SHRI OM PRAKASH SHARMA,INDORE vs. THE ITO 3(4), INDORE

आदेश / O R D E R

Per B.M. Biyani, A.M.:

1. That, the Ld. CIT(A) has erred in law in confirming addition of Rs. 2,53,98,000/- made by Ld. AO by treating the amount received by appellant in respect of transfer of his interest in the property inherited by him viz., share in his father’s interest in the partnership firm M/s. Bhagirath and Brothers, which devolved upon him as a result of death of his father on 12.6.1990, treating such right as transfer of his share in the immovable property belonging to the partnership firm and subjecting it to the capital gain in spite of the admitted factual position that the property in question belonged to the partnership firm of M/s. Bhagirath and Brothers and further, invoking the provisions of section 50C and treating the stamp duty value (Guideline price) as deemed full value of consideration for such alleged sale of property.

2. That, the Ld. CIT(A) has erred in law in confirming the addition in respect of cash deposits of Rs. 33,27,700/- as unexplained investment under section 69 of the Income Tax Act. 4. The background facts leading to present appeal are such that the assessee-individual filed original return of income of AY 2012-13 on 29.03.2013 declaring a total income of Rs. 2,87,160/- from salary and other sources which was processed u/s 143(1) of the Act. Subsequently, the case

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 was selected for scrutiny under “CASS” system and statutory notices u/s 143(2)/142(1) were issued to assessee from time to time. Ultimately, the AO completed assessment u/s 143(3) after making certain additions and determining total income at Rs. 2,90,19,565/-. Aggrieved by additions made by AO, the assessee carried matter in first-appeal but did not get any relief.

Still aggrieved, the assessee has come in next appeal before us on two grounds as re-produced in preceding paragraph; we proceed to adjudicate in in seriatim.

Ground No. 1:

After death of father, when the assessee wanted to leave family and the matter prolonged for a long time between assessee and his brothers, the assessee decided to give up his share in favour of family members and executed sale-deed. Thus, it was a mere devolution of property-cum-forced sale to family members. With these twin-submissions, the assessee claimed before AO that neither the impugned transaction would be taxable nor the deeming provision of consideration u/s 50C would apply. Additionally, the assessee also made a submission that the consideration received under sale-deed had been re-invested in certain properties, therefore the assessee would be entitled to exemption u/s 54/54F which would also reduce taxable gain to Rs. Nil. The AO considered assessee’s reply in Para 6 to 9 of assessment-order and upon consideration rejected the same. He observed that the assessee received impugned property from his father in individual capacity. He noted that the assessee also made sale in individual capacity which is evident from sale-deed wherein the assessee’s individual name and PAN have been mentioned and there is no mention of assessee’s HUF or HUF’s PAN. Therefore, the capital gain was earned by assessee in individual capacity and taxable in his individual assessment. The AO rejected

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 assessee’s claim of benefit of section 47(i) available to partition of HUF. The AO also invoked section 50C and adopted full value of consideration at Rs. 2,61,83,000/- (stamps authority valuation) for computation of capital gain as against the actual sale consideration of Rs. 1,80,00,000/- declared in sale-deed. The AO also rejected assessee’s claim of exemption u/s 54/54F. Ultimately, the AO made addition by concluding thus in assessment-order:

“9. पूंजीगत लाभ म� वृ�� – करदाता �वारा भमौर� दुबे तहसील व िजला इंदौर म� ि�थत जमीन व इस पर �न�म�त शेड �. 1800000/- म� �व�य क� गई । िजसक� वत�मान गाइड लाईन मू�य उपपंजीयक �वारा �. 26183000/- �नधा�रत क� गई है । इस�लए धारा 50सी के इस संपि�त का �व�य मू�य पूंजीगणना, के उ�े�य म� �. 26183000/- माना जाता है । �नधा�रती �वारा ये संपि�त के खर�द के सा�य म� कोई भी �माण ��तुत नह�ं �कये है इस�लए आयकर �नर��क �ी रामलखन यादव क� �रपोट� के आधार पर �दनांक 01.04.1981 का मू�य �. 100000/- �नधा�रत �कया जाता है । िजसका सूचकांक लागत �. 785000/- �नधा�रत �कया जाता है इस �कार �. 25398000/- द�घ�काल�न पूंजीगत लाभ �नधा�रत �कया जाता है एवं करदाता �वारा HUF के नाम से खर�दा गया रहवाह� �लाट (िजस पर आयकर �नर��क क� �रपोट� के आधार पर �दनांक 08.03.2015 तक कोई �नमा�ण काय� नह�ं �कया गया) एवं अपनी प�नी के नाम से जमीन म� रा�श �व�नयोग क� गई है । �क�तु करदाता �वारा अपने �वयं के नाम से धारा 54/54F के अंतग�त छूट लेने हेतु रहवासी संपि�त (मकान) म� कोई भी रा�श �व�नयोग नह�ं क� गई है और ना ह� �व�नयोग के संबंध म� कोई सा�य ��तुत �कया गया है िजससे यह �तीत हो �क करदाता �वारा रहवासी संपि�त म� �व�नयोग �कया गया है । अतः �. 25398000/- द�घ�काल�न पूंजीगत लाभ मानते हुए �. 25398000/- द�घ�काल�न पूंजीगत लाभ के �प म� करदाता क� आय म� जोड़ा जाता है । साथ ह� आयकर अ�ध�नयम क� धारा 271(1)(सी) क� शाि�त काय�वाह� आरंभ क� जाती है । 7. During first-appeal, the CIT(A) upheld AO’s order by observing thus:

