1. This appeal by the Revenue and cross objection by the assessee arise out of the order passed by the ld. CIT(A) on 18.10.2002 in relation to A.Y. 1990-91.
2. The solitary ground taken by the Revenue is against the deletion of addition of Rs. 49,49,500 made by the Assessing Officer under the head Capital Gains Under Section 45(4). Briefly stated the facts of the case are that the assessee firm came into existence by a partnership deed executed on 20.10.1979 between Shri Madan Lal Agarwal and Shri Badri Lal Sharma. Since the assessee firm had not furnished any return of income for the A.Y. in question and it came to the notice of the Assessing Officer that the assessee had enjoyed taxable income, a notice Under Section 148 was issued on 21.3.2001. In reply it was submitted on behalf of the assessee that the firm was dissolved w.e.f.
1.9.1939 and thereafter Shri Medan Lal Agarwal was authorized to use the name of the firm M/s Joy Exhibitors. It was, therefore, contended that the notice Under Section 148 in the name of the firm was illegal and against such illegal notice the return was filed by Shri Madan Lal Agarwal showing NIL income in his individual capacity. It was also informed to the Assessing Officer that the assessee firm had intimated the fact of discontinuance of the firm to the Assessing Officer Under Section 176 and hence there was no obligation to furnish the return of income for the relevant A.Y. However, during the course of assessment proceedings, a return was furnished on 21.1.2002 in respect of notice Under Section 148 declaring NIL income in the name of the firm M/s Joy Exhibitors, Bhilwara, though the issuance of notice Under Section 148 was challenged. The assessee was called upon to show as to why the value of assets as on the date of dissolution, i.e. 1.9.1989, be not estimated and the capital gain be taxed. It was replied on behalf of the assessee that the firm was not in existence as it was dissolved on 1.9.1989 on the basis of dissolution deed executed on 26.12.1989 and the name of the firm was allowed to be used to Shri Madan Lal Agarwal.
In the light of these facts, the Assessing Officer opined that the assets of the firm were distributed amongst the partners on the dissolution of the firm and the provisions of Section 45(4) were attracted. On the further perusal of record, the Assessing Officer observed that the assessee firm owned a piece of land earmarked for cinema house. On a reference being made to the DVO, the value of such land was determined at Rs. 49,95,000/-. A copy of the said report was supplied to the assessee with the request to furnish objections, if any. It was argued by the authorized representative before the Assessing Officer that the land was not belonging to the assessee and hence reference to the Valuation cell was illegal. It was further pleaded that no capital gain could be assessed in the hands of the assessee as the land was allotted to it for constructing cinema house and it was a condition that the cinema house was to be constructed within five years of the allotment of the land, which could not be complied with. As there was encroachment on land and litigation was going on, the construction work could not be carried out within the stipulated period and therefore, the State Government took over the land vide its order dated 29.12.1988. It was put forth that since there was no land available with the assessee on the date of dissolution, i.e. 1.9.1989, its cost should be taken at NIL and no capital gain could be taxed in the hands of the firm on distribution of assets amongst the partners on the date of dissolution. The Assessing Officer observed that the assessee firm had challenged the order of the State Government dated 29.12.1988 acquiring the land and vide its order dated 4.5.1991, the Government of Rajasthan had restored the asset to the assessee. It was, therefore, noticed that on the date of dissolution, the assessee was the rightful owner of the capital asset and, hence, the fair market value of the land stood divided amongst the partners.
By taking cognizance of the value determined by the DVO at Rs. 49,95,0007- and after deducting a sum of Rs. 49,500/- being the contribution made by both the partners for acquiring the land, capital gain Under Section 45(4) was computed at Rs. 49,49,500. In the first appeal, the ld. CIT(A) came to hold that reassessment was properly initiated; the firm was in existence in the period relevant to the A.Y.1990-91; capital asset did exist; the FMV of the land adopted by the Assessing Officer at Rs. 49.95 lakhs was not valid and the FMV was to be taken with reference to the dissolution deed which was indicated at Rs. 20 lakhs. He further held that the land was purchased by both Shri Madan Lal Agarwal and Shri Badri Lal Sharma in their individual capacity and hence they were co-owners and computation of capital gain Under Section 45(4) in the hands of the assessee firm was not justified. He, therefore, deleted the addition. The Revenue has come up in appeal against the said decision.
