Income Tax Appellate Tribunal - Nagpur
Rahul Kumar Bajaj vs Income Tax Officer on 8 July, 1997
Equivalent citations: [1998]64ITD73(NAG), [1999]240ITR12(NAG)
ORDER
J. Kathuria, J.M.
1. This appeal by the assessee pertains to the asst. yr. 1980-81. There are in all three issues agitated in this appeal. The first issue is regarding reopening of assessment under s. 147(b) of the IT Act, 1961 (the 'Act' for short).
2. Brief facts are these. The assessee is an individual. For the asst. yr. 1980-81 he had filed the return on 30th July, 1980, showing income of Rs. 2,93,030. Before filing the return the assessee had addressed a letter to the ITO 'A' Ward, Wardha, dt. 26th March, 1979, a copy of which is available at p. 120 of the assessee's compilation. In the said letter the assessee intimated that he had converted 5,500 equity shares of Bajaj Auto Limited into his stock-in-trade and that he was holding the said equity shares of Bajaj Auto Ltd. as his stock-in-trade and not as a capital investment. The AO completed the assessment on 22nd December, 1980 on a total income of Rs. 2,93,030.
In the body of the assessment order, the AO noted that during the year the assessee became a partner in the firm M/s Bajaj Trading Company, Wardha, by contributing 5,500 shares of Bajaj Auto Ltd. as his capital. The assessment was framed under s. 143(3) of the Act.
3. On 20th February, 1985, the AO reopened the proceedings under s. 147(b) of the Act by recording the following reasons :
"1/20th February, 1985.
The assessment in this case for the asst. yr. 1980-81 was finalised on 22nd December, 1980.
A letter No. IAC R II/Instr/84-85 dt. 19th February, 1985, was received from the IAC, Special Range, Nagpur, on 20th February, 1985. By the said letter, the IAC has drawn my attention to the decision of the Gujarat High Court in the case of CIT vs. Katrikeya V. Sarabhai (1981) 131 ITR 42 (Guj).
I have carefully examined the facts of the instant case in the light of the said decision of the Gujarat High Court. This judgment was delivered on 30th April, 1981 and was subsequently reported in the ITR. Thus, it is seen that the ITO was not aware about the said judgment while finalising the assessment in this case for the asst. yr. 1980-81. The ratio of the said judgment is clearly applicable to the facts of the instant case. Therefore, the capital gains amounting to Rs. 30,48,900, chargeable to tax, has escaped assessment.
In view of the above and in consequence of information in my possession, I have reason to believe that the assessee's income chargeable to tax has escaped assessment for the asst. yr. 1980-81. Action under s. 147(b) of the IT Act, 1961 is, therefore, necessary.
Issue, therefore, a notice under s. 148 of the IT Act, 1961 for the asst. yr. 1980-81."
A notice under s. 148 of the Act was issued on 20th February, 1985, in response to which the assessee filed a return on 26th March, 1985, declaring income of Rs. 2,93,078. The assessee, inter alia, challenged the reopening of assessment proceedings. The AO held that the ratio of the Gujarat High Court's decision in CIT vs. Kartikeya V. Sarabhai (supra) was clearly applicable to the facts of the assessee's case. It was pointed out by him that the original assessment was completed on 22nd December, 1980 whereas the judgment in the case of Kartikeya V. Sarabhai (supra) was delivered on 30th April, 18th & 4th May, 1981. He accordingly held that the assessment had been validly reopened.
4. The learned CIT(A) noted that the original assessment was completed without assessing any capital gains, that subsequently the notice of the AO was drawn to the decision of the Gujarat High Court in the case of Kartikey V. Sarabhai (supra) by the IAC advising him to examine the applicability of the ratio of that decision to the assessee's case, that the reopening of the assessment was made after such examination, that there was nothing on record to show that the AO considered the Full Bench decision of the Kerala High Court in A. Abdul Rahim, Travancore Confectionary Works vs. CIT (1977) 110 ITR 595 (Ker)(FB) and decision of the Karnataka High Court in Addl. CIT vs. M. A. J. Vasanaik (1979) 116 ITR 110 (Kar) to see if there was any transfer of assets involved in the assessee's case, that there was no evaluation of the series of similar transactions entered into by the assessee as well as other members of the Bajaj group over a number of years and cumulative effect of the same, that the advice received by the AO from the IAC to take note of the decision of the Gujarat High Court in the case of Kartikeya V. Sarabhai (supra) constituted 'information' within the scope of s. 147(b) of the Act and that in view of the Supreme Court's decision in A. L. A. Firm vs. CIT (1991) 189 ITR 285 (SC), a closer examination of the law in the light of the decision of the Gujarat High Court in the case of Kartikeya V. Sarabhai (supra) could lead to a valid information derived by the AO to clothe him with necessary jurisdiction for reopening the assessment under s. 147(b) of the Act. The learned CIT(A) accordingly upheld the validity of the re-assessment order.
