M/S. Hansallaya Properties, New ... vs Commissioner Of Income Tax, ...
2010 Latest Caselaw 4096 Del

*           IN THE HIGH COURT OF DELHI AT NEW DELHI


+                         ITR Nos. 203-10 of 1989
                                 with
                        ITR Nos. 19-20 of 1991


%                         Decision Delivered On: 06th September, 2010


1)    ITR Nos. 203-10 of 1989

      M/s. HANSALLAYA PROPERTIES, NEW DELHI                  . . . Appellant

                        through :          Mr. M.S. Syali, Sr. Advocate with
                                           Ms. Mahua Kalra, Advocate.


                               VERSUS


       COMMISSIONER OF INCOME TAX, DELHI-VIII, NEW DELHI
                                               . . .Respondent

                        through:           Mr. Sanjeev Sabharwal, Advocate


2)    ITR Nos. 19-20 of 1991

      Mrs. PUSHPA VADERA                                        ...Appellant

                        Through:           Mr. M.S. Syali, Sr. Advocate with
                                           Ms. Mahua Kalra, Advocate.

                                    VERSUS


      COMMISSIONER OF INCOME TAX                              ...Respondent

                        Through:           Mr. Sanjeev Sabharwal, Advocate


CORAM :-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MS. JUSTICE REVA KHETRAPAL

      1.    Whether Reporters of Local newspapers may be allowed
            to see the Judgment?
      2.    To be referred to the Reporter or not?
      3.    Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J. (ORAL)

1. Before we reproduce the questions of law referred for opinion of

this Court by the Income Tax Appellate Tribunal (hereinafter

referred to as „the Tribunal‟) in compliance with the order passed

by this Court under Section 256(2) of the Income Tax Act („the

Act‟ in short), we deem it appropriate to state the facts leading to

the reference.

2. The land at 15-Barakhamba Road, New Delhi (leasehold land) was

originally leased on 31.5.1932 to a partnership firm M/s.

Naraindass Hansraj in which late Shri H.R. Vadera was a partner.

On that land stood a building which was occupied by the two

daughters of Shri H.R. Vadera, viz., Dr. Miss Lila Raj and Dr. Miss

Shanti Raj. The firm M/s. Hansalaya Properties came into

existence with effect from 08.8.1970 under a deed of partnership

executed on the said date between late Shri H.R. Vadera and Mrs.

Pushpa Vadera. Two minor children of Mrs. Pushpa Vadera were

also admitted to the benefits of the said partnership. As per the

said partnership, the business of the assessee was of a

constructing a multi-storeyed commercial building on the land

situated at 15-Barakhamba Road, New Delhi after demolishing the

existing structure. The firm M/s. Naraindass Hans Raj had been

dissolved and the lease-hold land was allotted, to late Shri Hansraj

Vadera. On 08.8.1970 (the date on which the assessee firm was

constituted) late Shri H.R. Vadera brought in the aforesaid lease-

hold property and the building situated thereon as his capital

contribution in the capital of the said firm. This was done in terms

of Clause 3 of the said Partnership Deed. Thereafter on

31.8.1970, the capital account of late Shri H.R. Vadera was

credited by `2,01,000 and the same amount was debited in the

assessee's books as the value of the said property which had been

brought in by Shri H.R. Vadera in the said new firm. The building

plans for developing the aforesaid property for the purposes of

constructing a multi-storeyed commercial building thereon, were

approved by the New Delhi Municipal Corporation in October,

1970.

Shri H.R. Vadera expired on 09.11.1971 and under a Will

executed by him his son Mr. Devraj Vadera became the partner in

the said firm in his place. Thereafter, the building project

commenced and got completed by 31st May, 1977. In view of the

fact that the above project of the assessee went on for several

years, the assessee was asked by the Income Tax Authorities in

1977 (when the assessment for the Assessment Year 1975-76 was

taken up by the Income Tax Officers) to file a consolidated profit

and loss account for the entire period starting from 08.08.1970 to

31.051977 with a view to determine the profit of the entire

venture as all the assessments of the said firm were pending at

that time. The entire profit was thereafter apportioned in each

previous year. In the consolidated Profit and Loss Account for the

above period (which was filed by the assessee in September,

1977) the assessee debited as one of its items of expenditure, a

sum of `2,01,000 as the cost of the land at 15-Barakhamba Road,

New Delhi on which its project was being executed. However in

March, 1978, the assessee field a revised consolidated Profit and

Loss Account in which the cost of the aforesaid land was debited

by `36,61,625. The figure of ` 36,61, 625 represented the marked

value as per approved valuer's certificate as on 018.08.1970. The

capital account of late Shir Hansraj Vadera was credited with a

further sum of `34,60,625 (`36,61,625 - `2,01,000). The value of

the land in the wealth tax returns of Shri Hansraj Vadera and other

partners on the respective valuation dates, viz., March 31, 1970 to

1974 were revised keeping in view the value of land at `36,61,625

as on 08.08.1970, at `31,81,410, `40,09,900, `48,02,950,

`54,17,750 and `62,74,125 respectively. The revision in the value

of the land aforesaid was confirmed in appeals.

