1988 (2) TMI 100 - AT - Income Tax

Summary

Issues Involved:

1. Whether the transferred asset was a capital asset or stock-in-trade.
2. The extent of relief available under Section 54 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Whether the transferred asset was a capital asset or stock-in-trade:

The appellants contended that the property 'Madhu Park' was converted into stock-in-trade by a declaration dated 23-6-1980 for the proposed partnership business. The Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) (CIT(A)) held that the property transferred was a capital asset, not stock-in-trade. The appellants argued that the property was converted into a business asset and transferred to the partnership firm, M/s. Garden View Corporation, formed on 1-7-1980. The Tribunal examined the declaration and the partnership deed and concluded that the property was always intended to be a capital asset. The declaration was deemed a self-serving document aimed at tax avoidance. The Tribunal cited the Supreme Court's decision in Durga Prasad More's case, emphasizing that the surrounding circumstances did not support the conversion claim. The Tribunal held that the property was a capital asset and its transfer to the firm constituted a transfer within the meaning of Section 2(47) of the Act.

2. The extent of relief available under Section 54 of the Income Tax Act:

The appellants argued for full exemption under Section 54, claiming that the entire investment in the new house 'Raheja House' should be considered. The ITO allowed only the expenditure incurred after the transfer date (23-6-1980) for exemption. The Tribunal analyzed Section 54, which provides relief for capital gains if the assessee purchases or constructs a new house within specified periods. The Tribunal emphasized that the relief under Section 54 is for post-transfer investments. The Tribunal rejected the appellants' interpretation that pre-transfer expenditures should be considered. The Tribunal cited the Gujarat High Court's decision in Smt. Shantaben P. Gandhi's case, supporting the view that only post-transfer investments qualify for exemption. The Tribunal upheld the ITO and CIT(A)'s decision, allowing only the expenditure incurred after the transfer date for exemption under Section 54.

Conclusion:

The Tribunal dismissed the appeals, affirming that the property was a capital asset and only post-transfer investments in the new house qualify for exemption under Section 54.