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TMI Blog1988 (2) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the market value of the property was taken at Rs. 30 lacs and the value of the undivided share of each of the assessees amounted to Rs. 7.50 lacs. Each of the two assessees introduced his share of the stock-in-trade as capital in a firm called M/s. Garden View Corporation which was formed with effect from 1-7-1980 and in which the four brothers with 15 per cent each and their wives with 10 per cent each were the partners. Since the market value of the original property transferred was determined at Rs. 30 lacs, 25 per cent share of each of the assessees in this market value as stated above was worked out at Rs. 7,50,000. The 25 per cent share of each of the assessees was Rs. 1,66,548. Therefore, basically, capital gains of Rs. 5,83,452 became exigible to tax, out of which the ITO allowed u/s 54, 15 per cent share in the expenditure incurred on the construction of the new Raheja House from 1-7-1980 to 31-3-1982 in consonance with the directions of the IAC u/s 144A of the Act. The IAC, in his directions, observed that the transfer of 'Madhu Park' was effected on 23-6-1980. The construction of the new house was finally over in all respects on 31-3-1982 on which date the major porti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the four brothers on 23-6-1980 in which, inter alia, it was declared as under :-- " 2. We have decided to utilize the said property for a business, we propose to set up in partnership. With a view to contributing it into the firm we do, hereby, irrevocably declare that it shall, hereafter, be treated as our business asset." He then referred us to para 62 of Kanga Palkhivala's Practice of Income-tax, 7th Edition, in which it is observed that conversion of separate property into Joint family property does not involve any transfer and can be effected merely by clear expression of intention, i.e., by conduct, and does not require any formalities, like a registered document, to be complied with. Likewise, he argued, for converting the residential property into a business asset, no other formality than a mere declaration of intent was necessary and no registration of document or any other formality need be gone through. Shri Gupta then referred us to the deed of partnership which was entered into on 1-7-1980, i.e., 7 days after the declaration aforementioned, clauses (iv) and (v) of which read as under : " (iv) The parties of the first four parts will soon be shifting into anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was built should also be taken into account for determining the cost of the new asset and the entire cost of construction ought to have been considered for calculating the capital gains. He relied for this proposition on the decisions in the oases of Smt. Shantaben P. Gandhi v. CIT [1981] 129 ITR 218 (Guj.) and Addl. CIT v. Vidya Prakash Talwar [1981] 132 ITR 661 (Delhi). 6. Shri R.N. Srivastava, the learned Sr. Departmental Representative, on the other hand, argued that all this arrangement was part of a claim of tax planning and the ratio of the decision of the Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 was squarely applicable. He thereafter relied on a similar decision of the Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 in which the Supreme Court relied on its earlier decisions in CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 and McDowell Co. Ltd.'s case and observed as under :-- " It is the duty of the court, In every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smokescreen and discover the true state of affairs. The cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e engendered. They, therefore, formed a device of first making a declaration to the effect that the property would be converted into a trade asset and then creating a partnership firm to which each one of the co-owners of the property contributed their share as capital in the firm in which they were partners. All this was a grand design to reduce or avoid tax liability under the capital gains tax. We are, therefore, firstly satisfied that what was transferred to the firm was a capital asset and not stock-in-trade. It was never intended to be treated as a stock-in-trade, It was not a type of asset that could be traded in. Nor was it in fact traded as the subsequent conduct of the assessees showed. Therefore, we firmly hold that what was sold was a capital asset and the transfer to the firm of such residential house was a transfer within the meaning of sec. 2(47) of the Act. In fact, Shri Gupta did not seriously press the argument about treatment of the property as stock-in-trade. 8. The second question is the extent of the relief that would be available to the assessees u/s 54 of the Act. Sec. 54 as it then stood read as under : "54. Where a capital gain arises from the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfer. It was Shri Gupta's argument that the construction of the new house need not be commenced after the date of the transfer and completed within two years of that date. Therefore, argued Shri Gupta, the whole of the cost of fresh Investment should be allowed against the capital gains. We cannot persuade ourselves to accept this interpretation of the section in view of the facts before us. The details of new investment of Rs. 55,86,168, which was in the nature of residence at Pali Hill Road and which are reproduced hereinabove, would indicate that the appellants had purchased the land as early as on 31-3-1979 for Rs. 15,23,406. Construction expenses to the tune of Rs. 6,52,374 had already been incurred up to 31-3-1980. Thus, long before the assessees transferred the house property called 'Madhu Park' to the partnership firm on 1-7-1980, the assessee had already purchased land, started construction of a separate building. It could not be the intention of the Legislature to give adjustment of cost of investment in house property which had been made prior to the date of transfer of asset which resulted in capital gains. The whole intention behind giving relief u/s 54 was that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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