Capital Rubber Industries vs Deputy Commissioner Of ...
1997 Latest Caselaw 565 Del

ORDER

B. S. SALUJA, J.M. :

The assessee has filed this appeal against the order of CIT(A)-X, New Delhi, dt. 11th March, 1996, mainly on the ground of not treating Capital Rubber Industries as a partnership concern prior to 1985 which purchased a plot No. 327, Modern Industrial Estate, Bahadurgarh (Haryana), and not allowing the deduction of Rs. 2,11,314 made to HUDA in 1992 as part of cost of improvements while computing the capital gains as also for charging interest under ss. 234B and 234C.

2. In this case, the assessee had filed the return of income declaring total income of Rs. 19,33,940. A revised return was filed on 15th October, 1993, declaring total income of Rs. 23,25,300. Another revised return was filed on 11th January, 1995, declaring a total income of Rs. 21,10,930. The AO observed that during the year, the only income of the assessee-firm was on account of long-term capital gain which had arisen due to sale of an industrial plot to its sister concern namely, Relax Footwears (P) Ltd. He further observed that the return was revised for the first time because the cost of acquisition did not include Rs. 3,91,575 which is the cost of construction of boundary wall, store and pump set. He also observed that the return was again revised because the assessee wanted to increase the cost of acquisition on account of certain payments made to HUDA totalling Rs. 2,11,314. He further observed that the industrial plot was bought from HUDA in the name of Capital Rubber Industries vide deed of conveyance dt. 8th May, 1983, and that the cost of the plot was shown at Rs. 1,95,842. The stamp duty thereon was shown at Rs. 24,500. He also observed that the total payments made to HUDA on various dates were shown at Rs. 2,19,015. He, therefore, computed the total consideration passed on to HUDA before the deed of conveyance signed in 1983 plus the stamp duty at Rs. 2,43,515. The AO also noted that the payments made to HUDA were shown as withdrawal from the partnership concern namely, Capital Cycle Industries and Relaxo Rubbers. He also noted that the two partners, namely, Shri R. K. Dua and Shri M. L. Dua had contributed different amounts for the payment of instalments to HUDA. He also noted that Sh. M. L. Dua and Sh. R. K. Dua had been shown to be partners of Capital Cycle Industries and Relaxo Rubbers. The AO further referred to the schedule of payments made by these two persons and observed that the amounts had been withdrawn from some other partnership concerns. He observed that he said schedule clearly showed that Capital Rubber Industries was only used for the purpose of giving name for registering the plot which bought from HUDA in 1983. He observed that Capital Rubber Industries came into existence as a partnership concern only in 1985 vide partnership deed signed by Sh. M. L. Dua and Sh. R. K. Dua on 29th November, 1985. He further referred to cl. 7 of the said deed which stated that the bank account shall be opened and operated by any of the partners jointly or severally and concluded that the said clause showed that Capital Rubber Industries never existed before November, 1985. He also referred to cl. 1 of the partnership deed which mentioned that the partnership shall be deemed to have commenced from 5th August, 1983, after registration of the plot in the name of the firm. The AO held that the said clause was purposely introduced to legalise whatever illegal was done earlier. He held that the plot was bought in some non-existent or sham name, i.e., Capital Industries and that it was a colourable device by which the assessee had tried to evade taxes apart from avoiding a number of lapses. He further held that Capital Rubber Industries, in whose name the plot was purchased in 1983 cannot be treated as the assessee-firm which came into existence only in November, 1985. He also observed that the partnership can have retrospective effect in some extraordinary circumstances and the retrospective effect cannot be of a very long period. He also observed that two or more partners cannot form a partnership firm by merely signing the deed of partnership and give effect to the existence of the partnership to some retrospective date which was two or three years old. He also referred to the balance sheets of Capital Rubber Industries drawn as on 31st March, 1980 to 31st March, 1984, and observed that the balance sheets did not show anything other than the plot which was purchased from HUDA. He further observed that the copies of the balance sheets were never filed before the IT authorities and only when the assessee was requested to explain why the firm Capital Rubber Industries should not be treated as non-existent before 1985, the assessee filed the copies of the balance sheets. In the ultimate analysis, the AO held that the assessee-firm acquired the plot only in 1985 without paying any consideration. He further referred to the provisions of s. 48 which illustrate cost with respect to certain modes of acquisition/payment. The AO held that the modes of acquisition of the plot by the assessee-firm, which came into existence only in November, 1985, is not covered under s. 49, according to which the cost of acquisition is taken as the cost of acquisition by the earlier owner. He therefore, held that the cost of acquisition by the assessee for the said plot shall be taken as nil. He allowed the cost of construction to the extent of Rs. 3,94,619 in relation to boundary wall, store room and pump set. He further disallowed payments of Rs. 2,11,314 made to HUDA in 1982 before the plot was sold to Relaxo Footwear (P) Ltd. He, observed that the said payments were for clearing malba, security fees and extension fees. The AO held that the said payments could not be treated as cost of acquisition of the property. In view of the foregoing, the AO computed the capital gains on sale of the said plot of Rs. 27,90,381 after allowing the cost of construction at Rs. 3,94,619.

