9911796707
TMI Blog1987 (5) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... e limited companies, i.e. M/s. Universal Radiators Ltd. and M/s. Madras Radiators Pressings Ltd. and two of whom were individuals, i.e. Shri A.P. Madhavan and Miss P. Sarada, the latter two being the appellants before us. According to the instrument of partnership, the firm came into existence on the first day of April, 1975. Clause 3 sets out the business of the firm to be as under :--- " 3. The business of the firm shall be that of dealing in Real Estates, Owner of properties, Letting out or hiring out of properties, construction of Flats, Shops, houses, small residential houses and owning and dealing in agricultural lands and carrying out agricultural operations and horticultural operations, acting as Brokers and such other business or businesses as may be decided upon from time to time." The capital of the farm in terms of clause 6 was to be Rs. 1,00,000. The two companies were to make contributions towards capital as and when required by the firm. Clause 8 stated that Shri Madhavan and Miss Sarada owned in equal shares certain immovable property consisting of factory building and agricultural lands at Coimbatore in Survey No. 272/2A and having a total area of about 3 acr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere signatories. It was mentioned that " whereas the Urban Land Ceiling and Regulations Act, 1976 was passed subsequent to the formation of the partnership and the Act received the assent of the President of India on 17-1-1976 and the Act had the object of providing imposition of ceiling on vacant land and regulating construction of buildings, it was considered that the objects with which the partnership was formed could not be carried out in view of the policy of the Government and, therefore, no useful purpose would be served by continuing the partnership ". The partnership, it was stated, would therefore stand dissolved from the date of execution of the document i.e. 30-3-1976. The terms of the dissolution were set out and to the extent of the appeals now under consideration the relevant clauses as under :--- " 1. The partnership firm of Universal Real Estate Agency constituted under the Deed of Partnership dated 26-5-75 shall stand dissolved with effect from 30-3-76. 2. A Balance Sheet of the firm on 30-3-1976 has been drawn up and has been signed by all the partners hereto in token of the acceptance of the correctness thereof and it is annexed hereto. 3. The property situa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The Commissioner finally directed the WTO to verify the matter and delete the capital gains included in the assessments of each assessee if he found that no deed of sale was in fact executed and/or registered during the previous year relevant to the assessment year. It is found as a fact that there was no such registered document and, therefore, the assessment to capital gains holding that there was transfer of profits to the companies fell through. In the course of his order of revision the Commissioner made certain observations which had a bearing on the genuineness of the firm of M/s. Universal Real Estate Agency which was constituted under the deed of 1-4-1975. In the orders passed u/s. 25(2) the Commissioner set out in extenso the observations on this point in the earlier order' dated 26-2-1983 and we set out paragraph 5 of the order of the Commissioner now under appeal where such observations have been reproduced as under : " 5. The Commissioner of Income-tax (Central-I) Madras in the same case in his order No. C. 1511 (18)/81-Central-I dated 26-2-1983 held inter alia as under : " 8 : 7 : I have carefully considered the assessee's submission. I am unable to agree with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in any event capital gains did not accrue or arise to the assessee and therefore it was wrong on the part of the Income-tax Officer to have computed and assessed capital gains in this assessment year i.e. 1976-77. After quoting various decisions of the Supreme Court the Commissioner held in para 8:11. In this case the contention of the assessee is that no registered deed has been executed alienating the properties to the companies. If this contention is factually correct, there cannot be any capital gains in the light of, the Supreme Court's decisions in Commissioner of Income-tax v. Bhurangaya Coal Co. (34 ITR 802) and Alapati Venkatramaiah v. Commissioner of Income-tax (57 ITR 185). Therefore, respectfully following the Supreme Court's decisions, I would direct the Income-tax Officer to verify and delete the capital gains included in the assessment made if he finds that no deed of sale was in fact executed and registered during the previous year relevant to this assessment year." 8. The Commissioner in the present case then went on to consider whether in the aforesaid background the value of the land and other properties should be included in the hands of each of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the observations regarding the genuineness of the firm are not germane to the issue. 5. Accordingly, I direct that the observations made by me in para 8(7) are treated to be as deleted to the extent as noted above." This contention was considered by the Commissioner in his order u/s. 25(2) under appeal and he stated that in view of the clear finding of the department in the extracts quoted in paragraph 5 of his order and also by the assessing authorities the fact remains that the firm which was formed on 1-4-75 was a sham one and never existed and the subsequent observations of the Commissioner in his order u/s 154 did not alter the position because the earlier observations of the ITO and the IAC in bringing to tax capital gains still stood ground. The Commissioner, therefore, concluded that each of the assessees continued to be the owner of the immovable properties, referred to and since the value thereof was not included in the wealth-tax proceedings, there was an error on the part of the WTO which is prejudicial to the Revenue in each of the assessments. 