AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (1) TMI 1471
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....nsfer of land by Assessee, having only 5% share in the firm, is as good as transfer to M/s Sahara India Commercial Corporation Ltd., having a share of 90% in the firm and that such transfer of land to firm is only a colorable device to avoid payment of tax? ii. Whether Tribunal has erred in law in holding that full value of consideration in respect of transfer of land shall be the amount recorded in the books of the firm only as per Section 45 (3) of Act, 1961? (iii) Whether Tribunal has erred in law in holding that provisions of Section 50C of Act, 1961 cannot be invoked if registration of land, transferred, has not taken place, and no stamp duty has been paid as in the instant case? iv. Whether Tribunal has erred in law in holding that cost of acquisition in respect of transfer of land of 10,000 Sq.ft. will be cost of acquisition as on 1.4.81 whereas value of land in the books of Assessee was taken as NIL? (emphasis added) 4. Before answering aforesaid questions, it would be appropriate to have a bird eye view of relevant facts giving rise to present dispute. 5. Assessee, M/s Carlton Hotel Pvt. Ltd., Ranapratap Marg, Lucknow was lessee in....
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.... Sq.ft. Land, (at the rate of Rs. 325.819 per Sq.ft.) under the head "land" reflected in the schedule of fixed assets in balance sheet filed along with return. During year in question, it entered into partnership and contributed 2,40,000 Sq.ft. of land, valued as per books, at the cost of Rs. 7,81,96,735/-, which was proportionate to cost vis-a-vis total area of land held by Assessee. The value of land, in the account of firm, was also reflected to the same amount i.e. Rs. 7,81,96,735/-. There was no difference in value shown in the book of accounts of Assessee as well as Firm. 13. Assessee further said that under Section 45 (3) of Act, 1961, "capital contribution of immovable property" brought in by partners is chargeable to ''capital gain' in the hand of partnership who brings in such share as ''capital'. Section 45 (3) then says that for the purposes of Section 48, amount recorded in the books of accounts of Firm, as the value of "capital asset", shall be deemed to be the full value of consideration received or accruing as a result of transfer of capital asset. Section 50C would not be attracted, as claimed by Assessee. Section 50C would be attracted o....
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....t Ltd. Vs. CIT, 228 ITR 1 (SC). With regard to other points, appeal was partly allowed, with which we are not concerned in the present appeal. 16. In respect of aspects adjudicated against Assessee by CIT(A), further appeal before Tribunal was taken by Assessee, which has been decided vide impugned judgment and order dated 14.11.2008. Tribunal has allowed appeal. It has held that neither Section 50C of Act, 1961 could have been invoked in the case in hand, nor Assessee could have been denied benefit of Section 55 (2) (b), since it is an option given to Assessee to adopt either actual cost of acquisition of asset or paid market value of asset as on 01.04.1981, as the cost of asset under partnership. 17. As per partnership deed of the Firm, shares of profits of three partners were provided as under :- i. M/s SICCL 90% ii. M/s Carlton Hotel Pvt. Ltd. 05% iii. Shri I. Ahmad 05% 18. Capital contribution of three partners in the Firm is as under :- 1. M/s SICCL Rs. 1,36,37,700 (12%) 2. M/s Carlton Hotels (P) Ltd. Rs. 7, 81,96,735 (88%) 3. Mr. I. Ahmad Nil (0%) 19. Some of the terms and conditions of partnership deed whic....
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....e market price of land which has not been disclosed. This is further fortified from the fact that payment of freehold charges was made by controlling partner i.e. SICCL on behalf of Assessee. Partnership deed shows that Assessee has a little role in partnership business, which proves that it has already settled its score and alleged partnership was a cloak to otherwise deed of sale. The entire transaction is colourable and fraudulent. It is submitted that Tribunal while allowing appeal of Assessee, has ignored all these aspects and after discussing Section 50C of Act, 1961, has held that one of the ingredients to invoke Section 50C is that there is payment of stamp duty in respect of transfer of capital asset, being land or building or both, which will be required only when capital asset is registered under Registration Act, 1908 (hereinafter referred to as ''Act, 1908'). If payment of stamp duty for the purpose of transfer is not required, then there is no occasion to look into other conditions of Section 50C. It has also read Section 45 (3) in isolation and said that there is deeming fiction with regard to value of capital asset which has to be given full effect. Sri ....
