Bombay High Court
Sushila Devi Gupta vs Income Tax Officer on 24 November, 1997
Equivalent citations: (1998)62TTJ(MUMBAI)338
ORDER
Vimal Gandri Vice Presment :
These two appeals by the assessees for the asst. yr. 1985-86 involve common issue. Therefore, they were heard together and are being disposed of through this consolidated order for the sake of convenience.
2. The facts of the case, briefly stated, are that in 1959 J.M. Gupta purchased land at Santacruz, Mumbai. It was claimed to have been purchased with funds belonging to the HUF, headed by J.M. Gupta as Karta and comprising of Karta, his wife Snit. Sushila Devi Gupta and two sons, Anil Kumar Gupta & Arun Gupta. In the year 1962 three flats on ground floor and some portion on the first floor was constructed with the funds of the HUR On 1st of March, 1976 through a partial partition of the above HUF the above property was partitioned and specified shares were given to Snit. Sushila Devi and two sons of the Karta. It is claimed that as on the date of partition, Anil Kumar Gupta was married and had a son. Arun Gupta was unmarried.
3. The aforesaid partial partition was accepted in the hands of J.M. Gupta, HUF under s. 171 of the IT Act and s. 20 of the WT Act as is evident from order dt. 29th June, 1977, of the WTO. Anil Kumar Gupta and his brother Arun Gupta also effected partition of properties allotted to them on 20th June, 1984, and gave shares to their wives and sons, besides allotting shares to themselves. The aforesaid partitions recognised by the AO vide order, dt. 29th March, 1985, under s. 171(3) of the IT Act. On 8th May, 1979, Snit. Sushila Devi and her two sons Anil Kumar Gupta and Arun Kumar Gupta entered into an agreement to construct additional eight flats The said construction was completed 'in 1984 and two flats were given to Arun Gupta and three each to MST. Sushila Devi and Anil Kumar Gupta. It is relevant to mention that J.M. Gupta expired in the year 1980 and Arun Gupta got married and had a son before 1984. On this basis even Arun Gupta claimed status of HUF in respect of property received and constructed on behalf of the HUR In August, 1984, these three persons sold land and flats to N.T. Estates & Investments (P) Ltd. It is claimed that specified portion was sold by each of the co-owners. The assessees showed long-term capital gain on sale of land but short-term capital gain on sale of superstructure. Anil Kumar Gupta claimed that different portions allotted to respective members of his HUF were sold by them and capital gains was assessable accordingly.
4. The AO in the original assessments accepted the claim made by the assessees. However, subsequently he initiated proceedings under s. 148 of the IT Act and issued notice to the assessees on 23rd June, 1993. The assessees submitted same returns.
5. The AO did not accept that capital gain accrued to Snit. Sushila Devi, members of HUFs of Anil Kumar Gupta or the other son (this case is not before us). The AO opined that a business transaction was involved in the sale of the property and accordingly gain accrued was business income. The AO also refused to accept the status of bigger HUF or of Anil Kumar Gupta, HUR In this opinion, the income was assessable in the hands of Smt. Sushila Devi Gupta and Anil Kumar Gupta (individual).
6. Being aggrieved, the assessees carried the matter in appeal before the CIT(A) and vehemently challenged initiation of reassessment proceedings which was claimed to be bad in law and without jurisdiction. It was submitted that all material necessary for assessments were filed during the course of original proceedings and, therefore, reassessment proceedings were started merely on change of opinion. The assessees also insisted on furnishing of reasons recorded before initiation of action under s. 147/148 and complained that said reasons were also not supplied by the AO in spite of repeated demands. On merit, it was claimed that on partial partition of bigger HUF specified shares were allotted to the three members and those members had become exclusive owners of those shares. The construction made on land was also separate and specified and, therefore, gain had accrued to respective owners of the building.
7. The learned CIT(A) rejected objection of the assess relating to initiation of proceedings under s. 147/148. He sought remand report from the AO and after considering the same held that proceedings were initiated after taking approval from De. CIT, He referred to some report of De. Director of Inspection that entire profit of Rs. 43,04,518 accruing on sale of building was to be taxed at one point as business income. The CIT(A) also referred to information that creation of HUF in this case was not in order. In his view, reasons for reopening are confidential and there is no question of appellant being told about these reasons. On the basis of material before him he held that action under s. 148 suffered from no infirmity. He confirmed the same. The action was also held to be within time.
8. On examination of further facts he accepted that land was purchased by the .HUF of J.M. Gupta and that it was subjected to a partial partition in the accounting year 1975-76. The property was divided between wife of the Karta and smaller Huffs of his two sons. But he maintained that property even after partition was constructed by J.M. Gupta, HUF and before the completion certificate could be obtained, the same was sold to NT Estate & Investments (P) Ltd. for a total price of Rs. 66,02,736 vide agreement, dt. 18th Aug., 1984. The construction expenses were otherwise shown in books of Smt. Sushila Devi.
9. On the claim of sale after partition by Snit. Sushila Devi and the Huffs of two sons, the learned CIT(A) observed that information gathered showed that none of the members of Gupta family actually occupied any portion of building which stood in their names. He, therefore, rejected the claim of HUF and held that the assessees were not entitled to exemption under s. 54E of the IT Act. He further observed that question of any partition of property in the hands of Smt. Sushila Devi did not arise and smaller members of HUF could not be treated as owners of separate flats. The entire building was sold to one individual. As stated earlier, he accepted partial partition of the property but observed that 1/3rd share allotted to Arun Gupta went to him in his individual capacity and not as Karta of HUF. He further held that property could not be partitioned in case of Anil Kumar Gupta and Arun Gupta merely by filing affidavits. He, therefore, concluded that two sons had no HUFs. The document of declaration of partition (of 1984) was also held to be sham and any division of property on that basis was not valid. In his view, sale of all the flats could not be treated as short-term capital gains. The sale of flat, Nos. 1 & 2 on ground floor and flat Nos. 101 on first floor was to be treated as long-term capital gain entitled to exemption under s. 54E of the IT Act. The sale of other flats was held to be adventure in the nature of trade. Accordingly, I/3rd of the total gains was to be assessed in the hands of Smt. Sushila Devi and other 2/3rds in the hands of other two owners. While working out the gain, value of land is to be taken at original cost. The decision of Rajasthan High Court in the case of CIT v. Vimal Chand Golecha (1993) 119 CTR (Raj) 216: (1993) 201 HP 442 (Raj) was held to be not applicable as, in the view of the CIT(A), land and building constituted one and was to be treated as s single asset. The CIT(A) accordingly modified order of the AO.
10. The assessees has come up in appeal. We have heard both the parties. The learned counsel for the assessees vehemently challenged action of the AO under s. 147/148 of the IT Act and wanted us to see the reasons recorded by the AO. He also complained that Revenue authorities were not justified in holding that assessee were not entitled to examine reasons recorded before initiation of proceedings. The learned Departmental Representative did not have recorded reasons with him and, therefore, none could be produced before the bench. However, after examining facts and circumstances of the case, we are of the view that initiation of reassessment proceedings is without jurisdiction. In the first place lower authorities were not correct in not permitting the assessees to examine reasons recorded before initiation of proceedings. Secondly, the proceedings were initiated not on the basis of opinion formed by the AO but on the basis given by the Dy. Director of Inspection that transaction carried by the assessees was an adventure in the nature of trade. This learned Dy. Director of Inspection also doubted existence of HUF without examination of material available on record. In our considered opinion, the Dy. Director of Inspection or the AO did not examine order passed under s. 171, etc. to satisfy the test of a reasonable prudent man to form opinion that income had escaped assessment in this case. In the above background, we are unable to uphold the validity of proceedings under s. 147/148 of the IT Act.
11. In the circumstances of the case, we think it better to examine and decide the question raised on merit. The learned CIT(A) has accepted that land belonged to the HUF headed by J.M. Gupta who had constructed flats on the said land. The learned CIT(A) also accepted partial partition of the above HUF on 1st March, 1976, when specified shares were allotted to MST. Sushila Devi and to her two sons. Anil Kumar Gupta at that relevant time was married and had a son and, therefore, there should be no doubt that share allotted to him went to the HUF headed by him. The said HUF could be partitioned and mere fact that other copartner was a minor son was immaterial. The said HUF was rightly partitioned and the AO correctly accepted the said partition under s. 171 of the IT Act. In view of the above order accepting the partition the doubt expressed by the Dy. Director of Inspection or by the learned CIT(A) on existence and of partition of the HUFs must be held to be imaginary. These are not supported by any facts or law. The second son, no doubt, was unmarried on 1st March, 1976 and, therefore, the share in the property acquired by him went to him as an individual. But as soon as he got married the said share vested in his HUR Prior to 1984 when partition was effected by him he was also blessed with a son and, therefore, there should be no doubt that property acquired by him on 1st March, 1976, through partial partition of bigger HUF belonged to his smaller HUF. He was fully competent to partition that property and give shares to his wife and minor son. The doubt expressed by the learned CIT(A) about the existence or validity of above HUF is unjustified.
12. It is evident from the sale effected by seven persons that each of them sold specified share in land and building. The aforesaid share was acquired by each of them through partition of HUF and their ownership could not be doubted. The learned CIT(A)'s observations that the minor owners did not occupy the property but this is totally irrelevant. If the person had acquired ownership interest through partition, he cannot be divested merely because he had not occupied the property. It is settled law that a Karta of an HUF can effect a partition between himself and his minor sons and then hold the share of minor sons as a guardian of the minors and deal with it in accordance with law. No illegality in the sale effected on behalf of the minor children has been brought on record and it is not in dispute that purchasers from seven persons including the rflinors acquired valid title to the property. On the facts of the case, the transactions cannot be treated as an adventure in the nature of trade. These are to be assessed under the head "Capital gain" as transfer of capital assets was involved. The land admittedly was held for a period of more than six years and, therefore, any consideration on sale of land is to be assessed as long-term capital gain- The portion of superstructure sold was, admittedly, not held as a long-term capital asset and, therefore, capital gain on sale of superstructure is to be computed as short-term capital gain. The learned CIT(A) has already allowed relief under s. 54E of the IT Act and that point was not challenged before us. The AO shall compute capital gains keeping in view of our above observations.
13. The other question relating to charging of interest under ss. 217 and 139 of the IT Act is being treated as consequential as no arguments were advanced in respect of this issue.
14. In the result, both the appeals are allowed in the term stated above.