3. We have heard both the sides and perused the relevant material on record in the light of the precedents cited before us. Several contentions have been raised by the rival parties, which we would deal one by one.
The ld. Counsel for the assessee contended that no firm had come into existence at any point of time and hence the question of invoking the provisions of Section 45(4) on the distribution of the capital assets at the time of dissolution of firm, does not arise. While referring to Section 4 of the Indian Partnership Act, 1932, it was contended that the carrying on the business by the firm was a condition precedent. He argued that since no business was carried on by the assessee hence it would be wrong to call the assessee as a firm. Explaining the position further, he submitted that a piece of agricultural land was purchased by Shri Madan Lal Agarwal and Shri Badri Lal Sharma from Shri Shoba Lal on 31.7.1980. it was an agricultural land and in the occupation of M/s Mahalaxmi Saw Mills at a monthly rent of Rs. 225/- who was doing sawing business thereon. After purchasing the said land, it was surrendered to the Government of Rajasthan for its allotment for cinema building. The said land was allotted to the assessee on lease for a period of 20 years for construction of cinema house vide order of the Collector dated 22.1.1982. A lease deed was executed between the Government of Rajasthan and the firm M/s Joy Exhibitors for allotment of land for the period of 20 years. Since the assessee could not construct the cinema house, a notice dated 28.9.1988 was issued by the Collector inviting reasons as to why the said lease be not cancelled as the firm had failed to construct cinema house. The Collector, Bhilwara vide his order dated 29.12.1988 cancelled the lease deed and directed the Tehsildar to take action. The assessee filed an appeal against the order of the Collector and the Revenue Minister, Government of Rajasthan by order dated 4.5.1991 vacated the order of the Collector, Bhilwara dated 29.12.1988. On 27.2.1993 a fresh lease deed was executed between the Government of Rajasthan and M/s Joy Exhibitors allotting land for the business purposes and permission for construction of commercial complex was granted in 1999. The ld. A.R. argued that though a formal deed of dissolution was executed on 26.12.1989 as per which the firm was dissolved on 1.9.1989, but since no business was carried out by the said firm, hence it could not be said that there was a valid firm in existence. In the opposition, the ld. Departmental Representative took us through the relevant material to point out that the firm by the name of M/s Joy Exhibitors was duly brought into existence by a valid partnership deed dated 20.10.1979 consisting of two partners, namely Shri Badri Lal Sharma and Shri Madan Lal Agarwal.
Our attention was drawn towards copy of partnership deed placed on record. The ld. D.R. also submitted that the purchase of land was made in the joint names of the assessee firm and its partners. He further referred to the lease deed, a copy of which is placed at page 13 of the PB, to show that it was granted in favour of M/s Joy Exhibitors and the partner Shri Badri Lal Sharma. It was, therefore, argued that a valid partnership firm was brought into existence and it would be inappropriate to contend that there was no partnership firm at all, simply because the construction of cinema house could not be done.
4. From the facts noted above, it is discernible that a partnership firm was brought into existence vide indenture of partnership dated 20.10.1979. a copy of which is placed a page 1 of the PB. On going through this partnership deed, it, becomes obvious that the said partnership firm consisted of two partners Shri Badri Lal Sharma and Shri Madan Lal Agarwal and they were "desirous to start the cinema business in the partnership under the name and style of M/s Joy Exhibitors at Bhilwara". Having made the intention clear, a piece of land was, thereafter, purchased, a copy of registered sale deed is available at page 6 of the PB, from which it is clear that Shri Shoba Lal, sold it to the following three: Apart from the assessee firm's name, the remaining two persons are the partners who had purchased the land in pursuance to their intention of starting a cinema business in the partnership. The land was purchased after forming a partnership. In order to get the said land converted for setting up cinema, M/s Joy Exhibitors, Bhilwara surrendered it to the Collector for further allotment to it on lease. The Collector, vide order dated 22.1.1982, copy placed at page 11 of the PB, accepted the surrender made by the assessee firm [there is no reference to the names of partners in the said order] and then allotted the same piece of land to the assessee firm on lease for 20 years at a monthly rent of Rs. 625/-. A lease deed was executed between the firm M/s Joy Exhibitors, partner Shri Badri Lal Sharma for construction of cinema building. The case of the ld. A.R. is that since no business was carried on by the assessee firm and the conversion order passed on 22.1.1982 was revoked by later order