| SooperKanoon Citation | sooperkanoon.com/62708 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Jan-05-1987 |
| Judge | R Sangani, R Garg |
| Reported in | (1987)21ITD410(Mum.) |
| Appellant | Navinchandra H. Somaiya |
| Respondent | Ninth Income-tax Officer |
This firm was carrying on business as builders and contractors. The said firm had agreed to purchase a plot of land at Andheri from Nanalal Haridas (HUF) vide Agreement dated 9-11-1963. A public notice reserving the said plot for bus depot was published on 9-1-1964. In pursuance of the said notice the said plot of land was to be acquired from the vendor under the provisions of the Land Acquisition Act.
3. The firm raised objections against proposed acquisition. It filed Writ Petition (No. 313 of 1966) in the High Court challenging the proposed acquisition. The High Court directed the Divisional Commissioner to hold fresh inquiry under Section 5A of the Land Acquisition Act. This was in 1970.
4. The firm then filed suit No. 624 of 1973 in the Bombay High Court for specific performance of the contract dated 9-11-1963 against the vendor. During the pendency of this suit, the firm was dissolved in May 1978. Thereafter, the erstwhile partners continued the suit by amending the plaint. A compromise took place between the partners and the vendor and consent terms were drawn up on 20-7-1978. It was agreed that the agreement to sell dated 9-11-1963 subsisted.
5. Fresh acquisition proceedings commenced in 1977. The Special Land Acquisition Officer gave award under Section 11 of the Land Acquisition Act on 19-2-1979. Under the said award the assessee as partner of the dissolved firm got compensation at Rs. 4,67,000 on 22-2-1979.
6. The plea of the assessee before the Income-tax Officer was that the said amount of Rs. 4,67,000 was a capital receipt not subject to tax.
The alternate plea was that receipt of said amount gave rise to capital gains tax and not business income. The assessee claimed deduction under Section 54E of the Income-tax Act, 1961. The working regarding capital gains given by the assessee was as under:Capital receipt in Feb. 1979 4,67,000Less : Proportionate share in thein the land.
20,258Proportionate share in the pay-ment made to Architect 6,800Proportionate share in the pay-Total deductions 49,058Therefore, Long Term Capital Gain(as worked out below) 3,57,980 Balance 59,962- Net Amount of Capital Gain Exempted Gain consideration Deposit 4,67,000 4,00,000 4,17,942 3,57,980includible Long Term Capital Gain-Rs. 59,962Less : Deduction under Section 80-T Rs. Rs.(i) Initial deduction 5,000(ii) 25% of 54,962 13,740 18,740 18,740 7. The Income-tax Officer relied on Section 28(iv) read with Section 176(3A) of the Act. According to Mm, the value of the benefit whether convertible into money or not arising from business was chargeable to tax as business income under Section 28(iv) of the Act and that when the said business was discontinued and the amount was received by former partner after such discontinuance, the same was chargeable to tax as business income under Section 176(3A) of the Act, with the result that the above-mentioned amount was chargeable to tax as business income under these two provisions read together. He negatived the contention of the assessee that Section 176(3A) applied only in those cases where the firm had maintained accounts on cash basis. He, accordingly, brought the said amount to tax as business income and rejected the submissions that the amount represented capital gains and not business income.
8. The assessee filed appeal before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals), the assessee did not press his earlier plea that amount was not taxable at all. The only ground pressed by him was that the amount in question gave rise to capital gains and that tax should be determined in accordance with the provisions regarding capital gains tax including Section 54E of the Act.
9. Before the Commissioner of Income-tax (Appeals) it was admitted on behalf of the assessee that provisions of Section 176(3A) were attracted and the submission before him was that even under that provision the amount in question would be regarded as capital gains and not business income.
10. The Commissioner of Income-tax (Appeals) observed that the firm was carrying on business as builders and contractors and it was in the course of this business that the firm entered into agreement to purchase the said land. The firm, however, could not who received it after dissolution of firm by virtue of Section 176(3A). He, accordingly, confirmed the inclusion of the amount as business income in the hands of the assessee. The assessee is now in further appeal before us.
11. The first question that we have to decide is whether the right of the firm under the agreement dated 9-11-1963 was stock-in-trade of the firm as was contended on behalf of the department. The firm was no doubt carrying on business of builders and contractors and it was in the course of that business that the agreement dated 9-11-1963 was entered into. However, the fact remains that the firm never obtained possession of the land. It had not paid full price of the land. It had paid only earnest money. The firm did not acquire any right, title or interest in said land. The only right it had, at the time of agreement, was right of obtaining specific performance from the vendor. Even that right came to an end when the land was acquired by the Government by notification. The right that survived was thereafter right to obtain appropriate share in the compensation that would be paid by the Government to the vendor as a result of compulsory acquisition. In these circumstances, it cannot be said that land in question was stock-in-trade of the firm at any moment of time.
