Judgment:
1. The assessee has preferred this appeal against the order dated 16-1-1984 of Shri B.S. Hajela, AAC, who dismissed the appeal against order dated 28-3-1983 of Shri S.P. Singh, ITO.2. The relevant facts, in brief, are that the assessee was a partner in Shah Enterprise which was carrying on the business of construction and development of lands. The previous year, relevant for the assessment year 1980-81, ended on 31-3-1980. The system of accounting is mercantile. During the previous year relevant for the assessment year under consideration, the assessee transferred the land of which he was the owner to the firm for an amount of Rs. 1,10,990. After deducting the cost of acquisition of this land, the ITO subjected to tax an amount of Rs. 75,663 under the head 'Capital gains' and thereby rejected the contention of the assessee at the time of investment as capital, in the partnership (sic) the land was trading asset and, therefore, no capital gain was chargeable to tax for the same.
3. In appeal, on following the decision of the Hon'ble Gujarat High Court in the case of CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42, wherein it was held that where an asset belonging to an assessee is brought in by him into a firm in which he is a partner, the property in question would belong to the firm and the assessee will not have any power to dispose of whole or any part of it or any interest therein as his property ; that in a specific partnership property, a partner has no intrest and as soon as the property is acquired either by way of introduction by a partner or by way of subsequent purchase, it becomes assets of the partnership firm ; that in respect of that property, no partner can say that he has any specified interest in it. Thus, their Lordships of the Gujarat High Court held further that when an asset is introduced by a partner in the firm, the transaction amounts to transfer of property and the same is liable to capital gains.
Accordingly, he confirmed the action of the ITO holding therein that the ITO was justified in charging capital gains in the hands of the assessee.
4. The assessee being further aggrieved has made this appeal. Shri G.M.Patel, the learned counsel for the assessee, in arguing the appeal stated before us that he does not press ground Nos. 3 and 4 and the only grounds pressed are 1 and 2. Ground No. 1 says that the AAC has erred in confirming the ITO's action of rejection of the contention of assessee that at the time of investment as capital in the partnership firm, the land was trading asset and, therefore, no capital gain is chargeable for the same. This ground is to be rejected in view of the decision of the Hon'ble Gujarat High Court in the case of Kartikey V.Sarabhai (supra). Hence, we confirm the impugned order on this issue following the decision of the Hon'ble Gujarat High Court (supra) with respect as the same is binding on the Ahmedabad Bench of the Tribunal.
5. The second ground is that without prejudice to the first ground, the assessee's claim is that even if the land is held as capital asset at the time of investment as capital in the partnership firm, there is no extinguishment of the rights in the property and, therefore, the transaction is not covered by the definition of 'transfer' in relation to capital assets as per the provisions of Section 2(47) of the Income-tax Act, 1961 ('the Act'). This issue is also covered by the decision of their Lordships in the case of Kartikey V. Sarabhai (supra), and as such, we hold that this ground is also liable to be rejected. No other ground or issue is raised by the assessee. In view of our above discussions and reasons thereto we hold that the AAC is justified in arriving at his conclusion. Hence, we confirm his impugned order.
1. After going through the order of my learned brother, I discussed the matter and even sent the draft order for consideration of the issue involved. However, my learned brother is not in a position to accept my views and, therefore, I pass the following order.
2. The assessee is the karta of an HUF (smaller). While making an assessment for the previous year ending on 31-3-1980, the ITO scrutinised the claim in respect of transfer of a plot of land bearing F.P. No. 191 to the existing partnership firm of Shah Enterprise wherein the assessee is a partner on the footing whether provisions of Section 2(47) were attracted, because it was contended that the same was held as stock-in-trade by the assessee and, therefore, the land was not a capital asset within the meaning of Section 2(14) and, consequently, Section 2(47), if at all, did not apply. In this respect, a note was also appended to the statement of income filed together with the return of income. The ITO taking into account the history in respect of the assets obtained by the assessee by way of partition from bigger joint family from time to time observed that the land was held by the assessee as capital asset. The reliance placed by the assessee on the decision of CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC) was negatived. Considering the return of net wealth for the assessment year 1975-76 wherein the land was shown as stock-in-trade on the basis of which reliance of the assessee on the decision of CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) regarding intention of the assessee, etc., he observed that mere showing the higher value in respect of the land did not mean that there was a business activity, nor it changed the nature of the place of land under consideration. Hence, the same was capital asset within the meaning of Section 2(14). The contention of the assessee that he was a partner in Shah Enterprise and, therefore, introduction of the piece of land by way of capital was outside the meaning of Section 2(47) on the basis of decision in the case of Hind Construction Co. Ltd. (supra), was rejected on the ground that the said decision was under the Indian Income-tax Act, 1922 ('the 1922 Act') and under the Income-tax Act, 1961 there was change in the definition of 'transfer' and the case of Kartikey V. Sambhai (supra) decided by the Gujarat High Court was directly applicable.
