1. This appeal by the assessee is directed against the order of the Commissioner (Appeals) and relates to the assessment year 1980-81.
2. The assessee is assessed in the status of a HUF. Besides share income in a firm, the assessee owned a part of the property which was situated at 21, Barakhamba Road, New Delhi. The property in question belonged to the larger HUF and after the partition of this family, the assessee acquired one-fifth share in five-eighth part of the property as per decree by the Delhi High Court. According to the assessee, he wanted to start a business of real estates in the name of Ashok Kapur & Co. and he, therefore, shifted from this property and on 6-11-1979 made a declaration stating that he was converting his share in the property into stock-in-trade of the new business to be started in the name of Ashok Kapur & Co. As on 6-11-1979, the assessee valued his right in this property at Rs. 5,58,000. It was on the basis of the rates fixed by the Land and Development Officer. This amount was shown as the capital of the business of Ashok Kapur & Co.
3. The assessee entered into an agreement with Ansals Properties & Industries (P.) Ltd. on 19-11-1979 for the construction of a multi-storeyed building on Barakhamba Road and the arrangement in brief was that Ansal Properties & Industries (P.) Ltd. (Builders) was to construct this multi-storeyed building after demolishing all the structure at 21, Barakhamba Road, and all the investment in construction was to be made by the builders. After construction of the building, 50 per cent of the space made available to the assessee's share was to be handed over to the builders and 50 per cent of the constructed portion was to be retained by the assessee. The builders had to pay a security of Rs. 10 lakhs to the assessee, which had actually been paid in this year. The questions for consideration which arise in the present case are : 1. Whether as a result of the conversion of the assessee's share in the property into the assessee's stock-in-trade on 6-11-1979, there has been a 'transfer' and it has resulted in transfer of a capital asset which resulted in some taxable capital gain 2. Whether the action of the assessee in entering into the agreement with the builders has resulted in the transfer of the assessee's share in property to a partnership or to a joint venture and whether as a result of it some capital gain arises in the hands of the assessee 4. In respect of the first action, the ITO referred to the decision of the Supreme Court in the case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86. The ITO held that there was a transfer of the capital asset when the assessee converted the property belonging to him into the stock-in-trade of his business. The ITO observed that in the case before the Supreme Court, there was an assumption that there was difference between the cost to the assessee and cost to the business.
Taking these to be two separate identities, the ITO held that there was a transfer from one identity to another. According to the ITO, therefore, at the point of conversion itself, it can be held that some capital gains arose to the assessee and it has to be brought to tax.
5. The ITO further held that besides the action of conversion, the assessee had entered into an agreement with Ansal Properties & Industries (P.) Ltd. on 19-11-1979. According to his reading of this agreement, the absolute ownership of the assessee over the property was exchanged for a right to receive 50 per cent of the building to be constructed on that land and, thus, there was a transfer at that stage as well. As he found that the value of the assessee's share as on 1-1-1964 was shown at Rs. 50,000, he valued the property as on 1-1-1964 at Rs. 50,000 and proceeded to work out the capital gain, accordingly.
6. The IAC agreed with the conclusion arrived at by the ITO but he was of the view that the capital gains arose not as a result of conversion of the assessee's assets into stock-in-trade but by virtue of entering into a joint venture with Ansal Properties & Industries (P.) Ltd. According to him, the whole business was like partnership business. He observed that the assessee contributed his land, whereas the Ansal Properties & Industries (P.) Ltd. had to incur expenses on the construction of the multi-storeyed building. He also referred to the fact that 50 per cent of the constructed area was to go to Ansal Properties & Industries (P.) Ltd. and the other 50 per cent was to be retained by the assessee. According to him, the joint venture was in the nature of a partnership and the assessee was contributing his immovable property in the shape of land has transferred this property to the partnership and this has resulted in a capital gain to the assessee. In this connection, reference was made to the decision of A.Abdul Rahim, Travancore Confectionery Works v. CIT [1977] 110 ITR 595 (Ker.) (FB) and the decision of the Karnataka High Court in the case of Addl. CIT v. M.A.J. Vasanaik [1979] 116 ITR 110. According to the IAC, the right of the assessee in the land had extinguished and this right now belonged to the partnership or to the joint venture. He referred to the fact that the assessee had no right to sell or gift away in any other manner the said land after the date of agreement. A reference was also made to the decision of the Gujarat High Court in the case of CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42. In this case, it was held that transaction of introduction of a capital asset by a person in a firm, of which he is a partner, could constitute a transfer within the meaning of Section 45, read with Section 2(47), of the Income-tax Act, 1961 ('the Act'), so as to render the capital gains liable to tax.
