S. 147 — Reopening of the assessment for the second time to take a different view on the same matter is bad in law and liable to be quashed.

9. 
   (2009) 119 ITD 21 (Mum.)

Aum Chemicals
v.
ACIT, Palghar
Circle, Palghar

A.Y. : 1998-99.
Dated : 30-4-2008

Held 1 :

S. 147 —
Reopening of the assessment for the second time to take a different view on
the same matter is bad in law and liable to be quashed.

Held 2 :

S. 45 — A
partnership firm consisting of 2 partners was converted into company —
Partners were given shares of Company A to the extent of their credit balances
in Capital Account — It was held that since the condition of distribution of
capital assets on dissolution of firm is not fulfilled, S. 45(4) is not
applicable. Even otherwise after deducting cost of capital which was equal to
book value, capital gain would be nil.

Fact 1 :

The assessee firm
decided to sell its assets and liabilities to a private limited company.
Subsequently, the said consideration was distributed among partners and the
firm was dissolved. The Assessing Officer reopened the assessment and added
certain amount as Short Term Capital Gain u/s.45(4). The CIT(A) deleted the
addition. Afterwards AO again reopened the assessment on the ground that the
partners made an arrangement to avoid tax by not assigning values to
individual assets and added the value difference of assets to the income of
the assessee. On appeal to Tribunal, it held that there was nothing on record
to show that there was any failure on the part of assessee. It had disclosed
all material facts at the time of first reopening of assessment. Hence, it was
not permissible to reopen the assessment on the same reason to take different
view. Consequently, second time reopening of assessment was bad in law and
liable to be quashed.

Fact 2 :

On distribution of
assets and liabilities to the company, the company allotted shares to partners
in proportion to their capital contribution. The AO taxed short term capital
gain by invoking provisions of S. 45(4). It was held that for invoking S.
45(4) following two conditions are to be satisfied :

1. Transfer by way
of distribution of capital asset.

2. Transfer should
be on the dissolution of the firm or otherwise.

There is a
difference between vesting in private limited company and distribution of
capital assets. In case of vesting of property, the property vests in the
company as it exists. On the other hand, distribution on dissolution
presupposes processes of division, realisation, encashment of assets and
apportionment of the realised amount.

In the given case
there was no transfer of assets on dissolution of firm. Hence, first condition
is not satisfied. Further, even if S. 45(1) is applied, the full value of
consideration for the firm is book value of assets as allocation of shares had
no correlation of vesting of properties in company. Hence, capital gain would
be Nil.