2.1 On appeal, the decision of the ITO was confirmed. He further observed that the assessee entered into partnership . with Shah Enterprise only on 1-1-1975 but the assessee had not entered into any land transaction before 1-1-1975.
3. At the time of hearing, the learned counsel appearing on behalf of the assessee placed reliance on the decision of the Gujarat High Court in the case of Sitaram Motiram Jain v. CIT [1961] 43 ITR 405 to advance a submission that business carried on by the firm is a business carried on by the partnership. Therefore, the impugned land was outside the purview of Section 2(47). Bringing to our notice various statements in the compilation, particularly the deed of partnership of Shah Enterprise, it was stated that the deed is dated 1-1-1975 and the business of the partnership firm was to deal in real estate. Therefore, the assessee was already carrying on business in real estate.
Therefore, the case of Hind Construction Ltd. (supra) directly applied.
Alternatively, since the decision of Kartikey V. Sarabhai (supra) was pending before the Supreme Court and the matter is already heard, the order of the AAC be set aside with a direction to redecide the issue after the outcome of appeal before the Supreme Court.
4. The learned departmental representative supporting the orders of the authorities below also objected to the alternative submission regarding setting aside of the order of the AAC because the Supreme Court had heard the matter in Kartikey V. Sarabhai (supra) long ago and it is not known when the decision would be forthcoming.
5. I have considered the submissions and have gone through the material placed. I find some substance in the submissions of the learned counsel. The only short question which I have to decide is whether the assessee held the piece of land transferred on 30-8-1979 to the partnership firm of Shah Enterprise. Now, it is an admitted fact that Shah Enterprise, a partnership firm in which the assessee is a partner, is engaged in business of dealing in lands and acting as builders, developers of immovable properties, etc. From the copy of the deed of partnership, I find that all the partners have been stated by occupation, engaged in business. Clause 5(i) of the partnership deed further states that the land other than one under consideration contributed by the assessee on 1-1-1975 was held as capital asset.
Clause 5(//) further stated that on and from 1-7-1974 the assessee decided to trade in the lands contributed by developing the said lands and constructing for that purpose buildings thereon. Accordingly, entries in the books of the assessee were also passed revaluing the land which was transferred to the firm as stock-in-trade as mentioned in the said clause. Clause 5(m) further states that the assessee had appointed architect on 15-7-1974 for preparing plans for construction of buildings on the aforesaid lands and in fact submitted the plans to Ahmedabad Municipal Corporation on 23-8-1974 for approval and permission. The Ahmedabad Municipal Corporation approved the plans on 9-11-1974 by issuing two permissions for plot A and plot B. Clause 5(iv) states that the other three parties to the partnership firm at this time expressed their desire to join the business of developing the aforesaid lands. Therefore, the various clauses in the partnership deed entered into on 5-1-1975 unequivocally supports the contentions of the assessee that the assessee was engaged in the business of real estate ; initially as proprietor and, subsequently, as a partner in partnership firm of Shah Enterprise. This deed of partnership is not challenged on the ground of genuineness, though it appears that the authorities below have failed to appreciate this vital document and various clauses therein in spite of the facts being on record. The same cannot be challenged even ; because I observe from the details of the stamp paper that the same is dated 20-7-1972 issued to the assessee and others. The execution of the deed is also witnessed. With this background, the claim of the assessee that the land transferred during the year of consideration should be taken as stock-in-trade in the hands of the assessee and, therefore, outside the definition of Section 2(14) regarding capital asset, is required to be adjudicated. Added to the above is also a finding by the ITO that even in statement of wealth the land was shown as stock-in-trade. 5.1 The authorities below have negatived the contention of the assessee solely on the ground that before 1-1-1975 there was no transaction in land but then that cannot be the only test to decide whether the assessee is engaged in the business of real estate or not. There are innumerable authorities by way of judicial pronouncements of various High Courts and also the Supreme Court and in considering the decisions it is necessary to remember that they do not purport to lay down any general or universal test but certainly give guidelines to be applied for arriving at correct findings. Therefore, the issue involved is a matter of fact and substance. It is not necessary that there should be continuity of the repetitive transactions so as to constitute the activity as business.
