IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 27.09.2011 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice M.JAICHANDREN Tax Case (Appeal) Nos.166 to 169 of 2004 M/s.Midland Theatres No.12, Rutland Gate V Street Chennai-600 006 ...Appellant in TC(A)166 & 167/2004 A.R.Srinivasan by his Legal Representatives Mrs.Geetha Shivakumar and Mrs.Uma Shankar No.12, Rutland Gate V Street, Chennai-600 006 ..Appellant in TC(A).168 & 169/2004 -vs- Assistant Commissioner of Income Tax City Circle V (Inv) 121, Nungambakkam High Road Chennai-600 034 ...Respondent in all the above TC(Appeals) Tax Case (Appeal) Nos.166 and 167 of 2004 are filed under Section 260 A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, "C" Bench dated 20th October 2003 in ITA.Nos.747 and 748/Mds/(1991) for the assessment year 1985-86. Tax Case (Appeal) Nos.168 and 169 of 2004 are filed under Section 260 A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, "C" Bench dated 20th October 2003 in ITA.Nos.650 and 651/Mds/(1991) for the assessment year 1986-87. TCA Nos.166 to 169/04: against the Order of the Commissioner of Income Tax (Appeals) IX Madras-34 dated 18.2.1991 in ITA.No.34/88-89/C.C.V(Inv) & IT/WT/GT/Appeal No.52/89-90/C.C.V(Inv) IT/WT/GT/Appeal No.50/89-90. C.C.V(Inv) IT/WT/GT/Appeal No.51/89-90. https://hcservices.ecourts.gov.in/hcservices/ against the Order of the Income -Tax Officer(Inv) City Circle V Madras 34 dated 25.3.88 in GIR.No.2303-M/85-86(in TCA No.166/04) against the Order of the Asst.Commissioner of Income-Tax, City Circle (Inv) V-Madras-34 dated 31.3.89 in G.I.No.2303-K/198687 P.A.No. --(in TCA.No.167/04) GI.No.2708-S, PA.No.47-067 PX.7412(in TCA.No.168/04)/1986-87 G.I.No.2201-R/1986-87 P.A.No.57(in TCA.No.169/04) respectively. For Appellants : Mr.V.S.Jayakumar For respondent : Mr.J.Narayanaswamy Standing counsel for Income Tax Dept. J U D G M E N T (The Judgment of the Court was made by CHITRA VENKATARAMAN, J. ) The assessee is on appeal as against the order of the Income Tax Appellate Tribunal, "C" Bench dated 20th October 2003 in ITA.Nos.747,748, 650 and 651/Mds/(1991) relating to the assessment years 1985-86 in TC(A).No.166 and 167/2004 and 1986-87 in TC(A). No.168 and 169/2004, raising the following questions of law:- T.C.(A).No.166/2004:- "1. Whether in law the Income Tax Appellate Tribunal is justified in not granting registration to the appellant firm for the assessment year, not withstanding the fact that the appellant had complied with the provisions of Section 184(4) and 184(5) as applicable for the assessment year 1985- 86 and when the assessing officer had not even doubted the genuineness of the firm in his assessment order? 2. Whether in law the Income Tax Appellate Tribunal is justified in treating the appellant as an Association of persons applying the provisions of Section 184(5) of the Income Tax Act, 1961 as it stood with effect from 01.04.1993 for the assessment year 1985-86?" T.C.(A).No.167/2004:- "1. Whether in law for the purpose of grant of registration of a firm, it is enough if the partnership is evidenced by an instrument executed and operational in the previous year? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether in law mere fact that the date of execution of the partnership was wrongly given in a deed would not invalidate the deed? 3. Whether for determining the status of the appellant as a partnership firm the provisions of the Income Tax Act, 1961 as it stood on 01.04.1985 and 01.04.1986 are alone applicable and not the provisions of Income Tax Act as it stood on 01.04.1993 as assumed by the Honourable Income Tax Appellate Tribunal?" T.C.(A).No.168 and 169/2004:- "1. Whether in law the appellant is liable for Capital Gains for the assessment year 1986-87 in the admitted absence of any document of transfer as provided under the provisions of the Transfer of Property Act followed by the registration of documents under the provisions of the Indian Registration Act? 2. Whether in law mere availability of cost of acquisition and alleged sale consideration would be enough for fastening Capital Gains liability particularly in view of the decision of Their Lordships of the Supreme Court rendered in CIT Vs. Alapati Venkatamiah (57 ITR 185)? 3. Whether the Capital Gains even assuming that it is exigible is exempt in view of the provisions of Section 47(ii) as applicable for the assessment year 1986-87, since the appellant's daughters were not strangers to the concept of partnership? T.C.(A).No.168/2004:- "4. Whether in law that the Hon. Tribunal is right in not adjudicating the grounds relating to assessability of cash credits particularly in view of the exposition of law in CIT Vs. Noorjahan (237 ITR 570 SC) and right not diluting the additions in the light of the facts found by the Assessing Officer in the appellant's case?" 2. T.C.(A).Nos.166 and 167 of 2004, relating to the assessment year 1985-86, are by the firm viz., M/s.Midland Theatres, treated as Association of Persons. T.C.