TaxTMI 
TaxTMI 
2015 (5) TMI 468
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....llenged the validity of initiation of search on the assessee u/s. 132 of the Act, based on which proceedings u/s. 153A were initiated. We first proceed to adjudicate the merits of the addition made by the AO and consequently examine the issue with regard to validity of initiation of search u/s. 132 of the Act. 5. The assessee is in the real estate business. The undisputed facts are that the assessee was a member of HUF called C. Ramaiah Reddy, HUF. There was a family partition on 6.3.2004. The HUF was also carrying on real estate business. At the time of partition, the assets of the joint family included the real estate business and stock-in-trade of the real estate business were valued at fair market value and based on the same, properties were allotted to the members of the HUF. The assessee continued carrying the real estate business in his individual capacity. The stock-in-trade of the HUF real estate business which was allotted to the assessee was also treated as stock-in-trade of the business of real estate carried on by the assessee in his individual capacity. 6. During the previous year relevant to A.Ys. 2011-12 & 2012-13, the assessee had sold some of the stock-in-tr....
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....es legitimately payable. Though such a stand has been taken by the AO in the order of assessment, ultimately while computing the capital gains u/s. 45(2) of the Act, the AO took the cost of acquisition as per the values determined in the Deed of Partition on 6.3.2004. 9. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. Hence these appeals by the assessee before the Tribunal. 10. At the time of hearing of the appeals, the ld. counsel for the assessee brought to our notice that in assessee's own case properties which were allotted in the partition of the HUF and which were treated as stock-in-trade of business of real estate carried by the Assessee in his individual capacity, were sold in the previous year relevant to A.Y. 2006-07. The Revenue applied the provisions of section 45(2) of the Act and brought to tax capital gain on conversion of capital asset owned by the Assessee as stock-in-trade of business of real-estate. The said levy of tax on capital gain was challenged by the Assessee before the Tribunal. The Tribunal in ITA No.122/Bang/2011 for A.Y. 2006-07 in its order dated 25.5.2012 considered the above issue and came to the conclusion that the....
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....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 other source, other than from HUF. The learned City Civil Judge also held that the properties mentioned in the schedule to the suit are joint family properties. We have, therefore, no hesitation in holding that the entire properties are only HUF properties including the value declared in the return filed inform No.28. The growth and expansion therefrom are directly emanating from HUF assets do not require further discussion as considered for assessment as individual, as agitated in other grounds." From the above decision of the Tribunal in the assessee's own case, it is seen....
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....s 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 part of stock-in-trade of real estate business along with all other assets pertaining to the said business like cash in hand, bank balances, etc.) after allotting and providing a portion of such capital to parties No.2 to No.5 in the oral family arrangement and partition towards their respective shares to be owned and enjoyed by him in severality to the exclusion of parties No.2 to No.5 absolutely. .............. ............... 7.9 We also find from a perusal of the terms and conditions of clauses 4 to 7 of the Memorandum of Family Arrangement and Oral Partition dt.6.3.2004 that ....
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....eal 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-intrade by the assessee. A perusal of both the order of the Tribunal in the assessee's case in the block assessment coupled with the Memorandum of Family Arrangements and Oral Partition dt.6.3.2004 clearly establishes that the erstwhile joint family of the assessee was carrying on real estate business and was holding several properties as stock-in-trade. These properties which were hitherto being held as stock-in-trade, were allotted to the assessee on partition. It is also evident that the assessee continued to carry on the said real estate business after the partition. In these circumstances, it is clear that, there is no conversion of capital assets....
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....revious 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." (emphasis supplied) 12. The Tribunal in para 10 of its order, valuation of the property at the time of partition was dealt with by the Tribunal and the Tribunal came to the conclusion that the valuation as adopted at the time of partition was correct and had to be accepted. The following were the relevant observations of the Tribunal:- 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 un....
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....it was allotted ? Clearly it would 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 ....
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....11-12 & 2012-13 also? (v) Whether merely because the values of stock of land have been adopted in earlier years, these should be adopted under the present facts and circumstances for the years in question also? 15. On the above submission of the learned DR, the ld. counsel for the assessee submitted that when the provisions of section 45(2) of the Act are held to be not applicable, the question of cost of acquisition and computation of capital gain do not arise for consideration at all and therefore the discussion of the CIT(Appeals) on the above issues, in our view, is not relevant. 16. Respectfully following the decision of the Tribunal referred to above, we hold that the provisions of section 45(2) of the Act are not applicable to the facts of the case and therefore there cannot be any long term capital gain that can be brought to tax under those provisions for A.Ys. 2011-12 & 2012-13. The relevant grounds of appeal are allowed. 17. As we have observed, the other issues in the grounds of appeal including the validity of initiation of search u/s. 132 of the Act raised in A.Y. 2011-12 do not require any consideration and the issues are left open for adjudication. 18....