7. When the matter came before the Commissioner (Appeals), he was of the view that the claim of conversion of the property into stock-in-trade was a got-up evidence and the assertion so made was merely a make-believe. The Commissioner (Appeals) found that there were no activities by the assessee, which were associated with such business. There was no advertisement and publicity regarding the flats.
He pointed out that the books maintained by the HUF were also an after-thought and in this connection, he referred to the assessee not showing any business income from the business of Ashok Kapur & Co. and when he filed an estimate of income for the purpose of advance tax on 14-3-1980. He pointed out that if the assessee was carrying on the business, he would not have shown interest income under the head 'Income from other sources'. He also referred to the fact that while putting the value of that property, only the land was taken into consideration and not the structure. He also referred to the fact, that the assessee had no experience of the business in real estates and there was no evidence for carrying on of that business. The property in dispute was an ancestral property which was used as self-residence. The Commissioner (Appeals) further observed that the onus that business was started on 6-11-1979 was on the assessee, and this onus had not been discharged. The Commissioner (Appeals) further observed that the alleged conversion was merely a method of evading tax and, according to him, this did not accord with human probability that the whole lot of the co-owners would have turned overnight real estate dealers and builders of apartments. He also pointed out to the fact that the assessee had undefined share in the specific property as it had not been physically partitioned as yet, and with such an undefined property, no business could be carried on. He, therefore, held that the action of the assessee in valuing the property at Rs. 5,58,000 was infructuous and had no sequence in the context of determining the quantum of capital gains arising from the transfer.
8. The Commissioner (Appeals) then proceeded to consider the question of capital gains as a result of the agreement with Ansal Properties & Industries (P.) Ltd. on 19-11-1979. He noted the different clauses of the agreement dated 19-11-1979 and held that it was a single projector venture entered into by both the assessee and the builders. He observed that the scheme was that the assessee was to contribute his share in land and the builders were to construct the property at their cost and after the whole project was carried out, the space created was to be shared by them half and half. He also referred to the clauses referring to the future management of the new building to be constructed and the service organization, which was to continue business. He pointed out that under the agreement, not only the space was to be transferred but 50 per cent of the interest in the plot was also to be transferred to the builders after the completion of the building. According to him, the agreement envisaged a common possession of the land, its common exploitation for commercial construction and common possession and enjoyment of the completed building. Thus, according to him, there was a form of partnership which came into existence. According to him, the builders acted as an agent of the assessee, who was like a sleeping partner in a partnership business. According to the Commissioner (Appeals), the joint venture would come to an end after the building was completed and the two parties obtained their shares. The sale of the flats was not to be jointly undertaken. The Commissioner (Appeals) held that though there was no sharing of profits, there was sharing of the stock-in-trade and in a way it was sharing of the profits as well.
The Commissioner (Appeals) came to the conclusion that the assessee transferred his share in the property to a partnership business. This has resulted in some capital gains in his hands. As the quantum of capital gains was not in dispute, he upheld the same.
9. Before we proceed to consider the rival submissions, we may note some specific clauses of the agreement, dated 19-11-1979 : ...Whereas the builder is proposing to build a composite multi-storeyed commercial building on the entire premises No. 21, Barakhamba Road, New Delhi, and has offered in connection therewith to the owner dealer to erect a part of the said proposed multi-storeyed commercial building on the one-fifth share of the owner dealer in the said property (which amounts to one-eighth share in the said premises No. 21, Barakhamba Road, New Delhi) after demolition of the existing structures, at the builder's own cost and expenses and with builder's own resources and to pay in respect thereof or therefor all incidental and other charges including but not limited to commercialisation charges in consideration of the owner dealer allocating to the builder 50 per cent of the owner dealer's share, as hereinafter defined, in the said multi-storeyed commercial building, in the manner and subject to and on the terms and conditions hereinafter contained.
6. That builder shall not be entitled to occupy and use, in any manner whatsoever, any part of the existing buildings and structures including servant quarters and the annexe on the plot or demolish the same till : (i) Approvals have been obtained from the Land and Development Officer and ; (ii) All the building and other requisite plans for the project building have been approved by the appropriate municipal, statutory, the Government and local authorities ; and (iii) Owner dealer has granted approval in writing for such occupation or demolition after obtaining of approvals referred to in (i) and (ii) hereinabove.
