2012 (6) TMI 56
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....detailed list of assets and properties, which were received by the assessee consequent to his family agreement and partition are listed. It was submitted by the assessee that erstwhile joint family of the assessee was carrying on real estate business and the assets received were part of the stock-in-trade of the real estate business of the erstwhile joint family of the assessee and the value of properties adopted while making the family arrangement on 6.3.2004 have been adopted as cost and debited to the profit and loss account. The Assessing Officer was of the view that the lands sold by the assessee were treated as stock-in-trade in his books and as the same were sold in the relevant period, capital gains was attracted under section 45(2) of the Income Tax Act, 1961 (herein after referred as 'the Act'), but no such capital gains was offered to tax. The Assessing Officer sought the assessee's explanation as to why no capital gains was offered to tax in the return of income. The assessee submitted that there was no liability to capital gains. It was contended that the cost of the properties that were sold, was the amount fixed in the family agreement received by the ass....
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....sessing Officer that tax at the LTCG under section 45(2) of the Act was in order. The learned CIT(A) was of the view that the assessee had received certain assets on partition, which had to be regarded as capital assets in the hands of the assessee on partition. He also held that the assessee had converted such capital assets into stock-in-trade, on his continuing to carry on the business allotted to him on partition. As the assets so converted were sold during the relevant period, capital gains would arise thereon. The learned CIT(A) also upheld the view of the Assessing Officer that the value at which the lands were introduced in the partition deed was the fair market value and the same had to be treated as sale consideration received by the assessee on conversion of capital assets into stock-in-trade. 3. Aggrieved the assessee is in appeal before the ITAT. The grounds of appeal raised in this appeal are as under : "1. The orders of the authorities below in so far as they are against the appellant, are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The authorities below are not justified in assessing Long Term Capital Gains....
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....ds at S.No.1 and 5 are general in nature and do not call for any specific adjudication thereon. 6. The grounds of appeal raised at S.No.4 challenges the charging of interest under section 234B of the Act. The charging of interest under section 234B is consequential and mandatory. The Assessing Officer has no discretion in the matter and his action is in order. The Assessing Officer is, however, directed to recomputed the interest chargeable, if any, while giving effect to this order. 7.1 The only effective grounds of appeal to be considered by us in this appeal relate to Ground Nos.2 and 2.1. 7.2 The learned counsel for the assessee contended that the Assessing Officer has made three propositions to bring the transaction within the ambit of section 45(2) of the Act and for invoking section 49(1) of the Act. He submitted that the first proposition of the Assessing Officer is that the nature of assets held by the erstwhile joint family of the assessee is not relevant. The second proposition of the Assessing Officer is that the character of the assets received on a family partition is always a capital asset qua the recipient member. Thirdly, the Assessing Officer also held that the....
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....ly, upon partition and therefore they assume the character of capital assets in the hands of the assessee first and the assessee's carrying on the same business amounts to converting such assets into stock-in-trade. The learned Authorised Representative contended that the assessee was carrying on real estate business and therefore the Assessing Officer had correctly accepted the business income declared by the assessee. However, since the assessee had not declared capital gains under section 45(2) of the Act on the conversion of capital assets into stock-in-trade, the Assessing Officer was correct in computing the capital gains thereon and adopting the cost in accordance with the provisions of section 49(1) of the Act. He also submitted that the value of properties at the time of partition was the fair market value and the same had to be adopted for computing capital gains under section 45(2) of the Act. 7.4 We have heard both parties and have perused and carefully considered the material on record. The issue before us relates to the assessment of LTCG in the hands of the assessee in accordance with the provisions of section 45(2) and 49(1) of the Act. In the order of assessme....
