Arvind Shamji Chheda v. Commissioner of Income-tax
[Citation -2014-LL-0912-170]

Citation 2014-LL-0912-170
Appellant Name Arvind Shamji Chheda
Respondent Name Commissioner of Income-tax
Court HIGH COURT OF BOMBAY
Relevant Act Income-tax
Date of Order 12/09/2014
Assessment Year 1988-89
Judgment View Judgment
Keyword Tags construction activity • deed of dissolution • individual capacity • higher rate of tax • immovable property • long-term capital • commercial asset • dissolution deed • purchase of land • partnership act • conveyance deed • stock-in-trade • erstwhile firm • house property • capital asset • sale of land • take over • co-sharer • co-owned
Bot Summary: The partnership firm had agreed to develop the land later decided to dissolve the partnership and a dissolution deed dated April 1, 1985, came to be executed whereunder the partners decided to treat the partnership assets as their co-owned plots of land and as their personal capital assets. On behalf of the assessee, it is submitted that the plots of land in question were not stock-in-trade but capital assets. On appeal before the Income-tax Appellate Tribunal, the assessee pursued his case that the plot in question constituted a capital asset in the hands of the partners by virtue of the partnership and its dissolution but held there is no conveyance of the land unto individual members of the partners, although they had been treating the land as personal capital assets and reflected them in their wealth-tax returns. Dr. Shivram submitted that when the dissolution took place, the land became the absolute property of the two individuals in equal shares which they subsequently disposed of by a single document, namely, conveyance executed on September 16, 1987, in favour of M/s. Abhishek Construction Co. Dr. Shivram submitted that the gains from the conveyance of the property constituted long-term capital gains in view of the fact that the gains were made from sale of capital assets of the firm. Even otherwise, the sale had occurred within three years of acquiring the property and even assuming the same to be capital gains, it could not be termed as long-term capital gains and it can be treated as short-term capital gains. Thane as per conveyance deeds executed with vendors on April 2, 1982... ... And, whereas, the parties hereto have now decided to convert the partnership assets, i.e., individual co-ownership 2 plots of land as their personal capital assets... From the recitals which precede clause, it is clear that at the material time, i.e, the parties treated the two plots of land as stock-in-trade and it is only at the time of dissolution, they agreed to convert the partnership assets, i.e., having co-ownership of the two plots into a personal capital asset. We leave open the question whether the amount in the hands of the applicant-assessee is to be treated as long-term capital gains or short-term capital gains to be decided by the Department.


JUDGMENT judgment of court was delivered by A. K. Menon J.-The present reference is filed under section 256 of Income-tax Act, 1961 ("the I. T. Act"), and it pertains to assessment year 1988-89. assessee, individual, who was partner in partnership firm at material time, had filed application seeking reference of ten questions. following two questions have been since referred to this court: "1. Whether, on facts and in circumstances of case, Tribunal was justified in treating gains of Rs. 16,55,508 on sale of land as business income as against assessee's claim as long-term capital gains? 2. Whether, on facts and in circumstances of case, Tribunal had any material to come to conclusion that land sold by assessee was stock-in-trade of dissolved firm, hence, assessable as business income? " Dr. Shivram, learned senior counsel appearing on behalf of assessee, stated that only question that really requires to be answered is question No. 2. Before dealing with said question, it would be necessary to advert to few facts. Under partnership deed dated March 1, 1982, assessee and one Smt. Amrutben K. Chedda agreed to do business in partnership as builders and contractors in firm name and style of "Laxmi Construction Co." profits and losses were to be shared equally. partnership came into existence on March 1, 1982, and was at will. partnership deed is silent as to its assets or stock-in-trade existing. It transpires that said partners purchased two plots of land bearing Survey No. 14, Hissa No. 2 admeasuring 4406 square metres and Survey No. 15, Hissa No. 2 part admeasuring 8016 square metres at village Diwanman, Taluka Vasai, Dist. Thane under conveyance deed in their favour dated April 2, 1982. partnership firm had agreed to develop land, however, later decided to dissolve partnership and dissolution deed dated April 1, 1985, came to be executed whereunder partners decided to treat partnership assets as their co-owned plots of land and as their personal capital assets. lands were in their possession and they agreed to take over plots in their personal capacities as co-owners. Both parties agreed that they will repay loan that they had borrowed for purchase of land out of their own resources. Effective from date of dissolution, i.e., April 1, 1985, parties were retaining land as co-owners of lands. rest of contents of deed are not relevant for