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13

8. Now, the issue before us is whether or not the capital gain assessed by AO was taxable in the hands of assessee? To address this issue, Ld. Senior Advocate representing the assessee [Hereafter referred as “Ld. AR”] initially carried us to the copy of sale-deed dated 30.05.2011 placed at Page No. 100-113 of Paper-Book and drew our attention to following paragraph mentioned on Page No. 2 of the deed:

“�व�ेताप� यह �व�यप� �ेता प� के �हत म� �न�न शत� एवं दा�य�व� के अधीन �न�नानुसार �लख देतै है �क :- यह �क �ाम भमौर� दुबे तहसील व िजला इंदौर म� ि�थत सव� नंबर 263/2 रकबा 1.00 एकड एवं सव� नंबर 263/3 रकबा 0.86 एकड होकर कुल रकबा 1.86 एकड़ भू�म व उस पर �न�म�त शेड मेसस� भागीरथ एंड �दस� के �वा�म�व एवं अ�धप�य का है । सव�थम उपरो�त व�ण�त संपि�त मेसस� भागीरथ ए�ड �दस� (भागीदार� फम�) म� पंजीकृत �व�य प� �मांक 1अ/1606/�दनांक 13.03.1970 के �वारा �य क� है । उ�त फम� के भागीदार �ी भागीरथ शमा� का �वग�वास �दनांक 12.06.1990 को हो गया होने से उपरो�त व�ण�त संपि�त म� से उनका एक �तहाई अ�वभाजीत �ह�सा �व�ेताप�, �ेताप� एवं �ीमती गंगादेवी प�त �व.�ी भागीरथजी शमा� एवं हंसा �पता �व.�ी भागीरथजी शमा� को उनके वैधा�नक उ�तरा�धकार� नाते �ा�त हुआ है । �व�ेता प� इस �व�यप� �वारा �ेता प� को मेसस� भागीरथ ए�ड �दस� क� संपि�त अथा�त �ाम भमौर� दुबे तहसील व िजला इंदौर म� ि�थत सव� नंबर 263/2 रकबा 1.00 एकड एवं सव� नंबर 263/3 रकबा 0.86 एकड होकर कुल रकबा 1.86 एकड़ भू�म व उस पर �न�म�त 20000 वग�फ�ट शेड के एक �तहाई भाग म� से अपना अ�वभािजत भाग अथा�त 4501 वग�फ�ट भू�म उस पर �न�म�त 1111 वग�फ�ट शेड (िजसे इस लेख म� "उ�त संपि�त" कहा गया है ) �व�य कर रहे है । वत�मान म� उ�त संपि�त �व�ेताप� के �वा�म�व एवं आ�धप�य क� है तथा �व�ेताप� को उसे �व�य करने का पूण� अ�धकार �ा�त है । उ�त संपि�त �यवसा�यक �े� म� ि�थत होकर औ�यो�गक उपयोग क� है । �व�ेताप� ने उ�त संपि�त के अ�त�र�त इस �व�य प� �वारा अ�य �कसी संपि�त का �व�य नह�ं �कया है ।”

