HATHISINGA H. SHAH v. INCOME TAX OFFICER
[Citation -1985-LL-1231-2]

Citation 1985-LL-1231-2
Appellant Name HATHISINGA H. SHAH
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 31/12/1985
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags business of construction • business of real estate • urban land ceiling act • commercial expediency • return of net wealth • system of accounting • transfer of property • capital contribution • cost of acquisition • business activity • land transaction • stock-in-trade • capital asset • profit motive • capital gain • draft order • karta
Bot Summary: The ITO taking into account the history in respect of the assets obtained by the assessee by way of partition from bigger joint family from time to time observed that the land was held by the assessee as capital set. Considering the return of net wealth for the assessment year 1975-76 wherein the land was shown as stock-in-tread on the basis of which reliance of the assessee on the assessee on the decision of CIT v. Sutlej Cotton, Mills Supply Agency Ltd. 1975 100 ITR 706 regarding intention of the land did not mean that there was a business activity, nor it changed the nature of the place of land under consideration. 5.1 The authorities below have negatived the contention of the assessee solely on the ground that before 1-1-1975 there was no transaction in land but then that cannot be the only test to decide whether the assessee is engaged in the business of real estate or not. The short point of difference that arises for consideration is whether the land which was contributed by the assessee by the assessee as capital to the partnership firm was its stock-in-trade. The learned counsel for the assessee in the first place challenged the observations of the learned Judicial Member that the decision of the Gujarat High Court in Kartikey V. Sarabhai's case would cover the dispute against the assessee even on the basis that the land constituted stock-in-trade. 6, On a consideration of the facts and circumstances, I agree with the learned Accountant Member that the land transferred by the assessee to the partnership firm was the assessee's stock-in-trade and not a capital asset so as to come within the purview of section 2(47). The materials brought on record by the assessee in the shape of entries in the books of account and recital in the partnership deed and other facts and circumstances adverted to in detail in the learned Accountant Member's order clearly in my view establishes the assessee's claim that the land was held by the assessee as stock-in-trade intended to be dealt with as such.


assessee has preferred this appeal against order dated 16-1-1984 of Shri B. S. Hajela, AAC, who dismissed appeal against order dated 28-3- 1983 of Shri S. P. Singh, ITO. 2. relevant facts, in brief, are that assessee was partner in Shah Enterprise which was carrying on business of construction and development of lands. previous year, relevant for assessment year 1980-81, ended on 31-1-1980. system of accounting is mercantile, During previous year relevant for assessment year under consideration, assessee transferred land of which he was owner to firm for amount of Rs. 1,10,990. After educating cost of acquisition of this land, ITO subjected to tax amount of Rs. 75,663 under held 'Capital gains' and thereby rejected contention of assessee at time of investment as capital, in partnership (sic) land was trading asset and, therefore, no capital gain was chargeable to tax for same. 3. In appeal, on following decision of Hon'ble Gujarat High Court in case of CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42, wherein it was held that where set belonging to assessee is brought in by him into firm in which he is partner, property in question would belong to firm and assessee will not have any power to dispose of whole or any part of it or any interest therein as his property; that in specific partnership property, partner has no interest and as soon as property is acquired either by way of introduction by partner or by way of subsequent purchase, it becomes asses of partnership firm; that in empower of that property, no partner can say specified that when asset is introduced by partner in firm, transaction amounts to transfer of property action of ITO holding therein that ITO was justified in charging capital gains in hands of assessee. 4. assessee being further aggrieved has made this appeal. Shri G. M. Patil, learned counsel for assessee, in arguing appeal stated before us that he does not press ground Nos. 3 and 4 and only grounds pressed are 1 and 2. Ground No. 1 says that AAC has erred in confirming ITO's action of rejection of contention of assessee that at time of investment as capital in partnership firm, land was trading asset and, therefore, no capital gain is chargeable for same. This ground is to be rejected in view of decision of Hon'ble Gujarat High Court in case of Kartikey V. Sarabhai (supra). Hence, we confirm impugned order on this issue following decision of Hon'ble Gujarat High Court (supra) with respect as same is binding on Ahmedabad Bench of Tribunal. 5. second ground is that without prejudice to first ground, assessee's claim is that even if land is held as capital asset at time of investment as capital in partnership firm, there is not covered by definition of 'transfer' in relation to capital assets as per provisions of section 2(47) of Income-tax, Act 1961 ('the Act'). This issue is also covered by decision of their Lordships in case of Kartikey V. Sarabhai (supra), and as such, we hold that this ground is also liable to be rejected. No other ground or issue is raised by assessee. In view of our above discussions and reasons thereto we hold that AAC is justified in arriving at his conclusion. Hence, we confirm his impugned order. 