(A).No.168 of 2004, relating to https://hcservices.ecourts.gov.in/hcservices/ assessment year 1986-87, is by A.R.Srinivasan (individual) and TC(A). No.169 of 2004 is by A.R.Srinivasan (HUF). 3. The assessee in T.C.(A).Nos.166 and 167 of 2004 is stated to be a partnership firm constituted under the Partnership Deed dated 01.04.1984 with A.R.Srinivasan (individual), A.R.Srinivasan (HUF), Mrs.Geetha Shivakumar and Mrs.Uma Shankar, daughters of A.R.Srinivasan, as partners and later on constituted with three more persons namely, Jayapradha and her two brothers Rajbabu and Ramkumar under the partnership deed dated 24.4.1985. On 23.10.1985, there was a dissolution deed executed by the above seven partners. In the background of the above-said facts, questions arose as regards the status of the firm assessed as Association of Persons and capital gains arising at the hands of the firm on the allotment of the property viz., Midland Theatre, situate in an extent of 10.92 grounds, to the partners falling under Jaypradha Group. There was also a protective assessment at the hands of A.R.Srinivasan (individual) and A.R.Srinivasan (HUF), who were partners in the firm who had contributed their respective equal shares in the property Midland theatre towards their capital contribution in the firm. On the allotment of the lands to Jayapradha, A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) were protectively assessed on long term capital gains for the assessment year 1986-87. 4. Before going into the various issues arising in these appeals, few facts relevant need to be noted. 5. Originally, as early as 1929, A.K.Ramachandran, father of A.R.Srinivasan, purchased an extent of 14.73 grounds situate at General Patters Road. He constructed the theatre building viz., Midland Theatre, in the year 1931 with the funds of HUF. The Theatre was run by the said A.K.Ramachandran along with A.R.Srinivasan (HUF) as a partnership concern. It was later on dissolved. In the year 1972, A.R.Srinivasan (individual) along with his two daughters viz., Mrs.Geetha Shivakumar and Mrs.Uma Shankar, formed a partnership firm in the name of "Midland Picture Circuit" to carry on the business in hiring cine equipments furniture and air-conditioners. It constructed a mini theatre called "Leo" in the vacant portion of the land behind Midland Theatre in the year 1976 and conducted the business of exhibition of cine pictures. On 01.04.1982, A.R.Srinivasan (HUF) was taken in as partners, who brought in 50% of share in the land of an extent of 3 grounds, the balance 50% owned by A.R.Srinivasan (individual) as his capital contribution. The firm Midland Theatre constituted between A.R.Srinivasan (individual) and AR.Srinivasan (HUF), carrying on business in film exhibition and running the theatre Midland, inducted his daughters Mrs.Geetha Shivakumar and Mrs.Uma Shankar, as partners. With effect from 1.4.1984, A.R.Srinivasan (individual) and AR.Srinivasan (HUF), brought into the books of accounts of the firm, 50% of the share held by each of the above-said assessees in the property Midland theatre as by way of https://hcservices.ecourts.gov.in/hcservices/ capital contribution valued at Rs.14,05,500/- and 15,00,000/- respectively. It is stated that the theatre was leased out to a Private Limited Company called Midland Theatre (P) Limited. These assets were revalued on 23.4.1985 and the difference in value arising on the land and building on that account to the tune of Rs.9 lakhs and Rs.5,22,750/- respectively, was credited to each of the capital account of A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) as appearing in the books of the firm Midland Theatre. In the case of daughters of A.R.Srinivasan, no share in the revaluation was credited to their account. On 31.03.1984, the firm Midland Picture Circuit was dissolved with effect from 01.04.1984, revaluing the assets viz., the theatre Leo, furniture and fixtures at Rs.25 lakhs. A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) took over the business of Leo Theatre. In October 1984, A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) sold the fixtures to Smt.Jayapradha for Rs.10 Lakhs, and Leo Theatre with land and building on 30.07.1985, for Rs.15 Lakhs. As far as the capital gains arising on the sale of Leo Theatre is concerned, it was the contention of A.R.Srinivasan that the fixtures and superstructure belonged to the firm Midland Picture Circuit. The land belonged to A.R.Srinivasan (individual) and A.R.Srinivasan (HUF). On dissolution on 31.3.2004, A.R.Srinivasan (individual) took over the assets and liabilities of the firm at the revalued figure at Rs.25 lakhs. He was running the Theatre till March, 1985 and the cost of acquisition was to be taken at Rs.25 lakhs and hence, there was no capital gains. 