10. The owner dealer shall render to the builder all assistance necessary to enable the builder to prepare and pursue the application referred in Clause 7(a) and (b) hereinabove and/or obtain redevelopment permission for the plot, provided that all costs, charges and expenses and responsibility for pursuing the same and obtaining all permissions shall be to the account to the builder.
11. It is agreed and understood by and between the parties hereto that owner dealer alone shall be entitled to all compensation payable in respect of acquisition, if any, by any Government or local or statutory authority of any part of the plot and the builder shall have no right, title or interest whatsoever therein.
22. The builder is allowed to agree to sell the area comprised in builder's allocation his portion of 50 per cent area to prospecting flat buyers at builder's own risk and responsibility even prior to the sanctioning of the building plans and the approval of the project building by the concerned authorities or commencement of construction. The builder shall be entitled to sell to any third person whole or part of the saleable floor space, basement space and parking space forming part of builder's allocation, provided that such a transfer shall be registered only after the builder has completed the project building in all respects and has obtained occupation certificates, and the owner dealer has allocated 50 per cent interest in his one-eighth share in the plot to the builder or his nominees at builder's cost, i.e., builder or his nominees paying the stamp duty and registration charges in respect thereof, such transfer being part of the consideration pursuant to and in accordance with this agreement.
24. It is agreed and declared that the builder has no right, title or interest in any area other than that allocated by the owner dealer to the builder and the builder shall not be entitled to deal in respect of the same areas other than builder's allocation in any manner whatsoever.
33. The owner dealer and the builder shall meet and establish a service organisation as soon as possible after the completion of the building and consisting of one representation each of the owner dealer and the builder with equal powers of management. Such organisation may be a limited liability company or in any such form as may be mutually agreed between the owner dealer and the builder.
Immediately, on formation of such service organisation, both the owner dealer and the builder as also the transferees of their respective allocations, whether on the whole or part, shall transfer at such service organization's cost all their right, title and interest in the plot to the service organisation.
39. The builder shall act as an independent contractor in constructing the project building on the plot and the builder shall indemnify and keep the owner dealer indemnified harmless from and against all third party claims and actions arising out of any act or omission of the builder in relation to the construction of the project building or by reason of the builder in relation to the construction of the project building or by reason of the builder's obligations hereunder : 40. The builder shall deposit a sum of Rs. 10 (ten) lakhs as mentioned in Clause 5 free of interest as security for the due and faithful performance of the builder's obligation under this agreement.
41. In the event that building plans are not approved by the New Delhi Municipal Committee and others within 36 months of the signing of this agreement, this agreement shall he renewed for another period of 36 months provided the builder has given a further deposit of Rs. 5 lakhs (Rupees five lakhs only) free of interest before the expiry of the first 36 months' period. In the event of the builder failing to make the deposit within the stipulated period as aforesaid or the extended period expiring, as the case may be, without the building plans being approved by the concerned authorities, this agreement shall become void and the owner dealer shall refund to the builder the money deposited by builder as security deposit after deducting the monies which may have been paid out by the owner dealer on account of the builder, i.e., the monies the payment of which is the obligation of the builder under the provisions of this agreement, and the builder has refunded all the monies received by him from the prospective occupiers of any saleable area in the project building and further the builder will handover the vacant possession of the building and the plot of land to the owner dealer as was handed over to him. This agreement may further be extended by mutual agreement.
(i) The owner dealer and builder have entered into this agreement on a principal-to-principal basis only and nothing contained herein shall be deemed or construed as constituting a partnership between the builder and owner dealer, or as a joint venture or joint adventure between the owner dealer and the builder, nor shall the builder and owner dealer in any manner constitute an association of persons. Each shall be strictly responsible for his/her or its own tax liability and shall keep the other party hereto indemnified from and against the same.
(iii) Any notice required to be given by the owner dealer/builder shall, without prejudice to any other mode of service available, be deemed to have been sufficiently served on the owner dealer/builders if delivered by hand and receipt obtained or sent by prepaid registered post to the last known address of the owner dealer/builder, (iv) Nothing in these presents shall be construed as a demise or assignment or conveyance in law of the plot or any part thereof to the builder or as creating any right, title or interest in respect thereof in the builder.
