Income Tax Appellate Tribunal - Bangalore
Income-Tax Officer vs D. K. Panduranga Shetty & Sons on 1 February, 1996
Equivalent citations: [1996]58ITD353(BANG)
ORDER
Bandyopadhyay, AM
1. This appeal has been filed by the Department against the order of the CIT (A) directing AO not to assess any capital gains on the transfer of land house property belonging to the assessee to a partnership firm.
2. The assessee is a HUF. It was owning a land and house property which had been shown to be of the value of Rs. 80,000 in the return of wealth filed by the assessee for the assessment year 1980-81. A partnership firm called M/s. Kalpana Construction Co., was formed on 31-12-1980 with the following partners and the other details relating tot he formation of the partnership :
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Name of the partner Share of Amount of capital
profit contribution
or loss
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D.K. Panduranga Shetty
(HUF) 60% Rs. 5,00,000 (by way
of contributing
property along with
building under
consideration)
Smt. Sulakshana, wife
of Shri D.K. Panduranga 20% Rs. 10,000
Shri D.K. Panduranga
(individual) 10% Rs. 1,00,000
Miss Bindu Panduranga,
daughter of Shri D.K.
Panduranga 10% Rs. 10,000
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The ITO noted that although the property under consideration had been valued at Rs. 80,000 only in the wealth-tax return filed by the assessee for assessment year 1980-81, on 31-12-1980 however, the same property was contributed as capital to the abovementioned firm by declaring its value to be Rs. 5 lakhs. The ITO furthermore noted that although the partnership was to deal in real estate, including dealing in land, buildings, flats, etc., and constructing and letting them out and carrying on such other businesses as the partners might determine from time to time, the only income declared by the firm for the first year, i.e., assessment year 1981-82 was, however, Rs. 18,444 being commission received. The accounts for this year noted that inasmuch as no sales had been made, the stock brought in by the partners were considered at the cost on the closing day of the accounting year without any revaluation. For assessment year 1982-83 again, the ITO noted that no sales were made and the stocks remained as they were. There were no transactions during that year also excepting payment of Corporation tax, light and water charges. The ITO also mentions that the firm M/s. Kalpana Construction Co. did not file its returns of income after assessment year 1982-83. The assessee-HUF retired from the abovementioned firm on 15-1-1988 and the property which had originally been transferred to the firm was received back by the assessee. The same was sold by it for Rs. 7.50 lakhs in March 1988.
3. So far as the question of exigibility to capital gains on transfer of the property by the assessee to the firm in the present assessment year is concerned, it was pleaded by the assessee that in view of the decision of the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 no such capital gains could be considered to be liable to be taxed. The ITO, however, quoted from the abovementioned judgment of the Supreme Court and came to the conclusion that inasmuch as the partnership firm, viz., M/s. Kalpana Construction Co., had been formed by the assessee-HUF along with the wife and daughter of its karta and the karta himself, and since no real business activities had been conducted by the firm, the said partnership was merely a device for converting the asset of the assessee into money with a view to avoid liability for capital gains. Accordingly, the ITO charged the assessee to capital gains tax by considering the amount of Rs. 5 lakhs being value of the property shown in the partnership deed to be the consideration for transfer of the property as against its cost as per the WT return for assessment year 1980-81 considered at Rs. 80,000. The difference of Rs. 4,20,000 was actually treated as the amount of capital gains.
4. In the first appeal, however, the CIT (A) after taking into consideration the facts of the case, came to the conclusion that the assessee should not be considered to be liable to capital gains tax in this case and that, on the other hand, the assessee should receive the benefit of the decision of the Supreme Court in the case of Sunil Siddharthbhai (supra) in a general manner. The CIT (A) took special note of the contention of the assessee that the partnership firm, viz., M/s. Kalpana Construction Co., actually wanted to construct flats and sell the same but due to certain unavoidable problems between the said firm and the contractors, the business activities could not be carried on. Accordingly, the CIT (A) held that there was no mala fide or invalidity in constituting the firm and that the transaction appeared to be genuine.
5. Before us, the learned DR has strongly contended that the firm was formed merely for the purposes of avoiding capital gains on sale of the property ultimately made by the assessee. It has furthermore been argued that in any case, the transfer of the property by the assessee to the partnership firm itself attracts levy of capital gains tax. In support of this contention, reliance has been placed not only on the observations made at the last portion of the judgment in the case of Sunil Siddharthbhai (supra) but also on two other decisions to which we are adverting below.
6. Reliance has been placed by the learned DR on the decision of the ITAT, Bombay Bench 'B' (Special Bench) in the case of ITO v. Ramkrishna Bajaj [1992] 198 ITR a. In the said case, the assessee owned a number of shares including shares of two group companies and also entered into partnership with some other members of the same group wherein he brought in as his capital, 3000 shares of one of the companies after converting the same into stock-in-trade. The partnership firm started selling plots of land and also shares contributed as capital by the others belonging to the group including the assessee. The advances so collected were distributed amongst the partners and credited to their respective capital accounts whereby all the partners got their capital back (in cash) which they had contributed by way of land/shares after converting them into stock-in-trade. The firm under consideration was treated as a registered firm. Ultimately however, the Tribunal, by following the discussions made in the last portion of the decision in the case of Sunil Siddharthbhai (supra) held that although the firm formed by the assessee along with others might be genuine and recognised as such, under section 185 of the Act, the transaction might not, however, be genuine. The Tribunal finally held that the Bajaj Group as a whole, had adopted a device with a view to avoid huge amounts of tax on capital gains on sale of assets which the partners of the newly formed firm and brought into the firm by way of their share capital, and hence, the assessee was liable to tax on capital gains in the aforesaid transaction.
