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TMI Blog1984 (12) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... f Ashok Kapur Co. As on 6-11-1979, the assessee valued his right in this property at ₹ 5,58,000. It was on the basis of the rates fixed by the Land and Development Officer. This amount was shown as the capital of the business of Ashok Kapur Co. 3. The assessee entered into an agreement with Ansals Properties Industries (P.) Ltd. on 19-11-1979 for the construction of a multi. storeyed building on Barakhamba Road and the arrangement in brief was that Ansal Properties Industries (P.) Ltd. (Builders) was to construct this multi-storeyed building after demolishing all the structure at 21, Barakhamba Road, and all the investment in construction was to be made by the builders. After construction of the building, 50 per cent of the space made available to the assessee's share was to be handed over to the builders and 50 per cent of the constructed portion was to be retained by the assessee. The builders had to pay a security of ₹ 10 lakhs to the assessee, which had actually been paid in this year. The questions for consideration which arise in the present case are: 1. Whether as a result of the conversion of the assessee's share in the property into the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that 50 per cent of the constructed area was to go to Ansal Properties Industries (P.) Ltd. and the other 50 per cent was to be retained by the assessee. According to him, the joint venture was in the nature of a partnership and the assessee was contributing his immovable property in the shape of land has transferred this property to the partnership and this has resulted in a capital gain to the assessee. In this connection, reference was made to the decision of A. Abdul Rahim, Travancore Confectionery Works v. CIT [1977] 110 ITR 595 (Ker.) (FB) and the decision of the Karnataka High Court in the case of Addl. CIT v. M.A.J. Vasanaik [1979] 116 ITR 110 . According to the IAC, the right of the assessee in the land had extinguished and this right now belonged to the partnership or to the joint venture. He referred to the fact that the assessee-had no right to sell or gift away in any other manner the said land after the date of agreement. A reference was also made to the decision of the Gujarat High Court in the case of CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42. In this case, it was held that transaction of introduction of a capital asset by a person in a firm, of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as a result of the agreement with Ansal Properties Industries (P.) Ltd. on 19-11-1979. He noted the different clauses of the agreement dated 19-11-1979 and held that it was a single project or venture entered into by both the assessee and the builders. He observed that the scheme was that the assessee was to contribute his share in land and the builders were to construct the property at their cost and after the whole project was carried out, the space created was to be shared by them half and half. He also referred to the clauses referring to the future management of the new building to be constructed and the service organization, which was to continue business. He pointed out that under the agreement, not only the space was to be transferred but 50 per cent of the interest in the plot was also to be transferred to the builders after the completion of the building. According to him, the agreement envisaged a common possession of the land, its common exploitation for commercial construction and common possession and enjoyment of the completed building. Thus, according to him, there was a form of partnership which came into existence. According to him, the builders acted as an ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of approvals referred to in (i) and (ii) hereinabove. 7 to 9.****** 10. The owner dealer shall render to the builder all assistance necessary to enable the builder to prepare and pursue the application referred in clause 7(a ) and (b) hereinabove and/or obtain redevelopment permission for the plot, provided that all costs, charges and expenses and responsibility for pursuing the same and obtaining all permissions shall be to the account to the builder. 11. It is agreed and understood by and between the parties hereto that owner dealer alone shall be entitled to all compensation payable in respect of acquisition, if any, by any Government or local or statutory authority of any part of the plot and the builder shall have no right, title or interest whatsoever therein. 12 to 21.****** 22. The builder is allowed to agree to sell the area comprised in builder's allocation his portion of 50 per cent area to prospecting flat buyers at builder's own risk and responsibility even prior to the sanctioning of the building plans and the approval of the project building by the concerned authorities or commencement of construction. The builder shall be entitled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement. 41. In the event that building plans are not approved by the New Delhi Municipal Committee and others within 36 months of the signing of this agreement, this agreement shall be renewed for another period of 36 months provided the builder has given a further deposit of ₹ 5 lakhs (Rupees five lakhs only) free of interest before the expiry of the first 36 months period. In the event of the builder failing to make the deposit within the stipulated period as aforesaid or the extended period expiring, as the case may be, without the building plans being approved by the concerned authorities, this agreement shall become void and the owner dealer shall refund to the builder the money deposited by builder as security deposit after deducting the monies which may have been paid out by the owner dealer on account of the builder, i.e ., the monies the payment of which is the obligation of the builder under the provisions of this agreement, and the builder has refunded all the monies received by him from the prospective occupiers of any saleable area in the project building and further the builder will hand over the vacant possession of the building and the plot of land to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s own cost. The assessee was to take all action so as to enable the builder to get a sanction for the building plan and the other responsibilities in respect of the construction work were to be that of the builder. It was pointed out that the assessee had no concern with the construction itself except that the plan itself had to be made with his consent. It was also contended that there was no common business carried on by the assessee along with the builders and the assessee was not to take any profit out of the activities of the builders. It was also submitted that the other requirements of a partnership agreement were not satisfied and no part of the agreement contemplated that for this period when the construction work is carried on, the land will belong to the so-called joint venture. 