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....and has been discussed by this Court in some of the judicial pronouncements. In Sunni Central Board of Waqfs vs. Sri Gopal Singh Visharad and others 2010 ADJ (1) SFB) (LB) (in which one of us Sudhir Agarwal, J. was a member; rendered judgment which constituted majority on this aspect), this Court has observed as under : "4430. In the Legal Glossary 1992, fifth edition, published by the Legal Department of the Government of India at page 589, the meaning of the word "Nazul" has been given as "Rajbhoomi i.e. Government land". It is an Arabic word and it refers to a land annexed to Crown. During the British Regime, immoveable property of individuals, Zamindars, Nawabs and Rajas when confiscated for one or the other reason, it was termed as "Nazul property". The reason being that neither it was acquired nor purchased after making payment. In the old record, we are told when they used to be written in Urdu, this kind of land was shown as "Jaidad Munzabta". 4431. For dealing with such property under the authority of the Lt. Governor of North Western provinces, two orders were issued in October, 1846 and October, 1848 wherein after the words "Nazul property" its english ....
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....Nazul land. If the entire territory during Mughal regime would that of a king, as soon as the territory annexation or otherwise changed its hand with the East India Company, they would have entered into the shoes of the Mughal king and got the same rights, obligations, privileges etc. on the land. The status of the land would not have changed in such a manner. Such a land could not be confiscated since it was already the land of the king but when a proclamation was issued for confiscating the land, meaning thereby the East India Company or the British Government did not follow the same principle. In our view, in such a matter, even the doctrine of "escheat" or "bona vacantia" may not be applicable 4437. The question as to who could have been owner of the land in 1528 AD when alleged that the disputed building was constructed by Babar through his Commander Mir Baqi, the concept sought to be canvassed is that law, whether Islam or Hindu Shastras, do not recognise any personal right of ownership upon immoveable property. The entire property within the suzerainty of the king belong to him, who had right to tax its subject in the form of tax or otherwise by realising share in t....
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....ner." The right of the Crown to take as bona vacantia extends to personal property of every kind. Giving a notice at this stage that the escheat of real property of an intestate dying without heirs was abolished in 1925 and the Crown cannot take its property as bona vacantia. The principle of acquisition of property by escheat i.e right of the Government to take on property by escheat or bona vacantia for want of a rightful owner was enforced in the Indian territory during the period of East India Company by virtue of statute 16 and 17 Victoriae, C. 95, Section 27. 4440. We may recollect having gone through the history that several estates were taken over by British Company by applying the doctrine of lapse like Jhansi which was another kind of the above two principles. The above provisions had continued by virtue of Section 54 of Government of India Act, 1858, Section 20(3)(iii) of Government of India Act, 1915 and Section 174 of the Government of India Act, 1935. After the enactment of the Constitution of independent India, Article 296 now provides : "Subject as hereinafter provided, any property in the territory of India which, if this Constitution had not come....
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.... "The expression 'act of State' is, it is scarcely necessary to say, not limited to hostile action between rulers resulting in the occupation of territories. It includes all acquisitions of territory by a sovereign State for the first time, whether it be by conquest or cession." 4447. In Promod Chandra Deb Vs. State of Orissa AIR 1962 SC 1288, the Court said, " 'Act of State' is the taking over of sovereign powers by a State in respect of territory which was not till then a part of its territory, either by conquest, treaty or cession, or otherwise." 4448. To the same effect was the view taken by the Constitution Bench in Amarsarjit Singh Vs. State of Punjab AIR 1962 SC 1305 in para 12 as under : "It is settled law that conquest is not the only mode by which one State can acquire sovereignty over the territories belonging to another State, and that the same result can be achieved in any other mode which has the effect of establishing its sovereignty." 4449. In Thakur Amar Singhji Vs. State of Rajasthan AIR 1955 SC 504, in para 40, the Court said : "The status of a person must be either that of a sovereign or a subjec....
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.... Act, 1894, since there is no question of any transfer of ownership from one person to another but here State already own it, hence there is no question of any acquisition. (emphasis added) 27. Presently various provisions dealing ''Nazul' land have been compiled, in the State of U.P., in "Nazul Manual". In the context of Nazul land and Nazul Manual, recently in State of U.P. Vs. United Bank of India & others, 2016 (2) SCC 257, Court has observed that land and building in question is ''Nazul' property being property of Government maintained by State authorities in accordance with Nazul Rules but not administered as a State property. Court has also observed that lease of ''Nazul' land is governed in accordance with Government Grants Act, 1895 (hereinafter referred to as ''Act, 1895'). Section 2 and 3 thereto very specifically provide that provisions of Transfer of Property Act, 1882 (hereinafter referred to as ''Act, 1882') do not apply to Government land. Section 3 says that all provisions, restrictions, conditions and limitations ever contained in any such grant or transfer, as aforesaid, shall be valid and ta....