This would reject the ground on which the authorities below have rejected the claim of the assessee. In my opinion, the assessee can be said to be doing the business of real estate and holding the land in question as stock-in-trade on the basis of following important and distinct features. Existence of profit motive, an essential condition, is proved by entering into a partnership firm which is assessed having been engaged in similar business. The business in the real estate can be said to have commenced as soon as the essential activity in respect of that business as developers of land is first undertaken such as purchase of land. Here in this case, the assessee was already holding the land as capital asset before 1-1-1975. There is also supplementary work undertaken and carried out in connection with the property, viz., appointment of architects, submission of the plans and obtaining the approval for house construction from Ahmedabad Municipal Corporation, etc. From this, the motive becomes crystal clear. It also establishes that the assessee has dealt with the land, as a commodity, in the same way as a dealer in real estate would ordinarily deal with. The supplementary work carried out in respect of the development of the land clearly excludes the possibility that holding of the land was in the nature of investment. Now, in the light of all this the transaction in respect of transferring the land to the partnership firm would be related to the business of the assessee, the fact of the assessee being in the business of the real estate can readily be inferred. The intention to start the business was very much clear even before entering into partnership in the name of Shah Enterprise when the assessee started doing supplementary work in 1974, on the basis of ratio of decision in the case of Khan Bahadur Ahmed Alladin & Sons v.CIT [1968] 68 ITR 573 (SC) and Jankiram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC). It is not the case of the department that even subsequently, the assessee has not carried out the transactions in the nature of real estate. Suspension of any trans action during some period, if any, in respect of the real estate or delay for the same, has also to be considered in the light of emergency measures promulgated in 1975 particularly the Urban Land Ceiling Act, having far-reaching impact on the trade in real estate. All these factors considered in totality would clearly support the claim of the assessee.
I, therefore, hold that the transfer of the land in the year under consideration was not of capital asset but was of stock-in-trade and, therefore, the same was outside the provisions of Section 2(47).
7. The third ground was not pressed at the time of hearing and hence dismissed.
8. I set aside the order of the AAC on issue dealt with by me and direct the ITO to modify the assessment.
Because of the disagreement on the issue involved under appeal the matter is required to be referred to the Third Member. We request the Hon'ble President to do needful in the matter. The question referred for opinion is as under: Whether, in law and on the facts and in the circumstances of the case, the land transferred to the partnership firm of which the assessee is a partner, was held by the assessee as stock-in-trade and not as capital asset so as to attract the provisions of Section 2(47) of the Income-tax Act, 1961 1. The point of difference referred under Section 255(4) of the Act in this case is as under: Whether, in law and on the facts and in the circumstances of the case, the land transferred to the partnership firm of which the assessee is a partner, was held by the assessee as stock-in-trade and not as capital asset so as to attract the provisions of Section 2(47) of the Income-tax Act, 1961 2. The assessee in this case is a smaller HUF, viz., Hathising H. Shah.
It was a partner through the karta in the firm of Shah Enterprise which is said to be carrying on business in dealing in property, i.e., acquiring land and constructing building and flats thereon for sale.
During the previous year ended on 31-3-1980 relevant for the assessment year 1980-81 under consideration the assessee had brought into the firm as capital certain land bearing Final Plot No. 191 at a value of Rs. 1,10,990. The assessee claimed that this transaction did not amount to transfer within the meaning of Section 2(47) so as to attract capital gains charge and that the land before it was brought into the books of the firm as capital contribution, constituted in the assessee's hands as its stock-in-trade. This contention of the assessee was rejected by the ITO who held that the capital asset transferred to the firm is liable to capital gains tax. This order was upheld by the Commissioner (Appeals) in the appeal preferred by the assessee. In the further appeal before the Tribunal the contentions of the assessee were firstly, that the land brought into the firm was its stock-in-trade or trading asset and not a capital asset and, consequently, no capital gains charge was attracted, and secondly, even if the land is said to be capital asset, there is no transfer of the same within the meaning of Section 2(47) so as to attract capital gains charge.
