Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Per N.V. Vasudevan, Judicial Member These are appeals by the assessee against the common order dated 29.11.2013 of the CIT(Appeals)-VI, Bangalore relating to assessment year 2011-12 & 2012-13.
ITA Nos.1778 & 1779/Bang/2013 Page 2 of 18
In these appeals, the main grievance of the assessee is that the CIT(Appeals) erred in coming to the conclusion that long term capital gain
on sale of long term capital assets accrued to the assessee during the A.Ys. 2011-12 & 2012-13 chargeable to tax u/s. 45(2) of the Act.
The appeal for A.Y. 2011-12 arises out of an order passed by the
AO u/s. 143(3) r.w.s. 153A of the Act, while the appeal for A.Y. 2012-13 arises out of the order passed by the AO u/s. 143(3) of the Income-tax Act,
1961 [“the Act”].
In the appeal for A.Y. 2011-12, the assessee has also challenged the validity of initiation of search on the assessee u/s. 132 of the Act, based
on which proceedings u/s. 153A were initiated. We first proceed to adjudicate the merits of the addition made by the AO and consequently
examine the issue with regard to validity of initiation of search u/s. 132 of
the Act.
The assessee is in the real estate business. The undisputed facts
are that the assessee was a member of HUF called C. Ramaiah Reddy, HUF. There was a family partition on 6.3.2004. The HUF was also
carrying on real estate business. At the time of partition, the assets of the
joint family included the real estate business and stock-in-trade of the real estate business were valued at fair market value and based on the same,
properties were allotted to the members of the HUF. The assessee continued carrying the real estate business in his individual capacity. The
ITA Nos.1778 & 1779/Bang/2013 Page 3 of 18
stock-in-trade of the HUF real estate business which was allotted to the assessee was also treated as stock-in-trade of the business of real estate carried on by the assessee in his individual capacity.
During the previous year relevant to A.Ys. 2011-12 & 2012-13, the assessee had sold some of the stock-in-trade which originally belonged to the erstwhile HUF and which the assessee got on partition. According to the Revenue, provisions of section 45(2) of the Act will apply and the long term capital gain on the transaction of sale of such properties will have to be brought to tax. The provisions of Sec.45(2) of the Act read as follows:-
“45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (1A) …….. (2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock- in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.”
According to the Revenue, the share which the assessee obtained on partition of the stock-in-trade of the HUF was a capital asset in the
ITA Nos.1778 & 1779/Bang/2013 Page 4 of 18
hands of the assessee in his individual capacity and the Act by which the assessee treated the said assets received on partition as stock-in-trade of
the business of real estate carried on by him amounted to a transfer within the meaning of section 45(2) of the Act. Such transfer will be charged to
tax only when the capital asset converted as stock-in-trade of business is
ultimately sold by the assessee. According to the Revenue, the assessee sold the capital asset treated as stock-in-trade of business during the
previous year relevant to A.Ys. 2011-12 & 2012-13 and therefore the capital gain on such sale had to be brought to tax. It is on this basis the
assessments were framed by the AO.
We have already seen that at the time of partition of HUF, the stock- in-trade of HUF was valued at fair market value. According to the
Revenue, this valuation was not proper and had been done only with a view to avoid taxes legitimately payable. Though such a stand has been
taken by the AO in the order of assessment, ultimately while computing the
capital gains u/s. 45(2) of the Act, the AO took the cost of acquisition as per the values determined in the Deed of Partition on 6.3.2004.
On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. Hence these appeals by the assessee before the Tribunal.
At the time of hearing of the appeals, the ld. counsel for the
assessee brought to our notice that in assessee’s own case properties which were allotted in the partition of the HUF and which were treated as
ITA Nos.1778 & 1779/Bang/2013 Page 5 of 18
stock-in-trade of business of real estate carried by the Assessee in his individual capacity, were sold in the previous year relevant to A.Y. 2006-07. The Revenue applied the provisions of section 45(2) of the Act and brought to tax capital gain on conversion of capital asset owned by the Assessee as stock-in-trade of business of real-estate. The said levy of tax on capital gain was challenged by the Assessee before the Tribunal. The Tribunal in ITA No.122/Bang/2011 for A.Y. 2006-07 in its order dated 25.5.2012 considered the above issue and came to the conclusion that the provisions of section 45(2) of the Act are not attracted to the case of the assessee. The Tribunal also held that the provisions of section 49(1) will also not apply. The Tribunal in para 8 of its order came to the conclusion that there was no evidence to show that there was conversion of capital asset by the assessee as stock-in-trade and therefore the provisions of section 45(2) are not attracted. The following were the relevant observations of the Tribunal:-
“7.5 At the outset it is necessary to set out certain undisputed facts. Firstly the assessee in the instant case was a member of a Hindu Undivided Family (HUF) and there was a family partition on 6.3.2004. Secondly, it is also not in dispute that the family was carrying on real estate business and at the time of partition, the assets of the joint family including the stock-in-trade were valued at fair values and based on the same, allotment of properties were made. Thirdly, it is also not in dispute that the assessee is continuing to carry on the real estate business carried on by the erstwhile joint family and that the income from the sale of properties is to be assessed under the head ‘business income’. It is in this background of undisputed facts, that we have to see as to whether liability under section 45(2) of the Act is attracted or
ITA Nos.1778 & 1779/Bang/2013 Page 6 of 18
arises in the hands of the assessee, for the relevant period, by invoking the provisions of section 49(1) of the Act. 7.6 In order to resolve the said question it is necessary to consider whether the assets received by the assessee at the time of partition are capital assets or stock-in-trade. Both, the Assessing Officer and the learned CIT(A) have held that this aspect is not relevant. This is precisely because they proceeded on the assumption that every asset received on partition constitutes capital assets. Such a proposition is, however, incorrect. This is because of the nature of assets held by the joint family is certainly relevant and in fact the same is material to resolve and decide the dispute.
7.7 In order to ascertain the nature of assets held by the erstwhile joint family of the assessee, it is necessary to consider the background of the assessee and the issues arising in the assessee’s case in the earlier years. In the paper book furnished by the learned Departmental Representative, the orders of this Tribunal in the case of the assessee for the block period 1.4.1985 to 5.12.1995 in IT(SS)A No.10(Bang)/2008 dt.17.10.2008 is at pages 23 to 45 thereof. In para 15 of this order, it is held as under: “A cursory perusal of the details would indicate that all the properties held by the assessee are ancestral properties and if any purchase is made, this also through sale of ancestral properties. The business of brick industry, development of lands / constructions are carried on by the assessee only by ploughing back the wealth he obtained from HUF nucleus. From the facts it is also well founded that there was no other income to the assessee from any other source, other than from HUF. The learned City Civil Judge also held that the properties mentioned in the schedule to the suit are joint family properties. We have, therefore, no hesitation in holding that the entire properties are only HUF properties including the value declared in the return filed inform No.28. The growth and expansion therefrom are directly emanating from HUF assets do not require further discussion as considered for assessment as individual, as agitated in other grounds.”
