contained some papers which were there in the earlier paper book or were filed along with the appeal papers. The learned Counsel drew our attention to pages 5 to 11 of the paper book-1, which is the deed of dissolution dated 1-4-1988. In particular, our attention was drawn to page 5 of the dissolution deed which contains the narration to the effect that though the last balance sheet has not yet been prepared and signed but the firm owns only furniture of Rs. 26,665, stock of Rs. 1 lakh and loans, liabilities, debtors, creditors, etc. The case of the learned Counsel was that the firm did not own the land on the date of dissolution. He drew our attention to page 13 of the paper book, which shows the distribution of land and shed to various persons, ie., ex-partners and the partners. The case of the learned Counsel was that the land and shed had been distributed to erstwhile partners also. However, we find that no date has been put on the aforesaid document in the sense that the date of execution has been left blank though purportedly the distribution was made as per the distribution list dated 1-4-1988. The learned Counsel drew our attention to the sale deed of the land placed in paper book from pages 15 to 113, It was, inter alia, pointed out that parties at Sl. Nos. 1, 4, 7 & 8 were not the partners of the firm. The learned Counsel had also placed signed copy of the sale deed in paper book No. 2, which showed the same fact. It was pointed out that sale deed was executed on 22-1-1999 and thereafter a notice under Section 263 was issued on 16-11-1992 by relying the consideration mentioned in the sale deed, which was higher than the book value. The learned Counsel drew our attention to page 115 of the paper book which is a copy of the sub-registrar's register, showing the sale of the immovable property at Rs. 40 lakh. In regard to the plea that the land did not belong to the firm, but belonged to the partners, the learned Counsel referred to page 117 of the paper book, which is the will of late Shri Mohansingh Dhupad. According to this will, Shri Dhupad was having 15 per cent share in the land standing in the name of the assessee-firm, purchased from the Department of the Defence Ministry, of the value of Rs. 50,000. Therefore, it was stated that Shri Mohansingh Dhupad had been treating this property as his property and not the property of the firm. Attention was invited to the application made to the Income-tax Department for obtaining a certificate under Section 230A of the Act, which was signed by nine persons, though the application was made in the name of M/s. Gandamal & Sons and others. Attention was also drawn to page 137 where deduction of Rs. 3,08,743 was made from the land leaving no land with the firm on 31-3-1988.
3.2 The learned Counsel referred to Section 14 of the Indian Partnership Act. This section deals with the subject of 'property of the firm'. It is provided that subject to the contract between partners, the property of the firm includes property and rights and interest in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purpose and in the course of the business of the firm, and also includes the goodwill of the business. Unless contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm. Thus, the property owned or acquired by the partners and contributed or transferred by them to partnership may become property of the firm. Whether or not it has become partnership property is a question of fact, the answer to which depends upon the intention of the parties as manifested by an express or implied agreement. However, whatever has been thrown into the partnership stock, at the commencement of the business of the partnership, or added thereto, or obtained by means thereof, from time to time, during the continuance of the partnership, whether by purchase or by employment in the business, becomes partnership property, unless the contrary is established. The case of the learned Counsel was that the conduct of the partner, in particular, the will of late Shri Mohansingh Dhupad and distribution of land to the ex-partners and partners showed that they treated the land to be belonging to the partners. However, the land had been purchased with the funds of the firm and had been used continuously for the purpose of the business of the firm. The land was shown in the balance sheet of the firm. Therefore, it has to be clearly established that the land did not belong to the firm as per the proper interpretation, which can be placed in Section 14 of the Indian Partnership Act.
3.3 Coming to the applicability of Section 45(4), the learned Counsel clearly conceded that the ratio of the decision in the case of Malabar Fisheries Co. (supra) was not applicable in view of provisions of Section 45(4) inserted in with effect from 1-4-1988, applicable for assessment of income of the assessee for assessment year 1988-89, i.e., the year under appeal. However, he vehemently argued that the action of the learned CIT(A) in bringing the whole of the value of the land to capital gains lax instead of bringing to tax only the share which belonged to the existing partners as on 1-4-1988 was erroneous.
