| SooperKanoon Citation | sooperkanoon.com/67641 |
| Court | Income Tax Appellate Tribunal ITAT Ahmedabad |
| Decided On | Mar-19-1995 |
| Reported in | (1995)55ITD300(Ahd.) |
| Appellant | income-tax Officer |
| Respondent | Yogeshchandra V. Shah. |
"(1) The learned CIT(A) erred in law and on facts in not considering the transaction as transfer even though assessee had applied for certificate under section 230A of the Act and the fact that the assessee had forgone his all right in favour of the firm M/s. Parul Developers.
(2) On the facts of the case, DC(A)/CIT(A) ought to have upheld the order of the ITO/AC/IT)." The assessee purchased a piece of immovable property in the year 1976 in the Sadar area of Rajkot. Thereafter another piece of open land was purchased from Rajkot Municipal Corporation. The total cost of the land as per the assessees books of accounts was Rs. 90,640. During the year under consideration the assessee revalued the aforesaid property at Rs. 7 lakhs and contributed the same as his capital contribution in a partnership firm styled as M/s. Parul Developers. A partnership deed was executed on 3-9-1985 effective from 1-9-1985. In the preamble of the said partnership deed it has been clearly stated that Shri Yogeshchandra V. Shah (respondent-assessee) purchased land admeasuring 660-69 sq. mtrs. being immovable property known as "Saylas (Old) Rest House" along with adjoining land admeasuring 175-94 sq.mtrs. both totalling land 836.63 sq.mtrs. situated in Rajkot Municipal Corporation Limit Ward No. 14. The property was purchased from Shri Jashwantkunvarba Madarsingh Zala on 16-1-1978 and registered at No.170. Over and above 175.94 sq. mtrs. of land was purchased from Rajkot Municipal Corporation vide sale deed registration No. 6688 dated 13-11-1980. The said land was intended to be used for construction of residential flats/houses but such idea could not be materialised by Shri Yogeshchandra V. Shah. He therefore admitted 14 other persons as his partners and formed partnership firm with them under the name and style of M/s. Parul Developers with effect from 1-9-1985. The said immovable property was contributed by the assessee as his capital contribution in the said partnership firm. The assessee also applied for grant of certificate under section 230A(1) of the I.T. Act to the ITO Ward-B, Junagadh on or about 24-7-1986. It was stated in the said application that the property is being transferred to the firm and there is no sale. The ITO sent a letter dated 8-8-1986 to the assessee inter alia stating that unless the property is transferred within the meaning of section 2(47) of the Act, no certificate is required to be issued under section 230A(1) of the Act. He raised certain further queries in the said letter. The assessee submitted reply vide letter dated 12-8-1986. It was inter alia stated that in the said reply that the assessee has contributed the property to the firm of M/s. Parul Developers and as such his interest has become "limited", which is one of the words (limited), used in form No. 34-A. It was stated that the contribution of the aforesaid assets in the partnership firm has been agreed to be valued at Rs. 7 lakhs. Accordingly the capital account of the assessee in the books of account of the firm M/s. Parul Developers was credited by a sum of Rs. 7 lakhs being the capital contribution made in the firm. The desired certificate under section 230A was accordingly granted by the ITO, Ward-B, Junagadh.
2.2. Thereafter the assessee furnished a return of income for AY 1986-87 declaring an income of Rs. 1,11,880. In the note forming part of the return it was inter alia mentioned that the assessee has contributed his immovable property as capital in the firm of M/s. Parul Developers for Rs. 7 lakhs. The difference between capital contribution and the original cost price is not income or long term capital gains to the assessee. Hence the same has not been included in the income shown in the return of income. The assessee in response to letter dated 18-4-1988 received from the CIT submitted reply dated 3-5-1988. In the said letter all the aforesaid facts were explained. It was inter alia stated in the said letter that the assessee has not converted his capital assets into stock-in-trade of a business carried on by him. He has neither transferred his capital assets to anybody else. He had merely contributed the house property as his capital contribution and the sum of Rs. 7 lakhs was credited in his capital account appearing in the books of accounts of the firm.
