DLF Universal Ltd., V. DCIT, Central Circle-13,

ITA 2546/DEL/2001

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2364 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-06-2009
• Assessment Year: 1997-1998
• Appeal Filed On: 12-06-2001
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N P SWAHNEY SR; PRAKASH Y
• Assessee Lawyers: S K SHARMA ARS
• Keywords: Capital asset; Business income; Depreciation; Double taxation relief; Opportunity of being heard; Question of law; Cost of acquisition; Date of conversion; Difference of opinion; Valuation report; Capital receipt; Set aside; Liquidation; Capital Gains
• Section: 45(2); 143(3); 2(14); 205; 195; 201; 251; 191; 207; 208; 192; 64; 28

Judgement Text

ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 1 OF 230 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: B: SPECIAL BENCH NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI C.L. SETHI, JUDICIAL MEMBER AND SHRI DEEPAK R. SHAH, ACCOUNTANT MEMBER ITA NO. 3622/DEL/1995 ASSESSMENT YEAR: 1992-93 ITA NO. 2546/DEL/2001 ASSESSMENT YEAR: 1997-98 ITA NO. 3233/DEL/2001 ASSESSMENT YEAR: 1998-99 ITA NO. 267/DEL/2003 ASSESSMENT YEAR: 1999-2000 AND ITA NO. 4986/DEL/2003 ASSESSMENT YEAR: 2000-01 DLF UNIVERSAL LIMITED, DLF CENTRE, 9 TH FLOOR, SANSAD MARG, NEW DELHI VS. DY. COMMISSIONER OF INCOME TAX, SPECIAL RANGE (CENT.) I, MAYUR BHAWAN, NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI PRADEEP DINODIA, FCA SHRI R.K. KAPOOR AND SHRI S.K. SHARMA, ARS RESPONDENT BY: SHRI N.P. SWAHNEY, SR. STANDING COUNSEL AND SHRI PRAKASH YADAV, JR. STANDING COUNSEL ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 2 OF 230 O R D E R PER C. L. SETHI, JUDICIAL MEMBER THE HONBLE PRESIDENT, ITAT, VIDE ORDER DATED 15.06 .2008 AS MODIFIED BY HIS ORDER DATED 06.03.2009 HAS CONSTITU TED THE SPECIAL BENCH IN THE ABOVE REFERRED APPEALS TO DISPOSE OF ALL THE APPEALS IN ENTIRETY, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN ACC ORDANCE WITH LAW (INCLUDING DIRECTIONS OF HONBLE HIGH COURT IN THE MATTER). ITA NO. 3622/DEL/1995 2. FIRSTLY, WE TAKE UP THE APPEAL PERTAINING TO THE A SSESSMENT YEAR 1992-93. 3. IN THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESS MENT YEAR 1992-93, GROUND NO. 1 DIVIDED INTO SUB-GROUND NO. 1.1 TO 1.7 READ AS UNDER:- 1.1 THAT THE LEARNED CIT(A) HAS ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN ACCORDANCE WITH TH E PROVISIONS OF LAW AND PAST HISTORY OF THE CASE IN C ONFIRMING THE ADDITION OF RS. 6,01,78,261/- BEING THE SURPLUS ARISING ON LAND BROUGHT INTO THE COMMON STOCK OF THE PARTNERSH IP FIRM M/S. DLF COMMERCIAL DEVELOPERS. 1.2 THAT THE LEARNED CIT(A) HAS ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN ACCORDANCE WITH TH E ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 3 OF 230 PROVISIONS OF LAW IN HOLDING THAT THE STOCK IN HAND BROUGHT INTO THE COMMON STOCK OF THE PARTNERSHIP BY THE COM PANY BY CREDIT, AT AN AGREED VALUE, TO THE COMPANYS CAPITA L ACCOUNT AMOUNTED TO A TRANSFER OF THE ASSET TO THE PARTNERS HIP GIVING RISE TO A TAXABLE PROFIT. 1.3 THAT THE LEARNED CIT(A) HAS ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN ACCORDANCE WITH TH E PROVISIONS OF LAW IN HOLDING THAT THE AMOUNT OF RS. 6,01,78,261/- DETERMINED FOR CREDIT TO THE CAPITAL ACCOUNT IS A CONSIDERATION AND A PROFIT DERIVED FROM THE BUSIN ESS AND IN ANY CASE A BENEFIT ARISING TO THE APPELLANT FROM SU CH BUSINESS. 1.4 THAT THE LEARNED CIT(A) HAS ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN ACCORDANCE WITH TH E PROVISIONS OF LAW IN HOLDING THAT THE BRINGING OF T HE INDIVIDUAL ASSETS INTO THE COMMON STOCK OF PARTNERS HIP GIVES RISE TO A PROFIT IN THE COMMERCIAL SENSE WITHOUT AP PRECIATING THAT IN 156 ITR 509, IT HAS BEEN CLEARLY HELD THAT SUCH A TRANSACTION DOES NOT AMOUNT TO A SALE AND THAT WHAT EVER IS BROUGHT INTO THE PARTNERSHIP CEASES TO BE THE EXCLU SIVE PROPERTY OF THE PERSON WHO BROUGHT IT IN, THAT IS, AN EXCLUSIVE INTEREST IS REDUCED TO A SHARED INTEREST. 1.5 WITHOUT PREJUDICE TO THE ABOVE, IT IS RESPECTFULLY PRAYED THAT THE CIT(A) IS CLEARLY IN ERROR IN HOLDING THAT THE ENTIRE SURPLUS IS ASSESSABLE IN THE YEAR UNDER APPEAL. 1.6 THAT THE LEARNED CIT(A) HAS ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN ACCORDANCE WITH TH E PROVISIONS OF LAW IN HOLDING THAT IN CASE OF STOCK IN TRADE THERE IS NO DIFFICULTY IN COMPUTATION OF THE PROFIT U/S 28 WITHOUT APPRECIATING THAT IN 156 ITR 509, IT HAS BE EN SPECIFICALLY HELD BY THE HONBLE SUPREME COURT THAT NOTWITHSTANDING THE TRANSFER, THERE WOULD BE NO CONSIDERATION IN SUCH CASES AVAILABLE TO THE PARTNE R DURING THE SUBSISTENCE OF THE PARTNERSHIP AND HIS RIGHTS A RE LIMITED TO GETTING HIS SHARE OF PROFIT. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 4 OF 230 1.7 THAT THE LEARNED CIT(A) HAS ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN ACCORDANCE WITH TH E PROVISIONS OF LAW AND WITHOUT RAISING THE ISSUE, IN HOLDING THAT THE FIRM IS NOT GENUINE IN AS MUCH AS IT IS FO RMED WITH THE SOLE OBJECTIVE OF EVADING PAYMENT OF TAXES. 4. BRIEFLY STATED, APROPOS THE ISSUE INVOLVED IN GROUN D NO. 1.2 TO 1.7 OF THE APPEAL OF THE ASSESSEE, THE FACTS ARE THAT T HE ASSESSEE, A COMPANY, IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT, AND HOLD CERTAIN LANDS AS STOCK IN TRADE. BY A MEMORANDUM OF THE PARTNERS HIP EXECUTED ON 23 RD DAY OF MARCH, 1992, MADE EFFECTIVE FROM 16 TH DAY OF MARCH, 1992, THE ASSESSEE COMPANY ENTERED INTO PARTNERSHIP WITH FOUR OF ITS SUBSIDIARIES COMPANIES AND ONE INDIVIDUAL. THE ASSESSEE CONTRIBU TED ALL ITS RIGHT IN THE FIVE PLOTS OF LAND ADMEASURING ABOUT 16.98 ACRES IN CLUDING THE AREA OF LAND OWNED BUT IT, SITUATED IN DLF QUTAB ENCLAVE CO MPLEX, HEREINAFTER REFERRED TO AS SAID LAND, VALUED AT RS. 11.50 CRO RES AS CAPITAL CONTRIBUTION TO A NEWLY CONSTITUTED PARTNERSHIP FIR M VIZ., M/S. DLF COMMERCIAL DEVELOPERS, IN WHICH THE ASSESSEE BECAME A PARTNER WITH SHARE OF 76%. ALL THE RIGHT IN THE SAID PLOT OF LA ND BECAME THE PROPERTY OF THE PARTNERSHIP FIRM WITH EFFECT FROM 16THE DAY OF MARCH, 1992. THE ASSESSEES CONTRIBUTION OF CAPITAL IN THE NEWLY CON STITUTED FIRM REPRESENTED ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 5 OF 230 THE MARKET VALUE OF THE SAID PLOT OF LAND. THE MAR KET VALUE WAS DETERMINED AT RS. 11.50 CRORE. IN THE ASSESSEES B OOKS OF ACCOUNT, THE SAID LAND CONTRIBUTED TOWARDS CAPITAL IN THE PARTNERSHIP FIRM WAS SHOWN AT A COST OF RS. 4,40,62,419/-. THE SAID NEWLY CONSTITU TED PARTNERSHIP FIRM CREDITED THE CAPITAL ACCOUNT OF THE ASSESSEE COMPAN Y BY RS. 11.50 CRORES BEING THE VALUE OF THE LAND CONTRIBUTED BY THE ASSE SSEE AS CAPITAL. THE ASSESSEE ALSO RECORDED THE VALUE OF SAID LAND CONTR IBUTED AS CAPITAL IN THE FIRM AT RS. 11.50 CRORES IN ITS BOOKS, AND THE SURP LUS AMOUNTING TO RS. 6.01 CRORE WAS CREDITED TO THE PROFIT AND LOSS ACCO UNT, BUT, WAS CLAIMED AS NOT EXIGIBLE TO TAX IN THE RETURN OF INCOME FILED B Y THE ASSESSEE. THE ASSESSEE CLAIMED THE SURPLUS BEING DIFFERENCE BETWE EN THE VALUE AT WHICH THE LAND WAS CREDITED IN ASSESSEES CAPITAL ACCOUNT IN THE FIRM IN WHICH ASSESSEE BECAME A PARTNER AND THE BOOK-VALUE, CREDI TED IN ITS PROFIT AND LOSS ACCOUNT TO BE EXEMPTED FROM TAX RELYING UPON T HE DECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS. HIND CONS TRUCTION LTD. 83 ITR 211 (SC). ACCORDING TO THE ASSESSEE, THE SURPLUS O F RS. 6.01 CRORES WAS NOT ITS INCOME LIABLE TO TAX AS THERE WAS NO SALE O R TRANSFER OF LAND IN LAW AS THERE COULD BE NO SALE TO SELF. THE ASSESSEE AL SO SUBMITTED BEFORE THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 6 OF 230 A.O. THAT IDENTICAL CONTROVERSY HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN THE ASSESSMENT YEAR 1985-86. HOWEVER, THE A.O., AFTER CONSIDERING THE FACTS THAT IN ITS BOOKS, THE ASSESSEE HAS CREDITED THE SURPLUS IN THE PROFIT AND LOSS ACCOUNT AND UTILIZED THIS INCOME FOR DECLA RING DIVIDEND, HAS TREATED THIS SURPLUS AMOUNTING TO RS. 6.01 CRORE AS PROFIT DERIVED FROM THE TRANSFER OF LANDS TO THE FIRM BY THE RELYING UPON T HE JUDGMENT OF THE HONBLE APEX COURT IN THE CASE OF SUNIL SIDHHARTH B HAI VS. CIT REPORTED IN 156 ITR 509. THE A.O. WHILE TREATING THIS AMOUN T OF RS. 6.01 CRORE AS PROFIT CHARGEABLE TO TAX ALSO RELIED UPON THE PROVI SION OF SUB-SECTION (3) OF SECTION 45 OF THE INCOME-TAX ACT, WHICH WAS INSERTE D IN THE INCOME-TAX ACT WITH EFFECT FROM 01.04.1988. THE A.O. HAD ALSO TAKEN A VIEW THAT THE NEW PARTNERSHIP FIRM CONSTITUTED IN THE NAME AND ST YLE M/S. DLF COMMERCIAL DEVELOPERS WAS A BOGUS PARTNERSHIP OR A SHAM PARTNERSHIP AND THE TRANSACTION WAS NOT GENUINE. IN THIS CONNE CTION, THE A.O. PLACED RELIANCE ON THE DECISION OF APEX COURT IN THE CASE OF MCDOWELL AND COMPANY REPORTED IN 154 ITR 148 (SC). THE A.O. FURT HER HELD THAT HE WAS NOT FOLLOWING THE DECISION OF LD. CIT(A) FOR TH E ASSESSMENT YEAR ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 7 OF 230 1985-86, BECAUSE THAT DECISION HAS NOT BECOME FINAL AS THE ORDER OF THE LD. CIT(A) WAS PENDING BEFORE THE ITAT. 5. ON AN APPEAL, THE LD. CIT(A) UPHELD THE ORDER OF TH E A.O., FIRSTLY, ON THE REASONING THAT THE ASSESSEE COMPANY HAD SHOW N THE SURPLUS AS ITS INCOME IN ITS PROFIT AND LOSS ACCOUNT BY MAKING APP ROPRIATE CREDITS TO THE PROFIT AND LOSS ACCOUNT, AND ON COMMERCIAL PRINCIPL ES, THE SURPLUS REPRESENTS THE BUSINESS PROFIT AS HAS BEEN TREATED AS SUCH BY THE ASSESSEE; SECONDLY, ON THE REASONING THAT THE RATIO OF THE DE CISION IN THE CASE OF HIND CONSTRUCTION COMPANY (SUPRA) WAS NOT APPLICABL E TO THE FACTS OF THE ASSESSEES CASE AS THERE WERE VITAL DISTINGUISHING FEATURES AS DETAILED BY THE A.O. IN HIS ORDER; THIRDLY, ON THE REASONING TH AT AFTER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDHHART H BHAI (SUPRA), THE DECISION OF THE HIND CONSTRUCTION LTD. (SUPRA) STAN DS MODIFIED TO THAT EXTENT; FOURTHLY, ON THE REASONING THAT SINCE THE L AND SO TRANSFERRED REPRESENTED THE STOCK IN TRADE OF THE ASSESSEE, THE PROFITS WERE CHARGEABLE TO TAX U/S 28 OF THE ACT, WHICH STANDS ON DIFFERENT FOOTING WITH THE GAINS ARISING FROM THE TRANSFER OF CAPITAL OR FIXED ASSET S, AND LASTLY, ON THE REASONING THAT THE PRESENT PARTNERSHIP FIRM NEWLY C ONSTITUTED IS NOT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 8 OF 230 GENUINE IN AS MUCH AS IT HAS BEEN CONSTITUTED OR FO RMED WITH THE SOLE OBJECT OF EVADING PAYMENT OF TAXES AND, THEREFORE, THE ASSESSEES RELIANCE ON THE RATIO IN THE CASE OF HIND CONSTRUCTION COMPA NY (SUPRA) WAS TOTALLY OUT OF CONTEXT AND IRRELEVANT. 6. BEING AGGRIEVED, THE ASSESSEE HAS PREFERRED THIS A PPEAL BEFORE THE TRIBUNAL, AND THE TRIBUNAL VIDE ORDER DATED 30.03.2 007 DISMISSED THIS GROUND RAISED BY THE ASSESSEE AND UPHELD THE ORDER OF THE LD. CIT(A) BY DECIDING THE ISSUE AGAINST THE ASSESSEE. THE TRIBU NAL VIDE ORDER DATED 30.03.2007, DECIDED THE ISSUE AGAINST THE ASSESSEE ON MERITS IN THE LIGHT OF DETAILED REASONING GIVEN IN PARA NO. 6 TO 29 OF THA T ORDER. THE TRIBUNAL DECLINED TO ACCEPT THE CONTENTION OF THE ASSESSEE, IN THE LIGHT OF INSERTION OF SECTION 45(3) OF THE ACT WITH EFFECT FROM 1.04.1 988, AND FURTHER THAT SOME OF THE DECISIONS CITED BEFORE THE TRIBUNAL IN THE ASSESSMENT YEAR 1992-93 WERE NOT CONSIDERED IN THE EARLIER ASSESSME NT YEAR 1985-86 AND THE ISSUE WAS NOT MUCH DELIBERATED UPON BY THE TRIB UNAL IN THAT EARLIER YEAR. 7. AGAINST THE ORDER OF THE TRIBUNAL DATED 30.03.2007 , THE ASSESSEE PREFERRED AN APPEAL BEFORE THE HONBLE HIGH COURT, AND THEIR LORDSHIP ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 9 OF 230 VIDE ORDER DATED 11.01.2008 SET ASIDE THE ORDER OF THE TRIBUNAL AND REMITTED THE MATTER TO THE TRIBUNAL FOR A FRESH CON SIDERATION IN ACCORDANCE WITH LAW BY OBSERVING AS UNDER:- THE QUESTION THAT AROSE ON THE MERITS OF THE CASE BEFORE THE TRIBUNAL WAS WHETHER ON REVALUATION OF T HE STOCK IN TRADE OF THE ASSESSEE, THE ASSESSING OFFIC ER WAS JUSTIFIED IN MAKING AN ADDITION OF RS. 6.01 CRORES. AN IDENTICAL ISSUE HAD ARISEN IN THE CASE OF THE ASSESSEE, THOUGH IN RESPECT OF A DIFFERENT AMOUNT F OR THE ASSESSMENT YEAR 1985-86. IN RESPECT OF THAT ASSESS MENT YEAR, THE ASSESSING OFFICER MADE AN ADDITION, BUT T HAT WAS SET ASIDE BY THE COMMISSIONER OF INCOME TAX (APPEALS) BY A DETAILED ORDER DATED 29 TH OCTOBER, 1990. AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS), THE REVENUE PREFERRED AN APPEAL WHICH WAS HEARD AND DISMISSED B Y THE TRIBUNAL ON 31 ST JANUARY, 2001 BEING APPEAL NO. 873/DEL/1991 RELEVANT FOR THE ASSESSMENT YEAR 1985- 86. THE TRIBUNAL DID NOT GIVE ITS OWN REASONS WHILE DISPOSING OF THE APPEAL OF THE REVENUE BUT RELIED U PON THE BASIS AND REASONS GIVEN BY THE COMMISSIONER, WH ICH IT FOUND TO BE SOUND AND CONVINCING, SO AS NOT TO W ARRANT ANY INTERFERENCE WITH THE ORDER PASSED BY THE COMMISSIONER. WHEN THE SAME ISSUE AROSE IN THE PRESENT ASSESSMENT YEAR 1992-93, THE ASSESSING OFFICER AGAI N TOOK A VIEW WHICH WAS NOT FAVOURABLE TO THE ASSESSE E WITH THE RESULT THAT THE ASSESSEE PREFERRED AN APPE AL BEFORE THE COMMISSIONER, BUT BY AN ORDER DATED 10 TH ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 10 OF 230 MARCH, 1995 THE COMMISSIONER DISMISSED THE APPEAL O F THE ASSESSEE. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND ONE OF THE POINTS URGED BY THE ASSESSEE WAS THAT SINCE THE ISSUE RAISED IN 1985-8 6 WAS IDENTICAL, THE ORDER PASSED BY THE TRIBUNAL IN RESP ECT OF THAT YEAR SHOULD BE FOLLOWED BY THE TRIBUNAL IN THI S YEAR ALSO. THE TRIBUNAL CONSIDERED THAT CONTENTION IN PARAGRAPHS 30 TO 32 OF ITS ORDER AND REJECTED IT ON THREE GROUNDS; FIRSTLY, THAT ON THE EARLIER OCCASION THE COMMISSIONER HAD NOT TAKEN INTO CONSIDERATION AN AMENDMENT TO SECTION 45(3) OF THE ACT WHICH CAME IN TO FORCE FROM 1 ST APRIL, 1988 WHICH WAS, THEREFORE, NOT APPLICABLE IN RESPECT OF THE ASSESSMENT YEAR 1985-8 6; SECONDLY, THAT SOME OF THE DECISIONS CITED BEFORE T HE TRIBUNAL IN THE PRESENT MATTER WERE NOT CITED ON TH E EARLIER OCCASION; THIRDLY, THAT THE ISSUE RAISED WA S SENSITIVE AND WAS NOT DELIBERATED UPON BY THE TRI BUNAL ON THE EARLIER OCCASION. ON THIS BASIS, THE TRIBUN AL DECLINED TO FOLLOW THE ORDER PASSED IN RESPECT OF T HE ASSESSMENT YEAR 1985-86. IT IS NOW WELL SETTLED THAT WHEN ONE BENCH OF THE TRIBUNAL TAKES A VIEW, THEN ANOTHER BENCH OF THE TRIBUNAL CANNOT PASS A CONTRARY ORDER BUT MUST, IF IT DISAGREES WITH THAT VIEW, HAVE THE CONFLICT RESOLVE D BY REFERRING THE MATTER TO A LARGER BENCH. THIS IS NO T ONLY A MATTER OF JUDICIAL PROPRIETY BUT ALSO A MATTER OF J UDICIAL DISCIPLINE. IN UNION OF INDIA VS. SHRI P.D. SHARMA & ORS., 2004 III AD (DELHI) 131, A DIVISION BENCH OF THIS C OURT OBSERVED AS FOLLOWS:- IT IS NOW TRITE LAW THAT A COORDINATE BENCH OF THE TRIBUNAL CANNOT TAKE A VIEW CONTRARY TO A VIEW EXPRESSED BY EARLIER BENCH RENDERED EARLIER. IN ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 11 OF 230 CASE IT DIFFERS FROM THE DECISION OF THE EARLIER BENCH, THE ONLY COURSE OPEN TO IT TO IS TO REFER TH E MATTER TO A LARGER BENCH. IN SUNDARJAS KANYALAL BHATIA & ORS. VS. COLLECTOR, THANE, (1989) 3 SCC 396, THE SUPREME COU RT HELD AS FOLLOWS: THE JUDICIAL DECORUM AND LEGAL PROPRIETY DEMAND THAT WHERE A LEARNED SINGLE JUDGE OR A DIVISION BENCH DOES NOT AGREE WITH THE DECISION OF BENCH OF CO-ORDINATE JURISDICTION, THE MATTER SHALL BE REFERRED TO A LARGER BENCH. IT IS SUBVERSION OF JUDICIAL PROCESS NOT TO FOLLOW THIS PROCEDURE. (EMPHASIS SUPPLIED) IN ARRIVING AT THIS CONCLUSION, THE SUPREME COURT RELIED UPON TWO OF ITS EARLIER DECISIONS, NAMELY, MAHADEOLAL KANODIA VS. ADMINISTRATOR GENERAL OF WES T BENGAL, AIR 1960 SC 936 AND LALA SHRI BHAGWAN VS. RAM CHAND, AIR 1965 SC 1767. UNDER THESE CIRCUMSTANCES, WE ANSWER THE QUESTION IN THE NEGATIVE AND REMIT THE MATTER TO TH E TRIBUNAL FOR A FRESH CONSIDERATION IN ACCORDANCE WI TH LAW. 8. IN PURSUANCE TO THE AFORESAID ORDER OF THE HONBLE HIGH COURT, THE MATTER COME UP AGAIN BEFORE THE TRIBUNAL FOR ITS FR ESH CONSIDERATION AND DECISION. 9. WHEN THE APPEAL AGAIN CAME UP BEFORE THE DIVISION BENCH IN PURSUANCE TO THE AFORESAID HIGH COURTS ORDER, THE DIVISION BENCH ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 12 OF 230 OBSERVED THAT SINCE THE TRIBUNAL FOR THE REASONS RE CORDED IN THE ORDER PASSED FOR THE ASSESSMENT YEAR 1992-93 HAD TAKEN A VIEW CONTRARY TO THE VIEW TAKEN BY THE TRIBUNAL IN THE ASSESSMENT YEAR 1 985-86, THE MATTER NEEDS TO BE RESOLVED BY A LARGER BENCH. THE DIVISI ON BENCH THEN RECOMMENDED THE HONBLE PRESIDENT TO CONSTITUTE A S PECIAL BENCH TO DECIDE THE FOLLOWING QUESTION AS WELL AS TO DECIDE THE WHOLE APPEAL:- WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE ASSESSEE THE SURPLUS ARISING FROM LAND BROUGHT INTO THE COMMON STOCK OF THE PARTNERSHIP FIRM, M/S. DLF COMMERCIAL DEVELOPERS, BY CREDIT, AT AN AGREED VALUE, TO THE COMPANYS CAPITAL ACCOUNT AMOUNTED TO A TRANSFER OF THE ASSET TO THE PARTNERSHIP GIVE RISE TO A TAXABLE PROFIT? 10. IT IS IN THE ABOVE CIRCUMSTANCES THAT HONBLE PRES IDENT CONSTITUTED THE SPECIAL BENCH TO DISPOSE OFF THE ENTIRE APPEAL FOR A.Y. 1992-93, AND ALSO APPEALS FOR OTHER ASSESSMENT YEARS REFERRED TO IN THE CAUSE TITLE HERETO, AND WHILE DISPOSING OFF THE APPEALS IN ENTIRETY, TH E SPECIAL BENCH WAS DIRECTED TO CONSIDER THE FOLLOWING QUESTION ALSO:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE SURPLUS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 13 OF 230 ARISING ON REVALUATION OF THE LAND, HELD BY THE ASSESSEE AS STOCK-IN-TRADE AND BROUGHT INTO THE COMMON STOCK OF THE PARTNERSHIP FIRM M/S DLF COMMERCIAL DEVELOPERS, AND BY CREDIT, AT AN AGREED VALUE, TO THE ASSESSEES CAPITAL ACCOUNT, AMOUNTED TO A TRANSFER OF THE ASSET TO THE PARTNERSHIP FIRM AND CAN BE ASSESSED AS THE BUSINESS PROFITS OF THE ASSESSEE? 11. THE MATTER WAS THEN HEARD AT LENGTH BY THE SPECIAL BENCH ON VARIOUS DATES I.E. 14.10.2008, 20.10.2008, 11.11.20 08, 17.11.2008 AND LASTLY ON 18.11.2008. HOWEVER, IN THE COURSE OF DI CTATING THE ORDER, IT WAS FELT THAT THE QUESTION FRAMED AS ABOVE WAS RESTRICT ING POWERS OF THE BENCH TO CONSIDER ALL ASPECTS OF THE MATTER INVOLVED IN G ROUND NO. 1.1 TO 1.7 IN AS MUCH AS, IN THE QUESTION, A LIMITED ISSUE WAS FRAME D TO DECIDE AS TO WHETHER SURPLUS FROM THE CONTRIBUTION OF LAND TO A FIRM CAN BE ASSESSED AS BUSINESS PROFITS OF THE ASSESSEE, THOUGH, IN THE CO URSE OF HEARING OF THE APPEAL, RELIANCE WAS PLACED BY THE DEPARTMENT UPON THE APPLICABILITY OF SECTION 45(3) OF THE ACT, AS SO REFERRED TO AND REL IED UPON BY THE AUTHORITIES BELOW IN THEIR ORDERS, AND ALSO REFERRE D TO BY THE TRIBUNAL IN ITS ORDER DATED 30.03.2007 PASSED IN FIRST ROUND OF THI S APPEAL. THE MATTER ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 14 OF 230 WAS AGAIN PUT UP BEFORE THE HONBLE PRESIDENT, AND THE PRESIDENT AFTER HEARING BOTH THE PARTIES PASSED THE ORDER AS UNDER: - 06.03.2009: PRESENT SHRI DINODIA FOR THE ASSESSEE AND SHRI NP SAWHNEY FOR THE DEPTT. BOTH THE PARTIES AGREE THAT THE SPECIAL BENCH SHOULD DISPOSE OF THE APPEALS WITHOUT CONSIDERING THE QUESTION IN ACCORDANCE WITH LAW AND FACTS OF THE CASE (INCLUDING THE DIRECTIONS OF HONBE HIGH COURT). DIRECTIONS U/S. 255(3) BE ISSUED ACCORDINGLY. 