Bombay High Court
Smt. Nayantara G. Agrawal vs Commissioner Of Income-Tax on 26 August, 1993
Equivalent citations: [1994]207ITR639(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee, the Income-tax Appellate Tribunal has referred the following questions to this court for opinion.
"(1) Whether, on the facts and the circumstances of the case, can it be said that the firm was genuine ?
(2) Whether, on the facts and the circumstances of the case, when there were only two parties to the agreement, on the 'retirement' of one of the partners, is the firm dissolved ?
(3) Whether, on the facts and the circumstances of the case, on retirement of the assessee, her right in the land which was brought in as an asset got extinguished within the meaning of section 2(47) of the Income-tax Act ?
(4) Whether, on the facts and the circumstances of the case, without any other material on record except the affidavit dated March 13, 1972, can it be said that the assessee was doing business in buying and selling land ?
Additional question :
(5) If it is held that the firm is genuine, whether on the facts and in the circumstances of the case the sum of Rs. 9,92,504 or any part thereof received by the applicant on the dissolution of or retirement from the firm is liable to tax as capital gains ?"
2. The facts of this case, relevant for the determination of the controversy before us, briefly stated, are as under :
The assessee is an "individual". She is the wife of Sri G. N. Agarwal, who was the karta of his Hindu undivided family. Certain land was gifted to her by her husband, Sri G. N. Agarwal, by a gift deed dated March 21, 1963. This gift was made by Sri G. N. Agarwal in his capacity as a karta of the Hindu undivided family "Messrs. G. N. Agarwal". The validity of the above gift was challenged by the Revenue. The matter went up to the High Court. The High Court held the gift to be invalid. There was, however, a partial partition of the Hindu undivided family later and the property in question came to be allotted to the assessee. The land was held by the assessee as an owner since then. On March 13, 1972, the assessee made an affidavit stating therein that she had started the business of dealing in purchase and sale of land and real estate and has converted the land in question into stock-in-trade of that business and the value of the same for that purpose was Rs. 10 lakhs. There is nothing more on record except the above affidavit to indicate that the assessee, in fact, carried on any business of dealing in lands or real estate. On January 1, 1973, the assessee entered into a partnership with a company, Messrs. Agrawal Minerals (Goa) Pvt. Ltd., of which the assessee herself was also a director. The said firm was also to carry on the business of sale and purchase of lands. The assessee had a 50 per cent. share in the said firm and other 50 per cent. share belonged to the limited company. In terms of the deed of partnership, the assessee brought in the said land as her share of capital contribution in the partnership firm which was valued at Rs. 10,00,000. At that time, the other party did not bring in any capital but it was agreed that it might contribute capital as and when required. Such an occasion, however, did not arise. Though the above firm was to carry on the business of sale and purchase of land, no dealings inland were conducted by the said firm. On the other hand, within three months of its formation, on March 28, 1973, the assessee expressed her desire not to continue as a partner and accordingly, she retired and the firm was dissolved. The assets were shared. The land was retained by the limited company and the assessee got shares worth 10 lakhs of rupees. The Income-tax Officer held that there was no genuine partnership and the transaction was sham and the assessee had received the value of her land. The income-tax Officer, therefore, held it to be a transaction of transfer of land which would be subject to capital gains tax under section 45 of the Income-tax Act, 1961, and worked out the capital gains accordingly.
3. The Appellate Assistant Commissioner held the firm to be genuine. The Revenue filed an appeal to the Income-tax appellate Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal did not agree with the Appellate Assistant Commissioner and considering the entirety of the facts and Circumstances of the case held that the firm was not genuine. While arriving at this finding, the Tribunal took into consideration the fact that the so-called agreement of partnership was between the assessee and the company in which the husband of the assessee was a director and thereby land worth Rs. 10 lakhs was transferred by the assessee. It was also noticed that the contribution of the company in the partnership was practically nil. The Tribunal also observed that there was nothing on record, except the affidavit of the assessee herself, to show that she had converted the land into stock-in-trade or that she was carrying on any business of dealings in land. The Tribunal did not feel inclined to act on such an affidavit of the assessee without any material whatsoever to support the statement made therein. Considering all the facts and circumstances of the case, the tribunal came to a definite finding that the assessee had transferred the land to the company for Rs. 10 lakhs for which she received the amount of consideration in the form of shares. According to the Tribunal, in view of the definition of "transfer" as given in section 2(47) of the Act, the fact that the transfer took place without a formal deed of conveyance was of no consequence. Hence this reference at the instance of the assessee.
4. Mr. Pardiwalla, learned counsel for the assessee, submits that the findings of the Tribunal are not based on facts and, as such, not tenable. We have carefully considered the submission. However, in view of the clear facts of the case set out above, we find it difficult to accept the same. The Tribunal has considered the conduct of the assessee and the entire transaction and the deed which is evident from the following facts set out in its order :
"The agreement was between the assessee and the company in which the husband was a director. By the agreement dated January 1, 1973, the assessee brought in land worth Rs. 10 lakhs whereas the contribution of the other party was practically nil.
Clause 6 is very relevant which reads as under :
'The party of the second part shall bring in by way of its capital such sum of money as may be mutually agreed by and between the parties hereto.' There is nothing on record to show the second party brought any amount as its capital.
Clause 15 is very important in the sense that a party desiring to retire shall give three months' notice in writing.
It is strange that the assessee did not give notice regarding her intention to retire but curiously enough, the alleged firm was dissolved on March 28, 1973, i.e., the life of the firm was less than three months.
It may be mentioned that by a resolution dated December 30, 1972, the chairman explained to the board the offer made by Smt. N. G. Agarwal, a director of the company to do business in partnership dealing in land with equal sharing of profit and loss between herself and the company."
5. After discussion a resolution was passed to that effect.
6. On March 28, 1973, the chairman informed the board the desire of Smt. N. G. Agarwal to retire from the partnership and the chairman further informed that it should be accepted and a resolution was passed to the effect that Nayantara Agrawal was allowed to retire from the partnership firm and that Shri Purushottam R. Kejriwal was allowed to sign the deed of dissolution. It may be clarified that the chairman, G. N. Agarwal, is the husband of the assessee and Kejriwal is the brother of the assessee. Shri Purushottam R. Kejriwal has admitted the execution of "the so-called deed of dissolution".
7. It may further be mentioned that before the actual execution of the "dissolution deed" (if any) the assessee was already paid. The preamble to the indenture clearly states so. Moreover, the assessee was not given cash but shares worth Rs. 10 lakhs.
8. There is a letter dated January 2, 1975, addressed by the company to the head of the taluka office that the company became the successors to the partnership firm and that the company is the sale proprietor of the lands."
9. The Tribunal further observed :
"The above facts and circumstances go to show that the assessee transferred her land to the company for Rs. 10 lakhs though she received the amount in the form of shares and the assessee transferred the land without a deed of conveyance."
10. It was held :
"We agree with the departmental representative that by bringing in land as her share capital and later the assessee's retirement means that her right in the land is extinguished. It cannot be said, considering the material before us, that the assessee is still the owner of the land. The modus operandi adopted by the assessee is undoubtedly intelligent but it does not help her to get away from chargeability of capital gain."
11. On consideration of the facts and circumstances of the case, we find that the Tribunal was fully justified in coming to the above conclusion that the firm in question was not genuine and that the interest in the land got extinguished at least on March 28, 1973, when the so-called deed of partnership came to a end by the deed of dissolution and it became the property of the other partners, i.e., the company, for a consideration of Rs. 10 lakhs which was paid to the assessee in the form of shares.
12. In that view of the matter, we do not find that the Tribunal committed any error in not acting upon the affidavit of the assessee dated March 13, 1972, which evidently is not supported by any material whatsoever. We are of the clear opinion that the tribunal was right in holding that the firm was not genuine and that there was a transfer of capital asset from the assessee to the limited company within the meaning of section 2(47) of the Act which was subject to capital gains tax under section 45 of the Act. It may be appropriate to mention that the facts set out above clearly go to show that the various transactions including the creation of the partnership, transfer of land to the firm by way of capital contribution of the assessee and dissolution of the partnership were, in fact, only devices to evade capital gains tax that would arise as a result of transfer of the land in question by the assessee to the limited company. A careful perusal of the above transactions culminating in the transfer of land from the assessee to the company clearly goes to show that the real nature of the transaction is transfer of land. The principles of construction of such transactions are well-settled and it is too late in the day to say that the court should go strictly by the language of the documents prepared by the paries or the facts put forward by the parties and refuse to remove the veil to find out the real nature of the transaction.
13. Reference may be made in this connection to the decision of the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 wherein the Supreme Court disapproved the observation of Shah J. in CIT v. B. M. Kharwar to the effect that "the legal effect of a transaction cannot be displaced by probing into the substance of the transaction" when it observed (at page 160) :
"We think that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere."
14. The proper way to construe a taxing statue, while considering a device to avoid tax, as observed by the Supreme Court in McDowell and Co.'s case [1985] 154 ITR 148, at page 160, is not to ask whether the provision should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute but whether the transaction is a device to valid tax, and whether the transaction is such that the judicial process may accord its approval to it. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to consider whether the situation created by the devices could be related to the existing legislation with the aid of emerging techniques of interpretation to expose the devices for what they really are and to refuse to give judicial benediction. The courts in such a case should not lay undue emphasis on the language of each individual document as that is not determinative of the controversy. What is really necessary to be considered in such cases is the true nature and effect of the transaction. If on such a consideration, the court arrives at a finding that the true nature is "transfer of land" and the various steps originating from the affidavit and formation of partnership and culminating into dissolution of the same, in the process leaving the land with the company, are nothing but a device to avoid capital gains tax leviable under section 45 of the Act on transfer of the land to the company, such a device cannot get the seal of approval of this court.
15. In the light of the foregoing discussion, we hold that the firm was not genuine and we answer question No. 1 in the negative, i.e., in favour of the Revenue and against the assessee.
16. In view of our above answer to question No. 1, question No. 2 has become academic and hence need not be answered.
17. So far as question No. 3 concerned, we hold that there was a transfer of land in question from the assessee to the company within the meaning of section 2(47) of the Income-tax Act for a consideration of Rs. 10 lakhs on March 28, 1973, and capital gains tax was rightly levied thereon under section 45 of the Act.
18. Question No. 4 is also answered in the negative, i.e., in favour of the Revenue and against the assessee.
19. So far as question No. 5 is concerned, in view of the answer to the other questions, it becomes academic and, therefore, need not be answered. We, therefore, decline to answer the same.
20. This reference is answered accordingly.
21. We make no order as to costs.