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.... signify assent of continuance of lease even after expiry of lease period. 28. Here we find answer in Uttar Pradesh Public Premises (Eviction of unauthorised Occupants) Act, 1972 (hereinafter referred to as "Act, 1972"). Section 2(g) defines the term "unauthorised occupation" and "Public Premises" is under Section 2(e) and read as under:- "2(g) "unauthorised occupation", in relation to any public premises, means the occupation by any person of the public premises without authority for such occupation, and includes the continuance in occupation by any person of the public premises after the authority (whether by way of grant or any other mode of transfer) under which or the capacity in which he was allowed to hold or occupy the premises has expired or has been determined for any reason whatsoever and also includes continuance in occupation in the circumstances specified in sub-section (1) of Section 7 and a person shall not, merely by reason of the fact that he had paid any amount as rent, be deemed to be in authorised occupation." "2(e) "public premises" means any premises belonging to or taken on lease or requisitioned by or on behalf of the State Govern....
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.... "unauthorized occupant" subsequently after expiry of lease period. 35. In Delhi Development Authority vs. Anant Raj Agencies Pvt. Ltd. (supra) Court considered that land vested in DDA was a 'Nazul land' and that being so, power has been conferred upon DDA to grant lease which includes renewal of lease but in absence of said renewal of lease of property as required in law, original lessee cannot claim an automatic renewal in his favour. Court held as under:- "Thus, it is abundantly clear from the aforesaid legal statutory provisions of the DD Act and terms and conditions of the lease deed and the case law referred supra that there is no automatic renewal of lease of the property in question in favour of the original lessee" 36. Having said so, Court held that in absence of renewal of lease, status of original lessee in relation to disputed property was an "unauthorized occupant" in terms of Section 2(g) of Act, 1972. 37. It also said that any act on the part of DDA in respect of other communication would make no difference, since a "Public Premises" is to be dealt with by relevant statutory provisions including Act, 1971, Nazul Land Rules....
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....on as under :- "The instant case having peculiar facts and circumstances, namely, after 10.08.1968 the lease stands terminated by efflux of time, which is further evidently clear from the termination notice dated 01.09.1972 and thereafter, the original lessee becomes an unauthorised occupant in terms of Section 2(g) of the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 and consequently, not entitled to deal with the property in question in any manner. The very concept of conversion of leasehold rights to freehold rights is not applicable to the fact situation." 31. In the light of above exposition of law, when lease expired on 31st March, 1990, from 1st April 1990, Assessee became an "unauthorized occupant" of land in question. There was no occasion for him to maintain aforesaid land as part of its ''capital asset'. This explains the reason why it has disclosed value of land in books of account, ''Nil' as on 31st March, 2002. 32. Land came to be validly possessed by Assessee only with execution of Freehold Deed on 31st March, 2002. In other words, Assessee being a ''lessee' under lease dated 31st March, 1943, ceased....
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....ability of Section 50C, vis-a-vis, mutual relationship of execution or harmonious consideration of Section 45 (3), 48 and 50C of Act, 1961. 39. Section 45 (1) of Act, 1961 deals with ''capital gains' and says that any profit or gains arising from "transfer of a capital asset" effected in the previous year, shall be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of previous year in which transfer took place. This is subject to otherwise provided in Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H. 40. There are some further additions by way of insertion of Section 1A by Finance Act, 1999, w.e.f. 01.04.2000; sub-section 2, w.e.f. 01.04.1985; sub section 2A, w.e.f. 20.09.1995. 41. For our purpose, it is sub-section (3) of Section 47 which is relevant and came to be inserted by Finance Act, 1987, w.e.f. 01.04.1988 which reads as under:- "47(3). The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contri....
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....l be computed by converting the cost of acquisition,expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company : Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted: Provide....
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....ly, on the date of transfer. Section 45, in effect, not only defines "capital gains" but makes same chargeable to income tax and allots appropriate year for such charge. It also enacts a deeming provision, namely, "deemed income" which arises at a fixed point of time, i.e. on the date of transfer. 45. "Capital asset" is also defined in Section 2 (14), which says that property of any kind held by an Assessee, whether or not connected with his business or profession. But there are some exclusions in clauses (i) to (vi). Exclusionary provisions are not relevant for us. Relevant extract of definition of "capital asset" reads as under: "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -- ..........................................................................." 46. In Chapter IV of Act, 1961 some additions were made as special provisions for different purposes. For our purpose, it is Section 50C, inserted by Finance Act, 2002 w.e.f. 01.04.2003, made as a special provision, for full value of consideration in certain cases. It reads as under : "50C. Special provi....