present purpose. In assessment order for period 1988-89, assessee filed return of income on June 29, 1988, showing income of Rs. 15,49,110. He claimed long-term capital gains in sum of Rs. 8,22,754. Assessing Officer recorded that above two plots were sold by alleged coowners on September 16, 1987, to M/s. Abhishek Construction Co. for consideration of Rs. 37,50,000 and profit on sale of these two plots have been claimed by assessee as well as Smt. Amrutben Chedda as long-term capital gains. On behalf of assessee, it is submitted that plots of land in question were not stock-in-trade but capital assets. Assessing Officer treated same as business income after providing for deduction of amounts of stamp duty, costs and registration fees and capitalisation interest, etc., and arrived at figure of Rs. 24,15,540 which was subject to tax. Being aggrieved by said order, assessee filed appeal before Commissioner of Income-tax (Appeals) on August 25, 1989. Commissioner of Income-tax (Appeals) held that asset was stock-in-trade and continued to be so till date of sale dated September 16, 1987. While dismissing appeal, Commissioner of Income-tax (Appeals) proceeded on basis that issue under appeal was squarely covered by decision of this court in case of Khatau Vallabhdas v. CIT [1979] 119 ITR 846 (Bom). Commissioner of Income-tax (Appeals) observed that it is true that after receipt of plots, former partners, including assessee did not do anything to establish their intention of exploiting assets as commercial asset and there is nothing to indicate that former partners had taken steps to convert assets into capital asset. On appeal before Income-tax Appellate Tribunal, assessee pursued his case that plot in question constituted capital asset in hands of partners by virtue of partnership and its dissolution but held there is no conveyance of land unto individual members of partners, although they had been treating land as personal capital assets and reflected them in their wealth-tax returns. lands were sold after two and half years of dissolution of partnership. Mr. Suresh Kumar, learned counsel appearing for Revenue, submitted that land having been sold before three years, therefore, no deduction could be shown even assuming that it was long-term capital gains. It was contended before Income-tax Appellate Tribunal that whatever nature of assets in hands of firm after dissolution of firm, assets in hands of partners was always capital asset and also contended that other co-owner had already been assessed and her share in land was treated as long-term capital gains as result, same treatment was claimed by assessee in present case. Tribunal found that there was nothing to show that former partner, Smt. Amrutben Chedda, had been assessed on basis of profits as long-term capital. submission that view taken in case of co- owner should be adopted in case of assessee was rejected. Tribunal held that in absence of conveyance of land in individual names of partners, they could not be treated as co-owners and consequent gains could not be assessed as long-term capital gains but as stock-intrade. Tribunal was of view that lands were brought with intention to develop and carry out construction as builder and contractor. character and nature of land continues to be in hands of co-owners as such and constituted stock-in-trade of partnership firm and same was gain from business income. We have heard Dr. Shivram, learned senior counsel appearing on behalf of applicant and Mr. Suresh Kumar, learned counsel appearing on behalf of Revenue. Dr. Shivram submitted that when dissolution took place, land became absolute property of two individuals in equal shares which they subsequently disposed of by single document, namely, conveyance executed on September 16, 1987, in favour of M/s. Abhishek Construction Co. Dr. Shivram, then, submitted that gains from conveyance of property constituted long-term capital gains in view of fact that gains were made from sale of capital assets of firm. It appears that at time of hearing before Tribunal certain error crept into order and miscellaneous application was filed for correcting it. However, Tribunal found that there was no mistake in order but in paragraph 6 of order of Tribunal added words "at time of framing of assessment in instant case" after words "capital gains". Dr. Shivram referred to this correction as being evidence of fact that share of other co-owner was treated as capital gains in her hands. We are unable to accept this contention. There was nothing to show that share of other co- owner was treated as capital gains in her hands. In support of his contention, Dr. Shivram cited decision of honourable Supreme Court in matter Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, and, thereafter, his heirs and others which relies upon provisions of Indian Partnership Act, 1932. In said judgment, apex court had occasion to deal with sections 14, 15, 29, 32, 37 and 48 of Partnership Act and consider nature of interest of partner in partnership property during subsistence of partnership and after its dissolution. apex court has held that concept of partnership is to embark upon joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be exclusive property of person who brought it in. It would be trading asset of partnership in which