3. The learned Judicial Member rejected the contention of the assessee and applying the decision of the Gujarat High Court in Kartikey V.Sarabhai's case (supra) upheld the levy of capital gains tax. The learned Accountant Member on a consideration of the facts and materials on record held that the transfer of the land in the year under consideration made by the assessee to the firm is not a capital asset but was a stock-in-trade and, therefore, the same was outside the purview of Section 2(47). He, consequently, held that the second alternative ground, viz., that even if the land is held to be capital asset there is no transfer within the meaning of Section 2(47) does not survive for consideration. The short point of difference, therefore, that arises for consideration is whether the land which was contributed by the assessee as capital to the partnership firm was its stock-in-trade and not a capital asset 4. The learned counsel for the assessee in the first place challenged the observations of the learned Judicial Member that the decision of the Gujarat High Court in Kartikey V. Sarabhai's case (supra) would cover the dispute against the assessee even on the basis that the land constituted stock-in-trade. He further submitted that in the facts of the case, it was clear that the land transferred by the assessee was being held by it as stock-in-trade and there are enough materials to support the same and these are adverted to in the order of the learned Accountant Member. It is stated that the land was originally acquired by the assessee on a partition in 1966 and it was converted by the assessee into its stock-in-trade as the assessee intended to deal in business of developing the land, constructing buildings and flats thereon and selling out the same on profit. This intention of treating the land as stock-in-trade, it is submitted, is reflected in the further action taken by the assessee by entries in the books of account, appointment of architects for preparing plans for construction of buildings on the aforesaid lands and submitting plans to Ahmedabad Municipal Corporation for their approval and permission and the approval granted by the Ahmedabad Municipal Corporation, etc. These facts were recited in the partnership deed dated 1-1-1975 which have not been disputed or challenged. It was stated that though originally the assessee intended to deal in the business on his own of developing the property constructing buildings or flats thereon and selling them at a later stage, certain other persons also offered to join the partnership and the assessee decided to carry on the said business in partnership rather than singly.
5. The learned departmental representative contended that whatever may be the treatment to the land given by the assessee before the land was transferred to the firm, once it was contributed as capital to the firm its character changed and it became capital asset and, consequently, there was a transfer within the meaning of Section 2(47). The learned departmental representative also suggested that the various steps taken by the assessee of converting the land into stock-in-trade, securing municipal permission for construction and contributing the capital to the partnership firm all appear to be a device for avoiding capital gains and that at any rate the department should have opportunity to examine this aspect in view of the observations made by the Supreme Court in Sunil Siddharthbhai v. CIT [1985] 23 Taxman 14W. The learned counsel for the assessee contended that the scope of the point of difference cannot be enlarged as contended by the learned departmental representative. He submitted that there is no authority for the contention that the stock-in-trade which the assessee contributed as capital to the firm would lose its character as such and become a capital asset instead. It is further submitted that the Supreme Court decision in the case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 on the assessee's right to convert a capital asset into stock-in-trade still holds the field and the question whether the asset is held as stock-in-trade or as capital asset is a matter of intention reflected in the step or action taken in this regard and the treatment given to it.
6. On a consideration of the facts and circumstances, I agree with the learned Accountant Member that the land transferred by the assessee to the partnership firm was the assessee's stock-in-trade and not a capital asset so as to come within the purview of Section 2(47). The controversy raised in the appeal in the backdrop of the decision in Kartikey V. SarabhaVs case (supra) has lost much of its significance in the light of the decision of the Supreme Court in Sunil SiddharthbhaV s case (supra). Even if the asset contributed by the partner to the firm as capital is regarded as capital asset, it would not attract capital gains charge even though it may amount to transfer within the meaning of Section 2(47) because the consideration therefor, is not capable of evaluation and cannot fit in with the scheme of provisions relating to computation/charge of capital gains. However it is not necessary to go further into the aspect because of the limited scope of the point of difference, viz., whether the concerned land constitutes the assessee's stock-in-trade or capital asset. The materials brought on record by the assessee in the shape of entries in the books of account and recital in the partnership deed and other facts and circumstances adverted to in detail in the learned Accountant Member's order clearly in my view establishes the assessee's claim that the land was held by the assessee as stock-in-trade intended to be dealt with as such. The fact that the land was, subsequently, transferred to the partnership firm does not make it anytheless the stock-in-trade because whether the assessee should deal in the business singly on his own or should carry on such business in partnership with others is purely a matter of convenience and commercial expediency and where the assessee deals in the same business through a partnership instead of singly it will amount to his carrying on the business. It is well settled that business carried on by a partnership firm is business carried on by the partner himself--see the decision of the Supreme Court in CIT v. Ramniklal Kothari [1969] 74 ITR 57. As pointed out by the learned counsel for the assessee there is no scope for enlarging the controversy.
7. In the result, I agree with the learned Accountant Member and hold that the land transferred by the assessee to the firm is its stock-in-trade and does not fall within the purview of Section 2(47).
The matter will now go to the regular Bench for passing order afresh in accordance with the provisions of Section 255(4).