Income Tax Appellate Tribunal - Ahmedabad
New Gujarat Tin Printing Works, Baroda vs Assessee on 29 September, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A
"A "
BEFORE SHRI BHAVNESH SAINI,
SAINI, JUDICIAL MEMBER AND SHRI
N.S.SAINI,
N.S.SAINI, ACCOUNTANT MEMBER
Date of hearing :28-9-10 Drafted on:29-9-2010
ITA No.345/AHD/2008
Assessment Year : 2001-02
M/s. New Gujarat Tin Vs. Income Tax Officer,
Printing Works, Ward 5(4),
Opp. Birla Farm, Aayakar Bhavan,
Dabhoi Road, Near Race Course Circle,
Kapurai Baroda.
Chowkdi,Baroda.
PAN/GIR No. :AADFN 3717 A
(APPELLANT) .. (RESPONDENT)
Appellant by : Shri J.P. Shah, Advocate
Respondent by: Shri Anil Kumar D.R.
ORDER
PER N.S.SAINI , ACCOUNTANT MEMBER :-
This is an appeal filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-V Baroda, dated 26-11-2007.
2. Ground No.1 reads as under:-
"On the facts and in the circumstances of your appellant case and in law, the Hon'ble Commissioner has erred in upholding the decision of Learned Assessing Officer in respect of re-opening and re-assessment of your appellant's case.
3. At the time of the hearing the Learned Authorised Representative of the assessee submitted that he is not pressing this ground of appeal and therefore the same is dismissed as not pressed.
Ground Nos. 2 to 4 of appeal reads as under:-
-2-"2. On the facts and in the circumstances of the case and in law, the Hon'ble Commissioner of Income Tax (Appeals)-V, Baroda has erred in confirming the addition made by Learned Assessing Officer on account of short term capital gain amounting to `.2,88,00,255/-."
"3. On the facts and in the circumstances of Your appellant's case and in law the Learned Commissioner of Income Tax (Appeals) has erred in not accepting the plea of your appellant in respect of matter to be referred to Valuation cell for the purpose of valuation of the alleged property."
"4. On the facts and in the circumstances of Your Appellant's case and in law the Learned Commissioner of Income Tax (Appeals) has erred in not taking cognizance in respect of arguments put forward by your appellant towards "4.01. That the alleged valuation report dated 1-4-2000 includes cost of land also which is not owned by the firm and not considering the fresh valuation report submitted by your appellant.
"4.02. Not taking into consideration facts submitted by your appellant in respect of depreciation claimed by the newly formed Pvt. Ltd. Co. namely New Gujarat Tin Circle Depot Pvt. Ltd.
"4.03 In respect of plea made by your appellant to call data from Sub-Registrar which is authenticated body for valuation of every property."
4. The brief facts of the case are that the Learned Assessing Officer noticed that during the year under consideration two partners of the assessee-firm i.e. Abbasi H. Tinwala and Abbedin H. Tinwala have withdrawn Ratanpur Factory building from the assessee firm and the same was introduced in another firm M/s. Gujarat Tin Circle Depot on the same day i.e. 1-4-2000. In the next financial year this firm M/s. Gujarat Tin Circle Depot was converted into a company called New Gujarat Tin Circle Depot Pvt. Ltd. The Learned Assessing Officer noticed that the said Ratanpur factory building which was withdrawn by the partner at a written -3- down value of `.34,64,745/- was valued by a Registered Valuer for `.3,22,65,000/- for the purpose of new firm and the company.
5. The Learned Assessing Officer held that the withdrawal of the factory building was distribution of capital asset and is a transfer liable to tax under provisions of section 45(4) read with section 45 of the Income tax Act. The assessee did not file return in response to notice under section 148 of the Act within time. However, on 20-3-2006 the assessee filed a revised return and declared `.1,59,255/- as short term capital gain on transfer of Ratanpur factory building.