6. The firm Midland Theatre consisting of partners A.R.Srinivasan (individual), A.R.Srinivasan (HUF), Mrs.Geetha Shivakumar and Mrs.Uma Shankar, underwent a change in the constitution on 24.04.1985, by which, Jayapradha and her brother Raj Babu and Ramkumar were taken as partners therein, having the following share:- Share of Profit/Loss A.R.Srinivasan (individual) 5 Mrs.Uma Shankar 1 Mrs.Geetha Shivakumar 1 A.R.Srinivasan (HUF) 4 Jayapradha 4 Ram Babu 1 Ramkumar 1 ------------ 17 ------------ The following are the capital contribution of the partners:- a) In respect of A.R.Srinivasan (individual) and A.R.Srinivasan (HUF), the amount standing to their credit viz., the value of the https://hcservices.ecourts.gov.in/hcservices/ land and building as described in the schedule annexed to the partnership deed at Rs.60 lakhs. b) In respect of the Uma Shankar and Geetha Shivakumar, the amount standing to their credit in their respective accounts. c) In respect of Jayapradha, Rs.8,00,000/- (Rupees Eight Lakhs only). d) In respect of Ram Babu, Rs.1,00,000/- (Rupees One Lakh only). e) In respect of Ramkumar, Rs.1,00,000/- (Rupees One Lakh only). The deed also stated that in the event of a dissolution of the firm at any time, Jayapradha Group would be entitled to take over the entire business by paying A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) and his daughters, Rs.60 lakhs within a month from the date of dissolution and in default, to carry interest at 24%. The said partnership was dissolved on 23.10.1985. The firm did not file any return since the assessment year 1979-80 and all assessments were computed under Section 144 of the Act. On dissolution, Ms.Jayapradha took over the business of the firm, along with land and building and other assets. As per the dissolution deed, Ms.Jayapradha and her group took over the firm along with fixtures therein. The land and building titled "Midland Theatre", excluding the portion belonging to Leo Theatre and M/s.Savith Snacks Buildings, General Patters Road, was given to Jayapradha in terms of the dissolution deed. A.R.Srinivasan (individual), A.R.Srinivasan (HUF) and his two daughters viz., Mrs.Geetha Shivakumar and Mrs.Uma Shankar, were to receive the share amount due, at Rs.50 Lakhs referable to the capital credited as per the terms of the partnership deed. 7. During the previous year relevant to the assessment year 1985-86, when the firm Midland Theatre had A.R.Srinivasan (individual) A.R.Srinivasan (HUF) and the daughters of A.R.Srinivasan as partners, the firm is stated to have applied for registration of the firm under Section 185 of the Income Tax Act. In the return filed on 31.12.1986, the firm Midland Theatre claimed its status as that of a registered firm showing loss from business, which was subsequently revised, enhancing the loss to Rs.13,66,146/-. The assessee Midland Theatre did not file any application under Section 185 of the Income Tax Act for registration of the firm before the close of the accounting year. In the course of the assessment proceedings, the assessee placed only a photocopy of the Partnership deed. The claim of the assessee that the deed in original with the form sent from Kumbakonam through ordinary post, was verified only to find that there was no such entry in the tapal register. In the absence of any proof on filing of the application, the Assessing https://hcservices.ecourts.gov.in/hcservices/ Authority held that there was no valid partnership in the eye of law and the question of treating it as a registered firm did not arise. Further, he viewed that A.R.Srinivasan (individual) could not represent in dual capacity for HUF also. He viewed that this was obviously resisted to, so as to bring the land and building called Midland Theatre into the firm and be transferred to Jayapradha Group, who were inducted on 23.4.1985 and from which firm, A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) and the two daughters resigned on 24.10.1985. Thus the Assessing Officer held the status as that of Association of Persons. Thus, the Assessing Officer held that there was no partnership in the eye of law to consider the assessment under Section 184 of the Income Tax Act, 1961. Treating the status as Association of Persons, the assessment was completed, holding the transactions on the distribution of assets on dissolution as a colourable device for avoiding capital gains. 8. As far as assessment year 1986-87 is concerned, the Assessing Officer confirmed the view that there was no firm and that the status was to be held as Association of Persons. As far as the partnership deed executed with Jayapradha Group was concerned, the Assessing Officer viewed that the partnership deed dated 24.04.1985 was executed on a stamp paper purchased on 24.07.1985 and thus held that the genuineness of the constitution of the firm itself was doubtful. Further, the revaluation of the land and building done on 23.04.1985 raised further doubts as to the genuineness of the firm, since there was no need at all for the same. He further viewed that the firm was floated with the sole purpose of avoiding capital gains on transferring it to Jayapradha Group as part of the dissolution. The Assessing Officer thus viewed that the Association of Persons, which came into effect from 01.04.1984, was in existence upto 23.04.1985 and the profit arising out of the transfer of Midland Theatre consisting of land and building and other assets to Jayapradha and her Group was liable to be assessed in the hands of the Association of Persons, taking the cost of acquisition on the basis of the value shown as on 01.04.1984 and the sale consideration on the basis of the value agreed upon at Rs.60,00,000/- as on 23.10.1985. The Association of Persons was thus assessed for capital gains at Rs.29,19,500/-. As by way of protective assessment, A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) respectively were also assessed on the transfer as giving rise to long term capital gains. 