2010-VIL-410-ITAT-DEL
Equivalent Citation: [2010] 3 ITR 635, ITD 123, 001, TTJ 128, 121, [2010] 36 SOT 1 (DELHI) (SB)
Income Tax Appellate Tribunal DELHI
IT APPEAL NOS. 3622 (DELHI) OF 1995, 2546 AND 3233 (DELHI) OF 2001 AND 267 AND 4986 (DELHI) OF 2003
Date: 04.01.2010
DLF UNIVERSAL LIMITED.
Vs
DEPUTY COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : I. P. BANSAL., C. L. SETHI., DEEPAK R. SHAH.
JUDGMENT
4th Jan., 2010
The Hon'ble President, Tribunal, vide order dt.15th June, 2008 as modified by his order dt.6th March, 2009has constituted the Special Bench in the above-referred appeals to dispose of all the appeals in entirety, on the facts and circumstances of the case, and in accordance with law (including directions of Hon'ble High Court in the matter).
ITA No. 3622/Del/1995
2. Firstly, we take up the appeal pertaining to the asst. yr. 1992-93.
3. In the appeal filed by the assessee for the asst. yr. 1992-93, ground No. 1 divided into sub-ground Nos. 1.1 to 1.7 read as under:
"1.1 That the learned CIT(A) has erred on the facts and circumstances of the case and in accordance with the provisions of law and past history of the case in confirming the addition of Rs. 6,01,78,261 being the surplus arising on land brought into the common stock of the partnership firm M/s DLF Commercial Developers.
1.2 That the learned CIT(A) has erred on the facts and circumstances of the case and in accordance with the provisions of law in holding that the stock in hand brought into the common stock of the partnership by the company by credit, at an agreed value, to the company's capital account amounted to a transfer of the asset to the partnership giving rise to a taxable profit.
1.3 That the learned CIT(A) has erred on the facts and circumstances of the case and in accordance with the provisions of law in holding that the amount of Rs. 6,01,78,261 determined for credit to the capital account is a consideration and a profit derived from the business and in any case a benefit arising to the appellant from such business.
1.4 That the learned CIT(A) has erred on the facts and circumstances of the case and in accordance with the provisions of law in holding that the bringing of the individual assets into the common stock of partnership gives rise to a profit in the commercial sense without appreciating that in Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 1 72 : (1985) 156 ITR 509 (SC), it has been clearly held that such a transaction does not amount to a sale and that whatever is brought into the partnership ceases to be the exclusive property of the person who brought it in, that is, an exclusive interest is reduced to a shared interest.
1.5 Without prejudice to the above, it is respectfully prayed that the CIT(A) is clearly in error in holding that the entire surplus is assessable in the year under appeal.
1.6 That the learned CIT(A) has erred on the facts and circumstances of the case and in accordance with the provisions of law in holding that in case of stock-in-trade there is no difficulty in computation of the profit under s. 28 without appreciating that in (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC), it has been specifically held by the Hon'ble Supreme Court that 'notwithstanding the transfer, there would be no consideration in such cases available to the partner during the subsistence of the partnership and his rights are limited to getting his share of profit'.
1.7 That the learned CIT(A) has erred on the facts and circumstances of the case and in accordance with the provisions of law and without raising the issue, in holding that the firm is not genuine in as much as it is formed with the sole objective of evading payment of taxes."
4. Briefly stated, apropos the issue involved in ground Nos. 1.2 to 1.7 of the appeal of the assessee, the facts are that the assessee, a company, is engaged in the business of real estate development, and hold certain lands as stock-in-trade. By a memorandum of the partnership executed on 23rd day of March, 1992, made effective from 16th day of March, 1992, the assessee company entered into partnership with four of its subsidiary companies and one individual. The assessee contributed all its right in the five plots of land admeasuring about 16.98 acres including the area of land owned by it, situated in DLF Qutab Enclave Complex, hereinafter referred to as "said land", valued at Rs. 11.50 crores as capital contribution to a newly constituted partnership firm viz., M/s DLF Commercial Developers, in which the assessee became a partner with share of 76 per cent. All the right in the said plot of land became the property of the partnership firm w.e.f. 16th day of March, 1992. The assessee's contribution of capital in the newly constituted firm represented the market value of the said plot of land. The market value was determined at Rs. 11.50 crores. In the assessee's books of account, the said land contributed towards capital in the partnership firm was shown at a cost of Rs. 4,40,62,419. The said newly constituted partnership firm credited the capital account of the assessee company by Rs. 11.50 crores being the value of the land contributed by the assessee as capital. The assessee also recorded the value of said land contributed as capital in the firm at Rs. 11.50 crores in its books, and the surplus amounting to Rs. 6.01 crores was credited to the P&L a/c, but was claimed as not exigible to tax in the return of income filed by the assessee. The assessee claimed the surplus being difference between the value at which the land was credited in assessee's capital account in the firm in which assessee became a partner and the book value, credited in its P&L a/c to be exempted from tax relying upon the decision of Hon'ble apex Court in the case of CIT vs. Hind Construction Ltd. 1974 CTR (SC) 157 : (1972) 83 ITR 211 (SC). According to the assessee, the surplus of Rs. 6.01 crores was not its income liable to tax as there was no sale or transfer of land in law as there could be no sale to self. The assessee also submitted before the AO that identical controversy has been decided in favour of the assessee in the asst. yr. 1985-86. However, the AO, after considering the facts that in its books, the assessee has credited the surplus in the P&L a/c and utilized this income for declaring dividend, has treated this surplus amounting to Rs. 6.01 crores as profit derived from the transfer of lands to the firm by relying upon the judgment of the Hon'ble apex Court in the case of Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC). The AO while treating this amount of Rs. 6.01 crores as profit chargeable to tax also relied upon the provision of sub-s. (3) of s. 45 of the IT Act, which was inserted in the IT Act w.e.f.1st April, 1988. The AO had also taken a view that the new partnership firm constituted in the name and style M/s DLF Commercial Developers was a bogus partnership or a sham partnership and the transaction was not genuine. In this connection, the AO placed reliance on the decision of apex Court in the case of McDowell & Co. Ltd. vs. CTO (l985) 47 CTR (SC) 126 : (l985) 154 ITR 148 (SC). The AO further held that he was not following the decision of learned CIT(A) for the asst. yr. 1985-86, because that decision has not become final as the order of the learned CIT(A) was pending before the Tribunal.
5. On an appeal, the learned CIT(A) upheld the order of the AO, firstly, on the reasoning that the assessee company had shown the surplus as its income in its P&L a/c by making appropriate credits to the P&L a/c, and on commercial principles, the surplus represents the business profit as has been treated as such by the assessee; secondly, on the reasoning that the ratio of the decision in the case of Hind Construction Ltd. was not applicable to the facts of the assessee's case as there were vital distinguishing features as detailed by the AO in his order; thirdly, on the reasoning that after the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai, the decision of the Hind Construction Ltd. stands modified to that extent; fourthly, on the reasoning that since the land so transferred represented the stock-in-trade of the assessee, the profits were chargeable to tax under s. 28 of the Act, which stands on different footing with the gains arising from the transfer of capital or fixed assets, and lastly, on the reasoning that the present partnership firm newly constituted is not genuine in as much as it has been constituted or formed with the sole object of evading payment of taxes and, therefore, the assessee's reliance on the ratio in the case of Hind Construction Ltd. was totally out of context and irrelevant.
6. Being aggrieved, the assessee has preferred this appeal before the Tribunal, and the Tribunal vide order dt.30th March, 2007dismissed this ground raised by the assessee and upheld the order of the learned CIT(A) by deciding the issue against the assessee. The Tribunal vide order dt.30th March, 2007, decided the issue against the assessee on merits in the light of detailed reasoning given in para Nos. 6 to 29 of that order. The Tribunal declined to accept the contention of the assessee, in the light of insertion of s. 45(3) of the Act w.e.f. 1st April, 1988, and further that some of the decisions cited before the Tribunal in the asst. yr. 1992293 were not considered in the earlier asst. yr. 1985-86 and the issue was not much deliberated upon by the Tribunal in that earlier year.
7. Against the order of the Tribunal dt.30th March, 2007, the assessee preferred an appeal before the Hon'ble High Court, and their Lordships vide order dt.11th Jan., 2008set aside the order of the Tribunal and remitted the matter to the Tribunal for a fresh consideration m accordance with law by observing as under:
"The question that arose on the merits of the case before the Tribunal was whether on revaluation of the stock-in-trade of the assessee, the AO was justified in making an addition of Rs. 6.01 crores. An identical issue had arisen in the case of the assessee, though in respect of a different amount for the asst. yr. 1985-86. In respect of that assessment year, the AO made an addition, but that was set aside by the CIT(A) by a detailed order dt.29th Oct., 1990. Aggrieved by the order passed by the CIT(A), the Revenue preferred an appeal which was heard and dismissed by the Tribunal on31st Jan., 2001being Appeal No. 873/Del/1991 relevant for the asst. yr. 1985-86. The Tribunal did not give its own reasons while disposing of the appeal of the Revenue but relied upon the basis and reasons given by the CIT(A), which it found to be sound and convincing, so as not to warrant any interference with the order passed by the CIT(A). When the same issue arose in the present asst. yr. 1992-93, the AO again took a view which was not favourable to the assessee with the result that the assessee preferred an appeal before the CIT, but by an order dt.10th March, 1995the CIT(A) dismissed the appeal of the assessee. Being aggrieved, the assessee preferred an appeal before the Tribunal and one of the points urged by the assessee was that since the issue raised in 1985-86 was identical, the order passed by the Tribunal in respect of that year should be followed by the Tribunal in this year also. The Tribunal considered that contention in paras 30 to 32 of its order and rejected it on three grounds; firstly, that on the earlier occasion the CIT(A) had not taken into consideration an amendment to s. 45(3) of the Act which came into force from 1st April, 1988 which was, therefore, not applicable in respect of the asst. yr. 1985-86; secondly, that some of the decisions cited before the Tribunal in the present matter were not cited on the earlier occasion; thirdly, that the issue raised was 'sensitive' and was not deliberated upon by the Tribunal on the earlier occasion. On this basis, the Tribunal declined to follow the order passed in respect of the asst. yr. 1985-86. It is now well-settled that when one Bench of the Tribunal takes a view, then another Bench of the Tribunal cannot pass a contrary order but must, if it disagrees with that view, have the conflict resolved by referring the matter to a Larger Bench. This is not only a matter of judicial propriety but also a matter of judicial discipline. InUnionofIndiavs. P.D. Sharma & Ors. 2004 III AD (Del) 131, a Division Bench of this Court observed as follows:
'It is now trite law that a Co-ordinate Bench of the Tribunal cannot take a view contrary to a view expressed by earlier Bench rendered earlier. In case it differs from the decision of the earlier Bench, the only course open to it is to refer the matter to a Larger Bench.'
In Sundarjas Kanyalal Bhatia & Ors. vs. Collector (1989) 3 SCC 396, the Supreme Court held as follows:
The judicial decorum and legal propriety demand that where a learned Single Judge or a Division Bench does not agree with the decision of Bench of co-ordinate jurisdiction, the matter shall be referred to a Larger Bench. It is subversion of judicial process not to follow this procedure.'
In arriving at this conclusion, the Supreme Court relied upon two of its earlier decisions, namely, Mahadeolal Kanodia vs. Administrator General of West Bengal AIR 1960 SC 936 and Lala Shri Bhagwan vs. Ram Chand AIR 1965 SC 1767. Under these circumstances, we answer the question in the negative and remit the matter to the Tribunal for a fresh consideration in accordance with law."
8. In pursuance to the aforesaid order of the Hon'ble High Court, the matter come up again before the Tribunal for its fresh consideration and decision.
9. When the appeal again came up before the Division Bench in pursuance to the aforesaid High Court's order, the Division Bench observed that since the Tribunal for the reasons recorded in the order passed for the asst. yr. 1992-93 had taken a view contrary to the view taken by the Tribunal in the asst. yr. 1985-86, the matter needs to be resolved by a Larger Bench. The Division Bench then recommended the Hon'ble President to constitute a Special Bench to decide the following question as well as to decide the whole appeal:
"Whether in the facts and circumstances of the case of the assessee the surplus arising from land brought into the common stock of the partnership firm, M/s DLF Commercial Developers, by credit, at an agreed value, to the company's capital account amounted to a transfer of the asset to the partnership give rise to a taxable profit?"
10. It is in the above circumstances that Hon'ble President constituted the Special Bench to dispose of the entire appeal for asst. yr. 1992-93, and also appeals for other assessment years referred to in the cause title hereto, and while disposing of the appeals in entirety, the Special Bench was directed to consider the following question also:
"Whether on the facts and in the circumstances of the case, the surplus arising on revaluation of the land, held by the assessee as stock-in-trade and brought into the common stock of the partnership firm M/s DLF Commercial Developers, and by credit, at an agreed value, to the assessee's capital account, amounted to a transfer of the asset to the partnership firm and can be assessed as the business profits of the assessee?"
11. The matter was then heard at length by the Special Bench on various dates i.e., 14th Oct., 2008, 20th Oct., 2008, 11th Nov., 2008, 17th Nov., 2008 and lastly on 18th Nov., 2008. However, in the course of dictating the order, it was felt that the question framed as above was restricting powers of the Bench to consider all aspects of the matter involved in ground Nos. 1.1 to 1.7 in as much as, in the question, a limited issue was framed to decide as to whether surplus from the contribution of land to a firm can be assessed as business profits of the assessee, though, in the course of hearing of the appeal, reliance was placed by the Department upon the applicability of s. 45(3) of the Act, as so referred to and relied upon by the authorities below in their orders, and also referred to by the Tribunal in its order dt.30th March, 2007passed in first round of this appeal. The matter was again put up before the Hon'ble President, and the President after hearing both the parties passed the order as under:
"6th March, 2009:
Present Shri Dinodia for the assessee and Shri N.P. Sawhney for the Department. Both the parties agree that the Special Bench should dispose of the appeals without (sic) considering the question in accordance with law and facts of the case (including the directions of Hon'ble High Court). Directions under s. 255(3) be issued accordingly."
12. The matter was then again heard by the Special Bench to dispose of the entire appeals in accordance with law, and the facts of the case (including directions of the Hon'ble High Court), but without restricting ourselves to the question framed earlier.
Submissions of the assessee
13. Shri Pradeep Dinodia, chartered accountant, appearing for and on behalf of the assessee has submitted that the said plot of land contributed as capital by the assessee to a newly constituted partnership firm in which the assessee became a partner holding 76 per cent of shares, was held by assessee as its stock-in-trade of its business of real estate development, and the said land was also held by the newly constituted partnership firm as stock-in-trade. He further submitted that the said land was contributed to the firm as capital contribution by the assessee in the capacity of a partner. The newly constituted partnership firm credited the capital account of the assessee company at a market value of Rs. 11.50 crores, which was more than the cost price to the assessee. The surplus of Rs. 6.01 crores determined after considering cost to the assessee was shown in the P&L a/c of the assessee company, but, was claimed to be exempted from tax, in view of the decision of the Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. He further submitted that there was no sale of stock-in-trade by the assessee to a partnership firm when the same was contributed towards capital of the assessee as a partner. He pointed out that the law is well-settled that no one can earn profit from himself by over-valuing the stock as it is not a commercial transaction in the business sense, and as such, in the light of this well settled principle of taxation, the stand of the Department in charging the surplus amount to tax must fail. He further contended that when the assessee revalues its stock-in-trade at an amount more than cost price to it, the surplus does not result in the taxable amount as there was no sale at that time. Likewise, there was no sale of stock-in-trade at time when the new partnership firm was created and the land was contributed by the assessee to a firm as its capital contribution. He further submitted that without prejudice, even if the transaction of contributing land stock as its capital is treated as transfer, no gain arises to the assessee on the transaction in question as the biggest difference lies in the fact of the present case is that the assessee transferred its stock-in-trade and not any capital asset. In this respect, the decision of apex Court in the case of Hind Construction Ltd. was relied upon by the learned counsel for the assessee by saying that the facts of the case of Hind Construction Ltd. were identical to the facts of the instant case of the assessee. In support of his contentions, the learned counsel for the assessee has also relied upon the following decisions:
(i) Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC);
(ii) Sir Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC);
(iii) Sanjeev Woollen Mills vs. CIT (2005) 199 CTR (SC) 441 : (2005) 279 ITR 434 (SC).
13.1 The learned counsel for the assessee then submitted that the present case is a case where stock-in-trade and not any capital asset was contributed by the assessee to a partnership firm towards its capital. He, therefore, submitted that the definitions of "capital asset" and "transfer" defined under s. 2(14) and s. 2(47) respectively cannot be imported into the present case in as much as no capital asset is involved in the instant case of the assessee. He, further, pointed out that the stock-in-trade is specifically excluded from the ambit of a "capital asset" as defined under s. 2(14) of the Act, and as such the definition of "transfer" in relation to a capital asset defined under s. 2(47) is not applicable to the stock-in-trade. He, thus, submitted that contribution of stock-in-trade to a firm by a partner as capital contribution is neither sale nor a transfer, and as such, no income or profit did accrue or arise to the assessee on account of any surplus, resulted out of such contribution of stock-in-trade to a firm, at the amount more than the book value. At this stage, he placed heavy reliance on the decision of Hon'ble Calcutta High Court in the case of CIT vs. Hind Construction Ltd. (1970) 78 ITR 664 (Cal), which has been affirmed by the Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. Reliance was also placed upon the judgment of Hon'ble Madras High Court in the case CIT vs. Janab N. Hyath Batcha Sahib (1969) 72 ITR 528 (Mad) to contend that when a person hands over its property to a firm of partners consisting of himself and others, there is no transfer of property so as to constitute a sale of goods as defined under "Sales of Goods Act", and the partner cannot be said to have sold his property to the partnership firm. To the similar effect, reliance was placed upon the decision of Hon'ble Allahabad High Court in the case of Dr. M.C. Kackkar vs. CIT (1973) 92 ITR 87 (All). He further submitted that the aforesaid decisions of Hon'ble Madras High Court in the case of CIT vs. Janab N. Hyath Batcha Sahib and Hon'ble Allahabad High Court in the case of Dr. M.C. Kackkar vs. CIT, have been approved by the Hon'ble Supreme Court in the case of Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC). According to the learned counsel for the assessee, the view that the surplus arising on revaluation of its stock-in-trade at the time of contributing the same to a partnership firm is profit or gain chargeable to tax as the transaction amounts to a transfer of stock-in-trade from a partner to the firm is completely misleading and against the settled legal positions on the matter involved.
13.2 Having contended as above, the learned counsel for the assessee proceeded to argue that there is no charging provision in IT Act to tax this nature of transaction of making over a stock-in-trade as capital contribution to a firm in which the assessee is or becomes a partner. He further contended that if any transaction does not fall within the ambit of taxation, the tax cannot be imposed on the grounds of morality or equity. Similarly, in the converse situation, tax imposed by the statute must be levied in spite of its causing hardship to a taxpayer. In this connection, reliance was placed upon the following decisions:
(i) CIT vs. Keshavlal Lallubhai Patel (1965) 55 ITR 637 (SC);
(ii) Smt. Mohini Thapar vs. CIT 1972 CTR (SC) 214 : (1972) 83 ITR 208 (SC);
(iii) CIT vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC);
(iv) Manish Maheshwari vs. Asstt. CIT (2007) 208 CTR (SC) 97 : (2007) 289 ITR 341 (SC) : (2007) 159 Taxman 258 (SC).
13.3 It was further submitted by the learned counsel for the assessee that the law has been amended many times pursuant to judicial pronouncements in order to bring within the tax net certain transactions which the Courts otherwise found to be outside the purview of tax provisions, and some of such instances pointed out by the learned counsel for the assessee, are the amendment by way of insertion of s. 45(2) w.e.f. 1st April, 1964 (omitted in 1966 and reintroduced in 1984 in its present form) to tax the conversion of capital assets into stock-in-trade; ss. 45(3) and 45(4) inserted w.e.f. 1st April, 1988 to bring to tax certain situations which were otherwise held to be non-taxable by the Courts. But, he submitted, no such amendment has been brought to tax the surplus arising from revaluation of the stock-in-trade at the time when the same is contributed as capital by a partner to a firm, and, thus, there being no charging provisions in the Act, the surplus arising from revaluation of stock-in-trade at the time when the same is contributed as capital by a partner to a firm cannot be brought to tax.
13.4 With regard to the reliance placed by the AO upon the sub-s. (3) of s. 45 and upon the judgment of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT, he submitted that provisions of s. 45(3) and decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai cannot be applied to the present case in as much as the said provision and the decision are made in connection with a capital asset being contributed by the partner to a firm towards its capital, and not applicable to the case where stock-in-trade belonging to a partner is contributed by that partner to a firm towards its capital. He vehemently urged that a legal fiction created in s. 45(3) in relation to a capital asset cannot be extended beyond its terms and intent and thus cannot be applied in cases where stock-in-trade is contributed by a partner as its capital to a firm in which he is or becomes a partner. He, therefore, contended that the contribution of stock-in-trade by a partner to a firm cannot be considered to be a transfer and/or sale under the general law for the purpose of taxing the surplus arising from such contribution at an amount more than the cost to a partner. He submitted that the case of contribution of stock-in-trade by a partner to a firm is fully covered by the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. and not by propositions laid down by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT r/w s. 45(3) inserted in the statute w.e.f. 1st April, 1988. He urged that even the application of the provisions of s. 45(3) of the Act inserted w.e.f. 1st April, 1988 has not brought any change for bringing to tax the surplus arising from contribution of stock-in-trade by a partner to a firm at an amount more than the cost to the assessee because in the newly inserted s. 45(3) of the Act, the words "transfer of capital asset" are used though in the instant case of the assessee, it was a contribution of land which was held as stock-in-trade by the assessee. Thus, according to the learned counsel for the assessee, the decision of apex Court in the case of Sunil Siddharthbhai is of no help to the Revenue as their Lordships in that case were concerned with the situation where transfer of capital asset and not stock-in-trade was involved.
13.5 With regard to the CIT(A)'s observations that since the assessee company has shown the surplus as its income in its audited account by making appropriate credit to the P&L a/c, the surplus represents the business profit on commercial principles, the learned counsel for the assessee submitted that it is well-settled that entries in the books of accounts representing P&L a/c and balance sheet are not sacrosanct and not binding either on the assessee or on the Revenue as so held and observed in the following decisions:
(i) Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 863 (SC);
(ii) Sutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC);
(iii) United Commercial Bank vs. CIT (1999) 156 CTR (SC) 880 : (1999) 240 ITR 855 (SC) : (1999) 106 Taxman 601 (SC);
(iv) Karnataka Small Scale industries Development Corporation Ltd. vs. CIT (2003) 179 CTR (SC) 1 : (2002) 258 ITR 770 (SC) : (2003) 126 Taxman 121 (SC).
13.6 He further submitted that the identical issue has been decided in favour of the assessee by this Tribunal in asst. yr. 1985-86, after following the decision of Hon'ble Supreme Court in the case of Hind Construction Ltd., and that decision still holds the field in the case of contribution of stock-in-trade by a partner to a firm towards its capital contribution.
Submissions of the Revenue
14. Shri N.P. Sahni, senior standing counsel for the Department assisted by Shri P. Yadav, junior standing counsel for the Department, has submitted that the present case is a case where the assessee has shown the profit of Rs. 6.01 crores in respect of the portion of land transferred to a partnership firm in which the assessee became a partner, and has credited same in the P&L a/c prepared by the assessee, and a corresponding amount has been credited by the firm in the assessee's capital account, which goes to show and establish that it is a case of sale of stock-in-trade on credit by the partner to a firm, as there being no bar on sale of stock-in-trade by a partner to a partnership firm in which he is a partner. He further submitted that instead of contributing capital by payment of money, the assessee has contributed its capital by adjusting the sale value of the land transferred or sold by it to partnership firm. It was further contended by the learned standing counsel for the Revenue that when the assessee claims that he contributed its stock-in-trade to a firm, and treated the sale value as its capital credited in its capital account in the books of a firm, the transaction is nothing but is, in reality and substance, a transaction by way of sale at a given value, which was to be paid by the firm to the assessee partner. If it is the case of the assessee that stock-in-trade is given as stock-in-trade to a partnership firm for business, it is a case of trading or commercial transaction and is to be considered as sale at a given value at which assessee's capital account is credited in the books of a partnership firm, and thus the surplus arising therefrom is to be charged to tax as a business profit.
14.1 He further submitted that the intention of the assessee with regard to the transaction in question is to be gathered or judged from over all conduct of the assessee and the entries made by it in its books of accounts. From perusal of entries made in the books of accounts by the assessee, it is clear that the assessee has treated the transaction as sale of stock-in-trade by it to a firm in as much as, the assessee has itself credited the amount of sales and resultant profit in its P&L a/c, and the profit resultant therefrom was also utilized for the purpose of distribution of dividend to the shareholders. He further contended that if the contentions of the assessee, which are contrary to the entries made in the accounts and narration made in partnership deed, are looked dispassionately and in all fairness, it would be termed as nothing but a collusive arrangement between the parties to evade payment of correct taxes in respect of surplus amount credited in assessee's capital account.
14.2 With reference to the assessee's stand relying upon the decision of Hon'ble Supreme Court in the case of Hind Construction Ltd., the learned counsel standing counsel for the Revenue has submitted that the present case is not the case where value of stock-in-trade has been merely over-valued in the books of the assessee, but, it is the case where a credit on account of sale of land in question has been made in the P&L a/c and the corresponding entry has been made by the firm in its books, which indicates and points out that the transaction was in the nature of a sale of stock-in-trade by the assessee partner to the firm. He, therefore, submitted that the facts of the present case are on quite different footing than that of in the case of Hind Construction Ltd.
14.3 According to the learned standing counsel for the Revenue, the decision of Hind Construction Ltd. cannot be applied in the changed scenario, the facts of the instant case after insertion of provision of s. 45(3) of the Act w.e.f.1st April, 1988. He further submitted that the extended definition of "transfer" defined under s. 2(47) of the Act can be applied to the transaction of contribution of land by the assessee to a firm as capital contribution even if the land was held by the assessee company as stock-in-trade before it was so contributed. In this respect, he placed reliance upon the decision in cases of Sunil Siddharthbhai vs. CIT, CIT vs. Suresh Chandra Jain (1988) 71 CTR (AP) 42 : (1989) 178 ITR 241 (AP) and A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC).
14.4 The learned standing counsel for the Revenue made an attempt to distinguish the decision of Hon'ble Supreme Court in the case of Hind Construction Ltd. by contending that the case of a partner bringing his personal assets into the firm should be distinguished from the cases where a partner sales his assets including stock-in-trade to the firm, where tax consequences would be the same as in the case of sale to an outsider. He then submitted that the present case is a case where stock-in-trade has been in reality sold by the assessee to a firm in which it became a partner as would be clear from the treatment given by the assessee to the transaction in its books of accounts, by crediting the amount as sales, and by crediting the resultant profit in its P&L a/c.
14.5 It was further submitted by the standing counsel for the Department that in the case of CIT vs. Hind Construction the apex Court examined the question only from the point of view of sale, and not from the point of view whether there was any transfer of asset from a partner to a firm, which question has been considered and answered by the Hon'ble apex Court in the case of Sunil Siddharthbhai holding that when any asset is contributed by a partner to a firm as its capital, it amounts to a transfer even under the general law. Senior standing counsel for Revenue has also placed reliance upon the following decisions:
(i) Addl. CIT vs. M.A.J. Vasanaik (1979) 116 ITR 110 (Kar);
(ii) A. Abdul Rahim, Travancore Confectionery Works vs. CIT (1977) 110 ITR 595 (Ker);
(iii) Baldevji vs. CIT (1984) 40 CTR (Mad) 120 : (1985) 156 ITR 776 (Mad).
14.6 He then submitted that the dictum "one cannot make profit out of himself", is not attracted in the present case, in as much as, in the present case, the assessee being a separate taxable entity has transferred its stock-in-trade to a partnership firm, another taxable entity, and the surplus arising therefrom has been credited in the P&L a/c. He then pointed out that if it is case of the assessee that stock-in-trade was contributed to a firm, and the value of stock-in-trade at the amount more than the cost to the assessee is credited in its capital account by a firm, the transaction in that event would be only a business or trading transaction as is clear from the treatment given by the assessee to the transaction in its books of accounts. He, therefore, submitted that the AO as well as the CIT(A) have rightly taken a view that the surplus arising from transfer of stock-in-trade by the assessee to a firm is a profit assessable under s. 28 of the Act. In support of the contention that a partner can sale its stock-in-trade to a firm and there is no bar in making trading or commercial transaction in respect of the stock-in-trade between a firm and its partner, and an individual partner is distinguished and separate taxable entity as against the partnership firm in which he may be a partner: the learned standing counsel for the Revenue has placed heavy reliance on the decision of Hon'ble Supreme Court in the case of CIT vs. A.W. Figgies & Co. & Ors. (1953) 24 ITR 405 (SC). He then submitted that in the light of the position of law that the firm is a separate taxable entity from its partner, it is abundantly clear that the transaction of contributing stock-in-trade by a partner to a firm as its capital would be a transaction between two persons, and the concept that no person can make profit out of himself would not be applicable in that case. A reference was made to the decision of Hon'ble Madras High Court in the case of Baldevji vs. CIT.
14.7 The learned senior standing counsel for the Revenue further submitted that if it is a case of capital contribution of a capital asset, a capital gain is chargeable to tax under the amended provision of s. 45(3) of the Act, inserted in statute w.e.f.1st April, 1998.
14.8 To sum up, the learned standing counsel for the Revenue submitted that the Revenue's arguments are twofold as under:
(i) If it is assessee's case that it is case of capital contribution in the form of stock-in-trade, there is a change of ownership or extinguishment of right in that stock-in-trade of the assessee partner against the consideration credited in the assessee's capital account, and the surplus arising therefrom would be taxable as business profit.
(ii) If it is case of assessee that it is a case of capital contribution in the form of capital asset, the amount credited in the assessee's capital account shall be deemed to be consideration received by the assessee on transfer of capital asset to a firm, and capital gain arising therefrom would be chargeable under the head "Capital gain" under the newly inserted provisions of s. 45(3) of the Act, inserted from 1st April, 1988.
14.9 As against the contention of the learned counsel for the assessee that there is no provision in the Act to bring to tax the surplus arising from revaluation of stock-in-trade at the time when same is contributed as capital to a firm by a partner and the partner's account is credited by the amount more than the cost of stock-in-trade to the assessee partner, and no amendment like insertion of ss. 45(2). 45(3) and 45(4) has been made in the IT Act, the learned senior standing counsel for the Revenue has submitted that if it is the case of the assessee that stock-in-trade has been given to a firm by the partner towards its capital at a value more than the cost to the assessee, there is a transfer of stock-in-trade from partner's hand to the firm's hands and the resultant surplus shall be considered as business profit, which is duly covered by s. 28 itself. He further submitted that insertion of s. 45(3) in the Act was necessitated only because of the position taken in cases of transfer of capital asset by way of contribution to a firm by certain assessees to avoid payment of correct taxes, but so far as cases of transfer of stock-in-trade from partner to a firm are concerned, there was no problem and there was no necessity of making any amendment cither in s. 28 or some other section. In such like cases where stock-in-trade is contributed by the partner to a firm, the rights or interest in stock-in-trade were passed on from one person to another, and the transaction would be amounted to either sale or transfer in the general law if not within the meaning of s. 2(47), and liability to taxation on the surplus amount would arise on the date of such transaction. He further contended that if we look to the meaning of "person" as defined in s. 2(31) of the Act, it is clear that an individual partner is distinct and separate taxable entity as against a partnership firm, in which he may be a partner, and there being no bar of making any commercial or trading transaction between the firm and its partner, the transfer of stock-in-trade by a partner to a firm shall be considered as a transaction of sale or otherwise of transfer of stock-in-trade, and the transaction would be taxed accordingly. In support of this submission, he placed reliance upon the judgment of apex Court in the case of CIT vs. A.W. Figgies & Co. & Ors., with a submission that this decision was rendered by a Bench of three Judges of Hon'ble Supreme Court, and still hold the ground with binding force.
14.10 The learned standing counsel for the Revenue further submitted that if it is a case of capital contribution or extinguishment of rights in the land of the assessee partner, and the surplus arising from change of ownership or extinguishment of right of the assessee would thus, be taxable as business profit, and is to be taxed accordingly. On question whether this is change of ownership or extinguishment of right of the assessee in the land in question, a reliance was also placed upon the decision of Hon'ble apex Court in the case of CIT vs. Mrs. Grace Collis & Ors. (2001) 166 CTR (SC) 201 : (2001) 115 Taxman 326 (SC).
14.11 He further submitted that position of apex Court in the case of Hind Construction Ltd. would be of no help to the assessee in as much as the transaction of constituting firm by contributing land held by the assessee at higher value than the cost to the assessee is nothing but a colourable and calculated device to evade payment of correct taxes in respect of the surplus amount credited in the assessee's capital account by the firm when the resulted profit has been credited by the assessee in its P&L a/c, but has not offered it to tax. He, therefore, submitted that the transaction of contribution of capital of land in a partnership firm by the assessee partner is to be considered as transfer or sale of stock-in-trade by the assessee to a partnership firm i.e., from one taxable entity to another.
14.12 On the applicability of the provisions contained under s. 45(3) of the Act to the facts of the present case, the learned standing counsel for the Department has submitted that the said land contributed by the assessee partner to a partnership firm in which the assessee became a partner is otherwise to be considered as capital asset in as much as when stock-in-trade in the form of land held by the assessee was introduced by the way of capital contribution in a firm, the same stands converted to capital asset at that material point of contribution for the reason that the partnership firm was newly constituted and the land was contributed towards its capital, and, hence, the land has changed its character from stock-in-trade to capital asset. He further pointed out that in the partnership deed, it is nowhere stated that the capital contribution brought by the assessee was stock-in-trade even at the time it was contributed as capital in a firm in which assessee became a partner. In the deed of partnership, it is clearly stated that w.e.f. 16th day of March, 1992 all the rights of the assessee partner in the said plots of land (including the asset of land owned by the assessee) became the property of the partnership firm. The land was on account of capital contribution of the assessee in a firm, and it was upon to the firm to use it in any manner either as trading item or capital asset or as investment or in any other manner. The transaction of making over a land by the assessee to a partnership firm has been claimed by the assessee not to be in the nature of commercial or trading transaction and hence, the asset employed in the said transaction cannot be considered to be stock-in-trade in as much as stock-in-trade is always employed in the course of business or trading transaction. Stock-in-trades are the goods which are held for the purpose of trading in the course of carrying on business activities. When assessee accepted the position that the transaction in question is not a trading or commercial transaction, the question of treating the asset employed in that transaction as stock-in-trade cannot by any stretch of imagination, arise. He, therefore, concluded that the land, which was contributed by the assessee to partnership firm towards its capital, is nothing but is a contribution on capital account, and, thus, it has to be treated as capital asset. Therefore, even on this analogy, the surplus arising from the transaction in question by way of contribution of land as capital in a firm in which the assessee became partner at an amount more than the cost to the assessee, which has been credited in the capital account of the assessee in the books of the firm, is to be assessed under s. 45(3) of the Act if not found to be assessable under s. 28 of the Act.
Rejoinder by the assessee
15. In the rejoinder, the learned counsel for the assessee reiterated that the main argument of the Revenue that the assessee has reflected the surplus in its P&L a/c and has shown the sales of land in the books, and, therefore, the treatment given by the assessee in its books of accounts clearly proves that it was a transaction of sale and it is only in the IT return that the assessee was claiming the surplus to be exempted from tax, is not tenable and acceptable in as much as it is well-settled that the entries in the books of account are not conclusive or determinative in deciding the taxability or otherwise of a given item, and, thus, merely on the basis of entry in the books of account, it cannot be said that the any income or gain arises or accrues to the assessee in the true commercial sense which a businessman would understand as real income or gain.
15.1 With regard to the Revenue's reliance on the decision in the case of Baldevji vs. CIT in support of the contention that there was a transfer of land in question when the land was contributed towards capital by a partner to a firm in which he is or becomes a partner, the learned counsel for the assessee has pointed out that in this decision, the Hon'ble Court was concerned with the term "sold or otherwise transferred" for the purpose of withdrawal of benefit of development rebate under s. 155(5) of the Act in relation to a capital asset and not in relation to stock-in-trade, and hence placing reliance upon this decision is out of context.
15.2 The learned counsel for the assessee further contended that once the proposition laid down by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai that when a partner hands over a business asset to a partnership firm as his contribution to its capital, he cannot be said to have effected a sale is settled, there is no need to travel beyond this, and thus, contention of the Revenue that it was a case of sale of stock-in-trade must be rejected. He further reiterated that in the light of decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT, which has been followed by Hon'ble Madras High Court in the case of CIT vs. Padma Narasimhan & Ors. (2002) 255 ITR 441 (Mad), it is well-settled that although that was a case of transfer of capital asset, no income or gain accrues to a partner. He, therefore, urged that the issue arising in the instant case of the present assessee is fully covered by the judgment of Hon'ble Supreme Court in Hind Construction Ltd., Sunil Siddharthbhai and Sanjeev Woollen Mills and as also supported by other relevant judgments given in the synopsis of the assessee to the similar effect.
Decision
16. We have considered rival contentions of parties in the light of the facts of the present case, provisions of law contained in that behalf and decisions cited at the Bar. We have carefully gone through the orders of the authorities below and as well the material on record.
16.1 The question that arises for our consideration is whether, having regard to the facts and circumstances of the case, the surplus of Rs. 6.01 crores arising from the transaction of contributing the said land as capital by the assessee in a newly constituted partnership firm in which assessee became a partner, is liable to be taxed in the hands of the assessee as its income under IT Act, 1961.
16.2 In the light of the treatment given by the assessee to the transaction in its books of accounts, the main case made out by the Revenue is of sale or transfer of stock-in-trade by the assessee to a firm as against the assessee's claim that it is the case of capital contribution of stock-in-trade by a partner to a firm and not the case of any commercial or trading transaction in the business sense, and thus no sale or transfer of stock-in-trade had taken place. The answer to the controversy, in our opinion, rests mainly and primarily upon the determination of the nature of transaction made by the assessee as a partner with the firm in which assessee became a partner. We, therefore, find it necessary and proper on our part to first ascertain and determine the true nature and character of the transaction and the asset employed in the transaction. Tests to determine the nature of transaction and asset employed therein
16.3 It is well-settled that name or label which is given to any transaction by any party is irrelevant in assessing the exigibility of receipt arising from the transaction to tax. The true character or nature of any transaction is to be decided in each case on its facts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the Courts times and again, it is not possible to lay down any single test as infallible or single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. It is also impossible to evolve any single formula or criterion, which can be applied in determining the character of transaction, which comes before the Courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. No single test of universal application can be discovered for a solution of the question. The answer to the question must necessarily depend in each case on the impression and effect of all the relevant factors and circumstances provided therein, and which determine the character of the transaction. The Court has to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction in a given case. The question whether any asset is capital asset or otherwise can be determined with regard to the nature of the transaction in which such asset is employed and intention of the party, which would be gathered from surrounding circumstances after giving combined effect to all the factors and circumstances of any given case. It is also well-settled that the character of asset at the time of its transfer alone is relevant, and what was the nature at the time of its acquisition, is altogether irrelevant. The character of the asset is thus to be judged at the time when it is either sold or transferred or employed in any transaction. The material time with reference to which the question whether a particular asset which has been sold or transferred or otherwise transferred or employed in any transaction is a capital asset or not is to be decided, is the date of such sale or transfer, and not the time when it was acquired. We have to consider the changes in circumstances under which the asset is subsequently employed, from the circumstances prevailing on the date of its acquisition. It is also to be considered whether the case is a case of conversion of asset from one nature to another. In other words, it is also to be seen whether any capital asset has been converted into a stock-in-trade or vice versa, which can be determined with reference to the combined effect of all the factors appearing in any given case including the nature of the transaction in which it is employed and the intention of the party.
16.4 As held by various Courts time and again, for determining the real nature of income, the entries in the books of account are not decisive or conclusive. Whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto, and not on the view, which the assessee may take on his rights nor can the existence of entries in the books of accounts be decisive or conclusive in the matter. In other words, it is settled law that the manner in which entries are made in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any losses. It is the true nature and quality of the receipt and not the head under which it is entered in the account books, which would be proved decisive. The name which the parties may give to the transaction, which is the source of the receipt, and the characterization of the receipt by them are of little consequence. What is relevant is the true and legal effect of the transaction, and the entries in the books are not relevant.
16.5 In this view of the matter, it is, therefore, necessary for us to examine, analyse and appreciate all the relevant factors and circumstances of the present case to determine the true nature and character of the transaction of making over of assessee's personal asset as capital contribution towards its capital to a partnership firm in which the assessee became a partner and to determine the nature and character of asset employed in that transaction.
16.6 With regard to the controversy existing between "capital" and "revenue" receipts, the Courts have found it difficult to lay down any general considerations which would conclusively determine whether a certain receipt falls under one or the other category. Whether a particular receipt or transaction is on capital account or revenue account has frequently engaged the attention of the Courts. It may be broadly stated that what is received for loss of capital is a capital receipt; and what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is on account of loss of capital or profit in trading transaction. Cases on the border line give rise to vexing problems. It need hardly be said that the form in which the transaction, which gives rise to income, is clothed and the name which is given to it are irrelevant in determining the true and correct nature of the transaction. There is material distinction between commercial and trading transaction and transaction on capital field. The assessee may by making entries in the books, which are not in conformity with the facts of the case and proper accountancy principles, conceal real nature of the asset or the receipt or the transaction, as the case may be. In that event as already observed above, true nature and character of the transaction or receipt or asset in a given case is to be determined on a consideration of the totality of the circumstances of the case. Nature and character of transaction of making over personal assets of whatever character by a partner to a firm as capital contribution, in which he is or becomes a partner, and the nature of asset at time when it is employed therein
16.7 In the instant case before us, we are called upon to determine the true and correct nature of the transaction of contribution of partner's personal asset as capital contribution in the firm in which he became a partner. The facts of the present case reveal that the assessee company was carrying on a business of real estate, besides others. In the course of carrying on business of developing and dealing in real estates, the assessee held certain lands and right in lands as stock-in-trade of its business. The assessee company entered into a partnership with four of its subsidiaries companies and one individual as evidenced by the memorandum of partnership executed at New Delhi on 23rd day of March, 1992, with a object to start and carryon the business of developing and dealing in real estate, construction of buildings and letting them out or selling them. The assessee company had 76 per cent share, while the four subsidiary companies held 5 per cent share each and the individual 4 per cent in the profit or loss of the firm. In pursuance to their intention to enter into partnership with the object to start and carry on the real estate business, the assessee had agreed to bring all its rights in five plots of land measuring about 199.99 acres into the common stock of partnership, so that all the partners, who had agreed to entered into said partnership, may participate jointly in the development and construction of building thereupon, which were to be let out for earning rental income therefrom or sale of individual units comprised in such buildings. In pursuance to the aforesaid mutual agreement, the assessee had brought all its rights in the said plot of land into a common stock of partnership w.e.f.16th March, 1992, and all the rights of the assessee upon the said plot became the property of the partnership firm w.e.f.16th March, 1992. The assessee got the said plot of land brought into common stock of partnership valued by experts determining the value thereof at Rs. 1,150 lacs. In consideration of the assessee having brought in all its rights in the said plots of land into common stock of the partnership firm, the assessee's capital account was credited by Rs. 1,150 lacs in the accounts of the partnership firm. The assessee also credited its books by said sum of Rs. 1,150 lacs, and the difference between the cost reflecting in the assessee's account and the amount of Rs. 1,150 lacs at which the assessee's capital account was credited, after considering all expenses incurred in respect of said land by the assessee has been credited to the P&L a/c of the assessee company. In the books of the assessee company, the transaction resulted into the surplus of Rs. 6.01 crores, which was credited to the P&L a/c, but claimed as not exigible to tax in the return of income filed by the assessee for the assessment year in question. According to the assessee, the readjustment on account of the revaluation of stock-in-trade resulting in surplus of Rs. 6.01 crores was not its income as there was no transfer or sale of lands to any other person as in law, there could be no sale to itself, and the readjustment of the value of its lands held by the assessee as its stock-in-trade could not in law result into any profit chargeable to tax. The assessee placed reliance upon the decision of Hon'ble Supreme Court in the case reported as CIT vs. Hind Construction Ltd.
16.8 For ready reference, the relevant portion of recitals made in the deed of partnership executed on23rd March, 1992between the assessee and five other persons, and made effective from16th March, 1992, are being reproduced hereasunder:
"Partnership deed
This memorandum of partnership made atNew Delhithe 23rd day of March, 1992 between
1. M/s DLF Universal Ltd., a public limited company incorporated under the Companies Act, 1956 and having its registered office at Model Town, Faridabad in the State of Haryana of the one part;
2. M/s Apollo Land & Housing Co Ltd. also a company incorporated under the Companies Act 1956 and having its registered office at 1-E, Jhandewalan Extension, New Delhi of the second part;
3. M/s Moonlight Builder & Developers Ltd. also a company incorporated under the Companies Act, 1956 and having its registered office at 1-E, Jhandewalan Extension, New Delhi of the third part;
4. M/s Sunrise Land & Housing Co. Ltd. also a company incorporated under the Companies Act, 1956 and having its registered office at 1-MM, Jhandewalan Extension, New Delhi of the fourth part;
5. M/s DLF Builders & Developers Ltd. also a company incorporated under the Companies Act, 1956 and having its registered office at 1-E, Jhandewalan Extension, New Delhi of the fifth part;
6. Mr. Rajinder Singh son of Late Sri Kartar Singh Lamba resident of C-36, Fateh Nagar,New Delhi110 018 of the sixth part;
Whereas the parties of the first to second parts are carrying on the business of developing and dealing in real estate and are engaged in the development of a project known as 'DLF Qutab Enclave Complex' in Gurgaon, District of Haryana State which is hereinafter referred to as 'the said project' and
Whereas it was agreed between the parties hereto that out of aforesaid land, five plots of land admeasuring about 16.98 acres and morefully described in the Schedule written hereunder (and hereinafter referred to as 'the said plots') may be brought into the common stock of a partnership so that all the parties hereto participate jointly their further development and construction of buildings to be let out for earning rental income therefrom or sale of individual units comprised in such buildings; and
Whereas the parties of the third to sixth parts also agreed to participate in the further development of the said plots and the construction of buildings thereon as aforesaid; and
Whereas in accordance with the aforesaid agreement the party of the first part brought all its right in the said plots into the common stock of partnership; and
Whereas with effect from the 16th day of March, 1992 all the rights of the party of the first part in the said plots (including the area of land owned by it) became the property of the partnership firm; and
Whereas the parties hereto agreed that on the basis of expert valuation, the current value of the rights in the said plots is Rs. 1,150 lacs; and
Whereas the amount of Rs. 1,150 lacs was accordingly credited to the account of the party of the first part in the account books of the partnership firm on account of its having brought its right in the said plots into common stock of partnership to be treated as its contribution towards the capital of the partnership; and
Whereas the party of the first past has already paid an amount of Rs. 1,27,90,215 as advance towards purchase of land to its subsidiary companies from whom the land hereby brought into the common stock of partnership has been agreed to be purchased but whatever further amount becomes payable to the subsidiaries, the same will be payable by the firm; and
Whereas all the other parties hereto have agreed to contribute such amounts towards the capital of the partnership firm as are mentioned hereinafter and which may be varied from time to time; and
Whereas it was agreed that further amounts required for the business of the partnership will be contributed by the parties hereto as may be mutually agreed upon from time to time; and
Whereas the board of directors of the parties of the first to fifth part approved the proposal for their respective companies entering into partnership at their respective meetings.
Whereas the business of the partnership has already commenced w.e.f. 16th day of March, 1992.
Whereas the parties hereto are now desirous of recording the terms and conditions on which they have entered into partnership on the 16th day of March, 1992.
Now this memorandum witnesseth and it is hereby recorded and confirmed as under:
1. That the parties hereto have entered into partnership w.e.f. the 16th day of March, 1992 with the object of starting and carrying on the business of developing and dealing in real estate, constructing buildings and letting them out or selling them.
2. That the business is being and shall continue to be carried on under the name and style of DLF Commercial Developers.
3. That the party of the first part has brought all its right in the said plots of land admeasuring about 16.98 acres situated in DLF Qutub Enclave Complex and which are morefully described in the Schedule written hereunder into the common stock of partnership and all its right in the said plots became the property of the partnership firm w.e.f. 16th day of March, 1992.
4. That on account of the party of the first part having brought its right in the said plots into the common stock of the partnership, an amount of Rs. 1,150 lacs has been credited to the capital account of the party of the first part in the account books of the partnership firm.
5. That the party of the first part has already advanced an amount of Rs. 1,27,90,215 to the aforesaid subsidiary companies but whatever further amounts become payable to them, the same shall be paid and borne by the partnership firm.
6. That the party of the second to fifth part have agreed to bring by way of capital contribution an amount of Rs. one lac each and party of the sixth part agreed to bring in Rs. fifty thousand. The parties hereto may decide to contribute such further amounts of capital as may be required form time to time.
7. That regular books of account shall be maintained in respect of the business of the partnership and on a day to be mutually agreed upon, the account books shall be closed annually and a statement of all the assets and liabilities and the P&L a/c shall be prepared and signed on behalf of each partner and got audited by chartered accountants approved by the parties by mutual consent from time to time. The parties hereto shall be entitled to receive the net profit or bear the net loss (including profit or loss of a capital nature) in the following proportion:
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1. M/s DLF Universal Ltd. 76%
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2. M/s Apollo Land & Housing Co. Ltd. 5%
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3. M/s Moonlight Builders & Developers Ltd. 5%
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4. M/s Sunrise Land & Housing Co. Ltd. 5%
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5. M/s DLF Builders & Developers Ltd. 5%
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6. Mr. Rajinder Singh 4%
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8. That the retirement, death, insolvency or liquidation of any of the parties hereto shall not lead to the dissolution of the partnership as between the surviving or continuing parties."
16.9 From the submission of the assessee made before the authorities below as well as before us, we see that the learned counsel for the assessee has tried to make out the nature and character of the transaction in question as under:
(i) That the said land contributed as capital contribution by the assessee to the firm was held as stock-in-trade by the assessee.
(ii) That the stock-in-trade was contributed to the firm as capital contribution by the assessee in the capacity of a partner.
(iii) That the stock-in-trade contributed to the firm as capital contribution by the assessee in the capacity of a partner was also held as stock-in-trade by the firm.
(iv) That the surplus arises to the assessee on account of revaluation of stock-in-trade at higher value than the cost to the assessee and from contributing the same to a firm as its capital is not a profit or gain from business as contribution of stock-in-trade by a partner as its capital to a firm at higher value is not a commercial or trading transaction in a business sense, and it does not amount to a "sale" or "transfer".
16.10 The Revenue, on the other hand, has drawn inference/conclusion on the facts of the present case as under:
(i) That as per entries in the books of the assessee where the assessee has shown sale. reduction of stock-in-trade, crediting of sale account, crediting surplus in the P&L a/c, utilizing the surplus by way of distribution of dividend and carrying the surplus to balance sheet, and as per entry in the books of the partnership firm where the assessee partner's account was credited and purchase account was debited, and even otherwise as per general law, there leaves no doubt that ownership in stock-in-trade has been passed over by way of transfer or sale as understood in general law from assessee partner to a firm, and the transaction in question was a transaction of the sale between two different and distinct assessable entities.
(ii) That from the fact that the assessee company has entered into partnerships year after year with its subsidiaries and employees in a calculated manner, it is clear that the assessee has indulged in a colourable device to evade payment of correct taxes on transfer of stock-in-trade at an enhanced price, giving the transaction a colour of capital contribution by a partner to a firm as against real transaction of sale of stock-in-trade from one assessable entity to another.
(iii) Even otherwise, it is a case of capital asset brought in by partner to a partnership towards its capital contribution, and the profit or gains arising therefrom is chargeable to tax under the head "Capital gains" as per provisions contained in s. 45(3) of the Act inserted w.e.f. 1st April, 1988.
16.11 Insofar as the fact that the land contributed by the assessee partner to a firm towards its capital was held as stock-in-trade by the assessee for its business of real estate before the same was so contributed as capital to a firm is concerned, there is no dispute between the parties.
16.12 Now, the question arises as to whether the personal asset being said land contributed by assessee towards its capital in a partnership firm at the time the assessee became a partner is to be treated as capital asset or continued to be treated as stock-in-trade of the assessee, or whether it is a case of sale or transfer of stock-in-trade or capital asset, as the case may be, from a partner to a firm. Undoubtedly, a dispute in this regard does indeed lie between the assessee and the Department, which is to be decided in this case.
16.13 As already observed above herein, the book entries do not fix or regulate the liability of the assessee to tax. Moreover, the way in which entries are made by parties in their books of account or documents or papers is not determinative of the true and correct nature of the transaction. What is to be considered in the true and correct nature of the transaction with regards to the totality of the facts and circumstances of a given case. Therefore, the entries in the books of accounts of the assessee and the partnership firm alone are not decisive or conclusive to decide the question whether the assessee has transferred its personal assets to a partnership firm by way of capital contribution or it is a normal sale in the ordinary course of its business or trading transaction. We have carefully gone through the terms of the deed of partnership entered into between the assessee and five other partners, four are subsidiaries of the assessee company and one is an employee of the group company. There is no prohibition in law in entering into a partnership by a company with its subsidiaries. Further, under the law, a partner is permitted to bring his personal assets into a partnership by way of his capital contribution. The Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT was dealing with the situation where an individual makes over his capital asset to a partnership as his contribution towards capital and the asset was valued for that purposes at the market value, and in that event, it was held by the Hon'ble Supreme Court that there was a transfer of capital asset within the meaning of s. 45 of the IT Act, 1961. Thus, there is no bar in making over of personal asset belonging to a partner to a firm at a revalued market price as his contribution towards capital. Therefore, merely because, in the present case, the assessee has contributed land at revalued price, which is more than the cost price to the assessee, it cannot be said that the asset in question was not contributed to a firm by partner towards its capital. Even, such a transaction now takes care of by s. 45(3) of the IT Act, 1961, inserted from the asst. yr. 1988-89. Sub-s. (3) of s. 45 of the Act, effective from asst. yr. 1988-89, enacts that the profits and gains arising from the transfer of a capital asset by a person to a firm, in which he is or becomes a partner, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of s. 48, the amount recorded in the books of account of the firm as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Whether the transaction is a colourable device or ruse to evade payment of correct taxes
16.14 In the case of Sunil Siddharthbhai vs. CIT, the Hon'ble Supreme Court issued a word of caution by stating that the principles laid down by them in that case will hold good if the firm or the transaction is a genuine one, and thus observed as follows:
"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 IT 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 ITO 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 of the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the ITO 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."
16.15 In the light of aforesaid word of caution emphasized by the Hon'ble Supreme Court, we proceed to examine whether the transaction of creating the partnership firm in the present case before us is a genuine or a sham transaction, or even where the partnership is genuine, whether the transfer of land in question as capital contribution by the assessee to a partnership firm in which the assessee became a partner was merely a devise or ruse for converting the land into money which would substantially remain available for assessee's benefit without liability to income-tax.
16.16 The AO doubted the genuineness of the firm and also the transaction, and he held that it was a sham transaction with colourable device to avoid tax. The AO stated that the new partnership firm constituted w.e.f.16th March, 1992did not file any return of income for asst. yr. 1992-93 nor applied for registration of firm under s. 185 as it then stood. The AO had taken a note of the abovestated words of caution emphasized by Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT. The AO also made a reference to the decision of Hon'ble Supreme Court in the McDowell. The CIT(A) almost concurred with the findings of the AO on this aspect of the matter. The CIT(A) had highlighted a fact that the partnership firm was formed between the assessee and its 100 per cent subsidiaries and one employee of the group, and he then held that the transaction was made between interested and related persons as a colourable device to evade payment of taxes on surplus arising from the transaction.
16.17 On this aspect of the matter, the learned counsel for the assessee has submitted that the firm started filing of its return of income from next asst. yr. 1993-94 and compliance of provisions of s. 184 of the Act as applicable from asst. yr. 1993-94 and subsequent years was duly made, and the AO has also assessed the firm as such till dates as is evident from assessment orders for asst. yrs. 1993-94 to 1998-99, which are placed in the paper book filed by the assessee. He, therefore, contended that the genuineness of the new firm cannot be doubted. In its comments against AO's observations (placed at pp. 10-21 of the paper books dt. 1st April, 2006 filed by the assessee on 10th April, 2006/12th April, 2006), the assessee stated that "if the transaction of contribution of stock-in-trade, as capital to the new firm is sham, no transfer under (sic) law takes place as the transaction was not intended to be given effect to. In any case, the alleged surplus for enhancing the value of the land by book entries does not tantamount to sale as no one can sell to himself, in view of the law laid down by the Supreme Court in the case of Hind Construction Ltd. 1974 CTR (SC) 157 : (1972) 83 ITR 211 (SC) and considered in Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC) upholding the decision of Hind Construction Ltd. Against CIT(A)'s observation, the assessee submitted his comments (placed at pp. 22 to 23 of paper books filed by the assessee on 10th April, 2006/12th April, 2006) stating that since it was initial year of consisting of less than a month, no commercial activities were started during the year under consideration, but in subsequent assessment years from asst. yr. 1993-94, the firm has been duly assessed under s. 143(3) of the Act by the AO, and all the partners whether they are companies or individuals being separate entities, were being assessed to tax separately. It was further stated that the funds for carrying out business of the firm were raised by the firm. Before us, the learned counsel for the assessee has reiterated the comments of the assessee against the observations of the AO and the CIT(A) and pointed out that the Hon'ble Supreme Court in the case of Sunil Siddharthbhai issued a word of caution by stating that the principles laid down by their Lordships will hold good if the firm is a genuine one. The observation of Hon'ble Supreme Court at p. 523 of the report was referred to, and with regard to the said observation, the learned counsel for the assessee submitted that these are very important observations of the Hon'ble Supreme Court and they wish to submit that in all the cases before the Hon'ble Bench, no money whatsoever has been withdrawn by the assessee from the firms against the contribution of stock-in-trade made towards the capital.
16.18 Contra, the learned senior standing counsel for the Revenue has submitted that it is pertinent to note that the assessee company has entered into partnerships year after year with its subsidiaries and employees in a calculated manner to evade payment of correct taxes, and it is a clear-cut case of colourable device, and the decisions of the apex Court in the cases of Sunil Siddharthbhai and McDowell & Co. support the finding of the AO. He further submitted that the AO doubted not only the genuineness of the firm but also the very transaction of contributing land held by the assessee as stock-in-trade to a partnership firm towards its capital at an enhanced value credited in the assessee's account as the assessee did not offer the surplus arising from the said transaction to tax on the ground that no gain or benefit had accrued to the assessee either by way of sale or transfer though the surplus was recognized in the P&L a/c prepared by the assessee.
16.19 We have considered this aspect of the matter touching the words of caution emphasized by the Hon'ble Supreme Court in the judgment in the case of Sunil Siddharthbhai. The learned counsel for the assessee has rightly submitted that these are very important observations of the Hon'ble Supreme Court. However, he submitted that in all the cases before us, no money whatsoever has been withdrawn by the assessee from the firms against the contribution of stock-in-trade made towards capital. In the light of the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai, it is clear that it is open to the IT authority to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or 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. To examine and decide this aspect of the matter, certain factors or indicia as mentioned in the said decision including some other pertinent consideration may be taken into regard, and the AO shall be entitled to penetrate the veil covering it and ascertain the truth. The relevant passage of this decision has been set out above in para 16.14 of this order.
16.20 From the material placed on record, we find that the partnership firm so constituted has been assessed to tax as such from year to year by the Department, and the Department has not considered the firm as bogus or sham. Thus, we do not find any material to hold that the very transaction of creating the partnership itself is not genuine but a sham transaction. Having said so, we have to examine further even if the partnership is genuine, whether the transaction of transferring the assessee's personal asset in the form of land 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 the surplus arising from the transaction. We find that the assessee company has entered into partnership year after year with its subsidiaries and employees by contributing part of total land held by it to these firms. The year-wise details about constituting various firms is as under:
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Details of partnership firms
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Sl. Name of partnership firm Date of Relevant
No. partnership asst. yr.
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1. DLF Commercial Developers 16-3-1992 1992-93
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2. Real Estate Builders 31-1-1997 1997-98
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3. DLF Office Developers 24-2-1998 1998-99
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4. DIY Property Developers 24-2-1998 1998-99
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5. DLF City Centre 4-3-1999 1999-2000
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6. DLF Holdings (now know as 21-12-1998 1999-2000
DLF Residential Builders)
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7. DLF Home Builders 2-9-1998 1999-2000
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8. DLF Residential Developers 30-6-1998 1999-2000
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9. DLF Residential Partners 2-9-1998 1999-2000
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10. DLF Phase-IV Commercial Developers 10-6-1999 2000-01
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16.21 In the present case, the assessee's capital account was credited by the amount of Rs. 11.50 crores being the market value of the land contributed by the assessee as valued by the expert. On a plot of land contributed by the assessee to a firm, the firm has developed/ constructed three commercial complexes namely, "Super Mart 1", "Galleria" and "Plaza Tower" since 1997 and 2000 onwards, and some portion of "Galleria" and "Super Mart 1" have been sold, but no portion of "Plaza Tower" has been sold till date. The first sale of 20 units out of total 272 units of Super Mart 1 were made in asst. yr. 1997-98, and the first sale of some units out of total 566 units of Galleria is stated to be made in the year of 2000. No business activities were carried out by the firm in the year of its constitution. The assessee's capital account in the books of a firm was credited by an amount of Rs. 11.50 crores on16th March, 1992and it remained as closing balance as on31st March, 1992. The capital so credited in assessee's account remained the same till31st March, 1998. However, on perusal of statement of accounts of a firm, viz., M/s DLF Commercial Developers, for the year ended on 31st March, 1993 to 31st March, 1998, filed by the assessee before us, we find that besides partner's capital account, current account of each partner in the books of a firm have been created. These statement of accounts are placed at pp. 39 to 64 of a paper book dt.1st April, 2006filed by the assessee on10th April, 2006/20thApril, 2006 before us in this appeal. On perusal of partner's current account as on31st March, 1993, it is seen that assessee's share in loss of Rs. 57,191.16 for the year ended on31st March, 1993has been debited in the assessee partner's current account. In the year ended on 31st March, 1994, an amount of Rs. 4,46,75,888 (i.e., Rs. 446.75 lacs) has been withdrawn by the assessee from the firm though the firm had incurred a loss of Rs. 14,92,448, and the share in loss fallen in assessee's share was Rs. 11,34,260. It is thus seen that the assessee had received the sum of Rs. 4,46,75,888 for its benefit in the year ended on31st March, 1994. The year-wise withdrawal made by the assessee from the firm vis-a-vis its share in profit or loss of a firm upto31st March, 1998are detailed as under:
Year ended Withdrawal (in Rs.)(Receipt) Profit/(loss)
31-3-1993 Nil (57,191) loss
31-3-1994 4,46,75,888 ( 11,34,260) loss
31-3-1995 2,64,45,376 (5,25,877) loss
31-3-1996 (2,08,99,797) (3,24,237) loss
31-3-1997 31,77,26,485 2,25,02,835 profit
31-3-1998 22,51,74,769 3.29,60,839 profit
Total 59.31.22,721 5,34,22,109
The year-wise debit balance in the current account of assessee in the books of firm are determined in the balance sheet as under:
Year ended Debit balance in partners current account
31-3-1993 87,191
31-3-1994 4,58,67,341
31-3-1995 7,28,38,594
31-3-1996 5,22,63,034
31-3-1997 34,74,86,684
31-3-1998 53,97,00,614
16.22 From the above details, it is thus established that the assessee has been regularly withdrawing money from the firm to substantial extent more than the aggregate amount of capital contributed by the assessee and share of profit fallen in assessee's share, and even within the initial period of three years from the date of constitution of firm, the assessee had withdrawn the sum of Rs. 4,46,75,888 in the year ended on 31st March, 1994 and sum of Rs. 2,64,45,376 in the year ended on 31st March, 1995, and thereafter it continued to withdraw the money in each year with the net debit balance of Rs. 53.97 crores as on 31st March, 1998 as against capital of Rs. 11.50 crores. The aggregate amount of money withdrawn by the assessee comes to Rs. 59,31,22,721 (i.e., Rs. 59.31 crores) as against aggregate amount of profit fallen in assessee's share amounting to Rs. 5,34,22,109 (i.e., Rs. 6.34 crores) till 31st March. 1998, and thus the amount over-withdrawn by the assessee comes to Rs. 53,97,00,612 (i.e., Rs. 53.97 crores) as against capital of Rs. 11.50 crores standing in the name of the assessee as on 31st March, 1998.
16.23 In the light of the aforesaid facts establishing that the assessee had over-withdrawn net money to the extent of Rs. 53.97 crores till 31st March, 1998, the submission of the assessee that no money whatsoever has been withdrawn by assessee from the firm against contribution of stock-in-trade made towards the capital is totally misleading and false. The assessee has tried to give a totally wrong picture about the huge money withdrawn by it by debiting the same in a separate current account of partners and that too without making a whisper about it in its submissions made in this case either before the authorities below or before us. There is no dispute as to the proposition that an act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment of prejudice to the national interest as so observed by the Hon'ble Supreme Court in Union of India vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC). But this proposition is applicable insofar as the act of assessee in constituting partnership firm by contributing its personal assets to a firm as capital contribution is concerned. However, with regard to assessee's conduct in converting land into money by withdrawing huge and substantial money from the firm is to be viewed from the words of caution emphasized by Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT and also in view of the following observation of Constitution Bench of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. vs. CTO, which has been referred to in the case of Union of India vs. Azadi Bachao Andolan and was quoted with approval:
"Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges."
16.24 From this calculated device adopted, by the assessee, by withdrawing substantial amount of money for its benefit and debiting the same in its current account, it becomes clear that though the partnership firm as such is genuine, the transfer or contribution by the assessee of its personal land to the share capital of the firm represent a device or ruse for converting the land into money substantially withdrawn by the assessee from the firm for its benefit. Thus, the entry of Rs. 11.50 crores being value of land credited in assessee's capital account cannot be considered to be imaginary or notional one with no benefit or gain to the assessee. Therefore, the assessee's contention that the amount of Rs. 11.50 crores credited in assessee's capital account cannot be made a basis to work out any gain or profit arising to the assessee from the transaction of transferring its personal asset as capital contribution to a firm in which the assessee became a partner is not acceptable and is thus rejected. Therefore, even the partnership firm is considered to be genuine, the transaction of transferring assessee's land by way of capital contribution to the partnership at a market value more than the cost to the assessee represents a devise or ruse to convert the personal land of the assessee into money substantially for the benefit of the assessee while evading tax on a surplus amount arising to the assessee from the said transaction. In this view of the matter, which we have taken in the light of word of caution mentioned by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai, the amount representing the value of land contributed by the assessee as its capital in a firm in which the assessee became a partner and which has been credited in the assessee's capital account, is to be considered as a consideration received by the assessee on the transfer of its personal asset to a partnership firm. We, therefore, hold that the surplus arising from making over assessee's personal asset, i.e., said plot of land in question, to the firm as his contribution to its capital account is a profit or gain accrued to the assessee and is chargeable to tax. Whether transaction is on capital field or the revenue
16.25 Now, we have to examine whether the transaction in question is on capital field or the revenue, and the surplus so arising to the assessee is assessable to tax as profits from business or capital gain. It is an admitted position that the land in question has been transferred to a firm towards capital contribution by the assessee in the capacity of a partner. The firm so constituted is considered to be genuine one. The transaction cannot, therefore, be considered to be made in the nature of any normal and ordinary transaction of sale in course of any commercial or trading activity. The land has been contributed to firm as capital by the assessee partner in its capacity as a partner and not as a trader in any trading transaction. We are, therefore, in agreement with the contentions of the learned counsel for the assessee that the land in question belonging to the assessee was contributed to a partnership firm as assessee partner's contribution towards capital in the partnership when the assessee entered into a partnership with five other partners, and so, the transaction cannot be regarded as a trading or commercial transaction in the business sense. Resultantly, the transaction of making over of any personal assets of a partner to a firm as his contribution towards capital is, therefore, to be regarded as made on a capital field. Nature and character of the asset contributed by a partner to a firm as capital contribution at the time when the asset is employed in the transaction of contributing capital by a partner to a firm as his capital contribution
16.26 This now leaves us to determine the nature and character of the asset contributed by assessee partner to a firm as its capital contribution, at the time when he became a partner. The case of the assessee advanced before us is that the land contributed by assessee to the firm as its capital contribution at the time when the assessee became a partner in a firm, was nothing but stock-in-trade in as much as the same was held by the assessee as stock-in-trade of its business of real estate. On the contrary, the Department has advanced an alternative argument that in case the transaction is regarded as a case of capital contribution of asset by a partner, and not a sale of asset by a partner to a firm, the asset contributed by partner to a firm as its capital contribution should be regarded as capital asset brought in by the partner to the firm in which he became a partner.
16.27 To resolve this controversy, we think that it is appropriate for us to find out what right arises or accrues to a partner from the transaction of contributing his personal asset as its capital in the partnership firm in which he becomes a partner. In this respect, making a gainful reference to the judgment of three Judges of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT would suffice as, in this decision, the Hon'ble Supreme Court has analyzed and considered number of decisions decided time and again by the various High Courts and also by Supreme Court including its own decision in the case of Hind Construction Ltd. and Malabar Fisheries Co., which have been heavily relied upon by the learned counsel for the assessee to support his contention advanced before us.
16.28 In the said decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai, it has been held that the consideration for the making over of the personal asset by the partner to a firm is the right, which arises or accrues to the partner, during the subsistence of the partnership, is to get his share of the profit from time to time, and after the dissolution of the partnership or with his retirement from the partnership, to get the value of his share in the net partnership assets as on the date of the dissolution or retirement after deduction of liabilities and prior charges. In other words, in consideration for the transfer of the personal asset by a partner to a partnership firm towards his capital contribution, in which he becomes a partner, the following rights arise or accrue to a partner:
(i) Right to get his share of profit from time to time during the subsistence of the partnership; and
(ii) On the dissolution of partnership or with his retirement from the partnership, the right to get the value of his shares in the net partnership asset as on the date of dissolution or retirement after deduction of liabilities and prior charges.
16.29 In the aforesaid decision in the case of Sunil Siddharthbhai vs. CIT, Hon'ble Supreme Court further observed that at the time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration accrued by the partner when he brings personal asset in the partnership firm, when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liability and prior charges which may not have even arisen yet. It was further observed that when partner's personal asset merges into the capital of partnership firm, the corresponding credit entry is made in the partner's account in the books of the partnership, but that entry is made merely for the purpose of the adjusting the rights of the partners inter se, when the partnership is dissolved or partner retires. From this, it is, thus, clear that by bringing his personal asset towards capital in the partnership firm, the partner acquires rights to get share of the profits from time to time, and to get the value of his share in the net partnership asset as on the date of dissolution or retirement after deduction of liabilities and prior charges, and the credit entry in the partner's account on account of personal assets brought in into the partnership firm towards capital contribution is made merely for the purpose of the adjusting the rights of the partners inter se when the firm is dissolved or any partner retires. In this case, it has also been held that whatever is brought into the partnership ceases to be exclusive property of the person who brought it in, that is, an exclusive interest is reduced to a shared interest, as so contended by the assessee also vide contentions raised into ground No. 1.4 by the assessee.
16.30 The Hon'ble Supreme Court in the case of Sunil Siddharthbhai has noted the observation made in its own judgment in the case of Addanki Narayanapa vs. Bhaskara Krishanappa AIR 1966 SC 1300 : (1966) 3 SCR 400, where the Hon'ble Supreme Court explained the identical proposition as laid down in the case of Sunil Siddharthbhai vs. CIT, by observing as under:
".....Whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing, to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in cl. (a) and sub-cls. (i), (ii) and (iii) of cl. (b) of s. 48....."
16.31 In the aforesaid case of Addanki Narayanapa vs. Bhaskara Krishanappa the position has been elaborated by Hon'ble Supreme Court, which has been noted by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai, as under:
"....The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges...."
16.32 In the case of Sunil Siddharthbhai, the apex Court further observed as under:
"It is apparent, therefore, that when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the rights of other partners in it. It is not an interest which can be evaluated immediately, it is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner's interest takes place only when there is a dissolution of the firm or upon his retirement from it. It has sometimes been said, and we think erroneously, that the right of a partner to a share in the assets of the partnership firm arises upon dissolution of the firm or upon the partner retiring from the firm. We think it necessary to state that what is envisaged here is merely the right to realise the interest and receive its value. What is realized is the interest which the partner enjoys in the assets during the subsistence of the partnership firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement. It is because that interest exists already before dissolution, as was held by this Court in Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 (1979) 120 ITR 49 (SC), the distribution of the assets on dissolution does not amount to a transfer to the erstwhile partners. What the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. It is nothing strange in law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into a shared interest with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner's retirement."
16.33 The Hon'ble Supreme Court in the aforesaid case of Sunil Siddharthbhai vs. CIT proceeded further to observe as under:
'The learned counsel for the assessee has attempted to draw an analogy between the position arising when a personal asset is brought by a partner into a partnership as his contribution to the partnership capital and that which arises when on dissolution of the firm or on retirement, a share in the partnership assets passes to the erstwhile partner. It has been held by this Court in CIT vs. Dewas Cine Corporation (1968) 68 ITR 240 (SC), CIT vs. Bankey Lal Vaidya (1971) 79 ITR 594 (SC) and recently in Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC) as well as by the Punjab & Haryana High Court in Kay Engineering Co. vs. CIT (1971) 82 ITR 950 (P&H), the Kerala High Court in CIT vs. Nataraj Motor Service (1972) 86 ITR 109 (Ker) and the Gujarat High Court in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) that when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contemplated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realised by the receipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realisation of a pre-existing right. The position is different, it seems to us, when a partner brings his personal asset into the partnership firm as his contribution to its capital. An individual asset is the sole subject of consideration. An exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest."
16.34 In this decision, the Hon'ble Supreme Court further observed that there is no difficulty in accepting proposition that when a partner hands over a business asset to a partnership firm as his contribution to its capital, he cannot be said to have effected a sale. But while the transaction may not amount to a sale, can it be described as a transfer of some other kind?
16.35 In the said case the Hon'ble Supreme Court then observed and held as under:
"In its general sense, the expression 'transfer of property' connotes the passing of rights in the property from one person to another. In one case there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which the exclusive interest is reduced to a shared interest it would seem that there is a transfer of interest. Therefore, when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital."
16.36 With reference to the provisions contained in s. 17(1)(b) of the Registration Act, whether there is transfer when partner's exclusive interest, on its introduction as capital in the firm is reduced into a shared interest, the Court observed as under:
"Our attention has also been invited to cl. (b) of sub-s. (1) of s. 17 of the Indian Registration Act, 1908, which requires the registration of non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property; and to the view taken by the Courts in this country that when a person brings in even his immovable property as his contribution to the capital of the firm no written document or registration is required under that clause. That view was expressed in firm Ram Sahay Mall Rameshwar Dayal vs. Bishwanath Prasad AIR 1963 Pat 221. The learned Judges relied on the English law that the personal assets introduced by a partner into the firm as his contribution to its capital becomes the property of the firm by reason of the intention and agreement of the parties. The view does not spring from the consideration that there is no transfer, the view is that no document of transfer is required and that, therefore, registration is unnecessary. The Patna High Court reiterated that view in Sudhansu Kanta vs. Manindra Nath AIR 1965 Pat 144."
16.37 Thereafter, with reference to shares brought in by the partner into the firm, the Hon'ble Supreme Court has held as under:
"Accordingly, we hold that when the assessee brought the shares of the limited companies into the partnership firm as his contribution to its capital, there was a transfer of a capital asset within the terms of s. 45. In this view of the matter, we agree with the conclusion reached by the Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works vs. CIT (1977) 110 ITR 595 (Ker), the Karnataka High Court in Addl. CIT vs. M.A.J. Vasanaik (1979) 116 ITR 110 (Kar) and by the Gujarat High Court, in the judgment under appeal."
Various propositions of law laid down by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT
16.38 From the aforesaid decision of three Judges of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai, the position of law that emerges is summarized as under:
(i) The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatsoever is brought in would cease to be the exclusive property of the person who brought it in. It would be the asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership.
(ii) The person who brought in his personal asset into a firm would not be able to claim or exercise any exclusive right over any asset which he has brought in, much less over any other partnership asset. He would not be able to exercise his right even to the extent of his share in the business of the partnership during the subsistence of the partnership, no partner can deal with any portion of the partnership asset as his own.
(iii) Where a partner of a firm makes over his personal assets to a firm as his contribution towards capital, and whatever may be the character of the property which is brought in by the partners when the partnership is formed, what a partner, is entitled to or what right, which accrues or arises to a partner, is, during subsistence of partnership, to get his shares of the profits from time to time, and upon dissolution of the firm or with his retirement from the partnership, to get the value of his shares in the net profit from assets as on the date of the dissolution or retirement after deduction of liabilities and prior charges.
(iv) When a partner brings in his personal asset into the partnership firm as his contribution to capital, asset which originally was subject to the entire ownership of the partner becomes now the subject to the rights of other partners in it. In other words, what was the exclusive interest of a partner in his personal asset is upon its introduction into the partnership firm as his share to the partnership capital, transformed into a shared interest shared with the other partners in that asset. Qua that asset, there is a shared interest. It is not an interest which can be evaluated immediately. It is an interest which is subject to the operation of future transaction of the partnership.
(v) The evaluation of a partner's interest takes place only when there is dissolution of the firm or upon his retirement from it, and what is realized is the interest which the partner enjoys in the asset during the subsistence of the partnership firm by virtue of his status as a partner, and in accordance with the terms of the partnership agreement. It is because that interest exists already before dissolution, as was held by Hon'ble Supreme Court in the case of Malabar Fisheries Co. vs. CIT, that the distribution of the assets on dissolution or upon the retirement is the realization of a pre-existing right or an interest, which does not amount to a transfer to the erstwhile partners. What the partner gets upon dissolution or upon retirement is the realization of a pre-existing right or interest. That is why it has been held that there is no transfer.
(vi) When a partner hands over its business asset to a partnership firm as his contribution to its capital, he cannot be said to have effected the sale.
(vii) In its general sense, the expression "transfer of property" connotes the passing of right in property from one person to another. In one case there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of the rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons, and an exclusive interest in property is larger than the share in that property. To the extent to which the exclusive interest is reduced to a shared interest, there is a transfer of interest. Therefore, when a partner brings in his personal asset into the capital of the partnership as his contribution to its capital, he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm. While he does not lose his right in the asset altogether, what he enjoys now is a abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital.
(viii) When a partner retires or partnership is dissolved, what the partner received is his shares in the partnership, qua the net asset of the partnership firm. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realization of a pre-existing right. The position is different when a partner brings his personal asset into the partnership firm as his contribution to its capital. An individual asset is the sole subject of consideration. An exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest.
(ix) When a partner of a firm makes over his personal asset, which are held by him, to a firm as his contribution towards capital, there is a transfer of asset in its general sense because the exclusive interest of the partner in personal asset is reduced, on their entry into the firm, into a shared interest. In other words, to the extent to which the exclusive interest is reduced to a shared interest it would seem that there is a transfer of interest. In other words, to the extent to which the exclusive interest is reduced to a shared interest, it would seem that there is a transfer of interest.
(x) At the time when the partner transfers his personal asset to partnership firm there can be no reckoning of the liabilities and losses which the firm may suffer in years to come. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution as its capital cannot fall within the terms of s. 48 of the Act.
(xi) The view that when a person brings in even his immovable property as his contribution to the capital of the firm, no document or registration is required under s. 17(1)(b) of the Registration Act does not spring from the consideration that there is no transfer.
(xii) On introducing his personal asset into the partnership firm as his contribution to its capital, it cannot be said that any income or gain arises or accrues to the assessee in a true commercial sense which a businessman would understand as real income or gain.
(xiii) However, the situation would be different if it transpires that either partnership firm in question is not genuine or if the partnership firm is genuine, the transaction of transferring the personal asset to the partnership firm represents a devise or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on capital gain, and in that respect the AO is entitled to consider all the relevant indicia and other pertinent consideration in this regard, and he is entitled to penetrate a veil covering and ascertain the truth. Nature of right accrues or arises to a partner on his capital contribution of his personal assets to a firm in which he is or becomes a partner
16.39 From the said decision of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT, it is settled that when the partner brings personal asset into the partnership firm as his contribution to its capital, and whatever may be the character of the property which is brought in by the partner when the partnership firm is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what right the partner acquired is to get his share of profit during the subsistence of partnership, and upon dissolution of the partnership or on retirement, to share in the asset of the firm which remain after satisfying the liabilities. Thus, the nature of the right acquired by the assessee by contributing his personal asset of whatever character into a partnership firm towards its capital is a right of capital in nature to claim share of profit in the partnership firm, and upon the dissolution of the firm or his retirement, the share in the asset of the firm after satisfying the liabilities. It makes it clear that the transaction of becoming a partner and contribution of asset of whatever character as capital in the firm in which one becomes a partner is undoubtedly on a capital field, and not in the nature of any commercial or trading transaction. It is also not the case of the assessee that contribution of assessee's asset being land in question to a partnership firm towards its capital when assessee became a partner was a commercial or trading transaction. When it is accepted that the transaction is not in the nature of trading or commercial transaction, the question of treating the asset involved in that transaction as stock-in-trade does not arise. It is altogether a different matter that before contributing any personal asset by the partner to a firm, it might have a character of stock-in-trade or capital asset or any other asset in the hands of a partner, but at the time when the same is contributed as capital contribution in a firm in which the assessee becomes a partner, it would certainly have a character of capital asset only having regard to the capital nature of the transaction and nature of rights acquired by a partner in the firm on his becoming a partner. In other words, whatever may be the character of the property in the partner's hand before the same is brought in by the partner as capital contribution when a partnership is formed and he becomes a partner, the property brought in partakes the character of a capital asset, and in consideration of it being contributed to a partnership towards its capital, the partner acquires a right to get his share of profit in the firm, and upon dissolution of the partnership firm or his retirement, a partner is entitled to get share in the asset of the firm which remains after satisfying the liabilities of the firm. Whether a partner hands over his business asset to a firm as his capital contribution, he can be said to have effected a sale
16.40 The learned counsel for the assessee has rightly contended that when a partner hands over his business asset to a partnership firm as his contribution to its capital, he cannot be said to have effected a sale within the meaning of Sales of Goods Act, meaning thereby that the transfer of partner's personal asset to a partnership firm as his contribution to its capital is not a commercial or trading transaction. We find no difficulty in accepting this proposition in the light of the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd., which has been accepted and approved in the case of Sunil Siddharthbhai vs. CIT. When a view that when a partner hands over his personal asset of whatever character to a partnership firm as his contribution to its capital, the partner cannot be said to have effected a sale of that item is accepted, the question of treating that personal asset as stock-in-trade in the course of transaction when the same was contributed to a partnership firm as its capital, cannot arise irrespective of whatever may be the character while remaining in the hands of a partner before the same was contributed by him to a firm as its capital. In order to decide the character of an asset at the time when it transferred to a firm by a partner by way of capital contribution, one has to determine the nature of the asset that attaches to it at the time when the transaction of contributing the capital by a partner to a firm takes place, and such quality or character of an asset cannot be altered or affected by any previous or subsequent act or conduct of a partner or a firm in relation to that asset which has been contributed as capital in partnership firm by that partner. The treatment given or the entry made in the books of accounts by the partner in his books of accounts or by the partnership firm in their books with regard to any asset contributed by a partner as its capital to a firm is no more than a previous or subsequent act or conduct, which shall have no effect upon the very character attached to the asset at the time of transaction under which the asset is transferred by the partner to a partnership firm towards its capital contribution. In this view of the matter and in the light of the fact that when partner hands over its personal asset of whatever character to a partnership firm as his contribution to its capital, the transaction cannot be said to be in the nature of trading or commercial one so as to treat the asset involved in such transaction as stock-in-trade. The logical and rational view or conclusion that one could arrive is that at the time when any asset is transferred by a partner to a partnership firm as his contribution to its capital, the asset cannot retain the character of stock-in-trade at that material point of time and in the course of such contribution of capital as the same is not employed in any commercial or trading transaction carried out in the course of any business activity of the partner. There is no quarrel as to the contention of the assessee that as per definition of "capital asset" defined under s. 2(14) of the Act, any stock-in-trade, consumable stores or raw materials held for the purpose of the business or profession of the assessee are excluded from the ambit of "capital asset". In other words, an exception has been provided in the definition of "capital asset" under s. 2(14) of the Act to exclude "stock-in-trade or consumable stores or raw material held by the assessee for the purposes of his business or profession" from the purview of a capital asset. The phrase "stock-in-trade" would mean all those goods or commodities in which the particular individual deals in the sense of buying or selling in the course of its business activity. The stock-in-trade held by the assessee for the purpose of his business or profession would retain its same character only (till) it continues to be employed for the purpose of any business or commercial activity carried out by the assessee. This would mean that when a businessman withdraws his stock-in-trade held by him for the purpose of business or profession from his business for some purpose or purposes other than the purpose of dealing with it in the course of any trading or commercial transaction, it would lose its character of being "stock-in-trade", and will acquire such character with regard to the purpose for which same has been employed. In other words, the stock-in-trade held by the assessee for the purpose of his business or profession shall get converted into such other nature of asset having regard to the purpose for which it has been withdrawn from the business. In business, it does happen that capital asset is converted into stock-in-trade, and stock-in-trade into capital asset or asset ceases to be stock-in-trade. For example, where a dealer in jewellery brings in his personal jewellery to business, there is a conversion of capital asset to stock-in-trade. Similarly, a stock-in-trade is converted into a capital asset, when the dealer in jewellery withdraws jewellery from his business for his personal use or for holding the same as investment. Where a grocer draws a part of his stock for his personal consumption, there is a conversion from stock-in-trade to personal investment on withdrawal of stock-in-trade. In the case of a grocer, when he withdraws part of his stock for his personal consumption, stock-in-trade so withdrawn would not retain the character of stock-in-trade at the time when a grocer consumes that item withdrawn from his business; it is not a loss to business but it is regarded as personal expenses or drawing. In a situation where a grocer withdraws a part of his stock for his personal consumption, he would debit his business by the cost at which stock-in-trade was acquired, and no notional value can be attached thereto. The grocer would debit the cost of the stock withdrawn by him for his personal consumption which would negative the cost of purchase debited in the trading account, and the item shall be considered to be out of the purview of stock-in-trade at the time the grocer withdraws his stock for his personal consumption. In the case of Sir Kikabhai Premchand vs. CIT, the Hon'ble Supreme Court has decided that it is only a cost that should be the basis for computing the business income on conversion of stock withdrawn from business. In this case, the Hon'ble Supreme Court has taken up an illustration of a dealer in rice held as stock, drawing a small part of it for his home consumption. If he had debited the purchase to personal account, even initially, there would have been no profit element reckoned on such purchases. It should, therefore, make no difference merely because such stock is merely routed through business books. In the decision in the case of Sir Kikabhai Premchand vs. CIT, the Hon'ble Supreme Court further observed that withdrawing stock-in-trade by a businessman is not a business transaction and by act of withdrawal no profit can be said to accrue to him and, accordingly it is sufficient if said businessman has credited it business with cost price of stock so withdrawn. It is well-settled that profits from sale of stock-in-trade in the course of trading operation is business profit. As a natural corollary, when any asset is not employed in the course of any trading or commercial operation, the same cannot be considered to be stock-in-trade held for the purpose of business. Further, in the light of the ratio of decision of Hon'ble Supreme Court in the case of Sir Kikabhai Premchand vs. CIT, we may say that when stock-in-trade by a businessman is withdrawn from his business, its nature and character gets converted into a different character, and the act of withdrawing the stock-in-trade by a businessman cannot be held to be a business or commercial or trading transaction in the sense a businessman would understand. In Sir Kikabhai Premchand vs. CIT, where a part of the stock-in-trade was withdrawn by the assessee and endowed them on certain trusts of which the assessee was a trustee, the Hon'ble Supreme Court held that there being no commercial or trading transaction, it was not a case of sale of stock-in-trade and the withdrawal of stock-in-trade should be taken at cost. The Supreme Court further held that no man can be supposed to be trading with himself. From the said decision, it thus transpires that withdrawal of stock-in-trade from business is not a trading or commercial transaction in the course of carrying on business, and the withdrawal of stock-in-trade should be taken at cost. In the present case, when the assessee withdraws some plot of land being part of stock-in-trade for making contribution to a partnership firm as its capital at the time when he became a partner, there is a conversion on withdrawal of stock-in-trade into capital asset in as much as, as already discussed above, the act of contributing personal asset into a partnership firm as its capital when assessee becomes a partner in a firm is a transaction on capital field.
16.41 With regard to the proposition that one may convert a capital asset into stock-in-trade or vice versa, a useful reference may be made to one more decision of Hon'ble Supreme Court in the case of CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC), where the assessee held certain shares by way of investment, converted those shares into stock-in-trade of his business dealing in shares, and later on sold the shares, it was held that the profits on sale of shares sold by the assessee must be computed at the difference between sale price and the market price of the shares on the date of their conversion as stock-in-trade of the business of the assessee. As already observed above, whether there is any such conversion of stock-in-trade to capital asset or capital asset into stock-in-trade can only be decided in the light of the facts and circumstances of a given case. The taxability of the amount being the difference between the cost of asset originally acquired as investment and the market price of the asset on the date of its conversion from capital asset to stock-in-trade, now takes care of by the provisions contained in sub-s. (2) of s. 45 of the Act, which has been inserted w.e.f.1st April, 1985with a view to bring the aforesaid difference to tax as capital gain on conversion of investment into stock-in-trade. Since market value was adopted on conversion of investment into stock-in-trade in the aforesaid decision of Hon'ble Supreme Court in the case of CIT vs. Bai Shirinbai K. Kooka, it was considered fair by the legislature that the assessee should pay tax on such capital gains with reference to the market value adopted when computing the business income arising to the assessee from investment or personal asset converted into stock-in-trade. Conversely, a stock-in-trade can be converted into capital asset, and the tax on transfer of a such capital asset will be imposed in the year in which such capital asset is sold or otherwise transferred after deducting therefrom the cost of acquisition, and other deductions as provided under the law.
16.42 In the instant case of the assessee, it is not in dispute that the said land in question, amongst others, was acquired as stock-in-trade of the assessee's business. However, later on in the year under consideration, the said land in question being a part of the total stock-in-trade of the business got revalued by the assessee, and was contributed as capital contribution to a partnership firm in which assessee became a partner with a view to carry on business in partnership. At the cost of repetition, it is emphasized that the transaction of making over assessee's personal asset i.e., land in question, to a firm as its capital contribution in the capacity of a partner is not a commercial or trading transaction as so admitted by the assessee also. To say it differently, the land in question contributed by the assessee to a firm as its capital contribution has not been transferred or sold to a firm in the course any trading or commercial activity or transaction carried out by the assessee. We fail to understand that when land in question has not been sold or transferred to a firm in the course of any trading or business activity, but has been transferred by way of capital contribution to a firm, on what basis or criteria the land in question should be considered as stock-in-trade, when the same was contributed to a firm towards capital, when it is admitted position of law that the asset, which are held for sale in the ordinary course of business; in the process of production for such sale or in the form of materials or supplies to be consumed in the production process are only be considered as stock-in-trade or inventories. In the course of hearing of this appeal, a reliance was placed by the learned standing counsel for the Revenue on the Accounting Standards viz., Accounting Standard-1, Accounting Standardd2, and Accounting Standard-10 (AS-1, AS-2, and AS-10 respectively) in reply to the query raised by the Bench about the meaning of words "capital asset" and "stock-in-trade". It was pointed out to the Bench by both the parties that AS-2 deals with the valuation of inventories. The meaning of inventories as defined in AS-2 is that the inventories are assets held for sale in ordinary course of business; in the process of production for such sales; or in the form of materials or supplies to be consumed in the production process or in the rendering of services. Above meaning given to the inventories is an accepted proposition. From this definition of stock-in-trade or inventory, it is clear that in order to consider any asset as stock-in-trade or inventory, it is to be established that it was held for sale in the ordinary course of business; in the process of production of such sales; or in the form of materials or supplies to be consumed in the production process or in rendering of services. Under s. 2(14) of the Act, any stock-in-trade, consumable stores, or raw materials held for the purpose of his business or profession are excluded from the ambit of "capital asset". The expression used in s. 2(14) of the Act is "any stock-in-trade, consumable stores or materials held for the purposes of his business or profession". Thus, the emphasis has been given to the criteria that any stock-in-trade, consumable stores, or raw materials must be held for the purpose of his business or profession in order to treat the same as such. As a natural corollary, if one claims that any asset is/are either acquired or disposed of or otherwise dealt with as stock-in-trade, or consumable stores or raw materials, he must prove that the transaction of that asset effected by him is in the course of his business or profession, so as to treat the asset in question as stock-in-trade, consumable stores or raw materials, at the time when the transaction was made. The aforesaid definition of inventories mentioned in AS-2 has also been taken note of by the Hon'ble Supreme Court in the recent decision of Liberty India vs. CIT (2009) 225 CTR (SC) 233 : (2009) 28 DTR (SC) 73 : (2009) 317 ITR 218 (SC) by observing as under:
"19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard.
20. AS-2 deals with valuation of inventories. Inventories are assets held for sale in the ordinary course of business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production.
'Inventory' should be valued at the lower of cost and net realizable value (NRV). The cost of 'inventory' should comprise all costs of purchase, cost of conversion and other costs including costs incurred in bringing the 'inventory' to their present location and condition."
16.43 In this view of the matter, we, therefore, hold that in order to treat any asset as stock-in-trade, it must be established and proved that the asset was involved in the course of any commercial or trading transaction of a business carried out by the assessee, and that is to be considered and decided with reference to the transaction in which such asset is employed and not with reference to any past or subsequent act of the assessee, qua that asset.
16.44 Having regard to the nature of right acquired by a partner of a firm when he becomes a partner, his share in the firm undoubtedly constitutes "property", and "share of a partner" in a partnership firm would certainly be a capital asset within the meaning of s. 2(14) of the Act. Such an asset being a share of a partner in a partnership firm can be transferred, like any other property, and, on transfer being completed, the charge on capital gain tax would be attracted. As already observed above, when a partner of a firm makes over his personal asset to a firm as its contribution towards capital, the partner acquires a right to receive share in profit of the firm during the subsistence of the partnership and upon its dissolution or on his retirement, a right to share in the net asset of the firm. It thus, makes it clear that the partner has acquired a capital asset in the nature of his share in the partnership firm in consideration of his making over his personal asset to a firm. The transaction of making over personal assets to a firm, or receiving or realization of his share in assets on dissolution of the firm or on retirement of the partner, is undoubtedly to be held on a capital field.
16.45 Therefore, having regard to the nature of the transaction of contributing asset by a partner to a partnership firm towards his capital, the nature of the right that the partner acquires when he contributes his personal asset to a partnership firm as its capital, and such transactions being not in the nature of any commercial or trading transaction, notwithstanding the fact that the said land contributed by the assessee to a partnership firm as its capital was held as stock-in-trade for the purpose of assessee's business before the same was so contributed as capital in a firm, it ceases to be stock-in-trade at the time when the same was contributed into a partnership firm by the assessee partner towards its capital, and it gets converted from stock-in-trade into capital asset at that material point of time. Therefore, the question as to whether any income or gain has arisen or accrued to the assessee in the course of contributing the said land as capital contribution into a partnership firm at the time when assessee becomes a partner, is to be decided in the light of the premise that assessee has transferred or contributed a capital asset as capital contribution to a partnership firm in which he became a partner, and not in the light of the premise that there was a sale or transfer or contribution of stock-in-trade by a partner to a firm by way of capital contribution when the assessee became a partner.
16.46 The question whether, on facts of the present case, the land in question held by the assessee as stock-in-trade has been converted into capital asset and it partook the character of capital asset at the time when the assessee contributed it as its capital to a firm when he became a partner, can also be judged from one more point of view about the conduct, motive and intention of the assessee while making over the land in question as capital contribution to a firm in which he became a partner. The intention and motive of the assessee to treat any asset whether as stock-in-trade of its business or capital asset at any given point of time can be judged or inferred from the conduct of the assessee coupled with all surrounding circumstances and materials of any given case, having regard to the nature of transaction in which such asset is employed. In the present case, it is not in dispute that the assessee was following method of valuation of closing stock of its business at cost or market price, whichever is lower, as per settled and accepted principles of accountancy. Accordingly, the land in question as well all other plots of lands held by the assessee as stock-in-trade were used to be valued as per the said method of valuation at the end of the year when accounts of the assessee were made out. However, on 16th March, 1992 in the middle of the current year under consideration, the assessee got only the land in question revalued by the experts determining the market value as on 16th March, 1992 at Rs. 11.50 crores, which is more than the cost to the assessee, and the land was then contributed to the newly constituted partnership firm as capital contribution, and the surplus of Rs. 6.01 crores arising from the said transaction, was credited in the P&L a/c of the assessee firm and the value of the land was credited in the capital account of the assessee partner in the books of the firm. In this respect, and at this stage, we must keep in our mind that all other plots of lands and right in land held by the assessee as stock-in-trade, except the land in question, were neither valued nor any entry of any revaluation in respect thereto was made in the accounts of the assessee company. The conduct of the assessee in valuing only a part of stock-in-trade at market value as on 16th March, 1992 for the purpose of contributing the same as capital contribution in to the partnership firm in which he became a partner on and from 16th March, 1992, clearly indicates the intention and motive of the assessee that the assessee did not have any intention to treat the land in question as stock-in-trade anymore, but the intention was to treat the same as capital asset for the purpose of contributing the same as capital contribution to a firm for becoming a partner. It is an accepted system of accountancy that stock-in-trade of business at the end of the year are valued at cost or market price, whichever is lower, to determine the profit or loss, as the case may be of any business. Thus, the question of valuating the stock-in-trade at market value higher than the cost price in the middle of the year before the year ends, and then passing corresponding entries in the books of accounts, is totally unwarranted and is not usually associated with the stock-in-trade, unless the assessee intended to withdraw the stock-in-trade from his business and convert the same into capital asset for the purpose of contributing the same as capital in a partnership firm in which assessee became a partner. There is no mandatory Accounting Standard, which mandates the assessee to revalue its inventory upward as so admitted by the learned counsel for the assessee in reply to the query raised by the Bench. In the present case, we, therefore, find that there were material changes in circumstances under which the land was valued al market price higher than the cost price, the land was then contributed by the assessee partner to a partnership firm as capital contribution and the surplus arising from the said transaction was credited in the P&L a/c of the assessee, from the circumstances prevailing either on the date of its acquisition as stock-in-trade or just before the same was decided to be contributed as capital in a firm at a market price. At this stage, we find it necessary to point out one proposition that though accounting practices may not be the best guide in determining the nature of any asset held by the assessee, they are indicative of what the assessee itself thought of its nature or what treatment the assessee itself intended to give to the same. The intention of the assessee to hold any asset whether as stock-in-trade or capital asset can be gathered from the conduct of the assessee and the treatment given to it by the assessee in its records and books, though the same may not be conclusive but are undoubtedly a relevant factor coupled with some other factors or circumstances appearing in any given case. From all the factors as discussed above, if taken together, along with the position of law as to the nature of the transaction and rights acquired by the assessee on becoming a partner in a firm, it is clearly established and proved that the land held by the assessee as stock-in-trade before the same was contributed to a firm as capital has been converted into a capital asset at the time when the same was contributed as capital contribution to a firm in which the assessee became a partner. In this view of the matter, we, therefore, hold that the land in question contributed by the assessee as capital to a firm in which assessee became a partner was a capital asset in nature at that relevant point of time, and all the incidence of taxation would thus follow accordingly.
16.47 Before proceeding further, at this juncture, we have to deal with one more aspect of the matter flowing from the contentions of the learned counsel for the assessee to the effect that the AO as well as the CIT(A) have not controverted or disputed the fact that the land in question was a stock-in-trade both before and after the same was contributed by the assessee partner as its capital contribution to the partnership firm in which the assessee became a partner, and this finding of fact cannot now be changed at this stage. We have given our serious consideration to this contention raised by the learned counsel for the assessee. On perusal of orders of the authorities below, it becomes clear that both the authorities below have recorded a finding of fact that the land, which was contributed by the assessee company to a firm, was its stock-in-trade, and it became the partners' capital in the firm being the asset received in lieu of capital of the partner. Both the authorities below have also accepted the position that the land, which was contributed by assessee company as its capital, was held as stock-in-trade by the partnership firm in which the assessee became a partner. We have also accepted this position that the land in question contributed by assessee partner to a partnership firm as its capital contribution when the assessee become a partner, was held by the assessee as stock-in-trade before the same was contributed as its capital contribution to a firm. There is no dispute as to the fact that after receiving the land in question as capital contribution by the assessee partner, the firm treated the same as stock-in-trade of its business of real estate and started making construction thereupon for its business of real estate development in subsequent years. At the same time, the fact that the land in question was contributed to a firm as capital contribution by the assessee in the capacity of a partner is also not in dispute. In our opinion, the real controversy, in the present case, is not with regard to the nature of asset before or after the same was contributed to the partnership firm as capital contribution by the assessee partner when the assessee became a partner, but is with regard to the nature of the asset at the material point of time the same was contributed to a partnership firm by the assessee partner as its capital contribution when he became a partner in the firm. While the AO has claimed that it is a case of sale of stock-in-trade from one entity to another and the surplus resulted out therefrom is a profit from business chargeable to tax, the assessee has contended that it is a case where stock-in-trade has been contributed to a partnership firm by the assessee as its capital contribution and no commercial or trading transaction has taken place so as to give rise to a sale or transfer of stock-in-trade by a partner to a firm. In the light of the controversy set out above, we have addressed ourselves to determine the true and correct nature of the transaction and/or the asset employed in the transaction under which the assessee partner contributed towards its capital its personal asset held by it as stock-in-trade before the same was contributed as its capital to a firm, in which the assessee became a partner. This question whether the land in question was a capital asset or stock-in-trade in nature at the time when the same was contributed by the assessee to a partnership firm as its capital contribution when the assessee became a partner in that firm, is not one of fact: though it is dependent on the facts and the circumstances of the present case, the question does involve conclusions of law to be drawn from those facts. We, therefore, do not find any force or merit in the contention of the learned counsel for the assessee that the facts admitted by the Revenue authorities below are now being changed. Whether particular income assessed by the AO under one head can be brought to tax under another head by the Tribunal
16.48 The learned counsel for the assessee has also contended before us that the Revenue has changed its stand when an alternative argument was advanced by the learned special counsel for the Revenue that in the event the Tribunal comes to the conclusion that the transaction of making over personal assets by a partner to a partnership firm as its capital contribution is a case of capital asset brought in by a partner as its capital contribution in a firm in which it became a partner, the Tribunal may adjudicate the question whether the profit or gain arising to the assessee as a result of the said transaction is chargeable to tax under the provisions of s. 45(3) of the Act effective from 1st April, 1988 even if not under s. 28 of the Act. Both the parties have been heard on this aspect of the matter and also on the merits whether the surplus arising from the transaction involved in this case could indeed be assessed as capital gain.
16.48.1 There is no dispute to the position that the profits or gains or benefits arising to the assessee from said transaction in question has been assessed under the head "Business" by the AO in the light of the view that stock-in-trade was sold or transferred by the assessee company to a firm at an appreciated price. It was the claim of the assessee itself that the stock-in-trade held by it was contributed to a firm in which the assessee became a partner, and in the light of the stand so taken by the assessee, the AO brought the surplus to tax under the head "Business". In the light of the stand taken by the assessee that the land transferred to a partnership firm was stock-in-trade at the time when the same was contributed to a firm, the AO has treated the transaction of making over the land of the assessee to a firm to be in the nature of trading or commercial transaction rejecting the assessee's claim that it was not liable to be taxed as no sales had taken place. However, when an argument has been advanced supported by various decisions when a partner contributes its personal assets of whatever character to a firm towards its capital contribution when he becomes a partner, the asset involved in the transaction would partake the character of capital asset at that material point of time. The learned standing counsel for the Revenue advanced an alternative argument based on same set of facts but on different conclusions of law drawn from those facts that in case the contribution of land by assessee partner to a firm is accepted to have been made towards its capital contribution in a firm and the land involved in the said transaction of capital contribution to a firm is held to be of a "capital asset in nature" at the time when the same was contributed as capital contribution, the profit or gain arising from the transfer of a land by the assessee to a firm may be taxed under s. 45(3) of the Act inserted with effect from asst. yr. 1988-89. This alternative argument is, in our view, undoubtedly arising from the same set of facts, and in respect of same item of income arising from the same transaction, which have been considered in the assessment, made by the AO. Further, the provisions of ss. 2(14), 2(47) and 45(3) of the Act were very much relied upon by the AO while assessing the item to tax as is clear from the respective orders of the authorities below and from the submissions of the assessee made before the authorities below as well as before us. It is not the new source of income or new item of income that is sought to be taxed by the Revenue at this stage. It is the same income assessed by the AO that is now sought to be taxed under s. 45(3) of the Act in the light of the legal inferences drawn from same set of facts, as against the business profit assessed in the assessment made by the AO. The subject-matter of appeal has not been really changed. The change is only with regard to the correct head of income under which it is to be assessed under the IT Act. Thus, the contention of the assessee in this regard that the Department has no right to take an alternative plea to tax the profits or gains arising from transfer of land by assessee to a firm by way of capital contribution as per provisions of s. 45(3) of the Act is not found convincing.
16.48.2 Further, the answer to a question that whether the land in question had a character of capital asset or stock-in-trade at the time when the same was contributed as capital to a firm in which the assessee became a partner is based on a legal conclusion to be drawn from same set of facts. The relevant provisions of law contained in ss. 2(14). 2(47) and 45(3) were very much relied upon by the Departmental authorities below to bring the item to tax though the tax has been imposed by the AO and the CIT(A) under the head "Business profit". This makes it clear that the Department has not made out a new claim for the first time before the Tribunal by way of an alternative argument made before us.
16.48.3 It is not the case where any enhancement of income is sought for by the Revenue. It is also not the case where any benefit already granted to the assessee is sought to be taken back by the Department. The only point raised by the senior standing counsel for the Revenue is that in case the surplus arising from the transaction is not found to be assessable under the head "Business", the same may be taxed under the head "Capital gain", and in that situation the tax liabilities of the assessee would not increase. All the facts to decide the question as to whether the surplus in question is assessable under the head "Business" or "Capital gain" are available on record, which has been considered by the authorities below and which has been referred to by the assessee. The AO as well as the assessee both have admitted the fact that the land was contributed as capital contribution by the assessee in the capacity of a partner. The subject-matter involved in this issue is also not being changed in as much as in the light of the facts available on record and that were considered by the authorities below and also relied upon by the assessee, the same very transaction of contributing the land by a partner to a firm as its capital contribution is the sole basis to decide the alternative contention raised by the Revenue. By allowing Department to raise this additional plea, we do not think that we traverse beyond the subject-matter of dispute between the parties involved in this case. This alternative plea raised by the Revenue does not altogether change the complexion of the case, and only change sought to be made is to determine the correct head of income on same set of facts. The various decisions relied upon by the learned counsel for the assessee are, therefore, not applicable to the present case in as much as those cases were rendered either in the situation where new facts were considered, benefit already granted to the assessee was sought to be withdrawn, the subject-matter of the appeal was completely changed and the assessment was sought to be enhanced.
16.48.4 In this connection, a reliance was placed by the Revenue upon the decision of Special Bench of the Tribunal, Mumbai Bench "C" (Special Bench) in the case of Sumit Bhattacharya vs. Asstt. CIT (2008) 113 TTJ (Mumbai)(SB) 633 : (2008) 2 DTR (Mumbai)(SB)(Trib) 25 : (2008) 112 ITD 1 (Mumbai)(SB), where the Special Bench has taken a view that the Hon'ble Bombay High Court in the case of CIT vs. Gilbert & Barkar Manufacturing Co. 1977 CTR (Bom) 347 : (1978) 111 ITR 529 (Bom) has held that the Tribunal is competent to change the head of income even at the instance of the respondent when all the relevant facts are already on record as long as both the parties are heard on that issue. This decision of Special Bench in the case of Sumit Bhattacharya vs. Asstt. CIT and Hon'ble Bombay High Court in the case of CIT vs. Gilbert & Barkar Manufacturing Co. are directly on the issue that arises in the present case before us. In the case of CIT vs. Gilbert & Barkar Manufacturing Co., which has been relied upon by the Tribunal in the case of Sumit Bhattacharya vs. Asstt. CIT, the High Court has held as under:
"................ The Tribunal would have the discretion to allow any party to the appeal, may be the appellant or the respondent, to raise a new point or a new contention provided two things are satisfied. First, that for urging such a new point no new facts are required to be brought on record and the point is capable of being disposed of on the facts which are already on record and, secondly, an opportunity is given to the other side to meet that point that is being allowed to be raised for the first time in appeal. In the instant case, it cannot be disputed that all the facts that were required for determination of the point as to whether the income returned should be assessed under the heading 'Business income' or not were already on record before the Tribunal and no further investigation of any other facts was necessary and it was on the basis of facts which were already on record that the respondent wanted to canvass the point before the Tribunal that the income returned by it should be assessed under the heading 'Business income'. Secondly, the aspect whether a particular income returned by the assesses should be brought to tax under one or the other heading of income should not be regarded as such a new point as to make the other side taken by surprise, especially when all the facts necessary for that purpose are already on record and in the instant case the Department was given full opportunity by the Tribunal to meet the contention that was being permitted to be raised by the respondent for the first time in appeal. In our view, therefore, there was no question of placing the appellant in a worse position, which seems to be the implication of the question as framed. The Tribunal, in our view, was justified in permitting the respondent to agitate before it its contention that its income was assessable under the heading 'Business income' and, accordingly, the first question is answered in the affirmative."
16.48.5 The Special Bench in the case of Sumit Bhattacharya vs. Asstt. CIT has observed and held as under:
"It is well-settled that the Tribunal is competent to change the head of income even at the instance of the respondent when all the relevant facts are already on record and as long as both the parties are heard on that issue. In the instant case, it was the alternate contention of the Revenue that in the event the Tribunal came to the conclusion that the amount in question was not taxable under the head 'Income from salaries', the Tribunal might also adjudicate on the question whether or not the impugned amount be held as income from other sources. The Supreme Court in the case of Emil Webber vs. CIT (1993) 110 CTR (SC) 257 : (1993) 200 ITR 483 (SC) : (1993) 67 Taxman 532 (SC) has held that merely because an employment related income/benefit cannot be taxed under the head 'Income from salaries', such a benefit cannot go outside the ambit of taxable income and such an income can be taxed under the head 'Income from other sources'.
Therefore, even if the amount received by the assessee on redemption of share appreciation rights was held to be not taxable under the head 'Income from salaries', this fact, by itself, would not take the same outside the ambit of taxable income. Since, in such an eventuality and following the Supreme Court's judgment in Emil Webber's case, the said amount would be taxable under the head 'Income from other sources'. Therefore, even if it was held that the amount in question was received from a person other than the employer of the assessee, and that in order for an income to be taxed under the head 'Income from salaries' it is a condition precedent that the salary, benefit or the consideration must flow from employer to the employee, the amount received by the assessee on redemption of stock appreciation rights would still be taxable though under the head 'Income from other sources'. The plea raised by the assessee that the amount in question could not be taxed as 'income from salaries' was thus irrelevant."
16.48.6 In the instant case before us, all the facts required for deciding the point as to whether the surplus arising from the transaction can be assessed under the head "Capital gain" or not are already on record. No further investigation of any new fact is necessary. The provisions contained in s. 45(3), on the basis of which the income can be assessed under the head "Capital gain", has been considered and deliberated upon by both the authorities below, and assessee has also furnished its comments upon the applicability of provisions contained in s. 45(3) before the authorities below as well as before us. In the course of hearing of this appeal, a query was also raised by the Bench to both the parties to explain as to whether the income in question can be assessed under the head "Capital gain", and both the parties have advanced their arguments. As held by the Hon'ble Bombay High Court in the case of CIT vs. Gilbert & Barkar Manufacturing Co., the question whether a particular income should be brought to tax under one or other head cannot be considered to be entirely new point. The assessee has been given full opportunities to meet the alternative contention raised by the Department before us. In the case of the Sumit Bhattacharya vs. Asstt. CIT, the Special Bench had taken a view that the income, which was assessed by the AO under the head "Salary", could be taxed under head "Income from other sources", and the issue was decided accordingly by the Special Bench. In this respect, a reliance may also be placed upon the decision of Hon'ble Bombay High Court in the case of B.R. Bamasi vs. CIT (1972) 83 ITR 223 (Bom), where new ground before the Tribunal during arguments by the assessee in answer to appeal was permitted. The decision of Hon'ble Supreme Court in the case of Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 (SC) has held that the power of the Tribunal in dealing with appeals are expressed in s. 254(1) in the widest possible terms, however, with a restriction of its jurisdiction to the subject-matters of appeal.
16.48.7 Further, having regard to the actual controversy involved in the present appeal, in response to the Bench's suggestions, and notings, the Hon'ble President vide his order dt.6th March, 2009, after hearing both the parties, has directed this Special Bench to decide the appeal in its entirety without confining itself to the question earlier framed in the present case, in accordance with the law and in the light of the facts of the case including the High Court's direction as so agreed by both the parties. Therefore, the alternative plea raised by the Revenue to the effect that the surplus arising to the assessee may otherwise be held to be assessable under the head "Capital gain" instead of "business profit" is admitted for our consideration so that the income, if found by us as to be taxable, can be assessed under the correct head of income under the provision of the Act.
16.48.8 Before parting this aspect of the matter, we would like to make a reference to a decision of Hon'ble Supreme Court in the case of CIT vs. Ram Kumar Aggarwal & Bros. (1994) 116 CTR (SC) 98 : (1994) 205 ITR 251 (SC) relied upon by the learned counsel for the assessee to the effect that the respondent is not entitled to for the first time to claim before the Tribunal and the High Court that the shares ceased to be its stock-in-trade on the conversion of the company from public company to a private company. This case is rendered in the context of altogether different situation where it was an admitted position that the assessee held the shares of company as stock-in-trade of his business, and he received the money in lieu of his share holding in the company in which he had held shares as stock-in-trade and claimed relief as such in earlier years. This is not the case where assessee has converted its stock-in-trade into capital asset at any point of time. The assessee was all along claiming the benefit and being assessed by treating the shares as stock-in-trade, and the surplus received by the assessee from a liquidator in the distribution of assets of the company, was, thus, held as business income assessable in assessee's hands, and not as a profit from investment. In this case, the assessee made a fresh claim by contending that the shares held by it as stock-in-trade seized to be its stock-in-trade on the conversion of the company from a public company to a private company of which the assessee was holding shares as stock-in-trade, though, in the present case before us, it is the conduct of the assessee itself that he decided to contribute the land in question as capital in a partnership firm in which assessee became a partner, and it is not the case of realization of any money by the assessee in lieu of land in question held by it as stock-in-trade before the same was contributed as capital to a firm.
Conclusion
16.49 Applying the propositions laid down by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT to the facts of the present case and in the light of the view we have expressed above, we hold as under:
(i) When the assessee made over the said land in question to the partnership firm as his contribution to its capital, what right the assessee has acquired, during the subsistence of the partnership firm, is to get its shares of profits from time to time, and after dissolution of the partnership or on his retirement from the partnership firm, to receive the value of the share in the net partnership asset as on the date of dissolution or retirement after deduction of liabilities and prior charges.
(ii) When the land in question being the personal asset of the present assessee was contributed by the assessee partner to a firm towards its capital, the assessee reduced his exclusive right in the land in question to shared rights in it with other partners of the firm, and to that extent to which the assessee's exclusive interest in the said land is reduced to a shared interest, there was a transfer of interest in the land notwithstanding, the fact whether the land in question was being held by the assessee as its stock-in-trade or capital asset or otherwise before the same was contributed to a firm towards capital.
(iii) Having regard to the nature of right acquired by the assessee in consideration of his making over his land to a firm as its capital contribution to get his share of the profit from time to time during the subsistence of the partnership, and after the dissolution of the partnership or with his retirement from the partnership, to get the value of his shares in the net partnership asset as on the date of the dissolution or retirement after deduction of liabilities and prior charges, as understood in the general law, the land brought in by the assessee became the property of the firm, which would vest in all the partners, and in that sense, every partner has an interest in the property of the partnership, and during the subsistence of the partnership, no partner can deal with any portion of the property as his own, and the assessee's exclusive right in the said land has reduced to shared right in it. This position is undoubtedly applicable to all nature of assets whatsoever, brought in by any partner to a firm towards its capital contribution.
(iv) The position of law which arises when a personal asset is brought in by a partner into a partnership as his contribution to the partnership capital and that which arises when on dissolution of the firm or on retirement of a partner, share in the partnership asset passes to the erstwhile partner, are different to each other in as much as, in the case of dissolution or retirement of any partner, it is the realization of pre-existing right and that is why it has been held that there is no transfer though when a partner brings his personal asset into the partnership firm as his capital contribution to its capital, an exclusive interest of a partner in his personal asset before the partner enters the partnership reduced to a shared interest. Therefore, the proposition laid down by the Hon'ble Supreme Court in the case of Malabar Fisheries Co. vs. CIT, which was a case where on dissolution of partnership firm, a partner realized or received his interest in the partnership, has been distinguished by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT. Therefore, the meaning of "transfer of property" given by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT in the cases where partner brings his personal assets to a firm towards capital contribution is applicable to all kinds of assets brought in by the partners to a firm towards its capital contribution, and not only to a capital asset held by the partner before the same was contributed in the partnership. The analogy of reducing of exclusive interest of a partner, to shared interest in case partner brings in his personal asset into the partnership firm as his contribution to its capital is equally applicable to all kinds of assets belonging to a partner, and that is why the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT has used the expression "personal asset" while laying down a law that "it is apparent, therefore, that when a partner brings in his personal asset into a partnership as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now the subject to the right of other partners in it........... Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest............" The Hon'ble Supreme Court has also used the expression "personal asset" while deciding the issue whether there is a transfer of property when the individual property of a partner is contributed to a firm towards capital contribution by observing that. "Therefore, when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm". In this view of the matter even without applying of s. 2(47), we may hold that there was a transfer of property when any personal asset of whatever character of a partner is brought into a partnership firm by the partner as his contribution to its capital in as much as the exclusive interest of a partner in that property or asset is, upon its introduction into the partnership firm as his share to the partnership capitals transformed into an interest shared with the other partners in that property or asset.
(v) If we look carefully to the judgment in its entirety in the case of Sunil Siddharthbhai vs. CIT, it would be clear that whatever may be the character of the property in the hands of a partner before the same is brought in by the partner to a firm, when the partnership is formed, there is a transfer of a capital asset either in the general sense of the term "transfer of property" or within the meaning of s. 45 of the Act. The Hon'ble Supreme Court in that case was concerned with two appeals of two different assessees. In Civil Appeal No. 1841 of 1981, the assessee made over certain shares of limited company which were held by him as his capital asset to a firm as his contribution to the capital of the partnership firm. In Civil Appeal No. 1777 of 1981, the assessee introduced his share holdings in the partnership firm as his capital contribution. The partnership firm credited the accounts of the partners with the market value of the shares. In Civil Appeal No. 1841 of 1981, it has been specifically observed by the Hon'ble Supreme Court that shares were held by the partner as his capital asset, but in Civil Appeal No. 1777 of 1981 nothing is mentioned about whether share holdings by the partner was held as capital asset or as trading asset. While deciding the issue whether there was transfer of shares, the Hon'ble Supreme Court decided the issue by observing that "we hold that when the assessee brought the shares of the limited companies into the partnership firm as his contribution to its capital, there was a transfer of a capital asset within the terms of s. 45 of the IT Act". From the said observation and decision of Hon'ble Supreme Court, it cannot be said that the asset brought into a firm by a partner as capital contribution should be held by him as capital asset even before the same was contributed in order to treat the contribution of asset by a partner to a firm as a transfer of capital asset within the terms of s. 45 of the IT Act. Further, the Hon'ble Supreme Court referred to its own observation in the case of Addanki Narayanapa vs. Bhaskara Krishanappa with approval where this Court explained that "whatever may be the character of the property which is brought in by the partner when the partnership is formed...........", which goes to show that when any property of whatever character held by a partner is brought into a firm by the partner, it becomes the property of the firm, and what a partner is entitled to is his share of profits, if any, in the profit of the partnership firm, and upon the dissolution of the partnership, a right to share in the money representing the value of the property after meeting all the liabilities and expenses. Further, while stating the words of caution by the Hon'ble Supreme Court in the said case, they have used the words "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", which goes to show that whenever the matter of transfer of assets by a partner to the partnership firm by way of capital contribution was under their Lordships consideration, their Lordships used the words "transfer of personal asset by the assessee to a partnership in which he is or becomes a partner" but when question had arisen whether it is an attempt to avoid liability to income-tax, their Lordships has used the words "liability to income-tax on a capital gain" or "evading tax on a capital gain". This goes to show that in order to decide whether there was an attempt on a part of a partner to avoid liability to income-tax on capital gain, what is to be seen whether the transfer of any personal asset by the partner to a firm in which he is or becomes a partner is merely a device or ruse for converting his personal asset into money, and it is not necessary that there should be a transfer of capital asset only initially held by a partner to a firm. This proposition about avoiding liability to income-tax on capital gain by way of transfer of asset by a partner to a firm is applicable to all classes of assets transferred by a partner to a firm. It thus makes it clear that whatever may be the nature of the asset initially held by a partner before the same is contributed by him as capital contribution to a partnership firm, it shall assume the character of a capital asset at the time when it is contributed to a firm as capital contribution and any surplus arising therefrom is chargeable to tax as capital gain. Therefore, from this angle also, we hold that the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT is applicable not only to the cases where any capital asset of a partner is transferred by a partner to a firm as his capital contribution but, it is applicable to all kinds of personal assets of the partner transferred by him to a partnership firm as capital contribution, and in all such cases the liability of income-tax on capital gain would arise.
(vi) There is no quarrel as to the proposition that no income chargeable to tax would arise on mere revaluation of the closing stock at a market value more than the cost to the assessee as in such a case the profits shown on revaluation is only notional. We do not find any difficulty in accepting this contention raised by the learned counsel for the assessee in the light of the decision in the case of Sir Kikabhai Premchand vs. CIT, Chainrup Sampatram vs. CIT, CIT vs. Hind Construction Ltd., CIT vs. Birla Gwalior (P) Ltd. 1973 CTR (SC) 349 : (1973) 89 ITR 266 (SC) and Sanjeev Woollen Mills vs. CIT. However, facts are different in the present case. It is not the case where increase in the value of land can be said to be notional. In the present case, the asset has been valued at market rate, which is more than the cost to the assessee, and it has been contributed to a firm as capital contribution in which the assessee became a partner, and the market value was credited in the capital account of the assessee in the books of the firm, and similar amount is credited in the books of the assessee and surplus has been shown as income in the P&L a/c out of which the dividend was also paid. Therefore, decisions rendered in the context of the fact where mere revaluation of asset was made in books without anything more are not applicable to the facts of present case.
(vii) The contribution of land by the assessee to a firm as its capital contribution may in itself cannot be called as "sale". But the same does not mean that it is also not a "transfer" because, in such a case what was the exclusive interest of the assessee in the said land has, upon its introduction into the partnership firm as its share to the partnership capital, transformed into an interest shared with the other partners in or upon that land. When one talks of the partnership firm's property or firm's assets all that is meant is property or asset in which all partners have a joint or common interest. Accordingly, upon introduction of land by the assessee into the partnership firm as its shares to the partnership capital, the land so contributed becomes the property of the firm and the partnership property will vest in all the partners and in that sense every partner has acquired an interest in the property of the partnership firm. Therefore, the assessee's exclusive right in the said land has reduced to a shared interest, and to that extent, there is a transfer of land from assessee to a firm.
(viii) When the assessee contributes its personal asset held by it to a firm as its contribution towards capital, the assessee cannot be said to have effected any trading or commercial transaction, but the transaction shall be considered to have been effected on capital field. Therefore, the nature and character of land contributed by the present assessee to a firm towards its capital contribution shall assume the character of "capital asset" at the time when it was contributed to a firm towards capital contribution.
(ix) There is no quarrel as to the proposition that there is no transfer on mere conversion of stock-in-trade into capital assets and/or on revaluation thereof in the assessee's books and no income arising on such conversion. In other words, there could not be any actual profit or loss on withdrawal of stock-in-trade from a trading business and its conversion into capital asset. There was no deeming fiction to deem the conversion of stock-in-trade into capital assets as a transfer or to deem the fair market value as on the date of conversion as the cost of acquisition of the capital assets. However, a transfer does take place when any personal asset of a partner is introduced into a firm as his capital contribution, and the value of the asset recorded in the books of the firm shall be deemed to be full value of the consideration received or accruing as a result of the transfer of such asset contributed by the partner. Consequently, in the present case, there was no transfer of land held by the assessee as stock-in-trade when the same was merely revalued at a market value in its books and it was converted into capital asset and no profit or gain did accrue or arise to the assessee merely on its revaluation at a higher value more than the cost to the assessee in its books or on its mere conversation from stock-in-trade to a capital asset. In such a case, the conversion of stock-in-trade into investment has to be at cost/book value. Thus, the legal proposition that no man can make a profit out of himself or there could not be any actual or real profit or loss on withdrawal of stock from a trading business shall govern this type of cases. However, the position would be different in cases where on or after conversion of stock-in-trade into a capital asset either by implication of law or by act or conduct of the assessee, or otherwise, the asset is contributed to a firm as capital contribution by a partner at the value more than the cost to the assessee. In such a case, there is a transfer of asset being taken place and the value of the asset recorded in the books of the firm shall be deemed to be the full value of consideration received or accruing as a result of the transfer of the asset. Therefore, in the present case, when the land in question was contributed by the assessee to a firm as its capital contribution, in which the assessee became a partner, a transfer of capital asset had taken place, and the amount recorded in the books of account of the firm as the value of the land shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the land, and the profits or gains arising from such transfer of a capital asset by a person to a firm in which he becomes or is a partner by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place.
(x) In the light of the view we have taken above, we, therefore, hold that the surplus arising to the assessee from the transaction of contribution of land held by it to a firm as capital contribution shall be assessable to tax as profit or gains under the head "Capital gain" under s. 45 of the IT Act, and for that purpose, the amount of Rs. 11.50 crores recorded in the books of accounts of the partnership firm as the value of the land shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the land as so provided under sub-s. (3) of the s. 45 of the Act, effective from the asst. yr. 1988-89.
(xi) Even otherwise, the surplus arising to the assessee from the transaction of contribution of land as capital contribution to a firm in which the assessee became a partner shall be chargeable to tax in view of our finding given above that the transaction of transferring the land in question to the partnership firm is a device or ruse to convert the land in question into money substantially for the benefit of the assessee as the assessee has withdrawn substantial amount as observed and pointed out above in paras 16.19 to 16.24 of this order, for its benefit as a part of its well designed and calculated colourable strategy to convert the land into money for its own benefit.
(xii) Without prejudice to the view we have taken above, we further hold that even in case it is otherwise held that the land contributed by the assessee to a firm towards capital contribution should be treated as stock-in-trade even during the course of making the transaction of transferring or contributing the land to the partnership firm as capital contribution, the surplus arising to the assessee from the said transaction of contributing stock-in-trade to a firm shall then be assessable under the head "Business" in the view of the colourable device or ruse adopted by the assessee to convert stock-in-trade into money for its own benefit.
16.50 In the light of our finding that the transfer or contribution by the assessee of its personal land to the share capital of the firm represent a device or ruse for converting the land into money substantially withdrawn by the assessee from the firm for its benefit and even otherwise in view of our finding that the provisions contained in s. 45(3) of the Act inserted with effect from asst. yr. 1988-89, are applicable to the present case in this asst. yr. 1992-93 under consideration and in view of other findings we have given above, we hold that the earlier decisions of the Tribunal passed in the asst. yr. 1985-86 in the assessee's case shall have no application to the present case. We, therefore, reject the claim of the assessee that the issue involved in ground Nos. 1.1 to 1.7 should be decided in the terms of earlier order of the Tribunal passed in the asst. yr. 1985-86.
16.51 For the above reasons, we, therefore, direct the AO to compute the capital gain arising from the transfer of the said land by the present assessee to a partnership firm, in which it became a partner, by way of capital contribution, after taking the value of the consideration received or accruing as a result of such transfer at Rs. 11.50 crores being the amount recorded in the books of account of the firm as well as in the books of the assessee. The capital gain to be so computed shall be chargeable to tax in the year under consideration as per provisions of computation of capital gain and rate of tax provided in the Act or the respective Finance Act, as the case may be. We further observe that for the purpose of determining the year of acquisition of land or right to purchase the land, period of its holding, and the cost of its acquisition, the AO may take into consideration the ratio of the following decisions after providing an opportunity to the assessee to have its say in that regard:
I. CIT vs. Jannhavi Investments (P) Ltd. (2008) 215 CTR (Bom) 72 : (2008) 304 ITR 276 (Bom) (for computing the capital gains tax the "cost of acquisition" and not the cost or value on the date on which the asset was treated as a capital asset is relevant. Cost of acquisition on date asset was actually acquired and not on date of conversion to capital asset is relevant for the purpose of computing capital gain.)
II. Keshavji Karsondas vs. CIT (1994) 120 CTR (Bom) 109 : (1994) 207 ITR 737 (Bom) (for the purpose of computing capital gain, the cost of acquisition is the cost on the date when the asset was acquired and not the cost or value on date when asset became capital asset.)
III. Ranchhodbhai Bhaijibhai Patel vs. CIT (1971) 81 ITR 446 (Guj) (the only circumstances which must be satisfied in order to attract the charge to tax on capital gains under s. 45 of the Act is that the property transferred must be a capital asset at the date of transfer and it is not necessary it should have been a capital asset on the date of acquisition by the assessee.)
IV. Kalyani Exports & Investments (P) Ltd. vs. Dy. CIT (2001) 72 TTJ (Pune)(TM) 341 : (2001) 78 ITD 95 (Pune)(TM) (what is relevant for purpose of capital gain is cost of acquisition and not the value on date on which the asset became a capital asset.)
17. Ground No. 2 is in respect of the issue whether the interest received on FDRs made from internal development account is eligible for deduction and not to be included in assessee's assessable income. This issue was decided by the Tribunal in the first round by remitting the matter back to the file of the AO to decide the issue afresh by complying with the directions given by the Tribunal in other years as detailed in para 35 of the Tribunal's order dt.30th March, 2007, passed in the first round of this appeal before the Tribunal. At this stage, it is pertinent to note that the assessee went in appeal against the aforesaid order dt.30th March, 2007passed in the first round, before the Hon'ble High Court, and no grounds were raised by the assessee in respect this issue before the Hon'ble High Court as would be clear from the memorandum of appeal filed by the assessee before the Hon'ble High Court. Thus, this ground No. 2 stands decided in the terms of order dt.30th March, 2007of the Tribunal passed in the first round of this appeal.
18. Similarly, the issue involved in ground Nos. 4, 5, 6, 7, 8, 9, and 11 relating to (i) the disallowance of Rs. 2,74,702 being local conveyance and other incidental expenses, (ii) the disallowance of Rs. 15,000 under s. 40A(12) of the Act, (iii) disallowance of Rs. 4,49,485 being 10 per cent for common maintenance, (iv) ad hoc addition of Rs. 1,00,000, on account of guest house expenses, (v) taxability of Rs. 1,35,850 being the enhancement compensation received on acquisition of agricultural land, (vi) ad hoc disallowance of Rs. 2,00,000 out of foreign travelling expenses and (viii) the disallowance of Rs. 2,55,000 being subscription paid in respect of companies senior employees membership of the health club operated by DLF Hotels Ltd., respectively shall stand disposed of in the terms of the Tribunal's earlier order dt. 30th March, 2007, passed in the first round, in as much as, in respect of these issues, no appeals were either preferred by the assessee or by the Revenue before the Hon'ble High Court. The order of the Tribunal dt.30th March, 2007shall, therefore, be applied accordingly insofar as the issue involved in the aforesaid ground Nos. 4, 5, 6, 7, 8, 9, and 11 are concerned.
19. Now, we shall come to the ground No. 3, wherein the assessee has challenged the order of the CIT(A) in confirming the disallowance out of sales and business promotion expenses of Rs. 5,30,258.
20. This issue has been discussed by the Tribunal in paras 38 to 42 of its order dt.30th March, 2007passed in the first round, whereby the Tribunal has sustained the addition of Rs. 3,00,000, and allowed the balance relief to the assessee. On this issue, the assessee had taken a ground before the Hon'ble High Court as could be seen from the memorandum of appeal filed by the assessee before the Hon'ble High Court. However, the Hon'ble High Court has remitted the matter back to the Tribunal for fresh consideration only in respect of the issue with regard to the addition of surplus arising on revaluation of the land, when the same was contributed to a partnership firm, in which the assessee has became a partner, and the only question framed by the Hon'ble High Court was with regard to this matter. Nothing is mentioned in the Hon'ble High Court's order about this issue of confirming addition to the extent of Rs. 3,00,000 out of sales promotion and business promotion expenses. However, even otherwise, in the course of hearing of this appeal in the second round, nothing new has been submitted by the assessee. We, therefore, decide this issue in the light of earlier order dt.30th March, 2007whereby the addition of Rs. 5,30,258 sustained by the CIT(A) has been reduced to Rs. 3,00,000 by the Tribunal. We order accordingly.
21. Ground No. 10 is with regard to the disallowance of Rs. 1,03,505 being the amount written off out of advances and deposits. This issue has been discussed by the Tribunal in the first round at paras 67-70 of the Tribunal's order dt. 30th March, 2007, whereby the Tribunal has upheld the order of the CIT(A) on this issue in the light of the Tribunal's order in the case of this very assessee in the asst. yr. 1991-92. The assessee has raised this issue in the appeal filed before the Hon'ble High Court about Tribunal's order dt. 30th March, 2007 but nothing is mentioned in Hon'ble High Court's order whereby some other matter has been remitted to Tribunal for fresh consideration as observed above. Thus, this ground stands decided in terms of our order dt.30th March, 2007passed in the first round, and we do not find any reason to take a view other than the view already taken by the Tribunal in the first round. Thus, this ground stands rejected.
ITA No. 2546/Del/2001: Asst. yr. 1997-98
22. Now we shall come to the appeal filed by the assessee for the asst. yr. 1997-98, against the order dt. 14th May, 2001, passed by the learned CIT(A) in the matter of an assessment made under s. 143(3) of the IT Act, 1961 ("the Act").
23. The ground No. 1 is directed against the CIT(A)'s order in holding that the mercantile method of accounting followed by the assessee, is such that the income cannot properly be deduced therefrom, and thereby upholding the action of the AO in invoking the provisions of the first proviso to s. 145(1) of the Act. In the course of hearing both the parties have submitted that this issue is covered by the order of the Tribunal passed in ITA No. 1884/Del/1998 for the asst. yr. 1994-95, which has been followed by the Tribunal in subsequent asst. yrs. 1995-96, 1996-97, and 2001-02. Respectfully following the earlier decision of the Tribunal, where the Tribunal has held that the recourse of proviso to s. 145 of the Act is uncalled and book results are to be accepted. Thus, this ground is decided in favour of the assessee.
24. Ground No. 2 is directed against the CIT(A)'s order in disallowing the loss of Rs. 97,51,324 by holding that the sale price in respect of the constructed/built-up property should be accounted for at the time of handing over the possession or making convenience, which is earlier. In the course of hearing of this appeal, it has been pointed out by the representatives of both the parties that this issue is covered by the earlier decision of the Tribunal in the asst. yr. 1994-95 in ITA No. 3232/Del/2001, which has been followed by the Tribunal in the subsequent asst. yrs. 1995-96, 1996-97, and 2001-02. Respectfully following the Tribunal's earlier order in the asst. yr. 2004-05, where the Tribunal has held that the loss was disallowed by the AO after rejecting the method of accounting for booking of revenue at the time of convincing on built-up property, and in the light of the Tribunal's decision that the Department was not justified in invoking the provisions of s. 145, and in rejecting the method of accounting regularly followed by the assessee, the addition made by the AO on this account is not justified, and the ground is decided in favour of the assessee. We allow this ground raised by the assessee.
25. Ground No. 3 with sub-grounds (a) and (b) is with regard to the reworking of the cost of land at the average price of the cost of the land in Phases I to III and IV, Qutab Enclave Complex, now known as DLF city by dividing the cost of land acquired till end of each year by sellable in each phase separately and treating the area year-marked for schools, hospitals, clubs, and other community building as sellable area. In the course of hearing of this appeal its has been pointed out by the parties that identical issue has been decided by this Tribunal in asst. yr. 1994-95 in ITA No. 3232/Del/2001, which has been followed in subsequent years i.e., asst. yrs. 1995-96, 1996-97 and 2001-02, and thus, it is to be decided accordingly. Respectfully following the Tribunal's order, where the Tribunal has held that the Revenue was not justified in restricting writing off cost of land pertaining to Phases I to III of Qutab Enclave, and in holding that the assessee was justified in taking Phases I to IV as one project, and accordingly writing off cost of land, and the reworking done by the Department was set aside by the Tribunal. Respectfully following the aforesaid order, we decide this issue in favour of the assessee in the terms of Tribunal's order for asst. yr. 2004-05, which has been followed in asst. yrs. 1995-96, 1996-97, and 2001-02.
26. Ground No. 5 is against the CIT(A)'s order in holding that interest of Rs. 58,14,994 accrued on FDRs made from internal development is assessable in the assessee's hands.
26.1 In the course of hearing of this appeal, it was pointed out by both the parties that this issue has been decided by the Tribunal in asst. yr. 1994-95 in ITA No. 3232/Del/2001, which has been followed in subsequent asst. yrs. 1995-96, 1997-98, and 2001-02. Respectfully following the aforesaid order, where it has been held that the identical issue has been decided by the Tribunal in this very assessee's own case for the asst. yr. 1993-94, in ITA No. 6615/Del/1996, wherein the matter has been restored back to the file of the AO for fresh adjudication in accordance with the directions contained in earlier order of the Tribunal. we restore this issue to the file of the AO, and decide the issue in accordance with the directions given by the Tribunal in earlier years.
27. Now we come to the ground No. 4, which is directed against the CIT(A)'s order in confirming the addition of Rs. 14,36,41,533 being the surplus arising on land/rights in land held as stock-in-trade by the assessee, and brought into the partnership firm M/s Real Estate Builders as capital contribution.
27.1 During the relevant year corresponding to the asst. yr. 1997-98, the assessee became a partner in the newly constituted partnership firm, viz., M/s Real Estate Builders with profit/loss sharing ratio at 20 per cent. The assessee company contributed its ownership in 61 plots of land admeasuring 30,148.340 sq. mtrs. as well as its right to purchase 11 plots owned by its subsidiary company, 6,321.06 sq. mtrs. in Qutab Enclave Complex, as capital contribution in the said partnership firm. These plots of land were converted as capital investment in the firm at an agreed value of Rs. 21.15 crores, The transfer value of Rs. 21.15 crores was credited in assessee's capital account in the books of the firm. The transfer value of Rs. 21.15 crores resulted into the surplus of Rs. 14,36,41,533, which was not offered to tax by the assessee by giving a reason that same is not taxable in view of the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. The assessee also stated before the AO that in asst. yr. 1985-86, such surplus was held to be not taxable. However, the AO as well as the CIT(A) brought the said surplus to tax in the light of their view taken in asst. yr. 1992-93 after relying upon the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT and after making a reference to the provisions contained in ss. 2(47) and 45(3) of the Act.
27.2 We have heard both the parties and perused the materials on record.
27.3 It is admitted position that the assessee entered into a partnership with 12 numbers of its subsidiary companies with a view to start and carry on the business of constructing houses on 61 plots and 11 plots of land situated in the DLF Qutab Complex, which has been introduced by the assessee to the common stock of the firm for achieving the aforesaid purpose of the firm. The memorandum of partnership was executed on25th Feb., 1997. However, it has been made effective from31st Jan., 1997. The value of the 61 numbers of plot of lands brought in by the assessee partner to a firm was made at Rs. 17,60,00,000. In the partnership, it was also stated that the assessee was also the absolute owner or otherwise well substantially entitled to another lot of 11 plots jointly with the parties of 2nd to 5th parts described in the deed of partnership, admeasuring about 6,321.06 sq. mtrs. situated in the said complex, out of which the assessee was the owner to the extent area of land admeasuring about 3,036.78 sq. mtrs. and the balance area of 3,257.28 sq. mtrs. was owned by the parties of 2nd to 5th parts. The assessee also agreed to contribute his right in the said plots to the extent of area on land admeasuring about 3,063.78 sq. mtrs. to a common stock of partnership, and in consideration thereof the sum of Rs. 1,80,00,000 was credited to the account of the assessee in the books of the partnership firm as on31st Jan., 1997. The assessee had also had its rights to purchase area of land admeasuring about 3,257.28 sq. mtrs., which was also brought by the assessee into the common stock on partnership, and in consideration thereof, the sum of Rs. 1,75,00,000 was credited to the account of the assessee in the account books of the partnership firm as on 31st Jan., 1997. Thus, total amount of Rs. 21,15,00,000 (Rs. 17,60,00,000 + Rs. 1,80,00,000 + Rs. 1,75,00,000) was credited to the assessee's account in the account books of the partnership firm as on 31st Jan., 1997. It was further provided that w.e.f. 31st day of January, 1997, the said 61 plots and 11 plots of land had become absolute property of the partnership firm. It was further provided that out of the aforesaid amount of Rs. 21,15,00,000 (Rs. 21.15 crores) being value of the plot of land brought in by the assessee to a firm, the sum of Rs. 20,00,000 (Rs. 0.20 crores) will be treated as assessee's capital and shall carry no interest, and the remaining amount of Rs. 20,95,00,000 (Rs. 20.95 crores) will be treated as loan to the partnership firm, which may be either free of interest or carry interest at such rate as may be mutually agreed upon from time to time. We hold that the surplus arising to the assessee from the transfer of 61 plots of land and 11 plots of land is Rs. 14,36,41,533, which is liable to be taxed in the light of the provisions contained in s. 45(3) of the Act for the reasons given on identical issue in the asst. yr. 1992-93.
27.4 Even otherwise in the light of the word of caution emphasized by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT, where it has been emphasized that 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 tax, it will be open to the IT authority to go behind the transaction and examine, even where the partnership is genuine, whether 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. From the facts of the present case, it is more than clear that the transaction of transferring plots of land owned by the assessee to the partnership firm is not a real attempt to contribute to the share capital of the firm for the purpose Of carrying the partnership business as out of the total value of land, amounting to Rs. 21.15 crores, which has been recorded as value of land in the books of the partnership firm, the only sum of Rs. 20,00,000 has been allocated towards assessee's contribution to the share capital and a substantial portion amounting to Rs. 20,95,00,000 (Rs. 20.95 crores) has been made available with the assessee for his benefit in the nature of loan payable by the firm to the partner. It is well-known that the advances given in addition to the capital by a partner to a firm occupies a better position for the benefit of a partner as could be seen from s. 13(1)(c) vis-a-vis s. 13(1)(d) and s. 48(b)(ii) vis-a-vis s. 48(b)(iii) of the Indian Partnership Act where advances by a partner distinguished from capital are placed on better footing than the capital contributed by the partner for the purpose of partner's right to receive interest thereupon and to realize or recover the advances distinguished from capital. Moreover, the assessee has indulged into a well-designed and colourable strategy to convert its stock-in-trade into money by constituting various partnership firms year after and contributing part of its land out of total land held as stock-in-trade into various firms. The various partnership firms constituted by the assessee from year to year in asst. yr. 1992-93 and then in asst. yrs. 1997-98 to 2000-01, and also the details of total value of land contributed by the partners, the total amount treated as capital contribution, and the amount treated as loan by the assessee to a firm have been placed before us by the learned counsel for the assessee, which are annexed as Annex. A to this order. Therefore, in this view of the matter, the surplus arising from the transaction of transfer of assessee's property to a partnership firm is chargeable to tax in terms of our order for asst. yr. 1992-93.
ITA No. 3233/Del/2001: Asst. yr. 1998-99
28. Now we shall come to the appeal filed by the assessee for the asst. yr. 1998-99, directed against the CIT(A)'s order dt. 13th June, 2001, passed in the matter of an assessment made under s. 143(3) of the IT Act, 1961 ("the Act")
29. Ground Nos. 1, 2, 3, and 5 are identical to the ground Nos. 1, 2, 3, and 5 raised in the asst. yr. 1997-98. Therefore, these grounds shall stand decided in terms of our order deciding the identical ground in asst. yr. 1997-98. The decision given in asst. yr. 1997-98, on these issues shall apply to the identical issues involved in the asst. yr. 1998-99.
30. Ground No. 4 in asst. yr. 1998-99 is directed against the CIT(A)'s order in confirming the addition of Rs. 17,12,17,554 being the surplus amount arising on land/rights in land held as stock-in-trade and brought into the partnership firm as capital contribution by the assessee.
30.1 During the period relevant to the asst. yr. 1998-99, the assessee company became a partner in two newly constituted partnership firms viz., M/s DLF Office Developers and M/s DLF Property Developers, with profit/loss sharing ratio of 12 per cent in each firm. The assessee company contributed its right to purchase in one plot of land owned by its subsidiary companies at admeasuring about 1.152 acres inPhase-IIIDLFCity, Gurgaon, into the common stock of the partnership firm viz., M/s DLF Office Developers. The assessee company also contributed its ownership of nine residential plots of land in Phase-II admeasuring 4,631.17 sq. mtrs. as well its right to purchase 47 plots owned by its subsidiary companies into the common stock of partnership firm viz., M/s DLF Property Developers. These plots of lands were converted as a capital investment in the firm at an agreed value of Rs. 24.62 crores, which resulted in surplus of Rs. 17,12,17,554 to the assessee. The assessee credited this surplus to the P&L a/c but it claimed it to be exempted from tax in the light of the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd., and in the light of the decision taken in the asst. yr. 1985-86. However, the AO had brought the surplus to tax for the reason given in the asst. yr. 1992-93 by relying upon the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT and after making a reference to the provisions contained in ss. 2(47) and 45(3) of the Act.
30.2 On an appeal, the CIT(A) confirmed the AO's order in view of the order of the CIT(A) passed in asst. yr. 1992-93, which has also been followed by the CIT(A) in asst. yr. 1997-98.
30.3 We have heard both the parties and have carefully gone through the orders of the authorities below.
30.4 In this asst. yr. 1998-99 two partnership firms viz., M/s DLF Office Developers and M/s DLF Properly Developers were constituted vide memorandum of partnership executed on 23rd March, 1998 made effective from 24th Feb., 1998, wherein the assessee became a partner along with eight of its subsidiaries as partners in M/s DLF Office Developers and with other sixteen of its subsidiaries as partners in M/s DLF Property Developers. The assessee brought certain plot of land held by it into the common stock of partnership valued at Rs. 3,70,00,000, which amount was credited to the account of the assessee in the account books of the partnership firm. Out of the aforesaid amount of Rs. 3,70,00,000, the sum of Rs. 12,00,000 was treated as assessee's capital contribution without carrying any interest, and the remaining amount of Rs. 3,58,00,000 has been treated as a loan by the assessee to a partnership firm, which may be cither free of interest or carry interest at such rates as may be mutually agreed upon from time to time. The property brought in by the partners were treated as a property of a partnership firm on and from24th Feb., 1998.
30.5 Similarly, in the firm under name and style of M/s DLF Property Developers, the assessee brought certain plot of land held by it into the common stock of partnership, which were valued at Rs. 3,25,00,000, which amount was credited to the account of the assessee in the books of the partnership firm of24th Feb., 1998. The assessee also brought its right to purchase the land in respect of certain 47 plots of land into the common stock of the partnership firm, which were valued at Rs. 17,75,00,000. Thus, the total amount credited to the assessee's account was Rs. 21 crores out of which sum of Rs. 12 lacs was credited to the capital account of the assessee as its capital contribution without carrying any interest, and the remaining amount has been treated as loan by the assessee to the partnership firm, which may be either free of interest or may carry interest at such rates as may be mutually agreed upon from time to time. As a result of this transaction crediting the assessee's account by market value of the plot of land brought in by the assessee in a firm, the sum of Rs. 17,12,17,554 resulted as surplus to the assessee, which was credited to the P&L a/c of the assessee to claim as exempted from tax relying upon the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd.
30.6 In the light of our decision in the asst. yr. 1992-93 and 1997-98, we hold that the amount of Rs. 17,12,17,554 being surplus arising to the assessee is chargeable to tax as capital gain. The AO is directed to compute capital gain as per law as so held by us in asst. yr. 1992-93 and 1997-98.
30.7 We further hold that our view in para 27.4 in the asst. yr. 1997-98 shall also be applicable to this issue arising in this asst. yr. 1998-99.
ITA No. 267/Del/2003: Asst. yr. 1999-2000
31. Now we shall take up the appeal filed by assessee for the asst. yr. 1999-2000, directed against the order dt. 25th Oct., 2002, passed by the learned CIT(A) in the matter of an assessment made under s. 143(3) of the IT Act, 1961 ("the Act").
32. Ground No. 1 and ground No. 3 relating to the issue about reworking of cost of land in Phases I to III and IV in Qutab Enclave Complex and interest accrued on FDRs made from internal development account included in assessee's hand are identical to the ground Nos. 3 and 5 respectively for the asst. yr. 1997-98. Therefore, in terms of our order on the identical issue passed in the asst. yr. 1997-98 vide this common order, this issue has been decided accordingly. In other words, the decision on the identical issues rendered in the asst. yr. 1997-98 shall also apply to the identical issues raised in this asst. yr. 1999-2000.
33. Ground No. 2 in asst. yr. 1999-2000 against the CIT(A)'s order in confirming the addition of Rs. 54,82,91,077 being surplus arising on contribution of land held as stock-in-trade by the assessee and contributed to the partnership firm as capital contribution by the assessee in the capacity of a partner.
33.1 In this asst. yr. 1999-2000, the assessee became a partner in five newly constituted partnership firms. The assessee company contributed its land and right to purchase land owned by its subsidiary companies inDLFCity, Gurgaon to the partnership firms as capital contribution. Total value of all piece of lands were determined at an agreed value of Rs. 78.55 crores. These plots of lands were contributed by the assessee as capital contribution in the aforesaid five newly constituted partnership firms. As a result of this transaction, a surplus of Rs. 54,82,91,077 had arisen to the assessee. The assessee has credited this surplus to its P&L a/c. The firm also credited the assessee's capital account by sum of Rs. 78.55 crores. However, the assessee claimed the surplus to be exempted from tax in the light of the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. The assessee also stated before the AO that in asst. yr. 1985-86, such surplus was held to be not taxable. However, the AO as well as the CIT(A} brought the said surplus to tax in the light of their view taken in asst. yr. 1992-93 after relying upon the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT and after making a reference to the provisions contained in ss. 2(47) and 45(3) of the Act.
33.2 We have heard both the parties and have carefully gone through the orders of the authorities below.
33.3 In this year also five partnership firms were newly constituted in which the assessee became a partner. The assessee brought in certain plot of land in the common stock of this newly constituted firm at a value of Rs. 78.55 crores. The aforesaid amount of Rs. 78.55 crores was credited in the assessee's account in the books of account of the partnership firms. Out of the aforesaid amount of Rs. 78.55 crores credited in the assessee's account in the books of the firms sum of Rs. 9.50 was credited on account of assessee's capital contribution and balance amount of Rs. 69.05 crores (Rs. 78.55 crores - Rs. 9.50 crores) was treated as loan by the assessee to the newly constituted firms.
33.4 In the light of our decision in the asst. yrs. 1992-93, 1997-98 and 1998-99, we hold that the amount of Rs. 54,82,91,077 being surplus arising to the assessee is chargeable to tax as capital gain, and the AO is directed to compute capital gain as per law as so held by us in asst. yrs. 1992-93, 1997-98 and 1998-99.
33.5 We further hold that our view in para 27.4 in the asst. yr. 1997-98 shall also be applicable to this issue arising in this asst. yr. 1999-2000.
ITA No. 4986/Del/2003: Asst. yr. 2000-01
34. The last appeal filed by the assessee is pertaining to the asst. yr. 2000-01, directed against the CIT(A)'s order dt. 13th Sept., 2003, passed in the matter of a assessment made under s. 143(3) of the IT Act, 1961 ("the Act") by the AO.
35. Ground No. 1 is about the rejection of the method regularly employed by the assessee by the AO, and then confirming the addition on account of reworking of the cost of land at the average purchase price of land in Qutab Enclave Complex, and thus, making addition of Rs. 34,30,308, and addition of Rs. 1,60,69,880 on account of internal development expenses. This issue is covered by the Tribunal's decision in asst. yr. 1994-95, which has been followed in asst. yrs. 1995-96, 1996-97, and 2001-02. The aforesaid decision of the Tribunal has been followed by us while deciding these issues in the asst. yrs. 1997-98, 1998-99, and 1999-2000. Therefore, this issue is decided in favour of the assessee in terms of our order of the aforesaid years following the decision of Tribunal passed in asst. yr. 1994-95.
36. Ground No. 2 is with regard to the addition of Rs. 6,27,000 on account of accrued interest on FDRs made after withdrawal under authority of Haryana Government from internal development bank account. This issue has also been considered in the asst. yrs. 1997-98, 1998-99, and 2000-01 above after following the earlier decision of the Tribunal. Therefore, this issue has been decided accordingly in terms of our order passed in the asst. yrs. 1997-98, 1998-99, and 2000-01.
37. Ground No. 3 is directed against the CIT(A)'s order in confirming addition of Rs. 5,60,00,000 being the surplus arising on land held as stock-in-trade by the assessee but contributed to the partnership firm towards capital by the assessee.
37.1 During the period relevant to the asst. yr. 2000-01, the assessee became a partner in a partnership firm M/s DLF Phase-IV, Commercial Developers and contributed certain land owned by it as well as its right of purchase of land, to the aforesaid firm towards its capital, and surplus of Rs. 5,60,00,000, being the difference between the value credited in assessee's capital account, and the cost to the assessee was credited in the P&L a/c, but claimed as exempted from tax in the light of the decision of the Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. and in the light of the order decided in assessee's favour in the asst. yr. 1985-86. However, the AO rejected the assessee's claim in the light of the assessment order for the asst. yr. 1992-93 as well as for asst. yr. 1999-2000.
37.2 In the asst. yr. 2000-01, a partnership firm under name and style of M/s DLF Phase-IV, Commercial Developers, was constituted in which the assessee became a partner. The assessee brought in certain plot of land to the common stock of the partnership firm. These plots were valued at Rs. 8 crores, which was credited in the assessee's account in the books of the firm. Out of the aforesaid amount of Rs. 8 crores, the sum of Rs. 75,00,000 has been credited in the capital account of the assessee as assessee's capital contribution, and the balance sum of Rs. 7,25,00,000 has been treated a loan by the assessee to the firm. From this transaction a surplus of Rs. 5,60,00,000 had arisen to the assessee, which was credited in the P&L a/c of the assessee but claimed as exempted in the return of income filed by the assessee.
37.3 In the light of our decision in the asst. yrs. 1992-93, 1997-98 and 1998-99, we hold that the amount of Rs. 5,60,00,000 being surplus arising to the assessee is chargeable to tax as capital gain, and the AO is directed to compute capital gain as per law as so held by us in asst. yrs. 1992-93, 1997-98, 1998-99 and 1999-2000.
37.4 We further hold that our view in para 27.4 in the asst. yr. 1997-98 shall also be applicable to this issue arising in this asst. yr. 2000-01.
38. In the result, all these appeals filed by the assessee are partly allowed in the manner as indicated above.
39. This decision is pronounced in the open Court on4th Jan., 2010.
DEEPAK R. SHAH, A.M.: 31st Dec., 2009
40. I have perused the draft order proposed by my esteemed colleague. In so far as the appeal for asst. yr. 1992-93 is concerned, I am unable to concur with the proposition laid down as regards ground No. 1 (divided into sub-ground Nos. 1.1 to 1.7). As regards other grounds I fully agree with the finding given in relation thereto. Therefore, I proceed to hold as under in relation to ground No. 1 for asst. yr. 1992-93.
40.1 In the draft order proposed by my learned Brother the facts and arguments are elaborately discussed and hence I do not propose to comment upon the same. However, in para 16 of the draft order the proposition is laid down to which I am unable to agree and hence I proceed to hold as under.
41. The facts which are never in dispute are that the assessee was holding certain land as its stock-in-trade. The lands were brought in by the assessee as its capital contribution in a firm when the partnership firm was constituted. The partnership deed was constituted on23rd March, 1992but made effective from16th March, 1992. The cost of the said land in the hands of assessee was Rs. 5.49 crores. At the time of introduction of the said land the market value was determined at Rs. 11.5 crores. The amount credited to the account of partner in the books of firm when the land was contributed was taken as Rs. 11.5 crores. The difference of Rs. 6.01 crores was credited by the assessee to its P&L a/c. The assessee claimed the difference as not exigible to tax, relying on the decision of the Hon'ble Supreme Court in the case of Hind Construction Ltd. The AO treated the difference as chargeable income under the head "Profits and gains of business or profession". Learned CIT(A) also confirmed the same and held in p. 24 of his order as under:
"4. Since the land so transferred represented the stock-in-trade, the profits were chargeable under s. 28 of the Act which stands on a different footing then the gains arising from transfer of a capital or fixed asset."
In light of the above undisputed facts the issue which arises for consideration is whether the surplus credited to the P&L a/c on introduction of the land as its capital contribution, held by the assessee as stock-in-trade is chargeable to tax or not.
42. The question is regarding taxability of the land held by assessee as its stock-in-trade and introduced in the partnership firm as its capital contribution when the assessee became partner of the said firm. The words 'firm', 'partner' and 'partnership' are defined under the IT Act, 1961 (hereinafter referred to as 'the Act') in s. 2(23) of the Act. As per the said definition the words firm, partner and partnership have the meaning respectively assigned to them in the Indian Partnership Act, 1932 and the expression 'partner' shall also include any person who being a minor has been admitted to the benefits of partnership. Therefore, it is clear that the relation of firm and partner are the same as commonly understood under the Partnership Act. The firm is not a separate legal entity but only for the purpose of IT Act it is a separate taxable entity. Therefore, under normal provision the partner and firm are not separate. A person individually is a partner and collectively is called a firm. The firm is not distinct and separate from the partners constituting it. Therefore when any transaction takes place in normal course between a partner and a firm, no new rights are created. The Full Bench of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT made observation as to the right of partner when the partner introduces his assets as its capital contribution in the firm. These observations are elaborately noted in paras 16.30, 16.31, 16.32, 16.33, 16.35, 16.36 and 16.37 of the draft order proposed by my learned Brother. Various propositions laid down by Hon'ble Supreme Court in the said case are also summarized in para 16.38 of the draft order. In para 16.28 of the draft order the effect of introduction of the asset by a partner to a firm in which he become the partner has been summarized as to give following rights accruing in favour of a partner at the time of introduction:
"(i) Right to get his share of profit from time to time during the subsistence of the partnership; and
(ii) On the dissolution of partnership or with his retirement from the partnership, the right to get the value of his shares in the net partnership asset as on the date of dissolution or retirement after deduction of liabilities and prior charges."
42.1 As per the ratio laid down by various Courts including Hon'ble Supreme Court in the case of Sunil Siddharthbhai, the amount credited to the account of partner in the books of the firm and the resultant surplus will not amount to any income accruing or arising to the partner for the reason that:
1. The firm is no separate legal entity than the partners constituting it.
2. The partner is not legally entitled to claim the amount standing to the credit of his capital account as debt due by the firm in favour of the partner.
3. The right is merely to share profits from time to time during subsistence of partnership and only on dissolution or on retirement to get the value of his share in the net partnership asset. Thus it will be incorrect to hold that the amount of Rs. 11.5 crores credited to the account of the partner in the books of the firm is giving rise to any income chargeable to tax in the hands of the partner when he introduced his stock-in-trade as his capital contribution.
42.2 Hon'ble Supreme Court in the case of Sunil Siddharthbhai held that when the assessee, a partner in a firm, made over to the firm certain shares in a company which were held by him as 'capital asset', there was a "transfer" of the shares, but that he received no consideration within the meaning of s. 48. Nor did any profit or gain accrue to him for the purpose of s. 45. To overcome the situation the income-tax was amended whereby sub-s. (3) was inserted in s. 45 of the Act by Finance Act, 1987 w.e.f.1st April, 1988. According to s. 45(3) the profit or gain arising out of the transfer of a 'capital asset' by a person to a firm in which he becomes a partner by way of capital contribution or otherwise shall be chargeable to tax as his income. Sec. 45 is a section to charge the capital gain arising on transfer of a capital asset affected in the previous year. The phrase "capital asset" has been defined in the Act in s. 2(14) of the Act. According to the definition 'capital asset' means property of any kind held by an assessee but does not include any 'stock-in-trade' held for the purpose of his business or profession. Thus when "stock-in-trade" is specifically excluded from the definition of "capital asset" the charging provision of s. 45 and the computation provision contained in s. 48 cannot be applied in relation to stock in-trade. As per s. 2(47) the word "transfer" in relation to a 'capital asset' is defined to include various types of transactions. However, the said definition of transfer is only in relation to a capital asset and since the phrase "capital asset" excludes "stock-in-trade", the definition contained in s. 2(47) cannot be applied to a stock-in-trade. When the profits of business is to be computed under s. 28 of the Act, the income chargeable under the head 'Profits and gains of business or profession' shall be of any business or profession which was carried on by the assessee at any time during the previous year. The business can be carried on by the person either alone or in partnership with other partners. However, when the asset held by the partner individually is introduced by him as its capital contribution, it cannot be said that the assessee has carried on business with the firm in which he became the partner. Therefore, merely because the surplus was credited in the P&L a/c due to introduction of the stock-in-trade in the firm, will not be assessable as 'profits and gains of business or profession'. In the draft order in para 16.24 it has been agreed that the partnership firm as such is genuine. It is also a matter of record that all along the partnership firm has been assessed to tax and it is also found that after the land was contributed by the assessee in the partnership firm as its capital contribution, the said land was developed by the firm and profit was earned by the firm which has been assessed as such. This fact has been reiterated in para 16.25 of the draft order also. Even in para 16.20 of the draft order it has been accepted as under:
"From the material placed on record, we find that the partnership firm so constituted has been assessed to tax as such from year to year by the Department, and the Department has not considered the firm as bogus or sham. Thus, we do not find any material to hold that the very transaction of creating the partnership itself is not genuine but a sham transaction."
If this factual situation prevails then it cannot be said that when the assessee introduced its stock-in-trade as its capital contribution in the firm at the time when it became the partner gives rise to any profit or gains chargeable to tax under the head 'Business income'.
42.3 This proposition has been laid down by Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. While dismissing the civil appeal filed by the Revenue against the order of Hon'ble Calcutta High Court reported in CIT vs. Hind Construction Ltd. (1970) 78 ITR 664 (Cal), Hon'ble Supreme Court held:
"If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold these goods and made profits therefrom. Nor can a person by handing over his goods to a partnership of which he is a partner as his share of capital be considered as having sold the goods to the partnership."
It is also useful to refer the proposition laid down by Hon'ble Calcutta High Court in Hind Construction case wherein after referring to various case laws on the subject it was held:
"In our view, the taxability of a sum as income or profit would depend upon the real character or the substance of the transaction which yields such income or profit. In the instant case, we cannot agree with the contention that any transfer or sale has taken place between the assessee-company and the partnership firm. The transfer or sale is a bilateral transaction and there must be at least two persons, the transferor or the vendor on the one hand and the transferee or the purchaser on the other. In the facts of this case, the assessee-company's share of the machinery was valued originally at Rs. 2,06,745. Before the assets were transferred to the partnership firm, the assessee's share of the machinery was revalued at Rs. 6,06,372 and the said amount was entered in the assessee's books of account before the transfer. Whether this appreciated value is the market value or not, we do not know. The assessee might have increased the value for future advantage. The assessee-company formed a partnership in which the assessee-company had a half share. Whatever interest the assessee had in its own share of the machinery was transferred at the said appreciated value of Rs. 6,06,372 of the assessee's share of the capital in the partnership firm. Thus, the assessee is really investing or depositing its own assets in a partnership firm which was constituted by it and in which it has substantial control. In doing the same, it has only appreciated the value of the machinery. Whether the appreciation of the shares has been done before the transfer or after the transfer, there is no question of any purchase or sale of machinery. Nor can it be said that there was any profit motive in it. A notional or fictional income might have been caused in the records of the company or in the records of the firm. But no real income was received by the assessee. The nature and the character of the transaction is such that it is impossible to believe that there is any question of profit having been received in the accounting year. As a result of the appreciation of the value of the machinery the assessee as a partner in the partnership firm might get a future advantage. But, as the Supreme Court has said in Sir Kikabhai's case, tax cannot be imposed on the future advantage which might be available to the assessee. Further, there is no question of withdrawal of a part of the stock-in-trade, in the instant case, as it took place in Sharkey (Inspector of Taxes) vs. Wernher (1956) AC 58 : (1956) 29 ITR 962 (HL). In fact, in the latter case, reduction of stock-in-trade took place but the original business with its reduced stock-in-trade was carried on by the assessee. In the instant case, the assessee has transferred the entire value of the machinery to the partnership firm with the whole object of increasing the capital of the partnership firm. The assessee has transferred its own property to his partnership account in the firm. The facts and circumstances in which the transaction took place repel the idea of a transfer for consideration or a sale. In the instant case also, the market value of the disposal machinery was not gone into at all. The next point which repels the contention of the Revenue is that there is no question of any transfer or sale in the instant case because the firm is not a juristic person. The partnership has been defined in s. 4 of the Indian Partnership Act, 1932, which reads as follows:
'Partnership is 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. Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm' and the name under which their business is carried on is called the firm name.'
It appears from this definition that a firm cannot be called a separate entity. The same persons who are individually called partners are collectively known as the firm for the purpose of their business. The firm always consists of partners and the partners always are parts of the firm. Procedurally and for limited purpose a firm has been separately described, but in no sense, can a firm be called a juristic entity like a limited company. The name of a firm is the business name of the partners and, thus, when a person in individual capacity transfers his assets to his own firm, it cannot be said that the partner is transferring his assets to a distinct person. We agree with Mr. Pal that a firm may have a character distinct from a partner but such distinction is not because the firm and the partners are different entities. The distinction is for a limited purpose because a firm is only a descriptive name of the business of the partners. To illustrate, ordinarily, a firm comes to an end with the death of a partner, but there may be cases where a firm can continue although the old partners have died and the new partners have joined the firm. That contingency occurs where the terms of the partnership agreement provide that on the death of a partner the firm will not be dissolved. Juristically speaking, a person is one which is capable of rights and duties. In analysing the concept of 'right', it appears that a 'person' is a subject and object of 'right'. Such a 'person' may be natural or legal or artificial. A natural person, like a human being, is a being to whom law attributes personality in accordance with the reality and truth. A legal and artificial person, however, is a persona real or imaginary to whom law attributes personality by way of fiction, when there is none in fact. Thus, natural person is a person in fact as well as in law, whereas a legal or artificial person is a person in law but not in fact. A firm accordingly is neither a natural nor an artificial person. It is not natural, because a firm represents only a relationship or arrangement between persons who carry on business with a view to profit. It is not a living being. If a firm represents individual partners and, as such, is called a natural person, there is a relationship of identity between partners and their firm. Nor can it be called a legal or artificial person because there is no general law by which its personality is recognized. It is suggested that because a firm carries on business in its firm name and because a firm can sue and be sued, under the CPC, it has a distinct personality. Such personality can at best be a matter of procedural law. In substance, the firm name is only the business name of partners. It is allowed to sue and be sued as a matter of procedural law by way of convenience or expediency. It is not a corporate body with the right of perpetual succession nor its existence depends upon substantive law. The creation, continuation and extension of a firm is purely contractual and depends on the agreement between the partners. It is in that sense that Mr. D.N. Pritt in the latest edition of Pollock and Mulla's the Sale of Goods Act and The Partnership Act, 3rd edition, has made the following observations:
'A firm is currently regarded as something distinct from its members; they may have claims on the firm's property but it is not theirs; it has separate accounts, and is their debtor and creditor. Quite possibly some person who is not a member of the firm may have authority to do certain things in its name which some or one of the partners have not. In short, the firm is treated very much as if it were a corporation; it is an artificial or 'moral' person for business purposes......'
Thus, a partnership firm inIndia, although for limited purposes, is an individual or person or an entity, a legal personality cannot be attributed Lo it. In this connection reference may be made to a judgment of the Supreme Court in Dulichand Laxminarayan vs. CIT (1956) 29 ITR 535 (SC) : (1956) SCR 154 (SC), where S.R. Das C.J., after discussing the juristic character of a partnership firm, held that a firm is not an entity or a person ill law but merely a person or individual and a firm name is the collective name of these individuals who constitute the firm. The Judicial Committee also has held in Bhagwanji Morarji Goculdas vs. Alembic Commercial Works (1948) LR 75 IA 147 : AIR 1948 PC 100, that Indian law has not given legal personality to a firm apart from its partners. This view is also supported by another decision of the Supreme Court in CIT vs. A.W. Figgies & Co. & Ors. (1953) 24 ITR 405 (SC) : (1954) SCR 171 James Mackintosh in his book on Roman Law in Modem Practice (Tagore Law Lectures, 1933) at 126, has made the following observations:
'In Scotland and on the continent generally the firm is recognised as a person distinct from the partner; in England it is not and here English and Roman laws are in accord. The latter held the persons engaged in ordinary partnership (societas) or joint adventure are just so many individuals acting together under contract the property they contribute or acquire is their joint property; every debt due to the firm belongs in rateable shares to the various partners, and they are individually liable for the debts owing by the firm.'
Thus, it is obvious that unlike a company where there is perpetual succession a firm, although an entity for a limited purpose, cannot be considered as a juristic person. In the instant case, the assessee has got 50 per cent share in the fund and the other partner, Patel Engineering Co., who also owned the remaining 50 per cent share in the disposal machinery also transferred his share in the partnership capital. Thus, the assessee and Patel Engineering Co. have only transferred their respective interests in the disposal machinery to their own firm. The transfer, if at all, is a transfer to itself or to its own account. We are convinced that the nature of the transaction could at best be described as a readjustment of their assets in such a way that they can do their business in a different way. There is no question of ownership being transferred from one distinct person to another nor was there any consideration received by one individual from the other. Thus, there is no question of the assessee making any profit or gain and, therefore, the mere fact that the assessee transferred its interest to the assessee's firm at an appreciated value does not make the assessee liable to pay tax on the difference between the original price and the appreciated price."
42.4 Under the IT Act what is chargeable to tax is the income accruing to the assessee. The income can be said to have accrued provided the assessee either receives the sum or any legally enforceable right is acquired. Such right should be accruing immediately and should not be inchoate or contingent. The amount credited to the account of the partner is not a debt due by the firm to the partner. The partner cannot legally enforce the claim to receive the amount standing to the credit to his account in the books of the firm. Thus the amount due by the firm to the partner standing to the credit of partner's account whether by way of capital or by way of loan will not be a legally enforceable right in favour of partner against the firm or the other partners constituting such firm. For this purpose the entries made in the books of account of the assessee are not the criteria. This view has been reiterated by various Courts time and again including Supreme Court. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) the Full Bench of Hon'ble Supreme Court observed:
"It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from the receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override s. 56 or any other provision of the Act."
Since the facts admitted are that the land held by the assessee was held as stock-in-trade till it was introduced in the partnership firm and since the said transaction as also the firm so constituted are found to be genuine, by introduction of such stock-in-trade no income accrues to the assessee as chargeable under the head 'Profits and gains of business or profession'.
42.5 The reason given in the draft order for holding that surplus is chargeable to tax as business income is because of:
1. The amount is credited in the P&L a/c of the assessee.
2. The decision of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. applies.
3. The assessee has withdrawn substantial sum from the firm in subsequent years.
42.5.1 As discussed earlier the entries in the books of accounts are not the determinative factor for computation of income under the IT Act. For this proposition, further reliance is placed on following decisions:
(i) Kedarnath Jute Mfg. Co. Ltd. vs. CIT;
(ii) Sutlej Cotton Mills Ltd. vs. CIT;
(iii) United Commercial Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC);
(iv) Karnataka Small Scale Industries Development Corporation Ltd. vs. CIT (2003) 179 CTR (SC) 1 : (2002) 258 ITR 770 (SC).
42.5.2 As regards applicability of decision of Hon'ble Supreme Court in the case of McDowell & Co., the facts in the said case are entirely different than the facts of the present case. In the said case the transaction was found as a colourable device, whereas in the present case the transaction is not found to be a colourable device. The assessee is genuine; the land was held by it as stock-in-trade and is also found to be genuine. The firm constituted wherein the land was brought in as capital contribution is also found to be genuine. Therefore, there is no reason to hold that merely because higher amount was recorded in the capital account of the assessee partner, the transaction becomes a colourable device. On the contrary value of the land as agreed by the partners on the basis of valuation report at the time of formation of the firm was Rs. 11.5 crores. Therefore when identical amount is credited to the account of assessee as partner in the books of account of firm, such transaction cannot be branded as colourable device so as to bring the surplus as chargeable to tax as business income. Therefore the ratio laid down by Hon'ble Supreme Court in the case of McDowell & Co. cannot be applied. Hon'ble Supreme Court itself in its later decision in the case of CWT vs. Arvind Narottam (Indl.) (1988) 72 CTR (SC) 94 : (1988) 1 73 ITR 479 (SC) held:
"9. It is vehemently urged by Dr. Gauri Shanker that the approach to be adopted in this case is not that which finds favour under the income-tax law, and different considerations prevail under the Act. As I am proceeding on the basis of the true construction of the deeds of settlement I fail to see any substance in that contention. Reliance was also placed by the learned counsel for the Revenue on McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). That decision cannot advance the case of the Revenue because the language of the deeds of settlement is plain and admits of no ambiguity."
Justice Mukherjee agreeing with the judgment of Hon'ble Chief Justice further observed:
"2. Dr. V. Gauri Shanker appearing on behalf of the Revenue made an appeal before us stating that we should really construe the three trust deeds together and see 'the game of the hidden purpose' behind these trust deeds which were in fact, for the sole and exclusive benefit of the assessee. He drew our attention to the observations of Justice Chinnappa Reddy, with which other learned Judges of the Full Bench agreed in McDowell & Co. Ltd.'s case. He invited us that having regard to the taxing statute the tax avoidance device should be exposed. Justice Chinnappa Reddy has noticed the change in judicial attitude to the tax avoidance devices. Justice Reddy mentioned that in the country of its birth the principles ofWestminsterof condoning tax avoidance have been given a decent burial. In that very country, the phrase 'tax avoidance' is no longer condoned or looked upon with sympathy.
3. It is true that tax avoidance in any under-developed developing economy should not be encouraged on practical as well as ideological grounds. One would wish, as noted by Reddy, J. that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilization. But the question which many ordinary taxpayers very often in a country of shortages with ostentious consumption and deprivation for the large masses ask is, does he with taxes buy civilization or does he facilitate the wastes and ostentiousness of the few. Unless wastes and ostentiousness in the Government's spending are avoided or eschewed, no amount of moral sermons would change people attitude to tax avoidance.
4. In any event, however, where the true effect on the construction of the deed is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made it has to be noted and rejected. With these observations I agree."
The observation of Hon'ble Supreme Court in McDowell & Co. Ltd. has been further watered down by Hon'ble Supreme Court itself in its later decisions in the case of Union of India vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) : (2003) 132 Taxman 373 (SC) wherein the rule in McDowell case has been explained in following words:
"Far from being exorcised in its country of origin, IRC vs. Duke ofWestminster(1936) AC 1 continues to be alive and kicking inEngland. Interestingly, even in McDowell, though Chinnappa Reddy, J., dismissed the observations of J.C. Shah, J. in CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC) based on Duke of Westminster's case and IRC vs. Fisher's Executors (1926) AC 95, it does not appear that the rest of the Judges of the Constitutional Bench contributed to this radical thinking. The basic assumption made in the judgment of Chinnappa Reddy, J. in McDowell & Co. Ltd.'s case that the principle in Duke of Westminster's case has been departed from subsequently by the House of Lords inEngland, is not correct.One cannot agree with the view that Duke of Westminster's case is dead, or that its ghost has been exorcised inEngland. The House of Lords does not seem to think so, the principle in Duke of Westminster's case is very much alive and kicking in the country of its birth. And as far asIndiais concerned, the observations of Shah, J., in A. Raman & Co. are very much relevant even today. One may usefully refer to the judgment of the Madras High Court in M.V. Valliappan & Ors. vs. CIT (1988) 67 CTR (Mad) 289 : (1988) 170 ITR 238 (Mad) : (1988) 37 Taxman 46 (Mad) which has rightly been read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC vs. Challenge Corpn. Ltd. (1987) 2 WLR 24, and did not have the benefit of the House of Lords's pronouncement in Craven vs. White (1988) : 3 All ER 495, the view taken by the Madras High Court appears to be correct. Not only is the principle in Duke of Westminster's case alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell & Co. Ltd.'s case. In Waman Rao vs. Union of India (1981) 2 SCC 362 and Minerva Mills Ltd. vs. Union of India (1980) 3 SCC 625 the Court considered the import of the word 'device' with reference to Art. 318 which provides that the Acts and Regulations specified in Ninth Schedule shall not be deemed to be void or even to have become void on the ground that they are inconsistent with the fundamental rights. The use of the word 'device' was not pejorative, but to describe a provision of law intended to produce a certain legal result.If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non est based upon some hypothetical assessment of the 'real motive' of the assessee. The Court must deal with what is tangible in an objective manner and cannot afford to chase a will-o'-the-wisp. The judgment of the Privy Council in Bank of Chettinad Ltd. vs. CIT (1940) 8 ITR 522 (PC), wholeheartedly approving the dicta in the passage from the opinion of Lord Russel in Duke of Westminster's case, was the law in India when the Constitution came into force. This was the law in force then, which continued by reason of Art. 372. Unless abrogated by an Act of Parliament, or by a clear pronouncement of the Court, this legal principle would continue to hold good. Having anxiously scanned McDowell & Co. Ltd.'s case, one finds no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad's case. If any, the principle appears to have been reiterated with approval by the Constitutional Bench of the Court in Mathuram Agrawal vs. State ofMadhya Pradesh(1999) 8 SCC 667. Thus, one cannot accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, inIndia, as would entail a departure. From Duke of Westminster's case to Bank of Chettinad's case to Mathuram Agrawal's case, despite the hiccups of McDowell, the law has remained the same.One could not accept the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents."
Therefore, the surplus cannot be brought to tax as business income applying the ratio laid down in the case of McDowell & Co.
42.5.3 Another reason ascribed is that the assessee has withdrawn huge sum from the firm in subsequent years and the figures are noted in para 16.21 of the draft order. From the figures as noted itself, it is clear that till31st March, 1996the assessee has withdrawn only so much of the sum as is even less than the cost of land introduced as its capital contribution. Substantial sum is withdrawn only during financial year relevant to asst. yr. 1997-98. How the amount withdrawn five years after the introduction of capital will determine the nature of transaction as a colourable device in the year when such land was contributed as capital contribution in the firm. What is to be taxed is the income accruing or arising during the year and the transaction cannot be viewed at that point of time on the basis of likely effect five years after the transaction has been effected. Therefore in my humble opinion the withdrawal by the assessee from the firm during the financial year relevant to asst. yr. 1997-98 will not determine the nature of transaction on23rd March, 1992when the land was contributed as capital contribution in the firm in which the assessee became partner.
42.5.4 The 'word of caution' as given by Hon'ble Supreme Court in the case of Sunil Siddharthbhai which has been heavily relied upon in the draft order is in the words of Hon'ble Supreme Court itself in following context as observed in p. 523 of the report as extracted herein:
"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 to the share capital of the firm for the purpose of carrying on the partnership business."
In the present case, the fact, as also the draft order reveal that the firm is genuine and even the transfer by the partner of his asset to the partnership firm is a genuine intention to contribute to the capital of the firm for the purpose of carrying on the partnership business. It is not a case that the land was not contributed in the firm for the intended purpose but merely to walk away with the fund introduced by other partners. On the contrary the land has been developed by the firm by constructing building thereon and also subsequent sale thereof. Therefore, neither the firm is ingenuine nor the transaction of contributing to the capital of the firm is an ingenuine intention. The assessee holding the land can either develop it itself or the land can be developed by the firm in which the assessee is a partner. In both the cases the intended purpose of developing the land by the assessee is carried on and cannot be viewed with suspicion or to hold it as a colourable device.
42.6 After the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai the law as regards charging of capital gain has been amended by introduction of s. 45(3) of the Act. Even the definition of word "transfer" in s. 2(47) of the Act is substituted w.e.f.1st April, 1985but the definition is only in relation to a 'capital asset' and not for 'stock-in-trade'. The definition of 'capital asset' itself excludes the 'stock-in-trade'. In absence of any specific provision in the IT Act to tax such nature of transaction within the ambit of taxation, the tax cannot be imposed merely on the ground of morality. If the charge fails, no words of morality or equity can bring to tax a transaction, as held in the following cases:
(i) CIT vs. Keshavlal Lallubhai Patel;
(ii) Smt. Mohini Thapar vs. CIT;
(iii) CIT vs. C.P. Sarathy Mudaliar.
I therefore hold that the above nature of transaction cannot be considered as chargeable to tax under the head 'Profits and gains of business or profession'.
43. In the draft order it is also held that what was transferred was a capital asset and hence in view of s. 45(3) of the Act the surplus is also taxable under the head 'Capital gains'. In para 16.39 it has been concluded as under:
"In other words, whatever may be the character of the property in the partner's hand before the same is brought in by the partner as capital contribution when a partnership is formed and he becomes a partner, the property brought in partakes the character of a capital asset."
Similarly in para 16.40 it has been concluded that:
"In the present case, when the assessee withdraws some plot of land being part of stock-in-trade for making contribution to a partnership firm as its capital at the time when he became a partner, there is a conversion on withdrawal of stock-in-trade into capital asset in as much as, as already discussed above, the act of contributing personal asset into a partnership firm as its capital when assessee becomes a partner in a firm is a transaction on capital field."
In view of the above finding in the draft order the surplus is treated as capital gain and brought to tax under s. 45(3) of the Act. I am unable to concur with the above finding for the reasons stated below.
43.1 What was transferred was whether a capital asset or stock-in-trade was never the subject-matter of dispute before the authorities below. On the contrary the concurrent finding by the AO and by CIT(A) is that what was introduced by the partner was its stock-in-trade and was charged to tax only under the head 'Profits and gains of business or profession'. Even in the draft order it has been accepted that the land was held by the assessee as its stock-in-trade immediately before it was introduced as its capital contribution in the firm of which it became the partner. It is never demonstrated or claimed by the assessee that such land was ever converted from stock-in-trade to capital asset. When the assessee held the land as stock-in-trade, he could deal with such land either himself alone or in partnership with other partners. The partnership is not a distinct legal entity from the partners constituting it. The assessee chose to deal with the land in partnership. In such a situation the assessee continues to deal with such land as its stock-in-trade only. A partner may contribute his part of capital in any form and bring different nature of assets whether stock-in-trade or capital asset. But in absence of any specific action on the part of assessee to convert such land from stock-in-trade to capital asset, the Tribunal is not competent to change such nature when it was never an issue before it.
43.2 The draft order while holding that it has widest power under s. 254(1) so as to "pass such orders thereon as it thinks fit" fail to notice that the powers are limited by the word 'thereon' contained in s. 254(1) of the Act itself. Appeal on the issues involved has been filed by the assessee only. There is no cross-appeal or cross-objections by the Department. So Department's role is only to defend the orders of AO or for that matter CIT(A). The issue to be decided by the Tribunal should arise from the orders of the authorities below. The assessee cannot be put into any adverse situation at this stage of the appeal as is a settled law on this matter. Various authorities while dealing with the powers of Tribunal, in an appeal before it, have held as under:
Hon'ble Bombay High Court in the case of The Motor Union Insurance Co. Ltd. vs. CIT (1945) 13 ITR 272 (Bom), has held as under:
"The word 'thereon' used in s. 33(4) of the Indian IT Act only means 'on the appeal' which must mean on the grounds raised in the appeal. The sub-section only gives power to the Tribunal to give its decision and pass orders in respect of all grounds urged on behalf of the appellant in respect of the decision appealed against. In deciding those grounds it can pass appropriate orders. But it is not open to the Tribunal itself to raise a ground or permit the party, who has not appealed to raise a ground, which will work adversely to the appellant. The words of the section are not wide enough to include a power to enhancement, without an appeal by the CIT.
Rule 21 of the ITAT Rules, in terms, limits the appellant to the grounds urged in his memorandum of appeal and prescribes that if he wishes to raise any further ground, he has to do so after obtaining the leave of the Tribunal. The provision only says that the Tribunal is not obliged to rest its decision on the grounds urged by the appellant and does not enlarge the powers of the Tribunal to raise grounds of appeal against the appellant. It recognizes the principle that the judgment of the lower Court may be supported on any grounds, even though it is not raised in the memorandum of appeal. That, however, does not allow the Tribunal to suggest another mode of assessment altogether."
Hon'ble Bombay High Court in Indira Balakrishna, Manager of Estate of Balakrishna Purshottam Purani vs. CIT (1956) 30 ITR 320 (Bom), has held as under:
"Held further, that in giving findings and expressing opinions the Tribunal must confine itself to the questions that really arise in the appeal before it, and should not travel outside the ambit of its jurisdiction and express opinions prejudicial to the assessee on matters which do not really arise for decision in the appeal before it, which may help the Department in taking proceedings against the assessee e.g. under s. 34 of the Act."
Hon'ble Bombay High Court in the case of Pokhraj Hirachand vs. CIT (1963) 49 ITR 293 (Bom), has held as under:
"Though the powers of the Tribunal in dealing with an appeal under s. 33 are very wide, they are not absolute. The expression 'thereon' occurring in sub-s. (4) of s. 33 means the 'subject-matter of the appeal'. So s. 33(4) gives power to the Tribunal to consider only the subject-matter of the appeal. The subject-matter of the appeal before the Tribunal is the grounds of appeal raised by the appellant in his memorandum of appeal, the grounds which the Tribunal allows him to raise and the contentions raised by the respondent before the Tribunal in support of the order made by the AAC by challenging the adverse finding against him."
Hon'ble Supreme Court in the case of State ofKeralavs. Vijaya Stores (1979) 116 ITR 15 (SC), has held as under:
"Apart from statute, it is elementary that if a party appeals, he is the party who comes before the Tribunal to redress a grievance alleged by him. If the other side has any grievance, he has a right to file a cross-appeal or cross-objections. But, if no such thing is done, the other party, in law, is deemed to be satisfied with the decision. He is, of course, entitled to support the judgment of the first officer on any ground open to him, but he is not entitled to raise a ground so as to work adversely to the appellant and in his favour."
Hon'ble Mysore High Court in the case of Pathikonda Balasubba Setty (Decd.) vs. CIT (1967) 65 ITR 252 (Mys) held:
"The effect of provision of s. 33(4) of Act 1922 and s. 254(1) of the Act, 1961 the Tribunal's powers were limited to passing such orders as they may think fit on the appeal. The expression 'on the appeal' clearly and indubitably points to the conclusion that the powers of the appellate authority, the Tribunal, are limited to the subject-matter of the appeal. This is necessarily so because every point dealt with by the lower appellate Court, the AAC, need not be the subject of attack before the Tribunal. The interests of the Revenue are sufficiently protected by the extensive powers given to the first appellate authority, the AAC. At that stage, the only appellant would be the assessee, not the Department, although it is entitled to be represented by an officer of the Department in support of the order of the original Court. A mistake, if any, committed by the original authority, which is adverse to the interests of the assessee, will be canvassed by the assessee before the AAC. A mistake, if any, committed by the original assessing authority which is detrimental to the interests of the Revenue is capable of being corrected by the AAC even without an appeal having been presented by the Department. At the next stage of second appeal to the Tribunal, the liberty is given to both the sides to go up in appeal to the Tribunal and when the Tribunal comes to deal with the matter, the law regards it sufficient to leave it to the parties going up as appellants before the Tribunal to limit their attack on the order of the first appellate authority and to seek the intervention of the Tribunal only to the extent necessary to correct the errors in the order of the AAC according to the case of the appellant. It should be noted that in comparison to the sections describing the power of the AAC, the sections which describe the appellate powers of the Tribunal do not make any reference to a power to enhance the assessment or to enhance the tax in the same way as the AAC is empowered to do while dealing with an appeal against the order of the assessing authority. As the appellate power is a power which is conferred by statute, both its existence as well as its extent has to be gathered from the relevant statutory provision. The fundamental idea is that an appellant seeks a relief from an appellate Court, and not detriment to himself. Even under the general provisions of the law of procedure, the worst detriment which an appellate Court may visit on an appellant is to dismiss the appeal with a direction in an appropriate case to pay costs to the opposite side. An order adverse to the interests of the appellant-adverse in the sense that it takes away from him a benefit which he has already acquired under the order appealed from-is possible only by means of an order made either upon a cross-appeal filed by the other side or on the basis of a memorandum of cross-objections presented by him wherever the law permits him to do so."
In light of the above, I am of the opinion that the Tribunal cannot go into the question whether the asset introduced in the firm as capital contribution was a capital asset or not.
43.3 In the draft order it has been held that the land held as stock-in-trade before the same was contributed to a firm as capital has been converted into a capital asset at the time when the same was contributed as a capital contribution to a firm in which the assessee became a partner. There is no basis to hold that the nature of asset changed its colour from 'stock-in-trade' to 'capital asset'. The admitted position by authorities below as also in the draft order is that the land held by the assessee was stock-in-trade immediately before it was introduced as capital contribution. If that be so there is no change in the circumstances or any factors affecting the holding of land. In such circumstances, on introduction of such land as capital contribution do not change its character from stock-in-trade to capital asset. Just as the assessee can hold the land as stock-in-trade and deal with the same either individually, he continues to hold as stock-in-trade in the capacity as partner of the firm. In both the cases the person holding the land can be said to deal with such land only in capacity of trader and not in the form of capital asset. The admitted fact is also that the firm was also treating the land as its stock-in-trade and after the land was developed and sold with building thereon, the profit was also assessed as business income in the hand of firm. Therefore if it is held that the land held by assessee as stock-in-trade before the same was contributed to a firm has been converted into a capital asset, on introduction of same as capital contribution by partner there will be conversion of such land at two points of time i.e., firstly at the time when assessee introduced as capital contribution when the asset gets converted into capital assets and secondly when the firm receives the land and at that point of time is reconverted into stock-in-trade. In absence of any material to hold that that land was at all converted firstly into capital asset and reconverted into stock-in-trade, the finding given in the draft order is contrary to the facts on record.
44. The Tribunal while deciding the question as to whether it has power to change the head of income, the draft order holds that the Tribunal has such power under s. 254(1) and for this purpose reliance is placed on the decision of Special Bench of Tribunal in the case of Sumit Bhattacharya which in turn has relied upon the decision of Hon'ble Bombay High Court in the case of CIT vs. Gilbert & Barkar Manufacturing Co. The issue before the Special Bench was whether the amount received by assessee on realization of 'stock appreciation rights' which was per se income but whether chargeable under the head "Salaries". There was no dispute as to the nature of receipt which was in the form of income. In such a situation having found that when the amount received was income per se, the Tribunal within its power under s. 254(1) may bring it to tax under any head of income. However in the present case it is not an issue regarding change of head of income but issue is regarding whether there was transfer of stock-in-trade or capital asset i.e., nature of asset.
44.1 With regard to the rights of the defendant in appeal before the Tribunal and the scope of powers of the Tribunal, I may refer to the recent decision of the Hon'ble Special Bench, Mumbai in the case of Mahindra & Mahindra Ltd. vs. Dy. CIT (2009) 122 TTJ (Mumbai)(SB) 577 : (2009) 22 DTR (Mumbai)(SB)(Trib) 361. In that case also, the Departmental Representative wanted to set up a totally new case on facts, which required a different finding of fact from what the AO and the CIT(A) have found. The Tribunal in para 19.6 at 635 of the said judgment has held as under:
"After considering the rival submissions and perusing the relevant material on record we find that the AO has undoubtedly examined the provisions of DTAA betweenIndiaandUKfor deciding the taxability or otherwise of the sums paid to the non-resident. The assessee vide its letter dt.6th Feb, 1999, reproduced on p. 9 onwards of the assessment order, categorically stated in para 5.3 that the DTAA betweenIndiaandUKwas applicable. The AO has also not disputed this fact. He has referred to various articles of DTAA betweenIndiaandUKat several places of his order viz. paras 49, 50, 52 and 55 etc. At no stage it has been denied by the AO that DTAA betweenIndiaandUKwas not applicable. In such a situation it is impermissible for the learned Departmental Representative to come out with a submission contrary to the finding of the AO that DTAA withUKwas not relevant as both the lead managers were resident of countries other thanUK. In view of the admission of the AO and the further elaboration of the point in the light of DTAA betweenIndiaandUK, we cannot permit the learned Authorised Representative to take contrary stand from the one taken by the AO. In our considered opinion the learned Departmental Representative has no jurisdiction to go beyond the order passed by the AO or CIT(A). His scope of arguments is confined to supporting or defending the impugned order. He cannot set up an altogether different case. If the learned Departmental Representative is allowed to take up a new contention de hors the view taken by the AO that would mean the learned Authorised Representative (sic-Departmental Representative) is stepping into the shoes of the CIT exercising jurisdiction under s. 263. We, therefore, do not permit the learned Departmental Representative to transgress the boundaries of his arguments. Similar view has been taken by the Jodhpur Bench of the Tribunal in the case of Kwal Pro Exports vs. Asstt. CIT (2007) 109 TTJ (Jd) 869 : (2008) 110 ITD 59 (Jd). This contention is therefore repelled as devoid of any permit."
44.2 I also find that almost similar issue arose before Hon'ble Supreme Court in the case of CIT vs. Ram Kumar Aggarwal & Bros. In the said case the facts as noted by the Hon'ble Supreme Court in paras 2 and 3 are as under:
"2. The assessee is a partnership firm. The accounting year relevant to asst. yr. 1956-57 was the year ending on31st Dec., 1995. The ITO made an assessment on a total income of Rs. 36,41,544 which included a sum of Rs. 32,25,550 representing the surplus which he assessee received during the previous year from the liquidator of Chrestian Mica Co. Ltd. which went into voluntary liquidation in the year 1955. The assessee preferred an appeal to the AAC objecting to the inclusion of the said surplus amount. The appeal was dismissed. But on further appeal, the Tribunal agreed with its contention.
3. The assessee was a regular dealer in shares. In the year 1945, it purchased all the equity shares of Chrestian Mica Co. Ltd. which was then a public limited company. The assessee took over its management. In 1947, the company was converted into a public limited company. For the asst. yr. 1949-50, the assessee claimed a trading loss of Rs. 20,88,735 stated to be the loss suffered on account of depreciation of the value of the shares of the said company. This claim was made on the basis that all the shares of the company were held by it as stock-in-trade. Its claim was allowed by the Tribunal on appeal. In all the subsequent assessments, the said shares were created as its stock-in-trade and value of those shares as claimed by the assessee was adopted. In the assessment proceedings relating to the assessment year concerned herein (1956-57), the assessee admitted that the shares of the said company were held by it as stock-in-trade. On that basis, the said surplus amount received by it from the liquidator was included in its total income by the ITO and the AAC. On appeal, however, there was a difference of opinion between the JM and the AM whereupon the matter was referred to the Vice President. He upheld the assessee's plea. Then followed the reference to the High Court."
The High Court answered the question in favour of assessee. At the instance of Revenue further appeal was filed before Hon'ble Supreme Court and following questions were referred for the opinion of the Hon'ble Supreme Court:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in investigating the nature of the shares held by the assessee in Chrestian Mica Co. Ltd. when both the assessee and the IT authorities had treated them as the stock-in-trade of the assessee as a dealer in share for every assessment year since 1949-50 and proceeded on the same basis for the instant assessment year?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the shares held by assessee in Chrestian Mica Co. Ltd. were not its stock-in-trade for dealing in shares?
(3) If the answer to question (2) be in the negative then whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of rupees thirty two lacs twenty five thousand and five hundred and fifty was not assessable in the hands of the assessee?"
Hon'ble Supreme Court held as under:
"6. Whether shares of a company held by a person constitute his capital or his stock-in-trade, is not a pure question of law but essentially one of fact. While one person may hold the shares of a company by way of investment, the other may hold them as his stock-in-trade. In this case, it is clear beyond any doubt that the assessee has been holding the shares of the aforesaid company as its stock-in-trade. In the earlier years, it claimed a trading loss on the footing that they represented its stock-in-trade. Even in the present assessment proceedings for the asst. yr. 1956-57 (concerned herein), it took the very same stand though at the stage of Tribunal and High Court, it sought to wriggle out of the said admission unsuccessfully. The High Court has held rightly that it cannot do so and that it is bound by its admission and its course of conduct over the past several years. The High Court, it may be recalled, has also rejected its further submission that the said shares ceased to be its stock-in-trade on the conversion of the company from a public private limited company to a public limited company. If so, it follows that if the assessee receives any surplus amount in lieu of the said shares, it must be held to be a revenue receipt in his hands. It cannot be denied that the amount received by the assessee from the liquidator in this case was in lieu of its shareholding. In effect and in truth, the amount received by it represented he recompense for its shares, even though it is true there was no transfer of shares from the assessee to the liquidator or to anyone else. It was a case of return for the money paid by the assessee for acquiring the said shares. In one case, the return may be more than what the holder paid for them while in another it may be less; the character of the receipt remains the same. The High Court has however held in favour of the assessee opining that (i) whatever is received by the shareholder on a liquidation of a company is 'no income of the property but the property itself'; (ii) that whatever is distributed in a liquidation is capital, whatever may have been its source, as held in Brogan vs. Stafford Coal & Iron Co. Ltd. (1963) 41 Tax Cases 305 (HL); (iii) in the course of liquidation of the company the liquidator sells the assets of the company and not the shares of the shareholders; and (iv) where a limited company is liquidated and the liquidator distributes the surplus assets, there is no transaction in the trading sense between the liquidator and the shareholders. By virtue of his holding, a shareholder is entitled to surplus assets on the liquidation of the company and such surplus assets are in the nature of an accretion to the shares held by him. The question is whether the opinion of the High Court is correct in law. We find it difficult to say so. Sec. 511 of the Companies Act applies to every voluntary winding up. It says that 'subject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company'. The concluding words of this section indicate that the assets of a company, on its liquidation, shall be distributed among the shareholders according to their rights and interests in the company which necessarily means according to their shareholding. What each shareholder gets is proportionate to his shareholding in the company. Once the distribution takes place, the shares and the shareholding come to an end. The fact that the shares may technically continue until the name of the company is struck off the register of the company is of little significance. After the distribution of the assets, nothing remains of the shares. To say that the assets a shareholder receives on the liquidation of the company are unrelated to his shareholding is to be blind to the reality. Such an argument ignores the basic reality recognized by s. 511 of the Companies Act. The same comment holds good about the argument that the amount received is an accretion to the shares. It is true that a liquidator does not sell the shares. It is equally true that there is no transfer of shares by the shareholder to the liquidator or to any other person. That is not really necessary. So long as money is received in lieu of shares, there is a receipt and where an assessee is a dealer in shares, any surplus amount received by him constitutes his income. As stated above, where a company goes into liquidation and the liquidator distributes the assets of the company among the shareholders, what each shareholder gets is in lieu of his shareholding. That is the worth, the value and the price of his shareholding. A shareholder participates in the distribution of the assets of a company on its liquidation by virtue of and because of his shareholding. We, therefore, find it difficult to agree with the High Court that a shareholder participates in the distribution of assets on the liquidation of the company de hors his shareholding. Once this is so, it follows that the money received by the assessee in lieu of its shareholding partakes the same character in which he held the shares. If he held the shares as stock-in-trade, the money received by it represents his income, i.e., a revenue receipt in its hands. If it held them by way of investment, the money it receives represents a capital receipt by it."
In the concluding para Hon'ble Supreme Court set aside the judgment of the High Court and answered all the three questions referred in the negative i.e., in favour of Revenue and against the assessee.
44.3 What follows from the above decision of Hon'ble Supreme Court is that when both the assessee and the IT authorities had treated the nature of shares held by assessee as stock-in-trade and proceeded on the same basis for the relevant assessment year, the Tribunal was not justified in investigating the nature of the shares held by the assessee so as to hold the same as not part of stock-in-trade. Thus it was concluded that the admitted position of the nature of asset between the assessee and the Revenue authorities cannot be allowed to be changed by the Tribunal in view of the plea raised before it. Applying the same principle in the present case also since there is no dispute between the assessee and the Revenue regarding nature of asset being stock-in-trade, the Tribunal is not called upon to give a finding as to whether such asset was at all converted to capital asset and whether such land is part of capital asset or not.
44.4 There is a difference between changing the head of income in respect of receipts which are income per se and changing the nature of asset itself. While the receipt which is income per se may be brought to tax under a different head, the Tribunal will exceed its jurisdiction if it decides the nature of asset itself in a dispute raised for the first time at the instance of respondent. The counsel for the respondent represents the AO and hence his role is confined to the dispute before the AO and the counsel for the respondent cannot for the first time raise a fresh issue before the Tribunal which is not a subject-matter of dispute.
Sec. 254(1) of the IT Act reads as under:
"Sec. 254(1) The Appellate Tribunal may, after giving both the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit."
The powers of the Tribunal are in the widest terms. The only restriction on the powers of the Hon'ble Tribunal is contained in the word "thereon". The word 'thereon' has been interpreted to mean the subject-matter of the controversy before the Tribunal [Ref: Hukumchand Mills Ltd. vs. CIT at pp. 236-237]. The Tribunal can deal with only that part of the order of the first appellate authority which has been made the subject-matter of attack in the appeal before it. It is not open to the Tribunal to adjudicate or give a finding on a question which is not in dispute and which does not form the subject-matter of the appeal before it as held in Indira Balakrishna vs. CIT, affirmed, CIT vs. Indira Balakrishna (1960) 39 ITR 546 (SC), M.R.M. Periannan Chettiar vs. CIT (1960) 39 ITR 159 (Mad), V. Ramaswamy Iyengar & Anr. vs. CIT (1960) 40 ITR 377 (Mad), Pokhraj Hirachand vs. CIT, J.B. Greaves vs. CIT (1963) 49 ITR 107 (Bom), Pathikonda Balasubba Setty (Decd.) vs. CIT, P.R. Mukherjee vs. CIT (1979) 116 ITR 554 (Cal). On the same reasoning, where the controversy is precisely limited to a narrower compass, the Tribunal is not competent to so widen it as to traverse beyond the subject-matter which was to dispute before the IT authorities [R.L. Rajgharia vs. ITO (1977) 107 ITR 347 (Cal), affirmed in ITO vs. R.L. Rajgharia 1978 CTR (Cal) 123 : (1979) 119 ITR 872 (Cal)].
The Tribunal can decide only issues which were the subject-matter of the appeal before the first appellate authority. An additional plea which altogether changes the complexion of the case as originally brought before the first appellate authority and the Tribunal in second appeal cannot be permitted to be raised at the stage of hearing of the Tribunal appeal as held in Indian Steel & Wire Products Ltd. vs. CIT (1994) 121 CTR (Cal) 335 : (1994) 208 ITR 740, 743 (Cal). The Supreme Court in the case of CIT vs. Manick Sons (1969) 74 ITR 1, 5 (SC) held as under:
"The undertaking must therefore be ignored. Under s. 33(4) of the Indian IT Act, 1922, the Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power conferred by that sub-section is wide, but it is still a judicial power which must be exercised in respect of matters that arise in the appeal and according to law. The Tribunal in deciding an appeal before it must deal with questions of law and fact which arise out of the order of assessment made by the ITO and the order of the AAC. It cannot assume powers which are inconsistent with the express provisions of the Act or its scheme."
It can, therefore, be concluded that the Tribunal cannot decide an issue which does not arise out of the orders of the appellate authorities below. In this case, both the AO and the CIT(A) have held that the asset contributed by the appellant to the partnership firm was stock-in-trade and the assets continued to be held as stock-in-trade in the partnership firm. There is no difference of opinion between the authorities below on this issue and a finding of fact recorded by both the authorities below is not under challenge in the appeal filed before the Tribunal by the appellant or the Revenue. I therefore, hold that-
(a) The nature of asset when contributed by assessee was and continued to remain as stock-in-trade only and was neither intended to be converted as capital asset nor there is any material on record to hold that the asset contributed was capital asset.
(b) Since there was never a dispute between assessee and Revenue authorities regarding nature of asset of land being stock-in-trade, the Tribunal cannot go into the question whether the asset contributed was capital asset or not.
45. In the draft order it is proposed that primarily the surplus is chargeable to tax under the head 'Capital gains' and also held that in the situation that it is not chargeable as capital gain, it is taxable as business income also. This is so opined in sub-para (xii) of para 16.49 wherein the conclusion is arrived at. The Tribunal is a final authority on the finding of facts. The Tribunal is not an assessing authority but an appellate authority. Therefore, the Tribunal is required to give a finding of facts finally and not to give an alternative finding. This will be against the basic law giving power to the Tribunal to decide as final fact-finding authority. In the draft order before deciding regarding head of income, in the concluding portion of para 16.47 of the draft order it has been held:
"This question whether the land in question was a capital asset or stock-in-trade in nature at the time when the same was contributed by the assessee to a partnership firm as its capital contribution when the assessee became a partner in that firm, is not one of fact though it is dependent on the facts and the circumstances of the present case, the question does involve conclusions of law to be drawn from those facts. We, therefore, do no find any force or merit in the contention of the learned counsel for the assessee that the facts admitted by the Revenue authorities below are now being changed."
The aforesaid finding is contrary to the ruling of Hon'ble Supreme Court in the case of CIT vs. Ram Kumar Aggarwal & Bros. wherein at para 6 of the decision it was held:
"Whether shares of a company held by a person constitute his capital or his stock-in-trade, is not a pure question of law but essentially one of fact."
45.1 I therefore hold that the Tribunal should have restricted itself to the controversy as raised by the appellant and to give a finding only to the extent whether the surplus realized on introduction of land being held by it as stock-in-trade in the form of its capital contribution was chargeable as business income or not. Since I have earlier held that such introduction do not amount to giving rise to business income as no legal right is accruing in favour of assessee because of the credit to the account of partner by the firm, no income can be brought to tax. The law laid down by Hon'ble Supreme Court in the case of Hind Construction Ltd. and the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai are squarely applicable. Since the land was always held as stock-in-trade, which continued to be stock-in-trade even at the time of introduction and subsequently by the firm also, s. 45(3) which is applicable in respect of the capital asset cannot be applied to the stock-in-trade held by the assessee and introduced as capital contribution.
46. The issue which arises in appeal for asst. yr. 1992-93 in relation to ground No. 1 also arises in appeals for asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01. The discussion in relation thereto in the draft order is tabulated below:
-----------------------------------------------
Asst yr. Ground No. Para No. of draft order
-----------------------------------------------
1997-98 4 27 to 27.4
-----------------------------------------------
1998-99 4 30 to 30.6
-----------------------------------------------
1999-2000 2 33 to 33.5
-----------------------------------------------
2000-01 3 37 to 37.4
-----------------------------------------------
46.1 In relation to other grounds in appeals for asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01. I am in complete agreement with the view in the draft order. However, I am unable to agree in relation to issue regarding taxability of surplus arising on introduction of land into partnership firm as capital contribution by the assessee as discussed in table referred above.
47. For all these years it has been held that in view of the finding given in para 16 of the draft order pertaining to asst. yr. 1992-93 is being followed and since I am unable to concur with finding given in para 16 of the draft order and in respect of which I have proposed a separate order, my finding for all these years in relation to the above-referred issue will be the same. Therefore, in view of my finding given for asst. yr. 1992-93, the surplus is not chargeable to tax.
47.1 For asst. yrs. 1997-98 to 2000-01, there is one more aspect. In relation to asst. yr. 1997-98 in para 27.4 of the draft order, reference is made to ss. 13(c) and 13(d) as also to ss. 48(b)(ii) and 48 (b)(iii) of the Indian Partnership Act, 1932 to hold that the advance by partner is distinct from capital and is placed on better footing than the capital contributed by the partner for the purpose of partner's right to receive interest thereupon and to realize or recover the advance distinguished from capital. Sec. 13 of the Partnership Act is extracted herein:
"13. Subject to contract between the partners-
(a) .................
(b) .................;
(c) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits;
(d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent per annum;
(c) ................."
47.2 As per s. 13(c), subject to the contract between the partners, a partner is entitled to interest on the capital subscribed by him and such interest is payable only out of profits. Similarly as per s. 13(d) a partner is also entitled to interest if so agreed on the advance beyond the amount of capital he has agreed to subscribe. However, in both the cases the amount contributed by partner whether by way of capital or by way of advance do not partake the character of debt due by firm to the partner. Sec. 13 only regulates only relation of the partner inter se. Section starts with the words "subject to the contract between the partners" i.e., if the partners agree amongst themselves, a partner is entitled to interest on the capital as also on the advance beyond the amount of capital. However, in either case, it does not amount to a debt by the firm to the partner and in the event of dissolution the firm is not obliged to pay such sum to the partner. This proposition will be clear on reading s. 48 of the Partnership Act as extracted herein:
"48. In setting the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners be observed-
(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.
(b) the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;
(iii) in paying to each partner rateably what is due to him on account of capital; and
(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits."
47.3 Sec. 48 of the Partnership Act provides for the manner in which the accounts of the partners are to be settled after dissolution. Sec. 48 sets out priority in order of which the partnership assets are to be distributed. Firstly, it goes to pay the losses. Next it goes to pay the debts to the third parties. Only after the debts are paid to third parties, the priority will be first accorded to the advances given by the partner over and above his share of capital. Therefore, if there are no assets left after paying of the losses and debts to the third party, a partner will not receive any amount either towards his capital or towards advance given over and above his capital. In either case it is not debt due by the firm to the partner which is like debt due to third parties. Therefore, merely because part of the value of land brought in as capital contribution is treated as loan over and above the capital agreed upon, it will not have an effect of creating a right in favour of assessee at the time of entering into partnership to receive such sum so as to treat the surplus as income accruing in favour of the partner.
47.4 It is also to be noted that in these years there is no finding that any amount was withdrawn by the assessee from the firm even though the accounts of the firm record the capital of the assessee as brought in. On the contrary, the facts remain that after introduction of land held as stock-in-trade as capital contribution, no part of the amount credited to capital account has been withdrawn till date. Therefore, the situation in this year is distinct than the situation prevailing for asst. yr. 1992-93 which has been extensively discussed in para 16.21 of the draft order and heavily relied upon to hold that the transaction is a colourable device. Thus even the "word of caution" as found in the case of Sunil Siddharthbhai case is not applicable in all these years which is heavily relied upon to hold the introduction of capital as colourable device and for applying the ratio of McDowell case. This factual situation is absent in relation to appeal for asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01. Therefore even the finding for 1992-93 given in para 16 of the draft order will not apply in relation to other years as the factual situation differs materially. In view of above discussion, the surplus is not chargeable to tax for asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01. Accordingly grounds raised in this regard as tabulated above are allowed and are decided in favour of the assessee.
------------------------------------------------------------------
Sl. Name of partnership firm Date of Relevant
No. partnership Asst. yr.
------------------------------------------------------------------
1. DLF Commercial Developers 16-3-1992 1992-93
------------------------------------------------------------------
Total
------------------------------------------------------------------
2. Real Estate Builders 31-1-1997 1997-98
------------------------------------------------------------------
Total
------------------------------------------------------------------
3A DLF Office Developers 24-2-1998 1998-99
------------------------------------------------------------------
Total
------------------------------------------------------------------
3B DLF Property Developers 24-2-1998 1998-99
------------------------------------------------------------------
Total
------------------------------------------------------------------
4A DLF City Centre 4-3-1999 1999-2000
------------------------------------------------------------------
Total
------------------------------------------------------------------
4B DLF Golf Housing (now known 21-12-1998 1999-2000
as : DLF Residential Builders)
------------------------------------------------------------------
Total
------------------------------------------------------------------
4C DLF Home Builders 2-9-1998 1999-2000
------------------------------------------------------------------
Total
------------------------------------------------------------------
4D DLF Residential Developers 30-6-1998 1999-2000
------------------------------------------------------------------
Total
------------------------------------------------------------------
4E DLF Residential Partners 2-9-1998 1999-2000
------------------------------------------------------------------
Total
------------------------------------------------------------------
5. DLF Phase-IV Commercial 10-6-1999 2000-01
Developers
------------------------------------------------------------------
Total
------------------------------------------------------------------
Table Continues...
------------------------------------------------------------------
Name of partners Land contributed Amount treated
as capital
contribution
------------------------
Area Value
------------------------------------------------------------------
DLF Universal Ltd. 16.98 11,50,00,000 11,50,00,000
(Acres)
Apollo Land & Housing 1,00,000
Co. Ltd.
Moonlight Builders & 1,00,000
Developers Ltd.
Sunrise Land & Housing 1,00,000
Co. Ltd.
DLF Builders & 1,00,000
Developers Ltd.
Mr. Rajinder Singh 50,000
------------------------------------------------------------------
16.98 11,50,00,000 11,54,50,000
------------------------------------------------------------------
DLF Universal Ltd. 33,212.12 21,15,00,000 20,00,000
Kavicon Agro Farming 823.90 8,04,565 2,00,000
Co. (P) Ltd.
Instant Batteries Ltd. 1,733.38 6,27,047 2,00,000
Vee Dee Investment & 560.00 1,11,752 2,00,000
Agencies
Apollo Land & Housing 140.00 (sq. 22,697 2,00,000
Co. Ltd. mtrs.)
Aeshya Estates (P) Ltd. 9,00,000
Diwakar Estates (P) Ltd. 9,00,000
Pushpavali Builders & 9,00,000
Developers (P) Ltd.
Ujagar Estates (P) Ltd. 9,00,000
Vanutsar Properties (P) 9,00,000
Ltd.
Parvati Estates (P) Ltd. 9,00,000
Panchvati Estates (P) Ltd. 9,00,000
Kirtimaan Builders (P) 9,00,000
Ltd.
------------------------------------------------------------------
36,469.40 21,30,66,061 1,00,00,000
------------------------------------------------------------------
DLF Universal Ltd. 1.15 3,70,00,000 12,00,000
Developers
Aeshya Estates (P) Ltd. (Acres) 11,00,000
Diwakar Estates (P) Ltd. 11,00,000
Ujagar Estates (P) Ltd. 11,00,000
Pushpavali Builders & 11,00,000
Developers (P) Ltd.
Vanutsar Properties (P) 11,00,000
Ltd.
Parvati Estates (P) Ltd. 11,00,000
Panchvati Estates (P) Ltd. 11,00,000
Kirtimaan Builders (P) 11,00,000
Ltd.
------------------------------------------------------------------
1.15 3,70,00,000 1,00,00,000
------------------------------------------------------------------
DLF Universal Ltd. 4,613.17 17,75,00,000 1,00,000
Developers
Anurag Construction Co. 4,059.84 11,35,222 1,00,000
Ltd.
Apollo Land & Housing 1,167.48 1,95,711 1,00,000
Co. Ltd.
Delhi Land & Finance 2,810.53 18,64,002 1,00,000
Ltd.
DLF Housing & 2,581.51 4,90,767 1,00,000
Construction Ltd.
Instant Batteries Ltd. 2,634.34 9,62,929 1,00,000
Kavicon Agro Farming 2,461.27 24,45,627 1,00,000
Co. (P) Ltd.
Paragon Real Estates 10,275.40 21,11,693 1,00,000
& Apartments Ltd.
Vee Dee Investment & 542.22 (sq. 1,10,472 1,00,000
Agencies Ltd. mtrs.)
Aeshya Estates (P) Ltd. 10,00,000
Diwakar Estates (P) Ltd. 10,00,000
Ujagar Estates (P) Ltd. 10,00,000
Pushpavali Builders & 10,00,000
Developers (P) Ltd.
Vanutsar Properties (P) 10,00,000
Ltd.
Parvati Estates (P) Ltd. 10,00,000
Panchvati Estates (P) Ltd. 10,00,000
Kirtimaan Builders (P) 10,00,000
Ltd.
------------------------------------------------------------------
31,145.76 18,68,16,423 1,00,00,000
------------------------------------------------------------------
DLF Universal Ltd. 32.87 20,00,00,000 1,50,00,000
Apollo Land & Housing 1,42,51,374 20,00,000
Co. Ltd.
Delhi Land & Finance 24,95,494 20,00,000
Ltd.
Vee Dee Investment & 16,58,000 16,58,000
Agencies Ltd.
Aeshya Estates (P) Ltd. 19,00,00,000
------------------------------------------------------------------
32.87 21,84,04,868 21,06,58,000
------------------------------------------------------------------
DLF Universal Ltd. 25,543.17 14,25,00,000 2,00,00,000
(sq. mtrs.)
Madhur Cultivations Ltd. 76,82,114 15,00,000
Renkon Estates & Farms 14,44,622 14,44,622
Ltd.
Vidhur Cultivations Ltd. 3,05,522 3,05,522
Aravali Cultivations Ltd. 59,185 59,185
Kum Kum Cultivations (P) 4,58,197 4,58,197
Ltd.
Queensdale Cultivations 2,01,932 2,01,932
(P) Ltd.
Manavsthali Estates (P) 5,11,252 5,11,252
Ltd.
Swastha Builders (P) Ltd. 4,90,997 4,90,997
Aeshya Estates (P) Ltd. 15,00,000
Diwakar Estates (P) Ltd. 15,00,000
Ujagar Estates (P) Ltd. 15,00,000
Pushpavali Builders & 15,00,000
Developers (P) Ltd.
Vanutsar Properties (P) 15,00,000
Ltd.
Parvati Estates (P) Ltd. 15,00,000
Panchvati Estates (P) Ltd. 15,00,000
Kirtimaan Builders (P) 15,00,000
Ltd.
Moonlight Builders & 11,00,00,000
Developers Ltd.
------------------------------------------------------------------
25,543.17 15,36,53,821 14,69,71,707
------------------------------------------------------------------
DLF Universal Ltd. 24,950.58 13,45,00,000 2,00,00,000
(sq. mtrs.)
DLF Engineering Projects 62,72,364 45,00,000
Ltd.
DLF Industrial Finance & 27,29,919 27,29,919
Leasing Co. Ltd.
DLF Housing Finance Ltd. 32,21,008 32,21,008
Kavicon Agro Farming Co. 31,48,602 31,48,602
(P) Ltd.
Realest Builders & 11,50,00,000
Services Ltd.
------------------------------------------------------------------
24,950.58 14,98,71,893 14,85,99,529
------------------------------------------------------------------
DLF Universal Ltd. 26,885.34 15,05,00,000 2,00,00,000
Developers (sq. mtrs.)
Vee Dee Investment & 1,01,6916 16,00,000
Agencies Ltd.
Delhi Land & Finance 5,01,896 16,00,000
Ltd.
Instant Batteries Ltd. 19,26,470 16,00,000
Apollo Land & Housing 2,85,953 16,00,000
Co. Ltd.
Kavicon Agro Fanning Co. 33,11,981 16,00,000
(P) Ltd.
Mayur Recreational & 4,94,084 16,00,000
Development Ltd.
Bhagirathi Investment 29,98,962 16,00,000
(P) Ltd.
Moonlight Builders & 10,80,00,000
Developers Ltd.
Aeshya Estates (P) Ltd. 32,00,000
Diwakar Estates (P) Ltd. 32,00,000
Ujagar Estates (P) Ltd. 32,00,000
Pushpavali Builders & 32,00,000
Developers (P) Ltd.
Vanutsar Properties (P) 32,00,000
Ltd.
Parvati Estates (P) Ltd. 32,00,000
Panchvati Estates (P) Ltd. 32,00,000
Kirtimaan Builders (P) 32,00,000
Ltd.
------------------------------------------------------------------
26,885.34 16,10,36,262 16,48,00,000
------------------------------------------------------------------
DLF Universal Ltd. 26,806.13 15,80,00,000 2,00,00,000
Partners
Vee Dee Investment & 77,405 18,00,000
Agencies Ltd.
Delhi Land & Finance 1,45,75,288 18,00,000
Ltd.
Landsdale Estates (P) 63,02,405 18,00,000
Ltd.
Instant Batteries Ltd. 3,51,200 18,00,000
DLF General Finance Ltd. 2,51,856 18,00,000
Anurag Construction Co. 7,18,606 18,00,000
Ltd.
Apollo Land & Housing 84,477 18,00,000
Co. Ltd.
Kavicon Agro Farming Co. 53,96,284 18,00,000
(P) Ltd.
DLF Industrial Finance 1,55,772 18,00,000
& Leasing Co. Ltd.
Paragon Real Estates & 4,25,993 18,00,000
Apartments Ltd.
DLF Housing & 1,13,933 18,00,000
Construction Ltd.
DLF Housing Finance 2,10,040 18,00,000
Ltd.
Mayur Recreational & 3,08,079 18,00,000
Development Ltd.
Bhagirathi Investment 73,42,713 18,00,000
(P) Ltd.
Sunrise Land & Housing 14,00,00,000
Ltd.
------------------------------------------------------------------
26,806.13 18,12,14,051 18,52,00,000
------------------------------------------------------------------
DLF Universal Ltd. 0.68 8,00,00,000 75,00,000
(Acres)
Diwakar Estates (P) Ltd. 7,00,00.000
DLF Finance Services Ltd. 22,00,000
------------------------------------------------------------------
0.68 8,00,00,000 7,97,00,000
------------------------------------------------------------------
Table Continues...
------------------------------------------------------------------
Profit sharing Amount treated as Whether loan treated? If
ratio loan yes, whether interest
bearing or non-interest
bearing
------------------------------------------------------------------
76 - No
5
5
5
5
4
------------------------------------------------------------------
100
------------------------------------------------------------------
20 20,95,00,000 Yes, Non-interest bearing
2 6,04,565 "
2 4,27,047
2
2
9
9
9
9
9
9
9
9
------------------------------------------------------------------
100 21,05,31,612
------------------------------------------------------------------
12 3,58,00,000 Yes, Non-interest bearing
11
11
11
11
11
11
11
11
------------------------------------------------------------------
100 3,58,00,000
------------------------------------------------------------------
1 17,63,00,000 Yes, Non-interest bearing
1 10,35,222 "
1 95,711 "
1 17,64,002 "
1 3,90,767 "
1 8,62,929 "
1 23,45,627 "
1 20,11,693 "
1 10,472 "
10
10
10
10
10
10
10
------------------------------------------------------------------
100 18,48,16,423
------------------------------------------------------------------
11 18,50,00,000 Yes, Non-interest bearing
3 12,25,51,374
3 4,95,494
3
80
------------------------------------------------------------------
100 19,77,46,868
------------------------------------------------------------------
12 12,25,00,000 Yes, Non-interest bearing
1 61,82,114
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
72
------------------------------------------------------------------
100 12,86,82,114
------------------------------------------------------------------
13 11,45,00,000 Yes, Non-interest bearing
3 17,72,364
3
3
3
75
------------------------------------------------------------------
100 11,62,72,364
------------------------------------------------------------------
12 13,05,00,000 Yes, Non-interest bearing
1
1
1 3,26,470 Yes, Non-interest bearing
1
1 17,11,981 Yes, Non-interest bearing
1
1 13,98,962 Yes, Non-interest bearing
65
2
2
2
2
2
2
2
2
------------------------------------------------------------------
100 13,39,37,413
------------------------------------------------------------------
11 13,80,00,000 Yes, Non-interest bearing
1
1
1 45,02,405 Yes, Non-interest bearing
1
1
1
1
1 35,96,284 Yes, Non-interest bearing
1
1
1
1
1
1 55,42,713 "
75
------------------------------------------------------------------
100 15,16,41,402
------------------------------------------------------------------
14 7,25,00,000 Yes, Non-interest bearing
80
6
------------------------------------------------------------------
100 7,25,00,000
------------------------------------------------------------------
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