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TMI Blog1995 (9) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... f introduction of the land as your capital contribution, the value of your share of land was taken at Rs. 9 lakhs. It appears that a multi-storeyed building was constructed on this land and this was sold in the year 1986-87. At the time of sale, the value of land was finally determined by you along with other partners at a sum of Rs. 57 lakhs. There was, therefore, substantial capital gains on sale of the land in the assessment year 1986-87. It is also understood that M/s. Chitrakoot Projects sold the flat constructed on this land at a premium and incriminating documents were found at the time of search showing receipt of unaccounted premium to the extent of Rs. 37,23,640. In the above circumstances, the A.O. was not justified to complete your assessment under section 143(1) of the IT Act without proper enquiry. I, therefore, propose to revise your assessment within the meaning of section 263 of the Income-tax Act. Please show cause in writing on 1-3-1991 at 11.30 A.M. in my office why action under section 263 as proposed above should not be taken against you. You are also given an opportunity of being heard on the date and time indicated above." The assessees submitted detailed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was submitted that the focus of these provisions was on the year of sale and not in the year of conversion which has to be necessarily earlier and the flats having been sold in the accounting year relevant to the assessment year 1986-87, the capital gains are rightly assessable in the assessment year under appeal. The ld. D.R. also made a point that by virtue of section 139(10) of the Act the returns showing losses which were filed after 30-6-1986 should have been at any rate ignored by the ITO and he sought not to have accepted them and completed the assessments under section 143(1) of the Act. 7. On a careful consideration of the rival contentions, we are of the view that the orders of the CIT cannot be sustained. The brief facts are that each of the assessees herein held 1/5th undivided share in the land at 230A, AJC Bose Road, Calcutta. There was another brother who also held a similar share. The three of them entered into a partnership along with a limited company. The partnership was entered into on 1-7-1980. The object of the partnership was to carry on business in the purchase and sale of immovable properties and multi-storeyed buildings, flats, etc. The assessees her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worked out in such circumstances and therefore it was held that there can be no liability to tax on any capital gains. With the objective of nullifying the effect of this decision, section 45(3) was introduced. The effect of this provision is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner's income for the previous year in which the transfer took place. For the purpose of computing the capital gains, the value of the asset recorded in the books of the firm on the date of transfer shall be deemed to be the full value of the consideration. We are unable to appreciate how this provision can apply to the facts of the present appeals. Firstly, the section comes into force only from the assessment year 1988-89. Secondly, even if it is assumed that the section is applicable, the capital gains can be taxed only in the year in which the transfer took place and in the present case the transfer by way of capital contribution took place on 1-7-1980, which falls in the year ended 31-3-1981 relevant for the assessment year 1981-82 in both the assessees' cases. Therefore, the applicability of section 45(3) is ruled out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of acquisition to him. Hence, when the converted capital asset is sold by him as stock-in-trade, only the difference between sale price and market value of the stock-in-trade on the date of the conversion of the capital asset can be regarded as profit accruing to the assessee from the transaction. 2.3 With a view to preventing the avoidance of tax on such capital gains through the device of converting a capital asset into a trading asset, the Amending Act has substituted the definition of " transfer " in section 2(47) of the Act by a new definition to provide that, in a case where a capital asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment shall also be regarded as a transfer of the asset. 2.4 The amendment takes effect from 1st April, 1985 and will accordingly apply in relation to the assessment year 1985-86 and subsequent years." The provisions of section 45(2) are also elaborated by giving illustrations in paragraph 9 of the aforesaid Circular. These provisions take effect from the assessment year 1985-86. However, as is clear from the objective sought to be achieved by am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities. . . ." The aforesaid passage has been referred to by the Supreme Court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49/2 Taxman 409. If that be the legal position then in the present case after the partners have contributed capital in the form of their respective undivided interests in the plot of land, it is no longer open to them to claim that they still retain the interest in specie over that property. The firm is thereafter constituted the owner of the property. The conversion of the property from a capital asset to stock-in-trade thereafter is an act which can only be attributed to the firm. Apart from the fact that legally it is only the firm which can thereafter convert the property into stock-in-trade, even factually there is uncontroverted evidence in the cases before us to show that such an act can be attributed only to the firm. We are referring to the agreement dated 25-9-1980 bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a different year on different grounds. We have not been informed by the ld. D.R. that the assessment order in the firm's case has been either cancelled or set aside and therefore no assessment exists. We are therefore of the view that the CIT was in error in directing the ITO to enquire and include the proportionate share of the partners in the ' on monies ' received by the firm. 13. It may be recalled that the ld. D.R. had raised a point that the present appeal fell within the observations of the Supreme Court in Sunil Siddharthbhai's case at page 523. We are unable to accept the contention that the firm was created merely for the purpose of avoiding capital gains tax. The firm had been recognised to be genuine, has been granted registration and has also been assessed in respect of the sale of the building constructed by it. At no point of time or at any rate at no stage of the proceedings leading up to the present appeals have the revenue authorities doubted or impeached the genuineness of the firm. No materials have been brought even before us to support the contention. Whether the firm was created merely for the purpose of avoiding capital gains tax in the partners' hands ..... X X X X Extracts X X X X X X X X Extracts X X X X
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