5. Shri Y. P. Trivedi, the learned counsel for the assessee, submitted that the reopening was bad in law because it was based only on change of opinion by the AO. It was submitted that the Gujarat High Court was not the first or the only High Court to take a particular view in the matter. It was pointed out that the Full Bench of the Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works (supra) in the context of withdrawal of development rebate had held that there was an extinguishment of some of the rights of the assessee in the assets which were brought in by him for the purpose of the business of the partnership firm and as such there was a transfer of a capital asset within the meaning of s. 2(47) of the Act. It was also pointed out that the Karnataka High Court in the case of M. A. J. Vasanaik (supra) again in the context of withdrawal of development rebate had held that when individual business was converted into partnership business, there was a transfer of the assets of the individual to the partnership and it was not necessary to rely on the definition of 'transfer' in s. 2(47) of the Act because the said transaction amounted to a transfer in the eye of law even when the word 'transfer' was understood in the ordinary sense. It was, therefore, submitted that the issue whether there was a transfer when an assessee brought his individual assets as his capital contribution to the partnership firm had already been decided and the Gujarat High Court in that view of the matter did not cover any fresh ground. It was submitted that the factum of Rs. 5,500 equity shares of Bajaj Auto Ltd. having been converted into stock-in-trade was within the knowledge of the AO at the time of original assessment. It was pointed out that the AO in the original assessment order had duly noted that the assessee had become a partner in the firm M/s Bajaj Trading Co., Wardha, by contributing 5,500 shares of Bajaj Auto Ltd. as his capital. It was, therefore, submitted that all material facts necessary for assessment were already known to the AO and still at the time of original assessment no capital gains was included in the assessee's total income by the AO. It was pointed out that the AO received a communication from the IAC on 20th February, 1985 and without further examination of the facts of the assessee's case mechanically reopened the assessment on the same date. It was, therefore, argued that the reopening was based on a mere change of opinion and hence was bad in law.
6. The learned counsel further pointed out that the only basis for reopening the assessment was the decision of the Gujarat High Court in the case of Kartikey V. Sarabhai (supra) which had been overruled by the Supreme Court in the case of Kartikeya V. Sarabhai vs. CIT (1985) 156 ITR 509 (SC). It was submitted that the Supreme Court had held that when an assessee, a partner in a firm, made over to the firm certain shares in a company which were held by him, there was a 'transfer' of the shares but he received no consideration within the meaning of s. 48 of the Act and hence no profit or gain accrued to him for the purpose of s. 45 of the Act. It was submitted that if the very basis of reopening fell to the ground then the re-assessment proceedings were liable to be quashed. In this context the learned counsel relied on the Bombay High Court's decision in Seksaria Biswan Sugar Factory Ltd. & Anr. vs. IAC & Ors. (1990) 184 ITR 123 (Bom) at p. 126. That was a case where the AO at the time of original assessment had allowed as a deduction the amount donated to a scientific research organisation. Later on by way of a notification the prescribed authority withdrew the approval of the concerned institution as an agricultural institute with retrospective effect. On the basis of such notification, the AO reopened the proceedings. The assessee challenged the reopening under a writ petition and the Bombay High Court held that s. 295(4) of the Act no doubt empowered the CBDT to make rules with retrospective effect but the rules could be amended retrospectively but not to the prejudice of the assessee. It was observed that the notification in that case had been issued not by the CBDT but by the prescribed authority other than the Board. The High Court accordingly held that the information in the form of retrospective cancellation of the approval of the concerned institution as an agricultural institute was apparently invalid and unreliable. According to the High Court the formation of belief that income chargeable to tax had escaped assessment was thus without any material.
7. It was, therefore, submitted that the ratio of the Bombay High Court's decision in Seksaria Biswan Sugar Factory Ltd. (supra) was applicable to the instant case as well, because the very basis on which the proceedings had been knocked out by the Supreme Court in Kartikeya V. Sarabhai (supra) and the formation of belief that income chargeable to tax had escaped assessment was without any material.
8. Reliance was also placed on the Karnataka High Court's decision in CIT vs. L. F. D'Silva, (1991) 192 ITR 547 (Kar), for the proposition that in the case of Kartikeya V. Sarabhai (supra), the Supreme Court did not state that in every case of this nature the reality of the transaction should be scrutinized irrespective of any suspicious circumstances. It was submitted that merely because the said decision clarified the position in law that it was open to the IT authorities to go behind the transaction, every assessment proceeding need not be reopened. The learned counsel pointed out that the Supreme Court's decision in Kartikeya V. Sarabhai's case (supra) was rendered on 27th September, 1985, and was not available to the AO when the proceedings were reopened on 20th February, 1985. The submission was that even if the decision had been available to the AO, the same could not have been applied mechanically in each and every case irrespective of any suspicious circumstances. It was submitted that the AO had merely relied on the Gujarat High Court's decision in the case of Kartikeya V. Sarabhai (supra) without examining that the assessee had applied any device in converting the equity shares first into stock-in-trade and then transferring them to the partnership firm as capital contribution. According to the learned counsel this exercise was attempted later by the AO during the course of reassessment proceedings, but there were no suspicious circumstances at the time the proceedings were reopened. It was submitted that the firm M/s Bajaj Trading Co., Wardha, in which the assessee became a partner after contributing 5,500 equity shares of Bajaj Auto Ltd. as his capital contribution was a genuine firm. It was submitted that the firm was still in existence and had been granted registration year after year. It was vehemently argued that at the time of reopening of assessment there was no finding by the AO that the transaction was sham or a device to avoid the capital gains tax liability. According to the learned counsel the reopening of assessment was bad in law.
9. Shri R. S. Sundaram, learned Departmental standing counsel, submitted that the Supreme Court in the case of Kartikeya V. Sarabhai (supra) had clearly held 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 assets into money which would substantially remain available for his benefit without liability to income-tax on a capital gain then it would be open to the IT authorities to go behind the transaction and penetrate the veil covering the transaction and ascertaining the truth. It was submitted that in this case the AO had established that the assessee had employed a device to evade capital gains tax liability and the learned CIT(A) on merits had upheld that finding. It was submitted that going by the reverse way if the transaction is held to be sham ultimately the reopening of proceedings must be held to be justified. It was submitted that the High Court's decision in Kartikey V. Sarabhai (supra) did constitute valid information for reopening the proceedings. It was submitted that the Supreme Court had not overruled the High Court's decision but only diluted the same. He strongly relied on the reasoning given by the learned CIT(A) in upholding the validity of the reassessment proceedings.
10. We have carefully considered the rival submissions as also the facts on record. As pointed out by Shri Trivedi, the learned counsel for the assessee, the intimation to the AO regarding the conversion of 5,500 equity shares of Bajaj Auto Ltd. had been given on 26th March, 1979, even before filing of the return for the asst. yr. 1980-81. The AO was aware of the fact that the assessee had contributed 5,500 equity shares of Bajaj Auto Ltd. to the firm M/s Bajaj Trading Co. as capital contribution. The AO is expected to know the law. It is not the case of the AO that when he completed the original assessment, he was not aware of the Full Bench decision of the Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works (supra) or of the Karnataka High Court in M. A. J. Vasanaik (supra). The controversy covered by the Gujarat High Court in the case of Kartikey V. Sarabhai (supra) was not a new one. The two High Courts at least, as pointed out above, had held that when an asset is contributed by a partner to the partnership firm as capital contribution it amounts to 'transfer' within the meaning of s. 2(47) of the Act. In fact the Gujarat High Court in Kartikey V. Sarabhai (supra) at p. 57 of the report has observed that ......
"The approach made by us is somewhat different from the approach made by the Kerala and the Karnataka High Courts ........... Whilst the route is slightly different, the destination reached is the identical one."
This clearly shows that the Gujarat High Court's decision was not a virgin decision in the field and that the Kerala and Karnataka High Courts had adopted a similar view though in the context of withdrawal of development rebate. From the copy of the reasons recorded which have been reproduced earlier in this order it is clear that the AO received a letter from the IAC on 20th February, 1985, and on the same date reopened the proceedings in the assessee's case on the basis of the Gujarat High Court's decision in Kartikeya V. Sarabhai (supra). This was a mechanical application of mind. No facts regarding the genuineness or otherwise of the transaction are reflected in the reasons recorded. The decision of the Gujarat High Court was not the decision of a jurisdictional High Court which would be binding on the AO. The Kerala and Karnataka High Courts had already taken a view and their decisions were rendered on 16th July, 1974, and 12th September, 1978 respectively. The original assessment was completed on 22nd December, 1980. Those decisions were available to the AO and he was expected to be aware of the same. When on the basis of the decision of the Gujarat High Court in Kartikeya V. Sarabhai (supra) rendered in April-May, 1981, the AO reopened the proceedings in the assessee's case, he merely changed his opinion. It is settled law that on the basis of a mere change in opinion proceedings under s. 147(b) of the Act cannot be reopened. The AO at the time of reopening had not examined the question of genuineness or otherwise of the transaction nor had he penetrated the veil of the transaction. The reliance was solely on the Gujarat High Court's decision in Kartikey V. Sarabhai (supra). The reopening was thus based on a mere change of opinion and was, therefore, bad in law.
11. In the case of A. L. A. Firm (supra) the AO had completed the assessment on the date he received the return of income. He had not applied his mind and had not taken into consideration the decision of the jurisdictional High Court of Madras in the case of G. R. Ramacharia & Co. vs. CIT (1961) 41 ITR 142 (Mad). That decision was brought to his notice subsequently and so he reopened the proceedings under s. 147(b) of the Act. The facts of that case are clearly distinguishable from those of the assessee's case. In the case of the assessee the original return had been filed on 30th July, 1980 and the original assessment had been completed on 22nd December, 1980 under s. 143(3) of the Act. The AO was aware of all the relevant facts. He was expected to know the law. In any case it is not the Revenue's stand that he was not aware of the Kerala High Court's decision in the case of A. Abdul Rahim, Travancore Confectionery Works (supra) and Karnataka High Court's decision in M. A. J. Vasanaik (supra). The reliance by the learned Departmental standing counsel on the Supreme Court's decision in the case of A.L.A. Firm (supra), therefore, does not advance the case of the Revenue.
12. The learned Departmental standing counsel argued that the since ultimately it has been established that there was a device employed by the assessee in evading capital gains tax liability, the reopening the assessment was valid and legal. In our opinion, the flash-back or the backward frog leap method of reasoning cannot be logically invoked in order to ascertain the position at the entry point. What we have to see is the quality of information available to the AO at the time when he reopened the assessment proceedings and whether such information could reasonably lead to the formation of a positive belief that the income had escaped assessment. It is specious to contend that because finally on merits the addition had been sustained by the first appellate authority, it should be so held even at the time of initiation of proceedings. We, therefore, reject the argument of the Revenue in this regard.
13. We may not go the whole hog with the proposition enunciated by Shri Trivedi, the learned counsel for the assessee, that if the very basis of reopening fell to the ground, the reassessment proceedings were liable to be quashed. It is reiterated that we have to see the position as it prevailed when the reasons were recorded and the reopening was ordered. The final outcome may not be really germane to the issue as to whether the proceedings had been validly reopened. We have to see all the surrounding and relevant circumstances which prompted the AO to reopen the proceedings. The facts in the case of Seksaria Basiwan Sugar Factory Ltd. (supra) are distinguishable. In that case the prescribed authority had issued a notification cancelling the approval of the concerned institution as an agricultural institute. The approval was, however, cancelled retrospectively. This was not within the power of the prescribed authority. The notification on the basis of which the AO had reopened the assessment proceedings was apparently invalid and unreliable. This was held so by the Bombay High Court. The position in the instant case, however, is different. The AO had reopened the proceedings on the basis of the Gujarat High Court's decision in the case of Kartikey V. Sarabhai (supra). A High Court's judgment constitutes a formal source of law. It cannot be said that such a judgment was invalid or unreliable. It is a different matter that the said judgment was partially reversed by the Supreme Court later, but the judgment of a High Court cannot be equated with a notification by the prescribed authority which was apparently invalid and unreliable.
14. In the present case the AO did not reopen the proceedings on the basis of the Supreme Court's decision in Kartikeya V. Sarabhai (supra). If on that basis the AO had established that the assessee in this case had employed a device which had not been properly evaluated or appreciated in the first instance, then there should have been some justification for reopening the assessment proceedings. The proceedings were, however, reopened on the basis of the Gujarat High Court's decision in Kartikeya V. Sarabhai (supra) simpliciter. The Karnataka High Court in L. F. D' Silva (supra) has held that merely because the Supreme Court's decision in Kartikeya V. Sarabhai (supra) clarified the position in law that it was open to the IT authorities to go behind the transaction every assessment proceeding need not be reopened. The AO at the time of reopening has, therefore, to come to a positive finding that the assessee has employed a ruse or subterfuge to evade the capital gains tax liability by entering into a sham transaction. All this has to be clearly spelt out at the time of reopening of assessment which has not been done in the present case. The IT authorities, in our opinion, are not expected to reopen the case any and every time the judgment of a High Court is received enunciating and laying down a different point of view. That would create chaos in the realm of tax administration. The IT authorities are not expected to make roving or fishing enquiries. The information on the basis of which proceedings are reopened has to be reliable, credible and valid. It has to have a live nexus with the formation of a positive belief that income has escaped assessment and then and then also the proceedings may be reopened. In the present case what we find is that the AO has merely changed his opinion. He has merely relied on the Gujarat High Court's decision in the case of Kartikeya V. Sarabhai (supra) whose view in any case was not a new view and the Kerala and Karnataka High Court had also taken a similar view and this has been acknowledged by the Hon'ble Gujarat High Court in explicit terms at p. 57 of 131 ITR.
15. Taking into consideration the entire facts and circumstances of the case we hold that the reopening of proceedings by the AO on 20th February, 1985, was bad in law and on that ground that reassessment order dt. 19th February, 1986 is hereby quashed.
16. The other two issues are on merits and pertain to the rejection of the claim for conversion of capital asset into stock-in-trade and treating the contribution of shares to partnership firm as liable to capital gains tax.
17. The AO after the reopening of assessment proceedings processed the case in a detailed and comprehensive manner. It was found by him that the assessee had employed a systematic device in this case to evade the capital gains tax liability. It was noted that the assessee first converted 5,500 equity shares of Bajaj Auto Ltd. of the face value of rupees hundred each into stock-in-trade at the market rate of Rs. 575 per share on 26th March,1979. Thereafter he became a partner in the newly constituted firm M/s Bajaj Trading Co., Wardha, On 8th May, 1979, and the so-called converted shares were contributed as initial capital. In the books of the said firm the assessee was given credit to the tune of Rs. 31,62,500 representing the value of 5,500 equity shares at the rate of Rs. 575 per share. The assessee contributed another 4,000 equity shares of Bajaj Auto Ltd. to the said firm on 9th January, 1981. These were valued at the market price at Rs. 43,20,000 for which the assessee was given credit in his capital account in the books of M/s Bajaj Trading Co. The AO further noticed, as is clear from annexure to the assessment order that the assessee withdrew amounts on various dates from his capital account in the books of the firm M/s Bajaj Trading Co. and the balance amount that remained in the books of the said firm as on 9th January, 1981, was only of the order of Rs. 5,00,000. It was noted that the face value of the aforesaid 9,500 shares of Bajaj Auto Ltd. itself was Rs. 9,50,000 which had been contributed as initial and subsequent capital to the said firm by the assessee on two dates for which he had been given credit for Rs. 74,82,500. It was noted that from 16th July, 1980 to 22nd September, 1982, the assessee had withdrawn a total amount of Rs. 69,82,500 from the said firm thereby leaving a balance of a mere Rs. 5,00,000 in his capital account. It was noted that the amounts thus withdrawn amounting to Rs. 69,82,500 were invested elsewhere by the assessee and the entire arrangement had been made with a view to avoiding the capital gains tax liability. According to the AO it was a colourable device which was hit by the Supreme Court's decision in the case of McDowell & Co. Ltd. vs. CIT (1985) 154 ITR 148 (SC). He, therefore, held that the case was fairly covered by the observations of the Supreme Court in the case of Kartikeya V. Sarabhai (supra) at pp. 523 and 524. According to him the so-called conversion of shares as stock-in-trade, their contribution as capital to the firm M/s Bajaj Trading Co. at the market value and then withdrawal of a huge amount of Rs. 69,82,500 over a period of 3-4 years was a systematic device to evade the capital gains tax liability. He accordingly held that the shares of Bajaj Auto Ltd. had continued to be the capital assets of the assessee and the assessee was liable to tax on the capital gains arising out of the contribution of such shares to the partnership firm. He accordingly added the long-term capital gains on account of the transfer of 5,500 equity shares of Bajaj Auto Ltd. at Rs. 18,26,340 and included the same in the total income which was determined at Rs. 21,19,370 as against the originally assessed income of Rs. 2,93,030.
18. Aggrieved, the assessee preferred an appeal before the learned CIT(A) who relying on the Tribunal's decisions in Jamnalal & Sons Ltd. vs. IAC (1989) 29 ITD 164 (Bom) and ITO vs. Ramkrishna Bajaj (1992) 43 TTJ (Bom) 400 (SB) : (1992) 41 ITD 161 (Bom)(SB) rejected the assessee's claim on merits.
19. Shri Y. P. Trivedi, the learned counsel for the assessee, submitted that the Revenue authorities had not properly appreciated the matter in its proper perspective. IT was submitted that when the assessee converted 5,500 shares of Bajaj Auto Ltd. on 26th March, 1979 he duly informed the AO about such conversion. It was submitted that the firm Bajaj Trading Co. was a genuine firm which existed to this day and had been granted registration year after year. It was submitted that the assessee was a dealer in shares in his own right for this proposition he referred to pp. 132 onwards of the paper-book to show that the assessee had been having shares as stock-in-trade even as early as financial year 1975-76. It was submitted that the firm M/s Bajaj Trading Co. had also been dealing in shares, as would be clear from the chart placed at p. 268 of the paper-book. The learned counsel vehemently argued that the reservations expressed by the Supreme Court in the case of Kartikeya V. Sarabhai (supra) at pp. 523 and 524 of ITR would be applicable only if the partnership firm is sham and bringing into the shares by a partner is a device to convert shares into money through the instrumentality of the partnership firm. It was submitted that the assessee was a genuine, and bona fide dealer in shares, that he had converted 5,500 equity shares of Bajaj Auto Ltd. as stock-in-trade and brought them in the firm M/s Bajaj Trading Co. as his initial contribution. It was submitted that the purpose at that time was not to evade the capital gains tax liability because these shares had never been sold by the said firm till date. According to the learned counsel the real purpose of bringing said shares into the partnership firm was to mitigate the hardship on account of unbearable wealth-tax liability and to ensure that the aforesaid shares remained with the same group of people with a view to continuing the control over Bajaj Auto Ltd. It was submitted that the genuineness of the conversion was accepted in the wealth-tax proceedings. It was also submitted that s. 45(3) of the Act had been inserted by the Finance Act, 1987, w.e.f. 1st April, 1988 to overcome the Supreme Court's decision in Kartikeya V. Sarabhai (supra). It was, however, submitted that w.e.f. 1st April, 1988, the profits or gains arising from the transfer of a capital asset by a partner by way of capital contribution or otherwise would now be chargeable to tax, but that the assessee's case pertained to asst. yr. 1980-81 for which there was no such provision on the statute book. In this context the learned counsel relied on the Tribunal's decision in ITO vs. Yogeshchandra V. Shah (1995) 55 ITD 300 (Ahd) for the proposition that the provisions contained in s. 45(3) of the Act to nullify the effect of the judgment of the Supreme Court in the case of Kartikeya V. Sarabhai (supra) would not be applicable up to and including the asst. yr. 1987-88.
20. The learned counsel spent considerable time on explaining as to how the Tribunal's decisions in the case of Jamnalal & Sons Ltd. (supra) and ITO vs. Ramkrishna Bajaj (supra) were distinguishable on facts. It was, for instance, submitted that in the case of Jamnalal & Sons Ltd. (supra) the whole case turned on the fact that he contributed a capital of Rs. 1,23,16,750 of which Rs. 1,20,03,000 was the value of plots of land brought in by it. It was submitted that in that case the assessee was not a dealer in land. It was submitted that though along with the land shares had also been contributed but the book value of such shares was only Rs. 9,347 and there was no worthwhile discussion in the Tribunal's order regarding the shares. It was submitted that the Tribunal decided that case against the assessee primarily because that assessee was not a dealer in land, but there was no discussion regarding shares. It was submitted that the assessee filed a miscellaneous application in that case in which it was pleaded that the question of shares contributed by Jamnalal & Sons Ltd. had not been discussed by the Tribunal. It was submitted that unfortunately the said miscellaneous application was rejected because it was out of time. But while rejecting the miscellaneous application it was submitted that the Tribunal did observe that there was no discussion about the shares of Bajaj Electricals Ltd. It was, therefore, vehemently argued that since the question of shares had not been discussed in that case, that case would not be treated as an authority for deciding the case of the present assessee against the assessee.
21. As regards the case of Ramkrishna Bajaj (supra), it was submitted that he was not a dealer in shares in his own right and so it could be argued that his conversion of shares into stock-in-trade was a device to escape the clutches of capital gains tax liability. It was, however, submitted that in the present case the assessee was a dealer in shares even as early as financial year 1975-76 and had been dealing in shares thereafter. It was, therefore, submitted that conversion of such shares into stock-in-trade by him against this background could not be held to be a sham transaction. On the contrary, it was submitted that the conversion of shares into stock-in-trade was bona fide. It was submitted that the assessee with a view to proving his bona fides had informed the AO of the factum of conversion of 5,500 shares of Bajaj Auto Ltd. into stock-in-trade. It was submitted that after having established the bona fides it was for the Revenue to rebut the assessee's case which had not been rebutted. It was, therefore, submitted that the Special Bench decision of the Tribunal in the case of Ramkrishna Bajaj (supra) could also be no ground for rejecting the assessee's claim and for treating a huge amount as long-term capital gains in his hands.
22. The learned counsel emphasised that the conversion of 5,500 equity shares of Bajaj Auto Ltd. was genuine, the firm in which such shares were contributed as initial capital was also genuine, that the transaction had not been held to be sham by the Revenue authorities and the withdrawal of money over a period of 3 to 4 years from the said firm by the assessee would not mean that the assessee had encashed the said shares. It was submitted that the observations of the Supreme Court in the case of Kartikeya V. Sarabhai (supra) at pp. 523 and 524 of ITR were not attracted in the case and under the main judgment there could be no capital gains because even if there was transfer of shares, there was no consideration involved. It was also submitted that the assessee had not contributed a capital asset but only stock-in-trade and hence there could not be any capital gains tax liability in his hands. The learned counsel relied on the decisions in ITO vs. D. K. Panduranga Shetty & Sons (1997) 58 TTJ (Bang) 1 : (1996) : 58 ITD 353 (Bang), Banyan & Berry vs. CIT (1996) 222 ITR 831 (Guj), Dhirajben R. Amin & Anr. vs. CIT (1988) 174 ITR 307 (SC), Ambalal Sarabhai D. Trust vs. CIT (1995) 213 ITR 263 (Guj), CIT vs. Smt. Gira Sarabhai (1994) 209 ITR 356 (Guj), Rajmal Chordia vs. CIT (1995) 215 ITR 52 (Raj), Dr. Mir Masood Ali vs. CIT (1988) 169 ITR 521 (AP), Ram Chander Aggarwal vs. CIT (1995) 211 ITR 4 (Del), Ved Prakash Aggarwal vs. CIT (1989) 179 ITR 378 (P&H) and a few other judgments for the proposition that the asset transferred to a firm as contribution towards capital amounted to a transfer but since no consideration for transfer was computable gains arising out of transfer was not liable to be taxed under s. 45 of the Act. It was submitted that the various High Courts and the Tribunals have, as mentioned above, followed the Supreme Court's decision in the case of Kartikeya V. Sarabhai (supra). The learned counsel, therefore, vehemently argued that on merits, there was no justification for assessing capital gains tax in the hands of the assessee.
23. The learned Departmental standing counsel, however, strongly supported the impugned order and submitted that the Supreme Court in the case of Kartikeya V. Sarabhai (supra) had clearly spelt out that where the personal asset of the assessee was transferred to a partnership firm of which he was a partner or of which he became a partner and such transfer was a mere device then capital gains tax liability was certainly attracted. It was submitted that the modus operandi used by the assessee in the instant case was to convert 5,500 shares of Bajaj Auto Ltd. into money which would remain available for his benefit without liability to tax on capital gains. It was submitted that as analysed by the AO, the assessee had withdrawn substantial amounts from M/s Bajaj Trading Co. leaving behind a capital of Rs. 5,00,000 only which clearly showed how the shares had been converted into money for his immediate or deferred benefit without attracting capital gains tax liability. It was submitted that the genuineness or otherwise of the firm was not determinative of the issue and so was the case with the other transactions of the assessee as a dealer in shares. It was submitted that in such cases one had to see the scheme behind a particular transaction. It was elaborated that M/s Bajaj Trading Co. may be a genuine firm which may have been granted registration over the years and it may be existing till today and the assessee may have been a dealer in shares in his own right, but so far as the transaction of 5,500 equity shares of Bajaj Auto Ltd. was concerned, it was certainly a sham transaction. It was used as a mere device to convert those shares into money which would be substantially available to the assessee for his benefit. It was, therefore, submitted that the observations of the Supreme Court in the case of Kartikeya V. Sarabhai (supra) at pp. 523 and 524 were applicable to the instant case. It was also submitted that the Tribunal's decisions in the case of Jamnalal & Sons Ltd. (supra) and Ramkrishna Bajaj (supra) also supported the Revenue's case. The learned Departmental standing counsel submitted that in the case of Jamnalal Sons Ltd. (supra) the shares which had already been transferred to the partnership firm as capital contribution remained within the focus of the Tribunal though the main discussion centered on the contribution of land which formed a very big component of the capital contribution. It was submitted that the principles enunciated by the Supreme Court in the case of McDowell & Co. Ltd. (supra) were equally applicable in this case and the assessee had adopted an obvious device to escape the capital gains tax liability.
24. We have carefully considered the rival contentions and perused the facts on record. The Supreme Court in the case of Kartikeya V. Sarabhai (supra) has held that when an asset is contributed as capital by an assessee to a partnership firm on becoming a partner or as a partner then though there is transfer of the asset, there cannot be any consideration and hence the provisions of s. 45 of the Act are not attracted. Towards the end of the judgment at pp. 523 and 524, the Supreme Court has, however, made the following observations :
"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. 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 personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent 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."
Sub-s. (3) of s. 45 of the Act has been inserted by the Finance Act, 1987 w.e.f. 1st April, 1988 to nullify the effect of the Supreme Court's decision in the case of Kartikeya V. Sarabhai (supra). That law is, however, applicable for asst. yr. 1988-89 and onwards. In the present case, we are dealing with the asst. yr. 1980-81 for which year s. 45(3) of the Act was not available to the Revenue. The question to be decided, therefore, is whether the case is covered by the observations of the Supreme Court reproduced hereinabove. In our considered opinion the AO has demonstrated as to how the conversion of shares into stock-in-trade and their contribution to the firm M/s Bajaj Trading Co. as capital by the assessee and the withdrawal of huge moneys by the assessee over a period of 3 to 4 years clearly established that the transfer was merely a device for converting the asset into money which would substantially remain available for the assessee's benefit. The face value of the shares contributed by the assessee as capital to the said firm was itself Rs. 9,50,000 against which the balance left in the capital account of the assessee with M/s Bajaj Trading Co. was only Rs. 5,00,000. By this sophisticated device the assessee has coolly withdrawn a huge amount of Rs. 69,82,500 in a space of 3 to 4 years for his benefit and use. The assessee may have been a dealer in shares and the firm in which he became a partner may have been a genuine firm, but so far as the transaction of converting 5,500 equity shares into stock-in-trade and their subsequent contribution as capital to the firm M/s Bajaj Trade Co. is concerned, there is no doubt that the assessee had employed a colourable device to escape the clutches of capital gains tax liability. The principles laid down by the Supreme Court in the case of McDowell & Co. Ltd. (supra) are clearly applicable in this case. The learned counsel for the assessee has tried to cite a catena of decisions by various High Courts and the Supreme Court in which following the Supreme Court's decision in Kartikeya V. Sarabhai (supra) it has been held that capital gains tax liability is not attracted because there is no consideration when an asset is contributed as capital to the partnership firm. The High Courts are bound to follow the Supreme Court's decisions and by multiplying authorities the learned counsel cannot score a point. The issue in all those decisions was that there was transfer of capital asset as capital contribution to the firm by the assessee and there was no device employed. In the present case, however, the AO and the learned CIT(A) have demonstrated how the assessee has employed a device to encash 5,500 equity shares of Bajaj Auto Ltd. through the instrumentality of the firm M/s Bajaj Trading Co. The observations of the Supreme Court reproduced above are squarely applicable in the assessee's case. We hold accordingly.
25. The learned counsel has tried to distinguish the Tribunal's decisions in the cases of Ramkrishna Bajaj (supra) and Jamnalal & Sons Ltd. (supra). In the case of Ramkrishna Bajaj (supra) also the firms in which the assets were transferred as capital contribution were genuine firms and had been treated as such by the respective ITOs. The Tribunal found that the assessee had started dealing in shares only from asst. yr. 1981-82 perhaps with a view to establishing that he too was engaged in the business of share dealing. The object and purpose of converting the asset into stock-in-trade was found to be obvious by the Tribunal. The Tribunal applying the ratio of the Supreme Court's decision in the case of Kartikeya V. Sarabhai (supra) held that the assessee had employed a device to escape from capital gains tax liability. Shri Trivedi argued that that case was distinguishable because the assessee in that case was not a regular dealer in shares whereas in the instant case the present assessee was a regular dealer in shares. This argument, however, does not cut any ice with us. The assessee may have been a dealer in shares even prior to the conversion of 5,500 equity shares of Bajaj Auto Ltd. He may have continued to be a dealer in shares even afterwards, but so far as this transaction was concerned, this was aimed only at one thing and that was to escape the rigours of capital gains tax liability. The assessee proceeded systematically. He ensured that the AO was duly informed. The firm M/s Bajaj Trading Co. was constituted and the assessee became a partner and contributed 5,500 equity shares of Bajaj Auto Ltd. as initial capital. While converting the shares into stock-in-trade, the assessee valued them at market price and at the same value these were transferred to the firm M/s Bajaj Trading Co. The assessee was given credit at the market value in respect of these shares. Over a period of time the assessee withdrew the huge sums except an amount of Rs. 5,00,000 which remained with the firm M/s Bajaj Trading Co. This was all under a device whose sophistication was matched only by deep thinking. So the case of Ramkrishna Bajaj (supra) is not distinguishable on facts. The Tribunal in that case has decided the issue against the assessee and that case can legitimately be pressed into service against the assessee in the present case.
26. Shri Trivedi, the learned counsel for the assessee, has pointed out that in the case of Jamnalal Sons Ltd. (supra), the Tribunal had not discussed about the contribution of shares as capital. He has referred as to how the miscellaneous application filed in that case was rejected because it was out of time. He has also referred to some of the observations made by the Tribunal regarding there being no discussion about the shares.
27. We have carefully gone through the said decision which is reported at (1989) 29 ITD 164 (Bom) (supra). At p. 168 it is clearly mentioned that the contribution of stock-in-trade was in the form of land and shares and a sum of Rs. 2,00,000.
At p. 169 it is mentioned that the CIT(A), however, did not agree that the transfer of land and shares to the firm was a transfer of stock-in-trade.
At p. 174 it is mentioned that Shri Jetley also referred to the value of plot of Rs. 1,20,300 and value of shares of Rs. 1,13,750.
At p. 176 the following observations stand recorded :
"What we have to consider is whether land and shares held by the limited company since 1938 as capital asset became the stock-in-trade of the limited company by a mere declaration and whether it is necessary that there should be some further evidence that they should have been treated as stock-in-trade by the limited company prior to its contribution as capital to the partnership firm."
At p. 177 the Tribunal has recorded the following :
"However, the land and shares were never held by the limited company as their stock-in-trade. They never traded in land; they never dealt in land; they never traded in shares and if they intended to trade in land or shares after the partnership firm was formed, that was an event that took place after the so-called conversion of the capital asset into stock-in-trade."
At p. 179 there is a reference to the recovery of the value of its capital which it had contributed in specie.
At p. 180 there is a reference to the stock-in-trade of the firm being land and shares.
At p. 186 there is a reference to the value of the assets transferred which included the shares. The Tribunal in that case observed as under :
"The value of the assets transferred was realised by the assessee and in that sense the reservation expressed by the Supreme Court applies. The fact that the amount was realised in the third year does not make any difference to the main finding that the whole transaction was entered into with the intention of recouping the money value of the capital asset."
We have, therefore, no hesitation to say that though there may not be an elaborate discussion about the contribution of shares, the shares along with land were always in the focus before the Tribunal when the issue was decided against the assessee in that case. The ratio of that decision is applicable to the present case.
28. The learned counsel made much of the withdrawal of moneys over a period of 3 to 4 years. It was submitted that such a withdrawal was in due course and it could not be said that it was as a result of the device employed by the assessee. In the case of Jamnalal Sons Ltd. (supra) also the amount had been realised in the third year and still the Tribunal held that it did not make any difference to the finding that the whole transaction was entered into with the intention of recouping the money value of the capital asset.
29. Having regard to the entire facts and circumstances of the case we are clear in our mind that the assessee had employed a device in a systematic manner to escape the capital gains tax liability. If the assessee wanted to reduce the wealth-tax liability or wanted to continue the control over the company M/s Bajaj Auto Ltd. that may have been also the considerations of the assessee for which it is not possible for us to dissect the assessee's mind to reach the truth. Be that as it may, what stares us in the face of the present case is that a colourable device has been employed by the assessee to escape the rigours of the capital gains tax liability and this has been frowned by the Supreme Court in the case of Kartikeya V. Sarabhai (supra). On merits, therefore, we hold that the conversion of 5,500 equity shares Bajaj Auto Ltd. prior to their contribution to the firm M/s Bajaj Trading Co. was part of the device, such conversion was not bona fide and the ultimate aim and object of the assessee was to use the firm as a conduit for encashing the said shares into money for immediate or deferred use. We further hold that as a result of the device the assessee had sought to escape the capital gains tax liability and the Revenue authorities were justified in holding that the contribution of the assets to the firm M/s Bajaj Trading Co. was liable to capital gains tax.
30. Om merits, therefore, the case is decided against the assessee.
31. Since on the first issued of reopening of assessment we have quashed the assessment order, in effect the appeal shall be treated as allowed.