1988-VIL-59-ITAT-

Equivalent Citation: ITD 027, 551, TTJ 031,

Income Tax Appellate Tribunal BOMBAY

Date: 15.02.1988

CHANDRU L. RAHEJA.

Vs

THIRD INCOME-TAX OFFICER.

BENCH

Member(s)  : J. P. BENGRA., M. A. AJINKYA.

JUDGMENT

Per Shri M.A. Ajinkya, Accountant Member--These are appeals of two brothers for the assessment year 1981-82 raising a common issue. The appeals are directed against CIT (Appeals)'s decision in upholding the ITO's computation of a sum of Rs. 5,83,452 in each case as long-term capital gains and in further holding that the asset transferred cannot be held to be the assessees' stock-in-trade as it was only their shares which were transferred. Certain facts need to be stated.

2. The relevant accounting year ended on 31-3-1981. The two assessees were co-owners of a property called 'Madhu Park' which was owned by the two brothers each having 25 per cent share in the said property. By a declaration dated 23-6-1980, this property was allegedly converted into stock-in-trade for utilisation in a proposed partnership business. On the date of so-called conversion of the property into the stock-in-trade (23-6-1980), the market value of the property was taken at Rs. 30 lacs and the value of the undivided share of each of the assessees amounted to Rs. 7.50 lacs. Each of the two assessees introduced his share of the stock-in-trade as capital in a firm called M/s. Garden View Corporation which was formed with effect from 1-7-1980 and in which the four brothers with 15 per cent each and their wives with 10 per cent each were the partners. Since the market value of the original property transferred was determined at Rs. 30 lacs, 25 per cent share of each of the assessees in this market value as stated above was worked out at Rs. 7,50,000. The 25 per cent share of each of the assessees was Rs. 1,66,548. Therefore, basically, capital gains of Rs. 5,83,452 became exigible to tax, out of which the ITO allowed u/s 54, 15 per cent share in the expenditure incurred on the construction of the new Raheja House from 1-7-1980 to 31-3-1982 in consonance with the directions of the IAC u/s 144A of the Act. The IAC, in his directions, observed that the transfer of 'Madhu Park' was effected on 23-6-1980. The construction of the new house was finally over in all respects on 31-3-1982 on which date the major portion of the expenditure of Rs. 21,83,445 out of the total expenditure of Rs. 55,86,116 was incurred. The IAC held that the expenditure incurred on the new residential house after transfer of the old house, i.e., after 23-6-1980, would only be considered for adjustment under section 54 for computation of capital gains. It would appear that the construction of new Raheja House had started from 31-3-1979 and had gone on up to 31-3-1982 and the expenses incurred in this regard were as under :

The IAC directed that the expenditure incurred during the period after June 1980 would be taken into account as assessees' share of investment in the new house and would qualify for exemption u/s 54. In accordance with these directions, the ITO allowed Rs. 4,85,000 against the gross capital gains of Rs. 5,83,452 and included Rs. 98,452 as capital gains in the assessment of each of the two appellants.

3. The matter went before the CIT (Appeals) before whom it was firstly argued that what was transferred was not capital but only stock-in-trade. According to the ITO, there was a transfer within the meaning of sec. 2(47) following the High Court decision in the case of CIT v. Kartikey. V. Sarabhai [1981] 131 ITR 42 (Guj.) and such transfer would give rise to capital gains. CIT (Appeals) affirmed this stand of the ITO. The alternative argument before the CIT A) was that if capital gains had to be taxed, exemption u/s 54 should have been granted to him on the full amount of investment in the new house. Certain decisions were cited before the CIT(A) which he distinguished on facts and held that the ITO was justified in taking only the expenditure after the date of the transfer for the purpose of adjustment under sec. 54. It is against this finding of the CIT(A) that the present appeals by the appellants are filed.

4. Shri B.K. Gupta for the assessee firstly argued that what was transferred was not an asset but stock-in-trade of the assessees. He drew our attention to a declaration made by the four brothers on 23-6-1980 in which, inter alia, it was declared as under :--

" 2. We have decided to utilize the said property for a business, we propose to set up in partnership. With a view to contributing it into the firm we do, hereby, irrevocably declare that it shall, hereafter, be treated as our business asset."

He then referred us to para 62 of Kanga & Palkhivala's Practice of Income-tax, 7th Edition, in which it is observed that conversion of separate property into Joint family property does not involve any transfer and can be effected merely by clear expression of intention, i.e., by conduct, and does not require any formalities, like a registered document, to be complied with. Likewise, he argued, for converting the residential property into a business asset, no other formality than a mere declaration of intent was necessary and no registration of document or any other formality need be gone through. Shri Gupta then referred us to the deed of partnership which was entered into on 1-7-1980, i.e., 7 days after the declaration aforementioned, clauses (iv) and (v) of which read as under :

" (iv) The parties of the first four parts will soon be shifting into another property being constructed by them at Pali Hill, Bandra, Bombay-400050.