6. The Learned Assessing Officer found that the value of factory building has been credited in the partner's capital account by passing journal entries by the assessee. The Learned Assessing Officer asked the assessee to explain why capital gain as per section 45(4) should not be levied on the transfer price of `.3,22,65,000/-. The assessee explained that the valuation report dated 1-4-2000 relied upon by the Learned Assessing Officer was obtained for getting credit facility from Bank. The Learned Assessing Officer did not accept the contention of the assessee. He observed that the valuation report dated 1-4-2000 is authentic. He stated in the assessment order that valuation has been done at the instance of the partners of the assessee-firm. The new company M/s. New Gujarat Tin Circle Depot Pvt. Ltd., had taken over the entire balance sheet of New Gujarat Tin Circle Depot on 30-9-2001, and the value of factory building shown in the balance sheet of New Gujarat Tin Circle Depot was `.3,22,65,000/-.The Learned Assessing Officer examined the assessment records of New Gujarat Tin Circle Depot for Assessment Year 2001-02 and found that in the notes to account there was a mention of re-valuation of assets and the excess amount after re-valuation was credited to the partners capital account. The re-valuation of factory building is at `.3,22,65,000/-. Later on the new company New Gujarat Tin Circle Depot Pvt. Ltd., has claimed depreciation on this value. The -4- Learned Assessing Officer therefore, concluded that fair market value of factory building should be `.3,22,65,000/-. The partners have withdrawn these assets from the firm and introduced this as capital in another firm. Therefore, there was a transfer and capital gain is leviable on the difference of `.2,88,00,255/-.
7. On appeal, before the Learned Authorised Representative of the assessee submitted that the Learned Assessing Officer should have referred the case to District Valuation Officer for determination of fair market value for computing the capital gain. It was argued that amount of `.3,22,65,000/- includes value of land which remained with the partners. It was submitted that the Learned Assessing Officer has not taken cognizance of fresh valuation report submitted before him. It was also submitted that the Learned Assessing Officer has relied on the decision in the case of Hiralal Lokchandani vs. ITO 290 ITR-258 (Cuttack) and Rajlaxmi Trading Co. 250 ITR 581 (A.P.). It was submitted that the Learned Assessing Officer took the fair market value of Ratanpur building at `.3,22,65,000/-. From the valuer's report dated 1.4.2000 which is a overvalued figure as it includes value of land and Mr. Abbasi and Abbedin Tinwala had valued land and building for getting finance from Union Bank of India. The assessee supported his case for taking his valuation by referring to the fact that the partnership firm M/s. New Gujarat Tin Circle Depot had shown the book value of the factory building after depreciation at `.3,19,18,525/- and the same value had been taken by the private Limited Company which was formed by the conversion of M/s/ New Gujarat Tin Circle Depot under Chapter IX of the Companies Act." It was further argued that the Learned Assessing Officer completely overlooked the fact that the requirement of the Section 45(4) is that the fair market value of the assets transferred has to be ascertained.
8. He also submitted that another important aspect which was overlooked was that the valuation done by Abbasi and Abbedin -5- Tinwala comprised of land which was in their individual ownership and the factory building which was owned by the firm.
9. The Learned Commissioner of Income Tax (Appeals) after considering the submissions of the of the assessee observed that the capital asset has been withdrawn from the partnership firm and introduced as capital in another firm and therefore the provisions of Section 45(4) r.w.s. 50 became applicable and capital gain was leviable. The assessee has also accepted this fact by filing a revised return. The valuation was done at the instance of partners of assessee firm only. The value was again confirmed by the fact that the same amount has been credited on re-valuation in the new firm New Gujarat Tin Circle Depot, to the partners' capital account. The Private Limited Company has also claimed depreciation on this amount. The assessee cannot say that the entire chain of events was a mistake. It was significant to note that the company New Gujarat Tin Circle Depot Pvt. Ltd., which now owns all the assets has allotted shares to the partners of New Gujarat Tin Circle Depot on the basis of re-valuation price of `.3,22,65,000/-. Therefore, it is but reasonable to take the value of the transferred asset at `.3,22,65,000/-. The two cases relied upon b y the assessee have altogether different facts and therefore, are not applicable to the case of the assessee. The case of Hiralal Loklchandani (supra) relates to purchase of rough diamonds. The Tribunal in that case held that the valuation report submitted by the assessee should be considered by the Learned Assessing Officer and the Learned Commissioner of Income Tax (Appeals).The Tribunal observed that the Learned Commissioner of Income Tax (Appeals) had no power to admit additional evidence. In the case of the assessee a Valuation report was available on record from the partners of the assessee-firm for the very same asset by a registered valuer. By several other events the value of the asset was again reconfirmed. The same value was taken by the new private limited company for its book purpose. Shares to that extent were issued. Depreciation was claimed. In such circumstances, there was no further need to -6- value the asset again because it would be more convenient to the assessee. The Learned Commissioner of Income Tax (Appeals) accordingly concluded that the fair market value of the factory building at the time of the transfer was `.3,22,65,000/- and therefore the working out of capital gain by the Learned Assessing Officer.