11. The learned counsel for the assessee contended that the main thing to be decided in this case was, whether there was a transfer as a result of the agreement dated 19-11-1979. He submitted that the claim of the assessee regarding conversion of his capital asset into a stock-in-trade was only with a view to show that the assessee was carrying on the activity of turning plot of land into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without the building plan being approved by the concerned authorities, the agreement was to become void and the assessee had to refund to the builder the money deposited by the builder as a security deposit. In that situation, the vacant land and the building on it was to be returned to the assessee, who continued to be the owner. In the end, a reference was made to clause 43, sub-clause (i) and sub- clause (ii), which clarified that this was not a partnership agreement nor was it a joint venture and the assessee and the builder did not constitute an association of persons. Each party was responsible for his own activity and tax liability. Sub-clause (v) also clarified that there was no demise or assignment or conveyance in law of the plot or any part thereof to the builder and the builder did not get any right, title or interest in respect of that plot. 12. In the end the learned counsel for the assessee submitted that even if any transfer was contemplated in the agreement, it was to take place in future and nothing has happened in this year. At present, the assessee has not relinquished any right in respect of the plot of land or the building thereon. The learned counsel submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aration made by the assessee, which was clearly from the point of view of taxation. We agree with the reasoning given by the Commissioner (Appeals) on this aspect of the matter. Though we need not consider all the small facts mentioned by him, we agree that on 6-11-1979 there was no conversion of the capital asset into stock-in-trade and such action, which was taken for starting a venture, came only later when the agreement dated 19-11-1979 was executed. It may also be mentioned that there is no justification for the view that such conversion of a capital asset into stock-in-trade results in a transfer. Transfer contemplates two parties, namely, a transferor and a transferee. The observation of the ITO that the assessee and his business are two separate identities is not relevant for the purpose of finding whether there has been a transfer. The transfer has to be by one person to another person and not by one account of a person to another account of the same person. The inspiration for all this exercise has come up as a result of the decision of the Supreme Court in the case of Bai Shirinbal K. Kooka (supra), which has been referred to above. In that case the question for consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on his land and then ultimately to share the constructed space, it was a case of partnership. It has further been the case of the revenue that as a result of this action, the land was contributed as a capital to this partnership and as the market value of this property was at a particular figure, the differences between the cost of acquisition and the market value represented capital gains in the hands of the assessee. In other words, according to the revenue, when the partner brings his capital asset as his capital contribution in a firm and values it at a particular figure, there can be a capital gain in the hands of such assessee. 16. The first question, therefore, arises as to what was the nature of the agreement between the assessee and the builders whether this agreement brought into existence any partnership or anything akin to a partnership so that what would apply in the case of a partnership should also apply to the present case. The essentials of a partnership are that there should be two or more persons who should Come forward and agree to carry on any business and to further agree to share its profits or losses. There is a further requirement that the partners s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was any agency involved in it and each person was to operate in his own sphere. Though the legal effect cannot be determined merely by what is written in the deed, one cannot ignore the terms of the agreement without there being any reason for the same. The parties had agreed to jointly maintain the building and common facilities till the service organization came into existence. Thus, the activity was no doubt an activity in the nature of some business but the other two elements of sharing of profits and of agency was not indicated by the agreement. The parties have clearly stated that there was no partnership between them and they were to act on principal-to-principal basis and each was to be strictly responsible for his own sphere of activity and liabilities. The agreement had also made it clear that there was no understanding to assign or convey the plot of land to the builder and at least till the completion of the construction the assessee was to continue to be the sole owner of the land and interest in such land. The builder under the agreement has got the right to carry on the construction work but while the work was being carried on by him, the ownership in land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's share in the property and the intention of the builder to construct a multi-storeyed building on that property. The agreement does make a reference to the declaration dated 6-11-1979 and says that the assessee's share in property was contributed as proprietor's capital for the purpose of carrying on the business. The so-called partnership, however, does not take note of the value of the property at any particular figure and the fact that the value of the property was ₹ 5,58,000, as per the assessee's valuation, was not mentioned and was in fact irrelevant for the purpose of this agreement. Therefore, as far as this agreement is concerned, the question of any capital gains arising as a result of the valuation of the property at ₹ 5,58,000 does not arise. We have already mentioned above that there was a provision in the agreement that if the building plans were not ultimately approved, this agreement was to become void and the assessee had to refund the security deposit and the property belonging to the assessee was to be handed over to the assessee who continued to be the owner. This clause makes it clear that there was in fact no transfer of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(47). It is also held in that case that after the partner contributes such a capital asset as his capital in the firm, the property itself cannot be considered as his asset for the purposes of wealth-tax and it is not possible to argue that a person continues to be the owner of the property introduced by him in the firm of which he is a partner. According to their Lordships, the legal position is that the exclusive property of the person who brought it in, ceased to be the exclusive proprietor and it becomes an asset of the partnership in which all the partners would have interest in proportion to their shares. The partner cannot exercise his right in respect of that property even to the extent of his share. In this decision, reliance was placed on the decision of the Full Bench of the Kerala High Court in the case of A. Abdul Rahim, Travancore Confectionery Works (supra), wherein it was held that there is a transfer when a person as a partner brings his capital asset in a firm. Similar view was taken by the Karnataka High Court in the case of M.A.J. Vasanaik ( supra). In the latter case, it was also held that there is virtually a transfer of the rights in the property by the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of ₹ 75,000. The necessary entries were made. The question arose regarding the charge of capital gains. The Tribunal had given two reasons for holding that the transaction was not liable to capital gains tax. One was that there was no valid registered document of transfer and, therefore, the transaction will not attract tax on capital gains. The second reason was that when an individual property is covered into a partnership property, no transfer is involved. The Madras High Court has held that as there was no registered document transferring the immovable property, there was no valid transfer of the property. The High Court did not express any opinion on the question whether such a transaction at all could be considered as 'transfer'. As against this, it was held by the Rajasthan High Court in CIT v. Amber Corpn. [1981] 127 ITR 29 that on a reading of section 14 of the Indian Partnership Act, it would be clear that even in respect of an immovable property, no document, registered or otherwise, is required for transferring the property from the partner to the partnership. Though that case related to the question of allowance of depreciation, the principles discus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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