3. In the Estate duty proceedings of late Shri H.R. Vadera, the value

of the land was also revised by his son and heir Shri Devraj for

determining the interest of late H.R. Vadera in the partnership

firm wherein the value was revised to `45,23,800 keeping in view

the revision land value as on 08.08.1970 at `36,61,625. The said

revision of was finally accepted after appellate proceedings by

valuing the said land at `45,23,800 as revised by the legal heir.

The Income Tax Officer, in his draft order, rejected the revised

figure of the cost of land at `36,61,625 debited by the assessee to

its revised consolidated Profit and Loss Account and held that the

assessee was entitled only to a deduction of `2,01,000 as the cost

of the land in computing its profit from the venture. This was the

order for Assessment Years 1972-73 and from 1974-75 to 1977-

78. The assessment order was framed to the same effect after

obtaining the approval of the Inspecting Assistant Commissioner.

4. The Commissioner of Income Tax (Appeals) also held that the

assessee was entitled to a deduction of `2,01,000 only as the cost

of land in computing its profit from the venture.

5. Thereafter, the matter came up before the Income Tax Appellate

Tribunal (hereinafter referred to as 'the Tribunal'). It was

submitted on behalf of the assessee before the Tribunal that in

terms of Clause 3 of the Partnership Deed, the correct amount to

be credited to the capital account of late Shri H.R. Vadera and

debited in the assessee's account as the cost of the land was not

`2,01,000 (being the amount originally declared by late Shri H.R.

Vadera in his wealth tax returns for the Assessment Year 1970-

71), but the fair market value for the purpose of assessment, as

the return contemplates market value as determined by the

wealth tax authorities. It was also said that the land which was

brought in by late Shri H.R. Vadera as his capital contribution to

the assessee, had been received by the assessee as a capital

asset and had been subsequently converted into stock-in-trade by

the assessee and therefore, the assessee was entitled to debit in

its Profit and Loss Account, as the cost to it, the market value of

such land on the date of its conversion by the assessee into stock-

in-trade. It was also said that in any case the proper and real

commercial profits of the assessee could be ascertained only after

deducting the sum of `36,61,625 as the cost of land, being the

land's market value as on the date of its introduction into the

assessee firm. When the appeal was heard by the Division Bench,

there was difference of opinion. The Judicial Member vide its

order dated 18.06.1982 rejected all the arguments based on the

interpretation of Clause 3 of the Partnership Deed that the land

was initially received by the assessee as a capital asset and was,

therefore, converted by its into its stock-in-trade and that the real

profits had to be ascertained by the application of commercial

principles. However, the learned Accountant Member vide its

order dated 12.07.1982 accepted all the arguments of the

assessee and held that on the interpretation of Clause 3 of the

Partnership Deed and on account of the fact that the land brought

in by late Shri H.R. Vadera as his capital contribution to the

assessee was received initially by the assessee as a capital asset

and was thereafter converted by it into stock-in-trade, and also on

account of the general principles of commercial accounting for

determining the real profits of the business, the Assessee was

entitled to a debit of `36,61,625 in its Profit and Loss Account as

the cost to it of the land. On account of the above difference of

opinion, the following issues were referred to the Special Bench:

1) Whether the assessee firm is entitled to deduction of

`2,01,000 or `36,61,625 as cost of the land on which the

multi-storeyed building was constructed on the following

grounds:-

(a) Interpretation of Clause 3 of the Partnership

Agreement,

(b) The land having been brought in by late Shri

H.R. Vadera as a stock-in-trade or as a capital

asset, and

(c) If brought in as a capital asset, then on its being

converted into stock-in-trade.

2) Whether there is any evidence of money being charged

or so whether addition sustained by the Judicial Member

is justified.

6. The Special Bench vide its order dated 15.04.1983, agreed with

the view taken by the learned Judicial Member. In conformity with

the decision of the Special Bench, the Bench thereafter passed an

order dated 28.07.1983.

7. It is in the aforesaid background, the following two questions are

formulated and referred for opinion of this Court:

1) Whether the Tribunal was right in holding that in computing the profits and gains of the firm on the sale of the properties in question, the value of the plot brought in by one the partners M/s. Vadera by way of capital contribution, should be taken as figure with which he was initially credited in respect of that plot, viz., `2,01,000 or should the value be taken on some other basis? If so, what basis?

2) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is not entitled in the computation of its profits to the deduction of `3 lakhs paid to (Dr. Miss) Lila Raj and Dr. (Miss) Shanti Raj by the assessee firm?"

8. Out of the above questions, question No.1 is referred for

Assessment Years 1972-73 to 1979-80 and question No.2 for

Assessment Year 1972-73. Now we proceed to answer these

questions.