10. The Learned Authorised Representative of the assessee submitted that there was no dissolution of the firm and hence there was no transfer of assets. He further submitted that the transfer of an asset has to be by way of executed conveyance. He referred to page 1 of the paper book which contains report of the registered valuer Shri Virendra F. Panchal dated 1-4-2000 and pointed out that the name of the owners given at point No.3 of the said report was that of Shri Haji Abbasi Husamuddin Tinwala and Shri Haji Abedin Husamuddin Tinwala. Therefore, it can be seen that the assessee-firm is not the owner of the building. He further submitted that at page-63 to page 72 of the paper book contains valuation report of Government Approved Valuer wherein at page 68 it has been observed as under :-
"The property under valuation having registered sale deed and Revenue record in the name of Mr. Haji Husamuddin Tinwala and Mr. Haji Abedin Husamuddin Tinwala Sale Deed No.280 dated 7-3-1996."
11. From this also it can be seen that the property in question is not owned by the assessee-firm.
12. Lastly, the Learned Authorised Representative of the assessee argued that the definition contained in section 2(47) defines transfer as "(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; "
-7-13. As none of the above conditions exists in the case of the assessee there was no transfer of building made by the assessee- firm and therefore was not liable to tax under section 45(4) of the Act.
14. On the other hand the Learned Departmental Representative submitted that the building in question was part and parcel of the asset of the assessee-firm. The firm is owner of the property and the asset forms part of the written down value of the assets of the firm and depreciation was regularly being claimed by the assessee on such assets. After this the firm cannot turn around and say that it is not the owner of the Ratanpur factory because it was not transferred by way of a conveyance deed. The conduct of the assessee shows that the assessee was the owner of the Ratanpur Factory. The Private Ltd Company which ultimately became the owner of the Ratanpur factory building claimed depreciation on the value of this property at `.3,22,65,000/-. Therefore, the appeal of the assessee has no merit and the same should be dismissed.
15. We have heard the rival submissions and perused the materials available on record. In the instant case the assessee is a partnership firm carrying on business of Printing of Tin plates. The undisputed facts in the instant case are that two partners of the assessee-firm namely Abbasi H. Tinwala and Abbedin H. Tinwala withdrew Ratanpur factory building from the assessee firm at its written down value `.34,64,745/- on 1-4-2000. The said two partners contributed the said Ratanpur factory building to another partnership firm namely M/s. New Gujarat Tin Circle Depot on the very same day i.e. 1-4-2000. The assessee in its return filed in pursuance to notice under section 148 claimed that the market value of Ratanpur factory building was `.36,24,000/- on 1-4-2000 and therefore, the short term capital gain to be included in the assessee firm's total income was `.1,59,255/- only. The Learned Assessing Officer observed that as per valuation report earlier -8- submitted by the assessee the value of Ratanpur factory building was `.3,22,65,000/- and he rejected the new valuation report dated 28-2-2006 submitted by the assessee showing the value of Ratanpur factory building at `.36,24,000/-. The Learned Assessing Officer also rejected the contention of the assessee to the effect that the valuation of `.3,22,65,000/- made by the earlier valuer also included the value of land as because the company namely M/s. New Gujarat Tin Circle Depot Pvt. Ltd. which was formed by conversion of new partnership namely New Gujarat Tin Circle Depot claimed depreciation on entire value of `.3,22,65,000/-. The Learned Assessing Officer therefore treated the difference of `.3,22,65,000/- and book value of `.34,64,745/- i.e. `.2,88,00,255/- as the short term capital gain of the assessee firm liable to tax during the year under consideration. On appeal, the Learned Commissioner of Income Tax (Appeals) confirmed the action of the Learned Assessing Officer.