The assessee also placed reliance on the judgment of the Supreme Court in the case of Sunil Siddharthbhaiv. CIT [1985] 156 ITR 509 in which case the effect of revaluation of the assets and contribution of the capital assets in the partnership firm has been considered and it was held that no tax on such surplus credited as a result of revaluation at the time of contribution of assets in the firm can be subjected to tax.
It was also mentioned that the provisions of section 45(3) have been inserted w.e.f. asst. year 1988-89 to nullify the effect of the judgment of the Supreme Court in the case of Sunil Siddharthbhai (supra). These amended provisions are applicable from asst. year 1988-89 and cannot be applied with retrospective effect in the year under consideration i.e. AY 1986-87. It was therefore prayed before the CIT that the ITO be directed to accept the return of income for AY 1986-87 under section 143(1).
2.3. The assessee again sent a letter dated 29-3-1989 to the ITO Ward 2, Junagadh, during the course of assessment proceedings for AY 1986-87. In para-4 of said letter it was mentioned that the assessee has no income either as a contractor or as a builder or as a land developer. None of the firms in which the assessee is a partner also deals in the land and buildings, activities. In para 5 the assessee further submitted that the joined as a partner in the firm of M/s.
Parul Developers at Rajkot and has contributed by way of capital contribution, the above mentioned revalued property in the firm of M/s.
Parul Developers, Rajkot. He further explained that the provisions of section 45(2) read with section 2(47) as amended with effect from 1-4-1985 dealing with the conversion of capital assets into stock-in-trade and making them liable to tax, are not at all applicable in the case of the assessee, as he has not converted his capital assets into stock-in-trade of a business carried on by him. He has neither transferred his capital assets to anybody else. Reliance was again placed on the judgment of the Supreme Court in the case of Sunil Siddharthbhai (supra). The assessee also brought to the notice of the ITO the relevant provisions contained in section 2(47) and section 45(3) which were inserted w.e.f. 1-4-1985 applicable from AY 1988-89.
The assessee submitted before the ITO that the transaction of contribution of the immovable property in the partnership firm as his capital contribution in AY 1986-87 will not attract any tax and requested the Assessing Officer to accept the declared income.
3. The Assessing Officer did not accept the aforesaid submissions and came to the conclusion that the provisions of section 45(2) as amended from 1-4-1985 as well as section 2(47) as amended with effect from 1-4-1985 provides for levy of tax in respect of the conversion of the capital assets into stock-in-trade. However, he has noted assessees arguments at page 3 of the assessment order where the assessee categorically stated that he has not converted his capital assets into stock-in-trade of a business carried on by him. The Assessing Officer also arrived at the conclusion that the assessee had himself applied for certificate under section 230A and the name of the transferee is that of the aforesaid firm. The assessee thus impliedly admitted that although there was no sale, yet there was a transfer of the said property within the meaning of section 2(47). The Assessing Officer finally determined the long term capital gains at Rs. 4,35,140 by adopting the sale price of Rs. 7 lakhs and deducting therefrom the cost price and other deductions allowable under section 80T.4. The assessee preferred an appeal against the said assessment order and challenged the levy of tax on capital gains. The CIT(A) relying on the judgment of the Supreme Court in the case of Sunil Siddharthbhai (supra) held that the amended provisions of section 45(3) read with section 2(47) were not applicable in AY 1986-87. He therefore held that the ITO was not justified in computing the capital gains liable to tax by applying the amended provisions of section 45(2). The Revenue is in appeal against the said order passed by the CIT(A).
