THE ACIT, 3(1), BHOPAL vs. SHRI SEEMA NAGPAL, BHOPAL

Appeal by the assessee and the revenue are directed against order of the CIT(A), Bhopal dated 3.9.2014 pertaining to the assessment year 2009-10. Both the appeals are taken up for hearing together for the sake of convenience. First we take up assessee’s appeal. The assessee has raised following grounds of appeal:-

1. That the learned CIT(A) be held to have erred in sustaining the addition for long term capital gain made substantively in the case of the appellant. The addition made may therefore be deleted.

2. That the learned ACIT and also the learned CIT (A) be held to have erred in not considering full facts regarding the sale of workshop and treating the transaction to be made by the appellant individually. The addition made and sustained without considering full facts may therefore be deleted. 3. In the alternative and without prejudice to the grounds stated above, the addition of Rs.97,91,550/- made for long term capital gain in the assessment order u/s 143(3) and further increased to Rs.1,38,49,155/- in order u/s 154 be held to be high and unreasonable and be suitably reduced. 4. The appellant crave leave to add, amend or alter any ground of appeal before or during the course of appellate proceedings.

before or during the course of appellate proceedings. The learned assessing Officer discussed the addition of capital gain at Page 2 and 3 of the assessment order. The relevant discussions are reproduced here under- Assessee wide submission dated 09.11.2011 furnished details as was asked above. From the purchase deed of plot it is observed that the assessee and his wife Smt. Seem a Nagpal were purchased plot jointly from Shikhar Grah Nirman Sahkari Sansthan Mydt., Bhopal having khasra no. 36,37,4211,4212,43,40,38 & 41 measuring 6000 Sq. Ft. (557.62 Sq. Mt.) on 28.03.2002 for consideration of Rs. 3,30,0001-. Further the assessee constructed double storied building on the said plot and sold the same on 0910412008 for sale consideration of Rs. 1,10,00,000/- to My Bike through Partner Shri Saurabh Garg, Bhopal. However, the market price of the above property mentioned was Rs. 1,43,00,000/-. Assessee vide reply dated 21.11.2011 regarding long term capital gain of sale of property is as under:- "MIs Active Motors was a partnership firm of Shri Pawan Nagpal and Smt. Seema Nagpal. It was working since 1999. In the F. Y. 2001-02 plot of land was purchased. The payment was made from the funds of the firm, The payment had been made vide cheque no. 797626 dated 27.02.2002 of State Bank of India CC Ale, Sultania Road, Bhopal (The firm PAN is AAEFA8145J. It was regularly being assessed under the Income Tax Act). A workshop building was constructed on that plot in the year 2002-2003 and onwards. The above building was sold by partnership firm MIs Active Motors along with the other assets of the business in the F. Y. 2008-09. The profit earned in the transaction was offered to 4. Pawan Nagpal & Seema Nagpal income tax in the return of the relevant financial year (A. Y. 2009- 10). " The contention of the assessee cannot considered to be true and seems to be misleading. The assessee never transferred such property in the name of firm MIs Active Motors and not shown any capital gain if they transfer the above property in the said firm. From the purchase deed and sales deed of the property it is clearly mentioned that the property is purchased by Mr. Pawan Nagpal and Smt. Seema Nagpal and also sale by them only. Also the property was never been transferred to the firm MIs Active Motors is evident from sale deed itself. Further no such capital gain has been shown by them on such transfer to the said firm. On the basis of above facts, it is very clear that the said property was purchased by assessee and his wife and sale by them only. That on perusal of the above it will be seen that assessee along with his wife Smt. Seema Nagpal was carrying on business under the name and style M/S Active Motors Bhopal under dealership of Hero Honda Motor Cycle.That it was explained before AO that said firm purchased a plot Shikhar Grah Nirman Sahkari Sansthan Mydt., Bhopal having khasra no. 36,37,4211,42/2,43,40,38 & 41 measuring 6000 Sq. Ft. (557.62 Sq. Mt.) on 28.03.2002 for consideration of Rs. 3,30,000/-. The payment of Rs. 3,30,000/- was made by firm M/s Active Motors Bhopal to the seller of the land by cheque no. 797626 dated 27.02.2002 of State Bank of India CC Alc., Sultania Road, Bhopal and accordingly the said land as shown as addition to fixed assets for F.Y. 2001-02 total cost Rs. 4,25,3301-,breakup of the same are:- Particulars Amount Cost of land 3,30,000/- Registration Expenses 78,310/- Other Expenses 17,020/- Total Rs.4,25,330/- Please refer page 7 of paper book. This fact was duly explained to the AO vide letter dated 21.11.2011. The only objection of AO that in case of transfer of property to the firm attracts capital gain which has not been shown by the assessee. The finding as recorded by the AO is contrary to the facts stated at para 3 above. The another objection