10. The learned Counsel for the assessee referred to the relevant clauses of the agreement and submitted that the agreement has not resulted in a partnership and what has come into existence could not be equated with a partnership business. He clarified that the assessee was one of the persons who owned a part of the property at 21, Barakhamba Road, and the other parts belonged to the other members of the larger family. It was also pointed out by him that there were similar agreements between those persons and the builders, namely, the Ansal Properties & Industries (P.) Ltd. He, however, submitted that the assessee has never contributed the land belonging to him towards the capital of any partnership or any joint venture. According to him, the assessee continued to be the owner of the property and the position was to remain the same till the completion of the construction work. All what the agreement contemplated was the permission to the builder to construct a multi-storeyed building after demolishing the structure already standing on it and this was to be done at the builder's own cost. The assessee was to take all action so as to enable the builder to get a sanction for the building plan and the other responsibilities in respect of the construction work were to be that of the builder. It was pointed out that the assessee had no concern with the construction itself except that the plan itself had to be made with his consent. It was also contended that there was no common business carried on by the assessee along with the builders and the assessee was not to take any profit out of the activities of the builders. It was also submitted that the other requirements of a partnership agreement were not satisfied and no part of the agreement contemplated that for this period when the construction work is carried on, the land will belong to the so-called joint venture.
11. The learned Counsel for the assessee contended that the main thing to be decided in this case was, whether there was a transfer as a result of the agreement dated 19-11-1979. He submitted that the claim of the assessee regarding conversion of his capital asset into a stock-in-trade was only with a view to show that the assessee was carrying on the activity of turning plot of land into a commercial asset. He submitted that the Commissioner (Appeals) erred in holding that a partnership existed between the assessee and the builder and he further erred in holding that the assessee transferred his property to this partnership and capital gains arose to him as a result of this transfer. According to the learned Counsel, the agreement with the builders could not be considered in isolation and it was only a way of continuing the business activity of the family. In this connection, he referred to the various clauses of the deed, where it was pointed out that the construction was to be carried on principal-to-principal basis and there was no agency involved in this agreement. He pointed out that there is a provision in the agreement for an ultimate transfer at a future date by the assessee after the construction was completed and according to this understanding, the builders have to get 50 per cent of the constructed space and along with that the proportionate ownership in land was also to be transferred in favour of the ultimate purchasers. It was also contended that Clause 11 provided for all the compensation payable in respect of any future acquisition to the assessee and the builders had no right, title or interest therein. It was also pointed out that for the purpose of construction of the building, the assessee had to give a power of attorney in favour of the builders but the builders or their nominees were not entitled to sign or make any application in exercise of this power without a prior written consent of the assessee, who has been described as owner dealer. Referring to Clause 22 of the agreement, it was submitted that though the builder could raise funds in respect of available floor space, the transfer in respect of the space could be registered only after the builder completed the project building in all respects and after the assessee is allocated 50 per cent of interest of his one-eighth share in the plot to the builder. Clause 39 of the agreement lays down that the builder had to act as an independent contractor in constructing the building. He further referred to Clause 41 of the agreement, which provided for renewal of the agreement beyond three years on payment of Rs. 5 lakhs free of interest to the assessee by the builder and it was also provided that if the builder failed to make the deposit within the stipulated period, without the building plan being approved by the concerned authorities, the agreement was to become void and the assessee had to refund to the builder the money deposited by the builder as a security deposit. In that situation, the vacant land and the building on it was to be returned to the assessee, who continued to be the owner. In the end, a reference was made to Clause 43, Sub-clause (i) and Sub-clause (ii), which clarified that this was not a partnership agreement nor was it a joint venture and the assessee and the builder did not constitute an association of persons. Each party was responsible for his own activity and tax liability.
Sub-clause (v) also clarified that there was no demise or assignment or conveyance in law of the plot or any part thereof to the builder and the builder did not get any right, title or interest in respect of that plot.
12. In the end the learned Counsel for the assessee submitted that even if any transfer was contemplated in the agreement, it was to take place in future and nothing has happened in this year. At present, the assessee has not relinquished any right in respect of the plot of land or the building thereon. The learned Counsel submitted that the first point raised in respect of the conversion of the property becomes academic, if it is held that there was no transfer when the agreement dated 19-11-1979 was executed. There was no dispute regarding the quantum of the capital gains, once it was held that such capital gain was chargeable to tax.