6. In result, appeal is dismissed. Power Shri P. J. Goradia, Accountant Member - After going through order of my learned brother, I discussed matter and even sent draft order for consideration of issue involved. However, my learned brother is not in position to accept my view and, therefore, I pass following order. 2. assessee is karta of HUF (smaller). While making assessment for previous year ending on 31-3-1980 ITO scrutinised claim in respect of transfer of plot of land bearing, F. P. No. 191 to existing partnership firm of Shah Enterprise wherein assessee is partner on footing whether provisions of section 2(47) were attracted, because it was contended that same was held as stock-in-trades by assessee and, therefore, land was not capital asset within meaning of section 2(14) and, consequently, section 2(47) , if at all, did not apply. In this respect, note was also appended to statement of income filed together with return of income. ITO taking into account history in respect of assets obtained by assessee by way of partition from bigger joint family from time to time observed that land was held by assessee as capital set. reliance placed by assessee on decision of CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC) was envestigated., Considering return of net wealth for assessment year 1975-76 wherein land was shown as stock-in-tread on basis of which reliance of assessee on assessee on decision of CIT v. Sutlej Cotton, Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) regarding intention of land did not mean that there was business activity, nor it changed nature of place of land under consideration. Hence, same was capital asset within meaning of section 2(14). contention of assessee that he was partner is Shah Enterprise and, therefore, introduction of piece of land by way of capital was outside meaning so section 2(47) on basis of decision in case of Hind Construction Co. Ltd. (supra), was rejected on ground that said decision was under Indian Income-tax Act, 1922 ('the 1922 Act') and under Income-tax Act. 1961 there was change in definition of 'transfer' and case of Kartikey V. Sarabhai (supra) decided by Gujarat High Court was directly applicable. 2.1 On appeal, decision of ITO was confirmed. He further observed that assessee entered into partnership with Shah Enterprise only on 1-1- 1975 but assessee had not enter into any land transaction before 1-1-1975. 3. At time of hearing learned counsel appearing on beheld of assessee placed reliance on decision of Gujarat High Court in case of Sitaram Motiram Jain v. CIT [1961] 43 ITR 405 to advance submission that business carried on by firm is business carried on by partnership. Therefore, impugned land was outside purview of section 2(47). Bringing to our notice various statements in compilation, particularly dated 1-1- 1975 and business of partnership diem was to deal in real estate. Therefore, case of Hind Construction Ltd. (supra) directly applied. Alternatively, since decision of Kartikey V. Sarabhai (supra) was pending before Supreme Court and matter is already heard, order of AAC be set aside with direction to reduced issue after outcome of appeal before Supreme Court. 4. learned departmental representative supporting orders of authorities below also objected to alternative submission regarding setting aside of order of AAC because Supreme Court has heard matter in Kartikey V. Sarabhai (supra) long ago and it is not known when decision would be forthcoming. 5. I have considered submissions and have gone through material placed. I find some substance in submissions of learned counsel. Continuation of 1986-(015)-ITAT - 0086 - TAHD only short question which I have to decide is whether assessee held piece of land transferred on 30-8-1979 to partnership firm of Shah Enterprise. Now, it is admitted fact that Shah Enterprise, partnership firm in which assessee is partner, is engaged in business of dealing in lands and acting as builders, developers of immovable properties, etc. From copy of deed of partnership, I find that all partners have been stated by occupation, engaged in business. Clause 5(i) of partnership deed further states that land other than one under consideration contributed by assessee on 1-1- 1975 was held as capital asset. Clause 5(ii) further stated that on and from 1-7- 1974 assessee decided to trade in lands contributed by developing said lands and constructing for that purpose buildings hereon. Accordingly, entries in books of assessee were also passed revaluing land which was transferred to firm as stock-in-trade as mentioned in said clause. Clause 5(iii) further states that assessee had appointed architect on 15-7- 1974 for preparing plans for construction of buildings on aforesaid lands and in fact submitted plans to Ahmedabad Municipal Corporation on 23-8-1974 for approval and permission. Ahmedabad Municipal Corporation approved plans on 9-11-1975 by issuing two permissions for plot and plot B. Clause 5(iv) states that other three parties to partnership firm at this time expressed their desire to join business of developing aforesaid lands. Therefore, various clauses in partnership deed entered into on 5-1-1975 unequivocally supports contentions of assessee that assessee was engaged in business of real estate; initially as proprietor and, subsequently, as partner in partnership firm of Shah Enterprise. This deed of partnership is no challenged on ground of genuineness, though it appears that authorities below have failed to appreciate this vital document and various clauses therein in spite of facts being on record. same cannot be challenged even; because I observe from details of stamp paper that same is dated 20-7-1982 issued to assessee and others. execution of deed is also witnessed. With this background claim of assessee that land transferred during year of consideration should be taken as stock-in- trade in hands of assessee and, therefore, outside definition of section 2(14) regarding capital asset, is required to be adjudicated Added to above is also finding by ITO that even in statement of wealth land was shown as stock-in-trade. 