16. We find that the transfer has been defined in section 2(47) of the Income Tax Act as under:-
"(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; "
17. Thus we find that if a transaction falls within the ambit of the above stated definition of transfer then irrespective of the fact whether the transaction is a transfer within the Transfer of Property Act, 1881 or not, the income accrued on such transaction is chargeable to Income tax Act under section 45(4) of the Act. Thus we do not find force in the submission of the Learned Authorised Representative of the assessee to the effect that transfer of immovable property belonging to a firm in favour of its partners by mere book entries is not an acceptable mode of transfer of ownership unless it is followed by registration of a duly stamped deed of conveyance in favour of the partners.
-9-18. Further section 45(4) of the Act reads as under:-
"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 association of persons or body of individuals (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."
A reading of the above provision shows that profit arising on transfer of a capital asset by way of distribution of capital asset on dissolution of the firm or otherwise is chargeable to tax. Thus, the contention of the Learned Authorised Representative of the assessee that as in the instant case the distribution of Ratanpur factory building to the partners of the assessee firm was not on account of dissolution of the firm and therefore, not chargeable to tax also cannot be upheld. The word "otherwise" in our opinion covers a situation where the capital asset of the firm is distributed to its partners otherwise than on dissolution of the firm. Moreover, the assessee in the return of income filed in response to notice under section 148 dated 20-2-2006 admitted that short term capital gain arises on transfer of Ratanpur Factory building. The assessee in the letter dated 21-3-2006 addressed to the Learned Assessing Officer also contended that capital gain arises on transfer of Ratanpur Factory building (Paper book page-10). The admitted facts would also support the findings of the authorities below that it is a case of transfer of capital asset in question for which capital gain arises in accordance with law.
19 The Learned Authorised Representative of the assessee relied upon the decision in the cases of
(i) CIT vs. Dadha & Co. (1983) 142 ITR 792(Mad)
- 10 -
(ii) Abdul Kareemia & Bros vs. CIT (1984) 145 ITR 442(AP)
(iii) Jansons vs. C.I.T. (1985) 154 ITR 432(Kar)
(iv) C.I.T. vs. Bharati Engineering Corporation (1989) 180 ITR 32(P&H)
(v) CIT vs. Kedarnath Poddar & Co. (1993) 201 ITR ` 639(Cal)
(vi) C.I.T. vs. E.L.Navaneetha Chettiar & Sons (1995) 211 ITR 781(Mad)
(vii) C.I.T. vs. Palaniappa Enterprises (1998) 234 ITR 635 (Mad)
(viii) C.I.T. vs. S. Rajamani & Thangarajan Industries (2000)241 ITR 668(Mad.)
(ix) C.I.T. vs. Sri Ganganagar Fertilizer Corporation (1995) 214 ITR 317 (Raj.) for the contention that treatment of one or more parties of a property belonging to the partnership firm as individual property is not a valid transfer in absence of a conveyance deed executed in favour of partner. We find that section 45(4) was inserted in the Income tax Act w.e.f. 1-4-1988 and the above decisions relied upon by the Learned Authorised Representative of the assessee are all relating to the earlier assessment years. Thus, by the insertion of provisions of section 45(4) of the Act the legislative intent is clear that profits or gains arising on distribution of capital asset of a firm to its partners is a taxable event under the Income tax Act and thus the law on the issue has undergone an amendment w.e.f. 1-4-1988. Therefore, in our view the above cited decisions relied upon by the Learned Authorised Representative of the assessee are not applicable to the instant case as the Assessment Year involved in the instant case is Assessment Year 2001-02 which is after 1-4- 1988.
20 In view of the above, in our considered opinion the fair market value of Ratanpur factory building as on 1-4-2000 is to be treated as full value of consideration received or accrued to the
- 11 -
assessee firm as a result of distribution of the said capital asset to its two partners hence the only issue which we are left with is to determine what was the fair market value of Ratanpur factory building which was distributed by the assessee firm to its two partners on 1-4-2000. It is the undisputed fact that the Learned Assessing Officer has not got the fair market value of the said property determined by a Departmental Valuer. The Learned Assessing Officer adopted the fair market value of the property on the basis of a valuation report which was got prepared by the assessee firm by a registered valuer on 1-4-2000.