of Collector dated 29.12.1988 it could not be said that the firm has come into existence. He has relied on certain decisions including the case of CIT v. Jai Bharat Theatre and CIT v. Y. Narayana Murthy [Deed] . We are unable to accept the contention of the ld. A.R. that since no business could be carried on in the firm, the said firm was void ab initio. A great deal of stress has been placed on Section 4 of the Indian Partnership Act, 1932 for the support in favour of his argument. Let us see the definition of the partnership firm Under Section 4 of the Indian Partnership Act, as per which "partnership is the relation between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all". From the above definition, it is palpable that the partnership comes into existence when AGREEMENT is made for sharing the profits of the business, which is to be carried on by the partners. The essence of the definition is the agreement to share the profit of a business, which is to be carried on by the partners and the actual conducting or non-conducting of the business later on is not relevant at that stage. Simply on reaching the said agreement the partnership firm comes into existence. The indenture of partnership firm is the mode of expressing the intention to share the profits of the business into black and white. It is ostensible that before any business is actually embarked upon, several stages are involved in it. To put it in simple words, if a manufacturing unit is agreed to be established in partnership, a land would be purchased or taken on hire, building would be constructed, then machinery would be installed and it is only thereafter that the production would commence.
Can we say that a partnership firm has not come into existence till the goods produced are sold and the profit is realized. The answer is clearly in the negative. The activities listed above are various stages towards the commencement of business. The ld. A.R. has given too narrow a meaning to the concept of the partnership firm, which is incapable of acceptance. All the decisions relied upon by him are on the subject of grant of registration to the firm and have absolutely no bearing to the point before us. It is simple and plain that a partnership firm was created with the intention to start a cinema business. With a view to pursue the activity of the firm, a piece of land was purchased by the assessee firm after the commencement of partnership. The mere fact that the names of two partners are also mentioned in the sale deed alongwith the assessee firm would not make the land a property of partners individually. It is a settled legal position that firm is a compendious name of the partners as has been held by the Hon'ble Summit Court in the case of Malabar Fisheries Co. v. CIT and Third ITO v. Arunagiri Chettiar . Coming back to our case we find that after acquiring the land, the assessee firm applied for its conversion to the Collector, who accepted the conversion and passed order in the name ;of the assessee firm and not the partners individually. The lease deed was also executed in the name of the assessee firm. Since the construction of cinema could not take place due to the litigation with the earlier tenant, the order of conversion was revoked on 29.12.1988. It was only thereafter that the assessee firm intimated the fact of discontinuance of the firm to the Assessing Officer Under Section 176 as has been mentioned on page 2 of the assessment order. From the narration of the above facts, it is apparent that the assessee firm came into existence for construction of cinema, purchased the said land and thereafter it was dissolved on 1.9.1989. We are, therefore, not inclined to agree with the contention of the ld.A.R. that no valid partnership firm came into existence. It did come into existence in 1979 and was dissolved in 1989.
5. The ld. A.R. contended that the provisions of Section 45(4) can't be applied to the facts of the instant case on the ground that primarily there was no firm in existence and secondly there was no distribution of capital assets on the dissolution of the firm. He pointed out that the agricultural land so purchased was in the possession of the tenant and the Collector vide his letter dated 29.12.1988 had cancelled the lease deed with the direction to the State Government that the land may be resumed by it. The Tehsildar was directed to take action in this regard. It was stated that on the date of dissolution, namely 1.9.1989, the order of the Collector had since been passed and hence the assessee could not be said to be in the possession of any capital asset on this count. Once there was no capital asset, the ld. A.R. stated that, there was no question of its distribution on the dissolution. On the other hand, the ld. D.R. stated that the assessee firm had challenged the order of the State Government acquiring the land and the said possession was restored vide later order dated 4.5.1991. He further submitted that the Tehsildar had duly confirmed that the possession of the land was never taken back by the State Government and it very much remained with the assessee firm throughout.
