9911796707
TMI Blog2010 (1) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... e same in its current account, it becomes clear that though the partnership firm as such is genuine, the transfer or contribution by the assessee of its personal land to the share capital of the firm represent a device or ruse for converting the land into money substantially withdrawn by the assessee from the firm for its benefit. Thus, the entry of Rs. 11.50 crores being value of land credited in assessee's capital account cannot be considered to be imaginary or notional one with no benefit or gain to the assessee. Therefore, the assessee's contention that the amount of Rs. 11.50 crores credited in assessee's capital account cannot be made a basis to work out any gain or profit arising to the assessee from the transaction of transferring its personal asset as capital contribution to a firm in which the assessee became a partner is not acceptable and is thus rejected. Therefore, even the partnership firm is considered to be genuine, the transaction of transferring assessee's land by way of capital contribution to the partnership at a market value more than the cost to the assessee represents a devise or ruse to convert the personal land of the assessee into money su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of that asset effected by him is in the course of his business or profession, so as to treat the asset in question as stock-in-trade, consumable stores or raw materials, at the time when the transaction was made. We, therefore, hold that in order to treat any asset as stock-in-trade, it must be established and proved that the asset was involved in the course of any commercial or trading transaction of a business carried out by the assessee, and that is to be considered and decided with reference to the transaction in which such asset is employed and not with reference to any past or subsequent act of the assessee, qua that asset. Having regard to the nature of right acquired by a partner of a firm when he becomes a partner, his share in the firm undoubtedly constitutes property , and share of a partner in a partnership firm would certainly be a capital asset within the meaning of s. 2(14) of the Act. Such an asset being a share of a partner in a partnership firm can be transferred, like any other property, and, on transfer being completed, the charge on capital gain tax would be attracted. As already observed, when a partner of a firm makes over his personal asset to a firm as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent a device or ruse for converting the land into money substantially withdrawn by the assessee from the firm for its benefit and even otherwise in view of our finding that the provisions contained in s. 45(3) of the Act inserted with effect from asst. yr. 1988-89, are applicable to the present case in this asst. yr. 1992-93 under consideration and in view of other findings we have given above, we hold that the earlier decisions of the Tribunal passed in the asst. yr. 1985-86 in the assessee's case shall have no application to the present case. We, therefore, reject the claim of the assessee that the issue involved in ground Nos. 1.1 to 1.7 should be decided in the terms of earlier order of the Tribunal passed in the asst. yr. 1985-86. We, therefore, direct the AO to compute the capital gain arising from the transfer of the said land by the present assessee to a partnership firm, in which it became a partner, by way of capital contribution, after taking the value of the consideration received or accruing as a result of such transfer at Rs. 11.50 crores being the amount recorded in the books of account of the firm as well as in the books of the assessee. The capital gain to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and brought to tax under s. 45(3) of the Act. Tribunal's power to change the head of income - It is never demonstrated or claimed by the assessee that such land was ever converted from stock-in-trade to capital asset. When the assessee held the land as stock-in-trade, he could deal with such land either himself alone or in partnership with other partners. The partnership is not a distinct legal entity from the partners constituting it. The assessee chose to deal with the land in partnership. In such a situation the assessee continues to deal with such land as its stock-in-trade only. A partner may contribute his part of capital in any form and bring different nature of assets whether stock-in-trade or capital asset. But in absence of any specific action on the part of assessee to convert such land from stock-in-trade to capital asset, the Tribunal is not competent to change such nature when it was never an issue before it. The draft order while holding that it has widest power u/s 254(1) so as to pass such orders thereon as it thinks fit fail to notice that the powers are limited by the word 'thereon' contained in s. 254(1) of the Act itself. Thus, I am of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r will not apply in relation to other years as the factual situation differs materially. Thus, the surplus is not chargeable to tax for asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01. Accordingly grounds raised in this regard as tabulated above are allowed and are decided in favour of the assessee. - HON'BLE I.P. BANSAL, C.L. SETHI, JUDICIAL MEMBERS AND DEEPAK R. SHAH, ACCOUNTANT MEMBER For the Assessee : Pradeep Dinodia, R.K. Kapoor, S.K. Sharma For the Revenue : N. P. Sawhney, Prakash Yadav ORDER C.L. Sethi, Judicial Member 1. The Hon'ble President, Tribunal, vide order dt.15th June, 2008 as modified by his order dt. 6th March, 2009 has constituted the Special Bench in the above-referred appeals to dispose of all the appeals in entirety, on the facts and circumstances of the case, and in accordance with law (including directions of Hon'ble High Court in the matter). ITA No. 3622/Del/1995 2. Firstly, we take up the appeal pertaining to the asst. yr. 1992-93. 3. In the appeal filed by the assessee for the asst. yr. 1992-93, ground No. 1 divided into sub-ground Nos. 1.1 to 1.7 read as under: 1.1 That the learned CIT(A) has erred on the facts and circumstances of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red on the facts and circumstances of the case and in accordance with the provisions of law and without raising the issue, in holding that the firm is not genuine in as much as it is formed with the sole objective of evading payment of taxes. 4. Briefly stated, apropos the issue involved in ground Nos. 1.2 to 1.7 of the appeal of the assessee, the facts are that the assessee, a company, is engaged in the business of real estate development, and hold certain lands as stock-in-trade. By a memorandum of the partnership executed on 23rd day of March, 1992, made effective from 16th day of March, 1992, the assessee company entered into partnership with four of its subsidiary companies and one individual. The assessee contributed all its right in the five plots of land admeasuring about 16.98 acres including the area of land owned by it, situated in DLF Qutab Enclave Complex, hereinafter referred to as said land , valued at Rs. 11.50 crores as capital contribution to a newly constituted partnership firm viz., M/s DLF Commercial Developers, in which the assessee became a partner with share of 76 per cent. All the right in the said plot of land became the property of the partnership firm w. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance on the decision of apex Court in the case of McDowell Co. Ltd. vs. CTO (l985) 47 CTR (SC) 126 : (l985) 154 ITR 148 (SC). The AO further held that he was not following the decision of learned CIT(A) for the asst. yr. 1985-86, because that decision has not become final as the order of the learned CIT(A) was pending before the Tribunal. 5. On an appeal, the learned CIT(A) upheld the order of the AO, firstly, on the reasoning that the assessee company had shown the surplus as its income in its P L a/c by making appropriate credits to the P L a/c, and on commercial principles, the surplus represents the business profit as has been treated as such by the assessee; secondly, on the reasoning that the ratio of the decision in the case of Hind Construction Ltd. was not applicable to the facts of the assessee's case as there were vital distinguishing features as detailed by the AO in his order; thirdly, on the reasoning that after the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai, the decision of the Hind Construction Ltd. stands modified to that extent; fourthly, on the reasoning that since the land so transferred represented the stock-in-trade of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis and reasons given by the CIT(A), which it found to be sound and convincing, so as not to warrant any interference with the order passed by the CIT(A). When the same issue arose in the present asst. yr. 1992-93, the AO again took a view which was not favourable to the assessee with the result that the assessee preferred an appeal before the CIT, but by an order dt. 10th March, 1995 the CIT(A) dismissed the appeal of the assessee. Being aggrieved, the assessee preferred an appeal before the Tribunal and one of the points urged by the assessee was that since the issue raised in 1985-86 was identical, the order passed by the Tribunal in respect of that year should be followed by the Tribunal in this year also. The Tribunal considered that contention in paras 30 to 32 of its order and rejected it on three grounds; firstly, that on the earlier occasion the CIT(A) had not taken into consideration an amendment to s. 45(3) of the Act which came into force from 1st April, 1988 which was, therefore, not applicable in respect of the asst. yr. 1985-86; secondly, that some of the decisions cited before the Tribunal in the present matter were not cited on the earlier occasion; thirdly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the whole appeal: Whether in the facts and circumstances of the case of the assessee the surplus arising from land brought into the common stock of the partnership firm, M/s DLF Commercial Developers, by credit, at an agreed value, to the company's capital account amounted to a transfer of the asset to the partnership give rise to a taxable profit 10. It is in the above circumstances that Hon'ble President constituted the Special Bench to dispose of the entire appeal for asst. yr. 1992-93, and also appeals for other assessment years referred to in the cause title hereto, and while disposing of the appeals in entirety, the Special Bench was directed to consider the following question also: Whether on the facts and in the circumstances of the case, the surplus arising on revaluation of the land, held by the assessee as stock-in-trade and brought into the common stock of the partnership firm M/s DLF Commercial Developers, and by credit, at an agreed value, to the assessee's capital account, amounted to a transfer of the asset to the partnership firm and can be assessed as the business profits of the assessee? 11. The matter was then heard at length by the Special Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rplus of Rs. 6.01 crores determined after considering cost to the assessee was shown in the P L a/c of the assessee company, but, was claimed to be exempted from tax, in view of the decision of the Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. He further submitted that there was no sale of stock-in-trade by the assessee to a partnership firm when the same was contributed towards capital of the assessee as a partner. He pointed out that the law is well-settled that no one can earn profit from himself by over-valuing the stock as it is not a commercial transaction in the business sense, and as such, in the light of this well settled principle of taxation, the stand of the Department in charging the surplus amount to tax must fail. He further contended that when the assessee revalues its stock-in-trade at an amount more than cost price to it, the surplus does not result in the taxable amount as there was no sale at that time. Likewise, there was no sale of stock-in-trade at time when the new partnership firm was created and the land was contributed by the assessee to a firm as its capital contribution. He further submitted that without prejudice, even if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to a firm of partners consisting of himself and others, there is no transfer of property so as to constitute a sale of goods as defined under Sales of Goods Act , and the partner cannot be said to have sold his property to the partnership firm. To the similar effect, reliance was placed upon the decision of Hon'ble Allahabad High Court in the case of Dr. M.C. Kackkar vs. CIT (1973) 92 ITR 87 (All). He further submitted that the aforesaid decisions of Hon'ble Madras High Court in the case of CIT vs. Janab N. Hyath Batcha Sahib and Hon'ble Allahabad High Court in the case of Dr. M.C. Kackkar vs. CIT, have been approved by the Hon'ble Supreme Court in the case of Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC). According to the learned counsel for the assessee, the view that the surplus arising on revaluation of its stock-in-trade at the time of contributing the same to a partnership firm is profit or gain chargeable to tax as the transaction amounts to a transfer of stock-in-trade from a partner to the firm is completely misleading and against the settled legal positions on the matter involved. 