13. The departmental representative submitted that the agreement was in the nature of joint venture which was also in the nature of a partnership. It was submitted that by the agreement dated 19-11-1979, the property which originally belonged to the assessee-family stood transferred to the assessee along with the builder who constituted a sort of partnership for this purpose. It was submitted that the agreement could not cease to be a partnership agreement for an agreement for a joint venture merely because the party's right is like that in the agreement. Reliance was placed on the decisions cited by the learned Commissioner (Appeals) and particularly in the case of Kartikey v. Sarabhai (supra). It was further contended that in the case of a partner bringing his asset as a capital of the firm, no registration was necessary and the transfer takes place without such registration.
14. We have considered the rival submissions and we have gone through the agreement and other relevant documents. Though the ITO had first charged capital gains on the assessee converting an immovable property into stock-in-trade by valuing it at market rate, the assessment was also made with reference to the transfer, which, according to the ITO, took place by the agreement dated 19-11-1979. The Commissioner (Appeals) held that the assessee did not commence any business in real estate on 6-11-1979 and there was no occasion for treating the property as the assessee's stock-in-trade by valuing the property on some basis.
The learned Commissioner (Appeals) has proceeded to consider the question of capital gains only with reference to the agreement dated 19-11-1979. Though we will consider the decision of the learned Commissioner (Appeals), we may briefly deal with the conclusion of the ITO that on 6-11-1979 when there was conversion of the property into stock-in-trade, there was a transfer resulting in the capital gain.
Firstly, we find that there is no material to show that the assessee started business on 6-11-1979 and the only thing which is there was the declaration made by the assessee, which was clearly from the point of view of taxation. We agree with the reasoning given by the Commissioner (Appeals) on this aspect of the matter. Though we need not consider all the small facts mentioned by him, we agree that on 6-11-1979 there was no conversion of the capital asset into stock-in-trade and such action, which was taken for starting a venture, came only later when the agreement dated 19-11-1979 was executed. It may also be mentioned that there is no justification for the view that such conversion of a capital asset into stock-in-trade results in a transfer. Transfer contemplates two parties, namely, a transferor and a transferee. The observation of the ITO that the assessee and his business are two separate identities is not relevant for the purpose of finding whether there has been a transfer. The transfer has to be by one person to another person and not by one account of a person to another account of the same person. The inspiration for all this exercise has come up as a result of the decision of the Supreme Court in the case of Bai Shirinbai K. Kooka (supra), which has been referred to above. In that case the question for consideration was, as to what would be the business profit on a transaction where the stock-in-trade has been converted from a non-business asset. Certain shares, which were held on investment account, were to be dealt with commercially and the assessee had claimed that on the date when he decided to deal with those shares in the market and not to hold such an investment, he revalued the shares and continued his business in respect of those shares from that date. Ultimately, when the business profit was to be considered, the value of the opening stock was to be taken on the basis of the market value on the date of its conversion. Thus, the relevance of this action was for the purpose of computation of business income of a person. In the present case, there is no assessment of the business income of the assessee and the ITO has further held that the capital asset itself was transferred when the agreement was entered into on 19-11-1979 and in fact capital gain itself has been included in the hands of the assessee. This position has continued before the Commissioner (Appeals). In this view of the matter, there is no relevance of this exercise of valuing the so-called stock-in-trade by the assessee. It may also be mentioned that as under the law, as it stood, such a conversion could not be considered to be 'transfer'. The law has been amended by the Taxation Laws (Amendment) Act, 1984, providing that such conversion could be covered under the meaning of the word 'transfer'.
This amendment was not clarificatory but would make a provision for such a situation and it was intended to bring into the taxation net the gain arising to a person from such conversion. The opinion of the ITO, therefore, that such conversion results in a capital gain is without any basis. We have already mentioned that the Commissioner (Appeals) has not proceeded on the above basis.
15. Now we come to the consideration of the second limb of the assessment, which is in fact the main question remaining to be decided after the order of the Commissioner (Appeals). The reasoning of the revenue is that the agreement with builder on 19-11-1979 resulted in a partnership or a joint venture, which was in the nature of partnership.