9. The Commissioner of Wealth-tax directed the WTO to arrive at the market value of the property and include 50% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital accounts of the assessee-partners. For the fact that the firm did try to do business in some real estate the learned counsel relied on certain letters of 15-5-1975 and earlier dates where certain parties had made enquiries from the firm regarding construction of property, approval of blue-print etc. and one letter where the firm itself had mentioned to one Shankar Rajaram Associates in a letter dt. 10-4-1975 on the firm's letter-head that they had registered a new firm for the purpose of dealing in real estates. He clarified that the use of the term " registered " only meant that a firm had been formed. This was stated to be in conformity with the narration in the partnership deed which stated that the firm had come into existence from 1-4-1975 though the deed was executed only on 26-5-1975. 11. The learned Departmental Representative relied also on the decision of the Supreme Court in the case of Sunil Siddharthbhai and stated that it was essential that the veil should be pierced and the Income-tax Department had to go behind the facade of the document to find out the real nature of the transaction and in the Present case the alleged firm of Universal Real Estate Agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m are deemed to have been acquired for the firm." The property of the firm includes all properties and rights and interests in property originally brought into the stock of the firm. We have already referred to the relevant clauses of the partnership deed dated 26-5-1975. It was categorically mentioned in respect of each of the items of property that from 1-4-75 the property in question would " vest in the firm and shall be treated as property of the firm ". The statement is unambiguous. The properties in question were brought into the stock of the firm at the inception of the firm itself, i.e. 1-4-1975 according to the aforesaid statement. Merely because an apportionment of value was made and the major value was apportioned towards the current account of each of the assessees and only a negligible value was apportioned towards capital account it would not make the immovable property one which was not brought into the stock of the firm. Therefore (subject to our finding as to whether there was a firm in existence or not which we shall deal with later), the property in question was brought into the stock of the firm in terms of section 14 of the Partnership Act and again in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each assessee to the firm (subject to our finding regarding the firm being in existence). 14. In the case of Sunil Siddharthbhai Supreme Court had observed at page 523 as under :--- " 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 transaction and that the transfer by the partner of his personal asset to partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. 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 income-tax 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner now under appeal and he has, therefore, relied on this amongst other observations in the earlier order of the Commissioner. No doubt, in the order of the Commissioner dated 1-7-1983 u/s 154 he had stated that some of his observations would stand modified but the Commissioner had categorically stated that all he did was to reiterate the findings of the ITO and the IAC. So the effect of the order u/s 154 was only that there was no independent finding by him on the genuineness of the firm. The Commissioner, whose order is now under appeal, in dealing with the assessee's plea on the order u/s 154 stated with reference to his findings in the order u/s. 154 as under :--- " 8. These observations do not in any way advance the case of the assesses. What all the Commissioner said here is that some of the observations of his regarding the genuiness of the firm are not essential in respect of the dispute before him. Even then the observations of the Income-tax Officer and the Inspecting Assistant Commissioner to the effect that there was no genuine firm still hold good." It is therefore clear that the Commissioner in his order relied on the orders of the ITO and the IAC and the state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own capital when the properties were brought into its common stock by the partners and, therefore, had its own assets and liabilities. We do not express any opinion on the correspondence sought to be relied upon by the learned counsel between the firm and various persons because we do not know whether they were before the Income-tax authorities but we have restricted ourselves solely to documents which admittedly were before the Income-tax authorities. It is clear, therefore, that this is a case where there was a genuine firm which had come into existence. When a genuine firm had come into existence if partners brought their property into the common stock, there was a transfer of such property from the partners to the firm and the question of treating the property as continuing to be the separate property of the partners no longer arises. In the present case, we are not concerned with the further aspect mentioned in the case of Sunil Siddharthbhai, viz. whether the subsequent dissolution did have any effect of being a device or ruse to convert the personal assets into money substantially for the benefit of the assessee with a view to evading tax or not. In filing the wealth-tax r ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