13.2 Having contended as above, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion are made in connection with a capital asset being contributed by the partner to a firm towards its capital, and not applicable to the case where stock-in-trade belonging to a partner is contributed by that partner to a firm towards its capital. He vehemently urged that a legal fiction created in s. 45(3) in relation to a capital asset cannot be extended beyond its terms and intent and thus cannot be applied in cases where stock-in-trade is contributed by a partner as its capital to a firm in which he is or becomes a partner. He, therefore, contended that the contribution of stock-in-trade by a partner to a firm cannot be considered to be a transfer and/or sale under the general law for the purpose of taxing the surplus arising from such contribution at an amount more than the cost to a partner. He submitted that the case of contribution of stock-in-trade by a partner to a firm is fully covered by the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. and not by propositions laid down by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT r/w s. 45(3) inserted in the statute w.e.f. 1st April, 1988. He urged that even the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tnership firm in which the assessee became a partner, and has credited same in the P L a/c prepared by the assessee, and a corresponding amount has been credited by the firm in the assessee's capital account, which goes to show and establish that it is a case of sale of stock-in-trade on credit by the partner to a firm, as there being no bar on sale of stock-in-trade by a partner to a partnership firm in which he is a partner. He further submitted that instead of contributing capital by payment of money, the assessee has contributed its capital by adjusting the sale value of the land transferred or sold by it to partnership firm. It was further contended by the learned standing counsel for the Revenue that when the assessee claims that he contributed its stock-in-trade to a firm, and treated the sale value as its capital credited in its capital account in the books of a firm, the transaction is nothing but is, in reality and substance, a transaction by way of sale at a given value, which was to be paid by the firm to the assessee partner. If it is the case of the assessee that stock-in-trade is given as stock-in-trade to a partnership firm for business, it is a case of trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the transaction of contribution of land by the assessee to a firm as capital contribution even if the land was held by the assessee company as stock-in-trade before it was so contributed. In this respect, he placed reliance upon the decision in cases of Sunil Siddharthbhai vs. CIT, CIT vs. Suresh Chandra Jain (1988) 71 CTR (AP) 42 : (1989) 178 ITR 241 (AP) and A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC). 14.4 The learned standing counsel for the Revenue made an attempt to distinguish the decision of Hon'ble Supreme Court in the case of Hind Construction Ltd. by contending that the case of a partner bringing his personal assets into the firm should be distinguished from the cases where a partner sales his assets including stock-in-trade to the firm, where tax consequences would be the same as in the case of sale to an outsider. He then submitted that the present case is a case where stock-in-trade has been in reality sold by the assessee to a firm in which it became a partner as would be clear from the treatment given by the assessee to the transaction in its books of accounts, by crediting the amount as sales, and by crediting the resultant profit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the position of law that the firm is a separate taxable entity from its partner, it is abundantly clear that the transaction of contributing stock-in-trade by a partner to a firm as its capital would be a transaction between two persons, and the concept that no person can make profit out of himself would not be applicable in that case. A reference was made to the decision of Hon'ble Madras High Court in the case of Baldevji vs. CIT. 14.7 The learned senior standing counsel for the Revenue further submitted that if it is a case of capital contribution of a capital asset, a capital gain is chargeable to tax under the amended provision of s. 45(3) of the Act, inserted in statute w.e.f.1st April, 1998. 14.8 To sum up, the learned standing counsel for the Revenue submitted that the Revenue's arguments are twofold as under: (i) If it is assessee's case that it is case of capital contribution in the form of stock-in-trade, there is a change of ownership or extinguishment of right in that stock-in-trade of the assessee partner against the consideration credited in the assessee's capital account, and the surplus arising therefrom would be taxable as business profit. (ii) If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny commercial or trading transaction between the firm and its partner, the transfer of stock-in-trade by a partner to a firm shall be considered as a transaction of sale or otherwise of transfer of stock-in-trade, and the transaction would be taxed accordingly. In support of this submission, he placed reliance upon the judgment of apex Court in the case of CIT vs. A.W. Figgies Co. Ors., with a submission that this decision was rendered by a Bench of three Judges of Hon'ble Supreme Court, and still hold the ground with binding force. 14.10 The learned standing counsel for the Revenue further submitted that if it is a case of capital contribution or extinguishment of rights in the land of the assessee partner, and the surplus arising from change of ownership or extinguishment of right of the assessee would thus, be taxable as business profit, and is to be taxed accordingly. On question whether this is change of ownership or extinguishment of right of the assessee in the land in question, a reliance was also placed upon the decision of Hon'ble apex Court in the case of CIT vs. Mrs. Grace Collis Ors. (2001) 166 CTR (SC) 201 : (2001) 115 Taxman 326 (SC). 14.11 He further submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction and hence, the asset employed in the said transaction cannot be considered to be stock-in-trade in as much as stock-in-trade is always employed in the course of business or trading transaction. Stock-in-trades are the goods which are held for the purpose of trading in the course of carrying on business activities. When assessee accepted the position that the transaction in question is not a trading or commercial transaction, the question of treating the asset employed in that transaction as stock-in-trade cannot by any stretch of imagination, arise. He, therefore, concluded that the land, which was contributed by the assessee to partnership firm towards its capital, is nothing but is a contribution on capital account, and, thus, it has to be treated as capital asset. Therefore, even on this analogy, the surplus arising from the transaction in question by way of contribution of land as capital in a firm in which the assessee became partner at an amount more than the cost to the assessee, which has been credited in the capital account of the assessee in the books of the firm, is to be assessed under s. 45(3) of the Act if not found to be assessable under s. 28 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, urged that the issue arising in the instant case of the present assessee is fully covered by the judgment of Hon'ble Supreme Court in Hind Construction Ltd., Sunil Siddharthbhai and Sanjeev Woollen Mills and as also supported by other relevant judgments given in the synopsis of the assessee to the similar effect. Decision 16. We have considered rival contentions of parties in the light of the facts of the present case, provisions of law contained in that behalf and decisions cited at the Bar. We have carefully gone through the orders of the authorities below and as well the material on record. 16.1 The question that arises for our consideration is whether, having regard to the facts and circumstances of the case, the surplus of Rs. 6.01 crores arising from the transaction of contributing the said land as capital by the assessee in a newly constituted partnership firm in which assessee became a partner, is liable to be taxed in the hands of the assessee as its income under IT Act, 1961. 16.2 In the light of the treatment given by the assessee to the transaction in its books of accounts, the main case made out by the Revenue is of sale or transfer of stock-in-trade by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset is employed and intention of the party, which would be gathered from surrounding circumstances after giving combined effect to all the factors and circumstances of any given case. It is also well-settled that the character of asset at the time of its transfer alone is relevant, and what was the nature at the time of its acquisition, is altogether irrelevant. The character of the asset is thus to be judged at the time when it is either sold or transferred or employed in any transaction. The material time with reference to which the question whether a particular asset which has been sold or transferred or otherwise transferred or employed in any transaction is a capital asset or not is to be decided, is the date of such sale or transfer, and not the time when it was acquired. We have to consider the changes in circumstances under which the asset is subsequently employed, from the circumstances prevailing on the date of its acquisition. It is also to be considered whether the case is a case of conversion of asset from one nature to another. In other words, it is also to be seen whether any capital asset has been converted into a stock-in-trade or vice versa, which can be determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in trading transaction. Cases on the border line give rise to vexing problems. It need hardly be said that the form in which the transaction, which gives rise to income, is clothed and the name which is given to it are irrelevant in determining the true and correct nature of the transaction. There is material distinction between commercial and trading transaction and transaction on capital field. The assessee may by making entries in the books, which are not in conformity with the facts of the case and proper accountancy principles, conceal real nature of the asset or the receipt or the transaction, as the case may be. In that event as already observed above, true nature and character of the transaction or receipt or asset in a given case is to be determined on a consideration of the totality of the circumstances of the case. Nature and character of transaction of making over personal assets of whatever character by a partner to a firm as capital contribution, in which he is or becomes a partner, and the nature of asset at time when it is employed therein 16.7 In the instant case before us, we are called upon to determine the true and correct nature of the transaction of contribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses incurred in respect of said land by the assessee has been credited to the P L a/c of the assessee company. In the books of the assessee company, the transaction resulted into the surplus of Rs. 6.01 crores, which was credited to the P L a/c, but claimed as not exigible to tax in the return of income filed by the assessee for the assessment year in question. According to the assessee, the readjustment on account of the revaluation of stock-in-trade resulting in surplus of Rs. 6.01 crores was not its income as there was no transfer or sale of lands to any other person as in law, there could be no sale to itself, and the readjustment of the value of