1992 (7) TMI 105 - AT - Income Tax

Tribunal rules against contrived partnership for tax reduction; disallows unauthorized occupant compensation claim

The Tribunal upheld the Commissioner of Income Tax (Appeals)' determination that the formation of a partnership firm was a contrived effort to reduce ... Capital Gains, Construction Company Issues Involved:1. Determination of capital gains arising from the transfer of property to a partnership firm.2. Validity of the partnership firm and its impact on capital gains assessment.3. Allowability of Rs. 1,49,000 claimed as compensation paid to unauthorized occupants.Issue-wise Detailed Analysis:1. Determination of Capital Gains Arising from the Transfer of Property to a Partnership Firm:The assessee-company acquired 'Marshall Lodge' for Rs. 4,50,000, with the total cost of acquisition amounting to Rs. 4,90,510. The property was transferred to a partnership firm formed with Mr. S. J. Marshall and Jiji Marshall Investment Pvt. Ltd., with the assessee's capital contribution valued at Rs. 9,00,000 based on an architect's valuation report. Subsequently, the property was agreed to be sold to M/s. Kamal Construction Co. Pvt. Ltd. for Rs. 11 lakhs. The Assessing Officer (AO) treated the assessee's contribution to the partnership as a 'transfer' giving rise to capital gains, substituting the fair market value of Rs. 11 lakhs for the Rs. 9 lakhs valued by the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, noting the formation of the partnership firm was a contrived effort to reduce capital gains, and the actual transfer was from the assessee-company to Kamal Construction Co. Pvt. Ltd., not involving the partnership firm.2. Validity of the Partnership Firm and Its Impact on Capital Gains Assessment:The CIT(A) observed that the partnership firm was formed with the ostensible purpose of developing the property, but the real motive was to reduce capital gains. The partnership firm was formed on 1-8-1978, and the sale agreement was entered into within three days, indicating the firm was a contrived entity. The CIT(A) concluded that the partnership agreement was of no consequence, and the real income accrued to the assessee-company. The Tribunal agreed, noting that the property was sold by the assessee-company, with the conveyance executed in its name and not on behalf of the partnership firm. The Tribunal emphasized that income is exigible to tax in the hands of the person who earned it, and the partnership firm's assessment did not exonerate the assessee-company from its tax liability.3. Allowability of Rs. 1,49,000 Claimed as Compensation Paid to Unauthorized Occupants:The assessee-company claimed Rs. 1,49,000 paid to five parties who allegedly occupied the garage portion and compound of the property. The CIT(A) disallowed this claim, noting the property was sold on an 'as is where is basis,' subject to existing tenancies, and the sale agreement did not mention any unauthorized occupants. The Tribunal upheld this view, finding no material evidence to substantiate the claim or demonstrate the necessity of the payment. The agreement for sale explicitly stated the property was sold subject to existing tenancies, and there was no contractual obligation to pay the alleged unauthorized occupants.Conclusion:The Tribunal dismissed the appeal of the assessee, upholding the CIT(A)'s determination of long-term capital gains based on the fair market value of Rs. 11 lakhs and disallowance of the Rs. 1,49,000 claimed as compensation. The Tribunal emphasized that the real income accrued to the assessee-company and the partnership firm was of no consequence in this transaction.