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....racted in this case or not? This has to be examined in the light of the aforesaid provisions and also some of the authorities considering various shades of Section 45 (3). In order to attract Section 45 (3), the necessary requirements are :- "(i) there is a transfer of capital asset. (ii) such transfer is by a person; (iii) such transfer is to a firm; and (iv) the firm is such in which the person is or becomes a partner or member. (v) Such partner or membership of the person in the firm is by way of capital contribution or otherwise." 48. If these conditions are satisfied, for the purpose of evaluation of "capital asset", one would treat the full value of consideration received or accrued as recorded in the books of account of the firm. It is in respect of such ''capital asset', that profits or gains arising shall be chargeable to tax as such person's income of previous year in which such transfer takes place. 49. The first question would be, whether in the present case, when Assessee transfers his land by way of "capital contribution" and becomes a partner in the firm, does it result in transfer in terms of Section....
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....ion 48, income chargeable under the head ''Capital gains' shall be computed by deducting from full value of consideration received or accruing as a result of transfer of capital asset, the following amounts, namely :- "(i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of capital asset and cost of any improvement thereto." 52. Assessee therein argued that there was no "transfer" in general sense of that term when a partner brings his personal assets into firm as his contribution towards its capital, partnership firm is not a separate legal entity and assets owned by the partnership are collectively owned by the partners. Referring to the judgment in Malabar Fisheries Co. Vs. CIT, [1979] 120 ITR 49(SC), Court held that there is no reason not to accept the aforesaid proposition advanced by learned counsel for Assessee that a partnership firm is not a distinct legal entity apart from partners, constituting it, and equally in law, the firm as such has no separate rights of its own in the partnership assets and when one talks of firm's property or firm's assets, all that is meant is property....
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.... In another case, transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property, and in a third case, there may be a reduction of exclusive interest in the totality of rights of original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a shared interest in that property. To the extent to which the exclusive interest is reduced to a shared interest, it would seem that there is a transfer of interest. Therefore, when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive rights in the asset to shared rights in it with other partners of firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which cannot be identified with the fullness of the rights which he enjoyed in the asset before it entered the partnership capital. 56. Court in Sunil Siddharthbhai Vs. CIT (supra), in taking above view, also relied and referred to its earlier decision in Addanki Narayanappa Vs. Bhaskara Krishnappa, AIR 1996 SC 1300, wherein it was obse....
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....artners become joint asset. It is not an interest which can be evaluated immediately. It is an interest which is subject to the operation of future transactions of partnership. It may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner's interest takes place only when there is a dissolution of firm or upon his retirement from it. On dissolution of the firm or retirement of partner, he has right to realise interest and receive its value. It is the realization of interest which partner enjoys in the assets during subsistence of partnership firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement. Court held that because of that interest, existed already before dissolution, the distribution of asset on dissolution does not amount to a transfer to the erstwhile partners, as held in Malabar Fisheries Co. Vs. CIT (supra). The partner gets, upon dissolution or upon retirement, realisation of a pre-existing right or interest. In this backdrop, Court said :- "Therefore, what was the exclusive interest of a partner in his personal asset....
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.... (FB); Karnataka High Court in Addl. CIT Vs. M.A. J. Vasanaik [1979] 116 ITR 110; and Gujarat High Court in the judgment in appeal, i.e. in Sunil Siddharthbhai Vs. CIT (supra). 62. With reference to Section 17 of Act, 1908, Court observed that the registration of transfer by a partner of his asset to the capital of the firm is not necessary, since no document for such transfer is required. 63. Having said so, Court further said that such transfer of asset to the firm's capital as "capital contribution" by a partner would not necessarily result in receipt of any consideration by Assessee so as to attract Section 45 and the credit entry made in partner's capital account in the books of partnership firm does not represent the true value of consideration. It is a notional value only, intended to be taken into account at the time of determining value of partner's share in the net partnership assets on the date of dissolution or on his retirement. Court held that it is not correct to hold that consideration which a partner acquires on making over his personal asset to the partnership firm, as his contribution to its capital, can fall within the terms of Section 48. Sinc....