ITA Nos.1778 & 1779/Bang/2013 Page 7 of 18
From the above decision of the Tribunal in the assessee’s own case, it is seen that the assessee in block assessment proceedings claimed that all the properties held by him and the income arising therefrom belong to the joint family (HUF) and not to him in his individual capacity. The Tribunal after consideration of the material placed before it, held that the entire properties held by the assessee belonged to his joint family, as the same were ancestral in character and any purchase and sale of property was only by ploughing back the wealth obtained from the HUF nucleus. The assessee in his individual capacity did not have income from any source. In fact, in the course of search proceedings, it was also stated by the assessee that he was doing real estate business and this aspect is clear from paras 7 to 11 of the order of the Tribunal in the assessee’s own case (supra). Thus, it can be clearly inferred and concluded from the findings of the Tribunal in the assessee’s own case for the block period that the joint family of the assessee was the owner of various properties, which have since come to the assessee’s share upon partition, the same being held by the joint family as business assets forming part and parcel of its real estate business. 7.8 This conclusion reached by us is further corroborated and fortified by the recitals in the Memorandum of family arrangement and oral partition dt.6.3.2004 (page 103 of assessee’s paper book), which is relied on by the Assessing Officer and learned CIT(A) in order to hold that the assets received by the assessee on partition were capital assets while computing the capital gains under section 45(2) of the Act. It is relevant to reproduce clause (2) of the Memorandum of Family Arrangement and Oral Partition which reads as under : “2. The FIRST PARTY thereafterwards effected an Oral Family Arrangement in which all the properties of the joint family as aforesaid, especially, the capital of the family in real estate business after making a fair and market value valuation of all the properties held as stock-in-trade of the real estate business have been partitioned by him orally and in the said partition, he allotted and provided a portion of the capital various members towards their rights or assorted or assumed rights in all the assets of the family to ward of all possible litigations and bickering among the members thereof in future.”
ITA Nos.1778 & 1779/Bang/2013 Page 8 of 18
From a reading of the aforesaid clause (2), it becomes clear that all properties of the joint family, especially the capital of the family in the real estate business in the Memorandum dt.6.3.2004. It is only thereafter that the assessee was allotted the balance of the capital of the family in the real estate business in accordance with the terms and conditions of clause 3 of the Memorandum of Family Arrangement and Oral Partition which reads as under : “ 3. The FIRST PARTY has been allotted the balance of the capital of the family in real estate business being excess of assets over liabilities (after making revaluation of all the assets forming part of stock-in-trade of real estate business along with all other assets pertaining to the said business like cash in hand, bank balances, etc.) after allotting and providing a portion of such capital to parties No.2 to No.5 in the oral family arrangement and partition towards their respective shares to be owned and enjoyed by him in severality to the exclusion of parties No.2 to No.5 absolutely. ………….. …………… 7.9 We also find from a perusal of the terms and conditions of clauses 4 to 7 of the Memorandum of Family Arrangement and Oral Partition dt.6.3.2004 that the following persons were allotted substantial sums towards their share and rights in the assets of the erstwhile joint family. The allotment which was made from out of the family capital in real estate business that was allotted to the assessee or ‘First Party’ are as under : 1. Second Party – Smt. Nagarathna Rs.5 crores 2. Third Party - Smt. M.N. Manjula Rs.5 crores 3. Fourth Party – Kum.Sandhya Rs.5 Crores 4. Fifth Party – Master Deepak Rs.10 Crores A combined reading of the various clauses of the Memorandum of Family Arrangement and Oral
ITA Nos.1778 & 1779/Bang/2013 Page 9 of 18
Partition reveals that the assessee was allotted the balance of the capital of the family in real estate business after providing for the allotment to be made to the other four members of joint family as listed out above. It is also seen that this capital of the family in real estate business has been arrived at after making a fair market valuation of all the assets forming part of stock-in-trade of the real estate business of the erstwhile joint family. Therefore, it is clear that the cost of the assets allotted to the assessee is by making a market valuation at the time of partition based on which he assumed certain liabilities to be paid to other members of the erstwhile joint family. 