of AO was that sale deed was executed in the name of partners of land purchased. The learned AO also did 5 Pawan Nagpal & Seema Nagpal not appreciated that assessee firm constructed the building in the F.Y.2003-04 to 2005-06 and depreciation was claimed on said building for F.Y. 2006-07 and 2007-08. Please refer schedule of fixed assets page 9-13 of the paper book. During the course of appeal proceedings, same facts were pointed out before CIT(A). The learned CIT(A) discussed the facts on page 3 of the appellate order. The learned CIT(A) was of the view that assessee could not explain what is the new project. He was also not convinced to the investments in the new project. In fact the new project was nothing but a construction of building on the land purchased in the name of partners and debited to the books of the firm. The kind attention is invited to the schedule of fixed assets referred above. The firm claimed the depreciation on building under the head new project which was duly allowed in earlier years. Further the firm in which assessee is a partner has not claimed depreciation on the block of assets of land (please refer page 5 of appellate order) as no depreciation is allowable on land under the income tax act. The final findings of the CIT(A) are:- From the facts of the case discussed above, it is held that the land purchased in the F Y. was held by the appellant as capital asset and there was no construction of any workshop over the alleged plot of land by the partnership firm. In absence of any material evidences regarding the new project and its use for business purpose of the firm, it is difficult to accept that the new project was constructed within the plot of land purchased in F Y. 2001-02 and it was used for business purpose of the firm. In view of the above observation, the, submission of the learned AR is not acceptable as factually correct. The applicant has disclosed house rent of Rs. 5,02,2131- in the year under reference. As per the Schedule-D, another block of asset under the title "building residence" was found appearing throughout the years and upto the end of the year under reference. The block "Building" was the asset used for the purpose of the business over which the appellant claimed depreciation regularly. There was no addition to this block of asset from F Y. 2001-02 to F Y. 2008-09. The block "New Project", building and furniture’s were shown to have been write off by the end of the year under reference on account of closure of the firm and transfer of assets and liabilities to M/s My Bike. The sale deed speaks about sale of the plot and house building located in market area and after consideration of overall 6 Pawan Nagpal & Seema Nagpal facts and circumstances of the case, it is inferred that the alleged new project is nothing but the housing building constructed on the plot of land over which income from house property have been shown in the return. In the given facts and circumstances of the case and relying on decision of CIT vs Kumbhazha Tourist Home(ker) 328ITR 600, I find that there is no infirmity in the order of AD in assessing long term capital gain on transfer of the alleged land substantively in the hands of the appellant and, hence, addition made on this account is confirmed. That on perusal of the above it will be seen that there was no construction of any _ workshop over the alleged plot of land by the partnership firm. In this regard.it is submitted that learned CIT(A) totally failed to go through the copy of the sale deed executed in favor of MIS My Bike. Please refer page 16 of paper book where it has clearly mentioned that property is having two floors as such the findings recorded by the CIT(A) is not in appreciation to the facts and evidences available on record of AO and CIT(A). However learned CIT(A) referred to sale deed and accepted the fact that there was a construction of building on the plot. At the final, the learned CIT(A) relied to the decision of Kumbazha Tourist Home(Ker)328 ITR 600. The said case is in favor of the assessee wherein it has been held by the honorable Kerala high court that once the property is appearing in the books of the firm and in case of dissolution of firm sec 45(4) is applicable and capital gain arises on such transfer is to be taxed in the hands of the firm in view of the provisions of the sec 45(4) of the act. The Assessee is a partner in a firm named and cited as Active Motors. The main business of the firm was running agency of Hero Honda Motor cycles at Bhopal. F or this purpose, the firm required a showroom and workshop. Accordingly it purchased a plot in Halalpur, Lalghati, Bhopal which was registered in the name of partners including the present Assessee. The purchase consideration was paid from out of funds of the partnership firm including the registration expenses. As such the ownership in real terms belonged to the firm with the insignificant difference that the same was registered in the name of partners. The firm put up the construction on the above plot by creating infrastructure for showroom. Entire