6. In so far as the contention of the ld. A.R. regarding the non-applicability of the provisions of Section 45(4) on the ground that no partnership firm was in existence, is concerned, the same has been discarded by us in an earlier para. The other point raised by the ld.A.R. is that no asset was in existence capable of distribution on the date of dissolution of the firm, as the said land was ordered to be resumed by the State Government and its possession rested with the tenant with whom litigation was going on. In this back drop of facts, we have to determine as to whether there was any capital asset on the date of dissolution of the firm or not. From the facts recorded above, it is seen that the land was purchased by the assessee firm, the possession of which was given by it to the Government with a view to seek permission for construction of cinema house. Permission was granted and the land was given on lease to the assessee for 20 years.
As per the clause 5 of the least? deed, copy placed at pages 13 and 14 of the PB, even after expiry of the period of 20 years, option for renewal of lease deed was vested in the assessee. So it is not a case where the premises was taken by the assessee on rent without any legal right thereon. The land was, in fact, purchased by the assessee and thereafter, surrendered to the Government for taking it back on lease with permission to commence construction of cinema. No doubt, the in trial lease period is 20 years but the same was again renewable at the option of the assessee. It is in the light of these facts that the case of the present assessee having lease right cannot be equated with an ordinary hiring.
7. Here, we would like to mention that Section 45(4) is attracted on the distribution of capital assets on the dissolution of the firm.
There is no force in the submission of the ld. AR that since no business was done by the firm hence Section 45(4) is not applicable.
Once a valid firm is formed, which is later on dissolved, Section 45(4) applies subject to the fulfillment of other conditions prescribed therein. The earlier carrying on the business or otherwise is a totally irrelevant factor in so far as the application of Section 45(4) is concerned. What is the material consideration for invoking this provision is the distribution of 'capital asset'.
8. The term 'Capital asset' has been defined in Section 2(14) to mean "property of any kind held by an assessee, whether or not connected with his business or profession". Six items have been specified in this sub-section which are excluded from its purview, including the agricultural land. From the above definition, it follows that this definition is inclusive and includes every kind of property as generally understood. It cannot be restricted only to the tangible assets. In the case of Syndicate Bank Ltd. v. Addl. CIT where the business undertaking of the assessee company carrying on banking business was acquired by the Government and compensation was paid, it was held that the same attracted capital gain as it was a capital asset'. Their Lordships further explained the meaning of 'capital asset' in the following words: We will first consider the first part of the question. Capital asset has been defined under Section 2(14) of the I.T. Act, 1961. "Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; the assessee entered into a contract with the vendor for purchase of land and also paid earnest money deposit towards part of the purchase price. Permission was not granted by the Municipal Corporation for sub-division of the plot. The vendor refunded the earnest money deposit alongwith Rs. 5 lakhs for assigning the right for contract in accordance with tripartite agreement. The question raised in this case was whether the assignment of right to obtain sale deed in respect of immovable property is transfer of property. The Hon'ble High Court came to the conclusion that the right to acquire property under a contract is a capital asset and the profit arising from assigning of such right is liable to capital gains tax. In still another case, Addl. CIT v.Ganapathi Raju Jegi considered as a capital asset. From the survey of the above judgments, it becomes explicitly clear that the property of any kind including the right or interest in any property is also a capital asset, whose distribution on the dissolution of the partnership firm entails the liability of tax Under Section 45(4). It, therefore, follows that the interest of the assessee in the said land, which was originally purchased by it and given to the Government for conversion and the construction of cinema and was taken back on lease cannot said to be a non-property simply for the reason that the Collector, vide his order dated 29.12.1988 directed the Tehsildar to take action as per provisions of Rule 9(2) of the Rajasthan Land Revenue [Conversion and Regularization of Agricultural Land for Construction of Cinema, etc.] and revoked the conversion order earlier passed. It is further interesting to note that despite this order the land in question was not resumed by the State Government and retained status quo. The appeal filed by the assessee against the order of the Collector was accepted and the Revenue Minister set aside the order of the Collector dated 29.12.1988. Since on the date of dissolution, the assessee was in litigation with the Government qua the piece of land, we are satisfied with the contention of the ld. D.R. that the assessee did have interest in the property. which is a capital asset and this very interest was distributed amongst the partners on the dissolution of the firm as would be seen in the succeeding para.