(v) In the circumstances, the parties of the first four parts unanimously decided immediately prior to execution hereof to treat the said immovable property as a business asset, valued at a sum of Rs. 30.00 lakhs."

He then referred us to a decision of the Tribunal in Hathising H. Shah v. ITO [1986] 15 ITD 86 (Ahd.)(TM) in support of his case that the building was held as the stock-in-trade and the fact that it was transferred to the partnership firm did not make it anytheless stock-in-trade because whether the assessee should deal in the business singly on its own or should carry on such business in partnership with others is purely a matter of convenience and commercial expediency. He, therefore, firstly argued that what was sold was stock-in-trade and no capital gains on its transfer arose.

5. Assuming without admitting that the property called 'Raheja House' owned by the two appellants jointly was a capital asset, Shri Gupta argued that it was acquired in 1971 and the construction completed in 1975. The first assessment for the assessment year 1981-82 was for the period 1-7-1980 to 31-12-1980, which was the first accounting period of the firm. He brought to our notice a decision of the Calcutta High Court in the case of B.B. Sarkar v. CIT [1981] 132 ITR 150 in support of the claim that the relief u/s 54 should be given in such a way that the expressions used in the statute are harmoniously understood and proper effect is given to the correct object of the Legislature. The main purpose of section 54 is to give relief in respect of sale of a residential house. If an assessee is entitled to a relief on the fulfillment or either of the two conditions, that is to say, either purchasing a house property within one year or constructing a house within two years, it would be improper to hold that on the fulfillment of both the conditions he would be disentitled to that relief. According to Shri Gupta, the construction of the house property was completed on 31-3-1982, i.e., within two years of the sale of the house on 23-6-1980. It was immaterial for fulfillment of this desire when the construction of the house started. Therefore, the entire expenditure on the new house called 'Raheja House' should be taken into account. The price claimed for the plot of land on which the house property was built should also be taken into account for determining the cost of the new asset and the entire cost of construction ought to have been considered for calculating the capital gains. He relied for this proposition on the decisions in the oases of Smt. Shantaben P. Gandhi v. CIT [1981] 129 ITR 218 (Guj.) and Addl. CIT v. Vidya Prakash Talwar [1981] 132 ITR 661 (Delhi).

6. Shri R.N. Srivastava, the learned Sr. Departmental Representative, on the other hand, argued that all this arrangement was part of a claim of tax planning and the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 was squarely applicable. He thereafter relied on a similar decision of the Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 in which the Supreme Court relied on its earlier decisions in CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 and McDowell & Co. Ltd.'s case and observed as under :--

" It is the duty of the court, In every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smokescreen and discover the true state of affairs. The court is not to be satisfied with form and leave well alone the substance of a transaction ..... Avoidance of welfare legislation is as common as avoidance of taxation and the approach in considering problems arising out of such avoidance has necessarily to be the same."

He also relied on the decision in CIT v. Durga Prasad More [1971] 82 ITR 540 (SC). He said that whole transaction on the part of the assessee was a grand scheme of tax avoidance and one should look into the substance of the case and the assessee was not entitled to receive more relief than it had already got.

7. We have considered the submissions made on either side. Firstly, we are satisfied that the property called 'Madhu Park' was occupied as a residential property by the four brothers and the mere declaration to treat this property as stock-in-trade could not make it so. The declaration was a self-serving document as can be seen from the fact that 7 days after the declaration a partnership deed was formed in which the alleged share of the appellants in the so-called stock-in-trade was contributed as capital by valuing the same property at Rs. 30 lacs with the only intention of avoiding the liability under the head 'Capital gains'. As observed by the Supreme Court in Durga Prasad More's case at page 545 : 'If all that an assessee who wants to evade tax Is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax ...... The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were, entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.' The declaration, in our opinion, does not constitute evidence to support the assessees that the residential house, was converted into stock-in-trade. The surrounding circumstances do not support any such inference. In fact, in the declaration itself, the house has been described as a capital asset. The assessees did not intend to trade with the property in their possession by parcelling the property into flats or plots. At least, so far as this transaction is, concerned, the assessees were not dealers in flats but were interested in developing the property. They were also interested in avoiding the payment of capital gains that such development would have engendered. They, therefore, formed a device of first making a declaration to the effect that the property would be converted into a trade asset and then creating a partnership firm to which each one of the co-owners of the property contributed their share as capital in the firm in which they were partners. All this was a grand design to reduce or avoid tax liability under the capital gains tax. We are, therefore, firstly satisfied that what was transferred to the firm was a capital asset and not stock-in-trade. It was never intended to be treated as a stock-in-trade, It was not a type of asset that could be traded in. Nor was it in fact traded as the subsequent conduct of the assessees showed. Therefore, we firmly hold that what was sold was a capital asset and the transfer to the firm of such residential house was a transfer within the meaning of sec. 2(47) of the Act. In fact, Shri Gupta did not seriously press the argument about treatment of the property as stock-in-trade.