12. We may in this connection refer to the decision of Gujarat High Court in CIT v. Shah Doshi & Co. [1982] 133 ITR 23 where it was held that when a dealer in land enters into an agreement to purchase a piece of land, the land itself does not become his stock of trade because on entering into agreement he does not get any legal title to the land.
This decision supports the view which we have taken on the question whether the land itself was stock-in-trade of the firm at any moment of time.
13. Besides, we have to make distinction between any commercial commodity and real estate (see Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21, 26 (SC) person dealing in land may purchase a piece of land for mere investment without any intention to treat it as stock-in-trade.
All lands purchased by a dealer in lands do not automatically become his stock-in-trade. The surrounding circumstances are to be seen. In the present case acquisition proceedings started within three months of entering into agreement. Only earnest money had been paid. The price had not been paid. It cannot, therefore, be inferred that there was intention to treat it as stock-in-trade.
14. We shall now consider the question as to what was the nature of property received by the assessee on dissolution of partnership.
15. The deed of dissolution is dated 31-5-1978. It is mentioned therein that the firm was dissolved with effect from close of 21-5-1978. It is further mentioned that no dispute regarding accounts had survived because the accounts were adjusted by mutual understanding. Then there is mention about such of the affairs which had remained incomplete at the time of dissolution. One such item is agreement dated 9-11-1963 with which we are concerned here. This item is dealt with in para 6 of the deed in following words : The said dissolved firm had entered into an agreement on 9th November, 1963 to purchase .... and ultimately filed Suit No. 624 of 1973 in Bombay High Court against .... for specific performance of the agreement of sale mentioned in the plaint and for other reliefs.
The parties hereto and one Jairam Haridas, a retired partner are entitled to the benefits of the reliefs that may be granted to the plaintiffs in the said suit and they shall be individually entitled ho continue the proceedings under the said suit. The parties hereto hereby agree, confirm and declare that the interest of the parties hereto and said Jairam Hariram Somaiya in the said suit shall be as mentioned below :(a) Hariram N. Somaiya ..
20%(b) Navinchandra H. Somaiya ..
20%(c) Jairam H. Somaiya ..
20%(d) Smt. Asha N. Somaiya ..
20%(e) Smt. Sarla Dalip Sumaiya ..
20%.
16. It is obvious from this clause that interest of the firm under agreement dated 9-11-1963 was divided into five equal shares and each partner was allotted one-fifth share therein. The assessee thus had one-fifth share in the interest of the firm under agreement dated 9-11-1963. That interest of the firm resulted in grant of compensation and one-fifth of that compensation was received by the assesses as per terms in the deed of dissolution. Thus the amount of compensation represents the price which the assessee received for l/5th share in the interest of the firm under agreement dated 9-11-1963. The cost of acquisition of 1/5th share in the interest of the firm under agreement dated 9-11-1963 was l/5th of the amount spent by the firm in acquiring the said interest. It is now well settled that property allotted to a partner on dissolution of the firm was capital asset in his hands. In the present case, therefore l/5th share in the interest under agreement dated 9-11-1963 was a capital asset in the hands of the assessee on the date of dissolution and the gains received by him on receipt of his share of compensation, would, therefore, be capital gains chargeable under Section 45 of the Act.
17. Before arriving at above conclusion, we have duly considered the arguments advanced by the learned counsel for the department. His contention was that right to receive compensation could never be a capital asset. For this proposition he relied on the decision of Delhi High Court in CIT v. J. Dalmia [1984] 149 ITR 215 and Section 6 of the Transfer of Property Act. In the said decision, the assessee had given up claim for specific performance and had retained only right to damages. Damages were awarded by the arbitrator. The High Court held that right to damages being a mere right to sue cannot be transferred in view of Section 6 read with Section 5 of the Transfer of Property Act with the result that no capital gains arose to assessee on receipt of damages awarded. Ours is not a case where the assessee had a mere right to sue for damages. The assessee and other partners were pursuing the remedy of obtaining specific performance and ultimately they received compensation as a result of compulsory acquisition of the property. The validity of acquisition was under challenge in the Court.
On the date of dissolution, the assessee did not get mere right to sue ; he got l/5th share in the interest of the firm under agreement dated 9-11-1963 specific performance of which was being sought in the Court.
