Vildirect: IncomeTax-caselaws-2002-VIL-185-ITAT-PNE

2002-VIL-185-ITAT-PNE

Equivalent Citation: ITD 081, 218, TTJ 075, 675,

Income Tax Appellate Tribunal PUNE

Date: 11.01.2002

SMT. ARUNA A. BHAT.

ASSISTANT COMMISSIONER OF INCOME TAX.

BENCH

Member(s) : M. K. CHATURVEDI., U. B. S. BEDI., B. L. CHHIBBER.

JUDGMENT

Per Chhibber, Accountant Member--The main issue involved in this appeal in ground Nos. 1 to 5 is, whether the amount of Rs.62.50 lakhs received by the assessee on retirement from the partnership firm of M/s. A.V. Bhat & C.V. Shah is a capital receipt not liable to capital gains tax.

2. The assessee's husband Shri A.V. Bhat was a dealer in and developer of real estate on a large scale and in the course of his business had entered into several business deals with outsiders. One such deal related to what is referred to as 'Marketyard property'. Shri A.V. Bhat and Shri C.V. Shah (another financier and developer) entered into an agreement to purchase land belonging to Yadav Group by agreement dated 22-6-1986 with a view to develop the same in partnership as a joint venture. Shri A.V. Bhat and Shri C.V. Shah constituted an oral partnership. The occasion to draw up a formal Deed of Partnership did not arise as the property was embroiled in controversy as to title from the beginning and was under acquisition by the Income-tax Department. However, late Shri A.V. Bhat and Shri C.V. Shah took several steps in pursuance of their intention to develop the property like entering into an agreement with Poona Timber Industrial Association and Members thereof for development of the property; challenging the acquisition order etc. A bank account was also opened in the joint names of Shri Bhat and Shri Shah for the venture and was being operated by both of them. They also received various amounts from the Members of the Association in pursuance of the development contract.

3. Unfortunately, Shri A.V. Bhat died on 26-10-1990 in a car accident and the assessee herself was also very seriously injured. Though the assessee was vaguely familiar with the business affairs of her husband, it took her sometime not only to recover from physical injuries, but to get grasp of those affairs. In consultation with her relatives and friends, she decided to continue quite a few of the businesses left by her husband in partnership or otherwise; one such business venture related to the above property. It is significant to note that as early as on 14-7-1991 she made her intention very clear (within eight months of the tragedy) that she will step into the shoes of her husband and continue the businesses and Partnership in respect of the above property. This is clear from Clause No. 2 of the Agreement dated 14-7-1991 read with Clauses 19 and 20 of the Agreement dated 20-11-1993 appearing on page 106 of the assessee's paper book. It was clearly recited therein that the assessee and Shri C.V. Shah agreed to develop the said land and that amounts were invested in the 'said partnership'. The bank account was also continued by the assessee with Shri Shah. A copy of such account has already been placed on record, as desired by this Bench.

4. Subsequently, in view of the legal complications involved and her own perception of Shri Shah, the assessee desired to retire from the said partnership before which she wanted to bind Shri Shah that there was an existing partnership between them and that she had inherited rights, title and interest of her husband in the said Partnership. She also wanted to protect the interests of her minor children and with the above objects in mind, an Agreement dated 20-11-1993 was entered into between Shri Shah on one hand and the assessee for herself and her minor children and her major daughter Miss Gauri Ashok Bhat on the other hand. The said Agreement appears on page 96 of the assessee's paper book and recites the entire history as stated above, in particular clauses 19 & 20 referred to above; referred to the existence of the Partnership and Clause 27 clearly stated that the assessee and Shri Shah "should enter into a regular written agreement of Partnership with a view to continue the partnership joint venture." (Clauses 28 & 29 pages 110 & 111 of paper book) reaffirm the above intentions. Once this Agreement was on hand, the regular Deed of Partnership was also entered on 15-12-1993 and Clause 2 of the Partnership Deed makes the situation very clear when it provided that the Partnership Deed shall be deemed to have commenced from 27-10-1990, i.e., immediately after the death of Shri A.V. Bhat. After the assessee secured her position as above, she expressed her desire to withdraw from the said Partnership for the reasons stated above. Shri C.V. Shah requested that if the assessee and her daughter retired, the firm would automatically stand dissolved and hence his sons should be admitted to the said Partnership to ensure the continuity. The assessee agreed to this reasonable request and accordingly, another Partnership Deed appearing on page 140 of the paper book was executed admitting two sons of Shri C.V. Shah as partners. Thereafter, the assessee and her daughter retired from the said Partnership by executing a Deed of Retirement dated 25-1-1994 (appearing on page 158 of the paper book). On retirement, each of them received a sum of Rs.62.50 lakhs which amount is in dispute in this appeal.

5. Before the Assessing Officer, the assessee did not offer the amount of Rs.62.50 lakhs for tax in the return filed, relying on the decision of the Gujarat High Court in the case of CITv. Mohanbhai Pamabhai [1973] 91 ITR 393 as well as the decision of the Hon'ble Supreme Court in the same case Addl. CITv. Mohanbhai Pamabhai [1987] 165 ITR 166. The assessee explained that transfer of a capital asset, in order to attract capital gains tax, must be one as a result of which consideration is received or accrued to an assessee. When a partner retires from the Partnership, what he receives in his share in Partnership which is worked out and realised and does not represent consideration received by him as a result of extinguishment of his interest in partnership assets. The Assessing Officer did not accept the contention of the assessee and took a legal stand that the retirement amounts to transfer and relying heavily on the decision of the Bombay High Court in the case of CITv. Tribhuvandas G. Patel [1978] 115 ITR 95 held that the amount is liable to capital gain tax. He allowed only Rs.5000 being the share capital as cost.