5.1 authorities below have negatived contention of assessee solely on ground that before 1-1-1975 there was no transaction in land but then that cannot be only test to decide whether assessee is engaged in business of real estate or not. There are innumerable authorities by way of judicial pronouncements of various High Courts and also Supreme Court and in considering decisions it is necessary to remember that they do not purport to lay down any general or universal test but certainly give guidelines to be applied for arriving at correct findings. Therefore, issue involved is matter of fact and substance. It is not necessary that there should be continuity of repetitive transactions so as to constitute activity as business. This would reject ground on which authorities below have rejected claim of assessee. In my opinion, assessee can be said to be doing business of real estate and holding thee land in question as stock-in-trade on basis of following important and distinct features. Existence of profit motive, essential condition, is proved by entering into partnership firm which is assessed having been engaged in similar business. business in real estate can be said to have commenced as soon as essential activity in respect of that business as developers of land is first undertaken such as purchase of land. Here in this case, assessee was already holding land as capital asset before 1-1- 1975. There is also supplementary work undertaken and carried out in connection with property, viz., appointment of architects, submission of plans and obtaining approval for house construction from Ahmedabad Municipal Corporation, etc. From this, motive becomes crystal clear. It also establishes that assessee has dealth with land, as commodity, in same way as dealer in real estate would ordinarily deal with. supplementary work carried out in respect of development of land clearly excludes possibility that holding of land was in nature of investment. Now, in light of all this transaction in respect of transferring land to partnership firm would be related to business of assessee, fact of assessee being in business of real estate can readily be inferred. intention to start business was very much clear even before entering into partnership in name of Shah Enterprise when assessee started doing supplementary work in 1974, on basis of ration of decision in case of Khan Bahadur Ahmed Alladin & Sons v. CIT [1968] 68 ITR 573 (SC) and Jankiram Bahadur Rani v. CIT [1965] 57 ITR 21 (SC). It is not case of department that even subsequently, assessee has not carried out transactions in nature of real estate. Suspension of any transaction during some period, if any, in respect of real stated or delay for same, has also to be considered in light of emergency measures promulgated in 1975 particularly Urban Land Ceiling Act, having far-reaching impact on trade in real estate. All these factors considered in totality would clearly support claim of assessee. I, therefore, hold that transfer of land in he year under consideration was not of capital asset but was of stock-in-trade and, therefore, same was outside provision of section 2(47). 6. alternative ground, therefore, does not survive. 7. third ground was not pressed at time of hearing and hence dismissed. 8. I set aside order of AAC on issue dealt with by me and direct ITO to modify assessment. 9. In result, appeal is partly allowed. ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT, 1961 Because of disagreement on issue involved under appeal Because of disagreement on issue involved under appeal matter is required to be referred to Third Member. We request Hon'ble President to do needful in matter. question referred for opinion is under: "Whether, in law and on facts and in circumstances of case, land transferred to partnership firm of which assessee is partner, was held by assessee as stock-in-trade and not as capital asset so as to attract provisions of section 2(47) of Income-tax Act, 1961?" THIRD MEMBER ORDER Per Shri A. Krishnamurthy, Vice President - point of difference referred under section 255(4) of Act in this case is as under: "Whether, in law and on facts and in circumstances of case, land transferred to partnership firm of which assessee is partner, was held by assessee as stock-in-trade and not as capital asset so as to attract provision of section 2(47) of Income-tax Act, 1961?" 2. assessee in this case is smaller HUF, viz., Hathising H. Shah. It was partner through karta in firm of Shah Enterprise which is said to be carrying on business in dealing in property, i.e. acquiring land and constructing building and flats thereon for sale. During previous year ended on 31-3-1980 relevant for assessment year 1980-81 under consideration assessee had brought into firm as capital certain land bearing Final Plot NO. 191 at value of Rs. 1,10,990. assessee claimed that this transaction did not amount to transfer within meaning of section 2(47) so as to attract capital gains charge and that land before it was brought into books of firm as capital contribution, constituted in assessee's hands as its stock-in-trade. This contention of assessee was rejected by ITO who held that capital asset transferred to firm is liable to capital gains tax. This order was upheld by Commissioner (Appeals) in appeal preferred by assessee. In further appeal before Tribunal contentions of assessee were firstly, that land brought into firm was its stock-in-trade or trading asset and not capital asset and, consequently, no capital gains charge was attracted, and secondly, even if land is said to be capital asset, there is no transfer of same within meaning of section 2(47) so as to attract capital gains charge. 