Therefore, he contended that in case his plea regarding ownership of land by the partners is not accepted only proportionate value ought to be considered for the purpose of computing capital gains. The learned Counsel while not seriously contending the valuation of the property, pointed out that the plots of lands in question were sold on 22-1-1992, about four years after the dissolution of partnership for a consideration of Rs. 40 lakh. Therefore, it was insisted that the valuation of lands on 31-3-1988 at Rs. 39,49,300 was somewhat on the higher side. Therefore, it was pleaded that the fair market value of the land on the date of dissolution may be adopted by giving yearly discount from the actual consideration of Rs. 40 lakh received or accruing on 22-1-1992.
3.4 As against the aforesaid, the learned DR pointed out that the lands belonged to the partnership firm as shown in its balance sheets from year to year. He also referred to the distribution of the land on 31-3-1988 and pointed out that somewhat which is not owned by the firm, could not have been distributed by it. Therefore, it was argued that the firm was the owner of the land. In regard to its valuation, it was pointed out that the valuation officer has made the valuation on 31-3-1988. It was agreed to be sold on 8-4-1980, consequent to which the sale deed dated 22-1 1992 was executed. Therefore, the gap between the valuation date and the date of agreement to sell was only about two years. Accordingly, it was argued that the value estimated by the DVO was fair and reasonable. He also referred to the fact that partners and others had executed the sale deed, but pointed out that that was done only for the satisfaction of purchasers of lands. This subsequent conduct of the assessee in dealing with the purchasers does not lead to any inference that the lands belonged to individual partners and ex-partners and not to the firm. It was also pointed out that the provisions of Section 45(4) were clearly applicable in respect of distribution of the whole of the land and, accordingly, urged that the orders of the authorities below ought to be fully sustained on the facts and in the circumstances of the ease.
3.5 In the rejoinder, the learned Counsel pointed out that even prior to the sale and even during the subsistence of the partnership firm, the partners had dealt with the land as belonging to them, which will be clear from the will of late Shri Mohansingh Dhupad.
4.1 We have considered the facts of the case and rival submissions. The first question to be decided in this case is whether the land belonged to the individual partners or to the firm. It has been pointed out that the land was purchased with the funds of the firm. It was shown in the balance sheet of the assessee from year to year till it was distributed in connection with the dissolution of the firm. Section 14 of the Indian Partnership Act, clearly provides that any property obtained by the means of partnership from time to time during its continuation, whether by way of purchase or by employment in the business, is the partnership property unless contrary is established. The land had been purchased from the funds of the firm and it was used for the purpose of the firm. Therefore, the onus to prove that it belonged to the partners lied on the assessee. Thus, onus docs not get discharged by merely mentioning that the land belonged to the partners and it was distributed to them on 31-3-1988 in their respective profit-sharing ratios or by the will of late Shri Mohansingh Dhupad. Such onus could be discharged only by some firm evidence showing that since its acquisition, the land was treated by all the partners as their separate property. No such evidence has been produced and, therefore, it is held that the land belonged to the firm.
4.2 The second question to be decided in this case is whether the provisions of Section 45(4) are applicable on the facts of the case.
The case of the assessee was that the firm dissolved on 1-4-1988, but the land was distributed to the partners on 31-3-1988. In this connection, we may seek guidance from the decision of Hon'ble Bombay High Court - Panaji Bench, in the case of CIT v. A.N. Naik Associates . In this judgment, their Lordships pointed out that the effect of insertion of Sub-section (4) in Section 45 is that profits and gains arising from transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as firm's income in the previous year in which transfer took place. Coming to the interpretation of the word 'otherwise', it was pointed out that these words take into their ambit not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets to a retiring partner. In other words, the ratio of the case is that when a capital asset belonging to the firm is transferred to a partner on dissolution, reconstitution or on such similar occasion, then, such a transfer shall be deemed to be a transfer for the levy of capital gains tax under the provisions of Section 45(4). Coming to the facts of the case, the assessee was owner of the land and that is why it could distribute the land to the partners. The land was distributed in connection with the dissolution of the firm and, therefore, such transfer is covered directly under Section 45(4) or in any case under the word 'otherwise' employed in Section 45(4). Therefore, the instant case is one of transfer of assets to the partners on dissolution of the firm. Accordingly, it is held that the transaction is caught within the mischief of the provisions contained in Section 45(4).
