No formation of opinion by AO if no scrutiny assessment made earlier

ITAT DELHI BENCH ‘B’

Delhi Industries & Enterprises

Versus

Assistant Commissioner of Income-tax, Circle 30(1), New Delhi

IT Appeal Nos. 1464, 1465, 1534, 1535 & 2303 (Delhi) of 2010
[ASSESSMENT YEARS 2002-03 TO 2005-06]

OCTOBER  31, 2011

ORDER

Rajpal Yadav, Judicial Member

In this Bunch of five appeals, four are directed at the instance of assessee against the separate orders of Learned CIT(Appeals) dated 29.1.2010, 29.1.2010, 12.3.2010, 15.3.2010 passed in assessment years 2002-03 to 2005-06 respectively, whereas in assessment year 2005-06, revenue is in cross appeal. The assessment orders were passed in all these assessment years on 27.12.2007 under sec. 143(3) read with section 147 of the Income-tax Act, 1961. Common questions of facts and law are involved in all the appeals, therefore, we heard them together and deem it appropriate to dispose of them by this common order.

2. The first common issue raised by the assessee in all the assessment years is that Learned CIT(Appeals) has erred in upholding the reopening of assessment. Since the common facts are involved, therefore, for the facility of reference, we would take facts from assessment year 2002-03, however, if we find any variation of facts in any assessment year which required specific reference for the just decision of appeals then we would refer those facts from those assessment years.

3. The brief facts in assessment year 2002-03 are that assessee has filed a return of income on 30.7.2002 declaring an income of Rs. 12,23,340. This return was processed under sec. 143(1)(a) on 25.2.2003 on retuned income. Assessing Officer, thereafter passed an order under sec. 154 read with section 143(1) on 31.3.2003 and determined the taxable income of assessee at Rs. 79,89,490 after disallowing property tax of Rs. 61,00,190. He also disallowed interest on borrowed capital at Rs. 24,96,015. Dissatisfied with this adjustment, assessee carried the matter in appeal before the learned CIT(Appeals). Learned CIT(Appeals) decided the appeal on 14.8.2003 and Assessing Officer gave the effect to Learned CIT(Appeals)’s order on 27.2.2004. He recomputed the income of the assessee at Rs. 12,63,018. The assessee again moved an application under sec. 154. It claimed that advance rent of March 2001 amounting to Rs. 1,75,500 has been assessed in assessment year 2001-02 and, therefore, it cannot be considered again in 2002-03. In assessment year 2001-02, an assessment order was passed under sec. 143(3) of the Act. Learned Assessing Officer ultimately determined the income of assessee at Rs. 10,87,520.

4. Assessing Officer had issued notice under section 148 on 28.3.2007 after recording the reasons for reopening of the case. This notice was served in all the assessment years. Assessee filed a letter on 30.4.2007, in all the four assessment years, stating therein, that the return originally filed be treated as return filed under sec. 148 of the Act. There is no variation of facts in assessment year 2003-04 except that the proceedings under section 154 of the Act was not taken by the Assessing Officer.

5. In assessment year 2004-05, the assessee has filed the return on 29.10.2004 declaring an income of Rs. 51,40,790. A notice under sec. 143(2) of the Act was issued on 17.1.2005. Assessing Officer has passed an assessment order under sec. 143(3) on Ist of August 2005. He accepted the income declared by the assessee. The notice under sec. 148 of the Act was issued on 28.3.2007. Similarly, in assessment year 2005-06, assessee filed the return on 27.7.2005 declaring an income of Rs.78,81,880. It was processed under sec. 143(1) on 23rd September 2005. A notice under sec. 143(2) was issued upon the assessee and an assessment under sec. 143(3) was passed on 27.1.2006 and rest of the facts are identical to other years.

6. Assessing Officer has recorded separate reasons for re-opening of assessment in all these four years. The reasons for assessment years 2002-03 and 2003-04 are identical whereas the reasons for assessment years 2004-05 and 2005-06 are identical. Since both the parties have advanced multi-fold arguments on this issue and relied upon a large number of case laws for buttressing their contentions, therefore, we deem it appropriate to take note of the reasons recorded by the Assessing Officer which read as under:

Assessment Years 2002-03 & 2003-04:

Reasons for belief better that income has escaped assessment in the case of M/s. Delhi Industries & Enterprises for A.Y.2002-03

Return of income was, filed on 30.07.2002 declaring income of Rs. 12,23,340/- which was processed u/s 143(1) on 28.02.2003 on returned income. The assessee’s only source of income is rental income.

On going through the inspection report of Hon’ble CIT-X and the assessment records, I am satisfied that the income chargeable to tax has escaped assessment for the AY.2002-03 as per the reasons given below:-

“That during the A.Y. 2002-03, the assessee firm was sanctioned loan of Rs. 4 Crores by Vyshya Bank Ltd. on 12-05-2001 for the purpose of construction of commercial Complex/repayment of existing loan with Canera Bank. The building was completed in the F.Y. 2000-01 and the firm started getting rent in the F.Y. 2000-01 relevant to the A.Y .2001-02. The borrowed funds were not used for the purpose of construction as there was no addition to the commercial complex during the year, except repayment of outstanding loan of Rs. 1.66 Cr. payable to Canara Bank. The assessee has claimed deduction u/s 24 on account of interest for current year at Rs. 53.61,464/- which has been allowed. Since Vyshya Bank Ltd. duly certified that the loan of Rs.4 Cr. is being sanctioned for the purpose of construction of commercial complex/repayment of existing loan with Canara Bank and the Interest payable on that loan for the period is Rs. 53,61,484/- whereas the assessee has used only 1.66 Cr. out of loan of Rs. 4 Cr., on which deduction u/s 24 is claimed but the deduction u/s 24 should be restricted to the amount of interest attributable to repayment of loan of Canara Bank only. Thus deduction u/s 24 in respect on interest on a sum of Rs. 2.34 Cr. which was not utilized for the construction/repayment of loan is not allowable.

Besides this the income has also escaped assessment in respect of income earned on the balance borrowed funds utilized for the activities not disclosed by the assessee firm as the assessee has not shown any income except income from house property”.

Therefore, I have reasons to believe that the income above Rs. 1,00,000 as discussed above has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment Year 2002-03. Therefore, proceedings u/s 147 are initiated by issue of notice u/s 148 of the I.T. Act for the A.Y. 2002-03.

Issue notice u/s 148 for A. Y. 2002-03.

Sd/-

(Madhu B. Dhawan)

Asstt. Commissioner of Income-tax

Circle 30(1), New Delhi”

Reasons for belief that income has escaped assessment in the case of M/s. Delhi Industries & Enterprises for A.Y. 2004-05

Return of income was filed on 29.10.2004 declaring income of Rs. 51,40,790 which was processed u/s. 143(1). Subsequently the assessment was completed u/s. 143(3) on 1.8.2005 on returned income of Rs. 51,40,790. The assessee’s only source of income is rental income.