its lands held by the assessee as its stock-in-trade could not in law result into any profit chargeable to tax. The assessee placed reliance upon the decision of Hon'ble Supreme Court in the case reported as CIT vs. Hind Construction Ltd. 16.8 For ready reference, the relevant portion of recitals made in the deed of partnership executed on23rd March, 1992between the assessee and five other persons, and made effective from16th March, 1992, are being reproduced here as under: Partnership deed This memorandum of partnership made at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plots (including the area of land owned by it) became the property of the partnership firm; and Whereas the parties hereto agreed that on the basis of expert valuation, the current value of the rights in the said plots is Rs. 1,150 lacs; and Whereas the amount of Rs. 1,150 lacs was accordingly credited to the account of the party of the first part in the account books of the partnership firm on account of its having brought its right in the said plots into common stock of partnership to be treated as its contribution towards the capital of the partnership; and Whereas the party of the first past has already paid an amount of Rs. 1,27,90,215 as advance towards purchase of land to its subsidiary companies from whom the land hereby brought into the common stock of partnership has been agreed to be purchased but whatever further amount becomes payable to the subsidiaries, the same will be payable by the firm; and Whereas all the other parties hereto have agreed to contribute such amounts towards the capital of the partnership firm as are mentioned hereinafter and which may be varied from time to time; and Whereas it was agreed that further amounts required for the business of the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets and liabilities and the P L a/c shall be prepared and signed on behalf of each partner and got audited by chartered accountants approved by the parties by mutual consent from time to time. The parties hereto shall be entitled to receive the net profit or bear the net loss (including profit or loss of a capital nature) in the following proportion: 1. M/s DLF Universal Ltd. 76% 2. M/s Apollo Land Housing Co. Ltd. 5% 3. M/s Moonlight Builders Developers Ltd. 5% 4. M/s Sunrise Land Housing Co. Ltd. 5% 5. M/s DLF Builders Developers Ltd. 5% 6. Mr. Rajinder Singh 4% 8. That the retirement, death, insolvency or liquidation of any of the parties hereto shall not lead to the dissolution of the partnership as between the surviving or continuing parties. 16.9 From the submission of the assessee made before the authorities below as well as before us, we see that the learned counsel for the assessee has tried to make out the nature and character of the transaction in question as under: (i) That the said land contributed as capital contribution by the assessee to the firm was held as stock-in-trade by the assessee. (ii) That the stock-in-trade was contributed to the firm as capital contri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stock-in-trade by the assessee for its business of real estate before the same was so contributed as capital to a firm is concerned, there is no dispute between the parties. 16.12 Now, the question arises as to whether the personal asset being said land contributed by assessee towards its capital in a partnership firm at the time the assessee became a partner is to be treated as capital asset or continued to be treated as stock-in-trade of the assessee, or whether it is a case of sale or transfer of stock-in-trade or capital asset, as the case may be, from a partner to a firm. Undoubtedly, a dispute in this regard does indeed lie between the assessee and the Department, which is to be decided in this case. 16.13 As already observed above herein, the book entries do not fix or regulate the liability of the assessee to tax. Moreover, the way in which entries are made by parties in their books of account or documents or papers is not determinative of the true and correct nature of the transaction. What is to be considered in the true and correct nature of the transaction with regards to the totality of the facts and circumstances of a given case. Therefore, the entries in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Sunil Siddharthbhai vs. CIT, the Hon'ble Supreme Court issued a word of caution by stating that the principles laid down by them in that case will hold good if the firm or the transaction is a genuine one, and thus observed as follows: If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain, it will be open to the IT authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The ITO will be entitled to consider all the relevant indicia in this regard, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the firm started filing of its return of income from next asst. yr. 1993-94 and compliance of provisions of s. 184 of the Act as applicable from asst. yr. 1993-94 and subsequent years was duly made, and the AO has also assessed the firm as such till dates as is evident from assessment orders for asst. yrs. 1993-94 to 1998-99, which are placed in the paper book filed by the assessee. He, therefore, contended that the genuineness of the new firm cannot be doubted. In its comments against AO's observations (placed at pp. 10-21 of the paper books dt. 1st April, 2006 filed by the assessee on 10th April, 2006/12th April, 2006), the assessee stated that if the transaction of contribution of stock-in-trade, as capital to the new firm is sham, no transfer under (sic) law takes place as the transaction was not intended to be given effect to. In any case, the alleged surplus for enhancing the value of the land by book entries does not tantamount to sale as no one can sell to himself, in view of the law laid down by the Supreme Court in the case of Hind Construction Ltd. 1974 CTR (SC) 157 : (1972) 83 ITR 211 (SC) and considered in Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit had accrued to the assessee either by way of sale or transfer though the surplus was recognized in the P L a/c prepared by the assessee. 16.19 We have considered this aspect of the matter touching the words of caution emphasized by the Hon'ble Supreme Court in the judgment in the case of Sunil Siddharthbhai. The learned counsel for the assessee has rightly submitted that these are very important observations of the Hon'ble Supreme Court. However, he submitted that in all the cases before us, no money whatsoever has been withdrawn by the assessee from the firms against the contribution of stock-in-trade made towards capital. In the light of the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai, it is clear that it is open to the IT authority to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expert. On a plot of land contributed by the assessee to a firm, the firm has developed/ constructed three commercial complexes namely, Super Mart 1 , Galleria and Plaza Tower since 1997 and 2000 onwards, and some portion of Galleria and Super Mart 1 have been sold, but no portion of Plaza Tower has been sold till date. The first sale of 20 units out of total 272 units of Super Mart 1 were made in asst. yr. 1997-98, and the first sale of some units out of total 566 units of Galleria is stated to be made in the year of 2000. No business activities were carried out by the firm in the year of its constitution. The assessee's capital account in the books of a firm was credited by an amount of Rs. 11.50 crores on 16th March, 1992and it remained as closing balance as on 31st March, 1992. The capital so credited in assessee's account remained the same till31st March, 1998. However, on perusal of statement of accounts of a firm, viz., M/s DLF Commercial Developers, for the year ended on 31st March, 1993 to 31st March, 1998, filed by the assessee before us, we find that besides partner's capital account, current account of each partner in the books of a firm have been created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profit fallen in assessee's share amounting to Rs. 5,34,22,109 (i.e., Rs. 6.34 crores) till 31st March. 1998, and thus the amount over-withdrawn by the assessee comes to Rs. 53,97,00,612 (i.e., Rs. 53.97 crores) as against capital of Rs. 11.50 crores standing in the name of the assessee as on 31st March, 1998. 16.23 In the light of the aforesaid facts establishing that the assessee had over-withdrawn net money to the extent of Rs. 53.97 crores till 31st March, 1998, the submission of the assessee that no money whatsoever has been withdrawn by assessee from the firm against contribution of stock-in-trade made towards the capital is totally misleading and false. The assessee has tried to give a totally wrong picture about the huge money withdrawn by it by debiting the same in a separate current account of partners and that too without making a whisper about it in its submissions made in this case either before the authorities below or before us. There is no dispute as to the proposition that an act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment of prejudice to the natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship at a market value more than the cost to the assessee represents a devise or ruse to convert the personal land of the assessee into money substantially for the benefit of the assessee while evading tax on a surplus amount arising to the assessee from the said transaction. In this view of the matter, which we have taken in the light of word of caution mentioned by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai, the amount representing the value of land contributed by the assessee as its capital in a firm in which the assessee became a partner and which has been credited in the assessee's capital account, is to be considered as a consideration received by the assessee on the transfer of its personal asset to a partnership firm. We, therefore, hold that the surplus arising from making over assessee's personal asset, i.e., said plot of land in question, to the firm as his contribution to its capital account is a profit or gain accrued to the assessee and is chargeable to tax. Whether transaction is on capital field or the revenue 16.25 Now, we have to examine whether the transaction in question is on capital field or the revenue, and the surplus so arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appropriate for us to find out what right arises or accrues to a partner from the transaction of contributing his personal asset as its capital in the partnership firm in which he becomes a partner. In this respect, making a gainful reference to the judgment of three Judges of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT would suffice as, in this decision, the Hon'ble Supreme Court has analyzed and considered number of decisions decided time and again by the various High Courts and also by Supreme Court including its own decision in the case of Hind Construction Ltd. and Malabar Fisheries Co., which have been heavily relied upon by the learned counsel for the assessee to support his contention advanced before us. 16.28 In the said decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai, it has been held that the consideration for the making over of the personal asset by the partner to a firm is the right, which arises or accrues to the partner, during the subsistence of the partnership, is to get his share of the profit from time to time, and after the dissolution of the partnership or with his retirement from the partnership, to g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been held that whatever is brought into the partnership ceases to be exclusive property of the person who brought it in, that is, an exclusive interest is reduced to a shared interest, as so contended by the assessee also vide contentions raised into ground No. 1.4 by the assessee. 