expenditure was met from the coffers of the firm only. In support of this submission copies of details of assets as along with balance sheets are annexed herewith. Your honor may appreciate that above facts clearly show that the plot and the 7 Pawan Nagpal & Seema Nagpal superstructure belonged to the firm in all respect in the capacity of real and beneficial owner of the property. The firm continued to enjoy the benefits of ownership all along till it decided to give up the agency of Hero Honda. At this juncture, new business concern My Bike came into picture, who was allotted the agency. This new concern proposed to purchase the above property i.e. the plot with superstructure as being suitable to them. Therefore, the property in question was sold to this concern on 09/04/2008 for a consideration of Rs. 1,10,00,0001-. The partnership firm very honestly worked out the capital gain chargeable on the said transaction and paid the capital gain tax accordingly. The income which arose to the firm was duly disclosed by the firm in its return of income for the A Y 2009- 10. Please refer Acknowledgement of ITR along with Computation of Income of M/s Active Motors (the partnership firm) on page no. 27-29 of the paper book (Part-II). The assessing officer during the course of assessment uls 143(3) in the Assessee's case did not appreciate the above facts in the right perspective. He opined that since the plot was in the name of partners, the capital gain tax was chargeable in the hands of partners only. At the first appeal stage, the learned CIT appeal did not appreciate the facts of the case. He held that no construction was carried out on the plot, which is far from truth. The fact relating to the construction on the plot under reference is well evident from the balance sheet. Accordingly, the findings of the Learned CIT (appeal) are contrary to the factual matrix of the case. Reference is invited to Honorable Delhi High Court in the case of CIT vIs A.R. Chaddha & Co. (247 ITR 782,784) in which it has been held that "where the intention of the Assessee was to divest both the property and the income there from the rental income of the property was not to be included in the total income of the Assessee". It is reiterated that income from capital gain has already been included in the firms case for the A Y 2009-10. Therefore learned Assessing officer erred in taxing the same again in the hands of Assessee and learned CIT (appeal) also did not appreciate the facts in the right perspective. In this regard reference is invited to honorable Kolkata High Court decision in the case of CIT vIs Badulipur Tea Company (249 ITR 483,485), catch note of which is being reproduced here - Income-Accrual-Sale of business-Assets and liabilities of 8 Pawan Nagpal & Seema Nagpal assessee-company taken over by another company as per agreement which was approved by the RBI retrospectively from the date of agreement-Income of the year under consideration from the tea estate already assessed in the hands of transferee company-Same could not be assessed in the hands of the assessee Kerala High Court had an occasion to decide a similar issue in the case of D.K.B. & Co. vIs CIT (233 ITR 344,348) in which it has been held that – Income from deposits in the name of husband of one of the partner of the firm has been held to belong to the assessee firm because such deposits really belonged to the firm. Reference is further invited to honorable Andhra High Court decision in the case of Abdul Kareemia & Brothers VIS CIT 144 ITR 442 in which the Honorable High Court held that - It is equally well settled by the decision of the Supreme Court in Narayanappa's case, that a partner cannot at any given point of time claim any of the firm's properties to be his notwithstanding the fact that at one time they belonged to him and that he had put the properties into the assets of the firm. It has been found by the Tribunal and also the lower authorities as a fact that right from the depreciation on these properties also and that the income from these properties was treated as the firm's income and accordingly divided between the partners. Another significant finding is that the properties were also acquired with the funds of the firm and the cost of these properties was debited in the books of the firm. From all these circumstances, the departmental authorities and the Tribunal concluded and, in our opinion, rightly, that these properties became and were treated as the properties of the firm. Once that is so, it is not disputed that by merely making entries in the account books of the firm, the firm's properties cannot become and cannot be treated to have become the separate properties of the partners. Copy of above case laws enclosed herewith. It is therefore requested to delete the above addition from the hands of assessee since the amount of long term capital gain is already been taxed in the hands of firm Mis Active Motors and assessing the same again in assessee's hands will amount to double taxation. Therefore the same may kindly be deleted.