On going through the inspection report of the Hon’ble CIT-X and the assessment for the A.Y. 2004-05 as per the reasons given below:-

“That the assessee firm was reconstituted on 02.09.2003 with the new partners as under:

It was mutually agreed that the incoming partners would bring into the firm a sum of Rs. 6 crores as capital contribution. The outstanding liability of Rs. 3,53,88,785 of Vysha Bank as on 27.8.2003 was squared up out of the capital of incoming partners of Rs. 6 crores. The assessee firm during the year was sanctioned a sum of Rs. 5.50 Crores from the SBI on 4.3.2004 and the capital introduced by the incoming partners was repaid out of the loan so sanctioned from SBI.

Thereafter on the 30.09.2003 another instrument of retirement deed was executed between the retiring partners i.e. M/s. Daisy Estates Pvt. Ltd. and M/s. Raksha Properties Ltd. and the continuing partners. In para 5 & 8 of this partnership deed, it was mentioned that the continuing partners will take over all the assets and liabilities of the business carried on by the parties hereto in the name and style of the firm M/s. Delhi Industries and Enterprises going concern w.e.f. 20.9.2003. Thus, the firm was dissolved on 30.09.2003 and a new partnership deed was executed on 01.10.2003 with the following remaining partners:

The transfer of the capital assets on dissolution of the firm falls within the ambit of section 45(4) of the I.T. Act and the assessee firm has not shown any capital gains on the transfer of assets of the dissolved firm. The capital gains arising after ascertaining the fair market value of the assets on the date of such transfer has escaped assessment.

Further, deduction u/s. 24 on account of interest for current year at Rs. 29,79,150 has been allowed in excess since Vyshya Bank on 12.5.2001 sanctioned loan of Rs. 4 crores for the purpose of construction/repayment of existing loan with Canara Bank and the interest payable on that loan for the period is Rs. 53,61,484 whereas the assessee has used only 1.66 cr. Out of loan Rs. 4 Cr, on which deduction u/s. 24 is claimed but the deduction u/s 24 should be restricted to the amount of interest which attributable to repayment of loan of Canara Bank only. Thus, deduction u/s. 24 in respect of interest on a sum of Rs. 2.34 Cr. Which was not utilized for the construction/repayment of loan is not allowable.

Therefore, I have reasons to believe that the income above Rs. 1,00,000 as discussed above has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year 2004-05. Therefore, proceedings u/s. 147 are initiated by issue of notice u/s. 148 of the I.T. Act for the assessment year 2004-05.

Issue notice u/s. 148 for A.Y. 2004-05.

Sd/-

(Madhu B. Dhawan)

Astt. Commissioner of Income-tax

Circle 30(1), New Delhi

7. The learned counsel for the assessee while impugning the orders of the Learned CIT(Appeals) has submitted that reopening of an assessment should not be made on the basis of mere suspicion demonstrating the escapement of income rather the formation of belief at the end of the Assessing Officer should be based on sound information which is reliable and acceptable in law. For buttressing his contention, he relied upon the decisions of Hon’ble Supreme Court in the cases of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 and in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC). With regard to assessment years 2002-03 and 2003-04, he pointed out that though assessments were not framed under sec. 143(3) of the IT Act in both these assessment years but even then the reopening can be made if Assessing Officer was able to lay his hands on any fresh information after filing of the return. In other words, the contention of the learned counsel for the assessee is that once limitation to issue notices for scrutinizing the return under sec. 143(2) expires then Assessing Officer has been denuded from his powers to issue notice under sec. 148, unless some information came to the possession of the Assessing Officer afresh, after the filing of the return. For buttressing his contention, he made reference to a large number of decisions but we would like to refer the decision of jurisdictional High Court in the cases of Jay Bharat Maruti Ltd. v. CIT [2010] 324 ITR 289 and in the case of Shipra Srivastava v. Asstt. CIT [2009] 319 ITR 221, CIT v. Batra Bhatta Co. [2008] 174 Taxman 444 (Delhi) and United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317. He also referred the decision of Madras High Court in the case of Bapalal & Co. Exports v. Jt. CIT (OSD) [2007] 289 ITR 37. He further submitted that in assessment years 2002-03 and 2003-04, a notice under sec. 148 of the Act was issued on the basis of incorrect facts. He pointed out that the Assessing Officer in the reasons has referred that assessee took a loan of Rs. 4 crores from Vysya Bank which was alleged to have been used for repayment of loan from Canara Bank. But only a sum of Rs. 1.66 crores was used for making repayment of loan, meaning thereby the amounts to this extent was used for the purpose of construction and interest under sec. 24 of the Income-tax Act, 1961 could be allowed only on this amount. The learned counsel for the assessee submitted that outstanding actual loan of Canara Bank was Rs. 1,89,08,019. Thus, Assessing Officer failed to take cognizance of true facts before harboring a belief to reopen the assessment. He relied upon the decision of Hon’ble Delhi High Court in the case of CIT v. Raine Singh 337 ITR 417 (Sic). He further relied upon the decision of United Electrical Co. (P.) Ltd.(supra) for this proposition. In his next fold of submission, he pointed out that from perusal of the reasons, it reveals that A.O. received directions from the CIT-X, and thus, it is not the independent application of mind at the end of learned Assessing Officer. The reassessment is not sustainable in the eyes of law, if it is reopened on the direction of higher authority. He relied upon the decision of Hon’ble Supreme Court in the case of CIT v. Greenworld Corpn.[2009] 314 ITR 81. In his next fold of submissions, he pointed out that reassessment should not be used as a power to review. For buttressing his contention, he relied upon the decisions of Hon’ble Delhi High Court in the case of CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1. He further pointed out that this decision of the Full Bench of Hon’ble Delhi High Court has been affirmed by the Hon’ble Supreme Court in the judgment in CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561. The next proposition raised by the learned counsel for the assessee is that error or mistake committed by the Assessing Officer would not give him powers to rectify those mistakes by exercising powers under sec. 148. He relied upon the decision of Hon’ble Delhi High Court in the case of CIT v. Eicher Ltd. [2007] 294 ITR 310 and Ritu Investments (P.) Ltd. v. Dy. CIT [2012] 210 Taxman 70 (Mag.) (Delhi). He further pointed out that in assessment year 2002-03, Assessing Officer has made adjustments under sec. 154 which was not upheld by the Learned CIT(Appeals) on further appeal, therefore, on the basis of that very material, he cannot reopen the assessment. He relied upon the judgment of Hon’ble Delhi High Court in the case of CIT v. SFIL Stock Broking Ltd. [2010] 325 ITR 285. He also relied upon the decision of Bombay High Court in the case of Hindustan Unilever Ltd. v. Dy. CIT [2010] 325 ITR 102.