9. Aggrieved by the same, the assessee viz., Midland Theatre, the appellant in T.C.166 and 167 of 2004, A.R.Srinivasan (individual) and A.R.Srinivasan (HUF), the appellant in T.C.168 and 169 of 2004, filed respective appeals before the Commissioner of Income Tax (Appeals), who, however, reaffirmed the view of the Assessing Officer on the aspect of existence of partnership firm, treating the status as Association of Persons as well as on the aspect of Protective assessment to Capital Gains on Midland Theatre at the hands of A.R.Srinivasan (HUF) and A.R.Srinivasan (individual). Thus the https://hcservices.ecourts.gov.in/hcservices/ Commissioner of Income Tax (Appeals) upheld the orders of the Assessing Officer. 10. Aggrieved by the same, the respective appellants, for the respective assessment years, filed appeals before the Income Tax Appellate Tribunal, which confirmed the view of the Assessing Officer, particularly as regards the status of the assessee to be assessed as Association of persons. As regards the assessment to Long Term Capital Gains at the hands of A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) on the sale of Midland Theatre, the Income Tax Appellate Tribunal, once again reaffirmed the view of the Assessing Officer on the protective assessment made therein. However, the Income Tax Appellate Tribunal, in so holding, viewed the inclusion of the property Midland Theatre at the hands of Association of persons as double inclusion and held that the same could not be assessed at the hands of Association of persons. As regards the Revenue's appeal filed on the question of determination of the value of the land and Capital Gains, the Income Tax Appellate Tribunal rejected the same. 11. It is seen from the order of the Income Tax Appellate Tribunal that the contention of the assessee as regards the assessment on the unexplained cash credit, though raised by the assessee, was not considered. 12. The present appeals are by the assessee challenging the order of the Income Tax Appellate Tribunal in rejecting the contention of the assessee as regards the status taken as Association of Persons as well as on the assessment on A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) as long term capital gains on the sale of Midland Theatre to Jayapradha. 13. The contention of the assessee in T.C.(A).Nos.166 and 167 of 2004 relating to the firm is that even though the assessee firm had sent the original partnership deed by post and that sufficient contemporaneous records were placed before the Income Tax Appellate Tribunal as regards the existence of the partnership firm, the same had not received due consideration at the hands of the Tribunal. It is further contended that the Tribunal committed serious error in not treating the assessee as a Registered Firm. 14. As far as the appeals filed by A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) are concerned, it is contended that in the absence of any document in respect of the alleged sale as per the Transfer of Property Act, the fastening of the liability under Section 145 of the Income Tax Act, 1961, at the hands of A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) is contrary to the decision of the Supreme Court in the case of CIT Vs. Alapati Venkatamiah reported in 57 ITR 185. It is further contended that even assuming that the status of the assessee was to be treated as https://hcservices.ecourts.gov.in/hcservices/ Association of persons, with the status of the firm as Association of Persons remaining unchallenged by the Revenue, the question of assessing the individual and HUF assessees to long term capital gains does not arise. Quite apart, Section 47(ii) of the Act is applicable to the facts of the case; thus, the question of fastening any liability on capital gains does not arise. 15. Learned counsel appearing for the assessee, while taking us through the facts of the case, pointed out to Sections 182, 183, 184 and 185 of the Income Tax Act, 1961 as it stood at the material point of time and submitted that as per the law that stood at the relevant assessment year, if the assessee did not comply with the registration procedure for getting the status as a Registered Firm, under the stated circumstances therein, the only other option to the Revenue was to treat it as an Unregistered Firm and make assessment thereon. He further pointed out that prior to the amendment to Section 185 of the Income Tax Act, 1961 under the Finance Act, 1992, effective from 1.4.1993, substituting Sections 184, 185 and 186, as per the law that stood at the material time, the question of treating a firm as an Association of Persons did not arise. Thus only on and from 1.4.1993, that a firm not complying with the registration provisions would get assessed as Association of Persons. In the circumstances, the Income Tax Appellate Tribunal committed serious error in applying the amended provisions to the facts of the case. Consequently, he submitted that when there were enough evidence before the Income Tax Appellate Tribunal as regards the validly constituted partnership firm and its dissolution, the Tribunal ought not to have treated the assessee as Association of Persons. 