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Referring to this para, Ld. AR submitted that the sale-deed executed by assessee clearly mentions that there was a property consisting of 1.86 acres of land and 20,000 square feet of shed constructed thereon owned by one M/s Bhagirath & Brothers, a partnership firm [hereafter referred as “firm/partnership firm”]. That the said property was purchased by partnership firm vide purchase-deed dated 13.03.1970. That Shri Bhagirath Sharma, one partner of the said firm (who was father of assessee) was having ‘1/3rd undivided share in property’. That Shri Bhagirath Sharma expired on 12.06.1990 and his ‘1/3rd undivided share in property’ devolved upon 6 legal heirs, namely assessee (son of late Shri Bhagirath Sharma mentioned as “seller” in the sale-deed); Shri Kailash Sharma, Shri Ashok Sharma & Shri Mool Chand Sharma (3 brothers of assessee and sons of late Shri Bhagirath Sharma mentioned as “purchaser” in the sale-deed); 2 other family members Smt. Ganga Devi (mother of assessee and wife of late Shri Bhagirath Sharma) and Smt. Hansha (sister of assessee and daughter of late Shri Bhagirath Sharma). Accordingly, the assessee being one of the legal heirs out of 6 legal heirs had share measuring 4,501 square feet in land and 1,111 square feet in constructed-shed. To clarify the calculation of assessee’s share, we may mention that the partnership firm owned 1.86 acres of land (1 acre = 43,560 square feet, therefore 1.86 acres = 81,021 square feet) and 20,000 square feet of construction. Therefore, 1/3rd share of assessee’s father comes to 27,007 square feet of land and 6,666 square feet of construction and assessee’s 1/6th share in father’s share comes to Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 4,501 square feet of land and 1,111 square feet of construction. The assessee, described as “Seller” in the sale-deed, sold his share, namely 4,501 square feet of land and 1,111 square feet of construction to his 3 brothers described as “Purchaser” in the sale-deed [The CIT(A) has in advertently mentioned 2 brothers in place of 3 brothers]. Ld. AR that the sale-deed itself clearly mentions the status of property i.e. the property was actually owned by firm M/s Bhagirath & Brothers and not by assessee’s late father. The assessee’s father only had 1/3rd undivided share in the property of firm which upon his death devolved upon 6 legal heirs (including assessee). Ultimately, the assessee executed sale-deed to transfer/relinquish his own undivided share in father’s 1/3rd undivided share in the property owned by firm. Ld. AR submitted that although a sale-deed has been executed by assessee with his individual name and PAN but there is no taxable income earned by assessee-individual because of two alternative reasons mentioned below:

(i) The first reasoning advanced by Ld. AR is such that the impugned sale-deed had been executed by assessee as a part of a ‘family settlement’ agreed between assessee and his family members, therefore it was not a sale in fact. To prove existence of ‘family settlement’, Ld. AR drew our attention to a “Memorandum of Family Settlement” dated 30.05.2011 on stamp paper of Rs. 100/- made between all 6 legal heirs (including assessee), which is filed by assessee as an “additional evidence” under Rule 29 of Income-tax (Appellate Tribunal) Rules, 1963 on 21.06.2017 and also re-filed at Page No.

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 87-91 of the “Written-Submission” filed by assessee on 13.10.2013.

Referring to this document, Ld. AR tried to demonstrate that there was a ‘family settlement’ arrived at between family members (including assessee) under which the assessee agreed to relinquish/transfer the impugned undivided share in property of firm and it is only in furtherance of such ‘family settlement’ that the assessee executed sale-deed. Then, relying upon certain judgements copies filed in Paper-Book, Ld. AR submitted that the ‘family settlement’ does not entail any taxation under Income-tax, therefore the present case of assessee being a situation of ‘family settlement’, there arises no taxability.

(ii) The second plank of reasoning advanced by Ld. AR is such that the impugned property was actually owned by partnership firm and the assessee’s late father had no right in the property. When the assessee’s father had no right, the assessee cannot have any right. Therefore, even if a sale-deed had been executed by assessee for whatever reason, it cannot give rise to any income or taxable income in the hands of assessee. To explain as to why the assessee’s father had no right in the said property, Ld. AR relied upon section 14 of The Indian Partnership Act, 1932 which prescribes thus:

“14. The property of the firm - Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm; and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.”

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Then, Ld. AR invited our attention to a commentary given by an author on aforesaid section 14, filed at Page No. 34 of the Paper-Book, reading as under:

“7. No part of property of the firm or a definite share belong to any partner individually – It may be said that the rule adopted by English Courts is that real estate intended by the partners to constitute a part of the partnership property or treated by them as belonging to the partnership is regarded in equity as converted in to personality for all purposes and also for the settlement of the claims of the partners inter se. The law in India is not different. Secs. 14 and 15 of the Indian Partnership Act, 1932, speak about what would constitute the property of a firm and declare that such property shall be held and utilized for the purpose of the partnership thereby indicating that so long as the partnership continues no part of the assets of a partnership assets could be utilized for a purpose other than that of the partnership. A partner, therefore, seeking to get his share could not get his share in species in the movable and immovable properties but only after the assets have been converted into money, debts and liabilities discharged and it is only in the residue that he could get his proportionate share. The statute enjoins this process being gone through before a partner gets a share in the assets of the partnership and it is governed by Secs. 46,48 and 49 of the Partnership Act. It would, therefore, follow that a partner cannot predicate of a definite share in immovable property which he could transfer or give up. The concept of realty distinguished from personally under the English Law and by the English lawyers and jurists is not always identical with what the Indian Law and lawyers understand. The idea of ownership or real estate by a Hindu coparcenery is unique. To some measure an immovable property owned by a partnership is skin to, such a property belonging to a Hindu Joint Family. The ownership vests in each member of the coparcenary but there is a restriction on his power of disposal. The coparceners may agree not to partition the joint property and that will be binding upon them through their heirs may not be bound by such agreement. Similarly during a partnership the partners cannot take away their property that they may put into the stock of partnership. The individual owner becomes a joint owner with other partners. He retains an interest in that immovable property. Partnership is only the relationship between the partners. The firm is only an alias for the partners. When a firm is said to own a property, it is same as saying that the partners jointly own the property. Though in the mercantile world the firm is used as a quasi corporation, for sake of convenience, it is really not so. It is different from an Incorporated company, private or public. According to the definition of immovable property in the General Clauses Act any profit arising from land is also immovable property. An interest in the future sale-proceeds of an immovable property was held by the Judicial Committee to be immovable property. A partner’s interest or share in the firm’s assets is his proportion of partnership after payment of the firm’s debts and liabilities out of the assets. In that sense his interest in the partnership may be taken to be an interest in the immovable property belonging to the firm. Many of cases, both English and Indian, undoubtedly held such interest of partners not to be immovable

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 property. But that view is not consistent with the Indian concept of realty and ownership, or the view of the Judicial Committee referred above. Thereafter, Ld. AR relied upon decision of Hon’ble Supreme Court in Addanki Narayanappa and Another Vs. Bhaskara Krishtappa and 13 others (1966) SCC Online SC 6 : (1966) 3 SCR 400 : AIR 1966 SC 1300; we quote below the paras referred by Ld. AR during hearing:

property of the firm. The subject of dissolution of a firm and the consequences are dealt with in chapter VI, sections 39 to 55. Of these the one which is relevant for this discussion is section 48 which runs thus: "In settling the accounts of a firm after dissolution the following rules shall, subject to agreement by the partners, be observed: (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits. (b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :- (i) in paying the debts of the firm to third parties: (ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; (iii) in paying to each partner rateable what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits."

From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing, to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in cl. (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48. It has been stated in Lindley on Partnership, 12th ed. at p. 375: "What is meant by the share of a partner is his proportion of the partnership assets after they have been ill realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. This it is, and this only which on the death of a partner passes to his representatives, or to a legatee of his share .......... and which on his, bankruptcy passes to his trustee."

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 On perusal of these documents filed by assessee himself, we find that the “Partition-Deed” has been filed as “Annexure-C”. A careful reading of “Partition-Deed” reveals that the HUF had only movable property in the form of certain unsecured loans given to parties which were partitioned. The deed also makes it clear that there is no immovable property in HUF. Thus, the claim of transfer of impugned property under ‘partition of HUF’ as projected by assessee before AO, stands unproved. It seems that realizing this eventuality, the assessee has himself mentioned on Page No. 2 of the application under Rule 29 “family arrangement or partition”, “Family Settlement”. Needless to mention that the Ld. AR, during hearing before us, has also not made any pleading qua the claim of ‘partition of HUF’. We may also mention here that even if we assume that there was a partition of HUF then also the exclusion from ‘transfer’ u/s 47(i) is available only to HUF at the time of distribution of assets to its members on partition; the said exclusion is not available to a member who transfers his share/right in divided or undivided property. The act of transferring any share/right in property by a member to other members would be a posterior event to the partition of HUF and such act does not fit in section 47(i). Therefore, the assessee’s claim of ‘partition of HUF’ and thereby exclusion from taxation is an unproved claim besides being untenable in section 47(i); we are rejecting the same.

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 right became right of brothers for a consideration. Therefore, when a de facto transaction of sale by assessee has been made and the assessee has received a hefty consideration of Rs. 1,80,00,000/- for transfer of his right, it would attract taxability and it is nothing to do with the provisions of section 14 of the Indian Partnership Act. The department is not asking to pay tax on any kind of ‘notional’ transfer, the revenue’s case is such that the assessee has made an actual sale which is taxable. Needless to mention that the assessee is also claiming to have utilized the sale consideration of Rs. 1,80,00,000/- for making investments in newer properties (it is a different point that the assessee claimed exemption u/s 54/54F on the basis of those newer investments but the AO has disallowed exemption on a different premise). Therefore, we do not find any merit in the second claim of assessee argued by Ld. AR too. The same is hereby rejected.

Ground No. 2:

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13

Shri Om Prakash Sharma,Indore vs. ITO,3(4), Indore. AY 2012-13 Placing reliance on above submission, Ld. AR prayed that the addition has been wrongly made/upheld at lower level and it must be deleted.

Order pronounced in open court on 18.01.2024.