4.3 The third question to be decided is whether full value of the lands is to be taken into account for computing the capital gains or only 62 per cent of the full value of land is to be taken into account for computing capital gains. The case of the learned Counsel was that four partners had retired much before the event of dissolution and they had 38 per cent share in the lands. Therefore, this portion of the full value could not have been taken into account for computing the capital gains. We have considered this matter also. From the facts mentioned in the order of learned CIT(A), it is clear that the partners, who retired earlier, had 38 per cent share in the lands. The case of the assessee is that the entries were not passed in the books of account to transfer the land to them through oversight and such oversight should not act as estoppel against the asscssee's rightful claim that only 62 per cent of the value of the land should be brought to lax. It is an accepted principle of law that entries in the books of account are not conclusive of legal issues involved therein. Some partners had retired earlier. They were entitled to take away their proportionate share in the assets of the firm on that day. If that had been done, they would have taken away 38 per cent share in the lands and similar entries, as passed on 31-3-1988, would have been passed in the books of the assessee-firm on their retirement. On distribution of lands to them, there would have been no liability to capital gains as the decision of Hon'ble Supreme Court in the case of Malabar Fisheries Co.(supra) would have been applicable at that time. Further, the actual distribution made to the three ex-partners on 31-3-1988 was not qua-partners but as ex-partners, who were given share in the land. While Sub-section (4) of Section 45 does not specifically provide that the distribution of assets should be to the partners of the firm or members of the association of persons, it follows logically that the assets of the firm can only be distributed among the partners. Therefore, such condition will have to be read in Section 45(4) and, thus, distribution of assets to outsiders for satisfaction of their debts, representing their capital on the date of retirement is not caught within the mischief of Section 45(4). Therefore, we are of the view that the learned CIT(A) erred in holding that the full value of the land was liable to be taxed under Section 45(4). It is directed that only 62 per cent of the value of the land should be considered for the purpose of computing capital gains under this section.
4.4 The last issue to be decided in this case is whether the value estimated by the Valuation Officer of Rs. 39,49,300 as on 31-3-1988 was correct or not. The case of the learned Counsel was that the lands were sold for a consideration of Rs. 40 lakh on 22-1-1992. As against the aforesaid, the case of the learned DR was that the land was agreed to be sold on 8-4-1990, which was not as far removed from the date of dissolution as the date of execution of sale deed. It was also his argument that subsequent events should not be taken into account for fixation of the value of the land on 31-3-1988 as there could be increase or even decrease in the value of the asset with the efflux of time. We have given careful consideration to the rival submissions. We arc in agreement with the learned DR that subsequent events cannot be taken into account for fixing the value of land as the value may rise or fall, depending upon the market conditions. There is no evidence on record that the value of the lands had increased in the next two years.
The assessee also had not obtained any valuation report from the Registered Valuer to show that the valuation made by the valuation officer was on the higher side. But, it is also felt that valuation is a matter of art and not science and, therefore, there is no arithmetical formula for the valuation of the land. Therefore, looking to overall facts of the case, the ends of justice would be met if the value of the lands on the date of dissolution is adopted at a round sum of Rs. 39 lakh.
5. In view of the aforesaid discussion, various grounds of appeal are decided as under: (i) Ground No. 1(i) regarding ownership of the lands is decided against the assessee. Ground No. 1 (ii) regarding non-user of lands by the firm is dismissed as not pressed. Ground No. 1 (iii) is allowed to the extent that only 62 percent of the value of the land shall be taken as full value of the consideration received or accruing for the purpose of computation of capital gains, (ii) Ground Nos. 2 & 3 regarding transfer of lands on dissolution, and is taxation under Section 45(4) are partly allowed to the extent that 62 per cent of the value of lands shall be considered as full value of the consideration received or accruing, (iii) Ground No. 4 regarding rejection of additional evidence by the learned CIT(A) is treated as dismissed as it was not pressed in the course of hearing and the learned Counsel had mentioned that this ground is irrelevant to the controversy at hand, and (iv) Ground No. 5 regarding valuation of kind is allowed to the extent that full value of consideration received or accruing shall be taken at Rs. 39 lakhs.