21. On the other hand the assessee contended before the Learned Assessing Officer that the fair market value of the Ratanpur factory building was `.36,24,000/- only which was supported by the valuation report dated 28-2-2006 of a Registered Valuer. A copy of the said valuation report is placed at page Nos.62 to 72 of the paper book. We find that in the said valuation report the Registered Valuer has estimated the cost of construction of the said factory building and not its fair market value as on 1-4-2000. Moreover, it is observed that the said Ratanpur factory building along with land appurtenant thereto were contributed by the partners in a new partnership firm namely M/s. Gujarat Tin Circle Depot on the very same day for `.3,22,65,000/- and the same value agrees with the fair market value as opined in the Registered Valuer's report dated 1-4-2000. The break up of `.3,22,65,000/- as per valuation report dated 1-4-2000 was `.86,15,894/- for Ratanpur factory building and `.2,36,49,450/- for the land appurtenant thereto. In the above circumstances, in our considered view the lower authorities were justified in not accepting the fair market value of Ratanpur factory building as on 1-4-2000 at `.36,24,000/-.
22. It is observed that in the valuation report dated 1-4-2000 which is placed at page No.1 to 9 of the paper book that the registered valuer Shri Virendra F. Panchal in the said valuation report opined the fair market value of Ratanpur factory building at
- 12 -
`.86,15,894/- and the value of land appurtenant thereto at `.2,36,49,450/- and therefore the total value of the property at `.3,22,65,000/-.
23. The contention of the assessee before the Learned Assessing Officer was that the fair market value of the Ratanpur factory building was also opined by the Registered Valuer at `.86,15,894/- only on 1-4-2000 and therefore to deem the value of consideration in the hands of the assessee firm at `.3,22,65,000/- in respect of Ratanpur factory building was not proper. The assessee contended before the Learned Assessing Officer that the value of `.3,22,65,000/- included the value of land also which was not transferred by the assessee firm to its partners.
24. We find that the Learned Assessing Officer has not disputed the fact that only Ratanpur factory building was transferred by the assessee firm to its partners and land which were already owned by the partners were not transferred by the assessee firm to its partners. The Learned Assessing Officer rejected the contention of the assessee only on the ground that the new company namely M/s. Gujarat Tin Circle Depot Pvt. Ltd. has claimed depreciation on entire value of `.3,22,65,000/- and therefore he assumed that the fair market value of the said factory building as on 1-4-2000 was `.3,22,65,000/-. In our considered view this assumption on the part of the Learned Assessing Officer is not factually sustainable. We find that the valuation report dated 1-4-2000 was not disputed by the Revenue. As per the said valuation report the fair market value of the Ratanpur factory building as on 1-4-2000 was `.86,15,894/- only and the fair market value of land was `.2,36,49,450/-. Thus, in view of the above in our considered view the fair market value of the Ratanpur factory building as on 1-4-2000 which was distributed by the assessee firm to its two partners was `.86,15,894/- and accordingly, the short term capital gain in the hands of the assessee firm under section 45(4) will be difference between `.86,15,894 and the written down value of `.34,64,745/- which is
- 13 -
`.51,51,149/-. We therefore modify the orders of the lower authorities to the above extent and direct the Learned Assessing Officer to recompute the income of the assessee firm accordingly. Thus, the ground of appeal of the assessee is partly allowed as stated above.
25. In the result, the appeal of the assessee is partly allowed.
Order signed, dated and pronounced in the Court on 7th day of October, 2010.
Sd/- Sd/-
(BHAVNESH SAINI) ( N.S. SAINI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad: On this 7th day of October, 2010
Compiled and compared by : Patki
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)-V, Baroda.
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER,
स᭜यािपत ᮧित //True Copy//
(Dy./Asstt.Registrar), ITAT, Ahmedabad
Date Initials
1. Draft dictated on 28-09-2010 -----------------
2. Draft Placed before authority 01-10-2010 -----------------
3. Draft proposed & placed 01-10-2010 -----------------JM
Before the Second Member
4. Draft discussed/approved 05-10-2010 ----------------JM/AM
By Second Member
5. Approved Draft comes to P.S 07-10-2010 ----------------
6. Kept for pronouncement on 07-10-2010 ----------------
7. File sent to the Bench Clerk 07-10-2010 ----------------
8. Date on which file goes to the ---------------- ----------------
9. Date of dispatch of Order ---------------- ----------------