3. On first appeal, the learned counsel for the assessee submitted that the aforesaid plot was bought from HUDA in the name of Capital Rubber Industries vide conveyance deed dt. 5th August, 1983. He further submitted that the industrial plot was acquired with the intention to carry on the business of manufacturing and that the plot was acquired by two partners, namely, Sh. R. K. Dua and Sh. M. L. Dua and the initial payments were made in equal shares and subsequently equal amounts were being paid. He also submitted that the payments were being sent in the name of partnership and the partners used to sign it in that very capacity. He submitted that the photocopies of the forwarding letters as well as the receipts issued were proof of the payment having been made in the name of the firm. He further submitted that since no business was carried on, the partnership continued on the understanding between the partners and that in November, 1985, the partnership deed was drawn in writing. He also submitted that as per the partnership deed, it was decided that the plot in question owned by the two partners and registered in the name of the firm will be an asset of the firm. It was provided that the partnership shall be deemed to have commenced on the acquisition of the plot, i.e., 5th August, 1983, after registration of the plot in the name of the firm. He further contended that the AO had raised objections which were based on suspicion and surmises. He also contended that according to the provisions of Indian Partnership Act, no particular formalities were required for an agreement of partnership and that even writing was not necessary. He contended that the partnership could be formed by parole and that a contract expressed or implied was only essential to the formation of partnership and that the relation arises out of a mutual understanding evidenced by a consistent course of conduct or the admission of the parties concerned. He further referred to the decision reported in Narayan Prasad Vijaivargiya vs. CIT (1976) 102 ITR 748 (Cal), wherein the Honble High Court had observed that "The law is anxious to save a deed if possible. This is expressed in the maxim utnes magis valeat quam pareat. If by any reasonable construction, the intention of the parties can be arrived and that intention carried out consistently with rule of law, the Court will take that course". He further, relied on the decision of the Honble Supreme Court reported in Ram Laxman Sugar Mills vs. CIT & Anr. (1967) 66 ITR 613 (SC). The learned counsel further contended that all the documents which were produced indicated that there was a partnership existing and terms were reduced into writing in November, 1985. He further contended that partners can bring into the partnership, property belonging to them, by the evidence of their intention to make it part of the assets of the partnership. He, therefore, urged that the partnership deed should be read as a whole and given its due as per intention of the parties. He further contended that the AO had erred in applying the provisions of s. 49 and submitted that the capital gain has to be determined under s. 48 and that the cost of acquisition should be taken as existing on the date of the conveyance deed. He also contended that the payments made to HUDA in the year 1992 as part of cost of improvement should be taken into account for determining the capital gains.

4. The learned CIT(A) considered the submissions and relying on the decision of the Honble Supreme Court in the case of K. D. Kamath & Co. vs. CIT (1971) 82 ITR 680 (SC) and the decision of the Honble Bombay High Court in the case of G. S. Duggal & Co. (P) Ltd. vs. CIT (1 (1978) 111 ITR 757 (Bom), as also the decision of the Honble Andhra Pradesh High Court in the case of CIT vs. Ravi Construction (1987) 169 ITR 662 (AP), held that in order to constitute a partnership in law, there must be an agreement entered into by two or more persons, the agreement must be to share the profits of business and the business must be carried on by all or any of those persons acting for all. He held that all the said elements must be present before a group of persons who can be held to be partners of a partnership. In view of the said decisions, the learned CIT(A) held that neither the business was carried on by the assessee-firm from 1983 to 1985, nor any agreement was entered into by the partners during the said period. He, therefore, held that the above-mentioned conditions were not fulfillled and the firm had not come into existence from 1983 to 1985. He also held that the ratio of various cases relied upon by the learned counsel were not applicable to the facts of the present case. He, therefore, upheld the computation of capital gains at Rs. 27,90,381.