6. The assessee appealed to the CIT(A) and it was submitted that after the decision of the Hon'ble Supreme Court in the case of Mohanbhai Pamabhai the Bombay High Court judgments are no longer good law and that the detailed Note explaining the legal position was also submitted. The CIT(A) made out an entirely new and different case. He did not dispute the existence of Partnership, but concluded that there was a systematic plan right from the beginning to avoid tax and various Agreements entered into including the Partnership Deed was merely a device to avoid the tax. In para 6 of his order, he states that the assessee and her daughter were inducted into Partnership to exploit the benefits arising from the Agreements, but still held that the said Partnership Deed did not have any property worth the name. The learned CIT(A) simply interpreted various Agreements and came to a finding in para 10 of his order that the series of Agreements were nothing but in arrangement and the Partnership entered into were a mere ploy to create an alibi that the sums were received on retirement. After having held as above, in para 11 he gave directions to the Assessing Officer to re-compute the capital gains. Aggrieved by the orders of the Assessing Officer and the learned CIT(A), the assessee is in appeal before this Tribunal.

7. Shri S.N. Inamdar, the learned counsel for the assessee, submitted that the conclusions drawn by the CIT(A) are bereft of any evidence or material and are simply based on surmises and conjectures and that too, with a preconceived biased mind. According to the learned counsel, it is significant to note that even in the course of appeal proceedings, the Assessing Officer maintained that the assessee's joining as a partner cannot be ab initio treated as sham or an arrangement which is clear from para 13 of the CIT(A)'s order. Thus, the CIT(A) reversed the finding of the Assessing Officer without bringing on record any material whatsoever. According to the learned counsel, the CIT(A) has overlooked the facts that as early as on 14-7-1991 the assessee and Shri Shah had reaffirmed their Partnership and undertook all the obligations of the old Partnership between Shri Shah and the assessee's husband late Shri A.V. Bhat. His conclusion, therefore, that what was transferred was shares in immovable property is totally baseless; firstly, the assessee did not have any interest in the property as such but merely in the development agreement as also contained not only rights, but several obligations also. This cannot be described as immovable property and even if it is treated so, the assessee could not have transferred any interest in the immovable property except by a Registered document which admittedly is not the case. The learned counsel, therefore, submitted that the CIT(A) was not justified either on facts or in law in making out an entirely new case totally unsupported by any factual evidence. In support of his arguments, the learned counsel relied upon the following judgments:

(i) CITv. P.N. Sreenivasa Rao [1988] 171 ITR 562 (Ker.);

(ii) CITv. Neba Ram Hansraj [1997] 223 ITR 854 (Pat.);

(iii) CITv. Anant Narhar Nimkar (HUF) [1997] 95 Taxman 9 (Guj.);

(iv) CIT v. Shreyas Chinubhai [1998] 149 CTR 102 (Guj.)

8. Shri Adhir Jha, the learned D.R. strongly supported the orders of the Assessing Officer and the CIT(A). He referred to the letter dated 21-12-1998 written by the assessee to the CIT(A) in support of his contention that the CIT(A) had material before him in the form of statement by the assessee, that she inherited property from her husband which was transferred. In this regard, he also submitted that the powers of the CIT(A) are coterminus with that of the Assessing Officer. Reliance was placed on the judgment of the Hon'ble Supreme Court in CITv. Kanpur Coal Syndicate [1964] 53 ITR 225 and Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688 (SC).

He further placed reliance on the following judgments:

(i) CITv. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC),

(ii) CIT v. McMillan & Co. [1958] 33 ITR 182 (SC),

(iii) Bishamber Nath Ram Sarup v. CIT [1987] 163 ITR 87 (Delhi),

(iv) Indermal Natwarlal v. CIT [1987] 166 ITR 494 (M.P),

(v) Narrondas Manordass v. CIT [1951] 31 ITR 909 (Bom),

(vi) Mahesh Kumar Saharia v. ITO 19 TTJ 564 (Gau).

He therefore concluded that it was well within the jurisdiction of the CIT(A) to have gone into the facts of the case and to have come to a conclusion which was different from that arrived by the Assessing Officer. As regards the reliance placed by the assessee on the Partnership Deed dated 15-12-1993 which had been given retrospective effect from 14-7-1991 for the assertion that the partnership was in effect from 14-7-1991, the learned D.R. drew our attention to the judgment of the Calcutta High Court in Dawjee Dadabhoy & Co. v. CIT [1963] 49 ITR 698 for the proposition that retrospective effect cannot be given to any Partnership Deed. Thus, according to him, in effect the Partnership Deed drawn up and executed on 15-12-1993 can have effect only from that date. He submitted that by drawing up a separate Agreement within the space of two months wherein two new partners had been introduced into the firm and the assessee had retired, the assessee had tried to evade taxes. According to the learned D.R., the scheme of things would clearly come within the scope of the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. He submitted that the extenuating circumstances of the assessee by themselves would not and should not enable the assessee to get away without payment of the correct amount of taxes and even in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC) it has been held that the CIT(A) has a right to penetrate the veil and ascertain the truth.

9. We have considerd the rival submissions and perused the facts on record. It is noted that the Assessing Officer has not challenged the genuineness of the Partnership Deed or the recitals in various Deeds. This fact is clear from the observations of the CIT(A) in para 13.1 of his order when he states, "The Assessing Officer is also of the view that partnership is not 'sham' or an 'arrangement'. The Assessing Officer has accepted the fact that the amount was received on retirement. He, however, took a legal stand that the retirement amounts to transfer and relying heavily on the judgment of the Bombay High Court in Tribhuvandas G.Patel held that the amount is liable to capital gains tax. The Hon'ble Supreme Court in Mohanbhai Pamabhai has confirmed the decision of the Gujarat High Court in Mohanbhai Pamabhai case that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill, and no part of the amount received by him would be assessable as capital gains under section 45 of the Income-tax Act, 1961. The Hon'ble Apex Court again in the case of Tribhuvandas G. Patel v. CIT [1999] 236 ITR 515, following its earlier judgment in Mohanbhai Pamabhai partly reversed the decision of the Bombay High Court in Tribhuvandas G. Patel case relied upon by the Assessing Officer. Thus, the Assessing Officer's order has no legal legs to stand.