all partners would have interest in proportion to their share in joint venture of business of partnership. Even person who brought it in said property would not be able to claim or exercise any exclusive right over property which he has brought it. In that case, it was also held that deed of dissolution under which partnership is dissolved was not compulsorily registrable. Dr. Shivram, then, relied upon judgment of this court in Khatau Vallabhdas (supra). question before court was (page 849 of 119 ITR): "Whether, on facts and in circumstances of case, excess realised by assessee on sale of goods received in respect of his share in partnership firm on its dissolution was income, profits or gains from business or constituted capital gains". While determining question, court observed that it should be borne in mind that grocery articles are not purchased by trader by way of investment to acquire capital asset but they are always purchased as stock-in-trade. They are purchased to be resold as part of scheme of profit making. commodities sold were stock-in-trade of partnership firm and unless there was something to indicate that assessee had intended to hold stock as capital, it would have to be held that sale of grocery articles was made as part of trading activity. Dr. Shivram, then, relied upon decision of Gujarat High Court in case of Ramjibhai Dahyabhai v. CIT [1986] 158 ITR 540 (Guj). Gujarat High Court has considered decision of this court in Khatau Vallabhdas in which case under deed of dissolution of partnership firm dealing in grocery, stock-in-trade was divided amongst partners who agreed to pay same at cost. As against this, Mr. Suresh Kumar submitted that property was at all times stock-in-trade of erstwhile partners of firm and after dissolution of partnership, partners held assets and, therefore, there is no question of treating same capital assets as stock-in-trade. Even otherwise, sale had occurred within three years of acquiring property and even assuming same to be capital gains, it could not be termed as long-term capital gains and it can be treated as short-term capital gains. Mr. Suresh Kumar, on other hand, referred to question that was framed and referred to this court in Khatau Vallabhdas (supra) and sought to rely on observations of court that commodities in question had not changed their character from stock-in-trade to capital goods. In support of his contention, he sought to rely that issue in present case was squarely governed by provisions of Act and we must, however, bear in mind that Khatau Vallabhdas dealt with grocery stock-in-trade of perishable nature and, therefore, it is not possible to hold same as capital assets. On other hand, immovable property as, in present case, could certainly be traded as capital asset apart from stock-in-trade to aforesaid case. question which arises, therefore, for consideration is two-fold, firstly, whether property acquired by two co- owners and/or two partners were stock-intrade and, secondly, if same were stock-in-trade is their character changed and become capital assets. In this behalf, it is useful to refer to provisions of deed of dissolution particularly clause (3) which read as follows: "3. parties hereby declare that they have agreed to take over two plots of land as co-owners and will have absolute possession of said plots as their capital assets, and shall have co-ownership interest in said plots in equal proportion. Both parties hereby agreed that they will repay loans which they have borrowed for purchase of plots out of their own resources or borrowing on their personal accounts. They also agreed to pay of creditors and discharge other liabilities." As can be seen from above clause, erstwhile partners agreed to take over two plots of land as co-owners and claim possession of plots as their personal assets. It is also pertinent to note fact that in recitals of deed of dissolution, following portion is of relevance. "... And, whereas, partnership had purchased two plots of land (1) bearing survey No. 14, Hissa No. 3, admeasuring 8016 square metres and survey No. 15, Hissa No. 2 (part) admeasuring 4406 square metres at village Diwanman Taluka, Vasai, Dist. Thane as per conveyance deeds executed with vendors on April 2, 1982..." "... And, whereas, parties hereto have now decided to convert partnership assets, i.e., individual co-ownership 2 plots of land as their personal capital assets..." From recitals which precede clause (3), it is clear that at material time, i.e, parties treated two plots of land as stock-in-trade and it is only at time of dissolution, they agreed to convert partnership assets, i.e., having co-ownership of two plots into personal capital asset. property in hands of partners, therefore, did undergo change in nature by way of conversion of property into capital assets from its earlier nature of partnership property. Thus, in terms of judgment of Khatau Vallabhdas (supra), property did undergo change in its nature and, therefore, became eligible for being treated as capital asset subject to all other applicable provisions of law. In this respect, fact of non-registration need not engage our attention in view of judgment of apex court in Addanki Narayanappa (supra). Dr. Shivram also relied upon judgment of Mysore High Court in K. T. Appanna v. CIT [1967] 64 ITR 310 (Mysore) wherein court considered issue of partner who sold lands that fell to his share upon dissolution and whether it constituted profits of business and whether inference could be drawn that his partnership business continued. present case is not case where after dissolution of partnership, assessee had purchased another land and fact that assessee has sold land that fell to his share at time of dissolution of partnership, did not justify drawing inference that he wanted to continue on his own in business of erstwhile partnership of which he was member. Having observed thus court found that no conclusion can be drawn that sale in question by partnership was effected in course of business. court, then, held that sums earned out of transaction were revenue profits chargeable to tax. In present case, however, there is nothing to show that assessee as also erstwhile Smt. Amrutben Chheda had dissolved firm with intention to carry on said business of firm in their individual capacities. assessee and former partner sold land to third party. They did not carry on business of M/s. Laxmi Construction Co., partnership firm, i.e., of builders and/or contractors. It is not case of Revenue that business of firm was that of buying and selling land and that being case, it would have been possible to contend that sale of land by erstwhile partners constituted business of partnership in their individual capacity and for that reason could brought within fold of stock-in-trade. However, in case at hand, land was simpliciter sold to third party who incidentally might have hand, land was simpliciter sold to third party who incidentally might have been in business of construction. However, that is not factor that is relevant for purpose of present reference. Dr. Shivram then relied upon decision of this court in matter of P. H. Hamid v. CIT [2005] 278 ITR 112 (Bom) wherein certain assets of erstwhile firm were allowed depreciation and were sold to assessee upon dissolution of firm. assessee sold assets and invested sale proceeds in specified assets. It was held in that case that amount of depreciation availed of by erstwhile firm was not liable to be brought to tax in hands of assessee. next judgment relied upon by Dr. Shivram is Gulabrai Hanumanbox v. CWT [1992] 198 ITR 131 (Gauhati) in which facts pertain to house property jointly held in equal shares by assessee and other coowner for assessment year in question. In assessment order, report of valuer of assessee was accepted and share of half property in case of co- sharer was taken for particular amount. assessee in question then sought same benefit as given to coowner. In that case, we find that transaction of co-sharer was entitled to benefit, then assessee will be similarly placed and it would be highly improper to burden co-sharer with higher rate of tax and if such action is sanctioned, it would militate against principles of equality of laws enshrined in article 14 of Constitution. This, in our view, is not relevant in present case since there is no evidence that co-sharer was given benefit of long-term capital gains and, therefore, was relied to record extent of fact. Notwithstanding this we are of view that question before us is, whether, in facts of case, there was any material on record to come to conclusion that land sold by applicant was stock-in-trade. In our view, correct test to be applied is whether partnership assets were converted into capital assets of partners at time of dissolution. This, we find, was provided for in dissolution deed itself which records in clause (3) that parties have agreed to take over plots of land as co-owners and as capital assets and they shall have co-ownership and as test of conversion if applied, assessee has indeed provided for conversion. Hence, we have no difficulty in concluding that property does not seem to be stock-in-trade by execution of dissolution deed. In our view, there is no mode which provides for conversion of stock-in-trade into capital assets except by agreement of parties. In instant case, deed of dissolution achieves that objective. In case of Khatau Vallabhdas, court was concerned with division of stock- in-trade, i.e., grocery products. In present case, business of partnership was of builders/contractors and not of buying and selling land and partners at material time were not engaged in any construction activity and no such construction was being carried out on land. building was to be put up on land purchased by erstwhile partnership firm but land remained vacant and nothing is done on land or to land so as to show it as stock-in-trade and not treat it as capital assets share of assessee. In circumstances, we answer both questions in negative and hold in favour of assessee and against Revenue. We hold that Tribunal had no material to come to conclusion that land sold by applicant-assessee was stock-in-trade and Tribunal was not justified to treat same as business income. However, we leave open question whether amount in hands of applicant-assessee is to be treated as long-term capital gains or short-term capital gains to be decided by Department. reference is, therefore, accordingly answered. No order as to costs. *** Arvind Shamji Chheda v. Commissioner of Income-tax
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