M/s Apco Concrete Blocks & Allied Products, Bangalore V. JCIT, Bangalore

ITA 1024/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57431 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-12-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 23-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARCHANA CHOWDHRY CITII
• Assessee Lawyers: SARANGAN
• Keywords: Capital asset; Business income; Cost of acquisition; Date of conversion; Fair market value; Valuation report
• Section: 143(3); 234B

Judgement Text

PAGE 1 OF 14 ITA NO.1024/BANG /2010 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B BEFORE SHRI N K SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.1024/BANG/2010 (ASST. YEAR 2007-08) M/S APCO CONCRETE BLOCKS & ALLIED PRODUCTS, NO.805, 14 TH CROSS, I PHASE, J P NAGAR, BANGALORE-78. - APPELLANT PA NO. AABFA 9128 J VS THE JOINT COMMISSIONER OF INCOME TAX, (LTU), BANGALORE. - RESPONDENT DATE OF HEARING : 19/12/2011 DATE OF PRONOUNCEMENT : 06/01/2012 APPELLANT BY : SHRI SARANGAN, SR. ADVOCATE RESPONDENT BY : SMT. ARCHANA CHOWDHRY, CIT-II O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE ASSESSEE `FIRM IS DI RECTED AGAINST THE ORDER OF THE CIT (A)-II, BANGALORE. THE RELEVA NT ASSESSMENT YEAR (AY) IS 2007-08. 2. THE ASSESSEE FIRM, IN ALL, HAS RAISED NINE GROUNDS OF APPEAL. THE FIRST, SIXTH, EIGHTH AND NINTH GROUNDS ARE GENERAL IN NATURE WHICH REQUIRES NO ADJUDICATION AND, HENCE, THE SAME ARE D ISMISSED. PAGE 2 OF 14 ITA NO.1024/BANG /2010 2 3. THE GROUND NO.7 RELATES TO THE ISSUE OF LEVY OF INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT. LEVY OF INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT IS MANDATORY AND CONSEQUENTIAL I N NATURE AND, HENCE, THIS GROUND IS NOT MAINTAINABLE. 3.1. THE REMAINING GROUNDS, NAMELY, GROUND NOS.2, 3, 4 AND 5 RELATE TO THE ISSUE OF COMPUTATION OF LONG TERM CAP ITAL GAINS [LTCG]. 3.2. SUBSEQUENTLY, THE ASSESSEE FIRM IN ITS APPLICA TION DATED 18.10.2010 HAS RAISED AN ADDITIONAL GROUND WHICH RE ADS AS FOLLOWS: 1. WITHOUT PREJUDICE TO THE ABOVE GROUNDS OF APPEALS, THE CASE OF THE APPELLANT FALLS WITHIN SEC TION 49(I)(III) (A) OF THE ACT THERE BEING A SUCCESSION , INHERITANCE OR DEVOLUTION, THE COST OF ACQUISITION HAS TO BE TAKEN AS THE COST OF ACQUISITION TO THE PREVI OUS OWNER AND IN COMPUTING THE CAPITAL GAINS THAT COST OF ACQUISITION OR THE COST OF THE ASSET AS ON 1.4.1981 AT THE OPTION OF THE APPELLANT SHOULD BE ALLOWED AND I N ADDITION THAT COST HAS TO BE INCREASED BY COST INFLATION INDEX IN TERMS OF SECTION 48 OF THE ACT. 3.2.1. AFTER DUE CONSIDERATION OF THE LD. COUNSEL S SUBMISSION AND ALSO THE VERSION OF THE LD. D.R ON THE ISSUE, THE A SSESSEE FIRMS APPLICATION WAS ADMITTED AND THE REGISTRY WAS DIRECTED TO PLACE THE ASSESSEE FIRMS APPLICATION ON RECORD. 