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....titutes capital assets. Such a proposition is, however, incorrect. This is because of the nature of assets held by the joint family is certainly relevant and in fact the same is material to resolve and decide the dispute. 7.7 In order to ascertain the nature of assets held by the erstwhile joint family of the assessee, it is necessary to consider the background of the assessee and the issues arising in the assessee's case in the earlier years. In the paper book furnished by the learned Departmental Representative, the orders of this Tribunal in the case of the assessee for the block period 1.4.1985 to 5.12.1995 in IT(SS)A No.10(Bang)/2008 dt.17.10.2008 is at pages 23 to 45 thereof. In para 15 of this order, it is held as under : "A cursory perusal of the details would indicate that all the properties held by the assessee are ancestral properties and if any purchase is made, this also through sale of ancestral properties. The business of brick industry, development of lands/constructions are carried on by the assessee only by ploughing back the wealth he obtained from HUF nucleus. From the facts it is also well founded that there was no other income to the assessee from any o....
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....n which all the properties of the joint family as aforesaid, especially, the capital of the family in real estate business after making a fair and market value valuation of all the properties held as stock-in-trade of the real estate business have been partitioned by him orally and in the said partition, he allotted and provided a portion of the capital various members towards their rights or assorted or assumed rights in all the assets of the family to ward of all possible litigations and bickering among the members thereof in future." From a reading of the aforesaid clause (2), it becomes clear that all properties of the joint family, especially the capital of the family in the real estate business in the Memorandum dt.6.3.2004. It is only thereafter that the assessee was allotted the balance of the capital of the family in the real estate business in accordance with the terms and conditions of clause 3 of the Memorandum of Family Arrangement and Oral Partition which reads as under : "3. The FIRST PARTY has been allotted the balance of the capital of the family in real estate business being excess of assets over liabilities (after making revaluation of all the assets forming p....
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....l of the family in the real estate business comprising various assets, which were in the nature of stock-in-trade and it cannot be considered that the various assets or properties received by the assessee on partition are capital assets and these capital assets were converted into stock-in-trade of the real estate when the assessee continued to carry on the business of the erstwhile joint family. We also find, as rightly contended by the assessee, that if at all there was any capital asset received on partition, such a capital asset would be the real estate business carried on by the erstwhile family. 8. The Assessing Officer's application of the provisions of section 45(2) of the Act to the instant case is to be examined. The provisions of section 45(2) of the Act are attracted only when there is a conversion of a capital asset into stock-in-trade. As already observed by us, there is no material on record to support the view taken by the Assessing Officer that the assessee received certain capital assets on partition of the joint family which were later converted to stock-in-trade by the assessee. A perusal of both the order of the Tribunal in the assessee's case in the b....
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....ition of the asset. It is apparent from the language of sub-s. (1) itself which opens with the words "Where the capital asset became the property of the assessee" and after enumerating certain situations, provides that "the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it." The phrase 'the asset' used in the later part of the provision relates to the capital asset which became the property of the assessee in the given circumstances. The natural corollary which, therefore, follows is that the cost to the previous owner is considered as the cost of acquisition only of the capital asset, which becomes the property of the assessee in the modes given in cls.(1) to (iv). But once such capital asset is transferred and another capital asset is acquired, there is no applicability of s.49(1) to such converted asset." 10. Finally for consideration is whether the assessee was justified in adopting the cost of assets sold at the values fixed at the time of partition. In this connection, the Hon'ble Apex Court in the case of Kalooram Govindram (supra) thereof has observed as under : " The entire argument is ba....
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....uld be Rs. 500, though the original cost of the house at the time it was built or purchased was only Rs. 100. Because of the uneven rise in prices of the different houses, instead of two houses he got only one house at the partition. The cost to him, therefore, would be the cost at which the property was valued at the partition or at which it was auctioned for the purpose of partition. Take another illustration : Instead of partitioning the properties by evaluation thereof, the houses were sold to a third party. So far as the third party was concerned the cost price would be the price at which he purchased them. If instead, the properties were sold by auction between the brothers and the difference in prices was adjusted by cash payment, it would be incongruous to say that in the former the cost of the houses would be the cost actually paid by the third party purchaser and in the latter the cost of the houses would not be the price for which they were auctioned but the nominal price they bore in a remote past. Other illustrations may be visualized. Barring the cases of fraud, collusion and inflation and deflation of values for ulterior purposes, cost of an asset to a divided member....