The revenue has proceeded to argue that as the assessee, as the owner of the land, has come forward and agreed to let the builder construct a multi-storeyed building on his land and then ultimately to share the constructed space, it was a case of partnership. It has further been the case of the revenue that as a result of this action, the land was contributed as a capital to this partnership and as the market value of this property was at a particular figure, the differences between the cost of acquisition and the market value represented capital gains in the hands of the assessee. In other words, according to the revenue, when the partner brings his capital asset as his capital contribution in a firm and values it at a particular figure, there can be a capital gain in the hands of such assessee.
16. The first question, therefore, arises as to what was the nature of the agreement between the assessee and the builders whether this agreement brought into existence any partnership or anything akin to a partnership so that what would apply in the case of a partnership should also apply to the present case. The essentials of a partnership are that there should be two or more persons who should come forward and agree to carry on any business and to further agree to share its profits or losses. There is a further requirement that the partners should be agent to each other. Section 6 of the Indian Partnership Act, 1932, provides that in determining whether the person is or is not a partner in a firm, regard should be had to the real relations between the parties, as shown by all the relevant facts taken together. The sharing of profits of gross returns arising from property by persons holding a joint or common interest in that property does not by itself make such persons partners. In the instant case, the agreement is for two persons coming together with a common object of sharing constructed space in a multi-storeyed building. One party was the owner of the land and the other party was to fully contribute towards the construction.
The agreement was that after the construction was completed, 50 per cent of the space would come to the assessee and the other 50 per cent would be given to the builder in consideration of the investment made by him in the construction of the building. The builder was independent in his business and activity and the assessee had no right or responsibility in respect of the builder's activity. All the investments had to be made by the builder and the expenses had to be incurred by him. It is true that as far as the assessee was concerned, he had agreed to sign all the applications and necessary papers as the land belonged to him. In the construction activity and later on in the sale of the space allocated to the builder, whatever profit or loss arose to the builder was of no concern to the assessee. Similarly, whatever profit the assessee was to make by the sale of the constructed space, was no concern of the builder. Reading the agreement as a whole, one cannot deny that the activity as a whole was a business venture.
But the elements of partnership were not present in the agreement. The activity of each person was different and they were responsible for their own activity and the results of such activity. The learned Commissioner (Appeals) has also observed that there is no sharing of ultimate profits in the present case, though there is a sharing of the space to be constructed. In the activity of construction, the whole responsibility was of the builder though the formal permission has to be given by the assessee and wherever the local authorities were concerned, the papers have to be signed either by him or by his attorney holder. The agreement does not indicate that there was any agency involved in it and each person was to operate in his own sphere.
Though the legal effect cannot be determined merely by what is written in the deed, one cannot ignore the terms of the agreement without there being any reason for the same. The parties had agreed to jointly maintain the building and common facilities till the service organization came into existence. Thus, the activity was no doubt an activity in the nature of some business but the other two elements of sharing of profits and of agency was not indicated by the agreement.
The parties have clearly stated that there was no partnership between them and they were to act on principal-to-principal basis and each was to be strictly responsible for his own sphere of activity and liabilities. The agreement had also made it clear that there was no understanding to assign or convey the plot of land to the builder and at least till the completion of the construction, the assessee was to continue to be the sole owner of the land and interest in such land.
The builder under the agreement has got the right to carry on the construction work but while the work was being carried on by him, the ownership in land continues to' be of the assessee.
17. Thus, though to some extent a common venture was involved, no partnership as such has come into existence in the present case. The question for further consideration is that, whether the assessee, by agreeing with the builder to let him to construct the multi-storeyed building, has transferred his property to the builder or to the alleged partnership or joint venture. In our opinion, the agreement is very clear on this question as there is no other material on the basis of which it could be held that there has been any intention on the part of the assessee to relinquish any right in his property in favour of the builder or any other person. We have to consider whether there has been a transfer and that too in this year. It is an agreed position that the building had not been constructed and the consequential action to be taken had not been taken. In this situation, it cannot be held that the assessee brought the land as his capital in the so-called partnership.
It is only where an asset belonging to an assessee is brought in or introduced by him into a firm in which he is a partner, the property in question can be said to belong to the firm after such introduction.
Once a partner does it, he would no longer have any power to dispose of the whole or any part of it or any interest therein as his property.