4. THE ASSESSEE IS A REGISTERED FIRM CARRYING ON TH E BUSINESS OF TRADING IN CEMENT CONCRETE BLOCKS. FOR THE CONCERN ED ASSESSMENT YEAR, A RETURN OF INCOME WAS FILED, DECLARING A TOTAL INCOM E OF RS.5,15,63,550/- [RS.72,57,738/- AS BUSINESS INCOME AND RS.4,44,09,5 62/- AS LTCG ]. THE PAGE 3 OF 14 ITA NO.1024/BANG /2010 3 ASSESSMENT WAS TAKEN UP FOR SCRUTINY BY ISSUANCE OF N OTICE U/S 143(2) OF THE ACT AND ORDER U/S 143(3) OF THE ACT WAS PASSED ON 1 8.12.2009. THE ASSESSING OFFICER [AO] AFTER EXAMINING THE BOOKS OF ACCOUNTS AND OTHER DETAILS ACCEPTED THE BUSINESS INCOME RETURNED BY THE ASSESSEE, BUT, RE- COMPUTED THE LTCG ON THE SALE OF LAND OFFERED BY THE ASSESSEE BY ADOPTING THE BOOK VALUE OF THE SAID LAND AS THE COST OF ACQU ISITION OF THE CAPITAL ASSET IN PLACE OF THE MARKET VALUE AS ON 1.4.1981. 5. BRIEF FACTS IN RELATION TO THE ISSUE/VARIANCE I N COMPUTATION OF LTCG ARE AS FOLLOWS: BEFORE THE FORMATION OF THE ASS ESSEE FIRM, THE BUSINESS WAS CARRIED ON BY ONE OF THE PARTNERS OF THE FIRM AS A P ROPRIETARY CONCERN FROM 1973 TILL 31.3.1981. ON 1.4.1981, THE ASSESSEE FIR M WAS FORMED BY INDUCTING THE MAJOR SONS AND DAUGHTER AS PARTNERS. THE PROPR IETARY BUSINESS WAS SUCCEEDED BY THE FIRM AND THE ASSETS AND LIABILITIES OF THE PROPRIETARY BUSINESS BECAME THE ASSETS AND LIABILITIES OF THE P ARTNERSHIP FIRM. DURING THE RELEVANT AY, THE ASSESSEE FIRM HAD SOLD ITS LAN D FOR A CONSIDERATION OF RS.6 CRORES. THE SUBJECT LAND WAS ACQUIRED BY THE E RSTWHILE PROPRIETARY CONCERN IN THE YEAR 1971 AS AGRICULTURAL LAND AND, SUBSEQUENTLY, CONVERTED FOR INDUSTRIAL PURPOSE AND THE SAME BECAME THE ASSE T OF THE FIRM, CONSEQUENT TO THE SUCCESSION OF PROPRIETARY CONCERN INTO THE PARTNERSHIP FIRM IN 1981. WHILE COMPUTING THE CAPITAL GAINS, T HE ASSESSEE ESTIMATED THE MARKET VALUE AS ON 1.4.1981 ON THE BASIS OF THE VAL UATION REPORT OBTAINED FROM THE GOVERNMENT REGISTERED VALUER AT RS.30 LAKH S. AFTER PROVIDING INDEXATION, THE VALUE WAS DETERMINED AT RS.1,55,70, 000/- AND REDUCING THE PAGE 4 OF 14 ITA NO.1024/BANG /2010 4 SAME FROM THE NET CONSIDERATION OF RS.6 CRORES, OFF ERED A SUM OF RS.4.44 CRORES FOR THE PURPOSE OF COMPUTATION OF CAPITAL GA INS. HOWEVER, ACCORDING TO THE AO, THE COST OF ACQUISITION SHOULD BE THE AC TUAL COST TO THE ASSESSEE FIRM AND THE ACTUAL COST IS NOTHING BUT THE COST SH OWN AS PER THE BOOKS OF ACCOUNT AS ON 1.4.1981 AND NOT THE FAIR MARKET VALU E (FMV) AS ON 1.4.1981 AS CONTENDED BY THE ASSESSEE. THEREFORE, THE AO ADOPTE D THE VALUE OF RS.2,70,975/- AS TAKEN IN THE BOOKS OF ACCOUNTS ON 1.4.1981 WHEN THIS ASSET WAS INTRODUCED AS AN ASSET OF THE ASSESSEE FIRM. A CCORDINGLY, THE AO WORKED OUT THE INDEX COST OF THE ACQUISITION AT RS. 14,06,360/- AND REDUCING THE SAME FROM THE NET CONSIDERATION ARRIVED AT THE LTCG AT RS.5.83,95,652/- INSTEAD OF RS.4.44 CRORES DISCLOSE D BY THE ASSESSEE. THE REASONS GIVEN BY THE AO TO ADOPT THE BOOK VALUE AS C OST OF ACQUISITION ARE AS FOLLOWS: (I) THAT THE CONTENTION OF THE ASSESSEE WOULD HAVE