9. At this juncture, it would be relevant to consider the contents of the dissolution deed dated 26.12.1989, a copy of which is placed at pages 19 and 20 of the PB. As per clause 1, the firm shall stand dissolved on 1.9.1989. As per clause 2, Shri Madan Lal Agarwal, partner of the assessee firm can continue the firm on which Shri Badri Lal Sharma would have to objection. As per clause 4, Shri Madan Lal Agarwal, who will continue with the firm name could repossess the land from the State Government on which Shri Badri Lal Sharma would have no right, if such land is restored by the State Government. Clause 6, which is very crucial for our purpose states that Shri Madan Lal Agarwal would give 10 lakhs to Shri Badri Lal Sharma by 31.12.1992 in view of this irrespective of the fact whether the land is restored to Shri Madan Lal Agarwal for construction of cinema or otherwise or not.
From the reading of the above clauses of the dissolution deed, it is clearly borne out that the partners of the firm had valued this land at Rs. 20 lakhs, half of which share comes to Rs. 10 lakhs which was payable by Shri Madan Lal Agarwal to Shri Badri Lal Sharma, since it was the only asset with the assessee firm.
10. If we peruse the language of Section 2(14) it becomes clear that the capital asset has been defined to mean "property of any kind held by an assessee". It nowhere states that property, which the assessee holds must be his own. The necessary condition for bringing an asset within the purview of Section 2(14) is that it should be held by the assessee. Such property may be any immovable or movable, tangible or intangible or any right or interest etc. In a recent decision CIT v.Sujatha Jewellers the assessee took on lease an immovable property at Madras under lease agreement. Such a lease was for the period of 22 years. The assessee sub-leased it by a lease deed in favour of another company and under that sub-lease agreement that sub-lessee had to pay certain amounts to the assessee. The AO held that transfer of lease by the assessee amounted to transfer of capital asset and the consideration received under the transaction would partake the character of capital gain and would, therefore, be liable to tax. The ld. CIT(A) held that there was no transfer of capital asset which view was upheld by the Tribunal. The Hon'ble High Court, while overturning the view of the Tribunal, came to hold that transfer by way of lease is to be treated as transfer of capital asset on the principle that lease creates an interest in the land and when such leasehold right is sub-leased to another, it amounts to extinguishing the right in the property, bringing the case within the ambit of Section 45. When the facts of the instant case are seen in conjunction with the ratio laid down in the above decisions, it becomes clear that the interest in the property held by the assessee firm is a capital asset which was (sic) allotted to Shri Madan Lal Agarwal for consideration of Rs. 10 (sic) to the out going partner. All the necessary ingredients of Section 45(4) are, therefore, satisfied and the ld. CIT(A), in our (sic) himself in holding otherwise.
11. It was contended by the ld. A.R. that the land in question was an agricultural land and even if we go by the prescription of Section 2(14), the agricultural land is outside the scope of 'capital asset'.
On the contrary, the ld. Departmental representative argued with vehemence that it was not an agricultural land though described as so in the Registered sale deed at the time of purchase by the firm. He further submitted that the said land was in occupation of M/s Mahalaxmi Mills at monthly rent of Rs. 225/- who was doing sawing business thereon. He, therefore, submitted that it would be incorrect to call it as an agricultural land. He further pointed out that no agricultural operations were carried on and moreover the assessee had also purchased the land with a view to construct a cinema house.
12. Having heard both the sides and perused the relevant material on record, it is seen that it has been described as agricultural land in the registered sale deed. The surroundings of the land are mentioned in the said sale deed: On the east of this land there is a Government land, on its west side there is a road which goes towards Maharani Talkies. On the north side of this land there is a Government way which goes to the Post Office and the Government Quarters and on the south side there is a road which goes to the veterinary hospital. It is also noted that this land was in the possession of Mahalaxmi Saw Mills at monthly rent of Rs. 225/-, who were doing sawing business thereon. In these circumstances, we have to decide whether the said land can be characterized as agricultural land or not. The answer to this question can be easily obtained from the judgment of the Hon'ble Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim and Ors. v. CIT , in which case their Lordships were to adjudicate on the nature of land as to whether it was agricultural or not. It was observed that the determination of nature of land is basically a question of fact which has to be decided having regard to the facts and circumstances of that case. It listed several factors appearing for and against the assessee's case. The facts in assessee's favour were that land was registered as agricultural land in Revenue records, as is the case before us also. Further, the payment of land revenue made up to a particular year and there were agricultural lands abutting the said land and the appellants in that case had no other source except income from the said land. As against the above facts, the factors which were weighing against that assessee were that the land was situated within the Municipal limits; it was not cultivated for the last 4 - 5 years, the appellants had entered into an agreement with the State Housing Cooperative society to sell the land for non-agricultural purpose, etc.
