Income Tax Appellate Tribunal - Pune
P.N. Devgirikar vs Income-Tax Officer on 21 January, 1997
Equivalent citations: [1997]61ITD376(PUNE)
ORDER
Shri K.C. Singhal, Judicial Member
1. This appeal is against the order of the CIT(A), Pune, sustaining the addition of Rs. 1,89,900 made by the Assessing Officer under section 45(4) of the Act, pertaining to the assessment year 1991-92.
2. The brief facts of the case are these : The assessee is an individual who was a partner of M/s Shreenivas Enterprises. One of the partners of that firm, i.e., Shri Mahentesh N. Devgirikar died on 16-12-1990 and, therefore, the firm was dissolved by operation of law. The business of the dissolved firm was taken over by the assessee w.e.f. 17-12-1990. The Assessing Officer was of the view that on the dissolution of the firm, the capital gain arose to the assessee under section 45(4) of the Act in respect of assets held by the firm, because, according to him, there was a distribution of capital assets on the date of dissolution. He therefore, computed the fair market value of the plot at Rs. 5,39,600 and deducted the cost of the land, i.e., Rs. 3,59,700. Thus, the capital gain was computed at Rs. 1,79,900. Similarly, the capital gain in respect of plant and machinery and building was computed at Rs. 10,000 each. Thus, the total capital gain was Rs. 1,99,900 which was added to the income of the assessee. On appeal, the addition has been confirmed subject to reduction of income by Rs. 10,000. Aggrieved by the same, the assessee is in appeal before the Tribunal.
3. The learned counsel for the assessee Shri Pandit vehemently argued before us that even assuming that the provisions of section 45(4) were applicable, the same could not be assessed in the hands of the partner. He drew our attention to the provisions of section 45(4) to contend that in case of the dissolution of a firm, it is only the firm who is liable to tax and not the partner thereof. He further argued that the plot in question was allotted to the partnership firm by M.I.D.C. and the same could not be transferred without prior permission of the M.I.D.C. Therefore, it was only a case of deemed capital gain which could not be assessed under the provisions of section 45(4). On the other hand, the learned departmental representative Shri Manish Gupta though could not controvert the legal contention of the assessee, yet, he vehemently argued that the partner of the firm can be assessed directly in respect of his share of profit in a firm without assessing the capital gain in the hand of the firm. He relied upon the decision of the Allahabad High Court in the case of L. Satish Chand v. ITO [1970] 75 ITR 623. He further submitted that the assessment of the total income vis-a-vis the capital gain though could not be assessed in the hands of the partner fully, yet, the addition could be sustained to the extent of assessee's share in the income of the partnership firm as it was a mere mistake committed by the Assessing Officer. Lastly, it was submitted by him that the fact that the property allotted to the assessee-firm by the M.I.D.C. could not be transferred without its prior permission is not relevant for deciding the issue.
4. The rival submissions of both the parties have been considered carefully. In our opinion, the contention of the assessee that assuming the provision of section 45(4) applies even then, the income alleged to arise under the provision of section 45(4) cannot be assessed in the hands of the assessee, has force. We have gone through the provision of section 45(4) and bare reading of the aforesaid provision makes it clear that the profits and gains arising under this section can only be assessed in the hands of the firm only. Admittedly, the firm M/s Shreenivas Enterprises in which the assessee was a partner had not been assessed on such income before the assessment of the assessee. Therefore, assessing the said income in the hands of the assessee who was merely a partner of the firm, is in our opinion, illegal and therefore, the order of the CIT(A) cannot be sustained.
5. But the learned departmental representative has raised an interesting legal contention that a partner can be directly assessed to tax in respect of his share of profit from the firm without assessing the firm. Therefore, the addition to the extent of share of profit in the firm can be sustained. After giving our deep thought to the issue, we are of the opinion that his contention is without force. Under the Income-tax Act, 1961, section 4 is a charging section which provides that income-tax shall be charged in respect of total income of every person. The word 'person' has been defined under section 2(31) of the Act. According to this, it includes "individuals" as well as the "firm". Conjoint reading of these provisions clearly shows that the Firm as well as the partners are chargeable to tax in respect of their respective incomes. But the provisions of section 4 are subject to the other provisions of the Act. That means that the other provisions of the Act have overriding effect. We find that section 67 specifically deals with the assessment of the partner of the firm. This section provides the manner in which the income of the partner of the firm is to be determined. Sub-section (1) provides that the income of the firm computed shall be subject to certain adjustments as provided in clause (a) of sub-section (1) and then, the same shall be apportioned among the partners. Clauses (b) and (c) then provide that the amount of profit or loss so apportioned shall be increased or decreased as the case may be by the amount of salary, interest, commission or other remuneration paid to the partner. The amount so arrived at shall be treated as partner's share in the income/loss of the firm. Sub-section (2) further provides that the share of a partner as computed in sub-section (1) shall be apportioned under various heads of income in the same manner in which the income or loss of the firm has been determined. The above discussion clearly shows that income or loss of the firm has to be determined first in accordance with the provision of the Act. Once that is determined, then only the share of the partner in the income of the firm can be determined under section 67. There is no other manner of assessment of a partner of the firm. Therefore, in our opinion, keeping in view the scheme of the Act, the contention of the learned departmental representative that share of a partner in the profits of the firm can be assessed directly in the hands of the firm, without assessing the firm, cannot be accepted. Admittedly, the firm in which the assessee was a partner had not been assessed vis-a-vis the alleged income under section 45(4). Therefore, the question of sustaining the addition to the extent of his share in the profits of the firm does not arise.
6. Reliance of Mr. Gupta on the decision of the Hon'ble Allahabad High Court in the case of L. Satish Chand (supra) does not help the case of the revenue. That was a case which arose under the Indian Income-tax Act, 1922 whose provisions were entirely different. Under the 1922 Act, section 3 was charging section which provided an option to the Assessing Officer either to assess the firm or the partner thereof. Both the entities therefore, could not be assessed. It is because of such provision, the Court held that the partners could be assessed directly without assessing the firm. The decision of the Allahabad High Court was delivered on the basis of the Supreme Court decision in the case of CIT v. Murlidhar Jhawar & Purna Ginning & Pressing Factory [1966] 60 ITR 95. Since the option which was available to the Assessing Officer is not now available under section 4 of the 1961 Act, that decision cannot be applied to the present case. The view which we have taken is also fortified by the recent decision of the Supreme Court in the case of ITO v. Ch. Atchaiah [1996] 218 ITR 239, wherein it has been held as under :
"Under the present Act, the ITO has no option like the one he had under the 1922 Act. He can, and he must, tax the right person and the right person alone. By 'right person' is meant the person who is liable to be taxed according to law with reference to a particular income."
7. Before parting with our order, we would like to clarify that in the present case, we are not concerned about the applicability of provisions of section 45(4) to the facts of the case. We are disposing of the appeal on the assumption that such provisions are applicable to the case. We have deliberately refrained ourselves from expressing any view on the applicability of such provisions since the assessee has succeeded on the technical ground.
8. In view of the above discussion, we set aside the order of the CIT(A) and delete the addition of Rs. 1,89,900 sustained by him. Hence, the appeal of the assessee is allowed.