There can be the case of a partnership where the partner does not introduce his asset into the partnership as a capital but lets the firm use it for certain consideration. A person owning a building or a house can let the firm to carry on business in those premises without, in any way, transferring his ownership in that property. He may even charge rent or may give it without rent to the firm but the ownership could not be affected. Only in the case where the partner introduces a particular asset as his capital in the firm, the question of transfer to the firm arises and can be considered on the facts of a particular case. As we have pointed out in the present case, there is nothing to show that the plot of land was introduced by the assessee in the so-called joint venture or partnership and throughout the period of agreement, it was made clear that the assessee was to continue to be the legal and factual owner of the property.
18. In this connection, we may again refer to the agreement. The agreement refers to the assessee's share in the property and the intention of the builder to construct a multi-storeyed building on that property. The agreement does make a reference to the declaration dated 6-11-1979 and says that the assessee's share in property was contributed as proprietor's capital for the purpose of carrying on the business. The so-called partnership, however, does not take note of the value of the property at any particular figure and the fact that the value of the property was Rs. 5,58,000, as per the assessee's valuation, was not mentioned and was in fact irrelevant for the purpose of this agreement. Therefore, as far as this agreement is concerned, the question of any capital gains arising as a result of the valuation of the property at Rs. 5,58,000 does not arise. We have already mentioned above that there was a provision in the agreement that if the building plans were not ultimately approved, this agreement was to become void and the assessee had to refund the security deposit and the property belonging to the assessee was to be handed over to the assessee who continued to be the owner. This clause makes it clear that there was in fact no transfer of the property in favour of the builder or the so-called partnership. The question of the assessee's contribution of the land at a particular value would have become relevant, if the firm had any responsibility of returning that amount of money to the assessee in the case of the agreement falling thereon.
Here we have a case where the property belonging to the assessee is valued at a notional figure and the builder agrees to construct on it without any reference to its market or investment value. For the period of agreement, the property was to be under the ownership of the assessee and after that half of the property, alongwith the constructed space, was to belong to the assessee and the other half was to go to the builder in consideration of the investments made by him. The builder or the joint venture had nothing to do with the market value of the land, as neither the builder nor the joint venture had themselves any right to sell the property and the two parties had separately got the rights as given in the agreement.
19. Now we may note certain case laws on the point, though we may mention in the beginning that according to our finding, firstly, there was no partnership and secondly, there was no introduction of the property into the so-called firm. In view of this finding, the further question of there being any transfer for the purpose of charging capital gains could not arise. However, briefly, we may mention the case laws relied upon by the parties. The Supreme Court in CIT v. Hind Construction Ltd. [1972) 83 ITR 211 had observed that a person by handing over his goods to a partnership, of which he is a partner, cannot be taken to have sold the goods to partnership. This case, however, related to the Indian Income-tax Act, 1922, and it was not considering the scope of the term 'transfer' as given in Section 2(47) of the 1961 Act. When a partner introduces his property as his capital in the partnership and his account is credited for the estimated value of such property, it cannot be said that there was any sale or exchange. This question has been considered by the Gujarat High Court in the case of Kartikey V. Sarabhai (supra). After considering the various legal provisions, the High Court held that there is extinguishment of a right of the person in such capital asset and this comes under the term 'transfer' as defined in Section 2(47). It is also held in that case that after the partner contributes such a capital asset as his capital in the firm, the property itself cannot be considered as his asset for the purposes of wealth-tax and it is not possible to argue that a person continues to be the owner of the property introduced by him in the firm of which he is a partner.
According to their Lordships, the legal position is that the exclusive property of the person who brought it in, ceased to be the exclusive proprietor and it becomes an asset of the partnership in which all the partners would have interest in proportion to their shares. The partner cannot exercise his right in respect of that property even to the extent of his share. In this decision, reliance was placed on the decision of the Full Bench of the Kerala High Court in the case of A.Abdul Rahim, Travancore Confectionery Works (supra), wherein it was held that there is a transfer when a person as a partner brings his capital asset in a firm. Similar view was taken by the Karnataka High Court in the case of M.A.J. Vasanaik (supra). In the latter case, it was also held that there is virtually a transfer of the rights in the property by the partners to the firm. Their Lordships also referred to one decision of the Supreme Court and distinguished it by holding that that decision has not considered the provisions of Section 2(47). Their Lordships also clarified that such a situation need not be confused with another situation, when a firm is dissolved or its assets are distributed among the partners.
