Bombay High Court

Asstt. Cit vs Triloksingh P Rajpal on 9 June, 2004

Equivalent citations: (2004) 91 TTJ Mumbai 322

ORDER

H.S. Sidhu, J.M.

This appeal by the revenue is directed against order dated 20-10-1999, of the Commissioner (Appeals) pertaining to the assessment year 1993-94.

2. The appeal raises the following ground

"On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 65,46,656 made on account of long-term capital gains, ignoring the facts that the addition was made under section 45(3) of the Income Tax Act, 1961 read with section 2(47) and that any profit and gains arising on transfer of a capital asset by a person to firm/AoP shall be chargeable as the individual income of the previous year in which the transfer took place, and the value of the asset should be taken as market value of 1/4th share as per valuation report mentioned by the assessee in the note of balance sheet as at 31-3-1993, amounting to Rs. 66,25,000."

3. The facts, in brief, are that for the assessment year 1993-94 the assessment was originally finalised on 24-1-1995, on a total income of Rs. 3,76,710. The assessee had showed Rs. 35,132 in the balance sheet as at 31-3-1993, in the assets side claimed to be representing one-fourth share in residential house premises as co-owner at Dil Bahar Bungalow, P.M. Road, Santacruz (W), Bombay-400 054. At the end of the said balance sheet, vide footnote, the above amount was explained as follows :

"The above one-fourth share in residential premises as co-owner is converted into stock-in-trade in August, 1992, and the construction of the above plot is commenced along with other three co-owners in the name and style of M/s Amrita Associates. The market value of the one-fourth share of stock-in-trade is Rs. 66,25,000 as per the valuation report. The capital gains will be accounted for at the time of conveyance of the above property."

This was the subject-matter in proceedings under section 263. In the proceedings under section 263 the CIT, M.C. IX, Mumbai, vide his Order No. MC IX/263/16/16/96-97, dated 31-3-1997, cancelled the original assessment with a direction to the assessing officer to reframe the assessment afresh after considering the implications of "transfer" of the land by the assessee. In course of assessment pursuant to order under section 263, the assessing officer sought to levy tax on the said amount of Rs. 66,25,000 under the head of "Long-term capital gain". In response to notice, the assessee explained the footnote appearing on the balance sheet vide his letter dated 16-2-1999, relevant portion of which has been extracted by the assessing officer in the assessment order in para 3. It was explained that the assessee was a co-owner of the property in question along with three other co-owners, namely, (1) Smt. Hardevi P. Rajpal, (2) Smt. Kavita v. Bedessey nee Kavita P. Rajpal and (3) Smt. Pushpa N. Punjabi nee Pqshpa P. Rajpal, who are members of close-knit family and are joint owners of the residential premises, and were occupying the same as tenants-in- common. They are the original purchasers of the residential premises. All co-owners decided to develop the property and to build a multi-storey building thereon. For this purpose an Association of Persons (AoP) was formed by an agreement dated 8-8-1992, by the coowners with equal shares in profit/loss. By this agreement, the parties decided not to transfer their respective shares in the land to AoP, whose only purpose was to develop, construct upon the land and the sale of flats so constructed. The AoP was given the power to transfer the superstructure on its own, but insofar as the land is concerned the AoP is to act as agent of the members. The co-owners reserved their rights to fix the price of the land. The AoP was authorised to retain the profit on sale of superstructure and to distribute land cost in equal shares to the members. It was also made clear in the agreement itself that the co-owners retain their rights in the land till it is conveyed to the ultimate flat purchasers and that none of them has introduced his/her rights in the land as capital in the AoP. On the basis of the above explanation, it was contended by the a:ssessee before the assessing officer that before the formation of the AoP itself, the co-owners of the property had taken steps for the development of the same. The co-owners had already converted their assets into stock-in-trade, prior to formation of the AoP. The AoP was formed for maximising commercial exploitation and convenience. Agreements for the sale of flats were entered into by the AoP. The AoP retained the portion of sale consideration relating to the structure and the portion relating to the land was given to the co-owners. The land was not brought in by way of capital contribution and no entry was passed in the books of account of the AoP in respect of such land, or in respect of consideration, as there was no transfer of land to AoP. The assessing officer considered such explanation of the assessee and considering the facts and circumstances of the case, came to the conclusion that there was transfer of land to the AoP in the assessment year 1993-94 itself. He, therefore, took the value as arrived at by the approved valuer (i.e., Rs. 66,25,000) as the full value of consideration for the said transfer and thus computed the long-term capital gains at Rs. 65,46,656. In appeal, the assessee reiterated the submissions as were made before the assessing officer. After examining the facts of the case and evidence produced in support, the Commissioner (Appeals) came to the conclusion that there was no sale or "otherwise" transfer of land, converted into stock-in-trade in the year under appeal. Therefore, no capital gains accrued or arose to the assessee from the act of conversion of the asset into stock-in-trade in this year, in terms of section 45(2) of the Act. On the basis of such conclusion, the Commissioner (Appeals) deleted the addition of Rs. 65,46,656 as long-term capital gains made by the assessing officer.