12. THE MATTER WAS THEN AGAIN HEARD BY THE SPECIAL BEN CH TO DISPOSE OF THE ENTIRE APPEALS IN ACCORDANCE WITH LAW, AND THE FACTS OF THE CASE (INCLUDING DIRECTIONS OF THE HONBLE HIGH COURT), B UT WITHOUT RESTRICTING OURSELVES TO THE QUESTION FRAMED EARLIER. SUBMISSIONS OF THE ASSESSEE 13. SHRI PRADEEP DENODIA, CA, APPEARING FOR AND ON BEH ALF OF THE ASSESSEE HAS SUBMITTED THAT THE SAID PLOT OF LAND C ONTRIBUTED AS CAPITAL BY THE ASSESSEE TO A NEWLY CONSTITUTED PARTNERSHIP FIR M IN WHICH THE ASSESSEE BECAME A PARTNER HOLDING 76% OF SHARES, WERE HELD B Y ASSESSEE AS ITS STOCK IN TRADE OF ITS BUSINESS OF REAL ESTATE DEVEL OPMENT, AND THE SAID LAND ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 15 OF 230 WAS ALSO HELD BY THE NEWLY CONSTITUTED PARTNERSHIP FIRM AS STOCK IN TRADE. HE FURTHER SUBMITTED THAT THE SAID LAND WAS CONTRIB UTED TO THE FIRM AS CAPITAL CONTRIBUTION BY THE ASSESSEE IN THE CAPACIT Y OF A PARTNER. THE NEWLY CONSTITUTED PARTNERSHIP FIRM CREDITED THE CAP ITAL ACCOUNT OF THE ASSESSEE COMPANY AT A MARKET VALUE OF RS. 11.50 CRO RES, WHICH WAS MORE THAN THE COST PRICE TO THE ASSESSEE. THE SURPLUS O F RS. 6.01 CRORES DETERMINED AFTER CONSIDERING COST TO THE ASSESSEE W AS SHOWN IN THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE COMPANY, BUT, WAS CLAIMED TO BE EXEMPTED FROM TAX, IN VIEW OF THE DECISION OF THE H ONBLE SUPREME COURT IN THE CASE OF CIT VS. HIND CONSTRUCTION LTD. REPOR TED IN (1972) 83 ITR 211 (SC). HE FURTHER SUBMITTED THAT THERE WAS NO S ALE OF STOCK IN TRADE BY THE ASSESSEE TO A PARTNERSHIP FIRM WHEN THE SAME WA S CONTRIBUTED TOWARDS CAPITAL OF THE ASSESSEE AS A PARTNER. HE POINTED O UT THAT THE LAW IS WELL SETTLED THAT NO ONE CAN EARN PROFIT FROM HIMSELF BY OVER VALUING THE STOCK AS IT IS NOT A COMMERCIAL TRANSACTION IN THE BUSINE SS SENSE, AND AS SUCH, IN THE LIGHT OF THIS WELL SETTLED PRINCIPLE OF TAXATIO N, THE STAND OF THE DEPARTMENT IN CHARGING THE SURPLUS AMOUNT TO TAX MU ST FAIL. HE FURTHER CONTENDED THAT WHEN THE ASSESSEE REVALUES ITS STOCK IN TRADE AT AN AMOUNT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 16 OF 230 MORE THAN COST PRICE TO IT, THE SURPLUS DOES NOT RE SULT IN THE TAXABLE AMOUNT AS THERE WAS NO SALE AT THAT TIME. LIKEWISE, THERE WAS NO SALE OF STOCK IN TRADE AT TIME WHEN THE NEW PARTNERSHIP FIRM WAS CREATED AND THE LAND WAS CONTRIBUTED BY THE ASSESSEE TO A FIRM AS ITS CAPITAL CONTRIBUTI ON. HE FURTHER SUBMITTED THAT WITHOUT PREJUDICE, EVEN IF THE TRANSACTION OF CONTR IBUTING LAND STOCK AS ITS CAPITAL IS TREATED AS TRANSFER, NO GAIN ARISES TO T HE ASSESSEE ON THE TRANSACTION IN QUESTION AS THE BIGGEST DIFFERENCE LIES IN THE F ACT OF THE PRESENT CASE IS THAT THE ASSESSEE TRANSFERRED ITS STOCK IN TRADE AND NOT ANY CAPITAL ASSET IN THIS RESPECT, THE DECISION OF APEX COURT IN THE CASE OF HIND CONSTRUCTION CO. (SUPRA) WAS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE BY SAYING THAT THE FACTS OF THE CASE OF HIND CONSTRUCTION CO. (SUP RA) WERE IDENTICAL TO THE FACTS OF THE INSTANT CASE OF THE ASSESSEE. IN SUPP ORT OF HIS CONTENTIONS, THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO RELIED UPON THE F OLLOWING DECISIONS:- I. CHAINRUP SAMPATRAM V. COMMISSIONER OF INCOME-TAX [1953] 24 ITR 481 (SC) II. SIR KIKABHAI PREMCHAND V. COMMISSIONER OF INCOM E-TAX [1953] 24 ITR 506 (SC) III. SANJEEV WOOLLEN MILLS V. COMMISSIONER OF INCOM E-TAX [2005] 279 ITR 434 (SC) 13.1 THE LD. COUNSEL FOR THE ASSESSEE THEN SUBMITTED THA T THE PRESENT CASE IS A CASE WHERE STOCK IN TRADE AND NOT ANY CAPITAL ASSET WAS CONTRIBUTED BY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 17 OF 230 THE ASSESSEE TO A PARTNERSHIP FIRM TOWARDS ITS CAPI TAL. HE, THEREFORE, SUBMITTED THAT THE DEFINITION OF CAPITAL ASSET AN D TRANSFER DEFINED U/S. 2(14) AND 2(47) RESPECTIVELY CANNOT BE IMPORTED INT O THE PRESENT CASE IN AS MUCH AS NO CAPITAL ASSET IS INVOLVED IN THE INSTANT CASE OF THE ASSESSEE. HE, FURTHER, POINTED OUT THAT THE STOCK IN TRADE IS SPECIFICALLY EXCLUDED FROM THE AMBIT OF A CAPITAL ASSET AS DEFINED U/S. 2(14) OF THE ACT, AND AS SUCH THE DEFINITION OF TRANSFER IN RELATION TO A CAPITAL ASSET DEFINED U/S. 2(47) IS NOT APPLICABLE TO THE STOCK IN TRADE. HE, THUS, SUBMITTED THAT CONTRIBUTION OF STOCK IN TRADE TO A FIRM BY A PARTN ER AS CAPITAL CONTRIBUTION IS NEITHER SALE NOR A TRANSFER, AND AS SUCH, NO INC OME OR PROFIT DID ACCRUE OR ARISE TO THE ASSESSEE ON ACCOUNT OF ANY SURPLUS, RESULTED OUT OF SUCH CONTRIBUTION OF STOCK IN TRADE TO A FIRM, AT THE AM OUNT MORE THAN THE BOOK VALUE. AT THIS STAGE, HE PLACED HEAVY RELIANCE ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. HIND CON STRUCTION LTD., 78 ITR 664, WHICH HAS BEEN AFFIRMED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. HIND CONSTRUCTION LTD. 83 ITR 211 (SC). RELIANCE WAS ALSO PLACED UPON THE JUDGMENT OF HONBLE MADRAS HIGH COU RT IN THE CASE COMMISSIONER OF INCOME-TAX V. JANAB N. HYATH BATCH A SAHIB [1969] 72 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 18 OF 230 ITR 528 (MAD.) TO CONTEND THAT WHEN A PERSON HANDS OVER ITS PROPERTY TO A FIRM OF PARTNERS CONSISTING OF HIMSELF AND OTHERS , THERE IS NO TRANSFER OF PROPERTY SO AS TO CONSTITUTE A SALE OF GOODS AS DEF INED UNDER SALES OF GOODS ACT, AND THE PARTNER CANNOT BE SAID TO HAVE SOLD HIS PROPERTY TO THE PARTNERSHIP FIRM. TO THE SIMILAR EFFECT, RELIANCE WAS PLACED UPON THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CAS E OF DR. M.C. KACKKAR V. COMMISSIONER OF INCOME-TAX[1973] 92 ITR 87 (ALL.). HE FURTHER SUBMITTED THAT THE AFORESAID DECISIONS OF H ONBLE MADRAS HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. JANAB N. HYATH BATCHA SAHIB AND HONBLE ALLAHABAD HIGH COURT IN TH E CASE OF DR. M.C. KACKKAR V. COMMISSIONER OF INCOME-TAX, HAVE BEEN AP PROVED BY THE HONBLE SUPREME COURT IN THE CASE OF MALABAR FISHER IES CO. V. COMMISSIONER OF INCOME-TAX 120 ITR 49 (SC). ACCORD ING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE VIEW THAT THE SURPLUS ARISING ON REVALUATION OF ITS STOCK IN TRADE AT THE TIME OF CONTRIBUTING THE SAME TO A PARTNERSHIP FIRM IS PROFIT OR GAIN CHARGEABLE TO TAX AS THE TRANSACT ION AMOUNTS TO A TRANSFER OF STOCK IN TRADE FROM A PARTNER TO THE FIRM IS COM PLETELY MISLEADING AND AGAINST THE SETTLED LEGAL POSITIONS ON THE MATTER I NVOLVED. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 19 OF 230 13.2 HAVING CONTENDED AS ABOVE, THE LD. COUNSEL FOR THE ASSESSEE PROCEEDED TO ARGUE THAT THERE IS NO CHARGING PROVIS ION IN INCOME TAX ACT TO TAX THIS NATURE OF TRANSACTION OF MAKING OVER A STOCK IN TRADE AS CAPITAL CONTRIBUTION TO A FIRM IN WHICH THE ASSESSEE IS OR BECOMES A PARTNER. HE FURTHER CONTENDED THAT IF ANY TRANSACTION DOES NOT FALL WITHIN THE AMBIT OF TAXATION, THE TAX CANNOT BE IMPOSED ON THE GROUNDS OF MORALITY OR EQUITY. SIMILARLY, IN THE CONVERSE SITUATION, TAX IMPOSED B Y THE STATUE MUST BE LEVIED INSPITE OF ITS CAUSING HARDSHIP TO A TAX PAY ER. IN THIS CONNECTION, RELIANCE WERE PLACED UPON THE FOLLOWING DECISIONS:- I COMMISSIONER OF INCOME-TAX V. KESHAVLAL LALLUBHAI PATEL [1965] 55 ITR 637 (SC) II. SMT. MOHINI THAPAR V. COMMISSIONER OF INCOME-T AX [1972] 83 ITR 208 (SC) III. COMMISSIONER OF INCOME-TAX V. C. P. SARATHY MU DALIAR [1972] 83 ITR 170 (SC) IV MANISH MAHESHWARI V. ASSISTANT COMMISSIONER OF INCOME-TAX (2007) 289 ITR 341 (SC) = [2007] 159 TAXMAN 258 (SC) ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 20 OF 230 13.3 IT WAS FURTHER SUBMITTED BY THE LEARNED COUNSEL FO R THE ASSESSEE THAT THE LAW HAS BEEN AMENDED MANY TIMES PURSUANT TO JUD ICIAL PRONOUNCEMENTS IN ORDER TO BRING WITHIN THE TAX NET CERTAIN TRANSACTIONS WHICH THE COURTS OTHERWISE FOUND TO BE OUTSIDE THE PURVIEW OF TAX PROVISIONS, AND SOME OF SUCH INSTANCES POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, ARE THE AMENDMENT BY WAY OF INSE RTION OF SECTION 45(2) W.E.F. 001.04.1964 (OMITTED IN 1966 AND REINTRODUCE D IN 1984 IN ITS PRESENT FORM) TO TAX THE CONVERSION OF CAPITAL ASSE TS INTO STOCK IN TRADE, SECTION 45(3) AND 45(4) INSERTED W.E.F. 01.04.1988 TO BRING TO TAX CERTAIN SITUATIONS WHICH WERE OTHERWISE HELD TO BE NON-TAXA BLE BY THE COURTS. BUT, HE SUBMITTED, NO SUCH AMENDMENT HAS BEEN BROUGHT TO TAX THE SURPLUS ARISING FROM REVALUATION OF THE STOCK IN TRADE AT T HE TIME WHEN THE SAME IS CONTRIBUTED AS CAPITAL BY A PARTNER TO A FIRM, AND, THUS, THERE BEING NO CHARGING PROVISIONS IN THE ACT, THE SURPLUS ARISING FROM REVALUATION OF STOCK IN TRADE AT THE TIME WHEN THE SAME IS CONTRIB UTED AS CAPITAL BY A PARTNER TO A FIRM CANNOT BE BROUGHT TO TAX. 13.4 WITH REGARD TO THE RELIANCE PLACED BY THE AO UPON THE SUB-SECTION (3) OF SECTION 45 AND UPON THE JUDGMENT OF THE HON BLE SUPREME COURT IN ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 21 OF 230 THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX [1985] 156 ITR 509 (SC), HE SUBMITTED THAT PROVISIONS OF SECTION 45(3) AND DECISION OF HONBLE SUPREME COURT IN THE CASE OF SU NIL SIDDHARTHBHAI CANNOT BE APPLIED TO THE PRESENT CASE IN AS MUCH AS THE SAID PROVISION AND THE DECISION ARE MADE IN CONNECTION WITH A CAPITAL ASSET BEING CONTRIBUTED BY THE PARTNER TO A FIRM TOWARDS ITS CAPITAL, AND N OT APPLICABLE TO THE CASE WHERE STOCK IN TRADE BELONGING TO A PARTNER IS CONT RIBUTED BY THAT PARTNER TO A FIRM TOWARDS ITS CAPITAL. HE VEHEMENTLY URGED THAT A LEGAL FICTION CREATED IN SECTION 45(3) IN RELATION TO A CAPITAL A SSET CANNOT BE EXTENDED BEYOND ITS TERMS AND INTENT AND THUS CANNOT BE APPL IED IN CASES WHERE STOCK IN TRADE IS CONTRIBUTED BY A PARTNER AS ITS C APITAL TO A FIRM IN WHICH HE IS OR BECOMES A PARTNER. HE, THEREFORE, CONTEND ED THAT THE CONTRIBUTION OF STOCK IN TRADE BY A PARTNER TO A FIRM CANNOT BE CONSIDERED TO BE A TRANSFER AND/OR SALE UNDER THE GENERAL LAW FOR THE PURPOSE OF TAXING THE SURPLUS ARISING FROM SUCH CONTRIBUTION AT AN AMOUNT MORE THAN THE COST TO A PARTNER. HE SUBMITTED THAT THE CASE OF CONTRIBUTI ON OF STOCK IN TRADE BY A PARTNER TO A FIRM IS FULLY COVERED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. HIND CONSTRUCTION LTD. , (SUPRA) AND NOT BY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 22 OF 230 PREPOSITIONS LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI VS. CIT READ WITH SECTION 45(3) INSER TED IN THE STATUTE W.E.F. 01.04.1988. HE URGED THAT EVEN THE APPLICATION OF THE PROVISIONS OF SECTION 45(3) OF THE ACT INSERTED W.E.F. 01.04.1988 HAS NOT BROUGHT ANY CHANGE FOR BRINGING TO TAX THE SURPLUS ARISING FROM CONTRIBUTION OF STOCK IN TRADE BY A PARTNER TO A FIRM AT AN AMOUNT MORE THAN THE COST TO THE ASSESSEE BECAUSE IN THE NEWLY INSERTED SECTION 45(3) OF THE ACT, THE WORDS TRANSFER OF CAPITAL ASSET IS USED THOUGH IN THE INSTANT CAS E OF THE ASSESSEE, IT WAS A CONTRIBUTION OF LAND WHICH WAS HELD AS STOCK IN TR ADE BY THE ASSESSEE. THUS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSE SSEE, THE DECISION OF APEX COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPR A) IS OF NO HELP TO THE REVENUE AS THEIR LORDSHIPS IN THAT CASE WERE CONCER NED WITH THE SITUATION WHERE TRANSFER OF CAPITAL ASSET AND NOT STOCK IN TR ADE WAS INVOLVED. 13.5 WITH REGARD TO THE CIT(A)S OBSERVATIONS THAT SINC E THE ASSESSEE COMPANY HAS SHOWN THE SURPLUS AS ITS INCOME IN ITS AUDITED ACCOUNT BY MAKING APPROPRIATE CREDIT TO THE PROFIT AND LOSS AC COUNT, THE SURPLUS REPRESENTS THE BUSINESS PROFIT ON COMMERCIAL PRINCI PLES, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS WELL SETTLED THAT ENTRIES IN THE BOOKS OF ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 23 OF 230 ACCOUNTS REPRESENTING PROFIT AND LOSS ACCOUNT AND B ALANCE-SHEET ARE NOT SACROSANCT AND NOT BINDING EITHER ON THE ASSESSEE O R ON THE REVENUE AS SO HELD AND OBSERVED IN THE FOLLOWING DECISIONS:- I KEDARNATH JUTE MFG. CO. LTD. V. COMMISSIONER OF INCOME- TAX [1971] 82 ITR 363 (SC) II SUTLEJ COTTON MILLS LTD. VS. CIT (1979) 116 ITR 1 (SC) III UNITED COMMERCIAL BANK V. COMMISSIONER OF INCOM E-TAX [1999] 106 TAXMAN 601 (SC) = 240 ITR 355 (SC) IV KARNATAKA SMALL SCALE INDUSTRIES DEVELOPMENT CO RPN. LTD. V. COMMISSIONER OF INCOME-TAX [2003] 126 TAXMAN 121 (SC) = 258 ITR 770 (SC) 13.6 HE FURTHER SUBMITTED THAT THE IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THIS TRIBUNAL IN A.Y. 198 5-86, AFTER FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F HIND CONSTRUCTION LTD. (SUPRA), AND THAT DECISION STILL HOLDS THE FIE LD IN THE CASE OF CONTRIBUTION OF STOCK IN TRADE BY A PARTNER TO A FI RM TOWARDS ITS CAPITAL CONTRIBUTION. SUBMISSIONS OF THE REVENUE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 24 OF 230 14. SHRI N.P. SAHNI, SR. STANDING COUNSEL FOR THE DEPA RTMENT ASSISTED BY SHRI P. YADAV, JR. STANDING COUNSEL FOR THE DEPA RTMENT, HAS SUBMITTED THAT THE PRESENT CASE IS A CASE WHERE THE ASSESSEE HAS SHOWN THE PROFIT OF RS. 6.01 CRORES IN RESPECT OF THE PORTION OF LAND T RANSFERRED TO A PARTNERSHIP FIRM IN WHICH THE ASSESSEE BECAME A PAR TNER, AND HAS CREDITED SAME IN THE PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE, AND A CORRESPONDING AMOUNT HAS BEEN CREDITED BY THE FIRM IN THE ASSESSEES CAPITAL ACCOUNT, WHICH GOES TO SHOW AND ESTABLISH T HAT IT IS A CASE OF SALE OF STOCK IN TRADE ON CREDIT BY THE PARTNER TO A FIR M, AS THERE BEING NO BAR ON SALE OF STOCK IN TRADE BY A PARTNER TO A PARTNERSHI P FIRM IN WHICH HE IS A PARTNER. HE FURTHER SUBMITTED THAT INSTEAD OF CONT RIBUTING CAPITAL BY PAYMENT OF MONEY, THE ASSESSEE HAS CONTRIBUTED ITS CAPITAL BY ADJUSTING THE SALE VALUE OF THE LAND TRANSFERRED OR SOLD BY I T TO PARTNERSHIP FIRM. IT WAS FURTHER CONTENDED BY THE LD. STANDING COUNSEL F OR THE REVENUE THAT WHEN THE ASSESSEE CLAIMS THAT HE CONTRIBUTED ITS ST OCK IN TRADE TO A FIRM, AND TREATED THE SALE VALUE AS ITS CAPITAL CREDITED IN ITS CAPITAL ACCOUNT IN THE BOOKS OF A FIRM, THE TRANSACTION IS NOTHING BUT IS, IN REALITY AND SUBSTANCE, A TRANSACTION BY WAY OF SALE AT A GIVEN VALUE, WHIC H WAS TO BE PAID BY THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 25 OF 230 FIRM TO THE ASSESSEE PARTNER. IF IT IS THE CASE OF THE ASSESSEE THAT STOCK IN TRADE IS GIVEN AS STOCK IN TRADE TO A PARTNERSHIP F IRM FOR BUSINESS, IT IS A CASE OF TRADING OR COMMERCIAL TRANSACTION AND IS T O BE CONSIDERED AS SALE AT A GIVEN VALUE AT WHICH ASSESSEES CAPITAL ACCOUN T IS CREDITED IN THE BOOKS OF A PARTNERSHIP FIRM, AND THUS THE SURPLUS A RISING THERE FROM IS TO BE CHARGED TO TAX AS A BUSINESS PROFIT. 14.1 HE FURTHER SUBMITTED THAT THE INTENTION OF THE ASS ESSEE WITH REGARD TO THE TRANSACTION IN QUESTION IS TO BE GATHERED OR JUDGED FROM OVER ALL CONDUCT OF THE ASSESSEE AND THE ENTRIES MADE BY IT IN ITS BOOKS OF ACCOUNTS. FROM PERUSAL OF ENTRIES MADE IN THE BOOKS OF ACCOUN TS BY THE ASSESSEE, IT IS CLEAR THAT THE ASSESSEE HAS TREATED THE TRANSACT ION AS SALE OF STOCK IN TRADE BY IT TO A FIRM IN AS MUCH AS, THE ASSESSEE H AS ITSELF CREDITED THE AMOUNT OF SALES AND RESULTANT PROFIT IN ITS PROFIT AND LOSS ACCOUNT, AND THE PROFIT RESULTANT THERE FROM WAS ALSO UTILIZED FOR T HE PURPOSE OF DISTRIBUTION OF DIVIDEND TO THE SHARE HOLDERS. HE FURTHER CONTE NDED THAT IF THE CONTENTION OF THE ASSESSEE, WHICH ARE CONTRARY TO T HE ENTRIES MADE IN THE ACCOUNTS AND NARRATION MADE IN PARTNERSHIP DEED, IS LOOKED DISPASSIONATELY AND IN ALL FAIRNESS, IT WOULD TERMED AS NOTHING BUT A COLLUSIVE ARRANGEMENT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 26 OF 230 BETWEEN THE PARTIES TO EVADE PAYMENT OF CORRECT TAX ES IN RESPECT OF SURPLUS AMOUNT CREDITED IN ASSESSEES CAPITAL ACCOUNT. 14.2 WITH REFERENCE TO THE ASSESSEES STAND RELYING UPO N THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF HIND CONSTRUCT ION LTD., THE LD. STANDING COUNSEL FOR THE REVENUE HAS SUBMITTED THAT THE PRESENT CASE IS NOT THE CASE WHERE VALUE OF STOCK IN TRADE HAS BEEN MERELY OVER-VALUED IN THE BOOKS OF THE ASSESSEE, BUT, IT IS THE CASE WHER E A CREDIT ON ACCOUNT OF SALE OF LAND IN QUESTION HAS BEEN MADE IN THE PROFI T AND LOSS ACCOUNT AND THE CORRESPONDING ENTRY HAS BEEN MADE BY THE FIRM I N ITS BOOKS, WHCH INDICATES AND POINTS OUT THAT THE TRANSACTION WAS I N THE NATURE OF A SALE OF STOCK IN TRADE BY THE ASSESSEE PARTNER TO THE FIRM. HE, THEREFORE, SUBMITTED THAT THE FACTS OF THE PRESENT CASE ARE ON QUITE DIF FERENT FOOTING THAN THAT OF IN THE CASE OF HIND CONSTRUCTION LTD. (SUPRA). 14.3 ACCORDING TO THE LEARNED STANDING COUNSEL FOR THE REVENUE, THE DECISION OF HIND CONSTRUCTION CO. LTD. CANNOT BE AP PLIED IN THE CHANGED SCENARIO, THE FACTS OF THE INSTANT CASE AFTER INSER TION OF PROVISION OF SECTION 45(3) OF THE ACT W.E.F. 01.04.1988. HE FUR THER SUBMITTED THAT THE EXTENDED DEFINITION OF TRANSFER DEFINED U/S. 2(47 ) OF THE ACT CAN BE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 27 OF 230 APPLIED TO THE TRANSACTION OF CONTRIBUTION OF LAND BY THE ASSESSEE TO A FIRM AS CAPITAL CONTRIBUTION EVEN IF THE LAND WAS HELD B Y THE ASSESSEE COMPANY AS STOCK IN TRADE BEFORE IT WAS SO CONTRIBUTED. IN THIS RESPECT, HE PLACED RELIANCE UPON THE DECISION IN CASE OF SUNIL SIDDHA RTHBHAI VS. CIT 156 ITR 509 (SC), CIT VS. SURESH CHAND JAIN 178 ITR 241 (AP ) AND A.L.A. FIRM VS. CIT 189 ITR 285 (SC). 14.4 THE LD. STANDING COUNSEL FOR THE REVENUE MADE AN A TTEMPT TO DISTINGUISH THE DECISION OF HONBLE SUPREME COURT I N THE CASE OF HIND CONSTRUCTION LTD. BY CONTENDING THAT THE CASE OF A PARTNER BRINGING HIS PERSONAL ASSETS INTO THE FIRM SHOULD BE DISTINGUISH ED FROM THE CASES WHERE A PARTNER SALES HIS ASSETS INCLUDING STOCK IN TRADE TO THE FIRM, WHERE TAX CONSEQUENCES WOULD BE THE SAME AS IN THE CASE OF SA LE TO AN OUTSIDER. HE THEN SUBMITTED THAT THE PRESENT CASE IS A CASE WHER E STOCK IN TRADE HAS BEEN IN REALITY SOLD BY THE ASSESSEE TO A FIRM IN WHICH IT BECAME A PARTNER AS WOULD BE CLEAR FROM THE TREATMENT GIVEN BY THE ASSE SSEE TO THE TRANSACTION IN ITS BOOKS OF ACCOUNTS, BY CREDITING THE AMOUNT A S SALES, AND BY CREDITING THE RESULTANT PROFIT IN ITS PROFIT AND LOSS ACCOUNT . ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 28 OF 230 14.5 IT WAS FURTHER SUBMITTED BY THE STANDING COUNSEL F OR THE DEPARTMENT THAT IN THE CASE OF CIT VS. HIND CONSTRU CTION (SUPRA) THE APEX COURT EXAMINED THE QUESTION ONLY FROM THE POINT OF VIEW OF SALE, AND NOT FROM THE POINT OF VIEW WHETHER THERE WAS ANY TRANSF ER OF ASSET FROM A PARTNER TO A FIRM, WHICH QUESTION HAS BEEN CONSIDER ED AND ANSWERED BY THE HONBLE APEX COURT IN THE CASE OF SUNIL SIDDHAR THBHAI (SUPRA) HOLDING THAT WHEN ANY ASSET IS CONTRIBUTED BY A PARTNER TO A FIRM AS ITS CAPITAL, IT AMOUNTS TO A TRANSFER EVEN UNDER THE GENERAL LAW. SR. STANDING COUNSEL FOR REVENUE HAS ALSO PLACED RELIANCE UPON THE FOLLOWING DECISIONS:- I. ADDL. COMMISSIONER OF INCOME-TAX V. M.A.J. VASAN AIK [1979] 116 ITR 110 (KAR.) II. A. ABDUL RAHIM, TRAVANCORE CONFECTIONERY WORKS V. COMMISSIONER OF INCOME-TAX [1977] 110 ITR 595 (KER. ) III. BALDEVJI V. COMMISSIONER OF INCOME-TAX [1985 ] 156 ITR 776 (MAD.) 14.6 HE THEN SUBMITTED THAT THE DICTUM ONE CANNOT MAKE PROFIT OUT OF HIMSELF, IS NOT ATTRACTED IN THE PRESENT CA SE, IN AS MUCH AS, IN THE PRESENT CASE, THE ASSESSEE BEING A SEPARATE TAXABLE ENTITY HAS TRANSFERRED ITS STOCK IN TRADE TO A PARTNERSHIP FIRM, ANOTHER TAXAB LE ENTITY, AND THE SURPLUS ARISING THERE FROM HAS BEEN CREDITED IN THE PROFIT AND LOSS ACCOUNT. HE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 29 OF 230 THEN POINTED OUT THAT IF IT IS CASE OF THE ASSESSEE THAT STOCK IN TRADE WAS CONTRIBUTED TO A FIRM, AND THE VALUE OF STOCK IN TR ADE AT THE AMOUNT MORE THAN THE COST TO THE ASSESSEE IS CREDITED IN ITS CA PITAL ACCOUNT BY A FIRM, THE TRANSACTION IN THAT EVENT WOULD BE ONLY A BUSINESS OR TRADING TRANSACTION AS IS CLEAR FROM THE TREATMENT GIVEN BY THE ASSESSEE TO THE TRANSACTION IN ITS BOOKS OF ACCOUNTS. HE, THEREFORE, SUBMITTED THAT THE AO AS WELL AS THE CIT (A) HAS RIGHTLY TAKEN A VIEW THAT THE SUR PLUS ARISING FROM TRANSFER OF STOCK IN TRADE BY THE ASSESSEE TO A FI RM IS A PROFIT ASSESSABLE U/S. 28 OF THE ACT. IN SUPPORT OF THE CONTENTION THAT A PARTNER CAN SALE ITS STOCK IN TRADE TO A FIRM AND THERE IS NO BAR IN MAKING TRADING OR COMMERCIAL TRANSACTION IN RESPECT OF THE STOCK IN TRADE BETWEEN A FIRM AND ITS PARTNER, AND, AN INDIVIDUAL PARTNER IS DISTI NGUISHED AND SEPARATE TAXABLE ENTITY AS AGAINST THE PARTNERSHIP FIRM IN WHICH HE MAY BE A PARTNER, THE LD. SANDING COUNSEL FOR THE REVENUE HAS PLACED HEAVY RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. A. W. FIGGIES & C O. [1953] 24 ITR 405 (SC). HE THEN SUBMITTED THAT IN THE LIGHT OF THE POSITION OF LAW THAT THE FIRM IS A SEPARATE TAXABLE ENTITY FROM ITS PARTNER, IT IS ABDUNTLY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 30 OF 230 CLEAR THAT THE TRANSACTION OF CONTRIBUTING STOCK IN TRADE BY A PARTNER TO A FIRM AS ITS CAPITAL WOULD BE A TRANSACTION BETWEEN TWO PERSONS, AND THE CONCEPT THAT NO PERSON CAN MAKE PROFIT OUT OF HIMSE LF WOULD NOT BE APPLICABLE IN THAT CASE. A REFERENCE WAS MADE TO T HE DECISION OF HONBLE MADRAS HIGH IN THE CASE OF BALDEVJI V. COMMISSIONE R OF INCOME-TAX [1985] 156 ITR 776 (MAD.). 