5. The learned DR submitted that the facts and circumstances of the present case clearly attract the provisions of section 45(2) which were inserted w.e.f. 1-4-1985. The view taken by the Assessing Officer is further fortified by the amended definition of transfer given in section 2(47) w.e.f. 1-4-1985. The assessee by making revaluation of the immovable property converted his capital assets into stock-in-trade. Once the capital assets has been converted into stock-in-trade, that act of conversion results in transfer as per the amended definition of section 2(47). He further submitted that the definition of transfer w.e.f. AY 1985-86 includes inter alia a case where the asset is converted by the owner thereof into, or is treated by him as stock-in-trade of the business carried on by him. Such conversion or treatment of the asset as stock-in-trade will be regarded as transfer within the meaning of section 2(47). Section 45(2) also provides that the profits and gains arising from the transfer by way of conversion by the owner of capital asset into, or its treatment by him as stock in trade of a business carried on by him, shall be chargeable to income tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. It is further provided in section 45(2) that for the purpose of section 48, fair market value of the assets on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital assets. These two provisions read together clearly entitle the ITO to levy tax on capital gains arising due to such an act of conversion of the capital assets into stock-in-trade. The learned DR submitted that the provisions of section 45(3) which were inserted w.e.f. AY 1988-89 are not at all applicable on the facts and circumstances of the present case. He thus vehemently argued that the view taken by the Assessing Officer ought to have been confirmed by the CIT(A).
6. The learned counsel for the assessee submitted that the assessee time and again contended before the ITO as well as before the CIT, Administration that the assessee has never converted the capital assets in the form of above referred immovable property as stock-in-trade of a business carried on by him. It was also pointed out that the assessee never derived any income from the business of contractor, business of builder or a business of a developers. The assessee never carried on any such business. The property which represented the capital assets of the assessee was contributed by way of capital contribution in the partnership firm. Such an act did not attract any tax on capital gains prior to insertion of section 45(3) effective from AY 1988-89. Such a view is clearly fortified by the judgment of the Supreme Court in the case of Sunil Siddharthbhai (supra). He further submitted that the provisions of section 230A are not charging section. It is a provision which appears under the Chapter relating to collection and recovery.
The mere fact that an application for grant of certificate under section 230A was furnished, cannot amount to acceptance by the assessee that the act of contributing immovable property as capital contribution in the firm will amount to transfer as contemplated in section 2(47).
He submitted that such an application under section 230A in the prescribed form No. 34A was furnished because the prescribed contents of the said form inter alia include cases where the right, title or interest of the applicant is inter alia limited. The expression "limited" does not appear in section 2(47) defining the transfer in relation to capital assets. The assessee had furnished the said application by way of abundant caution with a view to ensure voluntary compliance of the relevant provisions of law. That should not result in fastening an illegal liability on the assessee. He thus strongly supported the order of the CIT(A).
7. We have carefully considered the rival submissions made by the learned representatives of the parties. We have also gone through the order of the departmental authorities as well as all other relevant material to which our attention was drawn during the course of hearing.
We have also gone through various case laws cited by the learned representatives of the parties during the course of hearing.
7.1. After giving very careful consideration to the entire material, we are of the considered opinion that the order passed by the CIT(A) if perfectly valid and justified. The reasons for our taking such a view are stated in the following paragraphs.
8. It was submitted on behalf of the assessee in various letters submitted before the ITO and before the CIT(A) that the immovable property in question, which represented capital assets belonging to the assessee was never converted into stock-in-trade of a business carried on by him. It was further categorically stated in the letter dated 29-3-1989 submitted to the ITO that the assessee has no income either as a contractor or a builder or as a developer. None of the firms in which the assessee was partner also deals in land and building activities. The assessee has contributed such capital assets (immovable property) by way of his capital contribution in the firm of M/s. Parul Developers. The assessee once again reiterated in this letter that the immovable property owned by him representing his capital assets was not converted into stock-in-trade of a business carried on by him. In view of such categorical repeated statements before the Assessing Officer, the finding given by the Assessing Officer that the assessee at the time of revaluation of the immovable property in question converted capital assets into stock in trade, is not based on any material or evidence existing on records. The ITO did not even require the assessee after receiving such letters from the assessee indicating his suspicion or disbelief about the correctness of such assertions made by the assessee in the above referred letters. The ITO did not even require the assessee to submit any further material or evidence to prove that the capital assets in question was not converted into stock-in-trade of a business carried on by him. The ITO has also failed to bring on record any evidence or material to indicate that such immovable property was converted or treated as stock-in-trade by the assessee of a business carried on by him. The Assessing Officer did not even examine or interrogate the assessee in relation to this vital fact, which is clinching and conclusive test for deciding as to whether the provisions of section 45(2) read with section 2(47) defining "transfer" as amended w.e.f. 1-4-1985 would be applicable or not in the present case. The burden clearly lies on the Revenue to establish that the capital assets in question was converted into stock-in-trade of a business carried on by him. The Assessing Officer miserably failed in discharging such burden. We are therefore of the considered opinion that the provisions of section 45(2) will not at all be applicable on the facts and circumstances of the present case.
9. The only provisions which can be applied in such facts and circumstances is section 45(3) which came into force w.e.f. AY 1988-89.
Newly inserted section 45(3) by the Finance Act, 1987 has been made effective from 1-4-1988 which will be applicable for AY 1988-89 and onwards. Those provisions cannot be made applicable with retrospective effect in relation to assessments for prior years. We are dealing with the assessees case for AY 1986-87. Hence newly inserted section 45(3) will not at all be applicable in the present case of the assessee. The aforesaid provisions of section 45(3) were inserted with a view to nullify the effect of the judgment of the Supreme Court in the case of Sunil Siddharthbhai (supra). It is therefore clear that the said judgment in the case of Sunil Siddharthbhai (supra) will hold the field upto and including the asst. year 1987-88. The Supreme Court in the aforesaid judgment held that where a partner contributes his asset to a partnership firm as his capital contribution, there is a transfer of the concerned assets by the partner to the firm because the exclusive interest of the partner in the concerned assets is reduced into share interest. However, the Supreme Court further held that a credit entry made in the books of account of the firm in the account of the concerned partner does not represent consideration for transfer of the said assets as capital contribution in the firm within the meaning of section 48. It was further held that since the computation provision relating to capital gains liable to tax cannot be applied in such a case, no tax can be levied on any such capital gains arising due to such act of contribution as capital contribution in the firm. The partnership firm in question has been treated by the Assessing Officer as genuine firm and the same has duly been granted registration for AY 1986-87 as per the statement at bar made by the learned counsel. The assessee has also submitted details of income assessed in the case of other partners of M/s. Parul Developers at page 59. The details of capital contributions made by other partners of the firm have also been submitted at page 60. The assessee has submitted a copy of written submissions dated 6-12-1989 submitted to the CIT(A). At page 7 of the said letter which appears at page 52 of paper book the assessee also submitted that the Supreme Court in the case of Sunil Siddharthbhai (supra) have expressed certain reservations such as whether transaction is sham or real. The assessee submitted all relevant facts which clearly prove that such reservations expressed in the judgment of the Supreme Court are not at all applicable in the facts and circumstances of the present case. The partners of the firm are not near relatives as defined in section 2(41) of the Act. The assessee who made capital contribution in the firm of immovable property has still continued as a partner of the said firm. The said firm is carrying on the said business even at present and the firm has declared substantial income for A.Y. 1989-90. The statement of income of the firm for AY 1989-90 has also been placed at page 54 of the compilation which shows that the firm derived total income of Rs. 8,32,000. The firm has been treated as genuine by the department.
10. The ground taken by the Revenue that the assessee has himself submitted application for grant of certificate under section 230A which necessarily implies that the assessee had accepted such a transaction as transfer within the meaning of section 2(47), is not valid and acceptable in law. The provisions of section 230A appear in the Chapter relating to collection and recovery and the provision has been inserted with a view to ensure recovery of existing tax liability. It does not in any manner support the revenues contention. The assessee has disclosed all relevant facts even at the time of furnishing the application in the prescribed form No. 34A under section 230A. The facts so clearly stated in the said application also support the assessees contention that it was not a sale but the asset was transferred to partnership firm as his capital contribution. Such an argument advanced on behalf of the revenue has no merit.
11. Considering these facts we are of the opinion that the CIT(A) has rightly held that no tax can be levied on any surplus derived by the assessee as a result of contribution of his capital asset as his capital contribution in the firm. No tax on any such capital gains can be levied. The CIT(A) has rightly deleted the addition.