9. From the facts emanated above, the following aspects clearly

emerge:

(a) Mr. H.R. Vadera was partner in some other firms, viz.,

M/s. Naraindass Hansraj and on dissolution of that firm

when the accounts of the partnership was settled, he

was given the leasehold land in question which came

to his share.

(b) Partnership in question, i.e., the assessee firm was

constituted in which Mr. Vadera also joined as one of

the partners, he brought the aforesaid asset into his

firm „as his capital contribution in the capital of the

said firm‟.

(c) Clause (3) of the Partnership Deed executed between

the partners provided the manner in which the said

land was to be valued to determine the capital

contributed by Mr. Vadera. This Clause reads as

under:

"the land situated at 15-Barakhamba Road, New Delhi shall be the property of the firm and as taken in the Wealth Tax return of Sh. Hansraj Vadera and shall be credited to his capital account in the books of the firm. Therefore, the respective partners may contribute such capital as they mutually agree upon."

10. On 31.08.1970, the capital account of Mr. Vadera was credited by

`2,01,000 and the same amount was debited in the assessee's

books as the value of the said property.

11. After construction of multi-storeyed commercial building on the

said plot of land, which took several years, the Assessing Officer

asked the assessee to file consolidated profit and loss account for

the entire period from 08.08.1970 to 31.05.1977. Though initially

in the consolidated profit and loss accounts in the said period, the

assessee debited a sum of `2,01,000 as cost of land, the revised

return was filed in March, 1978 wherein this cost of land was

debited by `36,61,625. It is not in dispute that the revised return

was filed well within permissible time. The books of account of

Mr. Vadera was also credited with further sum of `36,61,625

thereby showing his capital as `36,61,625.

12. In the wealth tax assessment, the property in question was finally

taxed at a value of `36,61,625. Same was the value taken in

proceedings under Gift Tax Act as well as Estate Duty assessment

while leaving the duty on the estate levy by Mr. Vadera.

13. Notwithstanding the fact that for the purpose of wealth tax charge

into the hands of Mr. Vadera, the value of this property was

treated at `36,61,625, and this fact was pleaded before the AO,

the AO refused to accept the same. The AO was of the opinion

that when the aforesaid property was brought by the assessee in

the form of his contribution as capital, value in the books of

account was shown as 2,01,000 and therefore, for the purpose of

the income tax that was the value which was to be taken into

consideration, moreso when the capital account of Mr. Vadera was

credited with this amount. He was of the opinion that the

assessment under the Income Tax Act was to be framed on the

basis of provisions contained in the Act and was not to be

influenced by other Direct Tax. This is the view, which is accepted

by the CIT(A) as well as the Tribunal and the proprietary or

correctness of this view is the subject matter of dispute.

14. No doubt, the Income Tax Authorities are supposed to look into

the provisions contained in the Act for the purpose of making

assessment. What we find is that even if those provisions are to

be applied, there is an error in the approach of the Authorities

below. We have already spelt out the basic features/facts of this

case. What is glossed over by the Authorities below is that the

property in question was brought in by Mr. Vadera as partner of

the assessee firm in the form of capital. Insofar as Mr. Vadera is

concerned, it was his capital contribution to the firm. Thus, it was

to be evaluated in the manner the partners agreed in the manner

provided in Clause 3 of the Partnership Deed. That Clause, which

has been reproduced above, clearly stipulates that it would be as

per the wealth tax returns. Thus, the capital that was brought in

by Mr. Vadera in the form of the aforesaid land was to be given

the valuation which had to be determined as per the wealth tax

returns by the Wealth Tax Authorities. Once we are clear in our

mind about this approach, which was required to be taken, it

hardly need to be emphasized that if the valuation of the land in

question was accepted by the Wealth Tax Authorities to be

`36,61,625, the contribution of the said land in the form of capital

to the firm also had to be at par. There could not have been a

different yardstick. It would be clearly an absurd position that for

the purpose of payments of wealth tax it was valued at

`36,61,625, but when it comes to his capital contribution by giving

that asset to the firm, it is valued at a partly sum of `2,01,000. No

doubt, entry in the books of account of the firm, in the beginning,

was at `2,01,000. But it was open and permissible to the

assessee to revise the same after the finalization of assessment

under the Wealth Tax Act, as precisely that was the modus of

valuation provided in the Partnership Deed itself by the partners.

However, as already pointed out above, this revision was carried

out by the assessee by filing revised return well within the

permissible limits prescribed under the Income Tax Act.

15. It is not in dispute that on the revision of the value of the said

asset, capital account of Mr. Vadera was also upgraded. We

accordingly answer the question No. 1 in favour of the assessee

and against the Revenue.

16. Insofar as second question of law is concerned, no arguments

were advanced and it is implied there from that this question is

not pressed. Therefore, this question is returned unanswered.

17. This Reference is answered accordingly.

(A.K. SIKRI) JUDGE

(REVA KHETRAPAL) JUDGE SEPTEMBER 06, 2010.

pmc