14.7 THE LD. SR. STANDING COUNSEL FOR THE REVENUE FURTH ER SUBMITTED THAT IF IT IS A CASE OF CAPITAL CONTRIBUT ION OF A CAPITAL ASSET, A CAPITAL GAIN IS CHARGEABLE TO TAX UNDER THE AMENDED PROVISION OF SECTION 45(3) OF THE ACT, INSERTED IN STATUTE W.E.F. 01.04. 1998 14.8 TO SUM-UP, THE LD. STANDING COUNSEL FOR THE REVENU E SUBMITTED THAT THE REVENUES ARGUMENTS ARE TWOFOLD AS UNDER:- I. IF IT IS A ASSESSEES CASE THAT IT IS CASE OF CAPIT AL CONTRIBUTION IN THE FORM OF STOCK IN TRADE, THERE IS A CHANGE OF OWNERSHIP OR EXTINGUISHMENT OF RIGHT IN THAT STOCK IN TRADE O F THE ASSESSEE PARTNER AGAINST THE CONSIDERATION CREDITED IN THE ASSESSEES CAPITAL ACCOUNT, AND THE SURPLUS ARISING THERE FROM WOULD BE TAXABLE AS BUSINESS PROFIT. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 31 OF 230 II. IF IT IS CASE OF ASSESSEE THAT IT IS A CASE OF CAPI TAL CONTRIBUTION IN THE FORM OF CAPITAL ASSET, THE AMOUNT CREDITED I N THE ASSESSEES CAPITAL ACCOUNT SHALL BE DEEMED TO BE CONSIDERATION RECEIVED BY THE ASSESSEE ON TRANSFER OF CAPITAL ASSET TO A FIRM, AND CAPITAL GAIN ARISING THERE FRO M WOULD BE CHARGEABLE UNDER THE HEAD CAPITAL GAIN UNDER THE NEWLY INSERTED PROVISIONS OF SECTION 45(3) OF THE ACT, IN SERTED FROM 01.04.1988. 14.9 AS AGAINST THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THERE IS NO PROVISION IN THE ACT TO BRING TO T AX THE SURPLUS ARISING FROM REVALUATION OF STOCK IN TRADE AT THE TIME WHEN SAME IS CONTRIBUTED AS CAPITAL TO A FIRM BY A PARTNER AND THE PARTNERS AC COUNT IS CREDITED BY THE AMOUNT MORE THAN THE COST OF STOCK IN TRADE TO THE ASSESSEE PARTNER, AND NO AMENDMENT LIKE INSERTION OF SECTION 45(2), 45(3) AN D 45(4) HAS BEEN MADE IN THE INCOME TAX ACT, THE LD. SR. STANDING COUNSEL FOR THE REVENUE HAS SUBMITTED THAT IF IT IS THE CASE OF THE ASSESSEE TH AT STOCK IN TRADE HAS BEEN GIVEN TO A FIRM BY THE PARTNER TOWARDS ITS CAPITAL AT A VALUE MORE THAN THE COST TO THE ASSESSEE, THERE IS A TRANSFER OF STOCK IN TRADE FROM PARTNERS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 32 OF 230 HAND TO THE FIRMS HANDS AND THE RESULTANT SURPLUS SHALL BE CONSIDERED AS BUSINESS PROFIT, WHICH IS DULY COVERED BY SECTION 2 8 ITSELF. HE FURTHER SUBMITTED THAT INSERTION OF SECTION 45(3) IN THE AC T WAS NECESSITED ONLY BECAUSE OF THE POSITION TAKEN IN CASES OF TRANSFER OF CAPITAL ASSET BY WAY OF CONTRIBUTION TO A FIRM BY CERTAIN ASSESSEES TO AVOI D PAYMENT OF CORRECT TAXES, BUT SO FAR AS CASES OF TRANSFER OF STOCK IN TRADE FROM PARTNER TO A FIRM ARE CONCERNED, THERE WAS NO PROBLEM AND THERE WAS N O NECESSITY OF MAKING ANY AMENDMENT EITHER IN SECTION 28 OR SOME O THER SECTION. IN SUCH LIKE CASES WHERE STOCK IN TRADE IS CONTRIBUTED BY THE PARTNER TO A FIRM, THE RIGHTS OR INTEREST IN STOCK IN TRADE WERE PASSE D ON FROM ONE PERSON TO ANOTHER, AND THE TRANSACTION WOULD BE AMOUNTED TO E ITHER SALE OR TRANSFER IN THE GENERAL LAW IF NOT WITHIN THE MEANING OF SEC TION 2(47), AND LIABILITY TO TAXATION ON THE SURPLUS AMOUNT WOULD ARISE ON TH E DATE OF SUCH TRANSACTION. HE FURTHER CONTENDED THAT IF WE LOOK TO THE MEANING OF PERSON AS DEFINED IN SECTION 2(31) OF THE ACT, IT IS CLEAR THAT AN INDIVIDUAL PARTNER IS DISTINCT AND SEPARATE TAXABLE ENTITY AS AGAINST A PARTNERSHIP FIRM, IN WHICH HE MAY BE A PARTNER, AND THERE BEING NO BAR OF MAKING ANY COMMERCIAL OR TRADING TRANSACTION BETWEE N THE FIRM AND ITS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 33 OF 230 PARTNER, THE TRANSFER OF STOCK IN TRADE BY A PARTNE R TO A FIRM SHALL BE CONSIDERED AS A TRANSACTION OF SALE OR OTHERWISE OF TRANSFER OF STOCK IN TRADE, AND THE TRANSACTION WOULD BE TAXED ACCORDING LY. IN SUPPORT OF THIS SUBMISSION, HE PLACED RELIANCE UPON THE JUDGMENT OF APEX COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. A.W. FIGGIES & CO. [1953] 24 ITR 405 (SC), WITH A SUBMISSION THAT THIS DECISION WAS RENDERED BY A BENCH OF THREE JUDGES OF HONBLE SUPREME COURT, AND STILL HOLD THE GROUND WITH BINDING FORCE. 14.10 THE LD. STANDING COUNSEL FOR THE REVENUE FURTHER S UBMITTED THAT IF IT IS A CASE OF CAPITAL CONTRIBUTION OR EXT INGUISHMENT OF RIGHTS IN THE LAND OF THE ASSESSEE PARTNER, AND THE SURPLUS ARISI NG FROM CHANGE OF OWNERSHIP OR EXTINGUISHMENT OF RIGHT OF THE ASSESSE E WOULD THUS, BE TAXABLE AS BUSINESS PROFIT, AND IS TO BE TAXED ACCO RDINGLY. ON QUESTION WHERE THESE IS CHANGE OF OWNERSHIP OR EXTINGUISHMEN T OF RIGHT OF THE ASSESSEE IN THE LAND IN QUESTION, A RELIANCE WAS AL SO PLACED UPON THE DECISION OF HONBLE APEX COURT IN THE CASE OF COMMI SSIONER OF INCOME- TAX V. GRACE COLLIS [2001] 115 TAXMAN 326 (SC). ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 34 OF 230 14.11 HE FURTHER SUBMITTED THAT POSITION OF APEX IN THE CASE OF HIND CONSTRUCTION LTD. WOULD BE OF NO HELP TO THE A SSESSEE IN AS MUCH AS THE TRANSACTION OF CONSTITUTING FIRM BY CONTRIBUTIN G LAND HELD BY THE ASSESSEE AT HIGHER VALUE THAN THE COST TO THE ASSES SEE IS NOTHING BUT A COLOURABLE AND CALCULATED DEVICE TO EVADE PAYMENT O F CORRECT TAXES IN RESPECT OF THE SURPLUS AMOUNT CREDITED IN THE ASSES SEES CAPITAL ACCOUNT BY THE FIRM WHEN THE RESULTED PROFIT HAS BEEN CREDITED BY THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT, BUT HAS NOT OFFERED IT TO TAX. HE, THEREFORE, SUBMITTED THAT THE TRANSACTION OF CONTRIBUTION OF C APITAL OF LAND IN A PARTNERSHIP FIRM BY THE ASSESSEE PARTNER IS TO BE C ONSIDERED AS TRANSFER OR SALE OF STOCK IN TRADE BY THE ASSESSEE TO A PARTNER SHIP FIRM I.E. FROM ONE TAXABLE ENTITY TO ANOTHER. 14.12 ON THE APPLICABILITY OF THE PROVISIONS CONTAINED U /S. 45(3) OF THE ACT TO THE FACTS OF THE PRESENT CASE, THE LD. S TANDING COUNSEL FOR THE DEPARTMENT HAS SUBMITTED THAT THE SAID LAND CONTRIB UTED BY THE ASSESSEE PARTNER TO A PARTNERSHIP FIRM IN WHICH THE ASSESSEE BECAME A PARTNER IS OTHERWISE TO BE CONSIDERED AS CAPITAL ASSET IN AS M UCH AS WHEN STOCK IN TRADE IN THE FORM OF LAND HELD BY THE ASSESSEE WAS INTRODUCED BY THE WAY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 35 OF 230 OF CAPITAL CONTRIBUTION IN A FIRM, THE SAME STANDS CONVERTED TO CAPITAL ASSET AT THAT MATERIAL POINT OF CONTRIBUTION FOR THE REAS ON THAT THE PARTNERSHIP FIRM WAS NEWLY CONSTITUTED AND THE LAND WAS CONTRIB UTED TOWARDS ITS CAPITAL, AND, HENCE, THE LAND HAS CHANGED ITS CHARA CTER FROM STOCK IN TRADE TO CAPITAL ASSET. HE FURTHER POINTED OUT THAT IN T HE PARTNERSHIP DEED, IT IS NOWHERE STATED THAT THE CAPITAL CONTRIBUTION BROUGH T BY THE ASSESSEE WAS STOCK IN TRADE EVEN AT THE TIME IT WAS CONTRIBUTED AS CAPITAL IN A FIRM IN WHICH ASSESSEE BECAME A PARTNER. IN THE DEED OF PA RTNERSHIP, IT IS CLEARLY STATED THAT WITH EFFECT FROM 16 TH DAY OF MARCH, 1992 ALL THE RIGHTS OF THE ASSESSEE PARTNER IN THE SAID PLOTS OF LAND (INCLUDI NG THE ASSET OF LAND OWNED BY THE ASSESSEE) BECAME THE PROPERTY OF THE P ARTNERSHIP FIRM. THE LAND WAS ON ACCOUNT OF CAPITAL CONTRIBUTION OF THE ASSESSEE IN A FIRM, AND IT WAS UPON TO THE FIRM TO USE IT IN ANY MANNER EITHER AS TRADING ITEM OR CAPITAL ASSET OR AS INVESTMENT OR IN ANY OTHER MANN ER. THE TRANSACTION OF MAKING OVER A LAND BY THE ASSESSEE TO A PARTNERSHIP FIRM HAS BEEN CLAIMED BY THE ASSESSEE NOT TO BE IN THE NATURE OF COMMERCI AL OR TRADING TRANSACTION AND HENCE, THE ASSET EMPLOYED IN THE SA ID TRANSACTION CANNOT BE CONSIDERED TO BE STOCK IN TRADE IN AS MUCH AS STOCK IN TRADE IS ALWAYS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 36 OF 230 EMPLOYED IN THE COURSE OF BUSINESS OR TRADING TRANS ACTION. STOCK IN TRADES ARE THE GOODS WHICH ARE HELD FOR THE PURPOSE OF TRA DING IN THE COURSE OF CARRYING ON BUSINESS ACTIVITIES. WHEN ASSESSEE ACC EPTED THE POSITION THAT THE TRANSACTION IN QUESTION IS NOT A TRADING OR COM MERCIAL TRANSACTION, THE QUESTION OF TREATING THE ASSET EMPLOYED IN THAT TRA NSACTION AS STOCK IN TRADE CANNOT BY ANY STRETCH OF IMAGINATION, ARISE. HE, T HEREFORE, CONCLUDED THAT THE LAND, WHICH WAS CONTRIBUTED BY THE ASSESSEE TO PARTNERSHIP FIRM TOWARDS ITS CAPITAL, IS NOTHING BUT IS A CONTRIBUTI ON ON CAPITAL ACCOUNT, AND, THUS, IT HAS TO BE TREATED AS CAPITAL ASSET. THERE FORE, EVEN ON THIS ANALOGY, THE SURPLUS ARISING FROM THE TRANSACTION IN QUESTIO N BY WAY OF CONTRIBUTION OF LAND AS CAPITAL IN A FIRM IN WHICH THE ASSESSEE BECAME PARTNER AT AN AMOUNT MORE THAN THE COST TO THE ASSESSEE, WHICH HA S BEEN CREDITED IN THE CAPITAL ACCOUNT OF THE ASSESSEE IN THE BOOKS OF THE FIRM, IS TO BE ASSESSED U/S. 45(3) OF THE ACT IF NOT FOUND TO BE ASSESSABLE U/S. 28 OF THE ACT. REJOINDER BY THE ASSESSEE 15. IN THE REJOINDER, THE LEARNED COUNSEL FOR THE ASSE SSEE REITERATED THAT THE MAIN ARGUMENT OF THE REVENUE TH AT THE ASSESSEE HAS REFLECTED THE SURPLUS IN ITS PROFIT AND LOSS ACCOUN T AND HAS SHOWN THE SALES ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 37 OF 230 OF LAND IN THE BOOKS, AND, THEREFORE, THE TREATMENT GIVEN BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS CLEARLY PROVES THAT IT WAS A TRANSACTION OF SALE AND IT IS ONLY IN THE INCOME TAX RETURN THAT THE ASSESSEE WAS CLAIMING THE SURPLUS TO BE EXEMPTED FROM TAX, IS NOT TENABLE AND ACCEPTA BLE IN AS MUCH AS IT IS WELL SETTLED THAT THE ENTRIES IN THE BOOKS OF ACCOU NT ARE NOT CONCLUSIVE OR DETERMINATIVE IN DECIDING THE TAXABILITY OR OTHERWI SE OF A GIVEN ITEM, AND, THUS, MERELY ON THE BASIS OF ENTRY IN THE BOOKS OF ACCOUNT, IT CANNOT BE SAID THAT THE ANY INCOME OR GAIN ARISES OR ACCRUES TO THE ASSESSEE IN THE TRUE COMMERCIAL SENSE WHICH A BUSINESSMAN WOULD UND ERSTAND AS REAL INCOME OR GAIN. 15.1 WITH REGARD TO THE REVENUES RELIANCE ON THE DECIS ION IN THE CASE OF BALDEVJI V. COMMISSIONER OF INCOME-TAX [198 5] 156 ITR 776 (MAD.) IN SUPPORT OF THE CONTENTION THAT THERE WAS A TRANSFER OF LAND IN QUESTION WHEN THE LAND WAS CONTRIBUTED TOWARDS CAPI TAL BY A PARTNER TO A FIRM IN WHICH HE IS OR BECOMES A PARTNER, THE LD. C OUNSEL FOR THE ASSESSEE HAS POINTED OUT THAT IN THIS DECISION, THE HONBLE COURT WAS CONCERNED WITH THE TERM SOLD OR OTHERWISE TRANSFERRED FOR T HE PURPOSE OF WITHDRAWAL OF BENEFIT OF DEVELOPMENT REBATE UNDER S ECTION 155 (5) OF THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 38 OF 230 ACT IN RELATION TO A CAPITAL ASSET AND NOT IN RELAT ION TO STOCK IN TRADE, AND HENCE PLACING RELIANCE UPON THIS DECISION IS OUT OF CONTEXT. 15.2 THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTENDE D THAT ONCE THE PROPOSITION LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPRA) THAT WHEN A PARTNER HANDS OVE R A BUSINESS ASSET TO A PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL , HE CANNOT BE SAID TO HAVE EFFECTED A SALE IS SETTLED, THERE IS NO NEED TO TRA VEL BEYOND THIS, AND THUS, CONTENTION OF THE REVENUE THAT IT WAS A CASE OF SAL E OF STOCK IN TRADE MUST BE REJECTED. HE FURTHER REITERATED THAT IN THE LIGHT OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA), WHICH HAS BEEN FOLLOWED BY HON BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. PADMA NARASIMHAN AND OTHER [ 2002] 255 ITR 441 (MAD.), IT IS WELL SETTLED THAT ALTHOUGH THAT WAS A CASE OF TRANSFER OF CAPITAL ASSET, NO INCOME OR GAIN ACCRUES TO A PARTNER. HE, THEREFORE, URGED THAT THE ISSUE ARISING IN THE INSTANT CASE OF THE PRESENT AS SESSEE IS FULLY COVERED BY THE JUDGMENT OF HONBLE SUPREME COURT IN THE HIND CONST RUCTION LTD. (83 ITR 211), SUNIL SIDDHARTHBHAI (156 ITR 509), AND SANJEE V WOOLLEN MILLS (279 ITR 434) AND AS ALSO SUPPORTED BY OTHER RELEVANT JU DGMENTS GIVEN IN THE SYNOPSIS OF THE ASSESSEE TO THE SIMILAR EFFECT. DECISION 16. WE HAVE CONSIDERED RIVAL CONTENTIONS OF PARTIES I N THE LIGHT OF THE FACTS OF THE PRESENT CASE, PROVISIONS OF LAW CO NTAINED IN THAT BEHALF AND ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 39 OF 230 DECISION CITED AT THE BAR. WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND AS WELL THE MATERIAL ON R ECORD. 16.1 THE QUESTION THAT ARISES FOR OUR CONSIDERATION IS WHETHER, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE SURPLUS OF RS. 6.01 CRORES ARISING FROM THE TRANSACTION OF CONTRIB UTING THE SAID LAND AS CAPITAL BY THE ASSESSEE IN A NEWLY CONSTITUTED PART NERSHIP FIRM IN WHICH ASSESSEE BECAME A PARTNER, IS LIABLE TO BE TAXED IN THE HANDS OF THE ASSESSEE AS ITS INCOME UNDER INCOME TAX ACT, 1961. 16.2 IN THE LIGHT OF THE TREATMENT GIVEN BY THE ASSESSE E TO THE TRANSACTION IN ITS BOOKS OF ACCOUNTS, THE MAIN CASE MADE OUT BY THE REVENUE IS OF SALE OR TRANSFER OF STOCK IN TRADE BY THE ASSESSEE TO A FIRM AS AGAINST THE ASSESSEES CLAIM THAT IT IS THE CASE OF CAPITAL CONTRIBUTION OF STOCK IN TRADE BY A PARTNER TO A FIRM AND NOT THE C ASE OF ANY COMMERCIAL OR TRADING TRANSACTION IN THE BUSINESS SENSE, AND THUS NO SALE OR TRANSFER OF STOCK IN TRADE HAD TAKEN PLACE. THE ANSWER TO THE CONTROVERSY, IN OUR OPINION, RESTS MAINLY AND PRIMARILY UPON THE DETERM INATION OF THE NATURE OF TRANSACTION MADE BY THE ASSESSEE AS A PARTNER WI TH THE FIRM IN WHICH ASSESSEE BECAME A PARTNER. WE, THEREFORE, FIND IT NECESSARY AND PROPER ON ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 40 OF 230 OUR PART TO FIRST ASCERTAIN AND DETERMINE THE TRUE NATURE AND CHARACTER OF THE TRANSACTION AND THE ASSET EMPLOYED IN THE TRANS ACTION. TESTS TO DETERMINE THE NATURE OF TRANSACTION AND AS SET EMPLOYED THEREIN 16.3 IT IS WELL SETTLED THAT NAME OR LABEL WHICH IS GIV EN TO ANY TRANSACTION BY ANY PARTLY IS IRRELEVANT IN ASSESSIN G THE EXIGIBILITY OF RECEIPT ARISING FROM THE TRANSACTION TO TAX. THE TRUE CHAR ACTER OR NATURE OF ANY TRANSACTION IS TO BE DECIDED IN EACH CASE ON ITS FA CTS. VARIOUS RULES HAVE BEEN ENUNCIATED AS FURNISHING A KEY TO THE SOLUTION OF THE QUESTION, BUT AS OFTEN OBSERVED BY THE COURTS TIMES AND AGAIN, IT IS NOT POSSIBLE TO LAY DOWN ANY SINGLE TEST AS INFALLIBLE OR SINGLE CRITERION A S DECISIVE IN THE DETERMINATION OF THE QUESTION, WHICH MUST ULTIMATEL Y DEPEND ON THE FACTS OF THE PARTICULAR CASE, AND THE AUTHORITIES BEARING ON THE QUESTION ARE VALUABLE ONLY AS INDICATING THE MATTERS THAT HAVE T O BE TAKEN INTO ACCOUNT IN REACHING A DECISION. IT IS ALSO IMPOSSIBLE TO E VOLVE ANY SINGLE FORMULA OR CRITERION, WHICH CAN BE APPLIED IN DETERMINING T HE CHARACTER OF TRANSACTION, WHICH COMES BEFORE THE COURTS IN TAX P ROCEEDINGS. IT WOULD BESIDES BE INEXPEDIENT TO MAKE ANY ATTEMPT TO EVOLV E SUCH A RULE OR FORMULA. NO SINGE TEST OF UNIVERSAL APPLICATION CA N BE DISCOVERED FOR A ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 41 OF 230 SOLUTION OF THE QUESTION. THE ANSWER TO THE QUESTI ON MUST NECESSARILY DEPEND IN EACH CASE ON THE IMPRESSION AND EFFECT OF ALL THE RELEVANT FACTORS AND CIRCUMSTANCES PROVIDED THEREIN, AND WHICH DETER MINE THE CHARACTER OF THE TRANSACTION. THE COURT HAS TO LOOK NOT ONLY IN TO THE DOCUMENTS BUT ALSO AT THE SURROUNDINGS CIRCUMSTANCES SO AS TO ARR IVE AT A DECISION AS TO WHAT WAS THE REAL NATURE OF THE TRANSACTION IN A GI VEN CASE. THE QUESTION WHETHER ANY ASSET IS CAPITAL ASSET OR OTHERWISE CAN BE DETERMINED WITH REGARD TO THE NATURE OF THE TRANSACTION IN WHICH SU CH ASSET IS EMPLOYED AND INTENTION OF THE PARTY, WHICH WOULD BE GATHERED FRO M SURROUNDING CIRCUMSTANCES AFTER GIVING COMBINED EFFECT TO ALL T HE FACTORS AND CIRCUMSTANCES OF ANY GIVEN CASE. IT IS ALSO WELL S ETTLED THAT THE CHARACTER OF ASSET AT THE TIME OF ITS TRANSFER ALONE IS RELEV ANT, AND WHAT WAS THE NATURE AT THE TIME OF ITS ACQUISITION, IS ALTOGETHE R IRRELEVANT. THE CHARACTER OF THE ASSET IS THUS TO BE JUDGED AT THE TIME WHEN IT IS EITHER SOLD OR TRANSFERRED OR EMPLOYED IN ANY TRANSACTION. THE MA TERIAL TIME WITH REFERENCE TO WHICH THE QUESTION WHETHER A PARTICULA R ASSET WHICH HAVE BEEN SOLD OR TRANSFERRED OR OTHERWISE TRANSFERRED O R EMPLOYED IN ANY TRANSACTION IS A CAPITAL ASSET OR NOT IS TO BE DECI DED, IS THE DATE OF SUCH SALE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 42 OF 230 OR TRANSFER, AND NOT THE TIME WHEN IT WAS ACQUIRED. WE HAVE TO CONSIDER THE CHANGES IN CIRCUMSTANCES UNDER WHICH THE ASSET IS SUBSEQUENTLY EMPLOYED, FROM THE CIRCUMSTANCES PREVAILING ON THE DATE OF ITS ACQUISITION. IT IS ALSO TO BE CONSIDERED WHETHER THE CASE IS A C ASE OF CONVERSION OF ASSET FROM ONE NATURE TO ANOTHER. IN OTHER WORDS, IT IS ALSO TO BE SEEN WHETHER ANY CAPITAL ASSET HAS BEEN CONVERTED INTO A STOCK I N TRADE OR VICE-VERSA, WHICH CAN BE DETERMINED WITH REFERENCE TO THE COMBI NED EFFECT OF ALL THE FACTORS APPEARING IN ANY GIVEN CASE INCLUDING THE N ATURE OF THE TRANSACTION IN WHICH IT IS EMPLOYED AND THE INTENTION OF THE PA RTY. 16.4 AS HELD BY VARIOUS COURTS TIMES AND AGAIN, FOR DET ERMINING THE REAL NATURE OF INCOME, THE ENTRIES IN THE BOOKS OF ACCOUNT ARE NOT DECISIVE OR CONCLUSIVE. WHETHER THE ASSESSEE IS EN TITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISIONS OF L AW RELATING THERE TO, AND NOT ON THE VIEW, WHICH THE ASSESSEE MAY TAKE ON HIS RIGHTS NOR CAN THE EXISTENCE OF ENTRIES IN THE BOOKS OF ACCOUNTS BE DE CISIVE OR CONCLUSIVE IN THE MATTER. IN OTHER WORDS, IT IS SETTLED LAW THAT THE MANNER IN WHICH ENTRIES ARE MADE IN THE BOOKS OF ACCOUNT IS NOT DET ERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSSES. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 43 OF 230 IT IS THE TRUE NATURE AND QUALITY OF THE RECEIPT AN D NOT THE HEAD UNDER WHICH IT IS ENTERED IN THE ACCOUNT BOOKS, WHICH WOULD BE PROVED DECISIVE. THE NAME WHICH THE PARTIES MAY GIVE TO THE TRANSACTION, WHICH IS THE SOURCE OF THE RECEIPT, AND THE CHARACTERIZATION OF THE RECEIP T BY THEM ARE OF LITTLE CONSEQUENCE. WHAT IS RELEVANT IS THE TRUE AND LEGA L EFFECT OF THE TRANSACTION, AND THE ENTRIES IN THE BOOKS ARE NOT R ELEVANT. 16.5 IN THIS VIEW OF THE MATTER, IT IS, THEREFORE, NECE SSARY FOR US TO EXAMINE, ANALYSIS AND APPRECIATE ALL THE RELEVANT F ACTORS AND CIRCUMSTANCES OF THE PRESENT CASE TO DETERMINE THE TRUE NATURE AND CHARACTER OF THE TRANSACTION OF MAKING OVER OF ASSE SSEES PERSONAL ASSET AS CAPITAL CONTRIBUTION TOWARDS ITS CAPITAL TO A PARTN ERSHIP FIRM IN WHICH THE ASSESSEE BECAME A PARTNER AND TO DETERMINE THE NATU RE AND CHARACTER OF ASSET EMPLOYED IN THAT TRANSACTION. 16.6 WITH REGARD TO THE CONTROVERSY EXISTING BETWEEN C APITAL AND REVENUE RECEIPTS, THE COURTS HAVE FOUND IT DI FFICULT TO LAY DOWN ANY GENERAL CONSIDERATIONS WHICH WOULD CONCLUSIVELY DE TERMINE WHETHER A CERTAIN RECEIPT FALLS UNDER ONE OR THE OTHER CATEGO RY. WHETHER A PARTICULAR RECEIPT OR TRANSACTION IS ON CAPITAL ACCOUNT OR REV ENUE ACCOUNT HAS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 44 OF 230 FREQUENTLY ENGAGED THE ATTENTION OF THE COURTS. IT MAY BE BROADLY STATED THAT WHAT IS RECEIVED FOR LOSS OF CAPITAL IS A CAPI TAL RECEIPT: AND WHAT IS RECEIVED AS PROFIT IN A TRADING TRANSACTION IS TAXA BLE INCOME. BUT THE DIFFICULTY ARISES IN ASCERTAINING WHETHER WHAT IS R ECEIVED IN A GIVEN CASE IS ON ACCOUNT OF LOSS OF CAPITAL OR PROFIT IN TRADING TRANSACTION. CASES ON THE BORDER LINE GIVE RISE TO VEXING PROBLEMS. IT NEED HARDLY BE SAID THAT THE FORM IN WHICH THE TRANSACTION, WHICH GIVE RISE TO I NCOME, IS CLOTHED AND THE NAME WHICH IS GIVEN TO IT ARE IRRELEVANT IN DET ERMINING THE TRUE AND CORRECT NATURE OF THE TRANSACTION. THERE IS MATERI AL DISTINCTION BETWEEN COMMERCIAL AND TRADING TRANSACTION AND TRANSACTION ON CAPITAL FIELD. THE ASSESSEE MAY BY MAKING ENTRIES IN THE BOOKS, WHICH ARE NOT IN CONFORMITY WITH THE FACTS OF THE CASE AND PROPER ACCOUNTANCY P RINCIPLES, CONCEAL REAL NATURE OF THE ASSET OR THE RECEIPT OR THE TRANSACTI ON, AS THE CASE MAY BE. IN THAT EVENT AS ALREADY OBSERVED ABOVE, TRUE NATURE A ND CHARACTER OF THE TRANSACTION OR RECEIPT OR ASSET IN A GIVEN CASE IS TO BE DETERMINED ON A CONSIDERATION OF THE TOTALITY OF THE CIRCUMSTANCES OF THE CASE. NATURE AND CHARACTER OF TRANSACTION OF MAKING OVER PERSONAL ASSETS OF WHATEVER CHARACTER BY A PARTNER TO A FIRM AS CAPITA L CONTRIBUTION, IN ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 45 OF 230 WHICH HE IS OR BECOMES A PARTNER, AND THE NATURE OF ASSET AT TIME WHEN IT IS EMPLOYED THEREIN. 16.7 IN THE INSTANT CASE BEFORE US, WE ARE CALLED UPON TO DETERMINE THE TRUE AND CORRECT NATURE OF THE TRANSACTION OF C ONTRIBUTION OF PARTNERS PERSONAL ASSET AS CAPITAL CONTRIBUTION IN THE FIRM IN WHICH HE BECAME A PARTNER. THE FACTS OF THE PRESENT CASE REVEALS THA T THE ASSESSEE COMPANY WAS CARRYING ON A BUSINESS OF REAL ESTATE, BESIDES OTHERS. IN THE COURSE OF CARRYING ON BUSINESS OF DEVELOPING AND DEALING IN R EAL ESTATES, THE ASSESSEE HELD CERTAIN LANDS AND RIGHT IN LANDS AS STOCK IN T RADE OF ITS BUSINESS. THE ASSESSEE COMPANY ENTERED INTO A PARTNERSHIP WITH FO UR OF ITS SUBSIDIARIES COMPANIES AND ONE INDIVIDUAL AS EVIDENCED BY THE ME MORANDUM OF PARTNERSHIP EXECUTED AT NEW DELHI ON 23 RD DAY OF MARCH, 1992, WITH A OBJECT TO START AND CARRY ON THE BUSINESS OF DEVELO PING AND DEALING IN REAL ESTATE, CONSTRUCTION OF BUILDINGS AND LETTING THEM OUT OR SELLING THEM. THE ASSESSEE COMPANY HAD 76% SHARE, WHILE THE FOUR SUBS IDIARY COMPANY HELD 5% SHARE EACH AND THE INDIVIDUAL 4% IN THE PROFITS OR LOSS OF THE FIRM. IN PURSUANT TO THEIR INTENTION TO ENTER INTO PARTNERSH IP WITH THE OBJECT TO START AND CARRY ON THE REAL ESTATE BUSINESS, THE ASSESSEE HAD AGREED TO BRING ALL ITS RIGHT IN FIVE PLOTS OF LAND MEASURING ABOUT 19 9.99 ACRES INTO THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 46 OF 230 COMMON STOCK OF PARTNERSHIP, SO THAT ALL THE PARTNE RS, WHO HAD AGREED TO ENTERED INTO SAID PARTNERSHIP, MAY PARTICIPATE JOIN TLY IN THE DEVELOPMENT AND CONSTRUCTION OF BUILDING THERE UPON, WHICH WERE TO BE LET OUT FOR EARNING RENTAL INCOME THERE FROM OR SALE OF INDIVID UAL UNITS COMPRISED IN SUCH BUILDINGS. IN PURSUANCE TO THE AFORESAID MUTU AL AGREEMENT, THE ASSESSEE HAD BROUGHT ALL ITS RIGHT IN THE SAID PLOT OF LAND INTO A COMMON STOCK OF PARTNERSHIP W.E.F. 16.03.1992, AND ALL THE RIGHTS OF THE ASSESSEE UPON THE SAID PLOT BECAME THE PROPERTY OF THE PARTN ERSHIP FIRM W.E.F. 16.03.1992. THE ASSESSEE GOT THE SAID PLOT OF LAND BROUGHT INTO COMMON STOCK OF PARTNERSHIP VALUED BY EXPERTS DETERMINING THE VALUE THEREOF AT RS. 1150 LACS. IN CONSIDERATION OF THE ASSESSEE HAVING BROUGHT IN ALL ITS RIGHT IN THE SAID PLOTS OF LAND INTO COMMON STOCK OF THE PARTNERSHIP FIRM, THE ASSESSEES CAPITAL ACCOUNT WAS CREDITED BY RS. 1150 LACS IN THE ACCOUNTS OF THE PARTNERSHIP FIRM. THE ASSESSEE ALSO CREDITED I TS BOOKS BY SAID SUM OF RS. 1150 LACS, AND THE DIFFERENCE BETWEEN THE COST REFLECTING IN THE ASSESSEES ACCOUNT AND THE AMOUNT OF RS. 1150 LACS AT WHICH THE ASSESSEES CAPITAL ACCOUNT WAS CREDITED, AFTER CONS IDERING ALL EXPENSES INCURRED IN RESPECT OF SAID LAND BY THE ASSESSEE HA S BEEN CREDITED TO THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 47 OF 230 PROFIT AND LOSS ACCOUNT OF THE ASSESSEE COMPANY. I N THE BOOKS OF THE ASSESSEE COMPANY, THE TRANSACTION RESULTED INTO THE SURPLUS OF RS.6.01 CRORES, WHICH WAS CREDITED TO THE PROFIT AND LOSS A CCOUNT, BUT CLAIMED AS NOT EXIGIBLE TO TAX IN THE RETURN OF INCOME FILED B Y THE ASSESSEE FOR THE ASSESSMENT YEAR IN QUESTION. ACCORDING TO THE ASSE SSEE, THE READJUSTMENT ON ACCOUNT OF THE REVALUATION OF STOCK IN TRADE RES ULTING IN SURPLUS OF RS. 6.01 CRORES WAS NOT ITS INCOME AS THERE WAS NO TRAN SFER OR SALE OF LANDS TO ANY OTHER PERSON AS IN LAW, THERE COULD BE NO SALE TO ITSELF, AND THE READJUSTMENT OF THE VALUE OF ITS LANDS HELD BY THE ASSESSEE AS ITS STOCK-IN- TRADE COULD NOT IN LAW RESULT IN TO ANY PROFIT CHAR GEABLE TO TAX. THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF HONB LE SUPREME COURT IN THE CASE REPORTED AS CIT VS. HIND CONSTRUCTION LTD. 83 ITR 211 (SC). 16.8 FOR READY REFERENCE, THE RELEVANT PORTION OF RECITA LS MADE IN THE DEED OF PARTNERSHIP EXECUTED ON 23.03.1992 BETW EEN THE ASSESSEE AND FIVE OTHER PERSONS, AND MADE EFFECTIVE FROM 16.03.1 992, ARE BEING REPRODUCED HERE AS UNDER:- PARTNERSHIP DEED ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 48 OF 230 THIS MEMORANDUM OF PARTNERSHIP MADE AT NEW DELHI TH E 23 RD DAY OF MARCH, 1992 BETWEEN 1. M/S. DLF UNIVERSAL LIMITED, A PUBLIC LIMITED COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956 AND HAVING ITS REGISTERED OFFICE AT MODEL TOWN, FARIDAB AD IN THE STATE OF HARYANA OF THE ONE PART; 2. M/S. APOLLO LAND & HOUSING CO LTD. ALSO A COMPAN Y INCORPORATED UNDER THE COMPANIES ACT, 1956 AND HAVI NG ITS REGISTERED OFFICE AT 1-E, JHANDEWALAN EXTENSION, NE W DELHI OF THE SECOND PART; 3. M/S. MOONLIGHT BUILDER & DEVELOPERS LTD. ALSO A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956 AND HAVING ITS REGISTERED OFFICE AT 1-E, JHANDEWALAN EX TENSION, NEW DELHI OF THE THIRD PART; 4. M/S. SUNRISE LAND & HOUSING CO LTD. ALSO A COMPA NY INCORPORATED UNDER THE COMPANIES ACT, 1956 AND HAVI NG ITS REGISTERED OFFICE AT 1-MM, JHANDEWALAN EXTENSION, N EW DELHI OF THE FOURTH PART; 5. M/S. DLF BUILDERS & DEVELOPERS LTD. ALSO A COMPA NY INCORPORATED UNDER THE COMPANIES ACT, 1956 AND HAVI NG ITS REGISTERED OFFICE AT 1-E, JHANDEWALAN EXTENSION, NE W DELHI OF THE FIFTH PART; 6. MR. RAJINDER SINGH SON OF LATE SRI KARTAR SINGH LAMBA RESIDENT OF C-36, FATEH NAGAR, NEW DELHI 110 018 OF THE SIXTH PART; WHEREAS THE PARTIES OF THE FIRST TO SECOND PARTS AR E CARRYING ON THE BUSINESS OF DEVELOPING AND DEALING IN REAL ESTATE AND ARE ENGAGED IN THE DEVELOPMENT OF A PROJ ECT KNOWN AS DLF QUTAB ENCLAVE COMPLEX IN GURGAON, DISTRICT OF HARYANA STATE WHICH IS HEREINA FTER REFERRED TO AS THE SAID PROJECT AND ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 49 OF 230 WHEREAS IT WAS AGREED BETWEEN THE PARTIES HERETO THAT OUT OF AFORESAID LAND, FIVE PLOTS OF LAND ADMEASURI NG ABOUT 16.98 ACRES AND MOREFULLY DESCRIBED IN THE SCHEDULE WRITTEN HEREUNDER (AND HEREINAFTER REFERRED TO AS THE SAID PLOTS) MAY BE BROUGHT INTO THE COMMON STOCK OF A PARTNERSH IP SO THAT ALL THE PARTIES HERETO PARTICIPATE JOINTLY THE IR FURTHER DEVELOPMENT AND CONSTRUCTION OF BUILDINGS TO BE LET OUT FOR EARNING RENTAL INCOME THEREFROM OR SALE OF INDIVIDU AL UNITS COMPRISED IN SUCH BUILDINGS; AND WHEREAS THE PARTIES OF THE THIRD TO SIXTH PART ALSO AGREED TO PARTICIPATE IN THE FURTHER DEVELOPMENT OF THE SA ID PLOTS AND THE CONSTRUCTION OF BUILDINGS THEREON AS AFORESAID; AND WHEREAS IN ACCORDANCE WITH THE AFORESAID AGREEMENT THE PARTY OF THE FIRST PART BROUGHT ALL ITS RIGHT IN TH E SAID PLOTS INTO THE COMMON STOCK OF PARTNERSHIP; AND WHEREAS WITH THE EFFECT FROM THE 16 TH DAY OF MARCH, 1992 ALL THE RIGHTS OF THE PARTY OF THE FIRST PART IN TH E SAID PLOTS (INCLUDING THE AREA OF LAND OWNED BY IT) BECAME THE PROPERTY OF THE PARTNERSHIP FIRM; AND WHEREAS THE PARTIES HERETO AGREED THAT ON THE BASIS OF EXPERT VALUATION, THE CURRENT VALUE OF THE RIGHTS I N THE SAID PLOTS IS RS.1150 LACS; AND WHEREAS THE AMOUNT OF RS.1150 LACS WAS ACCORDINGLY CREDITED TO THE ACCOUNT OF THE PARTY OF THE FIRST P ART IN THE ACCOUNT BOOKS OF THE PARTNERSHIP FIRM ON ACCOUNT OF ITS HAVING BROUGHT ITS RIGHT IN THE SAID PLOTS INTO COM MON STOCK OF PARTNERSHIP TO BE TREATED AS ITS CONTRIBUTION TO WARDS THE CAPITAL OF THE PARTNERSHIP; AND WHEREAS THE PARTY OF THE FIRST PAST HAS ALREADY PAI D AN AMOUNT OF RS.1,27,90,215/- AS ADVANCE TOWARDS PURCH ASE OF LAND TO ITS SUBSIDIARY COMPANIES FROM WHOM THE LAND HEREBY BROUGHT INTO THE COMMON STOCK OF PARTNERSHIP HAS BE EN ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 50 OF 230 AGREED TO BE PURCHASED BUT WHATEVER FURTHER AMOUNT BECOMES PAYABLE TO THE SUBSIDIARIES, THE SAME WILL BE PAYABLE BY THE FIRM; AND WHEREAS ALL THE OTHER PARTIES HERETO HAVE AGREED TO CONTRIBUTE SUCH AMOUNTS TOWARDS THE CAPITAL OF THE PARTNERSHIP FIRM AS ARE MENTIONED HEREINAFTER AND W HICH MAY BE VARIED FROM TIME TO TIME; AND WHEREAS IT WAS AGREED THAT FURTHER AMOUNTS REQUIRED FOR THE BUSINESS OF THE PARTNERSHIP WILL BE CONTRIBUTED BY THE PARTIES HERETO AS MAY BE MUTUALLY AGREED UPON FROM TIME TO TIME; AND WHEREAS THE BOARD OF DIRECTORS OF THE PARTIES OF TH E FIRST TO FIFTH PARTS APPROVED THE PROPOSAL FOR THEIR RESP ECTIVE COMPANIES ENTERING INTO PARTNERSHIP AT THEIR RESPEC TIVE MEETINGS. WHEREAS THE BUSINESS OF THE PARTNERSHIP HAS ALREADY COMMENCED WITH EFFECT FROM 16 TH DAY OF MARCH, 1992. WHEREAS THE PARTIES HERETO ARE NOW DESIROUS OF RECO RDING THE TERMS AND CONDITIONS ON WHICH THEY HAVE ENTERED INTO PARTNERSHIP ON THE 16 TH DAY OF MARCH, 1992. NOW THIS MEMORANDUM WITNESSETH AND IT IS HEREBY RECORDED AND CONFIRMED AS UNDER:- 1. THAT THE PARTIES HERETO HAVE ENTERED INTO PARTNERSH IP WITH EFFECT FROM THE 16 TH DAY OF MARCH, 1992 WITH THE OBJECT OF STARTING AND CARRYING ON THE BUSINESS OF DEVELOP ING AND DEALING IN REAL ESTATE, CONSTRUCTING BUILDINGS AND LETTING THEM OUT OR SELLING THEM. 2. THAT THE BUSINESS IS BEING AND SHALL CONTINUE TO BE CARRIED ON UNDER THE NAME AND STYLE OF DLF COMMERCI AL DEVELOPERS. 3. THAT THE PARTY OF THE FIRST PART HAS BROUGHT ALL IT S RIGHT IN THE SAID PLOTS OF LAND ADMEASURING ABOUT 16.98 A CRE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 51 OF 230 SITUATED IN DLF QUTUB ENCLAVE COMPLEX AND WHICH ARE MOREFULLY DESCRIBED IN THE SCHEDULE WRITTEN HEREUND ER INTO THE COMMON STOCK OF PARTNERSHIP AND ALL ITS RIGHT I N THE SAID PLOTS BECAME THE PROPERTY OF THE PARTNERSHIP FIRM W ITH EFFECT FROM 16 TH DAY OF MARCH, 1992. 4. THAT ON ACCOUNT OF THE PARTY OF THE FIRST PART HAVI NG BROUGHT ITS RIGHT IN THE SAID PLOTS INTO THE COMMON STOCK OF THE PARTNERSHIP, AN AMOUNT OF RS.1150 LACS HAS BEEN CREDITED TO THE CAPITAL ACCOUNT OF THE PARTY OF THE FIRST PA RT IN THE ACCOUNT BOOKS OF THE PARTNERSHIP FIRM. 5. THAT THE PARTY OF THE FIRST PART HAS ALREADY ADVANC ED AN AMOUNT OF RS.1,27,90,215/- TO THE AFORESAID SUBS IDIARY COMPANIES BUT WHATEVER FURTHER AMOUNTS BECOME PAYAB LE TO THEM, THE SAME SHALL BE PAID AND BORNE BY THE PARTN ERSHIP FIRM. 6. THAT THE PARTY OF THE SECOND TO FIFTH PART HAVE AGR EED TO BRING BY WAY OF CAPITAL CONTRIBUTION AN AMOUNT O F RS. ONE LAC EACH AND PARTY OF THE SIXTH PART AGREED TO BRIN G IN RS. FIFTY THOUSAND. THE PARTIES HERETO MAY DECIDE TO C ONTRIBUTE SUCH FURTHER AMOUNTS OF CAPITAL AS MAY BE REQUIRED FORM TIME TO TIME. 7. THAT REGULAR BOOKS OF ACCOUNT SHALL BE MAINTAINED I N RESPECT OF THE BUSINESS OF THE PARTNERSHIP AND ON A DAY TO BE MUTUALLY AGREED UPON, THE ACCOUNT BOOKS SHALL BE CL OSED ANNUALLY AND A STATEMENT OF ALL THE ASSETS AND LIAB ILITIES AND THE PROFIT AND LOSS ACCOUNT SHALL BE PREPARED AND S IGNED ON BEHALF OF EACH PARTNER AND GOT AUDITED BY CHARTERED ACCOUNTANTS APPROVED BY THE PARTIES BY MUTUAL CONSE NT FROM TIME TO TIME. THE PARTIES HERETO SHALL BE ENTITLED TO RECEIVED THE NET PROFIT OR BEAR THE NET LOSS (INCLUDING PROF IT OR LOSS OF A CAPITAL NATURE) IN THE FOLLOWING PROPORTION:- 1 M/S DLF UNIVERSAL LTD 76% 2 M/S APOLLO LAND & HOUSING CO LTD. 5% 3 M/S MOONLIGHT BUILDERS & DEVELOPERS 5% ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 52 OF 230 LTD. 4 M/S SUNRISE LAND & HOUSING CO LTD. 5% 5 M/S DLF BUILDERS & DEVELOPERS LTD. 5% 6 MR. RAJINDER SINGH 4% 7. THAT THE RETIREMENT, DEATH, INSOLVENCY OR LIQUID ATION OF ANY OF THE PARTIES HERETO SHALL NOT LEAD TO THE DIS SOLUTION OF THE PARTNERSHIP AS BETWEEN THE SURVIVING OR CONTINU ING PARTIES. 16.9 FROM THE SUBMISSION OF THE ASSESSEE MADE BEFORE TH E AUTHORITIES BELOW AS WELL AS BEFORE US, WE SEE THAT THE LEARNED COUNSEL FOR THE ASSESSEE HAS TRIED TO MAKE OUT THE NATURE AND C HARACTER OF THE TRANSACTION IN QUESTION AS UNDER: I. THAT THE SAID LAND CONTRIBUTED AS CAPITAL CONTRIBUT ION BY THE ASSESSEE TO THE FIRM WAS HELD AS STOCK IN TRADE BY THE ASSESSEE. II. THAT THE STOCK IN TRADE WAS CONTRIBUTED TO THE FIRM AS CAPITAL CONTRIBUTION BY THE ASSESSEE IN THE CAPACITY OF A P ARTNER. III. THAT THE STOCK IN TRADE CONTRIBUTED TO THE FIRM AS CAPITAL CONTRIBUTION BY THE ASSESSEE IN THE CAPACITY OF A P ARTNER WAS ALSO HELD AS STOCK IN TRADE BY THE FIRM. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 53 OF 230 IV. THAT THE SURPLUS ARISES TO THE ASSESSEE ON ACCOUNT OF REVALUATION OF STOCK IN TRADE AT HIGHER VALUE THAN THE COST TO THE ASSESSEE AND FROM CONTRIBUTING THE SAME TO A FI RM AS ITS CAPITAL IS NOT A PROFIT OR GAIN FROM BUSINESS AS CO NTRIBUTION OF STOCK IN TRADE BY A PARTNER AS ITS CAPITAL TO A FIR M AT HIGHER VALUE IS NOT A COMMERCIAL OR TRADING TRANSACTION IN A BUSINESS SENSE, AND IT DOES NOT AMOUNT TO A SALE OR TRANS FER. 16.10 THE REVENUE, ON THE OTHER HAND, HAS DRAWN INFERENCE/CONCLUSION ON THE FACTS OF THE PRESENT CA SE AS UNDER: I. THAT AS PER ENTRIES IN THE BOOKS OF THE ASSESSEE WH ERE THE ASSESSEE HAS SHOWN SALE, REDUCTION OF STOCK IN TRAD E, CREDITING OF SALE ACCOUNT, CREDITING SURPLUS IN THE P&L ACCOU NT, UTILIZING THE SURPLUS BY WAY OF DISTRIBUTION OF DIV IDEND AND CARRYING THE SURPLUS TO BALANCE-SHEET, AND AS PER E NTRY IN THE BOOKS OF THE PARTNERSHIP FIRM WHERE THE ASSESSEE PA RTNERS ACCOUNT WAS CREDITED AND PURCHASE ACCOUNT WAS DEBIT ED, AND EVEN OTHERWISE AS PER GENERAL LAW, THERE LEAVES NO DOUBT THAT OWNERSHIP IN STOCK IN TRADE HAS BEEN PASSED OVER BY WAY OF ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 54 OF 230 TRANSFER OR SALE AS UNDERSTOOD IN GENERAL LAW FROM ASSESSEE PARTNER TO A FIRM, AND THE TRANSACTION IN QUESTION WAS A TRANSACTION OF THE SALE BETWEEN TWO DIFFERENT AND D ISTINCT ASSESSABLE ENTITIES. II. THAT FROM THE FACT THAT THE ASSESSEE COMPANY HAS EN TERED INTO PARTNERSHIPS YEAR AFTER YEAR WITH ITS SUBSIDIARIES AND EMPLOYEES IN A CALCULATED MANNER, IT IS CLEAR THAT THE ASSESSEE HAS INDULGED IN A COLOURABLE DEVICE TO EVADE PAYMEN T OF CORRECT TAXES ON TRANSFER OF STOCK IN TRADE AT AN E NHANCED PRICE, GIVING THE TRANSACTION A COLOUR OF CAPITAL C ONTRIBUTION BY A PARTNER TO A FIRM AS AGAINST REAL TRANSACTION OF SALE OF STOCK IN TRADE FROM ONE ASSESSABLE ENTITY TO ANOTHE R. III. EVEN OTHERWISE, IT IS A CASE OF CAPITAL ASSET BROUG HT IN BY PARTNER TO A PARTNERSHIP TOWARDS ITS CAPITAL CONTRI BUTION, AND THE PROFIT OR GAINS ARISING THERE FROM IS CHARGEABL E TO TAX UNDER THE HEAD CAPITAL GAINS AS PER PROVISIONS CO NTAINED IN SECTION 45(3) OF THE ACT INSERTED W.E.F. 01.041988 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 55 OF 230 16.11 IN SO FAR AS THE FACT THAT THE LAND CONTRIBUTED BY THE ASSESSEE PARTNER TO A FIRM TOWARDS ITS CAPITAL WAS HELD AS S TOCK IN TRADE BY THE ASSESSEE FOR ITS BUSINESS OF REAL ESTATE BEFORE THE SAME WAS SO CONTRIBUTED AS CAPITAL TO A FIRM IS CONCERNED, THERE IS NO DISP UTE BETWEEN THE PARTIES. 16.12 NOW, THE QUESTION ARISES AS TO WHETHER THE PERSONA L ASSET BEING SAID LAND CONTRIBUTED BY ASSESSEE TOWARDS ITS CAPITAL IN A PARTNERSHIP FIRM AT THE TIME THE ASSESSEE BECAME A PARTNER IS T O BE TREATED AS CAPITAL ASSET OR CONTINUED TO BE TREATED AS STOCK IN TRADE OF THE ASSESSEE, OR WHETHER IT IS A CASE OF SALE OR TRANSFER OF STOCK I N TRADE OR CAPITAL ASSET, AS THE CASE MAY BE, FROM A PARTNER TO A FIRM. UNDOUBT EDLY, A DISPUTE IN THIS REGARD DOES INDEED LIE BETWEEN THE ASSESSEE AND TH E DEPARTMENT, WHICH IS TO BE DECIDED IN THIS CASE 16.13 AS ALREADY OBSERVED ABOVE HEREIN, THE BOOK-ENTRIES DO NOT FIX OR REGULATE THE LIABILITY OF THE ASSESSEE TO TAX. MOREOVER, THE WAY IN WHICH ENTRIES ARE MADE BY PARTIES IN THEIR BOOKS OF ACCOU NT OR DOCUMENTS OR PAPERS IS NOT DETERMINATIVE OF THE TRUE AND CORRECT NATURE OF THE TRANSACTION. WHAT IS TO BE CONSIDERED IN THE TRUE AND CORRECT NATURE OF THE TRANSACTION WITH REGARDS TO THE TOTALITY OF THE FAC TS AND CIRCUMSTANCES OF A ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 56 OF 230 GIVEN CASE. THEREFORE, THE ENTRIES IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND THE PARTNERSHIP FIRM ALONE ARE NOT DECISIVE OR CONCLUSIVE TO DECIDE THE QUESTION WHETHER THE ASSESSEE HAS TRANSFERRED ITS P ERSONAL ASSETS TO A PARTNERSHIP FIRM BY WAY OF CAPITAL CONTRIBUTION OR IT IS A NORMAL SALE IN THE ORDINARY COURSE OF ITS BUSINESS OR TRADING TRANSACT ION. WE HAVE CAREFULLY GONE THROUGH THE TERMS OF THE DEED OF PARTNERSHIP E NTERED INTO BETWEEN THE ASSESSEE AND FIVE OTHER PARTNERS, FOUR ARE SUBSIDIA RY OF THE ASSESSEE COMPANY AND ONE IS AN EMPLOYEE OF THE GROUP COMPANY . THERE IS NO PROHIBITION IN LAW IN ENTERING INTO A PARTNERSHIP B Y A COMPANY WITH ITS SUBSIDIARIES. FURTHER, UNDER THE LAW, A PARTNER IS PERMITTED TO BRING HIS PERSONAL ASSETS INTO A PARTNERSHIP BY WAY OF HIS CA PITAL CONTRIBUTION. THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHART HBHAI V. COMMISSIONER OF INCOME-TAX (1985) 156 ITR 509 (SC) WAS DEALING WITH THE SITUATION WHERE AN INDIVIDUAL MAKES OVER HIS CA PITAL ASSET TO A PARTNERSHIP AS HIS CONTRIBUTION TOWARDS CAPITAL AND THE ASSET WAS VALUED FOR THAT PURPOSES AT THE MARKET VALUE, AND IN THAT EVENT, IT WAS HELD BY THE HONBLE SUPREME COURT THAT THERE WAS A TRANSFER OF CAPITAL ASSET WITHIN THE MEANING OF SECTION 45 OF THE INCOME TAX ACT, 1961. THUS, THERE IS NO BAR ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 57 OF 230 IN MAKING OVER OF PERSONAL ASSET BELONGING TO A PAR TNER TO A FIRM AT A REVALUED MARKET PRICE AS HIS CONTRIBUTION TOWARDS C APITAL. THEREFORE, MERE BECAUSE, IN THE PRESENT CASE, THE ASSESSEE HAS CONT RIBUTED LAND AT REVALUED PRICE, WHICH IS MORE THAN THE COST PRICE TO THE ASS ESSEE, IT CANNOT BE SAID THAT THE ASSET IN QUESTION WAS NOT CONTRIBUTED TO A FIRM BY PARTNER TOWARDS ITS CAPITAL. EVEN, SUCH A TRANSACTION NOW TAKES CA RE OF BY SECTION 45(3) OF THE INCOME TAX ACT, 1961, INSERTED FROM THE ASSESSM ENT YEAR 1988-89. SUB-SECTION (3) OF SECTION 45 OF THE ACT, EFFECTIVE FROM ASSESSMENT YEAR 1988-89, ENACTS THAT THE PROFITS AND GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A PERSON TO A FIRM, IN WHICH HE IS OR BECOMES A PARTNER, BY WAY OF CAPITAL CONTRIBUTION OR OTHERWISE, SHALL BE CHARGEABLE TO TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TRANSFER TAKES PLACE AND, FOR THE PURPOSES OF SECTION 48, THE AMOUNT RECORDED IN THE BOOKS OF ACCOUNT OF THE FIRM AS THE VALUE OF THE CAPITAL ASSET SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. WHETHER THE TRANSACTION IS A COLOURABLE DEVICE OR R USE TO EVADE PAYMENT OF CORRECT TAXES ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 58 OF 230 16.14 IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA), THE HONBLE SUPREME COURT ISSUE D A WORD OF CAUTION BY STATING THAT THE PRINCIPLES LAID DOWN BY THEM IN THAT CASE WILL HOLD GOOD IF THE FIRM OR THE TRANSACTION IS A GENUINE ONE, AN D THUS OBSERVED AS FOLLOWS:- IF THE TRANSFER OF THE PERSONAL ASSET BY THE ASSESSEE TO A PARTNERSHIP IN WHICH HE IS OR BECOMES A PARTNER IS MERELY A DEVICE OR RUSE FOR CONVERTING T HE ASSET INTO MONEY WHICH WOULD SUBSTANTIALLY REMAIN AVAILABLE FOR HIS BENEFIT WITHOUT LIABILITY TO INCO ME-TAX ON A CAPITAL GAIN, IT WILL BE OPEN TO THE INCOME-TA X AUTHORITIES TO GO BEHIND THE TRANSACTION AND EXAMIN E WHETHER THE TRANSACTION OF CREATING THE PARTNERSHIP IS A GENUINE OR A SHAM TRANSACTION AND, EVEN WHERE THE PARTNERSHIP IS GENUINE, THE TRANSACTION OF TRANSFER RING THE PERSONAL ASSET TO THE PARTNERSHIP FIRM REPRESEN TS A REAL ATTEMPT TO CONTRIBUTE TO THE SHARE CAPITAL OF THE PARTNERSHIP FIRM FOR THE PURPOSE OF CARRYING ON THE PARTNERSHIP BUSINESS OR IS NOTHING BUT A DEVICE OR RUSE TO CONVERT THE PERSONAL ASSET INTO MONEY SUBSTANTIA LLY FOR THE BENEFIT OF THE ASSESSEE WHILE EVADING TAX O N A CAPITAL GAIN. THE ITO WILL BE ENTITLED TO CONSIDER ALL THE RELEVANT INDICIA IN THIS REGARD, WHETHER THE PARTNERSHIP IS FORMED BETWEEN THE ASSESSEE AND HIS WIFE AND CHILDREN OR SUBSTANTIALLY LIMITED TO THEM, WHETHER THE PERSONAL ASSET IS SOLD BY THE PARTNERSH IP FIRM SOON AFTER IT IS TRANSFERRED BY THE ASSESSEE T O IT, WHETHER THE PARTNERSHIP FIRM HAS NO SUBSTANTIAL OR REAL BUSINESS OR THE RECORD SHOWS THAT THERE WAS NO REAL NEED OF THE PARTNERSHIP FIRM FOR SUCH CAPITAL CONTRIBUTION FROM THE ASSESSEE. ALL THESE AND OTHER ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 59 OF 230 PERTINENT CONSIDERATIONS MAY BE TAKEN INTO REGARD WHEN THE ITO ENTERS UPON A SCRUTINY OF THE TRANSACT ION FOR IN THE TASK OF DETERMINING WHETHER A TRANSACTIO N IS A SHAM OR ILLUSORY TRANSACTION OR A DEVICE OR RUSE HE IS ENTITLED TO PENETRATE THE VEIL COVERING IT AND ASCE RTAIN THE TRUTH. 