BEEN TRUE, IF THE ASSET WAS ACQUIRED IN ANY OF THE MODES AS DESCRIBED IN SECTION 49 OF THE I.T. ACT, 1961 AND A S IT IS NOT FALLING IN THOSE MODES IN THE INSTANT CASE; & (II) THE COST OF ACQUISITION OF THE ASSET BROUGHT INTO T HE FIRM BY A PARTNER AS CAPITAL CONTRIBUTION IS TO BE T HAT VALUE WHICH WAS CREDITED IN THE BOOKS OF THE FIRM, BASED ON THE DECISION IN THE CASE OF RAJDOOT HOTEL ENTERPRISES CORPORATION V. CIT 167 ITR 167 (MP). 6. THE ASSESSEE BEING AGGRIEVED OF THE RE-COMPUTAT ION OF LTCG CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY. THE ASSESSEE HAD FILED ELABORATE WRITTEN SUBMISSIONS BE FORE THE FIRST APPELLATE AUTHORITY WHICH WAS REPRODUCED AT PARAGRAPH 3.4 OF T HE IMPUGNED ORDER PAGE 5 OF 14 ITA NO.1024/BANG /2010 5 UNDER CHALLENGE. THE ASSESSEE HAD ALSO PLACED RELI ANCE ON THE FOLLOWING JUDGMENTS OF THE HONBLE SUPREME COURT AS WELL AS T HE HIGH COURT. CIT V. K.H.CHAMBERS (1965) 55 ITR 674 (SC) CIT V. SUNIL DIDDARTH BHAI (1985) 156 ITR 509 (SC); CIT V. JAIDEO OIL MILLS (1992) 194 ITR 495. 6.1. THE CIT (A), FOLLOWING THE JUDGMENT OF THE HO NBLE MADRAS HIGH COURT IN THE CASE OF CIT V. HARIDOSS PURUSHOTH AMDOSS REPORTED IN 234 ITR 711 (MAD) DECIDED THE ISSUE AGAINST THE ASSESSE E AND CONFIRMED THE STAND OF THE AO ON THE ISSUE. 7. THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFOR E US. DURING THE COURSE OF HEARING, THE LD. SR. COUNSEL HAD REITERAT ED MORE OR LESS WHAT HAS BEEN DEPICTED BEFORE THE FIRST APPELLATE AUTHORITY. IN FURTHERANCE, IT WAS ARGUED, THE SUBSTANCES OF WHICH ARE SUMMARIZED HERE UNDER: (I) WITH REGARD TO THE AOS STAND THAT THE ASSET WA S NOT ACQUIRED BY ANY OF THE MODES SPECIFIED IN S.49 OF THE ACT, IT WAS CONTENDED THAT THE ASSET UNDER CONSIDERATION W AS ACQUIRED BY THE APPELLANT FIRM BY ONE OF THE MODES SPECIFIED I N S. 49 OF THE ACT BY SUCCESSION AND NOT BY PURCHASING THE SAME BY PAYING ANY MONEY; THAT THE ASSETS AND LIABILITIES OF T HE FIRM BY SUCCESSION OF THE PROPRIETARY CONCERN BY INDUCTING O THERS INTO THE FIRM. THUS, THERE WAS A SUCCESSION OF THE PROP RIETARY CONCERN BY THE PARTNERSHIP FIRM AND, THEREFORE, IT W AS ARGUED, THE CAPITAL ASSET BECAME THE PROPERTY OF THE APPELLA NT FIRM ONLY BY SUCCESSION WHICH DID FALL WITHIN THE AMBIT ( MODES) PRESCRIBED IN S.49(1) (III)(A) OF THE ACT. THE SAI D SECTION IMPLICITLY DENOTES THAT THE COST OF ACQUISITION OF T HE ASSET SHALL BE DEEMED TO BE THE COST FOR WHICH, THE PREVIOUS OW NER OF THE PROPERTY ACQUIRED IT I.E., THE PROPRIETOR OF THE ERS TWHILE PROPRIETARY CONCERN PAGE 6 OF 14 ITA NO.1024/BANG /2010 6 (II) IT WAS, FURTHER, SUBMITTED THAT THE RULING O F THE HONBLE APEX COURT IN THE CASE OF SUNIL SIDDHARTHBHAI V. C IT REPORTED IN (1985) 156 ITR 509 (SC) IS DIRECTLY APPLICABLE TO THE FACTS OF THE ISSUE UNDER CONSIDERATION. IT WAS STOUTLY DI SPUTED IN TAKING REFUGE IN THE RULING OF THE HONBLE MADRAS H IGH COURT REPORTED IN 234 ITR 711 (MAD) BY THE REVENUE WHICH I S CLEARLY DISTINGUISHABLE. FURTHER, IT WAS SUBMITTED THAT T HE LD. CIT (A) OUGHT TO HAVE HELD THAT THE IMMOVABLE PROPERTY HAVIN G BEEN ACQUIRED IN THE YEAR 1971, THE MARKET VALUE OF THE P ROPERTY AS IN 1971 AS INCREASED BY THE COST OF INFLATION INDEX AND OTHER EXPENSES FOR THE CONVERSION OF THE LAND FOR INDUSTR IAL USE SHOULD HAVE BEEN ALLOWED AS A DEDUCTION U/S 48 OF T HE ACT WHILE COMPUTING THE CAPITAL GAINS; AND THAT THE CIT (A) HAD, FURTHER, FAILED TO RECOGNIZE THAT THE VALUE TAKEN WAS SUPPOR TED BY A REGISTERED VALUERS REPORT AS ON THE DATE OF THE FO RMATION OF THE FIRM AND AS INCREASED BY THE COST OF INFLATION I NDEX, IF ANY, AS THE COST OF ACQUISITION FOR COMPUTATION OF CAPIT AL GAINS. (III) THE LD. SR. COUNSEL FURTHER ARGUED THAT THE CIT (A) FAILED TO APPRECIATE THAT THERE WAS NO COST OF ACQUISITION FOR THE FIRM SINCE THE ASSET WAS ALREADY IN THE BOOKS OF ACCOUNT OF THE PROPRIETARY CONCERN WHICH WAS, SUBSEQUENTLY, CONVERTE D INTO A PARTNERSHIP FIRM BY AN AGREEMENT OF PARTNERSHIP ENTE RED INTO BETWEEN THE ERSTWHILE PROPRIETOR AND THE NEW PARTNE RS WITHOUT CHANGE IN THE BOOK VALUE OF THE ASSET AND, THEREFOR E, THE BOOK VALUE OF THE ASSET AS ON THE DATE OF CONVERSION OF THE PROPRIETARY CONCERN INTO A PARTNERSHIP FIRM CANNOT B E TAKEN AS THE COST OF ACQUISITION OF THE ASSET. IN CONCLUSION, IT WAS FORCEFULL Y CONTENDED THAT THE LD. CIT (A) HAD FAILED TO APPRECIATE THAT THE EXISTING BUSINESS OF THE ERSTWHILE PROPRIETARY CONCERN HAS BEEN CONTINUED BY THE PARTNER SHIP FIRM AND NO NEW BUSINESS WAS COMMENCED BY THE PARTNERSHIP FIRM IN 19 81. THE LD. SR. COUNSEL, DURING THE COURSE OF HEARING, FURNISHED A PAPER BOOK CONTAINING 1 55 PAGES WHICH CONSIST OF, INTER ALIA, COPIES OF (I ) PARTNERSHIP DEED DATED PAGE 7 OF 14 ITA NO.1024/BANG /2010 7 1.4.1981; (II) COST INFLATION INDEX,; (III) CONVERS ION SANCTIONED CERTIFICATE; (IV) VALUATION REPORT ETC., 7.1. THE LD. D R PRESENT WAS HEARD. SHE WAS VERY SPECIFIC IN HER URGES THAT THE STAND OF THE AUTHORITIES BELOW ARE BACKING OF THE JUDICIAL PRONOUNCEMENTS ON A SIMILAR ISSUE AND, THEREFORE, P LEADED THAT THE CONCLUSION ARRIVED AT BY THE LD. CIT (A) REQUIRES NO INTERVENTION OF THIS BENCH AT THIS STAGE. 7.2. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS, ATTENTIVELY PERUSED THE RELEVANT CASE RECORDS, THE PAPER BOOK F URNISHED BY THE LD. COUNSEL AND ALSO THE CASE LAWS ON WHICH, THE RESPEC TIVE PARTIES HAVE PLACED THEIR UNSTINTED CONFIDENCE. 