That interest of the firm was capital asset and the assessee's l/5th share therein was also a capital asset with the result gains arising by award of compensation for acquisition of that asset were capital gains.
Another argument was that of dissolution showed that claim for specific performance had been given up. This is also not correct. The deed does not indicate any such thing. Yet another argument was that amount was fruit of litigation and as such could not give rise to capital gains.
This contention was also unacceptable. As already stated, although the amount came as a result of litigation, yet it was for acquisition by Government Of right of the firm under agreement dated 9-11-1963. It was also submitted that since partnership deed did not single out this property (right under deed dated 9-11-1963) it could not be capital asset. This submission was also without merit. As already stated this property was distributed to five partners on dissolution and as such the share received by the assessee as one of the partners was a capital asset in his hands. Thus, none of the contentions raised by the department can be accepted against the finding recorded by us in the earlier paragraphs.
18. The learned counsel for the department relied on Section 176(3A) of the Income-tax Act, 1961, which is as follows : (3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on business had such sum been received before such discontinuance.
19. The learned counsel for the assessee contended that this clause would not apply when the discontinuance is followed by continuance of business by other partners after dissolution and present case falls in that category in view of clause 7 of the deed of dissolution. We do not accept this contention. We are of the opinion that dissolution in this case had the effect of discontinuance of the business which was till then carried on by the firm and as such, the said provision would not be inapplicable in the present case merely because under Clause 7 of deed of dissolution the benefit of one project (which has no concern with agreement dated 9-11-1963) are assigned to one of the partners.
20. It was contended on behalf of the assessee that even if the business of the firm had not been discontinued and if the firm had received the compensation, that amount would have given rise to capital gains and not business income. The submission on behalf of department, on the other hand was, that said compensation would have resulted in business income and not in capital gains. On behalf of department reliance was placed on Sections 28(i) and 28(iv) of the Act. Decisions on which department relied were Khatau Vallabhdas v. CIT [1979] 119 ITR 846 (Bom.) and Donald Miranda v. CIT [1961] 42 ITR 166 (SC). On behalf of the assessee these decisions were distinguished and it was submitted that Section 28(vi) would not apply when cash was received because the words therein, viz., "any benefit or perquisite whether convertible into money or not" excluded cash receipts. Reliance was placed on decision of the Bombay High Court in CIT v. Indohem (P.) Ltd. [1981] 132 ITR 125 where similar words in Section 40(c) were interpreted so as to exclude cash receipts. On behalf of the department reliance was placed on Metal Rolling Works (P.) Ltd. v. CIT [1983] 142 ITR 1Y0 (Bom.) and Ravi Machine Tools (P.) Ltd. v. CIT [1978] 114 ITR 459 (Kar.), where it was held that gains by sale of import entitlements gave rise to business income under Section 28(iv) of the Act.
21. We do not consider it necessary to express any opinion on the question whether the receipt of compensation by the firm would have given rise to business income or capital gains, had the business been continued. This is because even if we assume that such compensation in the hands of the firm would have given rise to business income and not capital gains, yet said compensation received by assessee after dissolution of firm would not give rise to business income and that the words in Section 176(3A) do not warrant the conclusion that when particular receipt would have been business income in the hands of the firm if the firm had continued, the same would necessarily be business income in the hands of the partner after dissolution. It would, no doubt, represent income but not necessarily business income. The head under which it would fall would depend upon facts of the case and the facts of present case indicate that head under which the income would fall would be capital gains. We now proceed to give detailed reasons in support of the said conclusion.
22. We have already quoted Section 176(3A) of the Act. The words therein are almost identical with those in Section 176(4). The former applies to discontinuance of business while latter applies to discontinuance of profession. In Sub-sections (3A) and (4) of Section 176 there is no statement that income should be chargeable under the head "Business or profession". The provisions in subsections (3A) and (4) have set at rest the controversy whether the receipt in question (after discontinuance of business or profession) was taxable or not.
These provisions expressly say that it is taxable. However, they have left open the question about the character of the receipt, viz., as to under which head it would be assessable. The word "accordingly" in these provisions cannot be pressed into service as indicative of the head of the charge. This conclusion is fortified by comparison of these sub-sections with Sub-sections (1) to (4) of Section 41 which deal with similar items of statutory receipts. Those sub-sections lay down that such items of receipts or items due shall be chargeable in the year of receipt or in the year when they became due under the head "business or profession". There is no such express mention about the head "business or profession" in Sub-sections (3A) and (4) of Section 176. Recipient of the amounts may not be the person who carried on business or profession but may be a person who had stepped into his shoes as legal representative. The ambiguity has arisen, as rightly observed by the learned author in Sampath Iyengar's Law of Income-tax, page 3845 cited on behalf of the assessee, because of the introduction in an essentially procedural section like 176, charging provisions which should really find place elsewhere. In fact Choksi Committee drew attention to this aspect and suggested that Sub-sections (3A) and (4) should be deleted from Section 176 and appropriate provisions should be made in Section 28. We, therefore, hold that income which would have been charged as business income in the hands of the firm had the firm continued need not necessarily fall under the same head when received by another person after discontinuance of business under Section 176(3A) of the Act.