16.15 IN THE LIGHT OF AFORESAID WORD OF CAUTION EMPHASIZ ED BY THE HONBLE SUPREME COURT, WE PROCEED TO EXAMINE WHETHE R THE TRANSACTION OF CREATING THE PARTNERSHIP FIRM IN THE PRESENT CAS E BEFORE US IS A GENUINE OR A SHAM TRANSACTION, OR EVEN WHERE THE PARTNERSHI P IS GENUINE, WHETHER THE TRANSFER OF LAND IN QUESTION AS CAPITAL CONTRIB UTION BY THE ASSESSEE TO A PARTNERSHIP FIRM IN WHICH THE ASSESSEE BECAME A PAR TNER WAS MERELY A DEVISE OR RUSE FOR CONVERTING THE LAND INTO MONEY W HICH WOULD SUBSTANTIALLY REMAIN AVAILABLE FOR ASSESSEES BENEF IT WITHOUT LIABILITY TO INCOME TAX. 16.16 THE AO DOUBTED THE GENUINENESS OF THE FIRM AND ALS O THE TRANSACTION, AND HE HELD THAT IT WAS A SHAM TRANSAC TION WITH COLOURABLE DEVICE TO AVOID TAX. THE AO STATED THAT THE NEW PA RTNERSHIP FIRM CONSTITUTED W.E.F. 16.03.1992 DID NOT FILE ANY RETU RN OF INCOME FOR ASSESSMENT YEAR 1992-93 NOR APPLIED FOR REGISTRATIO N OF FIRM U/S. 185 AS IT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 60 OF 230 THEN STOOD. THE AO HAD TAKEN A NOTE OF THE ABOVE-S TATED WORDS OF CAUTION EMPHASIZED BY HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX [1985] 156 ITR509 (SC ). THE AO ALSO MADE A REFERENCE TO THE DECISION OF HONBLE SUPREME COURT IN THE MACDOWELLS REPORTED IN 154 ITR 148 (S.C.). THE CI T(A) ALMOST CONCURRED WITH THE FINDINGS OF THE AO ON THIS ASPEC T OF THE MATTER. THE CIT(A) HAD HIGHLIGHTED A FACT THAT THE PARTNERSHIP FIRM WAS FORMED BETWEEN THE ASSESSEE AND ITS 100% SUBSIDIARIES AND ONE EMPLOYEE OF THE GROUP, AND HE THEN HOLD THAT THE TRANSACTION WAS MA DE BETWEEN INTERESTED AND RELATED PERSONS AS A COLOURABLE DEVICE TO EVADE PAYMENT OF TAXES ON SURPLUS ARISING FROM THE TRANSACTION. 16.17 ON THIS ASPECT OF THE MATTER, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE FIRM STARTED FILING OF ITS RETURN OF INCOME FROM NEXT ASSESSMENT YEAR 1993-94 AND COMPLIANCE OF PROVISIONS OF SECTION 184 OF THE ACT AS APPLICABLE FROM ASSESSMEN T YEAR 1993-94 AND SUBSEQUENT YEARS WAS DULY MADE, AND THE AO HAS ALSO ASSESSED THE FIRM AS SUCH TILL DATES AS IS EVIDENT FROM ASSESSMENT ORDER S FOR ASSESSMENT YEAR 1993-94 TO 1998-99, WHICH ARE PLACED IN THE PAPER B OOK FILED BY THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 61 OF 230 ASSESSEE. HE, THEREFORE, CONTENDED THAT THE GENUIN ENESS OF THE NEW FIRM CANNOT BE DOUBTED. IN ITS COMMENTS AGAINST AOS OB SERVATIONS (PLACED AT PAGE 10-21 OF THE PAPER BOOKS DATED 01.04.2006 FILE D BY THE ASSESSEE ON 10.04.2006/12.04.2006), THE ASSESSEE STATED THAT IF THE TRANSACTION OF CONTRIBUTION OF STOCK IN TRADE, AS CAPITAL TO THE N EW FIRM IS SHAM, NO TRANSFER UNDER (SIC) LAW TAKE PLACE AS THE TRANSACT ION WAS NOT INTENDED TO BE GIVEN EFFECT TO. IN ANY CASE, THE ALLEGED SURPL US FOR ENHANCING THE VALUE OF THE LAND BY BOOK ENTRIES DOES NOT TANTAMOU NT TO SALE AS NO ONE CAN SALE TO HIMSELF, IN VIEW OF THE LAW LAID DOWN B Y THE SUPREME COURT IN THE CASE OF HIND CONSTRUCTION LTD. 83 ITR 211 (SC) AND CONSIDERED IN SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX [ 1985] 156 ITR509 (SC) UPHOLDING THE DECISION OF HIND CONSTRUCTION LT D. AGAINST CIT(A)S OBSERVATION, THE ASSESSEE SUBMITTED HIS COMMENTS (P LACED AT PAGES 22 TO 23 OF PAPER BOOKS FILED BY THE ASSESSEE ON 10.04.20 06/12.04.2006) STATING THAT SINCE IT WAS INITIAL YEAR OF CONSISTING OF LES S THAN A MONTH, NO COMMERCIAL ACTIVITIES WERE STARTED DURING THE YEAR UNDER CONSIDERATION, BUT IN SUBSEQUENT ASSESSMENT YEARS FROM ASSESSMENT YEAR 1993-94, THE FIRM HAS BEEN DULY ASSESSED U/S. 143(3) OF THE ACT BY THE AO, AND ALL THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 62 OF 230 PARTNERS WHETHER THEY ARE COMPANIES OR INDIVIDUALS BEING SEPARATE ENTITIES, WERE BEING ASSESSED TO TAX SEPARATELY. IT WAS FURT HER STATED THAT THE FUNDS FOR CARRYING OUT BUSINESS OF THE FIRM WERE RAISED B Y THE FIRM. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS REITERATED THE COMMENTS OF THE ASSESSEE AGAINST THE OBSERVATIONS OF THE AO AND THE CIT(A) AND POINTED OUT THAT THE HONBLE SUPREME COURT IN THE CASE OF S UNIL SIDDHARTHBHAI (SUPRA) ISSUED A WORD OF CAUTION BY STATING THAT TH E PRINCIPLES LAID DOWN BY THEIR LORDSHIP WILL HOLD GOOD IF THE FIRM IS A G ENUINE ONE. THE OBSERVATION OF HONBLE SUPREME COURT AT PAGE 523 OF THE REPORT WAS REFERRED TO, AND WITH REGARD TO THE SAID OBSERVATIO N, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE ARE VERY IMPORTAN T OBSERVATIONS OF THE HONBLE SUPREME COURT AND THEY WISH TO SUBMIT THAT IN ALL THE CASES BEFORE THE HONBLE BENCH, NO MONEY WHATSOEVER HAS B EEN WITHDRAWN BY THE ASSESSEE FROM THE FIRMS AGAINST THE CONTRIBUTIO N OF STOCK IN TRADE MADE TOWARDS THE CAPITAL (SEE THE WRITTEN SYNOPSIS FILED BY THE ASSESSEES A/R BEFORE US) 16.18 CONTRA, THE LD. SR. STANDING COUNSEL FOR THE REVEN UE HAS SUBMITTED THAT IT IS PERTINENT TO NOTE THAT THE ASS ESSEE COMPANY HAS ENTERED ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 63 OF 230 INTO PARTNERSHIPS YEAR AFTER YEAR WITH ITS SUBSIDIA RIES AND EMPLOYEES IN A CALCULATED MANNER TO EVADE PAYMENT OF CORRECT TAXES , AND IT IS A CLEAR-CUT CASE OF COLOURABLE DEVICE, AND THE DECISIONS OF THE APEX COURT IN THE CASES OF SUNIL SIDDHARTHBHAI (SUPRA) AND MCDOWELL AND COM PANY (SUPRA) SUPPORT THE FINDING OF THE AO. HE FURTHER SUBMITTE D THAT THE AO DOUBTED NOT ONLY THE GENUINENESS OF THE FIRM BUT ALSO THE V ERY TRANSACTION OF CONTRIBUTING LAND HELD BY THE ASSESSEE AS STOCK IN TRADE TO A PARTNERSHIP FIRM TOWARDS ITS CAPITAL AT AN ENHANCED VALUE CREDI TED IN THE ASSESSEES ACCOUNT AS THE ASSESSEE DID NOT OFFER THE SURPLUS A RISING FROM THE SAID TRANSACTION TO TAX ON THE GROUND THAT NO GAIN OR B ENEFIT HAD ACCRUED TO THE ASSESSEE EITHER BY WAY OF SALE OR TRANSFER THOUGH T HE SURPLUS WAS RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE. 16.19 WE HAVE CONSIDERED THIS ASPECT OF THE MATTER TOUCH ING THE WORDS OF CAUTION EMPHASIZED BY THE HONBLE SUPREME COURT IN THE JUDGMENT IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPRA) . THE LEARNED COUNSEL FOR THE ASSESSEE HAS RIGHTLY SUBMITTED THAT THESE A RE VERY IMPORTANT OBSERVATIONS OF THE HONBLE SUPREME COURT. HOWEVER , HE SUBMITTED THAT IN ALL THE CASES BEFORE US, NO MONEY WHATSOEVER HAS BEEN WITHDRAWN BY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 64 OF 230 THE ASSESSEE FROM THE FIRMS AGAINST THE CONTRIBUTIO N OF STOCK IN TRADE MADE TOWARDS CAPITAL. IN THE LIGHT OF THE DECISION OF H ONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPRA), IT IS CLEA R THAT IT IS OPEN TO THE INCOME TAX AUTHORITY TO GO BEHIND THE TRANSACTION A ND EXAMINE WHETHER THE TRANSACTION OF CREATING THE PARTNERSHIP IS A GE NUINE OR SHAM TRANSACTION AND, EVEN WHERE THE PARTNERSHIP IS A GENUINE, THE T RANSACTION OF TRANSFERRING THE PERSONAL ASSET TO THE PARTNERSHIP FIRM REPRESENTS A REAL ATTEMPTS TO CONTRIBUTE TO THE SHARE CAPITAL OF THE PARTNERSHIP FIRM FOR THE PURPOSE OF CARRYING ON THE PARTNERSHIP BUSINESS OR IS NOTHING BUT A DEVICE OR RUSE TO CONVERT THE PERSONAL ASSET INTO MONEY SU BSTANTIALLY FOR THE BENEFIT OF THE ASSESSEE WHILE EVADING TAX ON A CAPI TAL GAIN. TO EXAMINE AND DECIDE THIS ASPECT OF THE MATTER, CERTAIN FACTO RS OR INDICIA AS MENTIONED IN THE SAID DECISION INCLUDING SOME OTHER PERTINENT CONSIDERATION MAY BE TAKEN INTO REGARD, AND THE AO SHALL BE ENTITLED TO PENETRATE THE VEIL COVERING IT AND ASCERTAIN THE TR UTH. THE RELEVANT PASSAGE OF THIS DECISION HAS BEEN SET OUT ABOVE IN PARA 16. 14 OF THIS ORDER. 16.20 FROM THE MATERIAL PLACED ON RECORD, WE FIND THAT TH E PARTNERSHIP FIRM SO CONSTITUTED HAS BEEN ASSESSED T O TAX AS SUCH FROM YEAR ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 65 OF 230 TO YEAR BY THE DEPARTMENT, AND THE DEPARTMENT HAS N OT CONSIDERED THE FIRM AS BOGUS OR SHAM. THUS, WE DO NOT FIND ANY MATERIA L TO HOLD THAT THE VERY TRANSACTION OF CREATING THE PARTNERSHIP ITSELF IS N OT GENUINE BUT A SHAM TRANSACTION. HAVING SAID SO, WE HAVE TO EXAMINE FU RTHER EVEN IF THE PARTNERSHIP IS GENUINE, WHETHER THE TRANSACTION OF TRANSFERRING THE ASSESSEES PERSONAL ASSET IN THE FORM OF LAND TO TH E PARTNERSHIP FIRM REPRESENTS A REAL ATTEMPT TO CONTRIBUTE TO THE SHAR E CAPITAL OF THE PARTNERSHIP FIRM FOR THE PURPOSE OF CARRYING ON THE PARTNERSHIP BUSINESS OR IS NOTHING BUT A DEVICE OR RUSE TO CONVERT THE PERS ONAL ASSET INTO MONEY SUBSTANTIALLY FOR THE BENEFIT OF THE ASSESSEE WHILE EVADING TAX ON THE SURPLUS ARISING FROM THE TRANSACTION. WE FIND THAT THE ASSESSES COMPANY HAS ENTERED INTO PARTNERSHIP YEAR AFTER YEAR WITH I TS SUBSIDIARIES AND EMPLOYEES BY CONTRIBUTING PART OF TOTAL LAND HELD B Y IT TO THESE FIRMS. THE YEAR-WISE DETAILS ABOUT CONSTITUTING VARIOUS FIRMS IS AS UNDER:- DETAILS OF PARTNERHSIP FIRMS S. NO. NAME OF PARTNERSHIP FIRM DATE OF PARTNERSHIP RELEVANT ASST. YEAR 1 DLF COMMERCIAL DEVELOPERS 16.03.1992 1999-1993 2 REAL ESTATE BUILDERS 31.01.1997 1997-1998 3 DLF OFFICE DEVELOPERS 24.02.1998 1998-1999 4 DLF PROPERTY DEVELOPERS 24.02.1998 1998-9199 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 66 OF 230 5 DLF CITY CENTRE 04.031999 1999-2000 6 DLF HOLDINGS (NOW KNOW AS: DLF RESIDENTIAL BUILDERS) 21.12.1998 1999-2000 7 DLF HOME BUILDERS 02.09.1998 1999-2000 8 DLF RESIDENTIAL DEVELOPERS 30.06.1998 1999-2000 9 DLF RESIDENTIAL PARTNERS 02.09.1998 1999-2000 10 DLF PHASE IV COMMERCIAL DEVELOPERS 10.06.1999 2000-2001 16.21 IN THE PRESENT CASE, THE ASSESSEES CAPITAL ACCOUN T WAS CREDITED BY THE AMOUNT OF RS. 11.50 CRORES BEING TH E MARKET VALUE OF THE LAND CONTRIBUTED BY THE ASSESSEE AS VALUED BY THE E XPERT. ON A PLOT OF LAND CONTRIBUTED BY THE ASSESSEE TO A FIRM, THE FIRM HAS DEVELOPED/CONSTRUCTED THREE COMMERCIAL COMPLEXES NAMELY, SUPER MART 1, GALLERIA AND PLAZA TOWER SINCE 1997 AND 2000 ONWARDS, AND SOME PORTION OF GALLERIA AND SUPER MART 1 HAVE BEEN SOLD, BUT N O PORTION OF PLAZA TOWER HAS BEEN SOLD TILL DATE. THE FIRST SALE OF 20 UNITS OUT OF TOTAL 272 UNITS OF SUPER MART 1 WERE MADE IN A.Y. 1997-98, A ND THE FIRST SALE OF SOME UNITS OUT OF TOTAL 566 UNITS OF GALLERIA IS ST ATED TO BE MADE IN THE YEAR OF 2000. NO BUSINESS ACTIVITIES WERE CARRIED OUT BY THE FIRM IN THE YEAR OF ITS CONSTITUTION. THE ASSESSEES CAPITAL A CCOUNT IN THE BOOKS OF A FIRM WAS CREDITED BY AN AMOUNT OF RS. 11.50 CRORES ON 16.03.1992 AND IT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 67 OF 230 REMAINED AS CLOSING BALANCE AS ON 31.03.1992. THE CAPITAL SO CREDITED IN ASSESSEES ACCOUNT REMAINED THE SAME TILL 31.03.199 8. HOWEVER, ON PERUSAL OF STATEMENT OF ACCOUNTS OF A FIRM, VIZ., M /S. DLF COMMERCIAL DEVELOPERS, FOR THE YEAR ENDED ON 31.03.1993 TO 31. 03.1998, FILED BY THE ASSESSEE BEFORE US, WE FIND THAT BESIDES PARTNERS CAPITAL ACCOUNTS, CURRENT ACCOUNTS OF EACH PARTNER IN THE BOOKS OF A FIRM HAV E BEEN CREATED. THESE STATEMENT OF ACCOUNTS ARE PLACED AT PAGES 39 TO 64 OF A PAPER BOOK DATED 01.04.2006 FILED BY THE ASSESSEE ON 10.04.2006/20.0 4.2006 BEFORE US IN THIS APPEAL. ON PERUSAL OF PARTNERS CURRENT ACCOU NT AS ON 31.03.1993, IT IS SEEN THAT ASSESSEES SHARE IN LOSS OF RS. 57191.16 FOR THE YEAR ENDED ON 31.03.1993 HAS BEEN DEBITED IN THE ASSESSEE PARTNER S CURRENT ACCOUNT. IN THE YEAR ENDED ON 31.03.1994, AN AMOUNT OF RS. 4,46 ,75,888/- (I.E. 446.75 LACS) HAS BEEN WITHDRAWN BY THE ASSESSEE FROM THE F IRM THOUGH THE FIRM HAD INCURRED A LOSS OF RS.14,92,448/-, AND THE SHA RE IN LOSS FALLEN IN ASSESSEES SHARE WAS RS. 11,34,260/-. IT IS THUS S EEN THAT THE ASSESSEE HAD RECEIVED THE SUM OF RS. 4,46,75,888/- FOR ITS BENEF IT IN THE YEAR ENDED ON 31.03.1994. THE YEAR WISE WITHDRAWAL MADE BY THE A SSESSEE FROM THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 68 OF 230 FIRM VIS--VIS ITS SHARE IN PROFIT OR LOSS OF A FIR M UPTO 31.03.1998 ARE DETAILED AS UNDER:- YEAR ENDED WITHDRAWAL (IN RS.) (RECEIPT) PROFIT/(LOSS) 31.03.1993 NIL (57,191/-) LOSS 31.03.1994 4,46,75,888/- (11,34,260/-) LOSS 31.03.1995 2,64,45,376/- (5,25,877/-) LOSS 31.03.1996 (2,08,99,797/-) (3,24,237/-) LOSS 31.03.1997 31,77,26,485/- 2,25,02,835/- PROF IT 31.03.1998 22,51,74,769/- 3,29,60,839/- PROFI T TOTAL 59,31,22,721/- 5,34,22,109/- THE YEAR-WISE DEBIT BALANCE IN THE CURRENT ACCOUNT OF ASSESSEE IN THE BOOKS OF FIRM ARE DETERMINED IN THE BALANCE-SHE ET AS UNDER:- YEAR ENDED DEBIT BALANCE IN PARTNERS CURRENT ACCOUNT 31.03.1993 87,191/- 31.03.1994 4,58,67,341/- 31.03.1995 7,28,38,594/- 31.03.1996 5,22,63,034/- 31.03.1997 34,74,86,684/- 31.03.1998 53,97,00,614/- ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 69 OF 230 16.22 FROM THE ABOVE DETAILS, IT IS THUS ESTABLISHED THA T THE ASSESSEE HAS BEEN REGULARLY WITHDRAWING MONEY FROM THE FIRM TO SUBSTANTIAL EXTENT MORE THAN THE AGGREGATE AMOUNT OF CAPITAL CONTRIBUT ED BY THE ASSESSEE AND SHARE OF PROFIT FALLEN IN ASSESSEES SHARE , AND EV EN WITHIN THE INITIAL PERIOD OF THREE YEARS FROM THE DATE OF CONSTITUTION OF FIR M, THE ASSESSEE HAD WITHDRAWN THE SUM OF RS. 4,46,75,888/- IN THE YEAR ENDED ON 31.03.1994 AND SUM OF RS. 2,64,45,376/- IN THE YEAR ENDED ON 3 1.03.1995, AND THEREAFTER IT CONTINUED TO WITHDRAW THE MONEY IN EA CH YEAR WITH THE NET DEBIT BALANCE OF RS. 53.97 CRORES AS ON 31.03.1998 AS AGAINST CAPITAL OF RS. 11.50 CRORES. THE AGGREGATE AMOUNT OF MONEY WI THDRAWN BY THE ASSESSEE COMES TO RS. 59,31,22,721/- (I.E. RS. 59.3 1 CRORES) AS AGAINST AGGREGATE AMOUNT OF PROFIT FALLEN IN ASSESSEES SHA RE AMOUNTING TO RS. 5,34,22,109/- (I.E. RS. 6.34 CRORES) TILL 31.03.199 8, AND THUS THE AMOUNT OVER-WITHDRAWN BY THE ASSESSEE COMES TO RS. 53,97,0 0,612/- (I.E. 53.97 CRORES) AS AGAINST CAPITAL OF RS. 11.50 CRORES STAN DING IN THE NAME OF THE ASSESSEE AS ON 31.03.1998. 16.23 IN THE LIGHT OF THE AFORESAID FACTS ESTABLISHING T HAT THE ASSESSEE HAD OVER WITHDRAWN NET MONEY TO THE EXTENT OF RS. 53.97 CRORE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 70 OF 230 TILL 31.03.1998, THE SUBMISSION OF THE ASSESSEE THA T NO MONEY WHATSOEVER HAS BEEN WITHDRAWN BY ASSESSEE FROM THE FIRM AGAINS T CONTRIBUTION OF STOCK IN TRADE MADE TOWARDS THE CAPITAL IS TOTALLY MISLEADING AND FALSE. THE ASSESSEE HAS TRIED TO GIVE A TOTALLY WRONG PICT URE ABOUT THE HUGE MONEY WITHDRAWN BY IT BY DEBITING THE SAME IN A SEP ARATE CURRENT ACCOUNT OF PARTNERS AND THAT TOO WITHOUT MAKING A WHISPER A BOUT IT IN ITS SUBMISSIONS MADE IN THIS CASE EITHER BEFORE THE AUT HORITIES BELOW OR BEFORE US. THERE IS NO DISPUTE AS TO THE PROPOSITION THAT AN ACT WHICH IS OTHERWISE VALID IN LAW CANNOT BE TREATED AS NON EST MERELY ON THE BASIS OF SOME UNDER LYING MOTIVE SUPPOSEDLY RESULTING IN SOME ECO NOMIC DETRIMENT OF PREJUDICE TO THE NATIONAL INTEREST AS SO OBSERVED B Y THE HONBLE SUPREME COURT IN UNION OF INDIA VS. AZADI BACHAO ANDOLAN (2 003) 263 ITR 763. BUT THIS PROPOSITION IS APPLICABLE IN SO FAR AS THE ACT OF ASSESSEE IN CONSTITUTING PARTNERSHIP FIRM BY CONTRIBUTING ITS P ERSONAL ASSETS TO A FIRM AS CAPITAL CONTRIBUTION AS CONCERNED. HOWEVER, WIT H REGARD TO ASSESSEES CONDUCT IN CONVERTING LAND INTO MONEY BY WITHDRAWIN G HUGE AND SUBSTANTIAL MONEY FROM THE FIRM IS TO BE VIEWED FRO M THE WORDS OF CAUTION EMPHASIZED BY HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 71 OF 230 V. COMMISSIONER OF INCOME-TAX (SUPRA) AND ALSO IN V IEW OF THE FOLLOWING OBSERVATION OF CONSTITUTION BENCH OF HONBLE SUPREM E COURT IN THE CASE OF MC DOWELL & CO. LTD. V. COMMERCIAL TAX OFFICER [ 1985] 154 ITR 148(SC), WHICH HAS BEEN REFERRED TO IN THE CASE OF UNION OF INDIA VS. AZADI BACHAO ANDOLAN AND WAS QUOTED WITH APPROVAL:- TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHIN THE FRAMEWORK OF LAW. COLOURABLE DEVICES CANNOT BE PART OF TAX PLANNING AND IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS HONOUR ABLE TO AVOIDABLE THE PAYMENT OF TAX BY RESORTING THE DUBIOUS METHODS. IT IS THE OBLIGATION OF EVERY CIT IZEN TO PAY THE TAXES HONESTLY WITHOUT RESORTING TO SUBTERFUGES. 16.24 FROM THIS CALCULATED DEVICE ADOPTED, BY THE ASSESS EE, BY WITHDRAWING SUBSTANTIAL AMOUNT OF MONEY FOR ITS BEN EFIT AND DEBITING THE SAME IN ITS CURRENT ACCOUNT, IT BECOMES CLEAR THAT THOUGH THE PARTNERSHIP FIRM AS SUCH IS GENUINE, THE TRANSFER OR CONTRIBUTI ON BY THE ASSESSEE OF ITS PERSONAL LAND TO THE SHARE CAPITAL OF THE FIRM REPR ESENT A DEVICE OR RUSE FOR CONVERTING THE LAND INTO MONEY SUBSTANTIALLY WITHDR AWN BY THE ASSESSEE FROM THE FIRM FOR ITS BENEFIT. THUS, THE ENTRY OF RS. 11.50 CRORES BEING VALUE OF LAND CREDITED IN ASSESSEES CAPITAL ACCOUN T CANNOT BE CONSIDERED TO BE IMAGINARY OR NOTIONAL ONE WITH NO BENEFIT OR GAIN TO THE ASSESSEE. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 72 OF 230 THEREFORE, THE ASSESSEES CONTENTION THAT THE AMOUN T OF RS. 11.50 CRORES CREDITED IN ASSESSEES CAPITAL ACCOUNT CANNOT BE MA DE A BASIS TO WORK OUT ANY GAIN OR PROFIT ARISING TO THE ASSESSEE FROM THE TRANSACTION OF TRANSFERRING ITS PERSONAL ASSET AS CAPITAL CONTRIBU TION TO A FIRM IN WHICH THE ASSESSEE BECAME A PARTNER IS NOT ACCEPTABLE AND IS THUS REJECTED. THEREFORE, EVEN THE PARTNERSHIP FIRM IS CONSIDERED TO BE GENUINE, THE TRANSACTION OF TRANSFERRING ASSESSEES LAND BY WAY OF CAPITAL CONTRIBUTION TO THE PARTNERSHIP AT A MARKET VALUE MORE THAN THE COST TO THE ASSESSEE REPRESENTS A DEVISE OR RUSE TO CONVERT THE PERSONAL LAND OF THE ASSESSEE INTO MONEY SUBSTANTIALLY FOR THE BENEFIT OF THE ASSESSEE WHILE EVADING TAX ON A SURPLUS AMOUNT ARISING TO THE ASSESSEE FROM THE SAI D TRANSACTION. IN THIS VIEW OF THE MATTER, WHICH WE HAVE TAKEN IN THE LIGH T OF WORD OF CAUTION MENTIONED BY THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPRA), THE AMOUNT REPRESENTING THE VALUE OF LAND CONTRIBUTED BY THE ASSESSEE AS ITS CAPITAL IN A FIR M IN WHICH THE ASSESSEE BECAME A PARTNER AND WHICH HAS BEEN CREDITED IN THE ASSESSEES CAPITAL ACCOUNT, IS TO BE CONSIDERED AS A CONSIDERATION REC EIVED BY THE ASSESSEE ON THE TRANSFER OF ITS PERSONAL ASSET TO A PARTNERSHIP FIRM. WE, THEREFORE, HOLD ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 73 OF 230 THAT THE SURPLUS ARISING FROM MAKING OVER ASSESSEE S PERSONAL ASSET, I.E. SAID PLOT OF LAND IN QUESTION, TO THE FIRM AS HIS C ONTRIBUTION TO ITS CAPITAL ACCOUNT IS A PROFIT OR GAIN ACCRUED TO THE ASSESSEE AND IS CHARGEABLE TO TAX. WHETHER TRANSACTION IS ON CAPITAL FIELD OR THE REVE NUE 16.25 NOW, WE HAVE TO EXAMINE WHETHER THE TRANSACTION I N QUESTION IS ON CAPITAL FIELD OR THE REVENUE, AND THE SURPLUS SO ARISING TO THE ASSESSEE IS ASSESSABLE TO TAX AS PROFITS FROM BUSINESS OR CA PITAL GAIN. IT IS AN ADMITTED POSITION THAT THE LAND IN QUESTION HAS BEE N TRANSFERRED TO A FIRM TOWARDS CAPITAL CONTRIBUTION BY THE ASSESSEE IN THE CAPACITY OF A PARTNER. THE FIRM SO CONSTITUTED IS CONSIDERED TO BE GENUINE ONE. THE TRANSACTION CANNOT, THEREFORE, BE CONSIDERED TO BE MADE IN THE NATURE OF ANY NORMAL AND ORDINARY TRANSACTION OF SALE IN COURSE OF ANY C OMMERCIAL OR TRADING ACTIVITY. THE LAND HAS BEEN CONTRIBUTED TO FIRM AS CAPITAL BY THE ASSESSEE PARTNER IN ITS CAPACITY AS A PARTNER AND NOT AS A T RADER IN ANY TRADING TRANSACTION. WE ARE, THEREFORE, IN AGREEMENT WITH THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE LAND IN Q UESTION BELONGING TO THE ASSESSEE WAS CONTRIBUTED TO A PARTNERSHIP FIRM AS A SSESSEE PARTNERS CONTRIBUTION TOWARDS CAPITAL IN THE PARTNERSHIP WHE N THE ASSESSEE ENTERED ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 74 OF 230 INTO A PARTNERSHIP WITH FIVE OTHER PARTNERS, AND SO , THE TRANSACTION CANNOT BE REGARDED AS A TRADING OR COMMERCIAL TRANSACTION IN THE BUSINESS SENSE. RESULTANTLY, THE TRANSACTION OF MAKING OVER OF ANY PERSONAL ASSETS OF A PARTNER TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPIT AL IS, THEREFORE, TO E REGARDED AS MADE ON A CAPITAL FIELD. NATURE AND CHARACTER OF THE ASSET CONTRIBUTED BY A PARTNER TO A FIRM AS CAPITAL CONTRIBUTION AT THE TIME WHEN THE ASSET IS EMPLOYED IN THE TRANSACTION OF CONTRIBUTING CAPITAL BY A PARTNER TO A FIRM AS HIS CAPITAL CONTRIBUTION 16.26 THIS NOW LEAVES US TO DETERMINE THE NATURE AND CHA RACTER OF THE ASSET CONTRIBUTED BY ASSESSEE PARTNER TO A FIRM AS ITS CAPITAL CONTRIBUTION, AT THE TIME WHEN HE BECAME A PARTNER. THE CASE OF THE ASSESSEE ADVANCED BEFORE US IS THAT THE LAND CONTRI BUTED BY ASSESSEE TO THE FIRM AS ITS CAPITAL CONTRIBUTION AT THE TIME WHEN T HE ASSESSEE BECAME A PARTNER IN A FIRM, WAS NOTHING BUT STOCK IN TRADE I N AS MUCH AS THE SAME WAS HELD BY THE ASSESSEE AS STOCK IN TRADE OF ITS B USINESS OF REAL ESTATE. ON THE CONTRARY, THE DEPARTMENT HAS ADVANCED AN ALTERN ATIVE ARGUMENT THAT IN CASE THE TRANSACTION IS REGARDED AS A CASE OF CAPIT AL CONTRIBUTION OF ASSET BY A PARTNER, AND NOT A SALE OF ASSET BY A PARTNER TO A FIRM, THE ASSET ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 75 OF 230 CONTRIBUTED BY PARTNER TO A FIRM AS ITS CAPITAL CON TRIBUTION SHOULD BE REGARDED AS CAPITAL ASSET BROUGHT IN BY THE PARTNER TO THE FIRM IN WHICH HE BECAME A PARTNER. 16.27 TO RESOLVE THIS CONTROVERSY, WE THINK THAT IT IS A PPROPRIATE FOR US TO FIND OUT WHAT RIGHT ARISES OR ACCRUES TO A PA RTNER FROM THE TRANSACTION OF CONTRIBUTING HIS PERSONAL ASSET AS ITS CAPITAL I N THE PARTNERSHIP FIRM IN WHICH HE BECOMES A PARTNER. IN THIS RESPECT, MAKIN G A GAINFUL REFERENCE TO THE JUDGMENT OF THREE JUDGES OF THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX ( 1985) 156 ITR 509 (SC) WOULD SUFFICE AS, IN THIS DECISION, THE HONBL E SUPREME COURT HAS ANALYZED AND CONSIDERED NUMBER OF DECISIONS DECIDED TIMES AND AGAIN BY THE VARIOUS HIGH COURTS AND ALSO BY SUPREME COURT I NCLUDING ITS OWN DECISION IN THE CASE OF HINDI CONSTRUCTION CO. (SUP RA) AND MALABAR FISHERIES (SUPRA), WHICH HAVE BEEN HEAVILY RELIED U PON BY THE LD COUNSEL FOR THE ASSESSEE TO SUPPORT HIS CONTENTION ADVANCED BEFORE US. 16.28 IN THE SAID DECISION OF HONBLE SUPREME COURT IN T HE CASE OF SUNIL SIDHARTHABHAI (SUPRA), IT HAS BEEN HELD THAT THE CONSIDERATION FOR THE MAKING OVER OF THE PERSONAL ASSET BY THE PARTNER TO A FIRM IS THE RIGHT, ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 76 OF 230 WHICH ARISES OR ACCRUES TO THE PARTNER, DURING THE SUBSISTENCE OF THE PARTNERSHIP, IS TO GET HIS SHARE OF THE PROFIT FROM TIME TO TIME, AND AFTER THE DISSOLUTION OF THE PARTNERSHIP OR WITH HIS RETIREME NT FROM THE PARTNERSHIP, TO GET THE VALUE OF HIS SHARE IN THE NET PARTNERSHI P ASSETS AS ON THE DATE OF THE DISSOLUTION OR RETIREMENT AFTER DEDUCTION OF LI ABILITIES AND PRIOR CHARGES. IN OTHER WORDS, IN CONSIDERATION FOR THE TRANSFER OF THE PERSONAL ASSET BY A PARTNER TO A PARTNERSHIP FIRM TOWARDS HI S CAPITAL CONTRIBUTION, IN WHICH HE BECOMES A PARTNER, THE FOLLOWING RIGHTS AR ISES OR ACCRUES TO A PARTNER:- I. RIGHT TO GET HIS SHARE OF PROFIT FROM TIME TO TIME DURING THE SUBSISTENCE OF THE PARTNERSHIP; AND II. ON THE DISSOLUTION OF PARTNERSHIP OR WITH HIS RETIR EMENT FROM THE PARTNERSHIP, THE RIGHT TO GET THE VALUE OF HIS SHARES IN THE NET PARTNERSHIP ASSET AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES. 16.29 IN THE AFORESAID DECISION IN THE CASE OF SUNIL SID DHARTHBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA), HONBLE SUPREME COURT FURTHER OBSERVED THAT AT THE TIME WHEN THE PARTNER TRANSFER S HIS PERSONAL ASSET TO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 77 OF 230 THE PARTNERSHIP FIRM, THERE CAN BE NO RECKONING OF THE LIABILITIES AND LOSSES WHICH THE FIRM MAY SUFFER IN THE YEARS TO COME. ALL THAT LIES WITHIN THE WOMB OF THE FUTURE. IT IS IMPOSSIBLE TO CONCEIVE O F EVALUATING THE CONSIDERATION ACCRUED BY THE PARTNER WHEN HE BRINGS PERSONAL ASSET IN THE PARTNERSHIP FIRM, WHEN NEITHER CAN THE DATE OF DISS OLUTION OR RETIREMENT BE ENVISAGED NOR CAN THERE BE ANY ASCERTAINMENT OF LIA BILITY AND PRIOR CHARGES WHICH MAY NOT HAVE EVEN ARISEN YET. IT WAS FURTHER OBSERVED THAT WHEN PARTNERS PERSONAL ASSET MERGE INTO THE CAPITAL OF PARTNERSHIP FIRM, THE CORRESPONDING CREDIT ENTRY IS MADE IN THE PARTNERS ACCOUNT IN THE BOOKS OF THE PARTNERSHIP, BUT THAT ENTRY IS MADE MERELY FOR THE PURPOSE OF THE ADJUSTING THE RIGHTS OF THE PARTNERS INTER-SE, WHE N THE PARTNERSHIP IS DISSOLVED OR PARTNER RETIRES. FROM THIS, IT IS, TH US, CLEAR THAT BY BRINGING HIS PERSONAL ASSET TOWARDS CAPITAL IN THE PARTNERSH IP FIRM, THE PARTNER ACQUIRES RIGHTS TO GET SHARE OF THE PROFITS FROM TI ME TO TIME, AND TO GET THE VALUE OF HIS SHARE IN THE NET PARTNERSHIP ASSET AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER DEDUCTION OF LIABILITIES AND PR IOR CHARGES, AND THE CREDIT ENTRY IN THE PARTNERS ACCOUNT ON ACCOUNT OF PERSON AL ASSETS BROUGHT IN INTO THE PARTNERSHIP FIRM TOWARDS CAPITAL CONTRIBUTION I S MADE MERELY FOR THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 78 OF 230 PURPOSE OF THE ADJUSTING THE RIGHTS OF THE PARTNERS INTER-SE WHEN THE FIRM IS DISSOLVED OR ANY PARTNER RETIRES. IN THIS CASE, IT HAS ALSO BEEN HELD THAT WHATEVER IS BROUGHT INTO THE PARTNERSHIP CEASES TO BE EXCLUSIVE PROPERTY OF THE PERSON WHO BROUGHT IT IN, THAT IS, AND EXCLUSIV E INTEREST IS REDUCED TO A SHARED INTEREST, AS SO CONTENDED BY THE ASSESSEE AL SO VIDE CONTENTIONS RAISED INTO GROUND NO. 1.4 BY THE ASSESSEE. 16.30 THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (SURPA) HAS NOTED THE OBSERVATION MAD E IN ITS OWN JUDGMENT IN THE CASE OF ADDANKI NARAYANAPA VS. BHASKARA KRIS HANAPPA AIR (1966) (SC) 1300; (1966) 3 SCR 400 (SC), WHERE THE HONBLE SUPREME COURT EXPLAINED THE IDENTICAL PROPOSITION AS LAID DOWN IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA) , BY OBSERVING AS UNDER:- '.....WHATEVER MAY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY THE PARTNERS WHEN T HE PARTNERSHIP IS FORMED OR WHICH MAY BE ACQUIRED IN T HE COURSE OF THE BUSINESS OF THE PARTNERSHIP IT BECOME S THE PROPERTY OF THE FIRM AND WHAT A PARTNER IS ENTI TLED TO IS HIS SHARE OF PROFITS, IF ANY, ACCRUING, TO TH E PARTNERSHIP FROM THE REALISATION OF THIS PROPERTY, AND UPON DISSOLUTION OF THE PARTNERSHIP TO A SHARE IN T HE MONEY REPRESENTING THE VALUE OF THE PROPERTY. NO DOUBT, SINCE A FIRM HAS NO LEGAL EXISTENCE, THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 79 OF 230 PARTNERSHIP PROPERTY WILL VEST IN ALL THE PARTNERS AND IN THAT SENSE EVERY PARTNER HAS AN INTEREST IN THE PRO PERTY OF THE PARTNERSHIP. DURING THE SUBSISTENCE OF THE PARTNERSHIP, HOWEVER, NO PARTNER CAN DEAL WITH ANY PORTION OF THE PROPERLY AS HIS OWN. NOR CAN HE ASSI GN HIS INTEREST IN A SPECIFIC ITEM OF THE PARTNERSHIP PROPERTY TO ANYONE. HIS RIGHT IS TO OBTAIN SUCH PRO FITS, IF ANY, AS FALL TO HIS SHARE FROM TIME TO TIME AND UPON THE DISSOLUTION OF THE FIRM TO A SHARE IN THE ASSET S OF THE FIRM WHICH REMAIN AFTER SATISFYING THE LIABILITIES SET OUT IN CLAUSE (A) AND SUB-CLAUSES (I), (II) AND (III) O F CLAUSE (B) OF SECTION 48......' 16.31 IN THE AFORESAID CASE OF ADDANKI NARAYANAPA VS. BH ASKARA KRISHANAPPA (SC) (SUPRA) THE POSITION HAS BEEN ELAB ORATED BY HONBLE SUPREME COURT, WHICH HAS BEEN NOTED BY THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDHARTHBHAI (SUPRA), AS UNDER:- '...THE WHOLE CONCEPT OF PARTNERSHIP IS TO EMBARK UPON A JOINT VENTURE AND FOR THAT PURPOSE TO BRING IN AS CAPITAL MONEY OR EVEN PROPERTY INCLUDIN G IMMOVABLE PROPERTY. ONCE THAT IS DONE WHATEVER IS BROUGHT IN WOULD CEASE TO BE THE EXCLUSIVE PROPERTY OF THE PERSON WHO BROUGHT IT IN. IT WOULD BE THE TRADI NG ASSET OF THE PARTNERSHIP IN WHICH ALL THE PARTNERS WOULD HAVE INTEREST IN PROPORTION TO THEIR SHARE IN THE JOINT VENTURE OF THE BUSINESS OF PARTNERSHIP. THE P ERSON WHO BROUGHT IT IN WOULD, THEREFORE, NOT BE ABLE TO CLAIM OR EXERCISE ANY EXCLUSIVE RIGHT OVER ANY PROP ERTY WHICH HE HAS BROUGHT IN, MUCH LESS OVER ANY OTHER PARTNERSHIP PROPERTY. HE WOULD NOT BE ABLE TO EXERC ISE HIS RIGHT EVEN TO THE EXTENT OF HIS SHARE IN THE BU SINESS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 80 OF 230 OF THE PARTNERSHIP. AS ALREADY STATED, HIS RIGHT DU RING THE SUBSISTENCE OF THE PARTNERSHIP IS TO GET HIS SH ARE OF PROFITS FROM TIME TO TIME AS MAY BE AGREED UPON AMONG THE PARTNERS AND AFTER THE DISSOLUTION OF THE PARTNERSHIP OR WITH HIS RETIREMENT FROM PARTNERSHIP OF THE VALUE OF HIS SHARE IN THE NET PARTNERSHIP ASSET S AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER A DEDUCTION OF LIABILITIES AND PRIOR CHARGES...' 16.32 IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPRA), THE AP EX COURT FURTHER OBSERVED AS UNDER:- IT IS APPARENT, THEREFORE, THAT WHEN A PARTNER BRINGS IN HIS PERSONAL ASSET INTO A PARTNERSHIP FIR M AS HIS CONTRIBUTION TO ITS CAPITAL, AN ASSET WHICH ORIGINALLY WAS SUBJECT TO THE ENTIRE OWNERSHIP OF T HE PARTNER BECOMES NOW SUBJECT TO THE RIGHTS OF OTHER PARTNERS IN IT. IT IS NOT AN INTEREST WHICH CAN BE EVALUATED IMMEDIATELY, IT IS AN INTEREST WHICH IS S UBJECT TO THE OPERATION OF FUTURE TRANSACTIONS OF THE PARTNERSHIP, AND 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 THE FIRM OR UPON HIS RETIREMENT FROM IT. IT HAS SOMETIMES BEEN SAID, AND WE THINK ERRONEOUSLY, THAT THE RIGHT OF A PARTNER TO A SHARE IN THE ASSET S OF THE PARTNERSHIP FIRM ARISES UPON DISSOLUTION OF THE FIR M OR UPON THE PARTNER RETIRING FROM THE FIRM. WE THINK I T NECESSARY TO STATE THAT WHAT IS ENVISAGED HERE IS MERELY THE RIGHT TO REALISE THE INTEREST AND RECEIV E ITS VALUE. WHAT IS REALISED IS THE INTEREST WHICH THE P ARTNER ENJOYS IN THE ASSETS DURING THE SUBSISTENCE OF THE PARTNERSHIP FIRM BY VIRTUE OF HIS STATUS AS A PARTN ER ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 81 OF 230 AND IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP AGREEMENT. IT IS BECAUSE THAT INTEREST EXISTS ALREA DY BEFORE DISSOLUTION, AS WAS HELD BY THIS COURT IN MALABAR FISHERIES CO. V. CIT [1979] 120 ITR 49, THE DISTRIBUTION OF THE ASSETS ON DISSOLUTION DOES NOT AMOUNT TO A TRANSFER TO THE ERSTWHILE PARTNERS. WHA T THE PARTNER GETS UPON DISSOLUTION OR UPON RETIREMEN T IS THE REALISATION OF A PRE-EXISTING RIGHT OR INTEREST . IT IS NOTHING STRANGE IN LAW THAT A RIGHT OR INTEREST SHO ULD EXIST IN PRAESENTI BUT ITS REALISATION OR EXERCISE SHOULD BE POSTPONED. THEREFORE, WHAT WAS THE EXCLUSIVE INTEREST OF A PARTNER IN HIS PERSONAL ASSET IS, UPO N ITS INTRODUCTION INTO THE PARTNERSHIP FIRM AS HIS SHARE TO THE PARTNERSHIP CAPITAL, TRANSFORMED INTO A SHARED INTEREST WITH THE OTHER PARTNERS IN THAT ASSET. QUA THAT ASSET, THERE IS A SHARED INTEREST. DURING THE SUBSI STENCE OF THE PARTNERSHIP THE VALUE OF THE INTEREST OF EAC H PARTNER QUA THAT ASSET CANNOT BE ISOLATED OR CARVED OUT FROM THE VALUE OF THE PARTNER'S INTEREST IN THE TOT ALITY OF THE PARTNERSHIP ASSETS. AND IN REGARD TO THE LATTER , THE VALUE WILL BE REPRESENTED BY HIS SHARE IN THE NET A SSETS ON THE DISSOLUTION OF THE FIRM OR UPON THE PARTNER' S RETIREMENT. 16.33 THE HONBLE SUPREME COURT IN THE AFORESAID CASE O F SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA) PROCEEDED FURTHER TO OBSERVE AS UNDER:- THE LEARNED COUNSEL FOR THE ASSESSEE HAS ATTEMPTED TO DRAW AN ANALOGY BETWEEN THE POSITION ARISING WHEN A PERSONAL ASSET IS BROUGHT BY A PARTN ER INTO A PARTNERSHIP AS HIS CONTRIBUTION TO THE PARTNERSHIP CAPITAL AND THAT WHICH ARISES WHEN ON ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 82 OF 230 DISSOLUTION OF THE FIRM OR ON RETIREMENT, A SHARE I N THE PARTNERSHIP ASSETS PASSES TO THE ERSTWHILE PARTNER. IT HAS BEEN HELD BY THIS COURT IN CIT V. DEWAS CINE CORPORATION [1968] 68 ITR 240, CIT V. BANKEY LAL VAIDYA [1971] 79 ITR 594 AND RECENTLY IN MALABAR FISHERIES CO. V. CIT [1979] 120 ITR 49 AS WELL AS B Y THE PUNJAB AND HARYANA HIGH COURT IN KEY ENGG. CO. V. CIT [1971] 82 ITR 950, THE KERALA HIGH COURT IN CIT V. NATARAJ MOTOR SERVICE [1972] 86 ITR 109 AND THE GUJARAT HIGH COURT IN CIT V. MOHANBHAI PAMABHAI [1973] 91 ITR 393 THAT WHEN A PARTNER RETIRES OR THE PARTNERSHIP IS DISSOLVED, WHAT THE PARTNER RECEIVES IS HIS SHARE IN THE PARTNERSHIP. W HAT IS CONTEMPLATED HERE IS A SHARE OF THE PARTNER QUA THE NET ASSETS OF THE PARTNERSHIP FIRM. ON EVALUATION, THAT SHARE IN A PARTICULAR CASE MAY BE REALISED BY THE RECEIPT OF ONLY ONE OF ALL THE ASSETS. WHAT HAPPENS HERE IS THAT A SHARED INTEREST IN ALL THE ASSETS OF THE FIRM IS REPLACED BY AN EXCLUSIVE INTEREST IN AN ASSET OF EQ UAL VALUE. THAT IS WHY IT HAS BEEN HELD THAT THERE IS N O TRANSFER. IT IS THE REALISATION OF A PRE-EXISTING R IGHT. THE POSITION IS DIFFERENT, IT SEEMS TO US, WHEN A P ARTNER BRINGS HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL. AN INDIVIDUAL ASSE T IS THE SOLE SUBJECT OF CONSIDERATION. AN EXCLUSIVE INTERES T IN IT BEFORE IT ENTERS THE PARTNERSHIP IS REDUCED ON SUCH ENTRY INTO A SHARED INTEREST. 16.34 IN THIS DECISIONS, THE HONBLE SUPREME COURT FURTH ER OBSERVED THAT THERE IS NO DIFFICULTY IN ACCEPTING P ROPOSITION THAT WHEN A PARTNER HANDS OVER A BUSINESS ASSET TO A PARTNERSHI P FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, HE CANNOT BE SAID TO H AVE EFFECTED A SALE. BUT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 83 OF 230 WHILE THE TRANSACTION MAY NOT AMOUNT TO A SALE, CAN IT BE DESCRIBED AS A TRANSFER OF SOME OTHER KIND? 16.35 IN THE SAID CASE THE HONBLE SUPREME COURT THEN OB SERVED AND HELD AS UNDER:- IN ITS GENERAL SENSE, THE EXPRESSION 'TRANSFER OF PROPERTY' CONNOTES THE PASSING OF RIGHTS IN THE PRO PERTY FROM ONE PERSON TO ANOTHER. IN ONE CASE THERE MAY B E A PASSING OF THE ENTIRE BUNDLE OF RIGHTS FROM THE TRA NSFEROR TO THE TRANSFEREE. IN ANOTHER CASE, THE TRANSFER MA Y CONSIST OF ONE OF THE ESTATES ONLY OUT OF ALL THE E STATES COMPRISING THE TOTALITY OF RIGHTS IN THE PROPERTY. IN A THIRD CASE, THERE MAY BE A REDUCTION OF THE EXCLUSIVE INT EREST IN THE TOTALITY OF RIGHTS OF THE ORIGINAL OWNER INTO A JOINT OR SHARED INTEREST WITH OTHER PERSONS. AN EXCLUSIVE IN TEREST IN PROPERTY IS A LARGER INTEREST THAN A SHARE IN TH AT PROPERTY. TO THE EXTENT TO WHICH THE EXCLUSIVE INTE REST IS REDUCED TO A SHARED INTEREST IT WOULD SEEM THAT THE RE IS A TRANSFER OF INTEREST. THEREFORE, WHEN A PARTNER BRI NGS IN HIS PERSONAL ASSET INTO THE CAPITAL OF THE PARTNERS HIP 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 RI GHTS IN THE ASSET ALTOGETHER, WHAT HE ENJOYS NOW IS AN ABRI DGED RIGHT WHICH CANNOT BE IDENTIFIED WITH THE FULLNESS OF THE RIGHT WHICH HE ENJOYED IN THE ASSET BEFORE IT ENTER ED THE PARTNERSHIP CAPITAL 16.36 WITH REFERENCE TO THE PROVISIONS CONTAINED IN SECT ION 17(1)(B) OF THE REGISTRATION ACT, WHETHER THERE IS TRANSFER WHEN ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 84 OF 230 PARTNERS EXCLUSIVE INTEREST, ON ITS INTRODUCTION A S CAPITAL IN THE FIRM IS REDUCED INTO A SHARED INTEREST, THE COURT OBSERV ED AS UNDER:- OUR ATTENTION HAS ALSO BEEN INVITED TO CLAUSE (B) OF SUB-SECTION (1) OF SECTION 17 OF THE INDIAN REGISTRATION ACT, 1908, WHICH REQUIRES THE REGISTRA TION OF NON-TESTAMENTARY INSTRUMENTS WHICH PURPORT OR OPERATE TO CREATE, DECLARE, ASSIGN, LIMIT OR EXTING UISH, WHETHER IN PRESENT OR IN FUTURE, ANY RIGHT, TITLE O R INTEREST, WHETHER VESTED OR CONTINGENT, OF THE VALU E OF ONE HUNDRED RUPEES AND UPWARDS, TO OR IN IMMOVABLE PROPERTY; AND TO THE VIEW TAKEN BY THE COURTS IN TH IS COUNTRY THAT WHEN A PERSON BRINGS IN EVEN HIS IMMOVABLE PROPERTY AS HIS CONTRIBUTION TO THE CAPIT AL OF THE FIRM NO WRITTEN DOCUMENT OR REGISTRATION IS REQUIRED UNDER THAT CLAUSE. THAT VIEW WAS EXPRESSED IN FIRM RAM SAHAY MALL RAMESHWAR DAYAL V. BISHWANATH PRASAD AIR 1963 PAT. 221. THE LEARNED JUDGES RELIED ON THE ENGLISH LAW THAT THE PERSONAL ASSETS INTRODUCED BY A PARTNER INTO THE FIRM AS HIS CONTRIBUTION TO ITS CAPITAL BECOMES THE PROPERTY OF THE FIRM BY REASON OF THE INTENTION AND AGREEMENT OF TH E PARTIES. THE VIEW DOES NOT SPRING FROM THE CONSIDERATION THAT THERE IS NO TRANSFER, THE VIEW I S THAT NO DOCUMENT OF TRANSFER IS REQUIRED AND THAT, THERE FORE, REGISTRATION IS UNNECESSARY. THE PATNA HIGH COURT REITERATED THAT VIEW IN SUDHANSU KANTA V. MANINDRA NATH AIR 1965 PAT. 144. 16.37 THEREAFTER, WITH REFERENCE TO SHARES BROUGHT IN BY THE PARTNER INTO THE FIRM, THE HONBLE SUPREME COURT HAS HELD A S UNDER:- ACCORDINGLY, WE HOLD THAT WHEN THE ASSESSEE BROUGHT THE SHARES OF THE LIMITED COMPANIES INTO TH E ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 85 OF 230 PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL , THERE WAS A TRANSFER OF A CAPITAL ASSET WITHIN THE TERMS OF SECTION 45. IN THIS VIEW OF THE MATTER, WE AGREE WI TH THE CONCLUSION REACHED BY THE KERALA HIGH COURT IN A. ABDUL RAHIM, TRAVANCORE CANFECTIONERY WORKS V. CIT [1911] 110 ITR 595 (FB), THE KARNATAKA HIGH COURT IN ADDL. CIT V. M.A.J. VASANAIK [1979] 116 ITR 110 AND BY THE GUJARAT HIGH COURT, IN THE JUDGMENT UNDE R APPEAL. VARIOUS PROPOSITIONS OF LAW LAID DOWN BY THE HONBL E SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISS IONER OF INCOME-TAX 156 ITR 509 16.38 FROM THE AFORESAID DECISION OF THREE JUDGES OF THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (S UPRA), THE POSITION OF LAW THAT EMERGING IS SUMMARIZED AS UNDER: I. THE WHOLE CONCEPT OF PARTNERSHIP IS TO EMBARK UPON A JOINT VENTURE AND FOR THAT PURPOSE TO BRING IN AS CAPITAL MONEY O R EVEN PROPERTY INCLUDING IMMOVABLE PROPERTY. ONCE THAT IS DONE WH ATSOEVER IS BROUGHT IN WOULD CEASE TO BE THE EXCLUSIVE PROPERTY OF THE PERSON WHO BROUGHT IT IN. IT WOULD BE THE ASSET OF THE PA RTNERSHIP IN WHICH ALL THE PARTNERS WOULD HAVE INTEREST IN PROPORTION TO THEIR SHARE IN THE JOINT VENTURE OF THE BUSINESS OF PARTNERSHIP. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 86 OF 230 II. THE PERSON WHO BROUGHT IN HIS PERSONAL ASSET INTO A FIRM WOULD NOT BE ABLE TO CLAIM OR EXERCISE ANY EXCLUSIVE RIGHT OV ER ANY ASSET WHICH HE HAS BROUGHT IN, MUCH LESS OVER ANY OTHER P ARTNERSHIP ASSET. HE WOULD NOT BE ABLE TO EXERCISE HIS RIGHT EVEN TO THE EXTENT OF HIS SHARE IN THE BUSINESS OF THE PARTNERSHIP DURING THE SUBSISTENCE OF THE PARTNERSHIP, NO PARTNER CAN DEAL WITH ANY PORTION O F THE PARTNERSHIP ASSET AS HIS OWN. III. WHERE A PARTNER OF A FIRM MAKES OVER HIS PERSONAL A SSETS TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPITAL, AND WHATEVER M AY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY TH E PARTNERS WHEN THE PARTNERSHIP IS FORMED, WHAT A PARTNER, IS ENTIT LED TO OR WHAT RIGHT, WHICH ACCRUES OR ARISES TO A PARTNER, IS, DU RING SUBSISTENCE OF PARTNERSHIP, TO GET HIS SHARES OF THE PROFITS FROM TIME TO TIME, AND UPON DISSOLUTION OF THE FIRM OR WITH HIS RETIREMENT FROM THE PARTNERSHIP, TO GET THE VALUE OF HIS SHARES IN THE NET PROFIT FROM ASSETS AS ON THE DATE OF THE DISSOLUTION OR RETIREM ENT AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 87 OF 230 IV. WHEN A PARTNER BRINGS IN HIS PERSONAL ASSET INTO TH E PARTNERSHIP FIRM AS HIS CONTRIBUTION TO CAPITAL, ASSET WHICH ORIGINA LLY WAS SUBJECT TO THE ENTIRE OWNERSHIP OF THE PARTNER BECOMES NOW THE SUBJECT TO THE RIGHTS OF OTHER PARTNERS IN IT. IN OTHER WORDS, WH AT WAS THE EXCLUSIVE INTEREST OF A PARTNER IN HIS PERSONAL ASSET IS UPON ITS INTRODUCTION INTO THE PARTNERSHIP FIRM AS HIS SHARE TO THE PARTN ERSHIP CAPITAL, TRANSFORMED INTO A SHARED INTEREST SHARED WITH THE OTHER PARTNERS IN THAT ASSET. QUA THAT ASSET, THERE IS A SHARED INTER EST. IT IS NOT AN INTEREST WHICH CAN BE EVALUATED IMMEDIATELY. IT IS AN INTEREST WHICH IS SUBJECT TO THE OPERATION OF FUTURE TRANSACTION O F THE PARTNERSHIP. V. THE EVALUATION OF A PARTNERS INTEREST TAKES PLACE ONLY WHEN THERE IS DISSOLUTION OF THE FIRM OR UPON HIS RETIREMENT FROM IT, AND WHAT IS REALIZED IS THE INTEREST WHICH THE PARTNER ENJOYS I N THE ASSET DURING THE SUBSISTENCE OF THE PARTNERSHIP FIRM BY VIRTUE O F HIS STATUS AS A PARTNER, AND IN ACCORDANCE WITH THE TERMS OF THE PA RTNERSHIP AGREEMENT. IT IS BECAUSE THAT INTEREST EXISTS ALRE ADY BEFORE DISSOLUTION, AS WAS HELD BY HONBLE SUPREME COURT I N THE CASE OF MALABAR FISHERIES CO. V. COMMISSIONER OF INCOME-TAX [1979] 120 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 88 OF 230 ITR 49 (SC), THAT THE DISTRIBUTION OF THE ASSETS ON DISSOLUTION OR UPON THE RETIREMENT IS THE REALIZATION OF A PRE-EXI STING RIGHT OR AN INTEREST, WHICH DOES NOT AMOUNT TO A TRANSFER TO TH E ERSTWHILE PARTNERS. WHAT THE PARTNER GETS UPON DISSOLUTION O R UPON RETIREMENT IS THE REALIZATION OF A PRE-EXISTING RIGHT OR INTER EST. THAT IS WHY IT HAS BEEN HELD THAT THERE IS NO TRANSFER. VI. WHEN A PARTNER HANDS OVER ITS BUSINESS ASSET TO A P ARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, HE CANNOT BE SA ID TO HAVE EFFECTED THE SALE. VII. IN ITS GENERAL SENSE, THE EXPRESSION TRANSFER OF P ROPERTY CONNOTES THE PASSING OF RIGHT IN PROPERTY FROM ONE PERSON TO ANOTHER. IN ONE CASE THERE MAY BE A PASSING OF THE ENTIRE BUNDLE OF RIGHTS FROM THE TRANSFEROR TO THE TRANSFEREE. IN ANOTHER CASE, THE TRANSFER MAY CONSIST OF ONE OF THE ESTATES ONLY OUT OF ALL THE E STATES COMPRISING THE TOTALITY OF THE RIGHTS IN THE PROPERTY. IN A THIRD CASE, THERE MAY BE A REDUCTION OF THE EXCLUSIVE INTEREST IN THE TOT ALITY OF RIGHTS OF THE ORIGINAL OWNER INTO A JOINT OR SHARED INTEREST WITH OTHER PERSONS, AND AN EXCLUSIVE INTEREST IN PROPERTY IS LARGER THAN TH E SHARE IN THAT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 89 OF 230 PROPERTY. TO THE EXTENT TO WHICH THE EXCLUSIVE INT EREST IS REDUCED TO A SHARED INTEREST, THERE IS A TRANSFER OF INTEREST. THEREFORE, WHEN A PARTNER BRINGS IN HIS PERSONAL ASSET INTO THE CAPIT AL OF THE PARTNERSHIP AS HIS CONTRIBUTION TO ITS CAPITAL, HE REDUCES HIS EXCLUSIVE RIGHTS IN THE ASSET TO SHARED RIGHTS IN I T WITH THE OTHER PARTNERS OF THE FIRM. WHILE HE DOES NOT LOSE HIS R IGHT IN THE ASSET ALTOGETHER, WHAT HE ENJOYS NOW IS A ABRIDGED RIGHT WHICH CANNOT BE IDENTIFIED WITH THE FULLNESS OF THE RIGHT WHICH HE ENJOYED IN THE ASSET BEFORE IT ENTERED THE PARTNERSHIP CAPITAL. VIII. WHEN A PARTNER RETIRES OR PARTNERSHIP IS DISSOLVED, WHAT THE PARTNER RECEIVED IS HIS SHARES IN THE PARTNERSHIP, QUA THE NET ASSET OF THE PARTNERSHIP FIRM. WHAT HAPPENS HERE IS THAT A SHAR ED INTEREST IN ALL THE ASSETS OF THE FIRM IS REPLACED BY AN EXCLUSIVE INTEREST IN AN ASSETS OF EQUAL VALUE. THAT IS WHY IT HAS BEEN HEL D THAT THERE IS NO TRANSFER. IT IS THE REALIZATION OF A PRE-EXISTING RIGHT. THE POSITION IS DIFFERENT WHEN A PARTNER BRING HIS PERSONAL ASSET I NTO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL. AN INDIV IDUAL ASSET IS THE SOLE SUBJECT OF CONSIDERATION. AN EXCLUSIVE INTERE ST IN IT BEFORE IT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 90 OF 230 ENTERS THE PARTNERSHIP IS REDUCED ON SUCH ENTRY INT O A SHARED INTEREST. IX. WHEN A PARTNER OF A FIRM MAKES OVER HIS PERSONAL AS SET, WHICH ARE HELD BY HIM, TO A FIRM AS HIS CONTRIBUTION TOWARDS CAPITAL, THERE IS A TRANSFER OF A ASSET IN ITS GENERAL SENSE BECAUSE TH E EXCLUSIVE INTEREST OF THE PARTNER IN PERSONAL ASSET IS REDUCED, ON THE IR ENTRY INTO THE FIRM, INTO A SHARED INTEREST. IN OTHER WORDS, TO T HE EXTENT TO WHICH THE EXCLUSIVE INTEREST IS REDUCED TO A SHARED INTER EST IT WOULD SEEM THAT THERE IS A TRANSFER OF INTEREST. IN OTHER WOR DS, TO THE EXTENT TO WHICH THE EXCLUSIVE INTEREST IS REDUCED TO A SHARED INTEREST, IT WOULD SEEM THAT THERE IS A TRANSFER OF INTEREST. X. AT THE TIME WHEN THE PARTNER TRANSFERS HIS PERSONAL ASSET TO PARTNERSHIP FIRM THERE CAN BE NO RECKONING OF THE L IABILITIES AND LOSSES WHICH THE FIRM MAY SUFFERS IN YEARS TO COME. IT IS IMPOSSIBLE TO CONCEIVE OF EVALUATING THE CONSIDERATION ACQUIRE D BY THE PARTNER WHEN HE BRINGS HIS PERSONAL ASSET INTO THE PARTNERS HIP FIRM WHEN NEITHER CAN THE DATE OF DISSOLUTION OR RETIREMENT B E ENVISAGED NOR CAN THERE BE ANY ASCERTAINMENT OF LIABILITIES AND P RIOR CHARGES WHICH ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 91 OF 230 MAY NOT HAVE EVEN ARISEN YET. THEREFORE, THE CONSI DERATION WHICH A PARTNER ACQUIRES ON MAKING OVER HIS PERSONAL ASSET TO THE FIRM AS HIS CONTRIBUTION AS ITS CAPITAL CANNOT FALL WITHIN THE TERMS OF SECTION 48 OF THE ACT. XI. THE VIEW THAT WHEN A PERSON BRINGS IN EVEN HIS IMMO VABLE PROPERTY AS HIS CONTRIBUTION TO THE CAPITAL OF THE FIRM, NO DOCUMENT OR REGISTRATION IS REQUIRED UNDER SECTION 17(1)(B) OF THE REGISTRATION ACT DOES NOT SPRING FROM THE CONSIDERATION THAT THE RE IS NO TRANSFER. XII. ON INTRODUCING HIS PERSONAL ASSET INTO THE PARTNERS HIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, IT CANNOT BE SAID THAT ANY INCOME OR GAIN ARISES OR ACCRUES TO THE ASSESSEE IN A TRUE COMMERC IAL SENSE WHICH A BUSINESSMAN WOULD UNDERSTAND AS REAL INCOME OR GAIN . XIII. HOWEVER, THE SITUATION WOULD BE DIFFERENT IF IT TAN SPIRES THAT EITHER PARTNERSHIP FIRM IN QUESTION IS NOT GENUINE OR IF T HE PARTNERSHIP FIRM IS GENUINE, THE TRANSACTION OF TRANSFERRING THE PER SONAL ASSET TO THE PARTNERSHIP FIRM REPRESENTS A DEVISE OR RUSE TO CON VERT THE PERSONAL ASSET INTO MONEY SUBSTANTIALLY FOR THE BENEFIT OF T HE ASSESSEE WHILE EVADING TAX ON CAPITAL GAIN, AND IN THAT RESPECT TH E AO IS ENTITLED TO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 92 OF 230 CONSIDER ALL THE RELEVANT INDICIA AND OTHER PERTINE NT CONSIDERATION IN THIS REGARDS, AND HE IS ENTITLED TO PENETRATE A VEI L COVERING AND ASCERTAIN THE TRUTH. NATURE OF RIGHT ACCRUES OR ARISES TO A PARTNER ON H IS CAPITAL CONTRIBUTION OF HIS PERSONAL ASSETS TO AF FIRM IN W HICH HE IS OR BECOMES A PARTNER. 16.39 FROM THE SAID DECISION OF THE HONBLE SUPREME COUR T IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCO ME-TAX (SUPRA), IT IS SETTLED THAT WHEN THE PARTNER BRINGS PERSONAL ASSET INTO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, AND WHATEV ER MAY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY THE PARTNER WHEN THE PARTNERSHIP FIRM IS FORMED OR WHICH MAY BE ACQUIRED IN THE COUR SE OF THE BUSINESS OF THE PARTNERSHIP IT BECOMES THE PROPERTY OF THE FIRM AND WHAT RIGHT THE PARTNER ACQUIRED IS TO GET HIS SHARES OF PROFIT DUR ING THE SUBSISTENCE OF PARTNERSHIP, AND UPON DISSOLUTION OF THE PARTNERSHI P OR ON RETIREMENT, TO SHARE IN THE ASSET OF THE FIRM WHICH REMAIN AFTER S ATISFYING THE LIABILITIES. THUS, THE NATURE OF THE RIGHT ACQUIRED BY THE ASSES SEE BY CONTRIBUTING HIS PERSONAL ASSET OF WHATEVER CHARACTER IN TO A PARTNE RSHIP FIRM TOWARDS ITS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 93 OF 230 CAPITAL IS A RIGHT OF CAPITAL IN NATURE TO CLAIM SH ARE OF PROFIT IN THE PARTNERSHIP FIRM, AND UPON THE DISSOLUTION OF THE F IRM OR HIS RETIREMENT, THE SHARE IN THE ASSET OF THE FIRM AFTER SATISFYING THE LIABILITIES. IT MAKES IT CLEAR THAT THE TRANSACTION OF BECOMING A PARTNER AN D CONTRIBUTION OF ASSET OF WHATEVER CHARACTER AS CAPITAL IN THE FIRM IN WHI CH ONE BECOMES A PARTNER IS UNDOUBTEDLY ON A CAPITAL FIELD, AND NOT IN THE NATURE OF ANY COMMERCIAL OR TRADING TRANSACTION. IT IS ALSO NOT THE CASE OF THE ASSESSEE THAT CONTRIBUTION OF ASSESSEES ASSET BEING LAND IN QUESTION TO A PARTNERSHIP FIRM TOWARDS ITS CAPITAL WHEN ASSESSEE BECAME A PAR TNER WAS A COMMERCIAL OR TRADING TRANSACTION. WHEN IT IS ACCEPTED THAT T HE TRANSACTION IS NOT IN THE NATURE OF TRADING OR COMMERCIAL TRANSACTION, TH E QUESTION OF TREATING THE ASSET INVOLVED IN THAT TRANSACTION AS STOCK IN TRADE DOES NOT ARISE. IT IS ALTOGETHER A DIFFERENT MATTER THAT BEFORE CONTRIBUT ING ANY PERSONAL ASSET BY THE PARTNER TO A FIRM, IT MIGHT HAVE A CHARACTER OF STOCK IN TRADE OR CAPITAL ASSET OR ANY OTHER ASSET IN THE HANDS OF A PARTNER, BUT AT THE TIME WHEN THE SAME IS CONTRIBUTED AS CAPITAL CONTRIBUTION IN A FI RM IN WHICH THE ASSESSEE BECOMES A PARTNER, IT WOULD CERTAINLY HAVE A CHARAC TER OF CAPITAL ASSET ONLY HAVING REGARD TO THE CAPITAL NATURAL OF THE TRANSAC TION AND NATURE OF RIGHTS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 94 OF 230 ACQUIRED BY A PARTNER IN THE FIRM ON HIS BECOMING A PARTNER. IN OTHER WORDS, WHATEVER MAY BE THE CHARACTER OF THE PROPERT Y IN THE PARTNERS HAND BEFORE THE SAME IS BROUGHT IN BY THE PARTNER AS CAP ITAL CONTRIBUTION WHEN A PARTNERSHIP IS FORMED AND HE BECOMES A PARTNER, THE PROPERTY BROUGHT IN PARTAKES THE CHARACTER OF A CAPITAL ASSET, AND IN C ONSIDERATION OF IT BEING CONTRIBUTED TO A PARTNERSHIP TOWARDS ITS CAPITAL, T HE PARTNER ACQUIRES A RIGHT TO GET HIS SHARE OF PROFIT IN THE FIRM, AND UPON DI SSOLUTION OF THE PARTNERSHIP FIRM OR HIS RETIREMENT, A PARTNER IS EN TITLED TO GET SHARE IN THE ASSET OF THE FIRM WHICH REMAIN AFTER SATISFYING THE LIABILITIES OF THE FIRM. WHETHER A PARTNER HANDS OVER HIS BUSINESS ASSET TO A FIRM AS HIS CAPITAL CONTRIBUTION, HE CAN BE SAID TO HAVE EFFECT ED A SALE. 16.40 THE LD. COUNSEL FOR THE ASSESSEE HAS RIGHTLY CONTE NDED THAT WHEN A PARTNER HANDS OVER HIS BUSINESS ASSET TO A P ARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, HE CANNOT BE SAID TO H AVE EFFECT A SALE WITHIN THE MEANING OF SALES OF GOODS ACT, MEANING THEREBY THAT THE TRANSFER OF PARTNERS PERSONAL ASSET TO A PARTNERSHIP FIRM AS H IS CONTRIBUTION TO ITS CAPITAL IS NOT A COMMERCIAL OR TRADING TRANSACTION. WE FIND NO DIFFICULTY IN ACCEPTING THIS PROPOSITION IN THE LIGHT OF THE DECI SION OF HONBLE SUPREME ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 95 OF 230 COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. HIND CONSTRUCTION LTD [1972] 83 ITR 211 (SC), WHICH HAS BEEN ACCEPTED AND APPROVED IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCO ME-TAX (SUPRA). WHEN A VIEW THAT WHEN A PARTNER HANDS OVER HIS PERS ONAL ASSET OF WHATEVER CHARACTER TO A PARTNERSHIP FIRM AS HIS CON TRIBUTION TO ITS CAPITAL, THE PARTNER CANNOT BE SAID TO HAVE EFFECTED A SALE OF THAT ITEM IS ACCEPTED, THE QUESTION OF TREATING THAT PERSONAL ASSET AS STO CK IN TRADE IN THE COURSE OF TRANSACTION WHEN THE SAME WAS CONTRIBUTED TO A P ARTNERSHIP FIRM AS ITS CAPITAL, CANNOT ARISE IRRESPECTIVE OF WHATEVER MAY BE THE CHARACTER WHILE REMAINING IN THE HANDS OF A PARTNER BEFORE THE SAME WAS CONTRIBUTED BY HIM TO A FIRM AS ITS CAPITAL. IN ORDER TO DECIDE T HE CHARACTER OF AN ASSET AT THE TIME WHEN IT TRANSFERRED TO A FIRM BY A PARTNER BY WAY OF CAPITAL CONTRIBUTION, ONE HAS TO DETERMINE THE NATURE OF TH E ASSET THAT ATTACHES TO IT AT THE TIME WHEN THE TRANSACTION OF CONTRIBUTING TH E CAPITAL BY A PARTNER TO A FIRM TAKES PLACE, AND SUCH QUALITY OR CHARACTER O F AN ASSET CANNOT BE ALTERED OR AFFECTED BY ANY PREVIOUS OR SUBSEQUENT A CT OR CONDUCT OF A PARTNER OR A FIRM IN RELATION TO THAT ASSET WHICH H AS BEEN CONTRIBUTED AS CAPITAL IN PARTNERSHIP FIRM BY THAT PARTNER. THE T REATMENT GIVEN OR THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 96 OF 230 ENTRY MADE IN THE BOOKS OF ACCOUNTS BY THE PARTNER IN HIS BOOKS OF ACCOUNTS OR BY THE PARTNERSHIP FIRM IN THEIR BOOKS WITH REGARD TO ANY ASSET CONTRIBUTED BY A PARTNER AS ITS CAPITAL TO A FIRM I S NO MORE THAN A PREVIOUS OR SUBSEQUENT ACT OR CONDUCT, WHICH SHALL HAVE NO E FFECT UPON THE VERY CHARACTER ATTACHED TO THE ASSET AT THE TIME OF TRAN SACTION UNDER WHICH THE ASSET IS TRANSFERRED BY THE PARTNER TO A PARTNERSHI P FIRM TOWARDS ITS CAPITAL CONTRIBUTION. IN THIS VIEW OF THE MATTER AND IN TH E LIGHT OF THE FACT THAT WHEN PARTNER HANDS OVER ITS PERSONAL ASSET OF WHATE VER CHARACTER TO A PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL , THE TRANSACTION CANNOT BE SAID TO BE IN THE NATURE OF TRADING OR COMMERCIAL O NE SO AS TO TREAT THE ASSET INVOLVED IN SUCH TRANSACTION AS STOCK IN TRAD E. THE LOGICAL AND RATIONAL VIEW OR CONCLUSION THAT ONE COULD ARRIVE I S THAT AT THE TIME WHEN ANY ASSET IS TRANSFERRED BY A PARTNER TO A PARTNERS HIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, THE ASSET CANNOT RETAI N THE CHARACTER OF STOCK IN TRADE AT THAT MATERIAL POINT OF TIME AND IN THE COU RSE OF SUCH CONTRIBUTION OF CAPITAL AS THE SAME IS NOT EMPLOYED IN ANY COMME RCIAL OR TRADING TRANSACTION CARRIED OUT IN THE COURSE OF ANY BUSINE SS ACTIVITY OF THE PARTNER. THERE IS NO QUARREL AS TO THE CONTENTION OF THE ASS ESSEE THAT AS PER ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 97 OF 230 DEFINITION OF CAPITAL ASSET DEFINED U/S. 2(14) OF THE ACT, ANY STOCK IN TRADE, CONSUMABLE STORES OR RAW MATERIALS HELD FOR THE PURPOSE OF THE BUSINESS OR PROFESSION OF THE ASSESSEE ARE EXCLUDED FROM THE AMBIT OF CAPITAL ASSET. IN OTHER WORDS, AN EXCEPTION HAS BEEN PROVIDED IN THE DEFINITION OF CAPITAL ASSET UNDER SECTION 2(14) O F THE ACT TO EXCLUDE STOCK IN TRADE OR CONSUMABLE STORES OR RAW MATERIA L HELD BY THE ASSESSEE FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION FRO M THE PURVIEW OF A CAPITAL ASSET. THE PHRASE STOCK IN TRADE WOULD MEAN ALL THOSE GOODS OR COMMODITIES IN WHICH THE PARTICULAR INDIVIDUAL DEAL S IN THE SENSE OF BUYING OR SELLING IN THE COURSE OF ITS BUSINESS ACT IVITY. THE STOCK IN TRADE HELD BY THE ASSESSEE FOR THE PURPOSE OF HIS BUSINES S OR PROFESSION WOULD RETAIN ITS SAME CHARACTER ONLY IT CONTINUES TO BE E MPLOYED FOR THE PURPOSE OF ANY BUSINESS OR COMMERCIAL ACTIVITY CARRIED OUT BY THE ASSESSEE. THIS WOULD MEAN THAT WHEN A BUSINESSMAN WITHDRAWS HIS ST OCK IN TRADE HELD BY HIM FOR THE PURPOSE OF BUSINESS OR PROFESSION FROM HIS BUSINESS FOR SOME PURPOSE OR PURPOSES OTHER THAN THE PURPOSE OF DEALI NG WITH IT IN THE COURSE OF ANY TRADING OR COMMERCIAL TRANSACTION, IT WOULD LOSE ITS CHARACTER OF BEING STOCK IN TRADE, AND WILL ACQUIRE SUCH CHARA CTER WITH REGARD TO THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 98 OF 230 PURPOSE FOR WHICH SAME HAS BEEN EMPLOYED. IN OTHER WORDS, THE STOCK IN TRADE HELD BY THE ASSESSEE FOR THE PURPOSE OF HIS B USINESS OR PROFESSION SHALL GET CONVERTED INTO SUCH OTHER NATURE OF ASSET HAVING REGARD TO THE PURPOSE FOR WHICH IT HAS BEEN WITHDRAWN FROM THE BU SINESS. IN BUSINESS, IT DOES HAPPEN THAT CAPITAL ASSET IS CONVERTED INTO STOCK IN TRADE, AND STOCK IN TRADE INTO CAPITAL ASSET OR ASSET CEASES TO BE S TOCK IN TRADE. FOR EXAMPLE, WHERE A DEALER IN JEWELLERY BRINGS IN HIS PERSONAL JEWELLERY TO BUSINESS, THERE IS A CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE. SIMILARLY, A STOCK IN TRADE IS CONVERTED INTO A CAPITAL ASSET, WHEN THE DEALER IN JEWELLERY WITHDRAWS JEWELLERY FROM HIS BUSINESS FOR HIS PERSONAL USE OR FOR HOLDING THE SAME AS INVESTMENT. WHERE A GROCE R DRAWS A PART OF HIS STOCK FOR HIS PERSONAL CONSUMPTION, THERE IS A CONV ERSION FROM STOCK IN TRADE TO PERSONAL INVESTMENT ON WITHDRAWAL OF STOCK IN TRADE. IN THE CASE OF A GROCER, WHEN HE WITHDRAWS PART OF HIS STOCK FOR H IS PERSONAL CONSUMPTION, STOCK IN TRADE SO WITHDRAWN WOULD NOT RETAIN THE CHARACTER OF STOCK IN TRADE AT THE TIME WHEN A GROCER CONSUME S THAT ITEM WITHDRAWN FROM HIS BUSINESS; IT IS NOT A LOSS TO BUSINESS BUT IT IS REGARDED AS A PERSONAL EXPENSES OR DRAWING. IN A SITUATION WHERE A GROCER WITHDRAWS A ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 99 OF 230 PART OF HIS STOCK FOR HIS PERSONAL CONSUMPTION, HE WOULD DEBIT HIS BUSINESS BY THE COST AT WHICH STOCK IN TRADE WAS ACQUIRED, A ND NO NOTIONAL VALUE CAN BE ATTACHED THERETO. THE GROCER WOULD DEBIT TH E COST OF THE STOCK WITHDRAWN BY HIM FOR HIS PERSONAL CONSUMPTION WHICH WOULD NEGATIVE THE COST OF PURCHASE DEBITED IN THE TRADING ACCOUNT, AN D THE ITEM SHALL BE CONSIDERED TO BE OUT OF THE PURVIEW OF STOCK IN TRA DE AT THE TIME THE GROCER WITHDRAWS HIS STOCK FOR HIS PERSONAL CONSUMPTION. IN THE CASE OF SIR KIKABHAI PREMCHAND V. COMMISSIONER OF INCOME-TAX (1 953) 24 ITR 506 (SC), THE HONBLE SUPREME COURT HAS DECIDED THAT IT IS ONLY A COST THAT SHOULD BE THE BASIS FOR COMPUTING THE BUSINESS INCO ME ON CONVERSION OF STOCK WITHDRAWN FROM BUSINESS. IN THIS CASE, THE H ONBLE SUPREME COURT HAS TAKEN UP AN ILLUSTRATION OF A DEALER IN RICE HE LD AS STOCK, DRAWING A SMALL PART OF IT FOR HIS HOME CONSUMPTION. IF HE H AD DEBITED THE PURCHASE TO PERSONAL ACCOUNT, EVEN INITIALLY, THERE WOULD HA VE BEEN NO PROFIT ELEMENT RECKONED ON SUCH PURCHASES. IT SHOULD, THE REFORE, MAKE NO DIFFERENCE MERELY BECAUSE SUCH STOCK IS MERELY ROUT ED THROUGH BUSINESS BOOKS. IN THE DECISION IN THE CASE OF SIR KIKABH AI PREMCHAND V. COMMISSIONER OF INCOME-TAX (SUPRA), THE HONBLE SUP REME COURT FURTHER ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 100 OF 230 OBSERVED THAT WITHDRAWING STOCK IN TRADE BY A BUSIN ESSMAN IS NOT A BUSINESS TRANSACTION AND BY ACT OF WITHDRAWAL NO PR OFIT CAN BE SAID TO ACCRUE TO HIM AND, ACCORDINGLY IT IS SUFFICIENT IF SAID BUSINESSMAN HAS CREDITED IT BUSINESS WITH COST PRICE OF STOCK SO WI THDRAWN. IT IS WELL SETTLED THAT PROFITS FROM SALE OF STOCK IN TRADE IN THE COURSE OF TRADING OPERATION IS BUSINESS PROFIT. AS A NATURAL COROLLA RY, WHEN ANY ASSET IS NOT EMPLOYED IN THE COURSE OF ANY TRADING OR COMMERCIAL OPERATION, THE SAME CANNOT BE CONSIDERED TO BE STOCK IN TRADE HELD FOR THE PURPOSE OF BUSINESS. FURTHER, IN THE LIGHT OF THE RATIO OF DECISION OF H ONBLE SUPREME COURT IN THE CASE OF SIR KIKABHAI PREMCHAND VS. CIT (SURPA), WE MAY SAY THAT WHEN STOCK IN TRADE BY A BUSINESSMAN IS WITHDRAWN F ROM HIS BUSINESS, ITS NATURE AND CHARACTER GETS CONVERTED INTO A DIFFEREN T CHARACTER, AND THE ACT OF WITHDRAWING THE STOCK IN TRADE BY A BUSINESSMAN CANNOT BE HELD TO BE A BUSINESS OR COMMERCIAL OR TRADING TRANSACTION IN TH E SENSE A BUSINESSMAN WOULD UNDERSTAND. IN SIR KIKABHAI PREMCHAND V. CO MMISSIONER OF INCOME - TAX (SUPRA), WHERE A PART OF THE STOCK IN TRADE WAS WITHDRAWN BY THE ASSESSEE AND ENDOWED THEM ON CERTAIN TRUSTS OF WHICH THE ASSESSEE WAS A TRUSTEE, THE HONBLE SUPREME COURT HELD THAT THER E BEING NO COMMERCIAL ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 101 OF 230 OR TRADING TRANSACTION, IT WAS NOT A CASE OF SALE O F STOCK IN TRADE AND THE WITHDRAWAL OF STOCK IN TRADE SHOULD BE TAKEN AT COS T . THE SUPREME COURT FURTHER HELD THAT NO MAN CAN BE SUPPOSED TO BE TRAD ING WITH HIMSELF. FROM THE SAID DECISION, IT THUS TRANSPIRES THAT WIT HDRAWAL OF STOCK IN TRADE FROM BUSINESS IS NOT A TRADING OR COMMERCIAL TRANSA CTION IN THE COURSE OF CARRYING ON BUSINESS, AND THE WITHDRAWAL OF STOCK I N TRADE SHOULD BE TAKEN AT COST. IN THE PRESENT CASE, WHEN THE ASSESSEE WI THDRAWS SOME PLOT OF LAND BEING PART OF STOCK IN TRADE FOR MAKING CONTRI BUTION TO A PARTNERSHIP FIRM AS ITS CAPITAL AT THE TIME WHEN HE BECAME A PA RTNER, THERE IS A CONVERSION ON WITHDRAWAL OF STOCK IN TRADE INTO CAP ITAL ASSET IN AS MUCH AS, AS ALREADY DISCUSSED ABOVE, THE ACT OF CONTRIBU TING PERSONAL ASSET INTO A PARTNERSHIP FIRM AS ITS CAPITAL WHEN ASSESSEE BECOM ES A PARTNER IN A FIRM IS A TRANSACTION ON CAPITAL FIELD. 