8. The learned counsel for the assessee further submitted that in assessment years 2004-05 and 2005-06, facts are little different and the case of assessee is on a more sound footing. He pointed out that in these assessment years, assessments were framed under sec. 143(3) meaning thereby the Assessing Officer has scrutinized the return filed by the assessee. Assessing Officer in the reasons recorded by him has pointed out that the firm M/s. Delhi Industries & Enterprises was reconstituted on 2nd September 2003. He further observed that the firm was again reconstituted on 30th September 2003 and, therefore, the transfer of the capital assets on dissolution of the firm falls within the ambit of sec. 45(4) of the Act. He pointed out that the assessee has already submitted copies of the partnership deed exhibiting the retirement of two partners. Only two partners were retired on 30th September, 2003. The copy exhibiting the retirement was duly submitted to the Assessing Officer before scrutinizing return and thus there is no new information came to the notice of the Assessing Officer. The details with regard to the claim of deduction in respect of interest expenses on borrowed capital used for the purpose of the construction under sec. 24 of the Act was duly made in the return and it was verified by the Assessing Officer under sec. 143(3) of the Act. All these facts would indicate that no fresh material came to the possession of the Assessing Officer which can empower him to reopen the assessment. According to the Full Bench decision of the Hon’ble Delhi High Court in the case of Kelvinator of India Ltd. (supra), if a scrutiny assessment was made under sec. 143(3) then it will be presumed that such an order has been passed on application of mind, after going through all these details. Thus, on the basis of those very information, Assessing Officer cannot reopen the assessment. For buttressing his contentions, he relied upon the following decisions:

a.            Kelvinator of India Ltd.’s case (supra);

b.            CIT v. Jagson International Ltd.[2010] 321 ITR 544;

c.            Godrej Agrovet Ltd. v. Dy. CIT [2010] 323 ITR 97;

d.            Asstt. CIT v. O.P. Chawla [2008] 114 ITD 69 (Delhi) (TM);

e.            Satnam Overseas Ltd. v. Addl. CIT [2010] 329 ITR 237;

f.             Asian Paints Ltd. v. Dy. CIT [2009] 308 ITR 195 (Bom.);

g.            Mihir Textiles v. Jt. CIT [2011] 239 CTR 95 (Guj.);

h.            CIT v. Eicher Ltd. [2012] 344 ITR 37; and

i.             Jai Hotels Co. Ltd. v. Asstt. DIT [2009] 184 Taxman 1 (Delhi).

9. The learned counsel for the assessee while taking us through the orders of the Learned CIT(Appeals) pointed out that the Learned First Appellate Authority has made reference extensively to the judgment of Hon’ble Gujarat High Court in the case of Praful Chunilal Patel v. M.J. Makwana/Asstt. CIT [1999] 236 ITR 832. But the conclusion arrived in this decision could not met the concurrence of Hon’ble Delhi High Court in the case of Kelvinator of India Ltd. (supra). The Full Bench of the Hon’ble Delhi High Court, specifically differs with this decision after quoting the observations of Hon’ble Gujarat High Court. He made reference to page No.15 of the report in the case of Kelvinator of India Ltd. (supra). The decision of Hon’ble Delhi High Court was specifically brought to the notice of Learned CIT(Appeals) and she should have not given preference to the decision of a Division Bench of an Hon’ble Guj. Court which did not match with the view of full bench of Hon’ble jurisdictional High Court. He prayed that notice issued under sec. 148 of the Act in both the assessment years be quashed.

10. Learned DR on the other hand relied upon the orders of learned revenue authorities below. He pointed out that in assessment years 2002-03 and 2003-04, there is no scrutiny assessment. The information collected by the Assessing Officer should not have an external source only. According to him, there are different mechanism in the department for analyzing the details. Some information must have come to the possession of learned CIT who inspected the record. He prepared a report and transmitted it to the Assessing Officer for examination. It is the Assessing Officer who on analysis of the report, formed an opinion that income has escaped assessment. Learned CIT has not given any direction to the Assessing Officer for issuance of notice under sec. 148 of the Act. Assessing Officer has nowhere mentioned this aspect in the reasons recorded for reopening of the assessment. He has only made reference to the report of inspection carried out at the end of learned CIT. There is no formation of opinion in these two assessment years, therefore, it cannot be said that Assessing Officer was not having any information. The reopening has been made after collecting information which has a direct nexus with formation of belief demonstrating the escapement of income, thus, the decision relied upon by the learned counsel for the assessee for buttressing his proposition that reopening should not be resorted on mere suspicion, notice under sec. 148 should not be issued without collection of fresh information and reassessment notice under sec. 148 should not be issued on the directions of higher authorities, have no relevancy in the facts and circumstances available on the record. All these decisions are quite distinguishable. He further contended that Hon’ble Supreme Court in the case of Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 has pointed that sufficiency of the reasons cannot be tested at the stage of issuance of notice under sec. 148. It is the prima facie opinion of the Assessing Officer at that point of time. He also referred the decision of Hon’ble Delhi High Court in the case of Jindal Photo Films Ltd. v. Dy. CIT[1998] 234 ITR 170 discussed by the full bench of the Hon’ble Delhi High Court in the case of Kelvinator of India Ltd., wherein Hon’ble Delhi High Court has observed that if reasons to belief, be available, the writ court will not exercise its power of judicial review to go into the sufficiency or adequacy of the material available, meaning thereby, it is not advisable to test the adequacy of reasons for upholding or quashing the reopening of the assessment. The adjudicating authority has to see whether prima facie, some information is available with the Assessing Officer which has a direct nexus for formation of belief that income has escaped then Assessing Officer would have power to issue notice under sec. 148 of the Act. He further relied upon the decision of Hon’ble Supreme Court in the case of Claggett Brachi Co. Ltd. v. CIT [1989] 177 ITR 409. On the strength of this decision, he contended that the assessee in this case is a non-resident company whose main business consist in the purchase of Tobacco from India and its sales outside. The tobacco is sold directly on the assessee’s own account and for commission on behalf of the others. The purchase of tobaccos were effected through British India Corporation Ltd. Guntor who, were appointed agents of the assessee under sec. 43 of the Income-tax Act, 1922. For assessment years 1959-60 and 1960-61, the agents filed the returns of the income on behalf of the assessee. Assessing Officer after examining the balance sheet, completed the assessment under sec. 23(3) of the Indian Income-tax Act, 1922. For the year 1958, the gp on the sale of Indian tobacco, including commission, was shown in the balance sheet and profit and loss account of the assessee at 11108 pounds. As the assessee carried on business, not only in India but in other places also, the ITO worked out the proportionate overhead expenses of the assessee for its business in India. Subsequently, in the course of assessment proceedings for assessment years 1962-63, the ITO appears to have noticed that a mistake had been committed in the computation of the overhead expenditure. He issued a notice under sec. 148 of the Act. Hon’ble Supreme Court has upheld the reopening of the assessment on the ground that the case of the assessee falls within clause (b) of sec. 147 of the Act. Learned DR submitted that even if from the existing information, it is discernible that Assessing Officer has committed an error than that can be removed by exercising the powers under sec. 148 of the Act. He pointed out that benefit of the proviso appended to section 147 is not available to the assessee in the present appeals, because notice has been issued within four years from the end of the relevant assessment years. Thus, even if the assessment was made under sec. 143(3), the benefit of the proviso would not be available to the assessee. In such situation, if the Assessing Officer has information indicating escapement of income then, he can reopen the assessment. He further relied upon the decision of the Hon’ble Supreme Court in the case of ITO v. Purushottam Das Bangur [1997] 224 ITR 362. On the strength of this decision, he pointed out that Assessing Officer has information indicating escapement of income then, he can reopen the assessment. He further relied upon the decision of the Hon’ble Supreme Court in the case of Purushottam Das Bangur (supra). On the strength of this decision, he further pointed out that inspection report of learned CIT is an information and not a direction. He also referred the order of the ITAT in the case of Raj Woolen Industries v. Asstt. CIT [2012] 54 SOT 117. He also relied upon the decision of Hon’ble Kerala High Court in the case of CIT v. Best wood Industries & Saw Mills [2011] 331 ITR 63. He further relied upon the decision of Hon’ble Delhi High Court in the case of Diwakar Engineers Ltd. v. ITO [2010] 329 ITR 28. He prayed that the grounds challenging the reopening of assessment be rejected.

11. We have duly considered the rival contentions and gone through the record carefully. Section 147 has a direct bearing on the controversy, therefore, it is salutary upon us to take note of this section which reads as under:

147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:

Provided further that the Assessing Officer may assess or reassess such income, other than the income Involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.

Explanation 1.- Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2.- For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :-

(a)          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 ;

(b)          where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ;

(c)          where an assessment has been made, but –

(i)           income chargeable to tax has been under assessed ; or

(ii)          such income has been assessed at too low a rate ; or

(iii)         such income has been made the subject of excessive relief under this Act ; or

(iv)         excessive loss or depreciation allowance or any other allowance under this Act has been computed.

Explanation 3.—For the purpose of assessment or reassessment under this section, the Assessing Officer may ssess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.

12. A plain reading of the section would indicate that if Assessing Officer has reason to believe that any income chargeable to tax has escaped for any assessment year then he may subject to the conditions enumerated in section 148 to 153 of the Act, assess or reassess such income. Thus, the primary factor for exercising the powers under sec. 147 is that there should be some reasons which persuade the Assessing Officer to believe that income chargeable to tax has escaped. In other words, some information possessed by the Assessing Officer exhibiting the escapement of income would enable him to harbour the belief that income has escaped assessment and he would be authorized to issue notice under sec. 148 of the Act. However, if an assessment under sec. 143(3) was passed and 4 years have expired from the end of relevant assessment year, if Assessing Officer wants to reopen the assessment then interdiction provided in the proviso would come in his way, in that case, he can reopen the assessment, if he has reason to believe that income has escaped assessment by reason of the failure on the part of the assessee to make return under sec. 139 or in response to a notice under sec. 142(1) or under sec. 148 of the Act and the assessee failed to disclose all material facts fully and truly for the assessment of that year. In the present appeals, notice under sec. 148 has been issued within four years, therefore, the proviso appended to section 147 has no application on the dispute in hands. Thus, we do not wish to make any elaborate discussion on this issue. The first proposition canvassed by the assessee before us is that after expiry of limitation for issue of notice under se. 143(2), Assessing Officer cannot issue notice under sec. 148, unless a fresh information came to his possession. The emphasis of the learned counsel for the assessee was that details in respect of interest expenses was already on the record, therefore, no fresh information came to the possession of the Assessing Officer which can enable him to issue notice under sec. 148 particularly in assessment years 2002-03 and 2003-04. We have extracted the reasons recorded by the Assessing Officer in the foregoing paragraphs. On perusal of these reasons, it reveal that learned CIT on an inspection of the record in his jurisdiction found certain excess relief claimed by the assessee in respect of interest expenses. He transmitted the inspection report to the Assessing Officer, who formed an opinion that income has escaped assessment. There is no scrutiny assessment in the assessment years 2002-03 and 2003-04. Thus, the Assessing Officer has not formed any opinion on these issues i.e. about the assessability of interest expenses. There is no condition in section 147 that information should have flown from an external source after filing of the return and only then a notice under section 148 can be issued. Hon’ble Supreme Court in the case of Asstt. CIT Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500 has considered this aspect and observed that failure to take steps under sec. 143(3) will not rendered the Assessing Officer powerless to initiate reassessment proceedings even when the intimation under sec. 143(1) had been issued. The relevant observations of the Hon’ble Supreme Court in this case read as under:

“The scope and effect of section 147 as substituted with effect from April 1, 1989, as also section 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of sec. 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under sec. 147(a) two conditions were required to be satisfied: firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with sec. 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words, if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of proviso to sec. 147. The case at hand is covered by the main provision and not the proviso.

So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under sec. 147 and failure to take steps under sec. 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when the intimation under sec. 143(1) had been issued.”

13. We could appreciate the contention of the assessee that had there been any change of opinion but in these two years, there is no opinion expressed by the Assessing Officer on this issue. The assessee had referred number of decisions of Hon’ble Delhi High Court noticed earlier, but put emphases on the case of Shipra Srivastava (supra). In this case, there was only an intimation under sec. 143(1) of the Act. The learned Assessing Officer had issued notice under sec. 148. Hon’ble High Court has observed that Assessing Officer has not applied his mind on the information for arriving at a conclusion that reasons are available demonstrating the escapement of income. In that case, the assessee is a doctor in Escort Heart Institute and Research Centre. According to the Assessing Officer, she has been provided a rent free unfurnished accommodation and she has not disclosed the perquisite value of the residential accommodation at 10% of salary, Hon’ble Court has found as a matter of fact that assessee was not occupying rent free accommodation from the employer. The assessee and her husband shifted the accommodation mentioned by the Assessing Officer in the reasons recorded, into their own accommodation at Shipra Sun City. They have shifted from Delhi also in August 2003 and they were posted by their employer at Raipur (MP). The assessment year involved is 2005-06, therefore, there could not be any occasion for the Assessing Officer to say that perquisite value of rent free accommodation escaped assessment and the Assessing Officer has to reopen the assessment. To our mind, the facts of this case are quite distinguishable from the facts of the case in hand. In the reasons recorded, Assessing Officer has made a reference to the details available in the balance sheet demonstrating the fact that amount of interest claimed by the assessee in respect of the loan were exclusively not used for the purpose of construction, therefore, the deduction claimed by the assessee under sec. 24(b) would not be available. On the basis of this information, he has reopened the assessment. At that stage, only a prima facie opinion has to be made. It is not for the Assessing Officer to conclusively collect the evidence and demonstrate that ultimately disallowance/addition would be made. In a given case, if an assessee is able to explain the factual inaccuracy to the Assessing Officer, then he may drop the proceedings. A reference for fortifying this view can be made to the decision of Hon’ble Supreme Court in the case of Raymond Woollen Mills Ltd. (supra) as well as to the decision of the Hon’ble Delhi High Court in the case of Jindal Photo Films Ltd. (supra). The next proposition raised by the assessee is that reopening is based on mere suspicion. However, the learned counsel for the assessee was unable to substantiate this proposition from the fact. On reading of the reasons, prima facie, it is discernible that the Assessing Officer has the information in respect of his opinion. He has not issued the notice under section 148 on suspicion. The next proposition raised by the assessee is that notice under sec. 148 was issued under the direction of the learned CIT, however, we do not find any force in this submissions also, because nowhere learned CIT has directed the Assessing Officer to reopen the assessment. He has only transmitted the information which has been analysized by the Assessing Officer and he had formed his independent opinion. The next proposition raised by the assessee is that Assessing Officer has formed his opinion on the basis of incorrect facts. We have seen the balance sheet as well as the reasons recorded by the Assessing Officer. In the understanding of the Assessing Officer, only a sum of Rs. 1.66 crores was used out of the loan taken from Vysya Bank for repayment of Canara Bank’s loan, whereas according to the assessee, the loan of Canara Bank outstanding on that day was Rs. 1,89,08,019. In our opinion, it is not such an inaccuracy of facts which can goad the Assessing Officer at a wrong conclusion. Basic issue was whether loan of Rs. 4 crores taken from Vysya Bank was utilized for construction of the building giving rental income or repayment of the loan earlier used for the construction of the building. If there is a small variation of Rs. 22 lacs, it can be looked into after hearing the assessee. But this variation did not influence the Assessing Officer for arriving at a wrong conclusion in forming the belief.

14. As far as the case laws relied upon by assessee for the assessment years 2002-03 and 2003-04 are concerned, they are quite distinguishable on facts. We have already dealt with the decision rendered in the case of Shipra Srivastava (supra). In the case of Jai Bharat Maruti Ltd. (supra) relied upon by the assessee, we find that Hon’ble High Court, as a matter of fact found that Assessing Officer was not possessing any material on the basis of which a reasonable person could come to a conclusion that income has escaped assessment. This observation is available at page 298 of the report in para 28 of the judgment. Thus, in this case, factually, there was no information with the Assessing Officer to form the opinion that income has escaped assessment and on the basis of this categorical finding of fact, Hon’ble High Court did not upheld the reopening. The other decisions noticed by us are also distinguishable on facts. We have gone through them and we are of the view that assessee cannot draw any benefit from them. The assessee has placed on record a citation of more than 50 decisions on this single proposition and we do not deem it necessary to discuss all those decisions in this order.

15. In view of the above discussion, we are of the view that Assessing Officer has rightly reopened the assessment in assessment years 2002-03 and 2003-04.

16. As far as reopening of assessment in assessment years 2004-05 and 2005-06 is concerned, we find that facts are little different. In these two assessment years, the scrutiny assessment orders under sec. 143(3) were passed. The assessee has placed on record copy of the computation of income and the documents attached with it. On page 19 of the paper book, copy of Form No. 2D for assessment year 2004-05 is available. Alongwith the return, assessee has filed copy of partnership deed, TDS details and other details. In the reasons recorded by the Assessing Officer, he assigned two reasons, namely, that on 30th of September, 2003, assessee firm was dissolved and thus the transfer of capital assets on dissolution of the firm falls within the ambit of sec. 45(4) of the Act and a capital gain required to be computed. The second reason assigned by the Assessing Officer is that assessee claimed excess deduction in respect of interest paid under sec. 24 of the Act. The details in respect of interest expenses was also filed by the assessee. Both these issues were before the Assessing Officer, when he passed the scrutiny assessment, though no discussion on these issues is discernible but in view of the Full Bench decision of the Hon’ble Delhi High Court in the case of Kelvinator of India Ltd. (supra), it is to be construed that these must have been looked into. Learned CIT(Appeals) has upheld the reopening of assessment basically for two reasons. In her understanding, the number of documents i.e. partnership deed etc. were not only voluminous but spread over a number of years and meaningful reference could only be drawn after, some one delve deep into them . Assessing Officer in the scrutiny assessment failed to consider the issue. The observations of the Learned CIT(Appeals) on page 5 read as under:

“In the case at hand, the number of documents (partnership deeds, reconstitution deeds, retirement deeds, bank loan sanction papers etc.) were not only voluminous, but spread over a number of years, (from 1995 to 2003), and meaningful inferences could be drawn only after delving deep into them. Thus, it cannot be said that all the documents relied upon for reopening the assessment were readily made available to the Assessing Officer by the assessee or that the notice u/s. 148 was the result of a change in opinion by the Assessing Officer”.

17. Learned CIT(Appeals) thereafter extensively referred the decision of Hon’ble Gujarat High Court in the case of Praful Kumar Chunilal Patel (supra), on page Nos. 7 & 8 of the impugned order. Before commenting on those aspects, we would like to refer the concluding paragraph of Hon’ble Delhi High Court’s decision in the case of Kelvinator of India Ltd. (supra) which read as under:

“We, however, may hasten to add that if “reason to believe” of the Assessing Officer is founded on an information which might have been received by the Assessing Officer after the completion of assessment, it may be a sound foundation for exercising the power under sec. 147 read with sec. 148 of the Act.

We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the Assessing Officer had received information from an audit report which was not before the Income-tax Officer, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself.

We also cannot accept the submission of Mr. Jolly to the effect that only analysis in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under sec. 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of sec. 143 or sub-section (3) of sec. 143. When a regular order of assessment is passed in terms of the said sub-section (3) of sec. 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.

For the reasons aforementioned, we are of the opinion that the answer to the question raised before this Bench must be rendered in the affirmative, i.e., in favour of the assessee and against the Revenue. No order as to costs”.

18. Both the reasoning assigned by the Learned First Appellate Authority run contrary to the law laid down by the Full Bench of the Hon’ble jurisdictional High Court. The Hon’ble Court has emphasized that Assessing Officer cannot be given premium for his own wrongs. Therefore, we are of the view that no new information came to the possession of the Assessing Officer after passing of scrutiny assessment in these two assessment years. He has reopened the assessment on the basis of those very information upon which he could have passed a more detailed order under sec. 143(3) in the first round. Thus, reopening of assessment is merely based on change of opinion. The decision of Hon’ble Delhi High Court in the case of Kelvinator of India Ltd. (supra) has been further upheld by the Hon’ble Supreme Court also. Thus, in view of the above discussion, we are of the view that re-opening of assessment in assessment years 2004-05 and 2005-06 are not sustainable. They are quashed.

19. The next common issue involved in all the appeals relates to allowability of interest expenses under sec. 24(b) of the Income-tax Act, 1961. The facts as observed earlier are common in all the assessment years. For the facility of reference, we are taking up the facts from assessment year 2002-03. The assessee has claimed deduction of Rs. 78,57,499 under sec. 24(b) of the Act. It comprised a sum of Rs. 24,96,015 as previous year, 1/5th interest on borrowed capital and Rs.53,61,484 as current year interest on account of borrowed capital from Canara Bank, Vysya Bank, unsecured loans, creditors and loan raised by the partners. Assessing Officer has allowed the claim of previous year interest of Rs. 24,96,050 but restricted the current year interest to Rs. 26,51,953 comprising of Rs. 11,99,972 interest paid to Canara Bank and proportionate interest of Rs. 14,51,953 paid to Vysya Bank. Assessing Officer did not allow interest expenses alleged to have been paid on unsecured loans and loans raised by the partners of the firm. Dissatisfied with the action of the Assessing Officer, assessee carried the matter in appeal before the Learned CIT(Appeals). It pointed out that a sum of Rs. 4 crores was borrowed from Vysya Bank and it was used as under:

20. Learned First Appellate Authority has allowed the appeal partly. She observed that interest expenses to be actually allowed as deduction under sec. 24(b) out of the current year interest expenses claimed by the assessee at Rs. 53,61,484 will be the interest of Rs. 11,99,972 payable to Canara Bank and the interest worked out on loan of Rs. 2,26,82,244 payable to Vyasya Bank. Learned First Appellate Authority has accepted the contentions of the assessee that liability to pay Canara Bank was at Rs. 1.89 crores and Assessing Officer has wrongly construed it at Rs. 1.66 crores. Similarly, she accepted the utilization of Rs. 20,62,512 towards addition to the building and Rs. 17,25,713 for construction activity of the building. Her conclusion in paragraph No.7.5.3 reads as under:

“7.5.3 The sum and substance of the findings made above is that the deduction u/s.24(b) in respect of interest payable to Vyasya Bank, will be allowable on the loan amount of Rs. 2,26,82,244 (Rs. 1,89,08,019 utilized to repay the outstanding old loan of Canara Bank + Rs. 20,62,512 utilized for making the addition on the commercial property +Rs. 17,11,713, utilized for construction activity by way of repayment of outstanding creditors). The Assessing Officer is accordingly directed to rework the interest payable to Vyasya Bank during the relevant year on Rs. 2,26,82,244. As a result, out of the appellant’s claim of current year interest of Rs. 53,61,484, the interest to be actually allowed as deduction u/s. 24(b) will be the interest of Rs. 11,99,972 payable to Canara Bank and the interest worked out on loan of Rs. 2,26,82,244 payable to Vyasya Bank”.

21. The learned counsel for the assessee while impugning the order of the Learned CIT(Appeals) submitted that Learned First Appellate Authority has denied the claim of assessee basically for two reasons. According to the Learned CIT(Appeals), assessee took a loan of Rs. 4.33 crores from Canara Bank on 1.9.1997. The constructed value of the property was standing at Rs. 4,19,37,073 in the balance sheet till 31st March 2001. Thus, according to the Learned CIT(Appeals), the loan was taken for the purpose of construction of commercial complex and the construction must have been completed by the borrowed funds. The current loan taken from Vysaya Bank was thus not utilized for the purpose of the construction. The second reasoning assigned by the Learned CIT(Appeals) is that from the record, assessee failed to bring any substantive direct evidence demonstrating the fact that reduction of the Canara Bank loan to Rs. 1.89 crores was achieved with the help of borrowed funds by the partners or unsecured loan. In other words, according to the Learned CIT(Appeals), there is nothing on the record to suggest that unsecured loan taken by the assessee or by its partners was utilized for repayment of Canara Bank in earlier years. In order to substantiate assessee’s claim, learned counsel for the assessee drew our attention towards page No. 24 of the paper book where balance sheet as on 21.3.2001 in the case of assessee is available. Similarly, he drew our attention towards page No. 60 of the paper book where balance sheet as on 31.3.2001 of partner M/s. Raksha Properties Pvt. Ltd. is available. He pointed out that on the liability side, assessee has shown in its balance sheet the capital account of Daisy Estates Pvt. Ltd. and M/s. Raksha Properties Pvt. Ltd. There is a secured loan i.e. loan from Canara Bank. This loan has been shown at Rs.1.89 crores on the assets side. The only fixed asset with the assessee is the plot of loan and building. It has been valued at Rs. 4.20 crores. Apart from this main asset, there are certain current assets i.e. cash in hand, bank deposit, deposits with Delhi Vidyut Board etc. In the balance sheet of the partners, M/s. Raksha Properties Pvt. Ltd. has shown a liability of Rs. 1.14 crores in the previous year. At the close of 31.3.2002, it reduced to Rs. 30,90,881. Thus, the liability has been reduced roughly by a sum of Rs. 83 lacs. This loan of Rs. 83 lacs was shown as investment in the assessee M/s. Delhi Industries and Enterprises. The investment as on 31.3.2002 was Rs. 1,12,19,330. He pointed out that the only asset with the partner is the capital investment in the assessee’s firm and the corresponding liability is the loan amount representing this asset which clearly indicates that the funds borrowed by the partners were invested in the assessee’s firm and which was used for the purpose of repayment of loan. On the strength of these details, he pointed out that Learned First Appellate Authority has erred in not appreciating the facts in totality, rather dissecting the facts in a half way under the belief that direct evidence is not available. In this way, he prayed that funds used by the assessee from interest bearing funds of the partners and unsecured loans are to be considered as used for the purpose of the construction and interest expenses deserves to be allowed.

22. Learned DR on the other hand relied upon the order of the Learned CIT(Appeals). He pointed out that when construction was completed by the borrowed fund taken from Canara Bank then it is for the assessee to show that the current loan taken from Vysya Bank was used for the purpose of the construction of the building which gives rise to house property income. He pointed out that Learned CIT(Appeals) has specifically observed that there is no direct evidence on the record for substantiating this claim.

23. We have duly considered the rival contentions and gone through the record carefully. The assessee has submitted a statement exhibiting the utilization of current loan taken from Vysya Bank which has been noticed by the Learned CIT(Appeals) and extracted by us in the foregoing paragraphs. The stand of the assessee is that if the balance sheet of the partners and of the assessee are read together then it would reveal that the assessee is not having any other fixed assets on the assets side except this building. In the balance sheet of the partners, they have shown liability towards borrowed funds as well as capital investment in the assessee’s firm. The claim of the assessee that partners have borrowed funds, which was utilized by the assessee firm. The grievance of revenue authorities is that there is no need to read all these documents in a harmonious way. The utilization of funds or investment in the construction of the building by the assessee needs not to be explained through the deductive details available in the different balance sheet rather it should produce direct evidence exhibiting the source of fund and its utilization. Learned CIT(Appeals) has observed that assessee has adopted deductive reasoning for explaining its stand. In our opinion, it does not make any difference as to how one explain its position i.e. by deductive reasoning on inductive reasoning. One method enables the adjudication to arrive at fair conclusion by drawing inference from the maternal available on record. The other methods provide the external aid for the above object. The idea under both the methods to arrive at just conclusion, which is admissible in law. On due consideration of this logic, we are of the view that had these details were available then that would be an ideal situation and there may not be any controversy but can the department put the assessee under tax liability on the ground that why it used the funds borrowed by the partners for the construction purposes or whether the partners as well as the assessee must have used this amount for some other activities. The revenue is unable to collect any evidence demonstrating the other activities. As far as other aspects are concerned, there is no dispute between the department and the assessee. The interest expenses incurred by the assessee on the borrowed funds if used for the purpose of construction then deduction of such expenses will be admissible to the assessee under sec. 24(b) of the Income-tax Act, 1961. The only dispute between the parties relates to the quantification of amounts used for the purpose of construction. On an analysis of the balance sheet, we are of the view that the assessee is able to demonstrate, utilization of funds for the purpose of the construction. Learned revenue authorities without specifying any reason refused to take cognizance of the balance sheet of the partners. In view of the above discussion, we allow this ground of appeal raised by the assessee in all the assessment years and direct the Assessing Officer to grant deduction of interest expenses with regard to current interest charges also. The facts in other years are also common. Thus, in view of the above discussion, the grounds of appeal raised by the assessee in all the years are allowed and the solitary ground raised by the revenue in assessment year 2005-06 is rejected.

24. In assessment year 2004-05, the assessee has pleaded one more ground. In this ground of appeal, the grievance of the assessee is that the Learned CIT(Appeals) has erred in confirming the addition of Rs. 7,89,71,703 to the taxable income of the assessee on the ground that on retirement of partner, a capital gain has arisen to the assessee.

25. Learned First Appellate Authority in order to adjudicate this issue has noticed the complete history of the assessee’s firm right from 16th September 1973 when it was set up for the first time. At that point of time, there were three partners, namely, Shri Amar Nath Gupta, Shri Prem Nath Gupta and Shri Jai Nath Gupta each having 1/3rd share. On 17.1.1987, Shri Jai Nath Gupta expired. His five legal heirs stepped into the shoes of late Shri Jai Nath Gupta and became partners in the firm. Thereafter, many changes have been taken place. The firm was reconstituted on retirement of existing partners or inclusion of new partners. For the purpose of the dispute involved in this year, the facts are that on 2nd of September 2003, the firm was reconstituted by inclusion of four partners, namely, Bal Krishan Gupta, Krishan Gupta, Ankit Gupta and Aashis Gupta. Their profit sharing ratio is 20%, 20% & 10% 10% each. The existing two partners M/s. Daisy Estates Pvt. Ltd. and M/s. Raksha Properties Pvt. Ltd. were having 20% share each. The firm was reconstituted on 30th September 2003, two partners M/s. Daisy Estates Pvt. Ltd. and M/s. Raksha Properties Pvt. Ltd. have retired and the firm continued its business with the remaining four partners. The dispute between the revenue and assessee is whether on retirement of these two partners, there is distribution of assets giving rise of capital gain within the meaning of expression “on dissolution of firm or otherwise” employed in sec. 45(4) read with sec. 2(47) of the Act.

26. As per the Assessing Officer, it is the distribution of assets within the meaning of sec. 45(4) and thus a capital gain on transfer of capital assets deserve to be computed. On the other hand, case of the assessee is that the firm was not dissolved. It has not distributed its assets. It is continuing with the business and, therefore, on retirement of few partners, it cannot be construed that assessee has transferred the assets which can authorize the Assessing Officer to compute the capital gain.

27. With the assistance of learned representatives, we have gone through the record carefully. Learned DR relied upon the order of the Learned CIT(Appeals). He also brought to our notice the definition of transfer contained in sec. 2(47) of the Act as well as sec. 45(4) of the Act. Both these clauses read as under:

“2(47) ‘transfer’, in relation to a capital asset, includes, –

Explanation- For the purposes of sub-clauses (v) and (vi), ‘immovable property’ shall have the same meaning as in clause (d) of sec. 269UA.

45(4) 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 purpose of sec. 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”.

28. Learned DR pointed out that erstwhile partners M/s. Daisy Estates Pvt. Ltd. and M/s. Raksha Properties Pvt. Ltd. have relinquished all their rights in the partnership. They have withdrew their capital investment and the four partners who have been introduced in the month of September 2003 itself become the owner of the assets of the firm. Thus, it is a classical example of transfer of capital assets and if it cannot be construed as transfer of a capital assets by way of distribution of capital assets or otherwise mentioned in sec. 45(4) then there cannot be any other example. He further pointed out that this issue has been considered recently by the Hon’ble Karnataka High Court in the case of CIT v. Gurunath Talkies[2010] 328 ITR 59. He placed on record copy of the decision. He also relied upon the decision of Hon’ble Kerala High Court in the case of CIT v. Southern Tubes[2008] 306 ITR 216 and the decision of Hon’ble Mumbai High Court in the case of CIT v. AN Naik Associates [2004] 265 ITR 346. On the other hand, learned counsel for the assessee submitted that Hon’ble Kerala High Court decided the appeal in the case of Gurunath Talkies (supra). In a recent decision, the Hon’ble Kerala High Court CIT v. Vijayalakshmi Metal Industries[2002] 256 ITR 540 delivered on 28.10.2010 in the case of CIT v. M.V. Narayanan [IT Appeal No. 474 of 2009] has observed that sec. 45(4) is not applicable on retirement of partners when the firm is continuing with the business. There is no distribution of assets of the firm. He placed on record copy of the judgment of Hon’ble Kerala High Court. Apart from this decision, he pointed out that there are decisions in favour of the assessee rendered by the Hon’ble Madhaya Pradesh High Court in the case of CIT v. Moped & Machines[2006] 281 ITR 52, CIT v. Jayalakshmi Metal Industries [2002] 256 ITR 540. He further pointed out that there are number of decisions rendered by the ITAT on this issue which are in favour of the assessee. He mainly drew our attention towards the decision of the ITAT, Mumbai in the case of ITO v. Smt. Paru D. Dave[2008] 110 ITD 410.

29. On due consideration of the facts and circumstances, we find that Hon’ble Mumbai High Court in the case of A.N. Naik Associates (supra) has considered this aspect in details. Hon’ble High Court is of the opinion that by Finance Act, 1987, the Hon’ble Parliament brought on the statute book a new sub-section (4) in sec. 45 of the Act, the effect is that the profits or gains arising from the transfer of a capital assets by a firm to a partner on dissolution or otherwise would be chargeable as the firm’s income in the previous year in which the transfer took place and for the purpose of computation of capital gain, the fair market value of the assets on the date of transfer would be deemed to be the full value of the consideration received or accrued as a result of the transfer. According to the Hon’ble High Court, if one has to see the object of the Act and the mischief, it seeks to avoid, then it would be clear that the intention of the legislature was to bring into the transactions in the tax net, whereby assets were brought into a firm or taken out of firm. Hon’ble High Court has observed that expression “otherwise” employed in sub-section (4) of sec. 54 has to be read with the words “transfer of capital assets” by way of a distribution of capital assets. If it is so read then it becomes clear that even when a firm is in existence and there is a transfer of capital assets, it comes within the expression “otherwise”, as the object of the Amendment Act was to remove the loophole which existed, whereby capital gain tax was not chargeable. Hon’ble Kerala High Court in the case of Gurunath Talkies (supra), while dealing with this issue has observed in paragraph 20 that Hon’ble Karnataka High Court would prefer the view expressed by the Hon’ble Mumbai High Court in preference to the view expressed by Hon’ble Kerala High Court and Hon’ble Madhaya Pradesh High Court. The ITAT has also made a discussion on a similar issue in the case of Smt. Paru D. Dave (supra). The assessee Smt. Paru D. Dave and her husband were partners in the firm M/s. Rakshal Corporation having equal shares in the profit of the business. The firm was having a factory premises whose book value was Rs. 79,452 as on 31.3.1993. The firm did not claim any depreciation. The factory premises was revalued at Rs.23 lacs. Ultiamtely, both the partners have retired and new partners came there. In the assessment of the assessee firm, the difference in revaluation of the factory premises at Rs. 22,20,548 was treated as a short term capital gain. On appeal, Learned CIT(Appeals) deleted the addition from the hands of the firm on the ground that the partners have divested themselves of valuable rights and an assets handed over the same to the new partners. On the basis of this observations of the Learned CIT(Appeals), the cases of the partners have been reopened and capital gain has been assessed. The ITAT has made an elaborate discussion whereby it took into consideration the decision of Hon’ble Kerala High Court in the case of CIT v. Kunnamkulam Mill Board[2002] 257 ITR 544. This decision has been relied upon by the assessee before us also. The relevant discussion of the ITAT reads as under:

“9. The issue for our adjudication is whether short-term capital gain arises on surrender of rights in the revalued partnership assets. Partnership firm constituted of its partners is governed by the provisions of Partnership Act. The partnership firm is not a legal entity and property of the partnership vests in its partners inasmuch as all the partners have an interest in the partnership property. The provisions of the Partnership Act clearly provide that a property which is brought in by the partners on the formation of partnership or acquired in the course of business of partnership, becomes the property of the firm. The partners of a partnership firm are entitled to a share in the profits of the business to the extent of their share ratio. During the subsistence of partnership no partner has any assigned right or share in the partnership property. During the continuance of the partnership the partners have only a right in the profits of the partnership and no partner can deal with any portion of the partnership property as his own during the continuance of the partnership firm.”

10. Their Lordships of Hon’ble Supreme Court in S.V. Chandra Pandian v. S.V. Sivalinga Nadar[1995] 212 ITR 592 held that as under :

“…The above provisions make it clear that regardless of the character of the property brought in by the partners on the constitution of the partnership, such property shall become the property of the firm and an individual partner shall only be entitled to his share of profits, if any, accruing to the partnership from the realization of this property and upon dissolution of the partnership to a share in the money representing the value of the property. It is well-settled that the firm is not a legal entity, it has no legal existence, it is merely a compendious name and hence the partnership property would vest in all the partners of the firm. Accordingly, each and every partner of the firm would have an interest in the property or asset of the firm but during its subsistence no partner can deal with any portion of the property as belonging to him, nor can he assign his interest in any specific item thereof to anyone.”

On a true reading of the award as a whole, there was no doubt that it essentially dealt with the distribution of the surplus properties bringing to the dissolved firms. The award, therefore, did not require consideration under section 17(1) of the Registration Act.

11. Their Lordships of Hon’ble Supreme Court in Addanki Narayanappa v. Bhaskara Krishtappa AIR 1966 SC 1300 had held as under :

“…During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest, in a specific item of the partnership property to anyone. His right is to obtain such profits, if any as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities….”

12. As the partners have no right in the assets of the partnership firm, there was no transfer of any right in the said property on reconstitution/retirement of a partner. Their Lordships of Hon’ble Supreme Court in Addl. CIT v. Mohanbhai Pamabhai[1987] 165 ITR 166 had held that when a partner retired from the firm and received a share of amount calculated on the value of net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill and no part of the amount received by him would be assessable as capital gains under section 45 of the Income-tax Act. Similar view was taken by the Hon’ble Supreme Court in CIT v. R. Lingamallu Raghukumar[2001] 247 ITR 801. In case any asset/property is allocated to a partner in proportion to his share in the profits of the firm, there is no partition or transfer taking place nor there is any relinquishment of interest of other partners in the allocated property, in the sense of transfer or extinguishment of interest as envisaged under section 17 of the Registration Act. Thus, when dissolution of partnership firm takes place and residue is distributed amongst the partners after settlement of amounts, there is no transfer or relinquishment of interest as envisaged under section 17 of the Registration Act. This view was held by the Hon’ble Supreme Court in S.V. Chandra Pandian’s case (supra). The Income-tax Act has brought in by way of an amendment to section 45 of the Income-tax Act that on dissolution of partnership firm provisions of section 45(4) of the Act shall be applicable which treats the dissolution of a partnership as deemed transfer of assets from the partnership firm to its partners.

13. In a partnership amongst partners, each and every partner of the firm has an interest in each and every property of the partnership firm. Till the accounts are settled and the residue/surplus is not distributed amongst the partners, no partner can claim any share in such assets of the partnership firm. Each partner is entitled to its share of profits in the partnership firm but the entitlement of right in the assets/property of the partnership firm arises only on dissolution.

14. The other issue to be considered is whether there is a relinquishment of a right in the property of the firm on reconstitution of partnership firm. The partner of a partnership firm has only an interest in the property during the subsistence of the partnership firm. There is no relinquishment of any right in the partnership property on reconstitution/retirement of a partner.

15. Their Lordship of Kerala High Court in Kunnamkulam Mill Board’s case (supra) had held that—

“ownership of property does not change on change in the constitution of firm. As long as there is no distribution for the simple reason the firms total reconstitution, there is no transfer of capital assets.”

In the facts of the case before Kerala High Court, there was reconstitution of assets of the firm wherein the assets were revalued on mutual agreement of the partners. The difference in the revalued amounts was credited to the respective capital accounts of the partners. There was reconstitution of partnership firm with introduction of two partners for a short time and thereafter the original five partners retired and the business was carried on in partnership by the surviving two partners. It was held that in such cases of reconstitution, the ownership of the property does not change with the change in the constitution of the firm and accordingly there is no transfer of capital asset. It was further held that—

“if a partner retires, he does not transfer any right in the immovable property in favour of the surviving partner because he had no right with respect to the properties of the firm.”

30. On an analysis of all these decisions and the details, we find that there is conflict of opinion between the various Hon’ble High Courts. The decision of Hon’ble Kerala High Court in the case of Kannamkulam Mill Board (supra) is in favour of the assessee. Learned DR brought to our notice the decision of Hon’ble Kerala High Court in the case of CIT v. Southern Tubes[2008] 306 ITR 216 in favour of the revenue but we find in that case the firm was dissolved and assets were taken by one of the partners in his proprietaryship concern. The latest decision of Hon’ble Kerala High Court is again in favour of the assessee. Similarly, there are decisions at the end of the ITAT which are in favour of assessee. The decision of Hon’ble Madhaya Pradesh High Court is also in favour of the assessee. On the other hand, the decision of Hon’ble Karnataka High Court and Hon’ble Mumbai High Court are in favour of the revenue. Faced with this situation, we deem it appropriate to follow the decisions which are in favour of the assessee. Hon’ble Kerala High Court in its latest decision rendered on 28.10.2010 in the case of M.V. Narayanan (supra) has held that on retirement of partner, if the firm, continues with the business then there is no distribution of assets and section 45(4) of the Act would not be applicable. Though the parties have not advanced any agreement but at the time of decision, it struck to our mind, that true sense nothing was gained by the firm. If some thing has been transferred and any gain is there, then that would be to erstwhile partner. In the case Smt. Paru D. Dave (supra), after the order of the Learned CIT(Appeals) in the case of firm, assessment of retired partner was reopened. It gives an indication that real beneficiary of gain, if any, then it is the erstwhile partner. Since parties have not advanced any argument on this aspect, therefore, we do not wish to make any finding. We allow this ground of appeal raised by the assessee and held that no capital gain tax would be imposeable upon it on account of alleged allegation of distribution of assets.

31. We summarize the result as under: