The main legal point established in the judgment is that a notice issued under Section 148 of the Income Tax Act, 1961 must comply with the limitation period under Section 149, and the reopening of assessment must be based on a 'finding' or 'direction' as defined under Section 150(1) read with Explanation 2 to Section 153(3).

A.K. MENON, J.

1. By this writ petition, the petitioner challenges the notice under Section 148 of the Income Tax Act, 1961 (the 'Act') dated 21st July, 2003 seeking to reopen the assessment of the Petitioner's partnership firm for the assessment year 1990-91.

2. The brief facts are as follows : The petitioner is a partnership firm carrying on business at all material times with its principal place of business at 95, Queen's Road, Mumbai and with three other branches at one each at Juhu (Mumbai), Pune and Ahmedabad. With effect from 31st March, 1990 two partners of the petitioner firm retired. By a deed of retirement dated 25th May, 1990 the two retiring partners were allotted the branch at Ahmedabad with all its assets and liabilities at book value as their share in the business and as more particularly set out in the petition. During the course of assessment proceedings for the assessment year 1991-92, it was found that with effect from 1st April, 1990 the petitioner firm was left with only three shops situated at Queen's Road, Juhu and Pune. The Assessing Officer held that the branch at Ahmedabad which came to be allotted to the aforesaid retiring partners amounted to a transfer inclusive of capital assets by the firm to the retiring partners and therefore the Assessing Officer required the petitioner firm to explain as to why the provisions of Section 45(4) of the Act ought not to be applied on the footing that the allotment of the said branch amounted to distribution of a capital asset by way of transfer thereof.

3. In the instant case the firm having been reconstituted, continued to carry on business at the two establishments in Mumbai and one at Pune. The firm furnished its written submissions and inter alia contended that the Ahmedabad branch along with its assets and liabilities having been allotted to retiring partners in pursuance of a family arrangement, there was no 'transfer' of any capital asset as contemplated under Section 45(4) of the Act. Even otherwise, the conditions required by Section 45(4) of the Act were not attracted. They relied upon the provisions of the family arrangement dated 25th May, 1990. It was the case of the firm that all the partners had arrived at the family arrangement by which the aforesaid branch came to be allotted to the share of the retiring partners. The Assessing Officer however made an addition by way of capital gain in a sum of Rs.52,27,282/- consisting of Rs.37,27,282/- towards transfer of capital assets and a sum of Rs.15,00,000/- towards transfer of goodwill.

4. Being aggrieved by the order of the Assessing Officer, an appeal was preferred before the Commissioner of Income Tax (Appeals) [CIT (A)], who vide order dated 26th October, 1995 upheld the Assessing Officer's order. Being aggrieved by the order of the CIT (A), the firm filed an appeal before the Income Tax Appellate Tribunal bearing No. ITA No.9916/Mum/95. The Tribunal by its order dated 7th June, 2001 allowed the appeal inter alia holding that allotment of the said branch to the retiring partners did not amount to a transfer under Section 45(4) of the Act. It also held that Section 45 of the Act not being a Code in itself, it would not be appropriate to include the aforesaid allotment within the meaning of expression “transfer” as defined under Section 2(47) of the Act. In effect, the Tribunal held that upon retirement of partners and allotment of the Ahmedabad branch, there was no transfer within the aforesaid definition of Section 2(47) of the Act and therefore the addition of capital gain of Rs.52,27,282/- was directed to be deleted.

5. In the course of passing the order the tribunal in paragraph 8 of the order observed as follows :

“8. ….….

Even otherwise, it is a settled law that if while interpreting a provision two views are reasonably possible, then the interpretation in favour of the assessee should be adopted. In view of above, we have no hesitation to hold that Sec.45(4) was not applicable to the facts