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....and as real income or gain. 66. Court, therefore, categorically held in Sunil Siddharthbhai Vs. CIT (Supra) as under :- "the consideration received by the assessee on the transfer of his shares to the partnership firm does not fall within the contemplation of section 48 of the Income-tax Act and further that no profit or gain can be said to arise for the purposes of the Income-tax Act, we hold that these cases fall outside the scope of section 45 of the Act altogether." (emphasis added) 67. The aforesaid judgment would have been a complete answer to the questions posed above but matter does not rest here. When Sunil Siddharthbhai Vs. CIT (Supra) was decided, sub-section 3 of Section 47 was not in existence since it came to be inserted w.e.f. 1.4.1988. Subsequently, w.e.f. 1.4.2003, legislature inserted special provision for full value of consideration in certain cases. Whether subsequent enactments in Act, 1961 had resulted in any substantial change or not, has also to be examined. 68. One of the relevant aspects here is the "year of charge". By depiction, ''income' under the head "Capital gains" is deemed to be the income of previous year in ....
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....gains in real estate transactions.- 37.1 The Finance Act, 2002, has inserted a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property. 37.2 It provides that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration, and capital gains shall be computed accordingly under section 48 of the Income-tax Act. 37.3 It is further provided that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, and he has not disputed the value so adopted or assessed in any appeal or revision or reference before any authority or court, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A of the Income-tax Act. If the fair m....
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....stock and for this purpose reference was made to Section 14 and 46 of Act, 1932. It was held that this kind of transfer is neither prohibited by Act, 1982 or Act, 1908. This is a different issue. 76. Similarly, Patna High Court in Firm Ram Sahay Mall Rameshwar Dayal Vs. Bishwanath Prasad, AIR 1963 Pat 221, relied on English Partnership law and Partnership Act of U.S.A. and took same view. 77. We, however, do not find consideration of language of Section 17 (1) (b) of Act, 1908 in these authorities which requires registration of a non-testamentary document, which acts to the effect of extinguishing or limiting a right, title or interest in any immovable property of an individual. Non execution of a document for transfer of immovable property in partnership stock by one of the partners is one thing and its requirement of registration is another thing. What document would require registration is specified in Section 17 of Act, 1908. If conditions stated therein are satisfied the document has to be registered. It is no doubt true that once a partnership has come into existence, the stock whether immovable or movable, as narrated into share of individual partner in the partnership....
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.... without liability to Income Tax on a capital gain, it will be open to Income Tax authorities to go behind the transaction and examine whether transaction of creating partnership is genuine or a sham transaction. Even where partnership is genuine, whether transaction of transferring personal asset to the partnership firm represents a real attempt to contribute to the share capital of partnership firm for the purpose of carrying on partnership business or is nothing but a device or ruse to convert personal asset into money, substantially for the benefit of Assessee, while evading tax on a capital gain is the cardinal issue, which has to be considered. 80. In this case we find that this point was specifically appreciated by ACIT and CIT(A) and also raised before Tribunal but they have not recorded any finding thereon. 81. Sri Mudit Agarwal, appearing for Assessee, contended that bringing of personal asset into Firm, as contribution towards capital by a person does not amount to a ''sale'. This proposition, we find unexceptionable. 82. In CIT Vs. Hind Construction Ltd., [1972] 83 ITR 211 (SC), Assessee entered into a partnership. As its share of capital, it transf....
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....ner brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital. (emphasis added) 84. In the light of above discussion, and the authorities which have been followed subsequently in various authorities including B.T. Patil and sons Vs. Commissioner of Gift Tax, 2003 9 SCC 172, and CIT Vs. H. Rajan and H. Kannan, [1999] 236 ITR 42 (SC), a distinction, therefore, has been carved out by Courts i.e. when a partner receives his share in the partnership, and when partnership is dissolved or partner retires. Where share interest in the entire asset of the firm is replaced by an exclusive interest in an asset of equal value, it can be said that there is no transfer. It is the realisation of a pre-existing right. But the position would be different when a partner brings his asset into the partnership Firm as his con....
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....Reddy, J. in concurrent judgment delivered on behalf of majority by Hon'ble Ranganath Mishra, J., observed that tax avoidance may be legal, but tax evasion is illegal. Commenting on this, His Lordship said that a time has come to depart from the Westminster principle as emphatically as the British courts have done and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare state like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. 88. Then there is "the large hidden loss" to the community by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the tax-gatherer and his perhaps not no skillful advisers on the other side. There is a sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it. Th....