7.2.1. IT IS AN UNDISPUTED FACT THAT THERE WAS NO COST OF ACQUISITION FOR THE APPELLANT FIRM SINCE THE ASSET WAS ALREADY I N THE BOOKS OF ACCOUNT OF THE PROPRIETARY CONCERN WHICH WAS SUBSEQUENTLY CONVER TED INTO A PARTNERSHIP FIRM BY AN AGREEMENT OF PARTNERSHIP ENTE RED INTO BETWEEN THE ERSTWHILE PROPRIETOR OF THE PROPRIETARY CONCERN AND HIS FAMILY MEMBERS - THE NEW PARTNERS. HOWEVER, THERE WAS NO PARTITION AMONG THE FAMILY MEMBERS OF THE PROPRIETOR OF THE PROPRIETARY CONCERN . THERE WERE SALIENT DISTINGUISHING FEATURES, AS HIGHLIGHTED BY THE LD. COUNSEL THAT THE SUBJECT PROPERTY WAS NOT VALUED AS ON THE DATE OF FORMATION OF PARTNERSHIP FIRM. MOREOVER, THE BALANCE SHEET OF THE PROPRIETARY CONCE RN HAD BECOME THE BALANCE SHEET OF THE PARTNERSHIP FIRM WITHOUT ANY CH ANGE SUBJECT TO CAPITAL CONTRIBUTION. THE PROPERTY NOT HAVING BEEN REVALUED AT THE TIME OF CONVERTING THE PROPRIETARY CONCERN INTO A PARTNERSHI P FIRM WITHOUT ANY PAGE 8 OF 14 ITA NO.1024/BANG /2010 8 CHANGE SUBJECTED TO CAPITAL CONTRIBUTION AND THAT T HE PROPERTY NOT HAVING BEEN REVALUED, THE VALUE TAKEN IN THE BALANCE SHEET OF THE PARTNERSHIP FIRM WAS, EVIDENTLY, NOTIONAL. THIS IS QUITE CONTRAST TO THE FACTS OF THE CASE DEALT WITH BY THE HONBLE MADRAS HIGH COURT REPORTED IN (1998) 234 ITR 711 (MAD). IN THAT CASE, THERE WAS A FAMILY PARTIT ION AND THE ASSESSEE GOT HIS SHARE WHICH WAS VALUED WITH SOME COST. AS THE P ROPERTY BELONGED TO THE FIRM WAS TAKEN OUT AND WAS DIVIDED AMONG PARTNERS D URING THE SUBSISTENCE OF THE FIRM THE ASSESSEES ACCOUNT WAS DEBITED WITH RS.9400/- AND, THEREAFTER, HE HAD SOLD THAT PROPERTY FOR A CONSIDE RATION. CONSIDERING THE FACTS OF THE ISSUE, THE HONBLE MADRAS HIGH COURT H ELD THAT THE ASSESSEE WAS BOUND BY THE COST AS SHOWN IN THE BOOKS OF THE FIRM, AS WELL AS ITS OWN BOOKS AND THE VALUE WHICH THE PARTIES PUT FOR T HE LANDS WAS NOT A NOTIONAL ONE BUT A REAL ONE WHEREAS IN THE CASE ON HAND THE PROPERTY NOT HAVING BEEN REVALUED, THE VALUE TAKEN IN THE BALANC E SHEET OF THE PARTNERSHIP FIRM WAS, EVIDENTLY, NOTIONAL. WE ARE, THEREFORE, OF THE CONSIDERED VIEW THAT THE CASE LAW RELIED ON BY THE L D. CIT (A) TO JUSTIFY HIS STAND IS CLEARLY DISTINGUISHABLE. WE HAVE, WITH DUE RESPECTS, PERUSED THE RULING OF KALOORAM GOVINDRAM V. CIT REPORTED IN (19 65) 57 ITR 336 (SC). THE ISSUE BEFORE THE HONBLE COURT WAS OBVIOUSLY DIS TINGUISHABLE TO THE FACTS OF THE ISSUE ON HAND. 7.2.2. AT THIS JUNCTURE, WE WOULD LIKE TO RECALL T HE RULING OF THE HONBLE HIGHEST JUDICIARY OF THE COUNTRY IN THE CASE OF SUNIL SIDDHARTHBHAI V. CIT REPORTED IN (1985) 156 ITR 509 (SC). THE ISSUE OF INTRODUCTION OF CAPITAL ASSET BY PARTNER TO A FIRM, THE FIRM CREDITI NG MARKET PRICE OF ASSET TO THE PARTNER AS TO WHETHER IT AMOUNTS TO TRANSFER HAS BEEN DELIBERATED PAGE 9 OF 14 ITA NO.1024/BANG /2010 9 UPON IN AN EXHAUSTIVE MANNER BY THE HONBLE COURT W HICH EXTRACTED ARE AS UNDER: WHERE A PARTNER OF A FIRM MAKES OVER CAPITAL ASSET S WHICH ARE HELD BY HIM TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPITAL, THERE IS A TRANSFER OF A CAPITAL A SSET WITHIN THE TERMS OF S.45 OF THE ACT BECAUSE AN EXC LUSIVE INTEREST OF THE PARTNER IN PERSONAL ASSETS IS REDUC ED ON THEIR ENTRY INTO THE FIRM, INTO A SHARE INTEREST. T HE CONSIDERATION FOR THE TRANSFER F THE PERSONAL ASSET S IS THE RIGHT WHICH ARISES OR ACCRUES