4. Before us, the learned departmental Representative contended that on the facts and circumstances of the case, long-term capital gains arose and the assessing officer was justified in making the addition of Rs. 65,46,656 under section 45(3) read with section 2(47) of the Income Tax Act, 1961. The learned Authorised Representative of the assessee, on the other hand, argued in support of the impugned order of the Commissioner (Appeals).

5. Heard both the parties and carefully gone through the orders of the authorities below. The assessing officer appears to have considered the facts of the case to be falling under section 45(3) of the Income Tax Act, 1961, and not under section 45(2) of the said Act, as claimed by the assessee. The fact that the said property was converted into stock-in-trade had been clearly stated by way of footnote to the balance sheet attached to the return of income. The property was valued as on 1-6-1992, vide valuation report dated 8-6-1992. This was an action prior to formation of AoP and it is thus obvious that the only purpose of having the property valued was because such a valuation was necessary for the purposes of section 45(2) of the Act. Deed of AoP clearly established that the individual co-owners intended to commercially exploit the said property and had already taken several steps in that direction, which would be clearly evident from paras 5 and 7 of the deed of AoP. The assessee also produced before the Commissioner (Appeals) the photocopy of the letter dated 9-11-1991, of Hirendra Motiram Jhaveri & Sons (Architects, Engineers and Surveyors) on behalf of the co-owners and addressed to the Executive Engineer, Building Proposal (WS), BMC. He also produced such correspondences between the Municipal Corporation of Greater Bombay such as dated 19-11-1991, 28-11-1991, etc., as enumerated in the order of the Commissioner (Appeals) at p. 6 of his order. If these are considered it becomes clear that steps to convert the joint property in question into stock-in-trade were taken by the assessee prior to formation of AoP. It is also seen that there is no legal impediment to the members of the AoP retaining the ownership rights over the land and giving the ownership rights over the superstructure to the AoP. We are in full agreement with the observation of the Commissioner (Appeals) that merely pooling of the individual shares for the common purpose of making profit on sale of flats to be constructed, without receiving any consideration for such pooling of the land cannot attract capital gains tax, unless and until it is shown that the AoP credited the accounts of the members in its books with a sum larger than the cost price of the land, in terms of section 45(3) of the Act. Admittedly, there are no such entries as regards to the full value of consideration in the accounts of the AoP. Further, the table reproduced in assessment order at p. 32 and in the appellate order at p. 10, it is seen that the co-owner did not receive any such advance towards land costs. In view of this, the Commissioner (Appeals) is justified in holding that question of assessing the capital gains on conversion of assets into stock-in-trade this year does not arise. Considering the facts in its entirety, in our considered view, the Commissioner (Appeals) has rightly come to conclusion that there was no sale or otherwise' transfer of land, converted into stock-in-trade in the year under appeal. Therefore, no capital gains accrued or arose to the assessee from the act of conversion of the asset into stock-in-trade in this year, in terms of section 45(2) of the Act. In view of this, the Commissioner (Appeals) is justified in deleting the addition of Rs. 66,46,656 as long-term capital gains made by the assessing officer. We thus found no merit in the revenue's appeal, which fails.

6. In the result, the revenue's appeal is dismissed.