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TMI Blog2012 (6) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... fix the cost of the capital asset acquired on partition to be the cost at which it was acquired by the previous owner. In other words, the judgment of the Hon'ble Apex Court in Kalooram Govindram (1965 (4) TMI 15 (SC)) would not be applicable in a case of capital assets received on partition in the light of the provisions of section 49(1) of the Act. However, since the provisions of section 49(1) of the Act, does not apply to other assets, viz. stock-in-trade etc., the ratio of the judgment of the Hon'ble Apex Court would be applicable and it is the cost at which the assessee acquired the property in the partition that has to be taken. - IT Appeal No.122 (Bang.) of 2011 - - - Dated:- 25-5-2012 - P. Madhavi Devi And Jason P. Boaz, JJ. ORDER Jason P. Boaz, Accountant Member This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-III, Bangalore dated 26.11.2010 for the Assessment Year 2006-07. 2. The facts of the case, in brief, are as under : 2.1 The assessee, in the real estate business, filed his return of income for Assessment Year 2006-07 on 20.11.2006 declaring income of ₹ 1,37,71,300. The Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer observed that after partition, it was the choice of the assessee to either continue to hold the assets received as capital assets or convert them into stock-in-trade. In the instant case, since the assessee treated the lands received under family arrangement, which are capital assets, as stock-in-trade in his books and offered business income on sale of those lands, there was a conversion of capital assets into stock-in-trade. In other words, the Assessing Officer was of the view that the assessee had treated the lands received, which were stock-in-trade of the erstwhile family which immediately after partition became capital assets in the hands of the assessee, into stock-in-trade after partition when he started carrying on the business. Since such stock-in-trade was sold during the relevant period, there is a conversion of capital asset into stock-in-trade and capital gains under section 45(2) is attracted in this year a such stock-in-trade was sold. The value at which the lands were allotted in the family arrangement was admittedly the fair market value, which is to be treated as the sale consideration received on conversion and the original cost of the assets in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim of the appellant relating to the income from sale of property offered in the Assessment Year 2007-08 while considering the addition of ₹ 45,24,460 as short term capital gains instead of deleting the same straightway under the facts and in the circumstances of the appellant's case. 4. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies himself liable to be charged to interest under section 234B of the Act, which under the facts and in the circumstances of the appellant's case and the levy deserves to be cancelled. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs. 4. The learned counsel for the assessee submitted that the main issue to be decided relates to grounds of appeal Nos.2 and 2.1. He submitted that grounds of appeal raised at S.No.3 has become infructuous as the learned CIT(A) had directed the Assessing Officer to examine the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stwhile joint family of the assessee was carrying on real estate business and all the assets sold were held as stock-in-trade of such erstwhile family. It was submitted that the entire business as a whole was valued by taking the fair market value of the assets and the assessee was allotted the balance of capital in real estate business after providing for the allotment to the other co-parceners and members of the erstwhile joint family. The learned counsel for the assessee placed reliance on the decision of the Hon'ble Apex Court in the case of Kalooram Govindram v. CIT , (MP) reported in 57 ITR 335 and the decision of the ITAT Mumbai 'A' Bench in the case of Atul G. Puranik v. ITO reported in 58 DTR (Mum) (Trib) 208 (2011). The learned counsel for the assessee finally contended that if at all there was any capital asset received by the assessee on partition, it would have to be considered that the business of real estate being carried on by the erstwhile joint family, was the capital asset received by the assessee. Since the business as a whole, being the capital asset, was not transferred by the assessee, but only the assets were sold, there was no justificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umptions as there has been no conversion of capital assets into stock-in-trade by the assessee and that all the assets received by the assessee on partition was the balance of the capital in the real estate business of the erstwhile joint family, which comprised several assets in the nature of stock-in-trade and therefore neither section 49(1) nor section 45(2) of the Act were attracted or applicable. 7.5 At the outset it is necessary to set out certain undisputed facts. Firstly the assessee in the instant case was a member of a Hindu Undivided Family (HUF) and there was a family partition on 6.3.2004. Secondly, it is also not in dispute that the family was carrying on real estate business and at the time of partition, the assets of the joint family including the stock-in-trade were valued at fair values and based on the same, allotment of properties were made. Thirdly, it is also not in dispute that the assessee is continuing to carry on the real estate business carried on by the erstwhile joint family and that the income from the sale of properties is to be assessed under the head 'business income'. It is in this background of undisputed facts, that we have to see as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings claimed that all the properties held by him and the income arising therefrom belong to the joint family (HUF) and not to him in his individual capacity. The Tribunal after consideration of the material placed before it, held that the entire properties held by the assessee belonged to his joint family, as the same were ancestral in character and any purchase and sale of property was only by ploughing back the wealth obtained from the HUF nucleus. The assessee in his individual capacity did not have income from any source. In fact, in the course of search proceedings, it was also stated by the assessee that he was doing real estate business and this aspect is clear from paras 7 to 11 of the order of the Tribunal in the assessee's own case ( supra ). Thus, it can be clearly inferred and concluded from the findings of the Tribunal in the assessee's own case for the block period that the joint family of the assessee was the owner of various properties, which have since come to the assessee's share upon partition, the same being held by the joint family as business assets forming part and parcel of its real estate business. 7.8 This conclusion reached by us is further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their share and rights in the assets of the erstwhile joint family. The allotment which was made from out of the family capital in real estate business that was allotted to the assessee or 'First Party' are as under : 1. Second Party - Smt. Nagarathna ₹ 5 Crores. 2. Third Party - Smt. M.N. Manjula ₹ 5 Crores. 3. Fourth Party - Kum.Sandhya ₹ 5 Crores. 4. Fifth Party - Master Deepak ₹ 10 Crores. A combined reading of the various clauses of the Memorandum of Family Arrangement and Oral Partition reveals that the assessee was allotted the balance of the capital of the family in real estate business after providing for the allotment to be made to the other four members of joint family as listed out above. It is also seen that this capital of the family in real estate business has been arrived at after making a fair market valuation of all the assets forming part of stock-in-trade of the real estate business of the erstwhile joint fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that the assessee continued to carry on the said real estate business after the partition. In these circumstances, it is clear that, there is no conversion of capital assets to stock-in-trade either by the assessee or the joint family. In this view of the matter, we hold that the provision of section 45(2) of the Act are not applicable in the instant case and consequently the computation of capital gains made by the Assessing Officer is cancelled. 9. The learned Departmental Representative had advanced certain arguments with reference to the provisions of section 49(1) of the Act, to contend that the original cost of the assets has to be adopted as cost in the hands of the assessee which appear to be farfetched. Section 49(1) of the Act starts with the phrase. when the capital asset becomes the property of the assessee .. and therefore will be applicable only when the capital asset becomes the property of the assessee on distribution on the total or partial partition of the HUF. Section 49(1) of the Act will have no application in case the assets received on partition are not capital assets in the hands of the HUF, as in the instant case where they are stock-in-trade. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Partitioning is the ascertainment of individual shares and it can be brought about by an unambiguous declaration of their intention to divide, i.e. by a conscious alteration of their status. Such a declaration brings about a division in status. At that stage the members of an erstwhile joint family become tenants-in-common. The next step is the division by metes and bounds whereunder separate properties are allotted towards the said definite shares of the individuals. Whether the said process involves transfer or not within the meaning of the Transfer of Property Act, it certainly confers on a divided member an absolute title to a specified property, whereas before the partition he had only some interest in the entire joint family property. Though in one sense his interest in the property of the larger joint family has become crystallized into a specific property, in substance he acquires a title to a specific property. Even from a practical standpoint the legal fiction of is prejudicial to the interests of Revenue-existing title cannot be stretched too far. Take the following illustration : A and B were members of a joint Hindu family in 1930 and continued to be so till 1960, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the recipient of the properties. However, the specific provisions of section 49(1) of the Act have been enacted in the Income Tax Act, 1961, to fix the cost of the capital asset acquired on partition to be the cost at which it was acquired by the previous owner. In other words, the judgment of the Hon'ble Apex Court would not be applicable in a case of capital assets received on partition in the light of the provisions of section 49(1) of the Act. However, since the provisions of section 49(1) of the Act, does not apply to other assets, viz. stock-in-trade etc., the ratio of the judgment of the Hon'ble Apex Court would be applicable and it is the cost at which the assessee acquired the property in the partition that has to be taken. Therefore, the judgment of the Hon'ble Apex Court would be squarely applicable to the facts of the instant case and the assessee is justified in adopting the said cost for computing income from business. 11. In the result, the assessment of LTCG by invoking the provisions of section 45(2) of the Act is cancelled as there is no material or record to support the conclusions of the Assessing Officer and learned CIT(A) that the assessee re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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