On the cumulative consideration of these facts, the Hon'ble Court found that the appellant had no intention to bring it under cultivation as was clear from the fact of their application to sell it for non-agricultural purposes Under Section 63 of the Bombay Agricultural Land Act. In the background of these facts, the Hon'ble Court held the land to be non-agricultural. On applying the ratio of this decision to the facts of our case, it is found that the land was registered as agricultural land prior to purchase; it was being used for non-agricultural purposes since the tenant was using it for sawing business. The assessee also purchased this land with an intention to construct cinema and applied to the Government for its conversion into commercial one. The surroundings of the land as discussed above also shows that this land was not in the vicinity of other agricultural lands. On the cumulative effect of these factors for and against the assessee, in our considered view, the only possible opinion that can be formed is that the land was not agricultural. Similar opinion has been expressed by the Hon'ble Supreme Court in still another case in CIT v.Gemini Pictures Circuit P. Ltd. reasons, we are of the considered opinion that the contention raised on behalf of the assessee in this regard cannot be accepted and the piece of land cannot be held to be agricultural land.
13. The ld. Counsel for the assessee contended that the Assessing Officer issued notice Under Section 148 to M/s Joy Exhibitors in the status of AOP in A.Y. 1993-94 and charged to tax a sum of Rs. 20 lakhs towards the valuation of land on dissolution as payment of Rs. 10 lakhs was made by Shri Madan Lal Agarwal to Shri Badri Lal Sharma in two installments of Rs. 5 lakhs each on 1.12.1992 and 15.12.1992. It was submitted that an appeal was filed against this order and the ld.CIT(A) annulled the assessment on the ground that the firm M/s Joy Exhibitors stood dissolved w.e.f. 1.9.1989 and hence the latter notice issued in the name of the firm for making reassessment was invalid. In the background of these facts, the ld. A.R. contended that since no second appeal has been preferred either by the assessee or by the Revenue against that order of the ld. CIT(A) for A.Y. 1993-94 hence the finding contained therein has become final and accordingly the act of the Assessing Officer in charging to tax the capital gain on distribution of capital asset Under Section 45(4) in the year in question was invalid. In the opposition, the ld. Departmental representative invited our attention towards the submission made by M/s Joy Exhibitors before the Assessing Officer in A.Y. 1993-94, copy of which is available at page 33 onwards of the PB to show that it was categorically claimed that the firm M/s Joy Exhibitors was dissolved on 1.9.1989. He contended that the assessee could not move left and right sometimes claiming the firm not having come into existence and hence no consequential dissolution and on the other had claiming that the firm was dissolved on 1.9.1989. He further submitted that the order passed in A.Y. 1993-94 has no bearing on the issue in question as the Assessing Officer had rightly invoked the provisions of Section 45(4) in the year in question.
14. Having heard the rival submissions and perused the relevant material on record, we find that the assessee is blowing hot and cold in the same breath. In the year in question it claimed that there was no firm in existence because this submission suited it accordingly, whereas in A.Y. 1993-94 it was claimed that the firm was dissolved on 1.9.1989 and hence the action in the A.Y. 1993-94 was invalid. The further contention of the ld. A.R. that the order of the ld. CIT(A) for A.Y. 1993-94 was not assailed in the second appeal and hence this finding should be treated as final, is of no consequence in so far as the A.Y. is concerned. We observe that the ld. CIT(A) in the later year has given a categorical finding at the bottom of page 2 of the order that "The firm M/s Joy Exhibitors, Bhilwara ceases to exist w.e.f.