5. The learned counsel for the assessee Sh. O. P. Dua referred to the background history of the case. He submitted that the partnership deed was executed on 29th November, 1985 and that the same was given retrospective effect from 5th August, 1983, i.e., date of registration of the plot. He emphasised that the said plot was acquired from HUDA in the name of the partnership firm and that both the partners had been making payments to HUDA in equal amounts. In this connection, he invited our attention to Annexure-1 placed at p. 1 of the paper-book wherein details of payments made to HUDA in connection with purchase of plot have been given. The total payment has been shown at Rs. 2,19,015 and each partner had paid an amount of Rs. 1,09,507.50 from 8th December, 1986, to 28th July, 1993. The learned counsel further invited our attention to the application made by the partnership firm to Department of Industries, Haryana, on 8th December, 1976. A copy of the receipt No. 1506 issued by the Department of Industries, Haryana, on 8th December, 1976, is placed at p. 2 of the paper-book. It is mentioned in the said receipt that application form for allotment of plot of size 4000 sq. yds. in the proposed industrial area at Bahadurgarh along with bank draft dt. 8th December, 1976, on Punjab National Bank for Rs. 8,000 from Capital Rubber Industries, E-13, Rajouri Garden, New Delhi, has been received. He has also filed copies of receipts and payments received by HUDA from July, 1980, upto 28th July, 1993, the details whereof have been mentioned at p. 1 of the paper-book. The learned counsel has also filed copies of the deed of partnership executed on 29th November, 1985, as also the deed of conveyance of plot in question in favour of Capital Rubber Industries, New Delhi. In view of the said evidence, the learned counsel submitted that at best the partnership firm has to be treated as genuine from 29th November, 1985, though in terms of the provisions of the Partnership Act, even an oral agreement between the parties is recognised for constituting a partnership and the intention and conduct of the parties is relevant to determine that a partnership has come into existence. He stated that even if the firm is recognised from 29th November, 1985, it will only effect the cost index for the purposes of computing the capital gains and that instead of from 1983, the cost index from 1985 will be relevant. He further mentioned that the cost of improvement has to be allowed in the case of the assessee as the money was paid to HUDA for clearing of malba, extension fee, etc. The learned counsel also referred to the statement of facts, where the computation of capital gains has been made. With reference to a query from the Bench regarding status of Capital Cycle Industries and Relaxo Rubber from whose capital, the money was withdrawn for making payments to HUDA, the learned counsel submitted that the status of Capital Cycle Industries and Relaxo Rubber before 1985 was not very clear.

6. The learned Departmental Representative relied heavily on the orders of the tax authorities.

7. We have carefully considered the rival submissions on the issues involved in this appeal and have also perused the orders of the tax authorities. We have also perused the documents placed in the paper-book to which our attention was invited during the course of hearing. It is observed from the receipt issued by the Department of Industries, Haryana, placed at page 2 that the application was made in the name of Capital Rubber Industries, New Delhi. Further, the receipts issued by HUDA in relation to the payments made to it have all been issued in the name of Capital Rubber Industries. We have also perused the forwarding letters in relation to payments made to HUDA and all such letters have been signed on behalf of Capital Rubber Industries. It is observed from the deed of partnership drawn on 29th November, 1985, between Sh. R. K. Dua and Sh. M. L. Dua that the partnership business was to be carried on in the name and style of Capital Rubber Industries having its head office at E/13, Rajouri Garden, New Delhi. It is also observed from the registration deed in respect of registration of plot that the plot has been registered in the name of Capital Rubber Industries, New Delhi and the said deed has been drawn on 5th August, 1983. The said registration deed has been signed by the two partners. In view of the foregoing, we find force in the contentions of the learned counsel that the intention of the partners throughout has been to acquire the plot in the name of the firm and that the actual deed of partnership was drawn only in 1985 after the registration of the plot in the name of the said firm. Keeping in view the concession made by the learned counsel that at the most the firm can be recognised from the date of partnership deed, i.e., 29th November, 1985, we feel that the contentions of the learned counsel deserve to be accepted having regard to the provisions of the Partnership Act, 1932. In view of the said position, we feel that the cost of the plot has to be taken with reference to the total amount paid to HUDA and that the said cost of acquisition has to be indexed with reference to the financial year 1985. Further, the cost of construction has also to be indexed accordingly. We feel that the amounts paid by the assessee to HUDA with reference to the cost of improvement have to be taken into consideration while computing the capital gains. The assessee has computed the capital gains at Rs. 21,10,930 as mentioned in the statement of facts. The AO is, therefore, directed to verify the figures of said computation in the light of our decision and allow appropriate relief to the assessee. The AO is also directed to allow consequential relief to the assessee with reference to interest charged under ss. 234B and 234C.

8. In the result, the appeal is allowed.