4. Per contra Ld. DR opposed the submissions of the Pawan Nagpal & Seema Nagpal assessee. Ld. DR vehemently argued that the Ld. CIT(A) was not justified to delete the additions from wife of the assessee. He submitted that the assessee had purchased the property in the joint name of his wife Smt. Seema Nagpal. He submitted that plot was jointly owned which was purchased from Shikhar Grih Nirman Sahkari Sansthan for a sale consideration of Rs.3,30,000/- and further constructed double storied building on the said plot and sold the same on 9.4.2008 at a sale consideration of Rs.1.10 crores. The A.O. adopted the market rate of sale consideration at Rs.1.43 crores and computed the long term capital gain at Rs.97,91,550/- and added the same in the assessee’s hand on the protective basis and in the hands of Shri Pavan Nagpal, husband of the assessee on substantive basis. He submitted that the Ld. CIT(A) has deleted the addition purely on the basis that same has been substantively added in the hands of Shri Pavan Nagpal. He submitted that both the authorities have failed to appreciate the fact that property in question was purchased out of funds of the firm however sale deed was executed in the name of partners. It is also submitted that the building was constructed out of funds belonging to firm. The Revenue has been allowing depreciation thereon. 10 Pawan Nagpal & Seema Nagpal

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taken before him for decision afresh. Ld. CIT(A) is hereby directed to verify the claim of the assessee that the land in question was acquired and building thereon was constructed out of funds of firm and decide the issue afresh in accordance with law. The grounds raised in the appeal are allowed for statistical purpose. Appeal of the 17. Pawan Nagpal & Seema Nagpal assessee is allowed for statistical purposes.

Now coming to the Revenue’s appeal in ITANo.794/Ind/2014 The Revenue has raised following grounds of appeal:

“On the facts and in the circumstances of the case, the Commissioner of Income Tax (Appeal)-I has erred in:-

1. 1. Deleting the addition of Rs.1,38,49,155/- on account of Long Term Capital Gain in the hands of the assessee (As per the rectification order dated 19.09.2013).”

7. The Revenue in the present appeal has raised a solitary ground against deletion of Long Term Capital Gain which was made by the Assessing Officer on the protective basis. The representative of the respective parties have adopted in the same argument as were in ITANo.801/Ind/2014 wherein we have decided the appeal observing as under:

6. The contention of the assessee is that the land in question was transferred to the firm and a building was constructed thereon. It is also pointed out that claim of depreciation was being allowed to the firm. Another argument of assessee is that the firm is the real owner of the property as the cost of acquisition of this property was made by the firm but not the assessee. There is no dispute with regard to the 18 Pawan Nagpal & Seema Nagpal property in question is an immovable property, the assessee is required to prove the transfer of such property to the firm. In our view merely allowance of depreciation to the firm was not sufficient to hold that property was transferred to the firm. It is settled position of law that the transfer of any immovable property is required to be effected through a registered document. However, the question that the firm is the real owner of the property is not adjudicated by the authority below. Ld. counsel for the assessee pointed out that in acquisition of land and construction of property thereon funds belonging to firm was utilized and the assessee and his wife are merely name lenders. Moreover, it is a settled position of law that a partnership firm can acquire property in the name of its partners. We find merit into the contention of the assessee that a partnership firm however may be a separate entity but it acts through its partners. After considering the totality of fact and particularly in view of fact that the Ld. CIT(A) has not adjudicated this aspect. We hereby set aside the order of Ld. CIT(A) and restore the grounds of appeal taken before him for decision afresh. Ld. CIT(A) is hereby directed to verify the claim of the assessee that the land in question was acquired and building thereon was constructed out of funds of firm and decide the issue afresh in accordance with law. The grounds raised in the appeal are allowed for statistical purpose. Appeal of the assessee is allowed for statistical purposes.

In view of the above grounds raised in revenue’s appeal are allowed for statistical purpose.

Pawan Nagpal & Seema Nagpal

The order pronounced in the open Court on 15.03.2019.