7.10 From the facts and circumstances of the case on this issue, as discussed in the preceding paragraphs, 7.3 onwards and the clear wording of the Memorandum of Family Arrangement and Oral Partition, we are of the considered view that the assessee was allotted the family’s real estate business. In coming to this view, we are fortified by the decision of this Tribunal in the assessee’s own case for the block period, referred to earlier in this order. We, therefore, hold that the assessee, on partition of the joint family, had received the balance capital of the family in the real estate business comprising various assets, which were in the nature of stock-in-trade and it cannot be considered that the various assets or properties received by the assessee on partition are capital assets and these capital assets were converted into stock-in-trade of the real estate when the assessee continued to carry on the business of the erstwhile joint family. We also find, as rightly contended by the assessee, that if at all there was any capital asset received on partition, such a capital asset would be the real estate business carried on by the erstwhile family. 8. The Assessing Officer’s application of the provisions of section 45(2) of the Act to the instant case is to be examined. The provisions of section 45(2) of the Act are attracted only when there is a conversion of a capital asset into stock-in-trade. As already observed by us, there is no material on record to support the view taken by the
ITA Nos.1778 & 1779/Bang/2013 Page 10 of 18
Assessing Officer that the assessee received certain capital assets on partition of the joint family which were later converted to stock-in- trade by the assessee. A perusal of both the order of the Tribunal in the assessee’s case in the block assessment coupled with the Memorandum of Family Arrangements and Oral Partition dt.6.3.2004 clearly establishes that the erstwhile joint family of the assessee was carrying on real estate business and was holding several properties as stock-in-trade. These properties which were hitherto being held as stock-in-trade, were allotted to the assessee on partition. It is also evident that the assessee continued to carry on the said real estate business after the partition. In these circumstances, it is clear that, there is no conversion of capital assets to stock-in-trade either by the assessee or the joint family. In this view of the matter, we hold that the provision of section 45(2) of the Act are not applicable in the instant case and consequently the computation of capital gains made by the Assessing Officer is cancelled.” (emphasis supplied)
In para 9 of its order, the Tribunal came to the conclusion that the provisions of section 49(1) of the Act will have no application to the case of the assessee. The following were the relevant observations of the Tribunal:-
“9. The learned Departmental Representative had advanced certain arguments with reference to the provisions of section 49(1) of the Act, to contend that the original cost of the assets has to be adopted as cost in the hands of the assessee which appear to be farfetched. Section 49(1) of the Act starts with the phrase. “when the capital asset becomes the property of the assessee .....” and therefore will be applicable only when the capital asset becomes the property of the assessee on distribution on
ITA Nos.1778 & 1779/Bang/2013 Page 11 of 18
the total or partial partition of the HUF. Section 49(1) of the Act will have no application in case the assets received on partition are not capital assets in the hands of the HUF, as in the instant case where they are stock-in-trade. We have already held that the view of the Assessing Officer, that the assets received by the assessee on partition were capital assets is not borne out by any material on record and therefore the provisions of section 49(1) of the Act are not applicable. In this regard, the reliance placed by the assessee on the decision of the Mumbai Bench of the Tribunal in the case of Atul G Puranik (supra) is relevant. At para 10.3 thereof, it is held as under : “10.3 However, in order to apply the mandate of s.49(1), it is sine qua non that the capital asset acquired by the assessee in any of the modes prescribed in cls.(i) to (iv) should become the subject matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. It is apparent from the language of sub-s. (1) itself which opens with the words “Where the capital asset became the property of the assessee” and after enumerating certain situations, provides that “the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it.” The phrase ‘the asset’ used in the later part of the provision relates to the capital asset which became the property of the assessee in the given circumstances. The natural corollary which, therefore, follows is that the cost to the previous owner is considered as the cost of acquisition only of the capital asset, which becomes the property of the assessee in the modes given in cls.(1) to (iv). But once such capital asset is transferred and another capital asset is acquired, there is no applicability of s.49(1) to such converted asset.” (emphasis supplied)
ITA Nos.1778 & 1779/Bang/2013 Page 12 of 18
The Tribunal in para 10 of its order, valuation of the property at the time of partition was dealt with by the Tribunal and the Tribunal came to the conclusion that the valuation as adopted at the time of partition was correct and had to be accepted. The following were the relevant observations of the Tribunal:-