3. learned Judicial Member rejected contention of assessee and applying decision of Gujarat High Court in Kartikey V. Sarabhai's case (supra) upheld levy of capital gains tax. learned Accountant Member on consideration of facts and materials on record held that transfer of land in year under consideration made by assessee to firm is not capital asset but was stock-in-trade and, therefore, same was outside purview of section 2(47). He, consequently, held that second alternative ground, viz, that even if land is held to be capital asset there is no transfer within meaning of section 2(47) does not survive for consideration. short point of difference, therefore, that arises for consideration is whether land which was contributed by assessee by assessee as capital to partnership firm was its stock-in-trade. 4. learned counsel for assessee in first place challenged observations of learned Judicial Member that decision of Gujarat High Court in Kartikey V. Sarabhai's case (supra) would cover dispute against assessee even on basis that land constituted stock-in-trade. He further submitted that in facts of case, it was clear that land transferred by assessee was being held by it as stock-in-trade and there are enough materials to support same and these are adverted to in order of learned Accountant Member. It is stated that land was originally acquired by assessee on partition in 1966 and it was converted by assessee into its stock-in-trade as assessee intended to deal in business of developing land, constructing buildings and flats thereon and selling out some on profit. This intention of treating land as stock-in-trade, it is submitted, is reflected in further action taken by assessee by entries in books of account, appointment of architects for preparing plans for construction of buildings on aforesaid lands and submitting plans to Ahmedabad Municipal Corporation for their approval and permission and approval granted by Ahmedabad Municipal Corporation, etc. These facts were recited in partnership deed dated 1-1-1975 which have not been disputed or challenged. It was stated that though originally assessee intended to deal in business on his own of developing property constructing buildings or flats thereon and selling them at later stage, certain other persons also offered to join partnership and assessee decided to carry on said business in partnership rather than singly. 5. learned departmental representative contended that whatever may be treatment to land given by assessee before land was transferred to firm, once it was contributed as capital to firm its character changed and it became capital asset and, consequently, there was transfer within meaning of section 2(47). learned departmental representative also suggested that various steps taken by assessee of converting land into stock-in-trade, securing municipal permission for construction and contributing capital to partnership firm all appear to be device for avoiding capital gains and that at any rate department should have opportunity to examine this aspect in view of observations made by Supreme Court in Sunil Siddarthbhai v. CIT (1985) 23 TAXMAN 14W. learned counsel for assessee contended that scope of point of difference cannot be enlarged as contended by learned departmental representative. He submitted that there is no authority for contention that stock-in-trade which assessee contributed as capital to firm would lose its character as such and become capital asset instead. It is further submitted that supreme Court decision in case of CIT v. Bai Shirinbi K. Kooka (1962) 46 ITR 86 on assessee's right to convert capital asset into stock-in-trade or as capital asset as matter of intention reflected in step or action taken in this regard and treatment given to it. 6, On consideration of facts and circumstances, I agree with learned Accountant Member that land transferred by assessee to partnership firm was assessee's stock-in-trade and not capital asset so as to come within purview of section 2(47). controversy raised in appeal in backdrop of decision in Kartikey V. Sarabhai's case (supra) has lost much of its significance in light of decision of Supreme Court in Sunil Sidharthbhai's case (supra). Even if asset contributed by partner to firm as capital is regarded as capital asset, it would not attract capital gains charge even though it may amount to transfer within meaning of section 2(47) because consideration therefore, is not capable of evaluation and cannot fit in with scheme of provisions relating to computation/charge of cannot fit in with scheme of provisions relating to computation/charge of capital gains. However it is not necessary to go further into aspect because of limited scope of point of difference, viz., whether concerned land constitutes assessee's stock-in-trade or capital asset. materials brought on record by assessee in shape of entries in books of account and recital in partnership deed and other facts and circumstances adverted to in detail in learned Accountant Member's order clearly in my view establishes assessee's claim that land was held by assessee as stock-in-trade intended to be dealt with as such. fact that land was, subsequently, transferred to partnership firm does not make it anytheless stock-in-trade because whether assessee should deal in business singly on his own or should carry on such business in partnership with others is purely matter of convenience and commercial expediency and where assessee deals in same business through partnership instead of singly it will amount to his carrying open business. It is well settled that business carried on by partnership firm is business carried on by partner himself-see decision of Supreme Court in CIT v. Ramniklal Kothari (1969) 74 ITR 57. As pointed out by learned counsel for assessee there is no scope for enlarging controversy. 7. In result, I agree with learned Accountant Member and hold that land transferred by assessee to firm is its stock-in-trade and does not fall within purview of section 2(47). matter will now go to regular Bench for passing order afresh in accordance with provisions of section 255(4). *** HATHISINGA H. SHAH v. INCOME TAX OFFICER
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