Shri M.M. Cherian, Accountant Member - (1.) REVENUE has filed these three appeals against the order of the CIT (Appeals) III, Madras in the case of M/s. Modern Re-Rollers, Pondicherry for the assessment year 1981-82. As the issue involved in these appeals are common, they are consolidated in a common order.
(2.) The assessees Smt. R. Shyamala, Smt. G. Meenakshi and Smt. R. Ambica were carrying on business in partnership till 3-1-1981. On 3-1-1981 eight new partners were brought into the partnership, with four incoming partners bringing in land as their share capital and the other four partners bringing in cash towards their share capital. This arrangement with 11 partners including the eight new partners continued till 23-1-1981 and then the firm is said to have been dissolved. On dissolution the factory building, sheds, machinery and plant were taken over by the four new partners who introduced cash as their capital. The land on which the factory building stood belonged to Shri Munuswamy Mudaliar and his three sons, Sri M. Ranganathan, Sri M. Ramachandran and Sri M. Govindaswamy. The sons of Sri Munuswamy Mudaliar who were brought in as partners on 3-1-1981 were the husbands of the lady partners. The persons who joined the firm bringing in cash of Rs. 25,000 on 3-1-1981 were the following : 1. Shri Govinda Prasad 2. Shri Murilal Sonthalia Shri Pawankumar Sonthalia
(3.) DR. C.L. Lohia. Though the land belonged to Shri Munuswamy Mudaliar and his three sons, the factory building, plant and machinery etc. were owned by the firm comprising of the three lady partners. When the land was brought in by the partners, it was valued at Rs. 1 lakh and credit was accordingly given in the account of those four partners. On the eve of reconstitution on 3-1-1981 the assets of the firm such as factory building, shed, machinery, furniture etc. were revalued and the difference in value was credited to the accounts of the three lady partners. The firm was dissolved on 23-1-1981 and the four partners, Shri Govinda Prasad, Shri Murilal Sonthalia, Shri Pawankumar Sonthalia and DR. C.L. Lohia took over the assets of the firm and also the land. They then continued the business after giving the retiring partners cash in settlement of their accounts. From these facts the Assessing Officer came to the conclusion that the transactions on 3-1-1981 and 23-1-1981 were in the nature of a device by which the lady partners transferred the assets of the firm to the successors in the business. On that view of the matter, the Assessing Officer proceeded to compute the profit under section 41(2) and the capital gains on the transfer of the assets by the firm consisting of three lady partners, to the four persons who took over the business on 23-1-1981. Profit under section 41(2) on the transfer of the factory building, shed, furniture etc. was assessed at Rs. 1,96,434 and the capital gains at Rs. 2,05,556. 3. Against the assessment, the assessees filed appeals and the CIT(A) held that the entire arrangement of reconstitution of the firm was made with a view to transfer the assets belonging to the firm of the three lady partners to the four incoming partners. The CIT(A) noticed that the land belonging to Shri Munuswamy Mudaliar and his three sons, was brought to the firm for a value of Rs. 1 lakh and then transferred to the four new partners on the same value and so there was no capital gains on that transaction. As regards the other assets transferred by the firm, the CIT(A) held that this was a case of transfer of the whole undertaking and so, the provisions of section 41(2) were not attracted and accordingly there could be no assessment of profit under section 41(2). The appellate authority further held that tax was rightly leviable on the capital gains arising on the transfer of the assets. Regarding computation of the capital gains, it was held that it should be computed deducting the sum of Rs. 4,29,444 representing the cost of the assets as mentioned in the assessment order from the sale consideration of Rs. 6.35 lakhs. The Assessing Officer was directed to assess the surplus of Rs. 2,05,556 as capital gains and allow the deduction under section 80-T. Revenue has filed these appeals with the plea that the CIT(A) was not correct in giving the direction to compute the capital gains after deducting the actual cost of the assets from the sale consideration. 4. On behalf of Revenue, the Departmental Representative, Shri O.P. Sachan, submitted before us that the CIT(A) was not justified in directing the Assessing Officer to deduct the cost of the assets from the sale price to arrive at the capital gains. The Departmental Representative explained that what the firm transferred for Rs. 6.35 lakhs were only four items of assets which had been previously used in the business carried on by the firm. It was pointed out that those were depreciable items being building, machinery, electrical fittings and furniture, on which depreciation had been granted in the earlier years. DRawing our attention to the provisions of section 50 of the Income-tax Act, 1961, the learned D.R. submitted that for the purpose of computing capital gains the cost of acquisition of depreciable assets was to be taken as per section 50 and accordingly WDV of the assets as defined in clause (6) of section 43 should have been taken as the cost of acquisition. Shri Sachan submitted that in giving the direction to assess the capital gains at Rs. 2,05,556, the above provisions had been lost sight of and the CIT(A) had considered the cost of assets at Rs. 4,29,444 as shown in the assessment order. The learned D.R. pointed out that in the assessment cost of the assets was taken at Rs. 4,29,444 because there was profit under section 41(2) assessed separately and that having made the assessment in that manner the Assessing Officer computed the capital gains with reference to the actual cost of the assets, probably thinking that there would have been otherwise a double assessment in the sense that the sum of Rs. 1,96,434 (i.e., depreciation so far allowed) would have been again included in the computation of the capital gains. Shri Sachan submitted that after finding that profit under section 41(2) was not assessable, the CIT(A) should have found that for computing the capital gains the cost of acquisition should have been taken as per section 50 only. Arguing on the above lines, the learned D.R. made a strong plea for modifying the order of the CIT(A) to the extent of deducting the WDV of the assets under section 50 of the I.T. Act in the computation of the capital gains.;