IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN FRIDAY, THE 4TH DECEMBER 2009 / 13TH AGRAHAYANA 1931 ITA.No. 160 of 2009() --------------------- ITA.286/COCH/2003 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT ------------------------ M/S.KUMBAZHA TOURIST HOME (DISSOLVED) PATHANAMTHITTA ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04/12/2009, ALONG WITH ITA NO.180 OF 2009,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. .................................................................... I.T. Appeal Nos.160 & 180 of 2009 .................................................................... Dated this the 4th day of December, 2009. JUDGMENT Ramachandran Nair, J. The question raised in the connected appeals is whether the Tribunal was justified in holding that respondent-assessee is not liable for payment of tax on capital gains on the distribution of assets on the dissolution of the firm. We have heard Senior Standing Counsel appearing for the appellant and Adv. Sri.P.Balakrishnan appearing for the respondent. 2. A firm was constituted with four partners to take over 14.25 cents of land and a building thereon for running lodging business by the assessee-firm. The firm was constituted on 1.7.1979 and continued it's business upto the assessment for 1993-94 and dissolved with effect from 1.4.1993. Under the dissolution, the land and buildings brought as capital of the partners went back to the same partners. Even though the firm did not file return for the assessment year 1994-95 declaring ITA 160&180/09 2 capital gains on the dissolution of the firm, the Assessing Officer on getting information initiated proceedings for assessment for capital gains under Section 45(4) of the Income Tax Act. The assessee raised objection stating that there can be no capital gain on the dissolution of the firm as the land and respective portion of the building brought by the partners, on dissolution went back to the same partners and the transfer to the partners itself is accounted at the depreciated value of the building. The assessee raised objection against assessment for capital gains under Section 45 of the act by saying that transfer if any is of depreciable asset. The Assessing Officer substantially accepted the contentions of the assessee and limited the levy of capital gains to the extent of 14.25 cents of land involved. Since the building was sold at the book value i.e. depreciated value, the Assessing Officer accepted the transaction as one falling under Section 50(1) of the Act which does not attract any capital gains because the transfer was at the book value. Against this assessment, assessee filed appeal contending that assessment of capital gains on land value is not tenable. The Commissioner of Income Tax issued suo moto revisional orders under ITA 160&180/09 3 Section 263 holding that the entire transaction attracts tax on capital gains under Section 45(4) of the Act. The assessee's appeal on the levy of capital gains on land value was allowed by the C.I.T.(Appeals) and therefore, Revenue filed second appeal against the said order. Against the order issued by the Commissioner under Section 263, assessee also filed appeal before the Tribunal. The Tribunal after hearing both the appeals and the Cross Objection filed by the assessee, decided the appeals in favour of the assessee holding that the reference to valuation was not justified and therefore, assessment for capital gains does not arise. 3. After hearing both sides and after going through the Tribunal's order, we are unable to uphold the order of the Tribunal for more than one reason. In the first place, the Tribunal has not considered the applicability of Section 45(4) of the Act for the purpose of assessment on dissolution of the firm and distribution of the assets. In fact, the clearcut finding of the C.I.T.(Appeals) in the appeal filed by the assessee itself is that Section 45(4) is squarely applicable. It is an undisputed fact that at the time of constitution of the firm the partners ITA 160&180/09 4 brought the land and the respective portion of the building thereon towards their share capital and the firm for several years claimed ownership of the building and based on the same, depreciation was claimed in respect of the building for all the assessment years until 1993-94 which is the last year of assessment of the firm. Admittedly on dissolution the properties were reverted back to the partners in the same way it was brought by them to the firm as their capital. Under the partnership law as well as under Section 45(4), the transactions involve a transfer of the properties to the firm and retransfer to the partners on dissolution of the firm. In fact, Section 45(4) is intended to levy tax on capital gains on the distribution of assets on dissolution of the firm among partners. We do not find the Tribunal has considered the real question involved in this case. 4. The finding of the Tribunal that Section 55A has no application, in our view, is also not correct. In fact, Section 55A authorises the Assessing Officer to refer any capital asset for valuation to find out it's fair market value for the purpose of assessment of capital gains under Chapter IV E of the Act. We notice that the decision of the ITA 160&180/09 5 Supreme Court relied on by the Tribunal is not applicable on the facts of the case. Further, in our view, in order to make an assessment under Section 45(4), the Assessing Officer is free to refer any asset for valuation because when transfer value shown is book value, necessarily fair market value has to be determined for the purpose of determination of capital gains. Even though assessee again contended that the depreciated value is the fair market value, the same is not acceptable because depreciation itself is granted at the rate prescribed under the Act and not on the actual erosion in value and in fact in the course of time land and building only appreciates, no matter the building earns depreciation and in the course of time book value may become low. The finding of the Assessing Officer confirmed by the Tribunal that the transfer of building in the course of dissolution of the firm can be subjected to short term capital gain assessment under Section 50(1) and since the transfer is at book value, there is no gain justifying assessment, is not sustainable. What is contemplated under Section 50(1) is sale of depreciated assets by the assessee, whereas what is covered by Section 45(4) is distribution of assets in the course of ITA 160&180/09 6 dissolution of the firm. Therefore, in our view, the distribution of depreciated asset among the partners in the course of dissolution of a firm is not covered by Section 50(1), but is to be assessed under Section 45(4) of the Act. The clearcut finding in the assessment is that the land and building was brought to the firm as capital by the partners and based on the ownership claimed by the firm, it claimed depreciation for all the years it was carrying on the lodging business by using the said assets namely, land and building. Admittedly on dissolution the land and building were distributed among the partners of the dissolved firm. In our view, this is a clear case falling under Section 45(4) attracting liability for capital gains. We, therefore, uphold the reference of the asset for valuation under Section 55A as within the powers of the officer. Consequently we allow the appeals by reversing the orders of the Tribunal and restore the order of the Commissioner issued under Section 263 of the Income Tax Act. However, since there is a controversy on valuation, we remand the matter to the Tribunal for restoring the appeals and the Cross Objection and to decide the appeals on the valuation issue. The Tribunal is ITA 160&180/09 7 directed to decide the matter afresh within four months from date of receipt of copy of this judgment, after issuing notice to both sides. C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms