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income Tax Officer Vs. Marketers - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Amritsar
Decided On
Judge
Reported in(2008)114TTJ(Asr.)887
Appellantincome Tax Officer
RespondentMarketers
Excerpt:
1. the department's appeal and the assessee's cross-objection, for the asst. yr. 2002-03, are directed against the order dt. 31st aug., 2005 passed by the learned cit(a), jalandhar. 1. that on the facts and in the circumstances of the case and in law, the learned cit(a) has erred in deleting the following additions made by invoking the provision of section 45(4) of the it act: 2. that the learned cit(a) has erred in law in holding that it was a case of reconstitution of firm and not of discontinuation of business.2. that facts are that the partnership firm in the name of m/s marketers was constituted by two partners viz. shri mohinder pal shoor and his brother shri ved parkash shoor. the ao noticed that the assessee firm had been dissolved vide dissolution deed dt. 19th dec, 2001, with.....
Judgment:
1. The Department's appeal and the assessee's cross-objection, for the asst. yr. 2002-03, are directed against the order dt. 31st Aug., 2005 passed by the learned CIT(A), Jalandhar.

1. That on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the following additions made by invoking the provision of Section 45(4) of the IT Act: 2. That the learned CIT(A) has erred in law in holding that it was a case of reconstitution of firm and not of discontinuation of business.

2. That facts are that the partnership firm in the name of M/s Marketers was constituted by two partners viz. Shri Mohinder Pal Shoor and his brother Shri Ved Parkash Shoor. The AO noticed that the assessee firm had been dissolved vide dissolution deed dt. 19th Dec, 2001, with effect from the same date. This dissolution deed was made between Shri Mohinder Pal Shoor and Shri Ved Pakash Shoor. A fresh partnership deed dt. 21st Dec, 2001 was executed, whereby Shri Mohinder Pal Shoor entered into a partnership w.e.f. 21st Dec, 2001 with his son, Shri Gaurav Shoor. The AO observed that on 20th Dec, 2001, Shri Mohinder Pal Shoor was the sole proprietor of the concern M/s Marketers, after taking over the assets and liabilities of the erstwhile firm, including lands under factory building and the land appurtenant thereto, the building of the factory, machinery, stocks, etc. and this fact was evident as per Clause 1 of the partnership deed dt. 21st Dec., 2001. The AO accordingly asked the assessee as to why capital gain may not be levied on the gains arising out of the transfer of the land and buildings under Section 45(4) of the IT Act. In response thereto, the assessee moved an application dt. 14th Dec, 2004 under Section 144A of the IT Act before the Addl. CIT, Range I, Jalandhar, on the following grounds: (i) That no fresh assessment under Section 143(3) can be made in this case as assessment has already been completed under Section 143(3)(i) in response to notice under Section 143(1).

(ii) That the action of the AO in invoking the provisions of Section 45(4) of the IT Act, 1961 is invalid since the dissolution of the partnership purported to have taken on 19th Dec, 2001 has never taken place.

3. Vide order dt. 27th Jan., 2005, the Addl. CIT held that fresh assessment under Section 143(3) could be made. On the issue regarding the invocation of the provisions of Section 45(4) of the Act, the learned Addl. CIT directed the AO to examine all the relevant facts of the case and the law and to proceed according to the provisions of law.

4. Vide the assessment order, the AO observed that in the preamble of the dissolution deed, it had been laid down as follows: Whereas the party on the first part and party on the second part were carrying on the business of manufacturers and exporters of hand tools, machine tools and machinery parts at Basti Danishmandan Road, Jalandhar City under the name and style of M/s Marketers under the terms and conditions of partnership deed dt. 4th July, 1981 and have carried on the said business in partnership with each other under the same name and style upto 19th Dec, 2001 and Whereas the parties to this deed have after negotiations amongst themselves have decided to dissolve the said partnership and accordingly have dissolved the abovesaid firm as from the 19th Dec, 2001 and have settled the accounts amongst themselves and the party on the first part has continued and taken over the running business of the firm along with all the moveable and immovable properties and assets, liabilities, past, present, future. Contingent or otherwise in connection with and relating to the said business along with the trade name of the firm and its products and rights, titles and interests in quotas, permits, licences, concessions allotments, electric connection bearing No. LS-19 and other assets and both the parties have agreed to such arrangement on retirement of the second party and have settled the accounts accordingly and are desirous of reducing the terms and conditions of dissolution in writing, this indenture witnesseth as follows: The firm M/s Marketers is dissolved on 19th Dec, 2001 and the party on the '1st part' or 'continuing party' has taken over the running business of the firm.

2. The party on the first part or the continuing party has taken over and continued the running business of the said firm along with all the movable and immovable properties and all the assets and liabilities, past, present or future, accrued or accruing, contingent or otherwise along with the trade name of the firm and its products and rights in the telephones. The party on the second part shall not carry on the business in the name of M/s Marketers or hold out himself to be a partner of the said firm after 19th Dec, 2001.

3.0 As the firm has been dissolved and Shri Mohinder Pal Shoor erstwhile partner of the firm has taken over the running business of the concern with all its assets and liabilities, including land, buildings, machinery stock, furniture etc. remained individual proprietorship concern on 20th Dec, 2001 and again the proprietorship concern was converted into partnership firm vide instrument of partnership deed dt. 21st Dec, 2001 w.e.f. 21st Dec, 2001 as per Clause 1 of this deed. It was apparent that it was a case of transfer of movable and immovable assets of the firm and accordingly the gain arising out of the transfer of the said assets warranted the levy of capital gains under Section 45(4) of the IT Act, 1961. As mentioned above, as on 20th Dec, 2001 Shri Mohinder Pal Shoor was the sole proprietor of the concern and partnership concern was converted into proprietorship concern tantamounts to transfer of all assets. The reliance is placed in the case of Rajlaxmi Trading Co. v. CIT .

5. Before the learned CIT(A), the assessee contended, inter alia, that the AO had wrongly drawn the conclusion that after the dissolution of the erstwhile firm on 19th Dec, 2001, it had become a proprietorship firm on 20th Dec, 2001 and was, thereafter, converted into a partnership firm w.e.f. 21st Dec., 2001, which meant that the erstwhile firm had been dissolved and that the provisions of Section 45(4) were applicable; that the firm consisted of two partners; that Shri Ved Parkash Shoor retired from the partnership business w.e.f. 19th Dec, 2001 and Shri Gaurav Shoor was inducted in the running business of the assessee w.e.f. 20th Dec, 2001, vide partnership deed dt. 21st Dec, 2001; that the partnership deed remained to be written on 20th Dec, 2001, since it was weekly holiday; that as per paras 3 and 4 of the partnership deed, Shri Mohinder Pal Shoor continued running the business of the firm w.e.f. 20th Dec, 2001 and inducted Shri Gaurav Shoor as another partner w.e.f. 20th Dec, 2001 to give a legal shape to the partnership; that the following points were not disputed by the AO: (a) That Shri Ved Parkash Shoor, partner of the firm, retired from w.e.f. 19th Dec, 2001.

(b) That Shri Mohinder Pal Shoor continued the running business of the firm w.e.f. 20th Dec, 2001 and inducted Shri Gaurav Shoor, as per in the running business of the firm.

(c) That new deed of partnership was drawn to take Shri Gaurav Shoor as partner in running business w.e.f. 20th Dec., 2001.

(d) That all assets and liabilities of the old firm were taken over by the new partners.

(f) That bank accounts were continued as it were in the same name in the same premises and in the same products.

(g) That para 3 of the partnership deed provided that running business of the firm has been continued.

(h) That accounts of the suppliers were settled at the year end and not separately for the old firm and the alleged new firm.

(i) That accounts with buyers were settled at the year end and not separately for the old firm and the alleged new firm.

(j) That supplies to foreign customers were made as per orders received without differentiating order received by old firm and alleged new firm.

(k) That registrations with Government authorities such as Sales-tax Department, Excise and Taxation Department, Small Scale Industries Department, Pollution Department, P.F. Department, Electricity Department etc. remained the same and no change effected.

(m) The accounts of staff and labour were not settled at the time of retirement of Shri Ved Parkash Shoor.

6. The assessee further contended before the learned CIT(A) that it was thus a change in the constitution of the firm as per Section 187 of the IT Act and there was no dissolution of the firm; that Sections 187 and 188 provide the definitions of firm, partnership and partner; that Sections 31 to 38 of the Partnership Act refer to what constitutes partnership according to the firm and firm's name; that Sections 39 to 55 of the said Act deal with the dissolution of the firm; that under Section 42(c) of the said Act, a firm would get dissolved by the death of a partner, unless there is an agreement between the partners to the contrary; that a partnership firm or firm as such is not a separate independent entity, but only a combination of persons carrying on business with a motive to share the profits and some persons acting and conducting for and on behalf of the others; that there is no guarantee that all the partners who started the business of the firm would continue to be the partners till the end of the accounting year; that the constitution of the firm as well as the shares of the partners thereof may change or alter according to the desire of the partners; that the factum of the insolvency or death of a partner would normally dissolve a partnership; and that however, if there is an agreement to the contrary, there shall be no dissolution; that the remaining partners are at liberty to continue the firm and the business with the existing partners, as there would be no dissolution as per the provisions of the Partnership Act.

7. In the remand report dt. 30th May, 2005, the AO, inter alia, stated that as per the preamble of the partnership deed dt. 21st Dec, 2001, it was to commence on and from 21st Dec, 2001, and so there was no ground to presume that the firm had come into existence on 20th Dec, 2001; that further, Shri Mohinder Pal Shoor had made various financial transactions in the bank account of the assessee, on 20th Dec, 2001, which showed that it was factually incorrect to state that 20th Dec, 2001 was a public holiday.

8. The assessee filed counter submissions to the remand report of the AO. I have carefully considered the rival contentions in the light of partnership deed, provisions of law dealing with the issue under the IT Act (Section 187/188) as well as under the Partnership Act. The issue is also dependent on whether there was reconstitution of the firm. AO has mentioned in the order that the partnership deed dt.

21st Dec, 2001 was to commence from 21st Dec, 2001 and on 20th Dec, 2001 it was sole proprietary of Shri Mohinder Pal Shoor whereas as seen from the deed the new partner was inducted w.e.f. 20th Dec, 2001. On the closing of 19th Dec, 2001 all the transactions were accounted and on the very next day i.e. 20th Dec, 2001 the new partner joined and books of accounts were written from the period 20th Dec, 2001 to 31st March, 2002. The AO has not found merits in the contentions of the appellant that 20th Dec, 2001 being weekly holiday the deed was made effective from 21st Dec, 2001 when fact of weekly holiday was supported by appellant before the AO in form of certificate of the Asstt. Engineer of the concerned department. The AO thus concluded that the firm was dissolved but hot withstanding the provisions under Partnership Act governing similar situation the provisions of IT Act have to be given effect to. The facts regarding continuation of the business have not been commented upon by AO as per points 'a' to 'n' (supra) taken by the appellant in the written submissions. It was not a case of discontinuation of business as there was reconstitution of the firm by inducting partner on next date though deed was made effective from 21st Dec., 2001 and accounts of the reconstituted firm were written from 20th Dec, 2001.

It was also held in the case of Shakti Trading Co. v. CIT decided by Hon'ble apex Court that after dissolution of the firm on death of a partner out of 6 partners, the firm was reconstituted next date with the remaining 5 partners, it was not a case of discontinuation of business. Similarly in case of the appellant the firm was reconstituted and with one old partner new partner joined on the very next date. The arguments of the appellant that it was made effective from 21st Dec., 2001, backed by the evidence as to why so, have not been refuted by the AO. The judicial pronouncements relied upon of the Hon'ble jurisdictional High Court and Andhra Pradesh High Court (supra) rather go to support the case of the appellant that one partner of the old firm continuing in the reconstituted firm amounted to change in constitution under Section 187(1) of IT Act. In view of facts above, I do not agree with findings of the AO that the firm on dissolution became for a day the sole proprietary concern because the old business was continued with the new partner. By reporting financial transactions dt. 20th Dec., 2001 the AO tried to bely the holiday theory advocated by the appellant but after going through the said transactions as appearing in the bank account of the appellant and as explained in the counter-comments, I do not find merits in the conclusion of the AO. Therefore, ground taken by the appellant is allowed.

10. Apropos the plea that the AO had erred in applying the provisions of Section 45(4) of the Act, thereby holding that the dissolution of the firm had taken place on 19th Dec, 2001 and that the new firm was constituted on 21st Dec, 2001, the assessee contended before the learned CIT(A) that the provisions of Section 45(4) were not attracted; that this section got attracted only if there was a transfer of capital assets; that when the assets of the partnership are transferred to the retiring partner, the partnership which is assessable to tax ceases to have a right in favour of the partner to whom it is transferred and so, the transfer of the capital assets of the partnership to the retiring partners would amount to transfer of the capital assets in the nature of capital gains and business profits chargeable to tax under Section 45(4); that the AO had wrongly relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of Rajlaxmi Trading Co. v. CIT ; that in that case, there was a dissolution and transfer of assets, which were not the facts in the present case; that Section 45(4) is attracted when the assets are distributed amongst the partners and are also registered in their names, which was also not so in the present case; and that thus, the provisions of Section 45(4) of the Act are attracted when the assets are taken out of the firm.

I have considered the rival contentions in the light of details on record and the concerned provisions of law i.e. Section 45(4) of IT Act. It stands already adjudicated vide ground No. 6 that it was a case of change in constitution of the firm than dissolution of firm.

AO has invoked Section 45(4) of IT Act which reads as under: The profits or gains arising from the transfer of a capital asset by way of distribution of a firm or other AOP or BOI (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and for the purposes of Section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

The charge under Section 45(4) arises with the transfer of the assets of the firm than with its dissolution as held by Hon'ble Madras High Court in the case reported at CAT v. Vijayalakshmi Metal Industries 'dissolution was not a material aspect as material aspect was transfer of the assets'. It was seen from records that the P&L a/c, balance sheet filed for the subsequent period i.e. 20th Dec., 2001 to 31st March, 2002 reveals the continuation of the business and no transfer of assets except the credit balance in the capital account being taken away by the retiring partner. The AO while concluding that provisions of Section 45(4) are applicable has relied upon a case wherein assets were not only distributed but were also registered in the name of retiring partner but said are not the facts of the case under consideration.

On the other hand the case of appellant gets covered by judicial decisions relied in support (supra). The decision relied upon by the appellant in the case of Shakti Trading Co. will be partly relevant because it was primarily laid down in respect of asst. yr. 1984-85 i.e. prior to insertion of Section 45(4) but the principle as laid down therein is relevant that as the new firm was reconstituted, it was not the case of distribution of capital assets. There is no material on record to show that any distribution of assets and liabilities of the firm took place and business ceased to continue as one unit. Rather contentions of the appellant in this regard were not refuted. The decision of Hon'ble jurisdictional Tribunal (supra) also goes to support the case of the appellant. The AO has referred to chart of machinery furnished by assessee during the course of assessment proceedings but the crucial issue in charging of capital gains is transfer of the assets and the said is not the case here as all the assets became the assets of the reconstituted firm and there being no transfer, therefore, Section 45(4) does not get attracted.

Accordingly, grounds taken by appellant are allowed.

12. Before us, the learned Departmental Representative has impugned the order under appeal while supporting that passed by the AO. Written submissions running into twenty-eight pages have been submitted on behalf of the assessee, as well as verbal arguments have been made. The crux of the written submissions of the assessee is that order passed by the learned CIT(A) is well versed and requires no interference; that Section 45(4) of the Act is attracted only when the assets are distributed amongst the partners and are also actually registered/transferred in their names, which is not the case herein; that reliance by the AO on Rajlaxmi Trading Co. v. CIT (supra) was misconceived; and that the AO erred in invoking the provisions of Section 45(4), which action has correctly been set right by the learned CIT(A).

13. The Department has filed counter submissions to the written submissions filed by the assessee. The Department has supported the order passed by the AO.14. We have heard both the parties and have perused the material on record. In this case, the fresh partnership deed states, inter alia, that "Shri Mohinder Pal Shoor has taken over and continued the running business of the firm M/s Marketers w.e.f. 20th Dec., 2001 and has inducted Shri Gaurav Shoor. party of the second part, as a partner, in his running business." It further states that "the parties hereto...will become and continue as partners in the aforesaid partnership business...." Still further, it states that "that the partnership hereunder constituted shall commence on and from the 21st day of December, 2001...." It is basic law that the document is to be read as it is. The above recital in the partnership deed clearly and amply shows that the partnership between Shri Mohinder Pal Shoor and Shri Gaurav Shoor shall commence on and w.e.f. 21st Dec, 2001. When the assessee contends otherwise and states that this document was executed in order to give a legal shape to the partnership which started on 20th Dec, 2001, such an argument is obviously fallacious. Firstly, the intention is copiously evident in the deed itself. This deed is dt.

21st Dec, 2001. It states that Shri Mohinder Pal Shoor has inducted Shri Gaurav Shoor. When this is stated, no date is specified. But this does not act in favour of the assessee. Firstly, it is the date of execution of a document which relates to all the recitals contained therein, unless something to the contrary has been specified in the document, which is not so here. Moreover, the deed states that Shri Mohinder Pal Shoor has inducted Shri Gaurav Shoor in his running business. The existing set of circumstances becomes evident from this word 'his'. It is eloquent about the fact that as on 20th Dec, 2001, Shri Mohinder Pal Shoor had taken over the running business of the erstwhile firm and it was, as on that date, his business. Further, the deed, in para 1 at p. 2 thereof, states specifically, in no uncertain or unambiguous terms "partnership hereunder constituted shall commence on and from the 21 day of December, 2001." 15. Further, the AO has correctly taken note of the preamble of the dissolution deed, which specifically mentions, inter alia, that "the firm M/s .Marketers" is dissolved on 19th Dec, 2001 and the party of the "first part" or "continuing party" has taken over the running business of the firm: Whereas the party of the first part and party of the second part were carrying on the business of manufacturers and exporters of hand tools, machine tools and machinery parts at Basti Danishmandan Road, Jalandhar City under the name and style of M/s Marketers under the terms and conditions of partnership deed dt. 4th July, 1981 and have carried on the said business in partnership with each other under the same name and style upto 19th Dec, 2001 and Whereas the parties to this deed have after negotiations amongst themselves have decided to dissolve the said partnership and accordingly have dissolved the abovesaid firm as from the 19th Dec., 2001 and have settled the accounts amongst themselves and the party on the first part has continued and taken over the running business of the firm along with all the movable and immovable properties and assets, liabilities, past, present, future. Contingent or otherwise in connection with and relating to the said business along with the trade name of the firm and its products and rights, titles and interests in quotas, permits, licences, concessions, allotments, electric connection bearing No. LS-19 and other assets and both the parties have agreed to such arrangement on retirement of the second party and have settled the accounts accordingly and are desirous of reducing the terms and conditions of dissolution in writing, this indenture witnesseth as follows: The firm M/s Marketers is dissolved on 19th Dec, 2001 and the party on the '1st part' or 'continuing party' has taken over the running business of the firm.

2. The party on the first part or the continuing party has taken over and continued the running business of the said firm along with all the movable and immovable properties and all the assets and liabilities, past, present or future, accrued or accruing, contingent or otherwise along with the trade name of the firm and its products and rights, titles and interests in quotas, permits, licences and concessions along with the rights in the telephones.

The party on the second part shall not carry on the business in the name of M/s Marketers or hold out himself to be a partner of the said firm after 19th Dec, 2001.

16. Therefore, not only the partnership deed, but also the dissolution deed clearly bring forth the fact that the erstwhile firm got dissolved on 19th Dec, 2001 and Shri Mohinder Pal Shoor took over its running business as sole proprietor, and it was only on 21st Dec, 2001 that Shri Gaurav Shoor was inducted as a partner in the fresh partnership firm.

17. It is impossible to imagine a situation where Shri Gaurav Shoor could have been inducted by Shri Mohinder Pal Shoor as a partner, if Shri Ved Parkash Shoor had not expressly by way of the dissolution deed relinquished all his capital rights in the erstwhile firm. In this regard, para 2 of the dissolution deed is sufficiently eloquent regarding the intention of the parties: 2. The party on the first part or the continuing party has taken over and continued the running business of the said firm along with all the movable and immovable properties and all the assets and liabilities, past, present or future, accrued or accruing, contingent or otherwise along with the trade name of the firm and its products and rights, titles and interests in quotas, permits, licences and concessions along with the rights in the telephones.

The party on the second part shall not carry on the business in the name of M/s Marketers or hold out himself to be a partner of the said firm after 19th Dec, 2001.

18. It is clear from the above quoted preamble to the dissolution deed, that thereby, Shri Ved Parkash Shoor relinquished all his rights in the erstwhile partnership firm in favour of Shri Mohinder Pal Shoor, who took over the running business of the dissolved firm, as sole proprietor thereof. The rights of Shri Ved Parkash Shoor in the erstwhile partnership firm thus got extinguished. Such extinguishment was the extinguishment of his rights in the capital assets of the firm.

19. Section 45(4) of the Act gets attracted in the case of transfer of a capital asset by way of distribution of capital assets, inter alia, on the dissolution of a firm. In the present case, as discussed above, on the dissolution of the firm, its capital assets were taken over by the sole proprietor, Shri Mohinder Pal Shoor, as a running business.

There was, thus, a transfer of such capital assets within the meaning of Section 45(4), inviting invocation of that section, which was correctly done by the AO.20. Further, Section 47 of the Act enumerates certain specific transactions which are not to be regarded as 'transfer' within the meaning of Section 45. The transactions given in Section 47 are exclusive and not inclusive. No transaction other than those can be said to be not a transfer as envisaged by Section 45(4). The transaction presently under consideration, i.e., transfer of capital assets of a partnership firm to a proprietorship concern on the dissolution of such partnership firm, does not find place in the specific transactions stated in Section 47. Item (xiii) under Section 47 considers the transfer of a capital asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, to be not a transfer under Section 45(4). However, no item under Section 47 holds the transfer of the capital assets of a firm to a sole proprietary concern as a result of dissolution of the firm and the succession of the firm by a sole proprietary concern in the business carried on by the firm, to be not a transfer within Section 45(4), such a transaction would obviously have found a place in Section 47 along with the fifteen specific transactions mentioned therein.

21. Furthermore, Section 45(4) gets attracted in the case of transfer of a capital asset by way of distribution of capital assets not only on the dissolution of a firm, but where such transfer comes about otherwise than by way of such dissolution. Now, considering for the sake of argument, but not conceding, even if it be taken that no dissolution of the erstwhile partnership firm ever came about, it is a fact patent from the dissolution deed, as discussed above, that Shri Ved Parkash Shoor relinquished his rights in the capital assets of the partnership firm in favour of Shri Mohinder Pal Shoor. Thereby, such rights got effectively extinguished. Section 2(47)(ii) of the Act declares such extinguishment of rights to be a 'transfer' in relation to such capital assets.

22. Further still, Section 2(47)(vi) holds any transaction, inter alia, by way of becoming a member of an AOP, or by way of any agreement or any arrangement, or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property. The factum of Shri Gaurav Shoor joining in as a partner of the firm enabled him to enjoy the capital assets (immovable property).

Therefore also, this is a case of transfer attracting application of Section 45(4), which was rightly done by the AO.23. The learned CIT(A) has given much weightage to the fact that the books of account were written starting from 20th Dec., 2001. This, however, cannot and does not detract from the clear intention of the parties, as manifestly available from the dissolution deed as well as from the partnership deed, as discussed above. To reiterate, had the intention been as the assessee would like us to believe, there was nothing stopping the assessee from mentioning in the fresh partnership deed the factum of induction of Shri Gaurav Shoor, as a partner, w.e.f.

20th Dec, 2001. While holding that the AO did not agree with the assessee's contention that 20th Dec, 2001 being a weekly holiday, the deed was made effective from 21st Dec, 2001, the learned CIT(A) did not deem it appropriate to go into this question himself. Moreover, as discussed, if it had been the intention of the assessee to make the fresh partnership effective w.e.f. 20th Dec., 2001, there was nothing stopping him from mentioning this fact in the fresh partnership deed.

24. The learned CIT(A) has gone wrong in observing that it was not a case of discontinuation of business. The facts, as evident from the dissolution deed as well as from the partnership deed, could not be clearer, that it was, indeed, a case of dissolution of the erstwhile firm, the taking over of the running business of the firm by Shri Mohinder Pal Shoor as a proprietary business on his own, and his inducting his son Shri Gaurav Shoor as a partner in a fresh partnership, only on 21st Dec, 2001. Reliance by the learned CIT(A) on Shakti Trading Co. v. CIT is entirely misconceived.

Therein, it was a case of dissolution of the firm on the death of a partner of the firm out of six partners and reconstitution thereof on the next date, with the remaining five partners. The facts in the present case are totally different. The learned CIT(A), in placing such reliance, has presumed that in the present case, the firm was reconstituted on the very next date of the dissolution thereof, i.e., on 20th Dec, 2001, whereas it is not so, as seen from the above discussion.

25. The fresh partnership also states that the partnership constituted thereon shall commence on and from the 21st day of December, 2001 and the name and style of the firm shall be M/s Marketers. It does not help the assessee at all if all the assets and liabilities of the old firm were taken over by the new partners. The fact remains that prior to this taking over, it was Shri Mohinder Pal Shoor and him alone, who took over the running business of the erstwhile business, as his proprietary business, on 20th Dec, 2001. It also does not make any difference that the bank accounts were continuing as they were, in the same name, in the same premises and concerning the same products. The assessee contends that the third para of partnership deed provides that the running business of the firm has been continued, but he fails to notice that this very para of the partnership deed states that Shri Mohinder Pal Shoor had inducted Shri Gaurav Shoor in his own running business. Further, it similarly, does not matter that the accounts of the suppliers were settled at the year end. The business in the fresh partnership was running in the name of the erstwhile firm, i.e., M/s Marketers. Similar is the position with regard to the assertion that the supplies to foreign customers were made as per orders received without differentiating between the orders received by the old firm and the new firm. The facts that the registration with the Government authority remained unchanged; that the staff and labour employed by the firm remained the same; that the accounts of the staff and labour were not settled at the time of retirement of Shri Ved Paul Shoor; that one IT return was filed for both the periods; that the balance sheets and P&L accounts of both the firms were drawn in continuity from 19th Dec, 2001 to 20th Dec, 2001; and that the fixed assets were taken at the book value, also meet the same fate in view of the express, specific and intentional use of the word 'his' in the partnership deed, as discussed above.

26. Reference by the assessee to the various provisions of the Partnership Act is also of no aid to the assessee. Section 45(4) of the IT Act specifically deals with transfer of capital asset by way of distribution of capital assets on the dissolution of a firm. The coming into force of Section 45(4) brought about the omission of Section 47(ii), whereunder, any distribution of capital assets on the dissolution of a firm was not to be regarded as a transfer for the purposes of Section 45. The IT law gives the AO a power to assess the income of a person in the manner provided by the Act. True, the provisions of the Act have to be considered in the light of the relevant branches of law. However, where there is a specific provision of the IT Act which derogates from any other statutory law or personal law, it is such specific provision and that provision only, which is to be considered, as held in, CIT v. Bagyalakshmi & Co. .

In the present case, the erstwhile partnership firm consisted of two partners. One of them retired, expressly relinquishing his rights therein, in favour of the other, i.e., the assessee, by way of a specific deed of dissolution of the partnership firm. The assessee took over the running business of the erstwhile partnership firm, as sole proprietor. The provisions of Section 45(4) of the IT Act thus came into play, eclipsing those of the Partnership Act.

27. None of the cases cited on behalf of the assessee helps the assessee. None of them states that where the capital assets of an erstwhile firm have been transferred, Section 45(4) of the Act does not come into play.

28. From the above, it stands established that as on 20th Dec, 2001, the assets and liabilities of the erstwhile firm stood transferred to Shri Mohinder Pal Shoor, proprietor of the running business of the erstwhile firm. As such, Section 45(4) of the Act is squarely applicable and was rightly applied by the AO.29. Therefore, we find that the order of the learned CIT(A) is liable to be set aside and that of the AO is entitled to be restored. Ordered accordingly.

The assessee has filed C.O. No. 44/Asr/2005 merely to support the order of the learned CIT(A). We have, for the reasons discussed hereinabove, set aside the CIT(A)'s order while restoring that passed by the AO.Therefore, the assessee's CO. is liable to be dismissed. Ordered accordingly.

30. In the result, the appeal of the Department succeeds and is allowed and the CO. filed by the assessee is dismissed.


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