7. In the other case of Smt. Nayantara G. Agrawal v. CIT [1994] 207 ITR 639 (Bom.), the assessee formed a firm with a company in which her husband was a director to carry on business of purchase and sale of lands. The assessee brought in, as per capital contribution, land valued at Rs. 10 lakhs, whereas the company did not bring in any capital. No business of sale and purchase of land was conducted by the firm. The assessee retired from the firm within three months of its formation without giving the required notice. The firm was also dissolved within three months of its formation. The land was retained by the company and the assessee in consideration got Rs. 10 lakhs worth of shares in the company. It was held by the Bombay High Court that in the circumstances of the case, the true nature of the transaction was transaction was "transfer of land" and the various steps originating from the affidavit of the assessee and formation of partnership and culminating in the dissolution of the firm, in the process leaving the land with the company, were nothing but a device to avoid capital gains tax leviable under section 45 of the Act on the transfer of the land to the company.
8. Before we proceed to decide the issue, it would be worthwhile to repeat/quoting the relevant extract from the judgment of the Supreme Court in the case of Sunil Siddharthbhai (supra) which has been done by both the lower authorities :
"If the transfer of the personal assets by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain it will be open to the Income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, whether the transaction of transferring the personal assets 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 assets into money substantially for the benefit of the assessee while evading tax on a capital gain. The Income-tax Officer will be entitled to consider all the relevant indicia in this regard, viz., the partnership is formed between the assessee and his wife and children or substantially limited to them whether the personal asset it sold by the partnership if 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 assess to it, whether the partnership 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 Income-tax Office enters upon a scrutiny of the transaction, for the task of determining whether a transaction is a sham or an illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth."
In the instant case, many of the facts as suggested by the Supreme Court to be examined tend to affect the genuineness of the partnership firm formed by the assessee. The firm under consideration was formed by the assessee-HUF, its karta and the wife and daughter of the karta. There were very limited activities of the firm although the CIT (A) has mentioned that on account of certain practical difficulties, the firm was not in a position to carry on its regular business. It is also difficult to find out the reason for contribution of the property by the assessee to the firm inasmuch as the firm did not really require the said property as part of its assets. This is also evident from the fact that on retirement of the assessee from the firm, the property under consideration was returned back to it. However, two facts clearly mitigate the other considerations against the assessee. One of the these two facts is that whereas the firm was formed on 31-12-1980, the property under consideration was ultimately returned back to the assessee on 15-1-1988 and thereafter again, it was sold by the assessee in March 1988. Thus, there was a very long gap between formation of the partnership and contribution of the property by way of capital to it by the assessee and the ultimate sale of the property. It will be difficult to say that the ulterior motive of the assessee was to evade capital gains on the sale of the property which took place after a long gap of more than 7 years. The second mitigating circumstance which is of considerable importance, is that whereas in the two cases relied upon by the learned DR, the property contributed as capital to the respective firms was either retained by the other partner or sold away and the respective assessees were compensated in cash at the value declared in the partnership deed in respect of such sales, in the instant case, however, the property was not at all transferred by the partnership firm M/s. Kalpana Construction Co. On the other hand, the property was also ultimately made by the assessee itself. Hence, capital gains, if any, would ultimately arise in the hands of the assessee itself and the intervention of the firm is not at all material in determining the quantum of the capital gains. Whether, the assessee would argue at the time of computation of capital gains on the ultimate sale of the property in March 1988 that the cost of the property should be taken at Rs. 5 lakhs as shown in the books of the firm or not, is altogether a different issue. The Department may try to tackle the issue by relying on the original cost of the property in the hands of the assessee or in some other way. But it is clear on facts that by transferring the property to the firm by way of contributing the same towards capital of the assessee, the assessee was not in any way able to alienate the property ultimately. The discussions made by the Supreme Court, in the case of Sunil Siddharthbhai (supra) rest with considering whether the contribution of the property towards the capital of the firm by itself tantamounts to transfer of the property by the assessee at higher amount of consideration than the original price of the property. There is no doubt about the case that the facts are not so in the instant case. In the other two cases, the property ultimately passed out of the hands of the respective assessees and they got adequately compensated for the same. Capital gains tax was found to be exigible therefore, on the transfer of the property accordingly. In the instant case, the property remained with the firm for a long period of more than seven years and was not sold to outsiders during this period. The ultimate sale of the property was again effected by the assessee itself and not by the firm.
The Supreme Court clearly held in the case of Sunil Siddharthbhai (supra) that although there is a transfer of a capital asset within the terms of section 45, when a partner of a firm makes over capital assets which are held by him to the firm as his contribution towards capital, at the same time again, it is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal assets 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. In the instant case, the dissolution of the firm took place after a long gap of seven years and it cannot, therefore, be said that at the time of formation of the firm itself, the assessee had already envisaged the said dissolution and corresponding transfer of the property to outsiders at a much higher value. The Supreme Court also held in the said case that the credit entry made in the partner's capital account in the books of the partnership firm does not at all represent the true value of the consideration for the said transfer. In the instant case, the ITO held the amount of Rs. 5 lakhs shown in the books of the firm to be capital contribution made by the assessee in the form in the property to be the value of its consideration. According to the Supreme Court, such action on the part of the ITO is untenable. We are, therefore, finally of the opinion that the decision of the Supreme Court in the case of Sunil Siddharthbhai (supra) is fully applicable to the facts of the present case and in spite of there being a transfer made by the assessee to the partnership firm, of the property under consideration, in absence of any idea about the true value of consideration thereof, capital gains tax cannot be considered to be exigible in the present case. Ultimately therefore, we agree with CIT (A) in coming to the conclusion that capital gains tax is not exigible on this transfer.
9. The departmental appeal is, therefore, dismissed.