1.9.1989. There was no firm M/s Joy Exhibitors in existence during the F.Y. 1992-93 on which notice Under Section 148 could be served and the assessment in consequence thereto could be made". The assessee has also not filed any appeal against this order thereby impliedly accepting that M/s Joy Exhibitors was dissolved on 1.9.1989. Having accepted this finding, we are unable to appreciate its stand in the year in question being that there was no dissolution of the firm. As we have held in an earlier para that the provisions of Section 45(4) are rightly applicable as the firm M/s Joy Exhibitors was dissolved on 1.9.1989 and there was distribution of capital asset in the shape of transfer of interest in land to the continuing partner for a consideration of Rs. 10 lakhs. The proceedings in A.Y. 1993-94 were rightly quashed by the ld. CIT(A) on the premise that the subject matter already stood decided in A.Y. 1990-91. The ld. CIT(A) in the impugned order has given a finding in para 5.5 that the assessment was open in the case of retiring partner in A.Y. 1993-94 and the amount was assessed as capital gain on receipt basis. Though the order of the ld. CIT(A) for A.Y.1993-94 was passed on 3.11.2000 but the ld. CIT(A) in the impugned order dated 18.10.2002 observed conspicuous silence as regards the fate of the assessment order in A.Y. 1993-94 and thought it prudent to use only that part of the proceedings for A.Y. 1993-94 which supported his view without even bothering to discuss the material fact that the said order was quashed.
15. We further note that the ld. A.R. has argued that the land was purchased by both the partners in individual capacity and hence they were co-owners and the said land did not vest with the assessee firm.
He has relied on the order of the ld. CIT(A) in this regard to contend that capital gain could be charged in the hands of the partners in A.Y.1993-94 as has been held in para 5 of the impugned order. We are not convinced with this line of reasoning because firstly the assessee firm was brought into existence to construct cinema and it was only later on that the said land was purchased. The name of the assessee firm appears in the registered sale deed. Albeit the name of the partners also appear but that is for the fact that they were buyers in the capacity of the partners and not in individual capacity. It has been discussed above that the firm is the compendious name of partners taken together.
We are conscious that the partners cannot be debarred from purchasing property individually. The determinative factor is to judge the intention of the partner at the time of purchase of the property. If he is purchasing it in furtherance of the objects of the firm and there can be only single user, then it would remain the property of the firm.
Coming back to the facts of the case, we note that the firm was constituted to do cinema business. Only one composite piece of land was purchased as a single unit for constructing one cinema. The partnership firm applied for the conversion of whole land. Lease deed was also executed in the name of the firm. On dissolution of the firm, the adjustment of price of the interest in land was made subject matter of the dissolution deed. On the above facts, the irresistible conclusion that follows is that the land was purchased by the firm and not by the partners individually as co-owners. We hold that the ld. CIT(A) erred in holding otherwise.
16. Be that as it may, we find that it is only the right person and the right year in which income can be charged to tax. Merely because invalid proceedings are initiated in the hands of wrong person or in a wrong year, those cannot come in the way of disturbing the taxability in the correct year in the correct hands. We are reminded of the celebrated decision of the Hon'ble Supreme Court in the case of ITO v.Ch. Atchaiah in which it was held that if the ITO has assessed a wrong person, say individual instead of AOP, he is not precluded to assess the right person under the 1961 Act. Similar view has been reiterated by the Hon'ble Summit Court in the case of S.P.Jaiswal v. CIT charge the right person and the fact that the wrong person has already been charged is irrelevant. For the foregoing reasons, we are satisfied that the correct year for the charge of capital gains is A.Y. 1990-91 and hence the proceedings in 1993-94 are totally irrelevant.
17. The ld. Counsel for the assessee argued that the Revenue authorities had erred in adopting the value of this land at such a substantial figure. White referring to the report of the DVO, copy placed at pages 64 onwards of the PB, it was stated that the rate of Rs. 167/- per sq. ft. was taken on the strength of sale instances, which were of some nearby shops. It was further explained that the DVO had erred in treating this land as free hold land as mentioned in clause 6.1 of his report, whereas in fact, it was lease hold land. It was still further submitted on behalf of the assessee that even if the interest in the land was taken to be capital asset, then its value be taken at NIL. He relied on certain decisions led by the case of the Hon'ble Calcutta High Court in CWT v. U.C. Mehatab in which it was held that the right to receive compensation under the West Bengal Estates Acquisition Act, 1953 is an inchoate right till the publication of assessment role and was not a chargeable asset till then. He relied on certain other decisions also rendered in the context of Wealth-tax Act to submit that such inchoate right of the assessee in the said land be valued at NIL. In the opposition, the ld. D.R. relied on the assessment order in support of the value computed by the DVO which was taken into consideration by the Assessing Officer for determining the capital gain Under Section 45(4).