10. As regards the order of the CIT(A), it is noted that he has made out an entirely new and different case. He has also not disputed the existence of Partnership, but has concluded that there was a systematic plan right from the beginning to avoid tax and various agreements entered into including the Partnership Deed was merely a device to avoid the tax. The CIT(A) simply interpreted various Agreements with a pre-determined conclusion and came to a finding in para 10 of his order that the series of Agreements were nothing but an arrangement and the Partnership entered into were a mere ploy to create an alibi that sums were received on retirement. It is significant to note that in making such sweeping allegations (which cannot even be elevated to the status of a finding of fact), he did not bring on record any evidence or material, but simply relied on his own interpretation of the situation. He did not even examine the assessee who appeared before him or Shri C.V. Shah to ascertain their inter se relationship as partners. From the facts of the case, it is evident that there is no dispute that late Shri A.V. Bhat and Shri C.V. Shah constituted an oral Partnership. The occasion to draw up a formal Deed of Partnership did not arise as the property was embroiled in controversy as to title from the beginning and was under acquisition by the Income-tax Department. However, it is a fact that late Shri A.V. Bhat and Shri C.V. Shah took several steps in pursuance of their intention to develop the property like entering into an Agreement with Poona Timber Industrial Association and Members thereof for development of the property; challenging the acquisition order etc. It is also noted that a bank account was opened in the joint names of Shri Bhat and Shri Shah for this venture and was being operated by both of them. They also received various amounts from the Members of the Association in pursuance of the development contract. After the unfortunate death of her husband in a car accident, the assessee as his heir, stepped into the shoes of her husband to continue the business and the Partnership in respect of the above property. This fact is duly established from the reading of Clause 2 of the Agreement dated 14-7-1991 read with Clauses 19 & 20 of the Agreement dated 20-11-1993 appearing on page 106 of the assessee's paper book. It was clearly recited therein that the assessee and Shri Shah agreed to develop certain land and that amounts were invested in the 'said partnership'. The bank account was also continued by the assessee with Shri Shah. As heir of her late husband, the assessee was entitled to inherit 50% share of her husband and accordingly, in view of the legal complications involved and her own perception of Shri Shah, the assessee entered into a regular partnership with Shri Shah and, thereafter, desired to retire from the said Partnership. There was nothing wrong/sham in entering into regular partnership with Shri Shah. In fact, it was her late husband who was in partnership with Shri Shah and after the unfortunate mdeath of her husband, the assessee was bound to inherit her husband's share and, if in the process keeping in view the legal complications involved and her own perception of Shri Shah, she entered into a Partnership Deed, the whole thing was within the framework of law and such an arrangement cannot be termed as a mere ploy to create an alibi that sums were received on retirement, as held by the learned CIT(A). In fact, the CIT(A) has reversed the finding of the Assessing Officer that the arrangement was not sham without bringing on record any material whatsoever. He has overlooked the facts that as early as on 14-7-1991 the assessee and Shri Shah had reaffirmed their partnership undertook all the obligations of the old partnership between Shri Shah and the assessee's husband late Shri A.V. Bhat. His conclusion therefore that what was transferred was share in immovable property is totally baseless. Accordingly, we hold that the CIT(A) is not justified either on facts or in law in making out an entirely new case totally unsupported by any factual evidence.

11. In the course of hearing, the learned D.R. referred to the letter dated 21-12-1998 written by the assessee to the CIT(A) in support of his contention that the CIT(A) had material before him in the form of admission by the assessee that she inherited the property from her husband, which was transferred. We find that if one carefully reads the letter, it is clear that the assessee has categorically mentioned that what could be devolved by succession was only 50% share in partnership and not any specific share in any property; further this was only an alternate contention. We do agree with the learned D.R. that the powers of the CIT(A) are coterminus with that of the Assessing Officer, but the CIT(A) cannot draw conclusions which are bereft of any evidence or material as he has done in this case.

12. As regards the reliance placed by the learned D.R. on the decision of the Hon'ble Supreme Court in the case of McDowell& Co. Ltd., we find that neither the Assessing Officer nor the learned CIT(A) applied the ratio laid down by the Hon'ble Supreme Court to the facts of the case before us. Even otherwise, the ratio laid down by the Hon'ble Supreme Court does not apply to the facts of the present case. In the case of McDowell & Co. Ltd., the Hon'ble Supreme Court has held that "the tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning."' In the instant case, as is evident from the facts enumerated supra, no colourable device was adopted by the assessee and whatever the assessee did she did within the framework of law. Hence, the reliance placed by the learned D.R. on the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. is of no assistance to the Revenue. Accordingly, the assessee succeeds on ground Nos. 1 to 5, and the impugned addition of Rs.62.50 lakhs stands deleted.

13. The ground No. 6 reads as under:

"The learned CIT(A) erred in confirming the addition of Rs.4,04,412 without giving adequate opportunity."

The Assessing Officer made an addition of Rs.4,04,412 on account of unexplained capital introduced. The assessee submitted before the CIT(A) that the source of addition to the capital could clearly be explained, if sufficient opportunities were given by the Assessing Officer. The CIT(A) stated that the Assessing Officer had given sufficient opportunity to the assessee and accordingly confirmed the addition of Rs.4,04,412.

14. Shri Inamdar, the learned counsel for the assessee submitted that the CIT(A) has confirmed the addition of Rs.4,04,412 without giving proper opportunity to the assessee. The factual position was explained to the CIT(A) by letter dated 6-11-1998 and all the details were produced before him. Instead of examining the details and proofs, he remanded the matter to the Assessing Officer. Even the Assessing Officer admits in the assessment order in para 3 that all books of account were produced on 24-3-1998. Again on remanding, the assessee's representative attended with full details. However, the Assessing Officer was on leave on that day and did not examine the details himself; instead, the details were shown to the Inspector who failed to understand the facts. According to the learned counsel, it is totally wrong to say that the assessee did not comply with the directions and did not produce the books of account.

