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TMI Blog1997 (7) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer completed the assessment on 22-12-1980 on a total income of Rs. 2,93,030. In the body of the assessment order, the Assessing Officer noted that during the year the assessee became a partner in the firm M/s. Bajaj Trading Company, Wardha, by contributing 5,500 shares of Bajaj Auto Ltd. as his capital. The assessment was framed under section 143(3) of the Act. 3. On 20-2-1985, the Assessing Officer reopened the proceedings under section 147(b) of the Act by recording the following reasons :--- "20-2-85. The assessment in this case for the assessment year 1980-81 was finalised on 22-12-80. A letter No. IACR 11/Instra/84-85 dt. 19th Feb. 85 was, received from the IAC, Special Range, Nagpur, on 20-2-85. By the said letter, the IAC has drawn my attention to the decision of the Gujarat High Court in the case of Kartikey V. Sarabhai reported in 131 ITR 42. I have carefully examined the facts of the instant case in the light of the said decision of the Gujarat High Court. This judgment was delivered on 30th April, 81 and was subsequently reported in the ITR. Thus, it is seen that the ITO was not aware about the said judgment while finalising the assessment in this case fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Gujarat High Court in the case of Kartikey V. Sarabhai constituted 'information' within the scope of section 147(b) of the Act and that in view of the Supreme Court's decision in A.L.A. Firm v. CIT [1991] 189 ITR 285/55 Taxman 497, a closer examination of the law in the light of the decision of the Gujarat High Court in the case of Kartikey V. Sarabhai could lead to a valid information derived by the Assessing Officer to clothe him with necessary jurisdiction for reopening the assessment under section 147(b) of the Act. The learned CIT(Appeals) accordingly, upheld the validity of the reassessment order. 5. Shri Y.P. Trivedi, the learned counsel for the assessee, submitted that the reopening was bad in law because it was based only on change of opinion by the Assessing Officer. It was submitted that the Gujarat High Court was not the first or the only High Court to take a particular view in the matter. It was pointed out that the Full Bench of the Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works' case in the context of withdrawal of development rebate had held that there was an extinguishment of some of the rights of the assessee in the assets which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to the firm certain shares in a company which were held by him, there was a 'transfer' of the shares but he received no consideration within the meaning of section 48 of the Act and, hence, no profit or gain accrued to him for the purpose of section 45 of the Act. It was submitted that if the very basis of reopening fell to the ground then the reassessment proceedings were liable to be quashed. In this context the learned counsel relied on the Bombay High Court's decision in Seksaria Bisiwan Sugar Factory Ltd. v. IAC [1990] 184 ITR 123 at page 126. That was a case where the Assessing Officer at the time of original assessment had allowed as a deduction the amount donated to a scientific research organisation. Later on by way of a notification the prescribed authority withdrew the approval of the concerned institution as an agricultural institute with retrospective effect. On the basis of such notification, the Assessing Officer reopened the proceedings. The assessee challenged the reopening under a writ petition and the Bombay High Court held that section 295(4) of the Act no doubt empowered the Central Board of Direct Taxes to make rules with retrospective effect but the rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource of reassessment proceedings, but there were no suspicious circumstances at the time the proceedings were reopened. It was submitted that the firm M/s. Bajaj Trading Co., Wardha, in which the assessee became a partner after contributing 5,500 equity shares of Bajaj Auto Ltd. as his capital contribution was a genuine firm. It was submitted that the firm was still in existence and had been granted registration year after year. It was vehemently argued that at the time of reopening of assessment there was no finding by the Assessing Officer that the transaction was sham or a device to avoid the capital gains tax liability. According to the learned counsel, the reopening of assessment was bad in law. 9. Shri R.S. Sundaram, learned Departmental Standing Counsel, submitted that the Supreme Court in the case of Kartikeya V. Sarabhai had clearly held 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 assets into money which would substantially remain available for his benefit without liability to income-tax on a capital gain then it would be open to the income-tax authorities t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eached is the identical one." This clearly shows that the Gujarat High Court's decision was not a virgin decision in the field and that the Kerala and Karnataka High Courts had adopted a similar view though in the context of withdrawal of development rebate. From the copy of the reasons recorded which have been reproduced earlier in this order it is clear that the Assessing Officer received a letter from the IAC on 20-2-1985 and on the same date reopened the proceedings in the assessee's case on the basis of the Gujarat High Court's decision in Kartikey V. Sarabhai's case. This was a mechanical application of mind. No facts regarding the genuineness or otherwise of the transaction are reflected in the reasons recorded. The decision of the Gujarat High Court was not the decision of a jurisdictional High Court which would be binding on the Assessing Officer. The Kerala and Karnataka High Courts had already taken a view and their decisions were rendered on 16-7-1974 and 12-9-1978 respectively. The original assessment was completed on 22-12-1980. Those decisions were available to the Assessing Officer and he was expected to be aware of the same. When on the basis of the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch information could reasonably lead to the formation of a positive belief that the income had escaped assessment. It is specious to contend that because finally on merits the addition had been sustained by the first Appellate Authority, it should be so held even at the time of initiation of proceedings. We, therefore, reject the argument of the revenue in this regard. 