TO THE PARTNER DU RING THE SUBSISTENCE OF THE PARTNERSHIP TO GET HIS SHAR E OF THE PROFITS FROM TIME TO TIME AND, AFTER THE DISSOL UTION OF THE PARTNERSHIP OR WITH HIS RETIREMENT FROM THE PARTNERSHIP, TO GET THE VALUE OF HIS SHARE IN THE N ET PARTNERSHIP ASSETS AS ON THE DATE OF THE DISSOLUTIO N OR RETIREMENT AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES. THE CREDIT ENTRY MADE IN THE PARTNERS CA PITAL ACCOUNT IN THE BOOKS OF THE PARTNERSHIP FIRM DOES N OT REPRESENT THE TRUE VALUE OF THE CONSIDERATION IT I S A NOTIONAL VALUE ONLY, INTENDED TO BE TAKEN INTO ACCOU NT AT THE TIME OF DETERMINING THE VALUE OF THE PARTNERS SHARE IN THE NET PARTNERSHIP ASSETS ON THE DATE OF DISSOL UTION OR ON HIS RETIREMENT, A SHARE WHICH WILL DEPEND UPO N DEDUCTION OF THE LIABILITIES AND PRIOR CHARGES EXIS TING ON THE DATE OF DISSOLUTION OR RETIREMENT. IT IS NOT P OSSIBLE TO PREDICATE BEFOREHAND WHAT WILL BE THE POSITION I N TERMS OF MONETARY VALUE OF A PARTICULARS SHARE ON T HAT DATE. AT THE TIME WHEN THE PARTNER TRANSFERS HIS PERSONAL ASSET TO THE PARTNERSHIP FIRM, THERE CAN B E NO RECKONING OF THE LIABILITIES AND LOSSES WHICH THE F IRM MAY SUFFER IN THE YEARS TO COME. ALL THAT LIES WITHIN T HE WOMB OF THE FUTURE. IT IS IMPOSSIBLE TO CONCEIVE O F EVALUATING THE CONSIDERATION ACQUIRED BY THE PARTNER WHEN HE BRINGS HIS PERSONAL ASSET INTO THE PARTNERS HIP FIRM WHEN NEITHER CAN THE DATE OF DISSOLUTION OR RETIREMENT BE ENVISAGED NOR CAN THERE BE ANY ASCERTAINMENT OF LIABILITIES AND PRIOR CHARGES WHIC H MAY PAGE 10 OF 14 ITA NO.1024/BAN G/2010 10 NOT HAVE EVEN ARISEN YET. THEREFORE, THE CONSIDERA TION WHICH A PARTNER ACQUIRES ON MAKING OVER HIS PERSONA L ASSET TO THE FIRM AS HIS CONTRIBUTION TO ITS CAPITA L CANNOT FALL WITHIN THE TERMS OF SECTION 48. AND AS THAT P ROVISION IS FUNDAMENTAL TO THE COMPUTATION MACHINERY INCORPORATED IN THE SCHEME RELATING THE DETERMINATI ON OF THE CHARGE PROVIDED IN SECTION 45, SUCH A CASE MUST BE REGARDED AS FALLING OUTSIDE THE SCOPE OF CAPITAL GA INS TAXATION ALTOGETHER. AFTER APPLYING THE EARLIER RULI NG IN THE CASE OF CIT V. B.C. SRINIVASA SETTY (1981) 128 ITR 294 (SC), IT WAS HELD : ACCORDINGLY, THAT, WHEN THE ASSESSEE, A PARTNER IN A FIRM, MADE OVER TO THE FIRM CERTAIN SHARES IN A COM PANY WHICH WERE HELD BY HIM THERE WAS A TRANSFER OF THE SHARES, BUT THAT HE RECEIVED NO CONSIDERATION WITHI N THE MEANING OF SECTION 48. NOR ID ANY PROFIT OR GAIN AC CRUE TO HIM FOR THE PURPOSE OF SECTION 45. IF THE TRANSFER OF THE PERSONAL ASSET BY THE ASSESSE E TO A PARTNERSHIP IN WHICH HE IS OR BECOMES A PARTNER I S MERELY A DEVICE OR RUSE FOR CONVERTING THE ASSET INT O MONEY WHICH WOULD SUBSTANTIALLY REMAIN AVAILABLE FOR HIS BENEFIT WITHOUT LIABILITY TO INCOME-TAX ON A CAPITAL GAIN, IT WILL BE OPEN TO THE INCOME-TAX AUTHORITIES TO GO BE HIND THE TRANSACTION AND EXAMINE WHETHER THE TRANSACTION OF CREATING THE PARTNERSHIP IS