Finally for consideration is whether the assessee was justified in adopting the cost of assets sold at the values fixed at the time of partition. In this connection, the Hon'ble Apex Court in the case of Kalooram Govindram (supra) thereof has observed as under : “The entire argument is based on a misapprehension of the scope of partition under Hindu law. Coparcenary is a creature of Hindu law. The concept involves “community of interest, unity of possession and common enjoyment.” Each coparcener’s right extends to the whole joint family property; though each one of them has interest in the whole family property, he has no definite share therein. Partitioning is the ascertainment of individual shares and it can be brought about by an unambiguous declaration of their intention to divide, i.e. by a conscious alteration of their status. Such a declaration brings about a division in status. At that stage the members of an erstwhile joint family become tenants-in-common. The next step is the division by metes and bounds whereunder separate properties are allotted towards the said definite shares of the individuals. Whether the said process involves transfer or not within the meaning of the Transfer of Property Act, it certainly confers on a divided member an absolute title to a specified property, whereas before the partition he had only some interest in the entire joint family property. Though in one sense his interest in the property of the larger joint family has become crystallized into a specific property, in substance he acquires a title to a specific property. Even from a practical
ITA Nos.1778 & 1779/Bang/2013 Page 13 of 18
standpoint the legal fiction of “is prejudicial to the interests of Revenue-existing title” cannot be stretched too far. Take the following illustration : A and B were members of a joint Hindu family in 1930 and continued to be so till 1960, when a partition was effected between them. They had 4 houses in4 villages; and the original cost of each of the houses was Rs. 100. If a partition had taken place in 1930 or thereabout, each one of the two brothers would have got 2 houses each, and the partition would have been equitable and fair. But during these 30 years one village developed into a town and the value of the house therein had increased to Rs. 500. There was no appreciable rise in price in regard to the other 3 houses and they together would fetch only Rs. 500 in the market. In the result at the partition that was effected in 1960 the house in the town was given to one of the brothers and the other three houses together were given to the other brother. What would be the cost of the house in the town to the brother to whom it was allotted ? Clearly it would be Rs. 500, though the original cost of the house at the time it was built or purchased was only Rs. 100. Because of the uneven rise in prices of the different houses, instead of two houses he got only one house at the partition. The cost to him, therefore, would be the cost at which the property was valued at the partition or at which it was auctioned for the purpose of partition. Take another illustration : Instead of partitioning the properties by evaluation thereof, the houses were sold to a third party. So far as the third party was concerned the cost price would be the price at which he purchased them. If instead, the properties were sold by auction between the brothers and the difference in prices was adjusted by cash payment, it would be incongruous to say that in the former the cost of the houses would be the cost actually paid by the third party purchaser and in the latter the cost of the houses would not be the price for which they were auctioned but the nominal price they bore in a remote past. Other illustrations may be visualized.
ITA Nos.1778 & 1779/Bang/2013 Page 14 of 18
Barring the cases of fraud, collusion and inflation and deflation of values for ulterior purposes, cost of an asset to a divided member must necessarily be its cost to him at the time of partition, whether mentioned in the partition deed or ascertained aliunde.” From the ratio of the judgment of the Hon'ble Apex Court cited above, it is clear that the value of the properties fixed at the time of partition or determined aliunde would be the cost to be adopted in the hands of the recipient of the properties. However, the specific provisions of section 49(1) of the Act have been enacted in the Income Tax Act, 1961, to fix the cost of the capital asset acquired on partition to be the cost at which it was acquired by the previous owner. In other words, the judgment of the Hon'ble Apex Court would not be applicable in a case of capital assets received on partition in the light of the provisions of section 49(1) of the Act. However, since the provisions of section 49(1) of the Act, does not apply to other assets, viz. stock-in-trade etc., the ratio of the judgment of the Hon'ble Apex Court would be applicable and it is the cost at which the assessee acquired the property in the partition that has to be taken. Therefore, the judgment of the Hon'ble Apex Court would be squarely applicable to the facts of the instant case and the assessee is justified in adopting the said cost for computing income from business. (emphasis supplied)
In our view, the above findings of the Tribunal on identical facts and circumstances of the case will be applicable to the present years also.