13. We may not go the whole hog with the proposition enunciated by Shri Trivedi, the learned counsel for the assessee, that if the very basis of, reopening fell to the ground, the reassessment proceedings were liable to be quashed. It is reiterated that we have to see the position as it prevailed when the reasons were recorded and the reopening was ordered. The final outcome may not be really germane to the issue as to whether the proceedings had been validly reopened. We have to see all the surrounding and relevant circumstances which prompted the Assessing Officer to reopen the proceedings. The facts in the case of Seksaria Biswa Sugar Factory Ltd. are distinguishable. In that case, the prescribed authority had issued a notification cancelling the approval of the concerned institution as an agricultural institute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The information on the basis of which proceedings are reopened has to be reliable, credible and valid. It has to have a live nexus with the formation of a positive belief that income has escaped assessment and then alone the proceedings may be reopened. In the present case what we find is that the Assessing Officer has merely changed his opinion. He has merely relied on the Gujarat High Court's decision in the case of Kartikey V. Sarabhai whose view in any case was not a new view and the Kerala and Karnataka High Courts had also taken a similar view and this has been acknowledged by the Hon'ble Gujarat High Court in explicit terms at page 57 of 131 ITR. 15. Taking into consideration the entire facts and circumstances of the case, we hold that the reopening of proceedings by the Assessing Officer on 20-2-1985 was bad in law and on that ground the re-assessment order dated 19-2-1986 is hereby quashed. 16. The other two issues are on merits and pertain to the rejection of the claim for conversion of capital asset into stock-in-trade and treating the contribution of shares to partnership firm as liable to capital gains tax. 17. The Assessing Officer after the reopening of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade, their contribution as capital to the firm M/s. Bajaj Trading Co. at the market value and then withdrawal of a huge amount of Rs. 69,82,500 over a period of 3-4 years was a systematic device to evade the capital gains tax liability. He, accordingly, held that the shares of Bajaj Auto Ltd. had continued to be the capital assets of the assessee and the assessee was liable to tax on the capital gains arising out of the contribution of such shares to the partnership firm. He, accordingly, added the long-term capital gains on account of the transfer of 5,500 equity shares of Bajaj Auto Ltd. at Rs. 18,26,340 and included the same in the total income which was determined at Rs. 21,19,370 as against the originally assessed income of Rs. 2,93,030. 18. Aggrieved, the assessee preferred an appeal before the learned CIT(Appeals) who relying on the Tribunal's decisions in Jamnalal Sons Ltd. v. IAC [1989] 29 ITD 164 (Bom.) and ITO v. Ramkrishna Bajaj [1992] 41 ITD 161 (Bom.) (SB) rejected the assessee's claim on merits. 19. Shri Y.P. Trivedi, the learned counsel for the assessee, submitted that the revenue authorities had not properly appreciated the matter in its proper perspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute book. In this context, the learned counsel relied on the Tribunal's decision in ITO v. Yogeshchandra V. Shah [1995] 55 ITD 300 (Ahd.) for the proposition that the provisions contained in section 45(3) of the Act to nullify the effect of the judgment of the Supreme Court in the ease of Kartikeya V. Sarabhai would not be applicable up to and including the assessment year 1987-88. 20. The learned counsel spent considerable time on explaining as to how the Tribunal's decisions in the case of Jamnalal Sons Ltd. and Ramkrishna Bajaj were distinguishable on facts. It was, for instance, submitted that in the case of Jamnalal Sons Ltd., the whole case turned on the fact that he contributed a capital of Rs. 1,23,16,750 of which Rs. 1,20,03,000 was the value of plots of land brought in by it. It was submitted that in that case the assessee was not a dealer in land. It was submitted that though along with the land shares had also been contributed but the book value of such shares was only Rs. 9,347 and there was no worthwhile discussion in the Tribunal's order regarding the shares. It was submitted that the Tribunal decided that case against the assessee primarily because that assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee would not mean that the assessee had encashed the said shares. It was submitted that the observations of the Supreme Court in the case of Kartikeya V. Sarabhai at pages 523 and 524 were not attracted in the case and under the main judgment there could be no capital gains because even if there was transfer of shares, there was no consideration involved. It was also submitted that the assessee had not contributed a capital asset but only stock-in-trade and, hence, there could not be any capital gains tax liability in his hands. The learned counsel relied on the decisions in ITO v. D.K. Panduranga Shetty Sons [1996] 58 ITD 353 (Bang.); Banyan Berry v. CIT [1996] 222 ITR 831/84 Taxman 515 (Guj.); Dhirajben R. Amin v. CIT [1988] 174 ITR 307 (SC); Ambalal Sarabhai D. Trust v. CIT [1995] 213 ITR 263 (Guj.); CIT v. Smt. Gira Sarabhai [1994] 209 ITR 356 (Guj.); Rajmal Chordia v. CIT [1994] 215 ITR 52 (Raj.); Dr. Mir Masood Ali v. CIT [1988] 169 ITR 521/37 Taxman 171 (AP), Ram Chander Aggarwal v. CIT [1995] 211 ITR 4 (Delhi); Ved Parkash Aggarwal v. CIT [1989] 179 ITR 378 (Punj. Har.) and a few other judgments for the proposition that the asset transferred to a firm is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were applicable to the instant case. It was also submitted that the Tribunal's decisions in the case of Jamnalal Sons Ltd. and Ramkrishna Bajaj also supported the revenue's case. The learned Departmental Standing Counsel submitted that in the case of Jamnalal Sons Ltd., the shares which had already been transferred to the partnership firm as capital contribution remained within the focus of the Tribunal though the main discussion centered on the contribution of land which formed a very big component of the capital contribution. It was submitted that the principals enunciated by the Supreme Court in the case of McDowell Co. Ltd. were equally applicable in this case and the assessee had adopted an obvious device to escape the capital gains tax liability. 24. We have carefully considered the rival contentions and perused the facts on record. The Supreme Court in the case of Kartikeya V. Sarabhai has held that when an asset is contributed as capital by an assessee to a partnership firm on becoming a partner or as a partner then though there is transfer of the asset, there cannot be any consideration and, hence, the provisions of section 45 of the Act are not attracted. Towards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, applicable for assessment years 1988-89 and onwards. In the present case, we are dealing with the assessment year 1980-81 for which year section 45(3) of the Act was not available to the revenue. The question to be decided, therefore, is whether the case is covered by the observations of the Supreme Court reproduced hereinabove. In our considered opinion, the Assessing Officer has demonstrated as to how the conversion of shares into stock-in-trade and their contribution to the firm M/s. Bajaj Trading Co. as capital by the assessee and the withdrawal of huge moneys by the assessee over a period of 3 to 4 years clearly established that the transfer was merely a device for converting the asset into money which would substantially remain available for the assessee's benefit. The face value of the shares contributed by the assessee as capital to the said firm was itself Rs. 9,50,000 against which the balance left in the capital account of the assessee with M/s. Bajaj Trading Co. was only Rs. 5,00,000. By this sophisticated device the assessee has coolly withdrawn a huge amount of Rs. 69,82,500 in a space of 3 to 4 years for his benefit and use. The assessee may have been a dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinguishable because the assessee in that case was not a regular dealer in shares whereas in the instant case, the present assessee was a regular dealer in shares. This argument, however, does not cut any ice with us. The assessee may have been a dealer in shares even prior to the conversion of 5,500 equity shares of Bajaj Auto Ltd. He may have continued to be a dealer in shares even afterwards, but so far as this transaction was concerned, this was aimed only at one thing and that was to escape the rigours of capital gains tax liability. The assessee proceeded systematically. He ensured that the Assessing Officer was duly informed. The firm M/s. Bajaj Trading Co. was constituted and the assessee became a partner and contributed 5,500 equity shares of Bajaj Auto Ltd. as initial capital. While converting the shares into stock-in-trade, the assessee valued them at market price and at the same value these were transferred to the firm M/s. Bajaj Trading Co. The assessee was given credit at the market value in respect of these shares. Over a period of time the assessee withdrew the huge sums except an amount of Rs. 5,00,000 which remained with the firm M/s. Bajaj Trading Co. This wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of the assets transferred which included the shares. The Tribunal in that case observed as under :--- "The value of the assets transferred was realised by the assessee and in that sense the reservation expressed by the Supreme Court applies. The fact that the amount was realised in the third year does not make any difference to the main finding that the whole transaction was entered into with the intention of recouping the money value of the capital asset." We have, therefore, no hesitation to say that though there may not be an elaborate discussion about the contribution of shares, the shares along with land were always in the focus before the Tribunal when the issue was decided against the assessee in that case. The ratio of that decision is applicable to the present case. 28. The learned counsel made much of the withdrawal of moneys over a period of 3 to 4 years. It was submitted that such a withdrawal was in due course and it could not be said that it was as a result of the device employed by the assessee. In the case of Jamnalal Sons Ltd. also the amount had been realised in the third year and still the Tribunal held that it did not make any difference to the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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