16.30 The Hon'ble Supreme Court in the case of Sunil Siddharthbhai has noted the observation made in its own judgment in the case of Addanki Narayanapa vs. Bhaskara Krishanappa AIR 1966 SC 1300 : (1966) 3 SCR 400, where the Hon'ble Supreme Court explained the identical proposition as laid down in the case of Sunil Siddharthbhai vs. CIT, by observing as under: .....Whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing, to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iately, it is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner's interest takes place only when there is a dissolution of the firm or upon his retirement from it. It has sometimes been said, and we think erroneously, that the right of a partner to a share in the assets of the partnership firm arises upon dissolution of the firm or upon the partner retiring from the firm. We think it necessary to state that what is envisaged here is merely the right to realise the interest and receive its value. What is realized is the interest which the partner enjoys in the assets during the subsistence of the partnership firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement. It is because that interest exists already before dissolution, as was held by this Court in Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 (1979) 120 ITR 49 (SC), the distribution of the assets on dissolution does not amount to a transfer to the erstwhile partners. What ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer. It is the realisation of a pre-existing right. The position is different, it seems to us, when a partner brings his personal asset into the partnership firm as his contribution to its capital. An individual asset is the sole subject of consideration. An exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest. 16.34 In this decision, the Hon'ble Supreme Court further observed that there is no difficulty in accepting proposition that when a partner hands over a business asset to a partnership firm as his contribution to its capital, he cannot be said to have effected a sale. But while the transaction may not amount to a sale, can it be described as a transfer of some other kind? 16.35 In the said case the Hon'ble Supreme Court then observed and held as under: In its general sense, the expression 'transfer of property' connotes the passing of rights in the property from one person to another. In one case there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , with reference to shares brought in by the partner into the firm, the Hon'ble Supreme Court has held as under: Accordingly, we hold that when the assessee brought the shares of the limited companies into the partnership firm as his contribution to its capital, there was a transfer of a capital asset within the terms of s. 45. In this view of the matter, we agree with the conclusion reached by the Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works vs. CIT (1977) 110 ITR 595 (Ker), the Karnataka High Court in Addl. CIT vs. M.A.J. Vasanaik (1979) 116 ITR 110 (Kar) and by the Gujarat High Court, in the judgment under appeal. Various propositions of law laid down by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT 16.38 From the aforesaid decision of three Judges of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai, the position of law that emerges is summarized as under: (i) The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatsoever is brought in would cease to be the exclusive property of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court in the case of Malabar Fisheries Co. vs. CIT, that the distribution of the assets on dissolution or upon the retirement is the realization of a pre-existing right or an interest, which does not amount to a transfer to the erstwhile partners. What the partner gets upon dissolution or upon retirement is the realization of a pre-existing right or interest. That is why it has been held that there is no transfer. (vi) When a partner hands over its business asset to a partnership firm as his contribution to its capital, he cannot be said to have effected the sale. (vii) In its general sense, the expression transfer of property connotes the passing of right in property from one person to another. In one case there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of the rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons, and an exclusive interest in property is larger than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution as its capital cannot fall within the terms of s. 48 of the Act. (xi) The view that when a person brings in even his immovable property as his contribution to the capital of the firm, no document or registration is required under s. 17(1)(b) of the Registration Act does not spring from the consideration that there is no transfer. (xii) On introducing his personal asset into the partnership firm as his contribution to its capital, it cannot be said that any income or gain arises or accrues to the assessee in a true commercial sense which a businessman would understand as real income or gain. (xiii) However, the situation would be different if it transpires that either partnership firm in question is not genuine or if the partnership firm is genuine, the transaction of transferring the personal asset to the partnership firm represents a devise or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on capital gain, and in that respect the AO is entitled to consider all the relevant indicia and other pertinent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital nature of the transaction and nature of rights acquired by a partner in the firm on his becoming a partner. In other words, whatever may be the character of the property in the partner's hand before the same is brought in by the partner as capital contribution when a partnership is formed and he becomes a partner, the property brought in partakes the character of a capital asset, and in consideration of it being contributed to a partnership towards its capital, the partner acquires a right to get his share of profit in the firm, and upon dissolution of the partnership firm or his retirement, a partner is entitled to get share in the asset of the firm which remains after satisfying the liabilities of the firm. Whether a partner hands over his business asset to a firm as his capital contribution, he can be said to have effected a sale 16.40 The learned counsel for the assessee has rightly contended that when a partner hands over his business asset to a partnership firm as his contribution to its capital, he cannot be said to have effected a sale within the meaning of Sales of Goods Act, meaning thereby that the transfer of partner's personal asset to a partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s capital, the asset cannot retain the character of stock-in-trade at that material point of time and in the course of such contribution of capital as the same is not employed in any commercial or trading transaction carried out in the course of any business activity of the partner. There is no quarrel as to the contention of the assessee that as per definition of capital asset defined under s. 2(14) of the Act, any stock-in-trade, consumable stores or raw materials held for the purpose of the business or profession of the assessee are excluded from the ambit of capital asset . In other words, an exception has been provided in the definition of capital asset under s. 2(14) of the Act to exclude stock-in-trade or consumable stores or raw material held by the assessee for the purposes of his business or profession from the purview of a capital asset. The phrase stock-in-trade would mean all those goods or commodities in which the particular individual deals in the sense of buying or selling in the course of its business activity. The stock-in-trade held by the assessee for the purpose of his business or profession would retain its same character only (till) it continues to be employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business income on conversion of stock withdrawn from business. In this case, the Hon'ble Supreme Court has taken up an illustration of a dealer in rice held as stock, drawing a small part of it for his home consumption. If he had debited the purchase to personal account, even initially, there would have been no profit element reckoned on such purchases. It should, therefore, make no difference merely because such stock is merely routed through business books. In the decision in the case of Sir Kikabhai Premchand vs. CIT, the Hon'ble Supreme Court further observed that withdrawing stock-in-trade by a businessman is not a business transaction and by act of withdrawal no profit can be said to accrue to him and, accordingly it is sufficient if said businessman has credited it business with cost price of stock so withdrawn. It is well-settled that profits from sale of stock-in-trade in the course of trading operation is business profit. As a natural corollary, when any asset is not employed in the course of any trading or commercial operation, the same cannot be considered to be stock-in-trade held for the purpose of business. Further, in the light of the ratio of decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and circumstances of a given case. The taxability of the amount being the difference between the cost of asset originally acquired as investment and the market price of the asset on the date of its conversion from capital asset to stock-in-trade, now takes care of by the provisions contained in sub-s. (2) of s. 45 of the Act, which has been inserted w.e.f.1st April, 1985with a view to bring the aforesaid difference to tax as capital gain on conversion of investment into stock-in-trade. Since market value was adopted on conversion of investment into stock-in-trade in the aforesaid decision of Hon'ble Supreme Court in the case of CIT vs. Bai Shirinbai K. Kooka, it was considered fair by the legislature that the assessee should pay tax on such capital gains with reference to the market value adopted when computing the business income arising to the assessee from investment or personal asset converted into stock-in-trade. Conversely, a stock-in-trade can be converted into capital asset, and the tax on transfer of a such capital asset will be imposed in the year in which such capital asset is sold or otherwise transferred after deducting therefrom the cost of acquisition, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the production process or in the rendering of services. Above meaning given to the inventories is an accepted proposition. From this definition of stock-in-trade or inventory, it is clear that in order to consider any asset as stock-in-trade or inventory, it is to be established that it was held for sale in the ordinary course of business; in the process of production of such sales; or in the form of materials or supplies to be consumed in the production process or in rendering of services. Under s. 2(14) of the Act, any stock-in-trade, consumable stores, or raw materials held for the purpose of his business or profession are excluded from the ambit of capital asset . The expression used in s. 2(14) of the Act is any stock-in-trade, consumable stores or materials held for the purposes of his business or profession . Thus, the emphasis has been given to the criteria that any stock-in-trade, consumable stores, or raw materials must be held for the purpose of his business or profession in order to treat the same as such. As a natural corollary, if one claims that any asset is/are either acquired or disposed of or otherwise dealt with as stock-in-trade, or consumable stores or raw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the net asset of the firm. It thus, makes it clear that the partner has acquired a capital asset in the nature of his share in the partnership firm in consideration of his making over his personal asset to a firm. The transaction of making over personal assets to a firm, or receiving or realization of his share in assets on dissolution of the firm or on retirement of the partner, is undoubtedly to be held on a capital field. 16.45 Therefore, having regard to the nature of the transaction of contributing asset by a partner to a partnership firm towards his capital, the nature of the right that the partner acquires when he contributes his personal asset to a partnership firm as its capital, and such transactions being not in the nature of any commercial or trading transaction, notwithstanding the fact that the said land contributed by the assessee to a partnership firm as its capital was held as stock-in-trade for the purpose of assessee's business before the same was so contributed as capital in a firm, it ceases to be stock-in-trade at the time when the same was contributed into a partnership firm by the assessee partner towards its capital, and it gets converted from stock- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g from the said transaction, was credited in the P L a/c of the assessee firm and the value of the land was credited in the capital account of the assessee partner in the books of the firm. In this respect, and at this stage, we must keep in our mind that all other plots of lands and right in land held by the assessee as stock-in-trade, except the land in question, were neither valued nor any entry of any revaluation in respect thereto was made in the accounts of the assessee company. The conduct of the assessee in valuing only a part of stock-in-trade at market value as on 16th March, 1992 for the purpose of contributing the same as capital contribution in to the partnership firm in which he became a partner on and from 16th March, 1992, clearly indicates the intention and motive of the assessee that the assessee did not have any intention to treat the land in question as stock-in-trade anymore, but the intention was to treat the same as capital asset for the purpose of contributing the same as capital contribution to a firm for becoming a partner. It is an accepted system of accountancy that stock-in-trade of business at the end of the year are valued at cost or market price, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset at the time when the same was contributed as capital contribution to a firm in which the assessee became a partner. In this view of the matter, we, therefore, hold that the land in question contributed by the assessee as capital to a firm in which assessee became a partner was a capital asset in nature at that relevant point of time, and all the incidence of taxation would thus follow accordingly. 16.47 Before proceeding further, at this juncture, we have to deal with one more aspect of the matter flowing from the contentions of the learned counsel for the assessee to the effect that the AO as well as the CIT(A) have not controverted or disputed the fact that the land in question was a stock-in-trade both before and after the same was contributed by the assessee partner as its capital contribution to the partnership firm in which the assessee became a partner, and this finding of fact cannot now be changed at this stage. We have given our serious consideration to this contention raised by the learned counsel for the assessee. On perusal of orders of the authorities below, it becomes clear that both the authorities below have recorded a finding of fact that the land, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as stock-in-trade before the same was contributed as its capital to a firm, in which the assessee became a partner. This question whether the land in question was a capital asset or stock-in-trade in nature at the time when the same was contributed by the assessee to a partnership firm as its capital contribution when the assessee became a partner in that firm, is not one of fact: though it is dependent on the facts and the circumstances of the present case, the question does involve conclusions of law to be drawn from those facts. We, therefore, do not find any force or merit in the contention of the learned counsel for the assessee that the facts admitted by the Revenue authorities below are now being changed. Whether particular income assessed by the AO under one head can be brought to tax under another head by the Tribunal 16.48 The learned counsel for the assessee has also contended before us that the Revenue has changed its stand when an alternative argument was advanced by the learned special counsel for the Revenue that in the event the Tribunal comes to the conclusion that the transaction of making over personal assets by a partner to a partnership firm as its capital cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit or gain arising from the transfer of a land by the assessee to a firm may be taxed under s. 45(3) of the Act inserted with effect from asst. yr. 1988-89. This alternative argument is, in our view, undoubtedly arising from the same set of facts, and in respect of same item of income arising from the same transaction, which have been considered in the assessment, made by the AO. Further, the provisions of ss. 2(14), 2(47) and 45(3) of the Act were very much relied upon by the AO while assessing the item to tax as is clear from the respective orders of the authorities below and from the submissions of the assessee made before the authorities below as well as before us. It is not the new source of income or new item of income that is sought to be taxed by the Revenue at this stage. It is the same income assessed by the AO that is now sought to be taxed under s. 45(3) of the Act in the light of the legal inferences drawn from same set of facts, as against the business profit assessed in the assessment made by the AO. The subject-matter of appeal has not been really changed. The change is only with regard to the correct head of income under which it is to be assessed under the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat we traverse beyond the subject-matter of dispute between the parties involved in this case. This alternative plea raised by the Revenue does not altogether change the complexion of the case, and only change sought to be made is to determine the correct head of income on same set of facts. The various decisions relied upon by the learned counsel for the assessee are, therefore, not applicable to the present case in as much as those cases were rendered either in the situation where new facts were considered, benefit already granted to the assessee was sought to be withdrawn, the subject-matter of the appeal was completely changed and the assessment was sought to be enhanced. 16.48.4 In this connection, a reliance was placed by the Revenue upon the decision of Special Bench of the Tribunal, Mumbai Bench C (Special Bench) in the case of Sumit Bhattacharya vs. Asstt. CIT (2008) 113 TTJ (Mumbai)(SB) 633 : (2008) 2 DTR (Mumbai)(SB)(Trib) 25 : (2008) 112 ITD 1 (Mumbai)(SB), where the Special Bench has taken a view that the Hon'ble Bombay High Court in the case of CIT vs. Gilbert Barkar Manufacturing Co. 1977 CTR (Bom) 347 : (1978) 111 ITR 529 (Bom) has held that the Tribunal is com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te before it its contention that its income was assessable under the heading 'Business income' and, accordingly, the first question is answered in the affirmative. 16.48.5 The Special Bench in the case of Sumit Bhattacharya vs. Asstt. CIT has observed and held as under: It is well-settled that the Tribunal is competent to change the head of income even at the instance of the respondent when all the relevant facts are already on record and as long as both the parties are heard on that issue. In the instant case, it was the alternate contention of the Revenue that in the event the Tribunal came to the conclusion that the amount in question was not taxable under the head 'Income from salaries', the Tribunal might also adjudicate on the question whether or not the impugned amount be held as income from other sources. The Supreme Court in the case of Emil Webber vs. CIT (1993) 110 CTR (SC) 257 : (1993) 200 ITR 483 (SC) : (1993) 67 Taxman 532 (SC) has held that merely because an employment related income/benefit cannot be taxed under the head 'Income from salaries', such a benefit cannot go outside the ambit of taxable income and such an income can be taxed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch had taken a view that the income, which was assessed by the AO under the head Salary , could be taxed under head Income from other sources , and the issue was decided accordingly by the Special Bench. In this respect, a reliance may also be placed upon the decision of Hon'ble Bombay High Court in the case of B.R. Bamasi vs. CIT (1972) 83 ITR 223 (Bom), where new ground before the Tribunal during arguments by the assessee in answer to appeal was permitted. The decision of Hon'ble Supreme Court in the case of Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 (SC) has held that the power of the Tribunal in dealing with appeals are expressed in s. 254(1) in the widest possible terms, however, with a restriction of its jurisdiction to the subject-matters of appeal. 16.48.7 Further, having regard to the actual controversy involved in the present appeal, in response to the Bench's suggestions, and notings, the Hon'ble President vide his order dt. 6th March, 2009, after hearing both the parties, has directed this Special Bench to decide the appeal in its entirety without confining itself to the question earlier framed in the present case, in accordance with the law and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibuted as capital to a firm. Conclusion 16.49 Applying the propositions laid down by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT to the facts of the present case and in the light of the view we have expressed above, we hold as under: (i) When the assessee made over the said land in question to the partnership firm as his contribution to its capital, what right the assessee has acquired, during the subsistence of the partnership firm, is to get its shares of profits from time to time, and after dissolution of the partnership or on his retirement from the partnership firm, to receive the value of the share in the net partnership asset as on the date of dissolution or retirement after deduction of liabilities and prior charges. (ii) When the land in question being the personal asset of the present assessee was contributed by the assessee partner to a firm towards its capital, the assessee reduced his exclusive right in the land in question to shared rights in it with other partners of the firm, and to that extent to which the assessee's exclusive interest in the said land is reduced to a shared interest, there was a transfer of interest in the land not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT in the cases where partner brings his personal assets to a firm towards capital contribution is applicable to all kinds of assets brought in by the partners to a firm towards its capital contribution, and not only to a capital asset held by the partner before the same was contributed in the partnership. The analogy of reducing of exclusive interest of a partner, to shared interest in case partner brings in his personal asset into the partnership firm as his contribution to its capital is equally applicable to all kinds of assets belonging to a partner, and that is why the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT has used the expression personal asset while laying down a law that it is apparent, therefore, that when a partner brings in his personal asset into a partnership as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now the subject to the right of other partners in it........... Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er was held as capital asset or as trading asset. While deciding the issue whether there was transfer of shares, the Hon'ble Supreme Court decided the issue by observing that we hold that when the assessee brought the shares of the limited companies into the partnership firm as his contribution to its capital, there was a transfer of a capital asset within the terms of s. 45 of the IT Act . From the said observation and decision of Hon'ble Supreme Court, it cannot be said that the asset brought into a firm by a partner as capital contribution should be held by him as capital asset even before the same was contributed in order to treat the contribution of asset by a partner to a firm as a transfer of capital asset within the terms of s. 45 of the IT Act. Further, the Hon'ble Supreme Court referred to its own observation in the case of Addanki Narayanapa vs. Bhaskara Krishanappa with approval where this Court explained that whatever may be the character of the property which is brought in by the partner when the partnership is formed........... , which goes to show that when any property of whatever character held by a partner is brought into a firm by the partner, it bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any capital asset of a partner is transferred by a partner to a firm as his capital contribution but, it is applicable to all kinds of personal assets of the partner transferred by him to a partnership firm as capital contribution, and in all such cases the liability of income-tax on capital gain would arise. (vi) There is no quarrel as to the proposition that no income chargeable to tax would arise on mere revaluation of the closing stock at a market value more than the cost to the assessee as in such a case the profits shown on revaluation is only notional. We do not find any difficulty in accepting this contention raised by the learned counsel for the assessee in the light of the decision in the case of Sir Kikabhai Premchand vs. CIT, Chainrup Sampatram vs. CIT, CIT vs. Hind Construction Ltd., CIT vs. Birla Gwalior (P) Ltd. 1973 CTR (SC) 349 : (1973) 89 ITR 266 (SC) and Sanjeev Woollen Mills vs. CIT. However, facts are different in the present case. It is not the case where increase in the value of land can be said to be notional. In the present case, the asset has been valued at market rate, which is more than the cost to the assessee, and it has been contributed to a firm as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be any actual profit or loss on withdrawal of stock-in-trade from a trading business and its conversion into capital asset. There was no deeming fiction to deem the conversion of stock-in-trade into capital assets as a transfer or to deem the fair market value as on the date of conversion as the cost of acquisition of the capital assets. However, a transfer does take place when any personal asset of a partner is introduced into a firm as his capital contribution, and the value of the asset recorded in the books of the firm shall be deemed to be full value of the consideration received or accruing as a result of the transfer of such asset contributed by the partner. Consequently, in the present case, there was no transfer of land held by the assessee as stock-in-trade when the same was merely revalued at a market value in its books and it was converted into capital asset and no profit or gain did accrue or arise to the assessee merely on its revaluation at a higher value more than the cost to the assessee in its books or on its mere conversation from stock-in-trade to a capital asset. In such a case, the conversion of stock-in-trade into investment has to be at cost/book value. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the partnership firm is a device or ruse to convert the land in question into money substantially for the benefit of the assessee as the assessee has withdrawn substantial amount as observed and pointed out above in paras 16.19 to 16.24 of this order, for its benefit as a part of its well designed and calculated colourable strategy to convert the land into money for its own benefit. (xii) Without prejudice to the view we have taken above, we further hold that even in case it is otherwise held that the land contributed by the assessee to a firm towards capital contribution should be treated as stock-in-trade even during the course of making the transaction of transferring or contributing the land to the partnership firm as capital contribution, the surplus arising to the assessee from the said transaction of contributing stock-in-trade to a firm shall then be assessable under the head Business in the view of the colourable device or ruse adopted by the assessee to convert stock-in-trade into money for its own benefit. 16.50 In the light of our finding that the transfer or contribution by the assessee of its personal land to the share capital of the firm represent a device or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset became capital asset.) III. Ranchhodbhai Bhaijibhai Patel vs. CIT (1971) 81 ITR 446 (Guj) (the only circumstances which must be satisfied in order to attract the charge to tax on capital gains under s. 45 of the Act is that the property transferred must be a capital asset at the date of transfer and it is not necessary it should have been a capital asset on the date of acquisition by the assessee.) IV. Kalyani Exports Investments (P) Ltd. vs. Dy. CIT (2001) 72 TTJ (Pune)(TM) 341 : (2001) 78 ITD 95 (Pune)(TM) (what is relevant for purpose of capital gain is cost of acquisition and not the value on date on which the asset became a capital asset.) 17. Ground No. 2 is in respect of the issue whether the interest received on FDRs made from internal development account is eligible for deduction and not to be included in assessee's assessable income. This issue was decided by the Tribunal in the first round by remitting the matter back to the file of the AO to decide the issue afresh by complying with the directions given by the Tribunal in other years as detailed in para 35 of the Tribunal's order dt. 30th March, 2007, passed in the first round of this appeal before the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt has remitted the matter back to the Tribunal for fresh consideration only in respect of the issue with regard to the addition of surplus arising on revaluation of the land, when the same was contributed to a partnership firm, in which the assessee has became a partner, and the only question framed by the Hon'ble High Court was with regard to this matter. Nothing is mentioned in the Hon'ble High Court's order about this issue of confirming addition to the extent of Rs. 3,00,000 out of sales promotion and business promotion expenses. However, even otherwise, in the course of hearing of this appeal in the second round, nothing new has been submitted by the assessee. We, therefore, decide this issue in the light of earlier order dt. 30th March, 2007whereby the addition of Rs. 5,30,258 sustained by the CIT(A) has been reduced to Rs. 3,00,000 by the Tribunal. We order accordingly. 21. Ground No. 10 is with regard to the disallowance of Rs. 1,03,505 being the amount written off out of advances and deposits. This issue has been discussed by the Tribunal in the first round at paras 67-70 of the Tribunal's order dt. 30th March, 2007, whereby the Tribunal has upheld the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001-02. Respectfully following the Tribunal's earlier order in the asst. yr. 2004-05, where the Tribunal has held that the loss was disallowed by the AO after rejecting the method of accounting for booking of revenue at the time of convincing on built-up property, and in the light of the Tribunal's decision that the Department was not justified in invoking the provisions of s. 145, and in rejecting the method of accounting regularly followed by the assessee, the addition made by the AO on this account is not justified, and the ground is decided in favour of the assessee. We allow this ground raised by the assessee. 25. Ground No. 3 with sub-grounds (a) and (b) is with regard to the reworking of the cost of land at the average price of the cost of the land in Phases I to III and IV, Qutab Enclave Complex, now known as DLF city by dividing the cost of land acquired till end of each year by sellable in each phase separately and treating the area year-marked for schools, hospitals, clubs, and other community building as sellable area. In the course of hearing of this appeal its has been pointed out by the parties that identical issue has been decided by this Tribunal in asst. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its right to purchase 11 plots owned by its subsidiary company, 6,321.06 sq. mtrs. in Qutab Enclave Complex, as capital contribution in the said partnership firm. These plots of land were converted as capital investment in the firm at an agreed value of Rs. 21.15 crores, The transfer value of Rs. 21.15 crores was credited in assessee's capital account in the books of the firm. The transfer value of Rs. 21.15 crores resulted into the surplus of Rs. 14,36,41,533, which was not offered to tax by the assessee by giving a reason that same is not taxable in view of the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. The assessee also stated before the AO that in asst. yr. 1985-86, such surplus was held to be not taxable. However, the AO as well as the CIT(A) brought the said surplus to tax in the light of their view taken in asst. yr. 1992-93 after relying upon the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT and after making a reference to the provisions contained in ss. 2(47) and 45(3) of the Act. 27.2 We have heard both the parties and perused the materials on record. 27.3 It is admitted position that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning amount of Rs. 20,95,00,000 (Rs. 20.95 crores) will be treated as loan to the partnership firm, which may be either free of interest or carry interest at such rate as may be mutually agreed upon from time to time. We hold that the surplus arising to the assessee from the transfer of 61 plots of land and 11 plots of land is Rs. 14,36,41,533, which is liable to be taxed in the light of the provisions contained in s. 45(3) of the Act for the reasons given on identical issue in the asst. yr. 1992-93. 27.4 Even otherwise in the light of the word of caution emphasized by the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT, where it has been emphasized that if the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to tax, it will be open to the IT authority to go behind the transaction and examine, even where the partnership is genuine, whether the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-93. ITA No. 3233/Del/2001: Asst. yr. 1998-99 28. Now we shall come to the appeal filed by the assessee for the asst. yr. 1998-99, directed against the CIT(A)'s order dt. 13th June, 2001, passed in the matter of an assessment made under s. 143(3) of the IT Act, 1961 ( the Act ) 29. Ground Nos. 1, 2, 3, and 5 are identical to the ground Nos. 1, 2, 3, and 5 raised in the asst. yr. 1997-98. Therefore, these grounds shall stand decided in terms of our order deciding the identical ground in asst. yr. 1997-98. The decision given in asst. yr. 1997-98, on these issues shall apply to the identical issues involved in the asst. yr. 1998-99. 30. Ground No. 4 in asst. yr. 1998-99 is directed against the CIT(A)'s order in confirming the addition of Rs. 17,12,17,554 being the surplus amount arising on land/rights in land held as stock-in-trade and brought into the partnership firm as capital contribution by the assessee. 30.1 During the period relevant to the asst. yr. 1998-99, the assessee company became a partner in two newly constituted partnership firms viz., M/s DLF Office Developers and M/s DLF Property Developers, with profit/loss sharing ratio of 12 per cent in each firm. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as a loan by the assessee to a partnership firm, which may be cither free of interest or carry interest at such rates as may be mutually agreed upon from time to time. The property brought in by the partners were treated as a property of a partnership firm on and from24th Feb., 1998. 30.5 Similarly, in the firm under name and style of M/s DLF Property Developers, the assessee brought certain plot of land held by it into the common stock of partnership, which were valued at Rs. 3,25,00,000, which amount was credited to the account of the assessee in the books of the partnership firm of24th Feb., 1998. The assessee also brought its right to purchase the land in respect of certain 47 plots of land into the common stock of the partnership firm, which were valued at Rs. 17,75,00,000. Thus, the total amount credited to the assessee's account was Rs. 21 crores out of which sum of Rs. 12 lacs was credited to the capital account of the assessee as its capital contribution without carrying any interest, and the remaining amount has been treated as loan by the assessee to the partnership firm, which may be either free of interest or may carry interest at such rates as may be mutua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all piece of lands were determined at an agreed value of Rs. 78.55 crores. These plots of lands were contributed by the assessee as capital contribution in the aforesaid five newly constituted partnership firms. As a result of this transaction, a surplus of Rs. 54,82,91,077 had arisen to the assessee. The assessee has credited this surplus to its P L a/c. The firm also credited the assessee's capital account by sum of Rs. 78.55 crores. However, the assessee claimed the surplus to be exempted from tax in the light of the decision of Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. The assessee also stated before the AO that in asst. yr. 1985-86, such surplus was held to be not taxable. However, the AO as well as the CIT(A} brought the said surplus to tax in the light of their view taken in asst. yr. 1992-93 after relying upon the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs. CIT and after making a reference to the provisions contained in ss. 2(47) and 45(3) of the Act. 33.2 We have heard both the parties and have carefully gone through the orders of the authorities below. 33.3 In this year also five partnership firms were ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al development bank account. This issue has also been considered in the asst. yrs. 1997-98, 1998-99, and 2000-01 above after following the earlier decision of the Tribunal. Therefore, this issue has been decided accordingly in terms of our order passed in the asst. yrs. 1997-98, 1998-99, and 2000-01. 37. Ground No. 3 is directed against the CIT(A)'s order in confirming addition of Rs. 5,60,00,000 being the surplus arising on land held as stock-in-trade by the assessee but contributed to the partnership firm towards capital by the assessee. 37.1 During the period relevant to the asst. yr. 2000-01, the assessee became a partner in a partnership firm M/s DLF Phase-IV, Commercial Developers and contributed certain land owned by it as well as its right of purchase of land, to the aforesaid firm towards its capital, and surplus of Rs. 5,60,00,000, being the difference between the value credited in assessee's capital account, and the cost to the assessee was credited in the P L a/c, but claimed as exempted from tax in the light of the decision of the Hon'ble Supreme Court in the case of CIT vs. Hind Construction Ltd. and in the light of the order decided in assessee's favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under. 41. The facts which are never in dispute are that the assessee was holding certain land as its stock-in-trade. The lands were brought in by the assessee as its capital contribution in a firm when the partnership firm was constituted. The partnership deed was constituted on 23rd March, 1992 but made effective from 16th March, 1992. The cost of the said land in the hands of assessee was Rs. 5.49 crores. At the time of introduction of the said land the market value was determined at Rs. 11.5 crores. The amount credited to the account of partner in the books of firm when the land was contributed was taken as Rs. 11.5 crores. The difference of Rs. 6.01 crores was credited by the assessee to its P L a/c. The assessee claimed the difference as not exigible to tax, relying on the decision of the Hon'ble Supreme Court in the case of Hind Construction Ltd. The AO treated the difference as chargeable income under the head Profits and gains of business or profession . Learned CIT(A) also confirmed the same and held in p. 24 of his order as under: 4. Since the land so transferred represented the stock-in-trade, the profits were chargeable under s. 28 of the Act which stands on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (ii) On the dissolution of partnership or with his retirement from the partnership, the right to get the value of his shares in the net partnership asset as on the date of dissolution or retirement after deduction of liabilities and prior charges. 42.1 As per the ratio laid down by various Courts including Hon'ble Supreme Court in the case of Sunil Siddharthbhai, the amount credited to the account of partner in the books of the firm and the resultant surplus will not amount to any income accruing or arising to the partner for the reason that: 1. The firm is no separate legal entity than the partners constituting it. 2. The partner is not legally entitled to claim the amount standing to the credit of his capital account as debt due by the firm in favour of the partner. 3. The right is merely to share profits from time to time during subsistence of partnership and only on dissolution or on retirement to get the value of his share in the net partnership asset. Thus it will be incorrect to hold that the amount of Rs. 11.5 crores credited to the account of the partner in the books of the firm is giving rise to any income chargeable to tax in the hands of the partner when he intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e surplus was credited in the P L a/c due to introduction of the stock-in-trade in the firm, will not be assessable as 'profits and gains of business or profession'. In the draft order in para 16.24 it has been agreed that the partnership firm as such is genuine. It is also a matter of record that all along the partnership firm has been assessed to tax and it is also found that after the land was contributed by the assessee in the partnership firm as its capital contribution, the said land was developed by the firm and profit was earned by the firm which has been assessed as such. This fact has been reiterated in para 16.25 of the draft order also. Even in para 16.20 of the draft order it has been accepted as under: From the material placed on record, we find that the partnership firm so constituted has been assessed to tax as such from year to year by the Department, and the Department has not considered the firm as bogus or sham. Thus, we do not find any material to hold that the very transaction of creating the partnership itself is not genuine but a sham transaction. If this factual situation prevails then it cannot be said that when the assessee introduced its stock-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it and in which it has substantial control. In doing the same, it has only appreciated the value of the machinery. Whether the appreciation of the shares has been done before the transfer or after the transfer, there is no question of any purchase or sale of machinery. Nor can it be said that there was any profit motive in it. A notional or fictional income might have been caused in the records of the company or in the records of the firm. But no real income was received by the assessee. The nature and the character of the transaction is such that it is impossible to believe that there is any question of profit having been received in the accounting year. As a result of the appreciation of the value of the machinery the assessee as a partner in the partnership firm might get a future advantage. But, as the Supreme Court has said in Sir Kikabhai's case, tax cannot be imposed on the future advantage which might be available to the assessee. Further, there is no question of withdrawal of a part of the stock-in-trade, in the instant case, as it took place in Sharkey (Inspector of Taxes) vs. Wernher (1956) AC 58 : (1956) 29 ITR 962 (HL). In fact, in the latter case, reduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. That contingency occurs where the terms of the partnership agreement provide that on the death of a partner the firm will not be dissolved. Juristically speaking, a person is one which is capable of rights and duties. In analysing the concept of 'right', it appears that a 'person' is a subject and object of 'right'. Such a 'person' may be natural or legal or artificial. A natural person, like a human being, is a being to whom law attributes personality in accordance with the reality and truth. A legal and artificial person, however, is a persona real or imaginary to whom law attributes personality by way of fiction, when there is none in fact. Thus, natural person is a person in fact as well as in law, whereas a legal or artificial person is a person in law but not in fact. A firm accordingly is neither a natural nor an artificial person. It is not natural, because a firm represents only a relationship or arrangement between persons who carry on business with a view to profit. It is not a living being. If a firm represents individual partners and, as such, is called a natural person, there is a relationship of identity between partners and their f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Roman Law in Modem Practice (Tagore Law Lectures, 1933) at 126, has made the following observations: 'In Scotland and on the continent generally the firm is recognised as a person distinct from the partner; in England it is not and here English and Roman laws are in accord. The latter held the persons engaged in ordinary partnership (societas) or joint adventure are just so many individuals acting together under contract the property they contribute or acquire is their joint property; every debt due to the firm belongs in rateable shares to the various partners, and they are individually liable for the debts owing by the firm.' Thus, it is obvious that unlike a company where there is perpetual succession a firm, although an entity for a limited purpose, cannot be considered as a juristic person. In the instant case, the assessee has got 50 per cent share in the fund and the other partner, Patel Engineering Co., who also owned the remaining 50 per cent share in the disposal machinery also transferred his share in the partnership capital. Thus, the assessee and Patel Engineering Co. have only transferred their respective interests in the disposal machinery to their own fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted are that the land held by the assessee was held as stock-in-trade till it was introduced in the partnership firm and since the said transaction as also the firm so constituted are found to be genuine, by introduction of such stock-in-trade no income accrues to the assessee as chargeable under the head 'Profits and gains of business or profession'. 42.5 The reason given in the draft order for holding that surplus is chargeable to tax as business income is because of: 1. The amount is credited in the P L a/c of the assessee. 2. The decision of Hon'ble Supreme Court in the case of McDowell Co. Ltd. applies. 3. The assessee has withdrawn substantial sum from the firm in subsequent years. 42.5.1 As discussed earlier the entries in the books of accounts are not the determinative factor for computation of income under the IT Act. For this proposition, further reliance is placed on following decisions: (i) Kedarnath Jute Mfg. Co. Ltd. vs. CIT; (ii) Sutlej Cotton Mills Ltd. vs. CIT; (iii) United Commercial Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC); (iv) Karnataka Small Scale Industries Development Corporation Ltd. vs. CIT (2003) 179 CTR (SC) 1 : (2002) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He drew our attention to the observations of Justice Chinnappa Reddy, with which other learned Judges of the Full Bench agreed in McDowell Co. Ltd.'s case. He invited us that having regard to the taxing statute the tax avoidance device should be exposed. Justice Chinnappa Reddy has noticed the change in judicial attitude to the tax avoidance devices. Justice Reddy mentioned that in the country of its birth the principles of Westminster of condoning tax avoidance have been given a decent burial. In that very country, the phrase 'tax avoidance' is no longer condoned or looked upon with sympathy. 3. It is true that tax avoidance in any under-developed developing economy should not be encouraged on practical as well as ideological grounds. One would wish, as noted by Reddy, J. that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilization. But the question which many ordinary taxpayers very often in a country of shortages with ostentious consumption and deprivation for the large masses ask is, does he with taxes buy civilization or does he facilitate the wastes and ostentiousness of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC vs. Challenge Corpn. Ltd. (1987) 2 WLR 24, and did not have the benefit of the House of Lords's pronouncement in Craven vs. White (1988) : 3 All ER 495, the view taken by the Madras High Court appears to be correct. Not only is the principle in Duke of Westminster's case alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell Co. Ltd.'s case. In Waman Rao vs. Union of India (1981) 2 SCC 362 and Minerva Mills Ltd. vs. Union of India (1980) 3 SCC 625 the Court considered the import of the word 'device' with reference to Art. 318 which provides that the Acts and Regulations specified in Ninth Schedule shall not be deemed to be void or even to have become void on the ground that they are inconsistent with the fundamental rights. The use of the word 'device' was not pejorative, but to describe a provision of law intended to produce a certain legal result. If the Court finds that notwithstanding a series of legal steps taken by an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al year relevant to asst. yr. 1997-98. How the amount withdrawn five years after the introduction of capital will determine the nature of transaction as a colourable device in the year when such land was contributed as capital contribution in the firm. What is to be taxed is the income accruing or arising during the year and the transaction cannot be viewed at that point of time on the basis of likely effect five years after the transaction has been effected. Therefore in my humble opinion the withdrawal by the assessee from the firm during the financial year relevant to asst. yr. 1997-98 will not determine the nature of transaction on23rd March, 1992when the land was contributed as capital contribution in the firm in which the assessee became partner. 