8. The second question is the extent of the relief that would be available to the assessees u/s 54 of the Act. Sec. 54 as it then stood read as under :

"54. Where a capital gain arises from the transfer of a capital asset to which the provisions of section 53 are not applicable, being buildings or lands appurtenant thereto the income of which is chargeable under the head 'Income from house property', which in the two years immediately preceding the date on which the transfer took place, was being -used by the assessee or a parent, of his mainly for the purposes of his own or the parent's own residence, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed, a house property for the purposes of his own residence, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place it shall be dealt with in accordance with the following provisions of this section, that is to say,--

(i) if the amount of the capital gain is greater than the cost of the new asset, the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil ; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain."

The conditions here required to be fulfilled for getting the benefit of section 54(i) for the relevant assessment years were briefly as under :

(a) The capital gain should arise by a transfer by the assessee in a case where the provisions of sec. 53 are not applicable and the assessee should have either purchased within one year before or after date of the transfer house property for the purpose of his own residence or should have within a period of two years from the date of transfer constructed a house property for the purpose of his own residence. It may be emphasized here that in order to get relief u/s 54 the assessee should have constructed a house within two years after the date of the transfer. It was Shri Gupta's argument that the construction of the new house need not be commenced after the date of the transfer and completed within two years of that date. Therefore, argued Shri Gupta, the whole of the cost of fresh Investment should be allowed against the capital gains. We cannot persuade ourselves to accept this interpretation of the section in view of the facts before us. The details of new investment of Rs. 55,86,168, which was in the nature of residence at Pali Hill Road and which are reproduced hereinabove, would indicate that the appellants had purchased the land as early as on 31-3-1979 for Rs. 15,23,406. Construction expenses to the tune of Rs. 6,52,374 had already been incurred up to 31-3-1980. Thus, long before the assessees transferred the house property called 'Madhu Park' to the partnership firm on 1-7-1980, the assessee had already purchased land, started construction of a separate building. It could not be the intention of the Legislature to give adjustment of cost of investment in house property which had been made prior to the date of transfer of asset which resulted in capital gains. The whole intention behind giving relief u/s 54 was that the capital gains earned if invested in a house property either by way of purchase or by way of construction within stipulated periods should secure for the transferor some relief in the matter of capital gains tax. The relief contemplated u/s 54 in so far as it relates to construction of a house property is in respect of a post facto investment as would be clear from the language of the section, the relevant portion of which says 'as within a period of two years after that date constructed'. These words would be rendered meaningless if the cost of investment of an asset before the date of transfer is also taken into account for the purpose of adjusting it against the capital gains earned in terms of sec. 54. Further, we are satisfied that the authorities relied upon by Shri Gupta do not help his case in any way. In Smt. Shantaben P. Gandhi's case the assessee's property was divided into two parts, one of which was larger than the other. A building was constructed on the larger portion which was partly occupied by the assessee. The assessee constructed a house on the smaller plot which was completed in March 1968. The larger plot was sold and conveyance executed in March 1970. The assessee claimed exemption from capital gains arising on sale under sec. 54 on the ground that the house on the smaller plot had been constructed for the purpose of her residence. The Tribunal held that the assessee was not entitled to the exemption. On these facts, the Gujarat High Court held that the Tribunal was right in law in holding that the provisions of sec. 54 were not attracted in the instant case inasmuch as the assessee could not be said to have constructed within a, period of two years after the date of the transfer of the capital asset which had resulted in the capital gains. This decision of the Gujarat High Court only helps the interpretation put by us above. The second decision in the case of Vidya Prakash Talwar only reiterates the proposition that the benefit u/s 54 is available only when sale proceeds received on sale of capital asset are invested in a residential unit. The very purpose of sec. 54 would be defeated if an interpretation as advocated by Shri Gupta is to be put on It. We would, therefore, hold that the ITO and the CIT(A) were justified in the stand taken by them, namely, that only that part of the investment in the new house that was made out of the sale proceeds received after the transfer of the old house would qualify for exemption u/s 64. It may here be stated that there is nothing in the section which supports Shri Gupta's stand that the expenditure incurred prior to the date of transfer' in investing into an asset should also be taken into account for the purpose of adjustment under clause (ii) of sec. 54. The plain reading of the operative portion of sec. 54 would be that the Investment contemplated under that section is only of such funds as have been secured by way of sale proceeds on transfer of capital asset which led to capital gains. We would, therefore, reject the argument advanced in this behalf by Shri Gupta, confirm the orders of the CIT (A) and dismiss both the appeals.

 

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