Judgment K.S. Jhaveri, J. 1. Being aggrieved and dissatisfied with the impugned orders passed by the Income Tax Appellate Tribunal, Rajkot Bench (hereinafter referred to as ‘the Tribunal’) dated 21.07.2005 in ITA Nos. 521/Rjt/2003, 522/Rjt/2003 & 523/Rjt/2003 for the Assessment Year 1997-98, the revenue has preferred the present Tax Appeals. 1.1 The following substantial questions of law were raised while admitting the appeals on 08.09.2006 : “(A) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the decision of the A.O is not justified in holding that the assessee derived any benefit to the extent of 50% of the book value assets contributed by the partners to the new firm constituted by them from the assets that came to their share on the dissolution of the erstwhile firms? (B) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that provisions of Sec. 45(4) of the I.T Act is not applicable in the facts and circumstances of the case?” 2. The brief facts of the case are that up to financial year ending on 31.03.1996 all the three firms were assessed to tax as separate entity and thereafter with effect from 01.04.1996, in terms of the partnership deed dated 01.04.1996, the business of the three firms had been taken over by one new firm. On merger, the assets of the erstwhile firms were not realized, liabilities were not defrayed and the surplus was not worked out and not distributed amongst the partners of the erstwhile firm. The Assessing Officer applied provisions of section 41(2) and 45(4) of the Act and accordingly made assessement by taking 50% of book value of the assets taken over by the new firms at Rs. 58,00,415/-, Rs. 25,08,328/- and Rs. 9,85,122/- respectively in the cases of the three erstwhile firms. On appeal, the CIT (Appeals) deleted the addition. 3. On appeal before the Tribunal by the revenue, by the impugned order, Tribunal dismissed the appeals and upheld the findings of CIT(A). Being aggrieved and dissatisfied with the impugned order passed by the Tribunal, the revenue has preferred the present Tax Appeals for consideration of the aforesaid substantial question of law. 4. Mr. 3. On appeal before the Tribunal by the revenue, by the impugned order, Tribunal dismissed the appeals and upheld the findings of CIT(A). Being aggrieved and dissatisfied with the impugned order passed by the Tribunal, the revenue has preferred the present Tax Appeals for consideration of the aforesaid substantial question of law. 4. Mr. P.G. Desai, learned advocate appearing for the revenue has drawn our attention to the provisions of Section 45(4) of the Act and submitted that although no formal dissolution of the old firms has taken place as per provisions of Section 39 & 40 of the Partnership Act, yet the sequence of events clearly show that all the three firms have actually been dissolved and all their assets and liabilities have been transferred at book value to the newly constituted firm and accordingly provisions of Section 45(4) of the Act will clearly apply. 5. Mr. R.K. Patel, learned advocate appearing for the assessee supported the impugned orders and submitted that the same having been passed in accordance with law does not call for any interference. 6. We have heard learned advocates for the parties and perused the records. At the outset it shall be relevant to peruse section 45(4) of the Act and the same is reproduced hereunder: “45. Capital gains ... (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 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.” 6.1 The CIT(A) while allowing the appeal preferred by the assessee has proceeded on the footing that the assessee firm has not sold any asset to the new firm constructively or in the real sense of the term and that no gain is realized by the appellant firm. The CIT(A) has observed that there is no discontinuity in the business and no need of rendering the accounts and that no taxable profit has escaped assessment much less a profit which must be estimated in a rough and ready manner as is done in the assessment order. 6.2 The Tribunal has upheld the view taken by the CIT(A) and observed further in para 5 as under: “5. We have heard both the rival contentions of both parties. Looking to the facts and circumstances of the case, we find that three firms were dissolved and they have continued the business and the business was running as reconstituted firm, which is a merged firm. In the case of ALA firm vs. CIT 189 ITR 285 Hon’ble Supreme Court has held that the principle of valuing closing stock of business of cost or market value at the option of the assessee would hold good only so long as there is continuing business where the business is discontinued or any reason profits cannot be ascertained except by taking the closing stock at market value in the case of the dissolving firm. This is because settlement of accounts must not be on notional basis, but real basis. The assets have to be valued on the date of dissolution. This also applied to assets which are stock in ends. The surplus on revaluation should be charged to tax in the case of the firm as its profits in the year of dissolution. Herein this case, the assessee firm has not been dissolved, but there was a case of merger of three firms. The assets and liability of the three firms continued to be the liabilities of new firm. No tax advantage was arrived. The merger was for business convenience and efficiency. The Assessing Officer, in the assessment order, has verified the book value of the assets. We have also verified the trading balance sheets of the three erstwhile firms produced during the course of hearing and find that there was no dissolution of the firms but it was only a merger of the firms. The Assessing Officer, in the assessment order, has verified the book value of the assets. We have also verified the trading balance sheets of the three erstwhile firms produced during the course of hearing and find that there was no dissolution of the firms but it was only a merger of the firms. Therefore, we are of the view that the CIT(A) is justified in his action in holding that the AO does not appear to have made out a case that the assessee derived any benefit to the extent of the 50% of the book value of the assets contributed by the partners to the new firm constituted by them from the assets that came to their share on dissolution of the firm. The order of the CIT(A), therefore, need no interference, and as such, Revnue’s appeal in all these three cases are dismissed.” 6.3 In view of the aforesaid, we are of the opinion that the Tribunal as well as CIT(A) are justified in coming to the conclusion that the AO does not appear to have made out a case that the assessee derived any benefit to the extent of the 50% of the book value of the assets contributed by the partners to the new firm constituted by them from the assets that came to their share on dissolution of the firm. The authorities below have rightly interpreted the provisions of sections 41 and 45 of the Act. The contract entered into by the parties is required to be interpreted under the provisions of the Income Tax Act and not as per the whims of the revenue. 7. We, therefore, answer the question raised in the present appeals in favour of the assessee and against the department - revenue. Appeals are dismissed accordingly.