A GENUINE OR A SHAM TRANSACTION AND, EVEN WHERE THE PARTNERSHIP IS GENU INE, WHETHER THE TRANSACTION OF TRANSFERRING THE PERSONA L ASSET TO THE PARTNERSHIP FIRM REPRESENTS A REAL ATT EMPT TO CONTRIBUTE TO THE SHARE CAPITAL OF THE PARTNERSH IP FIRM FOR THE PURPOSE OF CARRYING ON THE PARTNERSHIP BUSINESS OR IS NOTHING BUT A DEVISE OR RUSE TO CONV ERT THE PERSONAL ASSET INTO MONEY SUBSTANTIALLY FOR THE BENEF IT OF THE ASSESSEE WHILE EVADING TAX ON A CAPITAL GAIN . THE INCOME-TAX OFFICER WILL BE ENTITLED TO CONSIDER ALL THE RELEVANT INDICIA IN THIS REGARD. PAGE 11 OF 14 ITA NO.1024/BAN G/2010 11 7.2.3. IN THE CASE ON HAND, THE ERSTWHIL E OWNER OF THE PROPRIETARY CONCERN MADE OVER HIS CAPITAL ASSET WHICH WAS HELD BY HIM INTO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TOWARDS CAPITA L, THE CREDIT ENTRY MADE IN THE PARTNERS CAPITAL ACCOUNT IN THE BOOKS OF TH E PARTNERSHIP FIRM DID NOT REPRESENT THE TRUE VALUE OF THE CAPITAL ASSET. 7.2.4. WITH REGARD TO THE APPLICABILITY OF THE PROVISIONS OF S.45 (3) OF THE ACT, WE FIND THAT THE SAID PROVISION WAS INSERT ED BY THE FINANCE ACT 1987 W.E.F. 1.4.1988 AND, THEREFORE, IT HAS NO RELEVANCE TO THE CAPITAL ASSET OF THE PROPRIETARY CONCERN BECAME THE ASSET O F THE PARTNERSHIP FIRM WAY BACK ON 1.4.1981 . FOR APPRECIATION OF FACTS, THE AMENDED PROVISION OF S.45(3) OF THE ACT READS AS UNDER: (3) THE PROFITS OR GAINS ARISING FROM THE TRANSFE R OF A CAPITAL ASSET BY A PERSON TO A FIRM OR OTHER ASSOCIA TION OF PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY O R A CO-OPERATIVE SOCIETY) IN WHICH HE IS OR BECOMES A P ARTNER OR MEMBER, BY WAY OF CAPITAL CONTRIBUTION OR OTHERWIS E, SHALL BE CHARGEABLE TO TAX AS HIS INCOME OF THE PRE VIOUS YEAR IN WHICH SUCH TRANSFER TAKES PLACE AND, FOR THE PURPOSE OF SECTION 48, THE AMOUNT RECORDED IN THE B OOKS OF ACCOUNT OF THE FIRM, ASSOCIATION OR BODY AS THE V ALUE OF THE CAPITAL ASSET SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESU LT OF THE TRANSFER OF THE CAPITAL ASSET. 7.2.5. AS STOUTLY ADVOCATED BY THE LD. COUNS EL FOR THE APPELLANT FIRM, THE PROVISIONS OF S. 55(2)(B) (I) OF THE ACT ARE RE LEVANT TO THE ISSUE UNDER CONSIDERATION. S.55 (2)(B) OF THE ACT READS AS UND ER: PAGE 12 OF 14 ITA NO.1024/BAN G/2010 12 (B) IN RELATION TO ANY OTHER CAPITAL ASSET,- (I) WHERE THE CAPITAL ASSET BECAME THE PROPERTY OF T HE ASSESSEE BEFORE THE 1 ST DAY OF APRIL, 1981 MEANS THE COST OF ACQUISITION OF THE ASSET TO THE ASSESSEE OR THE FAIR MARKET VALUE OF THE ASSET ON THE 1 ST DAY OF APRIL, 1981 AT THE OPTION OF THE ASSESSEE. (EMPHASIS UNDERLINED) 7.2.6. ON THE OTHER HAND, THE LD. AO HAD RELIED ON THE RULING OF THE HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF RAJ DOOT HOTEL ENTERPRISE CORPORATION V. CIT CITED SUPRA TO JUSTIFY HIS STAN D. THE ISSUE BEFORE THE HONBLE COURT, IN BRIEF, WAS THAT THE ASSESSEE FIRM CONSISTED OF EIGHT PARTNERS AND WAS CONSTITUTED IN 1967. THE PARTNERS OF THE FIRM HAD PURCHASED A PIECE OF LAND FOR A SUM OF RS.1.25 LAKH S IN 1965. THE PARTNERS TRANSFERRED THE LAND TO THE FIRM. A LAND ACCOUNT W AS OPENED IN THE BOOKS OF THE FIRM TO WHICH THE SUM OF RS.2 LAKHS WAS DEBITED AND A CORRESPONDING CREDIT WAS GIVEN TO THE CAPITAL ACCOUNTS OF THE EIG HT PARTNERS TO THE EXTENT OF THE SHARE OF EACH PARTNER IN THE OWNERSHIP OF TH E LAND. IN 1970, THE LAND WAS SOLD BY THE ASSESSEE FOR RS.2 LAKHS. THE INCOME -TAX OFFICER HELD THAT THE TRANSACTION HAD RESULTED IN A GAIN OF RS.75000/ - TO THE ASSESSEE WHICH WAS TAXABLE AND THIS WAS UPHELD BY THE TRIBUNAL. ON A REFERENCE: THE HONBLE COURT HAD HELD THAT IN THE INSTANT CASE , ALL THE EIGHT PARTNERS OF THE ASSESSEE BROUGHT THE PARC EL OF LAND OF WHICH THEY WERE CO-OWNERS INTO THE PARTNERSH IP FIRM AS THEIR CONTRIBUTION TO THE CAPITAL. THE AMO UNT OF SUCH CONTRIBUTIONS TO BE CREDITED INTO THE ACCOUNT OF EACH PARTNER WAS AGREED UPON BY ALL THE PARTNERS AND THIS TRANSACTION HAD BEEN FOUND TO BE A GENUINE TRANSACT ION. THE COST OF ACQUISITION OF THE LAND INCURRED BY THE ASSESSEE WAS RS.2 LAKHS. PAGE 13 OF 14 ITA NO.1024/BAN G/2010 13 7.2.7. WITH DUE RESPECTS, WE HAVE ALSO PERUSED THE RULING OF THE HONBLE MADHYA PRADESH HIGH COURT WHICH WAS ENTIRELY ON THE DIFFERENT FOOTING AND NO RELEVANCE TO THE ISSUE ON HAND IN TH E SENSE THAT IN THE PRESENT CASE UNDER CONSIDERATION THE ASSET WAS NOT VALUED AS ON THE DATE OF FORMATION OF PARTNERSHIP FIRM AND THE ENTIRE BALANC E SHEET OF THE PROPRIETOR BECAME THE BALANCE SHEET OF THE FIRM WIT HOUT ANY CHANGE. WE ARE, THEREFORE, OF THE FIRM VIEW THAT THE AO HAD TA KEN THE CUE FROM THE ABOVE RULING, PERHAPS, BY A WRONG NOTION WITHOUT ANY APPRECIATION OF FACTS. 7.2.8. IN AN OVERALL CONSIDERATION OF THE FACTS AN D CIRCUMSTANCES OF THE ISSUE AS DISCUSSED IN THE FOREGOING PARAGRAPHS, WE ARE OF THE CONSIDERED VIEW THAT THE LD. AO HAD NOT EXAMINED AS TO WHETHER THE COST VALUE GIVEN BY THE ASSESSEE FIRM IS CORRECT OR OTHERWISE, IN STEAD , HE HAD ADOPTED THE BOOK VALUE AS ON 1.4.1981. IN VIEW OF THE ABOVE, THE ISSUE IS REMITTED BACK TO THE FILE OF THE AO WITH A SPECIFIC DIRECTION TO EXAMINE AS TO WHETHER THE VALUE [FMV] SHOWN BY THE ASSESSEE FIRM IS CORRECT AS ON 1.4.1981 AND TO TAKE APPROPRIATE ACTION IN ACCORDANCE WITH THE PROV ISIONS OF THE ACT AT THAT RELEVANT PERIOD., THE LD. AO SHALL, HOWEVER, KEEP IN VIEW THE RULING OF THE HONBLE SUPREME COURT [ 156 ITR 509] AS WELL AS T HE FINDING OF THIS BENCH CITED SUPRA WHILE DECIDING THE ISSUE. IT IS ORDERE D ACCORDINGLY. 8. IN THE RESULT , THE APPELLANT FIRMS APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH DAY OF JANUARY, 2012. SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER PAGE 14 OF 14 ITA NO.1024/BAN G/2010 14 COPY TO:- 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONC ERNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.