18. Having regard to the facts of the case and perused the relevant material on record in the light of precedents relied upon, we rote that the Assessing Officer had taken the value at Rs. 49,95,000/- on the strength of DVO's report, which has not been made as per law. The DVO had erred in making proper valuation by treating it as a free hold land whereas it is not exactly so. Further, he has gone by the sale instances. No consideration has been given to the fact that the dispute was going on one hand with the tenant and on the other hand with the State Government. A land with such disputes cannot be equated with a disputeless land for the purposes of its valuation. At the same time, we find that the reliance of the ld. A.R. on decisions including U.C.Mehatab [supra] is misplaced because the said decision has been reversed by the Hon'ble Supreme Court in CWT v. U.C. Mehatab [1998] 231 ITR 501 [SC] by-holding that the right to compensation constitutes an asset within the meaning of W.T. Act even where compensation has neither been determined nor paid. The assessee's right to receive compensation can only be "asset" that may be determined and paid as compensation. Thus it emerges that the line of decisions relied upon by the ld. A.R. are not good law. At the same time, the factors which are against the assessee cannot be lost sight of in determining the fair market value as has been done by the DVO in the present case. The Hon'ble Supreme Court in the case of CWT v. Raghubar Narain Singh has held that while valuing the assets, consideration has to be given to the hazards which are prevalent in the case.
Similarly, the Hon'ble Gujarat High Court in the case of CWT v. Smt.
Shirinbanoo considered a case in which there was a mortgage debt on the property whose valuation was disputed. It was held that such mortgage debt was to be deducted for valuing the property for levy of additional wealth tax. From the above decisions, it becomes obvious that the factors which weigh against the assessee are required to be properly reflected it the process of determination of the fair market value. As these factors have not been taken into consideration while valuing the interest of the assessee in the land by the DVO and further no registered valuer's report has been made available on behalf of the assessee, in our considered opinion, the question of valuation cannot be decided at our end. We, therefore, set aside the impugned order and restore the matter to the file of the Assessing Officer for determination of proper fair market value of the assessee's interest in the land in accordance with our above referred observations. It is on the basis of such fresh value determined by the DVO and after considering the assessee's objection, the amount of capital gain in terms of Section 45(4) would be calculated in the present year.
19. In the result the appeal of the Revenue is allowed for statistical purposes.
20. Ground No. 1 (i) of the assessee's cross objection's against the upholding of the validity of notice Under Section 148 by the ld.CIT(A).
21. We have already recorded the facts in an earlier para, which led to the issuance of notice Under Section 148. The assessee assailed the issuance of such notice before the first appellate authority but without any success. Before us, it was contended on behalf of the assessee that the firm was not in existence; that no capital asset was in existence or in the ownership of assessee in the period relevant to A.Y. 1990-91 and hence there was no question of determination of capital asset. We find that all the objections raised in support of annulling the notice Under Section 148 have been elaborately discussed by us while disposing of Revenue's appeal. We have held above that the assessee firm was in existence, it dissolved on 1.9.1989 and there was distribution of capital asset. As the assessee firm had not furnished any return of income for A.Y. 1990-91, in our considered opinion, the Assessing Officer rightly proceeded to issue notice Under Section 148 to the assessee. Explanation 2(a) of Section 147 provides that where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax, it shall be deemed to be a case of income escaping assessment. In view of this clear mandate of Section 147, we are satisfied that notice Under Section 148 was rightly issued. This ground, therefore, fails.
22. Ground No. 1(ii) is against the order of the ld. CIT(A) holding that the firm was in existence in the previous year relevant to A.Y.1990-91. We have held that the firm was in existence in A.Y. 1990-91, which stood dissolved in 1.9.1989. In view of our above finding, this ground is no more valid and is dismissed.
23. Ground No. 1(iii) is against the finding of the ld. CIT(A) that the firm was in possession of land even after cancellation of deed by the Collector, Bhilwara. We have held in an earlier para that the assessee did have interest in the land even after cancellation of the deed by the Collector, Bhilwara. Therefore, this ground also fails.
24. Ground No. 1(iv) is against the direction of the ld. CIT(A) that the fair market value of the land be taken at Rs. 20 lakhs. In so far as the aspect of valuation is concerned, we have already sent it back to the Assessing Officer for a fresh decision and hence this finding of the ld. CIT(A) automatically gets effaced.
25. In the result, the cross objection of the assessee is partly allowed for statistical purposes.