23. Before parting with this topic, we mention that the learned counsel for the department had drawn our attention to the following observations in the treatise on Income-tax by Kanga and Palkhivala at page 996, Vol. I. Any sum chargeable by virtue of these sub-sections should be assessed under the head 'Business or Profession' and expenses incurred after the year of discontinuance to earn such sum should be allowed as deduction [Cf. Section 41(5)].
These observations, no doubt, support the revenue. At the time (1976) when said treatise was published, there was no reported decision on the point as to under what head the income should be assessed in the hands of recipient under Section 176A(3) or 176(4). Subsequently, there came decision of Madras High Court in CIT v. Estate of Late A.V. Viswanatha Sastri [1980] 121 ITR 270 where it was held that the amount received after the death of the person carrying on profession should be assessed in hands of the recipient under the head "other sources". This decision has expressed view contrary to the view expressed in said treatise in Volume I. Subsequently, in 1982 Vol. III of said treatise was published in which decisions published subsequent to the publication of Vol. I were cited. Regarding the above observation in Vol. I the learned author in Vol. III added : However, Madras High Court held in CIT v. Estate of Late A.V. Viswanatha Sastri [1980] 121 ITR 270 that the fees collected after the death of a professional person are taxable as income from other sources.
Thus, it is clear that the Madras High Court decision has taken a view different from the view expressed in Vol. I of said treatise. There is no High Court decision which has dissented from the view of Madras High Court in the above case. Consequently, we are bound to follow said decision. That decision is an authority for the view expounded by us earlier to the effect that the head under which income would be chargeable under Section 176(3A) need not necessarily be profits and gains of business or profession and the head under which such income would be chargeable would depend on the circumstances in which recipient received the amount.
24. In Estate of Late A.V. Viswanatha Sastri's case (supra) the head under which income was held assessable was income from other sources.
This was on the facts of that case. In our case the share of assessee in the interest of the firm under the agreement dated 9-11-1963 allotted to assessee on dissolution of the firm was his capital asset (and not stock-in-trade) and as such gains arising on receipt of his share of compensation would be assessable as capital gains and not as business income.
25. We consider it necessary to make special reference to decision of Bombay High Court in Khatau Vallabhdas' case (supra) on which great emphasis was laid by the learned counsel for the department. In that case on dissolution of the firm the partner received grossery articles of large value at cost which had been stock-in-trade of the firm and the partner then sold said articles and made gains. The controversy was whether the gains would be chargeable as business income or capital gains. The High Court observed that we have to look to the nature of commodities. The grossery articles are never purchased by way of investment. The High Court found that they had been acquired to make profit by sale as a part of profit-making scheme. Consequently, the profits were business profits. At pages 854 and 855, the High Court observed that as far as land was concerned, the matter was different.
The acquisition of land could as well be by investment and as such presumption which they drew regarding grossery articles was not necessarily applicable when what is allotted to a partner is land. This decision is of no assistance to us. In the present case, the circumstances do not indicate that the share which the assessee received in the interest of the firm in the agreement dated 9-11-1963 was intended to be stock-in-trade in the hands of the assessee. In fact the land had already been acquired and compensation in lieu of interest under the agreement dated 9-11-1963 had to be received. This was a clear case of capital asset in the hands of the assessee for which he received compensation and as such provisions relating to capital gains would be attracted.
26. We may reiterate that it was not the assessee's case before the Commissioner of Income-tax (Appeals) that the amount was not taxable at all. The plea was that it was taxable under the head 'Capital gains'.
Before us also the learned counsel for the assessee stated that it was not the assessee's case that the amount was not taxable at all. The assessee wanted that it should be taxed under the head 'Capital gains'.
27. We may also mention that one of the contentions raised on behalf of the assessee before us was that Section 1V6(3A) applied only when the firm had allowed cash system of accounting. We do not find anything in said provision to support said submission. Consequently, we have not accepted the said submission.
28. For the reasons given above, we set aside the orders of the authorities below on this point. We restore the matter to the ITO with direction to compute the capital gains and bring them to tax in accordance with law after giving exemption under Section 54E, if the assessee is so entitled.