20. It is true that there are decisions to the contrary also. In the case of CIT v. Abdul Khader Motor & Lorry Service [1978] 112 ITR 360, it was held by the Madras High Court that there was no transfer within the meaning of Section 2(47) when a partner brought certain buses and lorries belonging to him on his contribution towards the capital of the firm of which he was to be a partner. Though that was a case for deciding the application of Section 41(2) of the Act, it also considered the question of capital gains. In view of this conflict in decisions, we will have to see as to what interpretation can be placed having regard to the relevant decisions of the Allahabad High Court, which would be binding in the present case. We may also state that in the case of Kartikey V. Sarabhai (supra), the question of a capital gain arising by the credit of the value in the capital asset account was also considered and it was held that the payment of cash and credit of such amount in the capital account has the same effect as far as the charge of capital gains was concerned.
21. The other aspect of the case is, whether such a transfer could be considered as a valid transfer without registration of such a transaction. The learned Counsel for the assessee had drawn our attention to the provisions of the Indian Registration Act, 1908, which require the registration of all such transactions where the subject-matter of transfer is an immovable property having a value of more than Rs. 100. He also submitted that without such registration, no legal rights are created in respect of such a property. Whether the transfer of a capital asset by a partner to the firm by way of his capital contribution requires registration, was considered by the Madras High Court in the case of CIT v. T.M.B. Mohamed Abdul Khadar [1984] 16 Taxman 413 (Mad.). In that case also, the partner of the firm made a declaration that the property will be the property of the firm and the consideration will be Rs. 1,20,000 as against the book cost of Rs. 75,000. The necessary entries were made. The question arose regarding the charge of capital gains. The Tribunal had given two reasons for holding that the transaction was not liable to capital gains tax. One was that there was no valid registered document of transfer and, therefore, the transaction will not attract tax on capital gains. The second reason was that when an individual property is covered into a partnership property, no transfer is involved. The Madras High Court has held that as there was no registered document transferring the immovable property, there was no valid transfer of the property. The High Court did not express any opinion on the question whether such a transaction at all could be considered as 'transfer'. As against this, it was held by the Rajasthan High Court in CIT v. Amber Corpn. [1981] 127 ITR 29 that on a reading of Section 14 of the Indian Partnership Act, it would be clear that even in respect of an immovable property, no document, registered or otherwise, is required for transferring the property from the partner to the partnership. Though that case related to the question of allowance of depreciation, the principles discussed would be applicable in the present case as well.
22. The Allahabad High Court in the case of K.D. Pandey v. CWT [1977] 108 ITR 214 has held that a partner can bring his immovable property to the stock or capital of the firm without a registered document, and after such contribution the property in question becomes the property of the firm. Their Lordships in this case held that the decision of the Supreme Court in the case of Hind Construction Ltd. (supra) does not lay down the proposition that a partner cannot bring his immovable property as his contribution to the stock or capital of the firm except by way of a registered instrument of transfer. In other words, where a partner in his capacity as a partner brings to the firm some of his assets as his contribution towards capital, then it can be held that there is a transfer which does not require registration.
23. We have noted the above cases only because there was argument before us in this regard. We have already given a finding that in the present case, the assessee never entered into a partnership agreement and he did not contribute his property towards the asset of the partnership-firm and at no stage the so-called firm became entitled to deal with this property. The assessee continued to be the owner in the whole of this year and even in the year after, and the position was to continue till the completion of the construction. In view of this, the above case-laws lose their significance and are not applicable.
1. the assessee's admitted conversion of his immovable property into stock-in-trade on 6-11-1979 has not resulted in any transfer within the meaning of the Act for the purpose of charging of capital gains.
Firstly, we have not accepted the bona fides of such conversion and secondly, we have held that the legal effect of such conversion, even if it had taken place, could not be a 'transfer' for the purpose of charging capital gains.
2. By entering into an agreement with the builders Ansal Properties & Industries (P.) Ltd., the assessee did not enter into a partnership agreement and the two parties were to deal with each other on principal-to-principal basis. The important elements of the partnership were absent in this activity.
3. The assessee did not bring in his immovable property as a contribution towards his joint venture with the builders and the agreement contemplates the continued ownership of the assessee in respect of the immovable property.
4. There has thus, been no transfer by the assessee of the immovable property and the so-called firm or joint venture was not concerned with the notional valuation of the property as far as the venture's accounts were concerned.
The addition in respect of the capital gains has, therefore, to be deleted.