42.5.4 The 'word of caution' as given by Hon'ble Supreme Court in the case of Sunil Siddharthbhai which has been heavily relied upon in the draft order is in the words of Hon'ble Supreme Court itself in following context as observed in p. 523 of the report as extracted herein: We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us is also taxable under the head 'Capital gains'. In para 16.39 it has been concluded as under: In other words, whatever may be the character of the property in the partner's hand before the same is brought in by the partner as capital contribution when a partnership is formed and he becomes a partner, the property brought in partakes the character of a capital asset. Similarly in para 16.40 it has been concluded that: In the present case, when the assessee withdraws some plot of land being part of stock-in-trade for making contribution to a partnership firm as its capital at the time when he became a partner, there is a conversion on withdrawal of stock-in-trade into capital asset in as much as, as already discussed above, the act of contributing personal asset into a partnership firm as its capital when assessee becomes a partner in a firm is a transaction on capital field. In view of the above finding in the draft order the surplus is treated as capital gain and brought to tax under s. 45(3) of the Act. I am unable to concur with the above finding for the reasons stated below. 43.1 What was transferred was whether a capital asset or stock-in-trade was never the subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The sub-section only gives power to the Tribunal to give its decision and pass orders in respect of all grounds urged on behalf of the appellant in respect of the decision appealed against. In deciding those grounds it can pass appropriate orders. But it is not open to the Tribunal itself to raise a ground or permit the party, who has not appealed to raise a ground, which will work adversely to the appellant. The words of the section are not wide enough to include a power to enhancement, without an appeal by the CIT. Rule 21 of the ITAT Rules, in terms, limits the appellant to the grounds urged in his memorandum of appeal and prescribes that if he wishes to raise any further ground, he has to do so after obtaining the leave of the Tribunal. The provision only says that the Tribunal is not obliged to rest its decision on the grounds urged by the appellant and does not enlarge the powers of the Tribunal to raise grounds of appeal against the appellant. It recognizes the principle that the judgment of the lower Court may be supported on any grounds, even though it is not raised in the memorandum of appeal. That, however, does not allow the Tribunal to suggest another mode of assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oints to the conclusion that the powers of the appellate authority, the Tribunal, are limited to the subject-matter of the appeal. This is necessarily so because every point dealt with by the lower appellate Court, the AAC, need not be the subject of attack before the Tribunal. The interests of the Revenue are sufficiently protected by the extensive powers given to the first appellate authority, the AAC. At that stage, the only appellant would be the assessee, not the Department, although it is entitled to be represented by an officer of the Department in support of the order of the original Court. A mistake, if any, committed by the original authority, which is adverse to the interests of the assessee, will be canvassed by the assessee before the AAC. A mistake, if any, committed by the original assessing authority which is detrimental to the interests of the Revenue is capable of being corrected by the AAC even without an appeal having been presented by the Department. At the next stage of second appeal to the Tribunal, the liberty is given to both the sides to go up in appeal to the Tribunal and when the Tribunal comes to deal with the matter, the law regards it sufficient to le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding of land. In such circumstances, on introduction of such land as capital contribution do not change its character from stock-in-trade to capital asset. Just as the assessee can hold the land as stock-in-trade and deal with the same either individually, he continues to hold as stock-in-trade in the capacity as partner of the firm. In both the cases the person holding the land can be said to deal with such land only in capacity of trader and not in the form of capital asset. The admitted fact is also that the firm was also treating the land as its stock-in-trade and after the land was developed and sold with building thereon, the profit was also assessed as business income in the hand of firm. Therefore if it is held that the land held by assessee as stock-in-trade before the same was contributed to a firm has been converted into a capital asset, on introduction of same as capital contribution by partner there will be conversion of such land at two points of time i.e., firstly at the time when assessee introduced as capital contribution when the asset gets converted into capital assets and secondly when the firm receives the land and at that point of time is reconverted into s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India and UK at several places of his order viz. paras 49, 50, 52 and 55 etc. At no stage it has been denied by the AO that DTAA between India and UK was not applicable. In such a situation it is impermissible for the learned Departmental Representative to come out with a submission contrary to the finding of the AO that DTAA with UK was not relevant as both the lead managers were resident of countries other than UK. In view of the admission of the AO and the further elaboration of the point in the light of DTAA between India and UK, we cannot permit the learned Authorised Representative to take contrary stand from the one taken by the AO. In our considered opinion the learned Departmental Representative has no jurisdiction to go beyond the order passed by the AO or CIT(A). His scope of arguments is confined to supporting or defending the impugned order. He cannot set up an altogether different case. If the learned Departmental Representative is allowed to take up a new contention de hors the view taken by the AO that would mean the learned Authorised Representative (sic-Departmental Representative) is stepping into the shoes of the CIT exercising jurisdiction under s. 263. We, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's plea. Then followed the reference to the High Court. The High Court answered the question in favour of assessee. At the instance of Revenue further appeal was filed before Hon'ble Supreme Court and following questions were referred for the opinion of the Hon'ble Supreme Court: (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in investigating the nature of the shares held by the assessee in Chrestian Mica Co. Ltd. when both the assessee and the IT authorities had treated them as the stock-in-trade of the assessee as a dealer in share for every assessment year since 1949-50 and proceeded on the same basis for the instant assessment year? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the shares held by assessee in Chrestian Mica Co. Ltd. were not its stock-in-trade for dealing in shares? (3) If the answer to question (2) be in the negative then whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of rupees thirty two lacs twenty five thousand and five hundred and fifty was not assessable in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders; and (iv) where a limited company is liquidated and the liquidator distributes the surplus assets, there is no transaction in the trading sense between the liquidator and the shareholders. By virtue of his holding, a shareholder is entitled to surplus assets on the liquidation of the company and such surplus assets are in the nature of an accretion to the shares held by him. The question is whether the opinion of the High Court is correct in law. We find it difficult to say so. Sec. 511 of the Companies Act applies to every voluntary winding up. It says that 'subject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company'. The concluding words of this section indicate that the assets of a company, on its liquidation, shall be distributed among the shareholders according to their rights and interests in the company which necessarily means according to their shareholding. What each sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as stock-in-trade and proceeded on the same basis for the relevant assessment year, the Tribunal was not justified in investigating the nature of the shares held by the assessee so as to hold the same as not part of stock-in-trade. Thus it was concluded that the admitted position of the nature of asset between the assessee and the Revenue authorities cannot be allowed to be changed by the Tribunal in view of the plea raised before it. Applying the same principle in the present case also since there is no dispute between the assessee and the Revenue regarding nature of asset being stock-in-trade, the Tribunal is not called upon to give a finding as to whether such asset was at all converted to capital asset and whether such land is part of capital asset or not. 44.4 There is a difference between changing the head of income in respect of receipts which are income per se and changing the nature of asset itself. While the receipt which is income per se may be brought to tax under a different head, the Tribunal will exceed its jurisdiction if it decides the nature of asset itself in a dispute raised for the first time at the instance of respondent. The counsel for the respondent r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be ignored. Under s. 33(4) of the Indian IT Act, 1922, the Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power conferred by that sub-section is wide, but it is still a judicial power which must be exercised in respect of matters that arise in the appeal and according to law. The Tribunal in deciding an appeal before it must deal with questions of law and fact which arise out of the order of assessment made by the ITO and the order of the AAC. It cannot assume powers which are inconsistent with the express provisions of the Act or its scheme. It can, therefore, be concluded that the Tribunal cannot decide an issue which does not arise out of the orders of the appellate authorities below. In this case, both the AO and the CIT(A) have held that the asset contributed by the appellant to the partnership firm was stock-in-trade and the assets continued to be held as stock-in-trade in the partnership firm. There is no difference of opinion between the authorities below on this issue and a finding of fact recorded by both the authorities below is not under challenge in the appeal filed before the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to give a finding only to the extent whether the surplus realized on introduction of land being held by it as stock-in-trade in the form of its capital contribution was chargeable as business income or not. Since I have earlier held that such introduction do not amount to giving rise to business income as no legal right is accruing in favour of assessee because of the credit to the account of partner by the firm, no income can be brought to tax. The law laid down by Hon'ble Supreme Court in the case of Hind Construction Ltd. and the decision of Hon'ble Supreme Court in the case of Sunil Siddharthbhai are squarely applicable. Since the land was always held as stock-in-trade, which continued to be stock-in-trade even at the time of introduction and subsequently by the firm also, s. 45(3) which is applicable in respect of the capital asset cannot be applied to the stock-in-trade held by the assessee and introduced as capital contribution. 46. The issue which arises in appeal for asst. yr. 1992-93 in relation to ground No. 1 also arises in appeals for asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01. The discussion in relation thereto in the draft order is tabulated below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance do not partake the character of debt due by firm to the partner. Sec. 13 only regulates only relation of the partner inter se. Section starts with the words subject to the contract between the partners i.e., if the partners agree amongst themselves, a partner is entitled to interest on the capital as also on the advance beyond the amount of capital. However, in either case, it does not amount to a debt by the firm to the partner and in the event of dissolution the firm is not obliged to pay such sum to the partner. This proposition will be clear on reading s. 48 of the Partnership Act as extracted herein: 48. In setting the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners be observed- (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits. (b) the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order: (i) in paying the debts of the firm to third parties; (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