15. Shri Adhir Jha, the learned DR. relied upon the orders of the authorities below.

16. We have considered the rival submissions.

After hearing both the parties, we are of the opinion that in the interest of justice this matter should be restored to the file of the Assessing Officer. The assessee will produce the books of account before the Assessing Officer and file all evidence in her possession to satisfy the Assessing Officer about the source of the amount of Rs.4,04,412. The matter is accordingly restored to the file of the Assessing Officer.

17. Ground Nos. 7 & 8 read as under:

"7. The learned CIT(A) erred in enhancing the assessment by Rs.1 lakh by completely ignoring Rule 46A and on factually erroneous grounds.

8. The learned CIT(A) erred in ignoring the revised working submitted by the appellant without pointing out any flaw therein and by rejecting the evidence produced, even though the enhancement proceedings were commenced for the first time in the course of the hearing before him."

18. From the above grounds, it is noted that the assessee has objected to the enhancement made by the CIT(A) enhancing the assessment by Rs.1,00,000. The facts leading to the enhancement have been given by the CIT(A) in para 15 of his order. The CIT(A) gave notice of enhancement and in response to this notice, the assessee produced evidence to point out how enhancement was not warranted. The CIT(A) refused to look into the evidence on the ground that it was fresh evidence and without giving any further opportunity enhanced the income by Rs.1,00,000.

19. Shri Inamdar, the learned counsel for the assessee, submitted that surprisingly when the CIT(A) issued notice of enhancement, the assessee produced the evidence to point out how the enhancement was not warranted. The CIT(A) refused to look into the evidence on the ground that it was fresh evidence. He failed to appreciate that when enhancement notice is issued, the assessee is bound to produce fresh evidence. Further, he totally ignored Rule 46A(4). In the said circumstances, the learned counsel submitted that the matter may be sent back to the CIT(A) to consider all the evidences produced (already filed before the ITAT).

20. Shri Adhir Jha, the learned D.R. relied on the order of the CIT(A).

21. After hearing both the parties, we agree with the contention of the learned counsel that the matter deserves to be restored to the file of the CIT(A) because he failed to take note of the evidence produced before him in support of the argument of the assessee that no enhancement was called for. Accordingly, we set aside the order of the CIT(A) on this issue and restore the matter back to his file to consider all evidences which the assessee may like to produce before him.

22. In the result, the appeal is allowed in part.

Per Singhal (Judicial Member)

23. After going through the proposed order in the case of Mrs. Aruna Bhat (I.T.A. No. 444/PN/99) and having discussion with my Learned Brother, I have not been able to persuade myself to agree with the conclusions arrived at by him in paras 10 to 12 for the reasons mentioned hereafter.

24. The controversy between the parties, is whether the C.I.T.(A) was justified in holding that the sum of Rs.62.5 lakhs received by the assessee is assessable to tax under the head "capital gains".

25. The facts of the case have been set out by my Learned Brother in paras 2 to 4 of the proposed order, but certain factual observations made by him, in my view, are not borne out from the record. In order to appreciate the controversy in the right perspective, it would be necessary to ascertain the exact facts available from the record. The Tribunal being the last fact finding authority is bound to record the facts on the basis of material placed before it. At this stage, reference can be made to the observations of the Supreme Court in the case of Dhirajlal Giridharilal 26 ITR 736 wherein it has been held:

"When a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding."

In view of the above observations, it is necessary to find out the relevant facts before drawing any inference for or against any party. However, the factual controversy would be dealt with by me later on at the appropriate place in my order.

26. In the proposed order, it has been held that arrangement between the parties, by execution of the agreement dated 20-11-1993, partnership deeds dated 15-12-1999 and 19-1-1994 and retirement deed dated 25-1-1994 was within legal framework and therefore, the CIT(A) was not justified in holding that such arrangement was a device to avoid the tax. According to him, the CIT(A) was not justified in making out a new case since the Assessing Officer had never doubted the existence of partnership between the parties, executed on 15-12-1993. It has also been held by him that what was received by the assessee on the death of her husband was 50% share in the partnership and not any specific share in the property. For the similar reason, it has been held that the amount received by the assessee on the date of retirement was nothing, but that amount towards the satisfaction of her share in the partnership. Since it is not possible for me to agree with such conclusion, I proceed to express my descending view.

27. The proposed order has been gone through by me carefully. The perusal of the same shows that the entire conclusions are based on the assumption that there existed in oral partnership between Shri Ashok V. Bhat and Shri C.V. Shah. It is well settled principle of law that burden of proving the existence of a fact lies on the person who asserts the existence of such facts.

The assessee has filed voluminous paper book containing 182 pages and additional paper book of 25 pages, but there is no contemporary material/evidence to show the existence of such partnership. In the entire arguments, the Ld. counsel for the assessee has tried to establish this fact by referring to certain clause in the agreement dated 20-11-1993 and partnership deed dated 15-12-1993, but has not been able to produce any contemporary material/evidence to prove such fact. The only undisputed fact is that Shri Ashok V. Bhat and Shri C.V. Shah entered into an agreement dated 22-6-1986 to purchase the land belonging to Yadav Group jointly with a view to develop the same. But there is no presumption of law that an agreement to purchase of property jointly constitute the partnership between the parties. The existence of partnership is not a matter of status unlike HUF, but is a relation between the parties arising out of an agreement. So nothing can be presumed in this regard on the basis of mere agreement to purchase the property in joint names.

Reference can be made to the provisions of section 6 of Indian Partnership Act, 1932 which are set out as under:--

"6. Mode of determining existence of partnership

In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to be real relation between the parties, as shown by all relevant facts taken together.

Explanation 1:-- The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners."

28. The above provisions clearly show that existence of partnership cannot be assumed merely on the basis of joint ownership of the property despite sharing of profit or of the gross returns arising from such property. The reason is obvious. The most essential ingredient of the partnership is the existence of element of agency between parties to the agreement as per section 4 of Indian Partnership Act, 1932. No doubt, the agreement of partnership may be oral one, but in such case, the parties to the agreement must produce the relevant material or evidence of show the circumstances to prove the same. However, no such material has been produced before us or before the lower authorities. Sufficient opportunity was given to the assessee by us to bring to such material or evidence, but nothing could be produced. Admittedly, no books of account were maintained in respect of such joint venture except execution of an agreement dated 18-8-1988. Nothing has been brought on record to prove any activity of development with reference to such property. It was stated by the ld. counsel for the assessee that joint bank account was maintained by Shri Ashok V. Bhat and Shri C.V. Shah as partners, but not material has been brought to prove that any such account was maintained with any bank in the status of partnership despite proper opportunity being given to him. At one stage of hearing, it was argued by the ld. counsel for the assessee that aforesaid agreement to purchase such property was subject to acquisition proceedings by appropriate authority. We asked him to produce the correspondence between the assessee and appropriate authority as well as copy of form 37-I so that it may be shown that Shri Ashok V. Bhat and Shri C.V. Shah acted as partners. But this was also not produced. In the course of hearing, reference was also made to the writ petition (No. 494 of 1990) filed by Shri A.V. Bhat and Shri C.V. Shah in the High Court of Bombay challenging the acquisition proceedings by the appropriate authority. The assessee was asked to produce the copy of the W.P. so as to prove the fact that Shri Ashok Bhat and Shri C.V. Shah acted as partners. Even this evidence was not filed despite proper opportunity being given to him. It is, therefore, clear that no contemporary material or circumstantial evidence has been brought on record to prove the existence of oral partnership between Shri Ashok V. Bhat and Shri C.V. Shah. Hence no presumption can be raised that there was a partnership between these two persons in view of clear provisions of section 6 of Indian Partnership Act, 1932.

29. There is a further assumption in the proposed order that after the death of her husband, Shri Ashok V. Bhat, the assessee stepped into the shoes of her husband and continued in partnership with Shri C.V. Shah. Reliance has been placed on clause 2 of the agreement dated 14-7-1991. The copy of such agreement is placed in additional paper book at pages 2-9 by way of additional evidence which was admitted in the interest of justice. This agreement has been looked into very carefully. Firstly, it is to be seen that it is not an agreement between the assessee and Shri C.V. Shah, but is a multi-party agreement for ratification of the earlier agreement dated 18-8-1988. Consequently, clause 2 of this agreement on which reliance is placed, does not indicate anything to prove either that there was any partnership between Shri Ashok V. Bhat and Shri C.V. Shah or any partnership existed between Shri Shah and the assessee. This clause is quoted as under:

"2. The Developers state and declare that Developer No. 1-A to 1-D are the sole heirs and successors to the right, title and interest of late Shri A.V. Bhat and that the Developers herein do hereby adopt the said Agreement mutatis mutandis i.e., all the lights and title with all the obligations whatsoever contained therein are binding and continue to bind the parties as if the Association i.e., the party of the second part herein is the Promoter in the said Agreement dated 18-8-1988."

The perusal of the above clause, nowhere shows that assessee became the partner with Shri Shah. It is also interesting to note that the preamble of the agreement as well as clause 2 described the assessee as well as her children viz. Miss Gauree V. Bhat, Miss Supriya A. Bhat and Master Kedar A. Bhat as legal heirs of Shri Ashok V. Bhat and nowhere indicated even remotely that she stepped into shoes of her husband as partner. In the argument made by the Ld. counsel for the assessee, it was stated that assessee and Shri Shah continued to operate bank account jointly as partners, but nothing has been produced to establish that any bank account was operated as partners. During the period between 26-10-1990 (date of death of Shri Ashok V. Bhat, husband of the assessee) and 15-12-1993 (date of partnership between the assessee and Shri C.V. Shah), there is not even an iota of evidence to establish the existence of any partnership between the assessee and Shri Shah. Therefore, in my opinion, no such presumption can be raised on the basis of agreement dated 14-7-1991.

30. Lastly reference has been made to the agreement dated 20-11-1993 and partnership deed dated 15-12-1993 as a circumstantial evidence to establish the existence of such partnership. These agreements are itself subject matter of dispute by the CIT(A) as a part of device to avoid the tax on "capital gains" arising out of the transfer of her interest in the development rights in the said property. Therefore, no evidential value can be attached to such material. Such material could be taken into consideration only when there was some material in existence in the past to indicate such partnership. In my opinion, the circumstantial material to which reference has been made cannot be the basis for holding that there existed any partnership in 1996 or thereafter prior to 20-11-1993 unless supported by any contemporary material/evidence.

31. Even otherwise there appears to be inconsistency between agreement dated 14-7-1991 on one hand and agreement dated 20-11-1993 and partnership deed dated 15-12-1993 on the other hand. In agreement dated 14-7-1991, the assessee along with her all three children are shown as parties to the agreement and on the basis of this agreement, it was vehemently submitted by the Ld. counsel for the assessee that such agreement showed their intention to continue the earlier partnership, but on the other hand two children of the assessee viz. Ms. Supriya Bhat and Master Kedar Bhat have not been shown as parties to the partnership agreement for the reasons best known to them. According to the Hindu Succession Act, the assessee and her children had 1/4th share each in the estate left by her husband, Shri Ashok Bhat, and the assessee was bound to protect such interest of the minor children till the attendant of majority. According to section 8 of Hindu Minority and Guardianship Act, 1956 natural guardian has to do all acts which are necessary or reasonable and proper for the benefit of the minor and protection of minor's interest in the estate. Further such guardian cannot transfer the interest of minor in the estate without the previous permission of the Court. Accordingly, the assessee could not appropriate the interest of minor children to herself. If there was continuation of partnership after the death of Shri Ashok Bhat, as argued by counsel for the assessee, then, there was no reason for not admitting the minors to the benefits of partnership particularly when such minors were made parties to the agreement dated 14-7-1991. For the reasons best known to them, they excluded the minors though legally she was bound to protect the interest of the minors. In my opinion, the agreement dated 20-11-1993 was brought on the record only to justify their story that partnership existed right from the inception.

32. In view of the above discussion, it is held that there was no partnership in existence either between Shri Ashok V. Bhat and Shri C.V. Shah or between the assessee and Shri C.V. Shah.

33. In view of the above finding, the case of assessee has no legs to stand since it is entirely built up on the plea that right from the beginning there existed a partnership between Shri Ashok Bhat and Shri C.V. Shah and later on between the assessee and Shri C.V. Shah. Still I would now deal with the real controversy as to whether the arrangement between the parties between 20-11-1993 to 25-1-1994 was a device to avoid the tax on "capital gains" on account of transfer of interest in the property belonging to assessee and her children.

34. Before coming to the merits of the case, it would be useful to refer the disallowance of their Lordships of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai and appearing at page 523 which are, being reproduced as under:

"We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction and that the transfer by the partner of his personal asset to partnership firm represents a genuine intention to contribute the share capital of the firm for the purpose of carrying on the partnership business. If the transfer of the personal. asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain, it will be open to the income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The Income-tax Officer will be entitled to consider all the, relevant indicia in this regard, whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent consideration may be taken into regard when the Income-tax Officer enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth."

The perusal of the above observations clearly shows that if any partnership is created for the conversion of the asset into money without attracting liability to the income-tax on "capital gains", then tax authorities would be justified to go behind the transactions and determine the real transactions. Therefore, it would be wrong to hold that CIT(A) made put a new case as genuineness of partnership was never doubted by the Assessing Officer. In the case of Kanpur Coal Syndicate, it has been clearly held that the first appellate authority has pleanary powers in disposing of an appeal and the scope of his powers is coterminus with that of Assessing Officer. He can do what the ITO can do and can also direct him to do what he failed to do.

Therefore, in my opinion, no fault can be found with the action of the CIT(A) disputing the genuineness of the partnership if the facts so warranted.

35. In the present case it has been found as discussed above that there was no partnership either between Shri Ashok V. Bhat and Shri C.V. Shah or between the assessee and Shri C.V. Shah prior to 15-12-1993 when the alleged partnership agreement was entered into. It is to be noted that only capital of Rs.5,000 to each was required to be invested by the parties. Further right from the inception i.e., 22-6-1986, no development activity whatsoever was carried on till 15-12-1993. Even no development on land took place after the commencement of so-called partnership. Lastly within a short period of 40 days, the assessee and her daughter retired from the said partnership only to receive the hefty amount of Rs.62.5 lakhs each in lieu of giving up their interest in the aforesaid land. It is also interesting to know that value of such right was not brought as their capital in the partnership firm on 15-12-1993. So such right did not become the asset of the partnership firm. Therefore, the question of transferring the same through so-called arrangement was a mockery. Even otherwise, the only intention in creating the partnership was to convert their interest in the land into money without paying tax on the "capital gains" which otherwise would have become due against the assessee. There is nothing on the record on the basis of which genuineness of the partnership can be presumed rather there is every reason to hold that creation of so-called partnership was only a device to avoid the "capital gains" tax. The view which has been taken by me is fully fortified by the judgment of the Bombay High Court in the case of Smt. Nayan tara G. Agrawal v. CIT [1994] 207 ITR 639 where on similar facts, it was held that creation of partnership was with a view to avoid tax on "capital gains" and therefore, such transaction can be ignored and consequently, the receipt by the assessee can be brought to tax. Before parting with this order, I would like to point out that assessee in her statement under section 131 dated 15-10-1997 had herself admitted in answer to question No. 22 that this property was purchased for Rs.2,31,032 in 1986-87 and the same was sold to Shri C.V. Shah Group in financial year 1993-94 for consideration of Rs.1.15 crore. This answer also shows the clear intention of the parties.

36. In view of the above discussion, it is held that there was no partnership in existence either between Shri A.V. Bhat and Shri C.V. Shah or between the assessee and Shri C.V. Shah. Further it is held that partnership dated 15-12-1993 was created with a view to convert their rights of development in the land into money with a view to avoid tax on 'capital gains'. However, considering the provisions of Hindu Succession Act, 1956, I am of the view that assessee and her children had 1/4th share each in the interest in the land belonging to late Shri Ashok V. Bhat. Therefore, as a necessary corollary, she was entitled only to 1/4th of the total consideration received and not 50% as has been taxed by the revenue. Though this aspect was not contested before us, yet the interest of justice demands that it should be held so. The order of CIT(A), is, therefore, modified on this issue and the Assessing Officer is directed to compute the "capital gains" with reference to 2596 of the total receipts.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

Per Chhibber, Accountant Member.--As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following questions may be referred to a Third Member or to pass such orders as the President may desire:

(1) Whether on the basis of material on the record, can it be said that there was no partnership between Shri Ashok V. Bhat and Shri C.V. Shah or between the assessee and Shri C.V. Shah, prior to 15-12-1993?

(2) Whether on the facts and circumstances of the case, can it be said that creation of partnership by an agreement dated 15-12-1993 was merely a device to convert the right of the assessee in the land into money with a view to avoid the liability of tax on "capital gains"?

THIRD MEMBER ORDER

M.K. Chaturvedi, Vice President--Under section 255(4) of the Income-tax Act (hereinafter called the Act), the following two questions were referred for my opinion:

"(1) Whether on the basis of material on the record, can it be said that there was no partnership between Shri Ashok V. Bhat and Shri C.V. Shah or between the assessee and Shri C.V. Shah, prior to 15-12-1993?

2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. At the outset, Shri S.N. Inamdar, the learned counsel for the assessee, narrated the background. It was submitted that there existed oral partnership between Shri Ashok V. Bhat and Shri C.V. Shah and also between the assessee and Shri C.V. Shah prior to 15-12-1993. The said partnership came into existence consequent upon the completion of agreement to purchase land belonging to Yadav Group. Reference was made to the agreement dated 22-6-1986. As some controversy crept in regard to the property, Deed of Partnership could not be constituted. Shri A.V. Bhat and Shri C.V. Shah took several steps together to develope the property. Agreement with Poona Timber Small Scale Industrial Association on the one hand, and Shri A.V. Bhat and Shri C.V. Shah on the other hand, was entered into on 18-8-1988 for development of property known as Market Yard property. The Agreement for the purchase of this property was made jointly on 22-6-1986. The acquisition order was challenged jointly. Bank account was opened in the joint names of Shri A.V. Bhat and Shri C.V. Shah, which was operated by both of them. They also received various amounts from the members of the Association in pursuance of the development contract.

3. Attention was invited on the fact that both the parties were engaged in real property business. The Market Yard property which was said to be purchased in partnership was a commercial property. The purchase was with an intent to exploit the property for commercial purposes. This property was commercially exploited. It was stated to be acquired in the ordinary course of business. The learned counsel described the various circumstances under which assessee was precluded from producing the complete details in regard to the partnership business.

4. Shri A.V. Bhat died on 26-10-1990 in a car accident. Assessee was also seriously injured. It took her sometime to recover from physical as well as mental trauma caused due to the accident and demise of her husband. Thereafter, assessee stepped into the shoes of her husband and continued the business in partnership in relation to the Market Yard property. Fresh Agreement was executed on 14-7-1991 between the assessee, her children and Shri Chandrakant V. Shah on the one hand as developers and the Poona Timber Small Scale Industrial Association on the other hand. This Agreement indicates that the assessee continued to carry the business which her husband was doing. The learned counsel invited my attention on Clause 25 of the Deed of Partnership dated 15-12-1993. This reads as under:

"The Parties hereto however propose to continue the partnership business carried on by the said C.W. Shah and A.V. Bhat with the object of carrying out the said transactions in anticipation of the order of acquisition being set aside or withdrawn and now propose to do the business relating to the said transactions or venture in partnership on the terms and conditions herein mentioned."

It was stipulated in the said Deed of Partnership that the partnership shall be deemed to have been commenced from 27-10-1990 and the period of partnership will be coterminus with the completion of the business or venture contemplated by and comprised in the said Agreement.

5. The learned counsel placed before me the bank account with the Vidya Sahakari Bank Ltd., Laxmi Road, Pune. It was pointed out that the name of assessee was substituted in the bank after the demise of her husband. Learned counsel relied on the decision of the Apex Court rendered in the case of Tribhuvandas G. Patel. In this case, the decision of the Bombay High Court in the case of Tribhuvandas G. Patel was partly reversed. It is pertinent to note that Revenue relied on the decision of the Bombay High Court Tribhuvandas G. Patel's case. The Hon'ble Supreme Court has held that even where a partner retires and some amount is paid to him towards the share in the assets, it should be treated as falling under clause (ii) of section 47. As such, it cannot be treated as a transfer. Ex-Consequenti, capital gains is not exigible on the said amount.

6. Shri Rajkumar, learned CIT (DR) submitted that assessee failed to adduce sufficient evidence to establish the existence of partnership. Normally the terms and conditions of the partnership are recorded in writing. In the present case, no Deed was executed. Besides, Mr. Bhat did not reflect existence of such partnership in his books of account. Joint account could be opened with any one. It does not prove the existence of a partnership. Shri Rajkumar relied on the decision of the Apex Court rendered in the case of Champaran Cane Concern v. State of Bihar [1963] 49 ITR 152. In this case, assessee was carrying on agricultural operations. Certain farms were purchased jointly by two individuals who had appointed a common manager for the agricultural operations. It was claimed to be a co-ownership concern. Assessing Officer assessed it as a partnership firm on the following grounds:

(i) that the name of assessee was "the Champaran Cane Concern",

(ii) that the two individuals joined together in appointing a common manager for supervision of cultivation, and

(iii) that the cultivation was made jointly on behalf of the two individuals by the common manager and the profits arising therefrom were distributed to them in proportion to their respective shares.

The Court held that the circumstance relied upon were not circumstances from which an inference that the assessee was a partnership necessarily followed. The facts and circumstances found by the taxing authorities were all consistent with the claim of the assessee that it was a coownership concern, the common manager whereof was liable to assessment under section 13 of the Agricultural Income-tax Act. One of the principal differences between a co-ownership and a partnership was that co-ownership was not necessarily the result of an agreement whereas partnership was. In this case, there was nothing in the record to show that there was any agreement between the individuals to form a partnership. The second difference was that a co-ownership did not necessarily involve a community of profit or of loss but a partnership deed. The third difference was that one co-owner could, without the consent of the other, transfer his interest to a stranger. A partner could not do this. In a partnership each partner acted for all, whereas in a co-ownership one co-owner was not as such the agent, real or implied, of the other.

7. Shri Rajkumar next relied on the decision of the Apex Court rendered in the case of Mohanbhai Pamabhai. In this case, Hon'ble Supreme Court decided the issue following their decision rendered in the case of Sunil Siddharthbhai. In this case, Hon'ble Gujarat High Court Mohanbhai Pamabhai's case took the view that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill, and no part of the amount received by him would be assessable as capital gains u/s 45 of the Act. The department preferred appeal before the Apex Court. Hon'ble Supreme Court dismissed the appeal following the case of Sunil Siddharthbhai. Therefore, this decision is of no help to the department.

8. Shri Rajkumar further relied on the decision of the Special Bench rendered in the case of ITO v. Ramkrishna Bajaj [1992] 198 ITR 1 (Bom.)(AT)(SB). In this case, the Tribunal took the view that if the transfer of a personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to Income-tax on a capital gain, it will be open to the Income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain.

9. Reliance was further placed on the decision of the Special Bench rendered in the case of Rahul Kumar Bajaj v. First ITO [1998] 64 ITD 73 (Nag.). In this case, the assessee converted certain equity shares into stock-in-trade at their market value. Thereafter, he contributed those shares to a firm as initial capital. Subsequently, in a period of 3 to 4 years, assessee withdrew a substantial amount from that firm. On this factual background, the Tribunal held that it could be said that it was merely a colourable device for converting asset into money which would substantially remain available for assessee's benefit and, therefore, gain arising out of contribution of assets to firm was liable to capital gains tax.

10. Shri Rajkumar further relied on the decision of the Hon'ble Bombay High Court rendered in the case of Smt. Nayantara G. Agrawal. In this case, the assessee. entered into a partnership with a company in which her husband was Director. The firm was formed to carry on business of purchased and sale of lands. Assessee brought her land valued at Rs.10 lakhs as her share of capital contribution in partnership. The company did not introduce any capital. There was no business of sale and purchase of land conducted by the firm. Assessee retired from the firm within three months of its formation without giving required notice. Thereafter, the firm was dissolved. The land was retained by the company. Assessee in consideration got shares worth Rs.10 lakhs. There was no evidence except Affidavit of assessee that she converted land into stock-in-trade. On this factual backdrop, the Hon'ble High Court held that the transaction was sham transaction. No genuine firm was in existence. On the basis of aforesaid precedents, it was argued that the assessee failed to adduce any evidence apropos the existence of oral partnership. Onus was on the assessee to prove the existence of partnership. The assessee could not discharge such onus. As such, contention of the assessee cannot be accepted.

11. I have taken into consideration the entire conspectus of the arguments raised by both the parties. In my opinion, if the evidence available on record can warrant the inference that a person did act as a partner, then the mere fact that Deed of Partnership was not executed would not make any material difference. The existence of the fact of a contract is quite distinct from the proof of the terms of the contract. Thus, the fact of existence of a partnership may be proved by parol evidence of the acts of parties without production of the Deed.

12. Under section 4 of the Partnership Act, 1932, partnership is defined as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The agreement contemplated under this section need not be an express agreement in writing, but an implied contract which can be inferred from the conduct of the parties in relation to the business and the circumstances transpiring in the case. Therefore, apart from a written agreement, actual conduct or the intentions of the parties is important in deciding questions of partnership, but intention is often incapable of proof. It has therefore to be deduced by inference. The basis of partnership is the desire to obtain the benefits of mutual agency. The different motives affecting the positions of individuals comprising it has reference to both the nature of the common object of the relationship and also to the position of each party thereto. Therefore, in determining the question as to whether a partnership is constituted and if so, whether it is genuine, it is often important to ascertain the underlying intention which caused the relationship to be brought into existence.

13. A distinction between co-owners and partners is that in the case of coownership, the co-owners do not intend to carry on a business. In the case of partnership, carrying on business is a necessary requirement. I two or more persons buy a land on joint account with an intention of having an interest according to the amount invested by them, they are merely co-owners. They do not become partners merely because they are entitled to share the income they get according to their shares. On the other hand, if two or more persons put together certain amounts of money in certain shares for the purpose of purchasing properties and selling them for profits for common benefit, it has to be said that such business amounts to the partnership concern. That is, if two or more persons expressly acquire property for the purpose of joint business they bring property into partnership stock and they become partners.

14. Adverting to the facts of the present case, I find that Shri A.V. Bhat and Shri C.V. Shah were engaged in the real property business. Market Yard property was acquired with a view to earn profit. This is evident from the fact that both the persons entered into an Agreement with Poona Timber Small Scale Industrial Association. Indisputably, the Market Yard property was a commercial property. Shri C.V. Shah, the surviving partner accepted the existence of the partnership with Shri A.V. Bhat. In the Agreement dated 20-11-1993, it is stipulated, vide Clause 9, that lands were agreed to be purchased and developed by Shri C.V. Shah and Shri A.V. Bhat jointly as equal partners of a partnership between them, and though actually no partnership deed was executed by and between them, they continued to act as partners on the oral understanding between them.

15. Shri C.V. Shah ratified the act of partnership. Shri Ashok V. Bhat died on 26-10-1990 leaving behind his wife Smt. Aruna A. Bhat, a major daughter Miss Gauri Bhat, a minor daughter Supriya Bhat and a minor son Kedar Bhat. Thereafter, Shri C.V. Shah included Smt. Aruna A. Bhat and Miss Gauri Bhat into the business of real property. As the sanction of the competent Court was required for admitting the minors into the benefits of the partnership and without that sanction the transaction was not binding on them, besides there were certain practical difficulties also, as such minors were not admitted into the benefits of the partnership.

16. Interest of a partner that he holds in a firm is property in the real sense of the term. Shri Ashok V. Bhat deployed capital to acquire right in the Market Yard Property. This was a valuable right. He used his business acumen and expertise to develop this right. He, along with Shri C.V. Shah exploited the property by entering into an Agreement with Poona Timber Small Scale Industrial Association. This clearly indicates that the intention was to earn profit out of the exploitation of the said property along with Shri C.V. Shah. On this factual background, it can be said that there existed a partnership.

17. The law as regards burden is canonised in the dictum: "Incumbit probatio qui dicit non qui negat". The burden of proving lies upon one who alleges the existence of a fact, not upon one who denies it. The assessee demonstrated with reference to the various circumstantial evidence that there existed a partnership. Existence of such fact was ratified in the Agreement dated 20-11-1993 and also in the Deed of Partnership executed on 15-12-1993. There is no material to show that the partnership was merely a device to convert the right of the assessee in the land into money with a view to avoid the liability of tax on capital gains. I have considered the various circumstances narrated in the two conflicting orders. I am inclined to agree with the conclusion of the learned Accountant Member for the various reasons given in his order.

18. I now direct the Registry to place the appeal before the Bench for consequential order in accordance with the majority view.

Per Chhibber, Accountant Member--As there was a difference of opinion between the Accountant Member and the Judicial Member, the following questions were referred to a Third Member:

2. The learned Vice-President (Judicial Member) Shri M.K. Chaturvedi, sitting as Third Member, vide his opinion dated 7-12-2001 has concurred with the views of the Accountant Member and has answered the questions in the negative. In accordance with the majority view, the issue stands decided in favour of the assessee and against the Revenue.

3. In the result, the appeal is Allowed.

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