16. He submitted that given the fact that the property in question was treated as capital contribution by A.R.Srinivasan (individual) and A.R.Srinivasan (HUF), on the dissolution of the firm, the property thus allotted to the partners, would not attract any of the provisions relating to capital gains; as such, the question of invoking the provisions relating to capital gains does not arise. He further pointed out to the circumstances under which the firm was reconstituted and thereafter sale of a portion of the property covered under a larger extent of 14 and odd acres was made to one of the inducting partners viz., Jayapradha. After the firm was dissolved, the properties which were there in the capital account of the firm, were distributed among the various partners of the dissolved firm. Thus, in the background of the said facts, the question of treating the partnership firm as Association of persons did not arise. In any event, there being no transfer, the question of invoking the provisions relating to capital gains does not arise. Hence, the assessment as such, has to be set aside. 17. He also pointed out that the Revenue had made protective assessment on A.R.Srinivasan (individual) and A.R.Srinivasan (HUF), assessing on the transfer of Midland Theatre to Capital Gains. Even https://hcservices.ecourts.gov.in/hcservices/ going by the view taken as to the existence of the firm, there being no documents of sale executed by the A.R.Srinivasan (HUF) and A.R.Srinivasan (individual) in the name of Jayapradha and others, the question of assessing A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) under the provisions on capital gains did not arise. 18. As regards cash credits, he pointed out that the Tribunal had not dealt with the same and hence, the matter requires reconsideration at the hands of the Tribunal. 19. Supporting the order of the Income Tax Appellate Tribunal, learned Standing counsel appearing for the Revenue pointed out that when the genuineness of the firm itself is in doubt, rightly, the Revenue made protective assessment at the hands of the A.R.Srinivasan (individual) and A.R.Srinivasan (HUF) and assessed them under the provisions on Capital Gains. Hence, no exception could be taken to the order of the Income Tax Appellate Tribunal. 20. Heard learned counsel appearing for the assessee and learned counsel appearing for the Revenue and perused the material available on record. 21. A reading of the order of the Income Tax Appellate Tribunal shows that it affirmed the view of the Assessing Officer on the aspect of existence of a valid partnership firm. As far as the claim for registration or at least to follow the procedure relating to the registered firm as applicable to the unregistered firm is concerned, the Tribunal pointed out that the assessee did not produce the original partnership deed either before the Assessing Officer or before the Tribunal. The assessee was directed to produce at least possible evidence and contemporaneous records that there existed a genuine partnership. 22. It is seen from the order of the Tribunal and the other authorities that the said partnership firm claimed that it had sent the original deed of partnership to the Income Tax Officer by ordinary post. The Tribunal pointed out that the assessee could not show that the cover sent from the Auditor's Officer at Kumbakonam contained the application for registration along with the partnership deed in original. The assessee had sent it in an insufficiently stamped cover. There was nothing on record to show that the Department ever received such deed sent by post, or for that matter, the assessee ever produced the original deed before the authorities concerned. In the absence of any material to substantiate this aspect, the Tribunal held that no document was placed on record that the assessee applied under Section 185 of the Income Tax Act, 1961 to treat the firm as a Registered Firm. It however rejected the observation of the Assessing Officer as regards A.R.Srinivasan signing in dual capacity. Accordingly, the Tribunal upheld the view https://hcservices.ecourts.gov.in/hcservices/ of the Assessing Officer in treating the firm as Association of Persons. 23. As far as the claim of the assessee for inducting three more partners is concerned, the Tribunal pointed out that the deed of partnership dated 23.04.1985 was written in a stamp paper dated