The ld. DR pointed out before us that the CIT(Appeals) in the impugned orders had framed the following four issues for consideration and elaborated on the same in the impugned order:-
ITA Nos.1778 & 1779/Bang/2013 Page 15 of 18
(i) Whether the cost of acquisition claimed by the appellant is correct? (ii) Whether the increased values of land as per ‘Partition’ under facts and circumstances of the case can be adopted as such as cost of acquisition of the property and whether the decision of Hon’ble Supreme Court in the case of Kallooram Govindam v CIT (MP) 57 ITR 335 can be applied in this regard under the circumstances of the case? (iii) Whether section 45(2) is to be applied? Whether any benefit of long term capital gain is to be allowed u/s 45(2)? (iv) Whether under the circumstances of the case, the decision of Hon’ble ITAT for A.Y. 2006-07 dated 25.05.2012 can be applied in toto to A.Y. 2011-12 & 2012-13 also? (v) Whether merely because the values of stock of land have been adopted in earlier years, these should be adopted under the present facts and circumstances for the years in question also? 15. On the above submission of the learned DR, the ld. counsel for the
assessee submitted that when the provisions of section 45(2) of the Act
are held to be not applicable, the question of cost of acquisition and
computation of capital gain do not arise for consideration at all and
therefore the discussion of the CIT(Appeals) on the above issues, in our
view, is not relevant.
Respectfully following the decision of the Tribunal referred to above, we hold that the provisions of section 45(2) of the Act are not applicable to the facts of the case and therefore there cannot be any long term capital gain that can be brought to tax under those provisions for A.Ys. 2011-12 & 2012-13. The relevant grounds of appeal are allowed.
ITA Nos.1778 & 1779/Bang/2013 Page 16 of 18
As we have observed, the other issues in the grounds of appeal including the validity of initiation of search u/s. 132 of the Act raised in A.Y. 2011-12 do not require any consideration and the issues are left open for adjudication.
Ground No.4 raised by the assessee for the A.Y. 2011-12 (ITA No.1778/Bang/2012) requires specific adjudication and the same reads as follows:-
“4. The learned CIT(A) is not justified in sustaining the addition of a sum of Rs.6,74,320 as unexplained jewellery under the facts and in the circumstances of the appellant’s case.”
In the course of search proceedings at the residence on 5.7.2011, some excess jewellery was found. The assessee offered a sum of Rs.50 lakhs as additional income on account of jewellery found being unaccounted investment. However, as per the valuation report, jewellery was valued at a sum of Rs.56,74,320. The AO therefore added the difference i.e., a sum of Rs.6,74,320 to the total income of the assessee. It was the stand of the assessee that additional income offered was based on the valuation on the date of search, whereas the valuation report was later point of time and therefore the addition cannot be sustained. Both the AO and the CIT(Appeals) rejected the claim of the assessee. The assessee is in appeal against the order of the CIT(Appeals) on this issue.
ITA Nos.1778 & 1779/Bang/2013 Page 17 of 18
We have heard the submissions of ld. counsel for the assessee, who reiterated the submission made before the revenue authorities. A specific query was put to the ld. counsel for the assessee as to whether any reconciliation was filed to highlight the difference between the amount offered as income and the report of the valuation. The ld. counsel for the assessee submitted that no such reconciliation was filed. In our view, when the quantum of jewellery found and the valuation is not disputed, the value as per the valuation report ought to have been offered as income on account of excess jewellery found. The valuation is done only as on the date of search. Therefore, the revenue authorities were justified in making the impugned addition. We, therefore, confirm the order of the CIT(Appeals) and dismiss ground No.4 raised by the assessee.
In the result, ITA No.1778/Bang/2012 (A.Y. 2011-12) is partly allowed, while ITA No.1779/Bang/2012 (A.Y. 2012-13) is allowed.
Pronounced in the open court on this 10th day of April, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 10th April, 2015.
/D S/
ITA Nos.1778 & 1779/Bang/2013 Page 18 of 18
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar/ Senior Private Secretary ITAT, Bangalore.