16.41 WITH REGARD TO THE PROPOSITION THAT ONE MAY CONVER T A CAPITAL ASSET INTO STOCK IN TRADE OR VICE-VERSA, A USEFUL R EFERENCE MAY BE MADE TO ONE MORE DECISION OF HONBLE SUPREME COURT IN THE C ASE OF COMMISSIONER OF INCOME-TAX V. BAI SHIRINBAI K. KOOK A [1962] 46 ITR 86 (SC), WHERE THE ASSESSEE HELD CERTAIN SHARES BY WAY OF INVESTMENT, ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 102 OF 230 CONVERTED THOSE SHARES INTO STOCK IN TRADE OF HIS B USINESS DEALING IN SHARES, AND LATER ON SOLD THE SHARES, IT WAS HELD THAT THE PROFITS ON SALE OF SHARES SOLD BY THE ASSESSEE MUST BE COMPUTED AT THE DIFFER ENCE BETWEEN SALE PRICE AND THE MARKET PRICE OF THE SHARES ON THE DAT E OF THEIR CONVERSION AS STOCK IN TRADE OF THE BUSINESS OF THE ASSESSEE. A S ALREADY OBSERVED ABOVE, WHETHER THERE IS ANY SUCH CONVERSION OF STOCK IN TR ADE TO CAPITAL ASSET OR CAPITAL ASSET INTO STOCK IN TRADE CAN ONLY BE DECID ED IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF A GIVEN CASE. THE TAXABILITY OF THE AMOUNT BEING THE DIFFERENCE BETWEEN THE COST OF ASSET ORIGINALLY ACQ UIRED AS INVESTMENT AND THE MARKET PRICE OF THE ASSET ON THE DATE OF ITS CO NVERSION FROM CAPITAL ASSET TO STOCK IN TRADE, NOW TAKES CARE OF BY THE P ROVISIONS CONTAINED IN SUB-SECTION (2) OF SECTION 45 OF THE ACT, WHICH HAS BEEN INSERTED W.E.F. 01.04.1985 WITH A VIEW TO BRING THE AFORESAID DIFFE RENCE TO TAX AS CAPITAL GAIN ON CONVERSION OF INVESTMENT INTO STOCK IN TRAD E. SINCE MARKET VALUE WAS ADOPTED ON CONVERSION OF INVESTMENT INTO STOCK IN TRADE IN THE AFORESAID DECISION OF HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. BAI SHIRINBAI K. KOOKA (SUPRA), IT WAS CONSIDERED FAIR BY THE LEGISLATURE THAT THE ASSESSEE SHOULD PAY TAX ON SUCH CAPITAL GAINS WITH ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 103 OF 230 REFERENCE TO THE MARKET VALUE ADOPTED WHEN COMPUTIN G THE BUSINESS INCOME ARISING TO THE ASSESSEE FROM INVESTMENT OR P ERSONAL ASSET CONVERTED INTO STOCK IN TRADE. CONVERSELY, A STOC K IN TRADE CAN BE CONVERTED INTO CAPITAL ASSET, AND THE TAX ON TRANSF ER OF A SUCH CAPITAL ASSET WILL BE IMPOSED IN THE YEAR IN WHICH SUCH CAPITAL A SSET IS SOLD OR OTHERWISE TRANSFERRED AFTER DEDUCTING THERE FROM THE COST OF ACQUISITION, AND OTHER DEDUCTIONS AS PROVIDED UNDER THE LAW. 16.42 IN THE INSTANT CASE OF THE ASSESSEE, IT IS NOT IN D ISPUTE THAT THE SAID LAND IN QUESTION, AMONGST OTHERS, WAS ACQUIRED AS STOCK IN TRADE OF THE ASSESSEES BUSINESS. HOWEVER, LATER ON IN THE YEAR UNDER CONSIDERATION, THE SAID LAND IN QUESTION BEING A PART OF THE TOTAL STOCK IN TRADE OF THE BUSINESS GOT REVALUED BY THE ASSESSEE, AND WAS CONT RIBUTED AS CAPITAL CONTRIBUTION TO A PARTNERSHIP FIRM IN WHICH ASSESSE E BECAME A PARTNER WITH A VIEW TO CARRY ON BUSINESS IN PARTNERSHIP. AT THE COST OF REPETITION, IT IS EMPHASIZED THAT THE TRANSACTION OF MAKING OVER ASSE SSEES PERSONAL ASSET I.E. LAND IN QUESTION, TO A FIRM AS ITS CAPITAL CON TRIBUTION IN THE CAPACITY OF A PARTNER IS NOT A COMMERCIAL OR TRADING TRANSACTIO N AS SO ADMITTED BY THE ASSESSEE ALSO. TO SAY IT DIFFERENTLY, THE LAND IN QUESTION CONTRIBUTED BY THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 104 OF 230 ASSESSEE TO A FIRM AS ITS CAPITAL CONTRIBUTION HAS NOT BEEN TRANSFERRED OR SOLD TO A FIRM IN THE COURSE ANY TRADING OR COMMERC IAL ACTIVITY OR TRANSACTION CARRIED OUT BY THE ASSESSEE. WE FAIL T O UNDERSTAND THAT WHEN LAND IN QUESTION HAS NOT BEEN SOLD OR TRANSFERRED T O A FIRM IN THE COURSE OF ANY TRADING OR BUSINESS ACTIVITY, BUT HAS BEEN TRAN SFERRED BY WAY OF CAPITAL CONTRIBUTION TO A FIRM, ON WHAT BASIS OR CRITERIA T HE LAND IN QUESTION SHOULD BE CONSIDERED AS STOCK IN TRADE, WHEN THE SAME WAS CONTRIBUTED TO A FIRM TOWARDS CAPITAL, WHEN IT IS ADMITTED POSITION OF LA W THAT THE ASSET, WHICH ARE HELD FOR SALE IN THE ORDINARY COURSE OF BUSINES S; IN THE PROCESS OF PRODUCTION FOR SUCH SALE OR IN THE FORM OF MATERIAL S OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION PROCESS ARE ONLY BE CONS IDERED AS STOCK IN TRADE OR INVENTORIES. IN THE COURSE OF HEARING OF THIS APPEAL, A RELIANCE WAS PLACED BY THE LD. STANDING COUNSEL FOR THE REVENUE ON THE ACCOUNTING STANDARDS VIZ., ACCOUNTING STANDARD - 1, ACCOUNTIN G STANDARD 2, AND ACCOUNTING STANDARD 10 (AS 1, AS 2, AND AS 1 0 RESPECTIVELY) IN REPLY TO THE QUERY RAISED BY THE BENCH ABOUT THE ME ANING OF WORDS CAPITAL ASSET AND STOCK IN TRADE. IT WAS POINT ED OUT TO THE BENCH BY BOTH THE PARTIES THAT AS 2 DEALS WITH THE VALUATIO N OF INVENTORIES. THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 105 OF 230 MEANING OF INVENTORIES AS DEFINED IN AS 2 IS THAT THE INVENTORIES ARE ASSETS HELD FOR SALE IN ORDINARY COURSE OF BUSINESS ; IN THE PROCESS OF PRODUCTION FOR SUCH SALES; OR IN THE FORM OF MATERI ALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION PROCESS OR IN THE RENDER ING OF SERVICES. ABOVE MEANING GIVEN TO THE INVENTORIES IS AN ACCEPT ED PROPOSITION. FROM THIS DEFINITION OF STOCK IN TRADE OR INVENTORY, IT IS CLEAR THAT IN ORDER TO CONSIDER ANY ASSET AS STOCK IN TRADE OR INVENTORY, IT IS TO BE ESTABLISHED THAT IT WAS HELD FOR SALE IN THE ORDINARY COURSE OF BUSI NESS; IN THE PROCESS OF PRODUCTION OF SUCH SALES; OR IN THE FORM OF MATERIA LS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION PROCESS OR IN RENDERING OF SERVICES. UNDER SECTION 2(14) OF THE ACT, ANY STOCK IN TRADE, CONSU MABLE STORES, OR RAW MATERIALS HELD FOR THE PURPOSE OF HIS BUSINESS OR P ROFESSION ARE EXCLUDED FROM THE AMBIT OF CAPITAL ASSET. THE EXPRESSION USED IN SECTION 2(14) OF THE ACT IS ANY STOCK IN TRADE, CONSUMABLE STORES O R MATERIALS HELD FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION. THUS, THE EMPHASIS HAS BEEN GIVEN TO THE CRITERIA THAT ANY STOCK IN TRADE, CONS UMABLE STORES, OR RAW MATERIALS MUST BE HELD FOR THE PURPOSE OF HIS BUSIN ESS OR PROFESSION IN ORDER TO TREAT THE SAME AS SUCH. AS A NATURAL CORO LLARY, IF ONE CLAIMS THAT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 106 OF 230 ANY ASSET IS ARE EITHER ACQUIRED OR DISPOSED OF OR OTHERWISE DEALT WITH AS STOCK IN TRADE, OR CONSUMABLE STORES OR RAW MATERIA LS, HE MUST PROVE THAT THE TRANSACTION OF THAT ASSET EFFECTED BY HIM IS IN THE COURSE OF HIS BUSINESS OR PROFESSION, SO AS TO TREAT THE ASSET IN QUESTION AS STOCK IN TRADE, CONSUMABLE STORES OR RAW MATERIALS, AT THE TIME WHE N THE TRANSACTION WAS MADE. THE AFORESAID DEFINITION OF INVENTORIES ME NTIONED IN AS 2 HAS ALSO BEEN TAKEN NOTE OF BY THE HONBLE SUPREME COUR T IN THE RECENT DECISION OF LIBERTY INDIA VS, CIT (2009) 317 ITR 21 8 (SC) BY OBSERVING AS UNDER: 19. SINCE RELIANCE WAS PLACED ON BEHALF OF THE ASSESSEE(S) ON AS 2 WE NEED TO ANALYSE THE SAID STANDARD. 20. AS 2 DEALS WITH VALUATION OF INVENTORIES. INVENTORIES ARE ASSETS HELD FOR SALE IN THE ORDINARY COURSE OF BUSINESS; IN THE PROCESS OF PRODUCTION FOR SUCH SALE; OR IN THE FORM OF MATERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION. INVENTORY SHOULD BE VALUED AT THE LOWER OF COST AND NET REALIZABLE VALUE (NRV). THE COST OF INVENTORY SHOULD COMPRISE ALL COSTS OF PURCHASE, COST OF CONVERSION AND OTHER COSTS INCLUDING COSTS INCURRED IN BRINGING THE INVENTORY TO THEIR PRESENT LOCATION AND CONDITION. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 107 OF 230 16.43. IN THIS VIEW OF THE MATTER, WE, THEREFORE, HOLD THAT IN ORDER TO TREAT ANY ASSET AS STOCK IN TRADE, IT MUST BE ESTAB LISHED AND PROVED THAT THE ASSET WAS INVOLVED IN THE COURSE OF ANY COMMERCIAL OR TRADING TRANSACTION OF A BUSINESS CARRIED OUT BY THE ASSESSEE, AND THAT IS TO BE CONSIDERED AND DECIDED WITH REFERENCE TO THE TRANSACTION IN WHICH SUCH ASSET IS EMPLOYED AND NOT WITH REFERENCE TO ANY PAST OR SUBSEQUENT AC T OF THE ASSESSEE, QUA THAT ASSET. 16.44 HAVING REGARD TO THE NATURE OF RIGHT ACQUIRES BY A PARTNER OF A FIRM WHEN HE BECOMES A PARTNER, HIS SHARE IN FIRM U NDOUBTEDLY CONSTITUTES PROPERTY, AND SHARE OF A PARTNER IN A PARTNERSH IP FIRM WOULD CERTAINLY BE A CAPITAL ASSET WITHIN THE MEANING OF SECTION 2( 14) OF THE ACT. SUCH AN ASSET BEING A SHARE OF A PARTNER IN A PARTNERSHIP F IRM CAN BE TRANSFERRED, LIKE ANY OTHER PROPERTY, AND, ON TRANSFER BEING COM PLETED, THE CHARGE ON CAPITAL GAIN TAX WOULD BE ATTRACTED. AS ALREADY OB SERVED ABOVE, WHEN A PARTNER OF A FIRM MAKES OVER HIS PERSONAL ASSET TO A FIRM AS ITS CONTRIBUTION TOWARDS CAPITAL, THE PARTNER ACQUIRES A RIGHT TO RE CEIVE SHARE IN PROFIT OF THE FIRM DURING THE SUBSISTENCE OF THE PARTNERSHIP AND UPON ITS DISSOLUTION OR ON HIS RETIREMENT, A RIGHT TO SHARE IN THE NET ASSE T OF THE FIRM. IT THUS, ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 108 OF 230 MAKES IT CLEAR THAT THE PARTNER HAS ACQUIRED A CAPI TAL ASSET IN THE NATURE OF HIS SHARE IN THE PARTNERSHIP FIRM IN CONSIDERATION OF HIS MAKING OVER HIS PERSONAL ASSET TO A FIRM. THE TRANSACTION OF MAKIN G OVER PERSONAL ASSETS TO A FIRM, OR RECEIVING OR REALIZATION OF HIS SHARE IN ASSETS ON DISSOLUTION OF THE FIRM OR ON RETIREMENT OF THE PARTNER, IS UNDOUB TEDLY TO BE HELD ON A CAPITAL FIELD. 16.45 THEREFORE, HAVING REGARD TO THE NATURE OF THE TRAN SACTION OF CONTRIBUTING ASSET BY A PARTNER TO A PARTNERSHIP FI RM TOWARDS HIS CAPITAL, THE NATURE OF THE RIGHT THAT THE PARTNER ACQUIRES W HEN HE CONTRIBUTES HIS PERSONAL ASSET TO A PARTNERSHIP FIRM AS ITS CAPITAL , AND SUCH TRANSACTIONS BEING NOT IN THE NATURE OF ANY COMMERCIAL OR TRADIN G TRANSACTION, NOTWITHSTANDING THE FACT THAT THE SAID LAND CONTRIB UTED BY THE ASSESSEE TO A PARTNERSHIP FIRM AS ITS CAPITAL WAS HELD AS STOCK I N TRADE FOR THE PURPOSE OF ASSESSEES BUSINESS BEFORE THE SAME WAS SO CONTRIBU TED AS CAPITAL IN A FIRM, IT CEASES TO BE STOCK IN TRADE AT THE TIME WH EN THE SAME WAS CONTRIBUTED INTO A PARTNERSHIP FIRM BY THE ASSESSEE PARTNER TOWARDS ITS CAPITAL, AND IT GETS CONVERTED FROM STOCK IN TRADE INTO CAPITAL ASSET AT THAT MATERIAL POINT OF TIME. THEREFORE, THE QUESTION AS TO WHETHER ANY INCOME ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 109 OF 230 OR GAIN HAS ARISEN OR ACCRUED TO THE ASSESSEE IN TH E COURSE OF CONTRIBUTING THE SAID LAND AS CAPITAL CONTRIBUTION INTO A PARTNE RSHIP FIRM AT THE TIME WHEN ASSESSEE BECOMES A PARTNER, IS TO BE DECIDED I N THE LIGHT OF THE PREMISES THAT ASSESSEE HAS TRANSFERRED OR CONTRIBUT ED A CAPITAL ASSET AS CAPITAL CONTRIBUTION TO A PARTNERSHIP FIRM IN WHICH HE BECAME A PARTNER, AND NOT IN THE LIGHT OF THE PREMISES THAT THERE WAS A SALE OR TRANSFER OR CONTRIBUTION OF STOCK IN TRADE BY A PARTNER TO A FI RM BY WAY OF CAPITAL CONTRIBUTION WHEN THE ASSESSEE BECAME A PARTNER. 16.46 THE QUESTION WHETHER, ON FACTS OF THE PRESENT CASE , THE LAND IN QUESTION HELD BY THE ASSESSEE AS STOCK IN TRADE HAS BEEN CONVERTED INTO CAPITAL ASSET AND IT PARTOOK THE CHARACTER OF CAPIT AL ASSET AT THE TIME WHEN THE ASSESSEE CONTRIBUTED IT AS ITS CAPITAL TO A FIR M WHEN HE BECAME A PARTNER, CAN ALSO BE JUDGED FROM ONE MORE POINT OF VIEW ABOUT THE CONDUCT, MOTIVE AND INTENTION OF THE ASSESSEE WHILE MAKING OVER THE LAND IN QUESTION AS CAPITAL CONTRIBUTION TO A FIRM IN WH ICH HE BECAME A PARTNER. THE INTENTION AND MOTIVE OF THE ASSESSEE TO TREAT A NY ASSET WHETHER AS STOCK IN TRADE OF ITS BUSINESS OR CAPITAL ASSET AT ANY GIVEN POINT OF TIME CAN BE JUDGED OR INFERRED FROM THE CONDUCT OF THE ASSES SEE COUPLED WITH ALL ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 110 OF 230 SURROUNDING CIRCUMSTANCES AND MATERIALS OF ANY GIVE N CASE, HAVING REGARD TO THE NATURE OF TRANSACTION IN WHICH SUCH ASSET IS EMPLOYED. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE ASSESSE E WAS FOLLOWING METHOD OF VALUATION OF CLOSING STOCK OF ITS BUSINESS AT COST OR MARKET PRICE, WHICHEVER IS LOWER, AS PER SETTLED AND ACCEPTED PRI NCIPLES OF ACCOUNTANCY. ACCORDINGLY, THE LAND IN QUESTION AS WELL ALL OTHER PLOTS OF LANDS HELD BY THE ASSESSEE AS STOCK IN TRADE WERE USED TO BE VALU ED AS PER THE SAID METHOD OF VALUATION AT THE END OF THE YEAR WHEN ACC OUNTS OF THE ASSESSEE WERE MADE OUT. HOWEVER, ON 16.03.1992 IN THE MIDDL E OF THE CURRENT YEAR UNDER CONSIDERATION, THE ASSESSEE GOT ONLY THE LAND IN QUESTION REVALUED BY THE EXPERTS DETERMINING THE MARKET VALUE AS ON 16.0 3.1992 AT RS. 11.50 CRORES, WHICH IS MORE THAN THE COST TO THE ASSESSEE , AND THE LAND WAS THEN CONTRIBUTED TO THE NEWLY CONSTITUTED PARTNERSHIP FI RM AS CAPITAL CONTRIBUTION, AND THE SURPLUS OF RS. 6.01 CRORES AR ISING FROM THE SAID TRANSACTION, WAS CREDITED IN THE PROFIT AND LOSS AC COUNT OF THE ASSESSEE FIRM AND THE VALUE OF THE LAND WAS CREDITED IN THE CAPIT AL ACCOUNT OF THE ASSESSEE PARTNER IN THE BOOKS OF THE FIRM. IN THIS RESPECT, AND AT THIS STAGE, WE MUST KEEP IN OUR MIND THAT ALL OTHER PLOTS OF LA NDS AND RIGHT INLAND ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 111 OF 230 HELD BY THE ASSESSEE AS STOCK IN TRADE, EXCEPT THE LAND IN QUESTION, WERE NEITHER VALUED NOR ANY ENTRY OF ANY REVALUATION IN RESPECT THERE TO WAS MADE IN THE ACCOUNTS OF THE ASSESSEE COMPANY. THE CONDUCT OF THE ASSESSEE IN VALUING ONLY A PART OF STOCK IN TRADE A T MARKET VALUE AS ON 16.03.1992 FOR THE PURPOSE OF CONTRIBUTING THE SAME AS CAPITAL CONTRIBUTION IN TO THE PARTNERSHIP FIRM IN WHICH HE BECAME A PARTNER ON AND FROM 16.03.1992, CLEARLY INDICATES THE INTENTIO N AND MOTIVE OF THE ASSESSEE THAT THE ASSESSEE DID NOT HAVE ANY INTENTI ON TO TREAT THE LAND IN QUESTION AS STOCK IN TRADE ANYMORE, BUT THE INTENTI ON WAS TO TREAT THE SAME AS CAPITAL ASSET FOR THE PURPOSE OF CONTRIBUTING TH E SAME AS CAPITAL CONTRIBUTION TO A FIRM FOR BECOMING A PARTNER. IT IS AN ACCEPTED SYSTEM OF ACCOUNTANCY THAT STOCK IN TRADE OF BUSINESS AT THE END OF THE YEAR ARE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LOWER, TO DETERMINE THE PROFIT OR LOSS, AS THE CASE MAY BE OF ANY BUSINESS. THUS, THE QUESTION OF VALUATING THE STOCK IN TRADE AT MARKET VALUE HIGHER THAN THE COST PRICE IN THE MIDDLE OF THE YEAR BEFORE THE YEAR ENDS, AND TH EN PASSING CORRESPONDING ENTRIES IN THE BOOKS OF ACCOUNTS, IS TOTALLY UNWARRANTED AND IS NOT USUALLY ASSOCIATED WITH THE STOCK IN TRADE, UNLESS THE ASSESSEE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 112 OF 230 INTENDED TO WITHDRAW THE STOCK IN TRADE FROM HIS BU SINESS AND CONVERT THE SAME INTO CAPITAL ASSET FOR THE PURPOSE OF CONTRIBU TING THE SAME AS CAPITAL IN A PARTNERSHIP FIRM IN WHICH ASSESSEE BECAME A PA RTNER. THERE IS NO MANDATORY ACCOUNTING STANDARD, WHICH MANDATES THE A SSESSEE TO REVALUE ITS INVENTORY UPWARD AS SO ADMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE IN REPLY TO THE QUERY RAISED BY THE BENCH. IN THE PRESENT CASE, WE, THEREFORE, FIND THAT THERE WERE MATERIAL CHANGE S IN CIRCUMSTANCES UNDER WHICH THE LAND WAS VALUED AT MARKET PRICE HIG HER THAN THE COST PRICE, THE LAND WAS THEN CONTRIBUTED BY THE ASSESSE E PARTNER TO A PARTNERSHIP FIRM AS CAPITAL CONTRIBUTION AND THE SU RPLUS ARISING FROM THE SAID TRANSACTION WAS CREDITED IN THE PROFIT AND LOS S ACCOUNT OF THE ASSESSEE, FROM THE CIRCUMSTANCES PREVAILING EITHER ON THE DAT E OF ITS ACQUISITION AS STOCK IN TRADE OR JUST BEFORE THE SAME WAS DECIDED TO BE CONTRIBUTED AS CAPITAL IN A FIRM AT A MARKET PRICE. AT THIS STAGE , WE FIND IT NECESSARY TO POINT OUT ONE PROPOSITION THAT THOUGH ACCOUNTING PR ACTICES MAY NOT BE THE BEST GUIDE IN DETERMINING THE NATURE OF ANY ASSET H ELD BY THE ASSESSEE, THEY ARE INDICATIVE OF WHAT THE ASSESSEE ITSELF THOUGHT OF ITS NATURE OR WHAT TREATMENT THE ASSESSEE ITSELF INTENDED TO GIVE TO T HE SAME. THE INTENTION OF ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 113 OF 230 THE ASSESSEE TO HOLD ANY ASSET WHETHER AS STOCK IN TRADE OR CAPITAL ASSET CAN BE GATHERED FROM THE CONDUCT OF THE ASSESSEE AND TH E TREATMENT GIVEN TO IT BY THE ASSESSEE IN ITS RECORDS AND BOOKS, THOUGH TH E SAME MAY NOT BE CONCLUSIVE BUT ARE UNDOUBTEDLY A RELEVANT FACTORS C OUPLED WITH SOME OTHER FACTORS OR CIRCUMSTANCES APPEARING IN ANY GIVEN CAS E. FROM ALL THE FACTORS AS DISCUSSED ABOVE, IF TAKEN TOGETHER, ALONGWITH TH E POSITION OF LAW AS TO THE NATURE OF THE TRANSACTION AND RIGHTS ACQUIRES B Y THE ASSESSEE ON BECOMING A PARTNER IN A FIRM, IT IS CLEARLY ESTABLI SHED AND PROVED THAT THE LAND HELD BY THE ASSESSEE AS STOCK IN TRADE BEFORE THE SAME WAS CONTRIBUTED TO A FIRM AS CAPITAL HAS BEEN CONVERTED INTO A CAPITAL ASSET AT THE TIME WHEN THE SAME WAS CONTRIBUTED AS CAPITAL C ONTRIBUTION TO A FIRM IN WHICH THE ASSESSEE BECAME A PARTNER. IN THIS VI EW OF THE MATTER, WE, THEREFORE, HOLD THAT THE LAND IN QUESTION CONTRIBUT ED BY THE ASSESSEE AS CAPITAL TO A FIRM IN WHICH ASSESSEE BECAME A PARTNE R WAS A CAPITAL ASSET IN NATURE AT THAT RELEVANT POINT OF TIME, AND ALL THE INCIDENCE OF TAXATION WOULD THUS FOLLOW ACCORDINGLY. 16.47 BEFORE PROCEEDING FURTHER, AT THIS JUNCTURE, WE H AVE TO DEAL WITH ONE MORE ASPECT OF THE MATTER FLOWING FROM THE CONTENTIONS OF THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 114 OF 230 LEARNED COUNSEL FOR THE ASSESSEE TO THE EFFECT THAT THE AO AS WELL AS THE CIT HAS NOT CONTROVERTED OR DISPUTED THE FACT THAT THE LAND IN QUESTION WAS A STOCK IN TRADE BOTH BEFORE AND AFTER THE SAME WAS CONTRIBUTED BY THE ASSESSEE PARTNER AS ITS CAPITAL CONTRIBUTION TO THE PARTNERSHIP FIRM IN WHICH THE ASSESSEE BECAME A PARTNER, AND THIS FINDING OF FACT CANNOT NOW BE CHANGED AT THIS STAGE. WE HAVE GIVEN OUR SERIOUS C ONSIDERATION TO THIS CONTENTION RAISED BY THE LEARNED COUNSEL FOR THE AS SESSEE. ON PERUSAL OF ORDERS OF THE AUTHORITIES BELOW, IT BECOMES CLEAR T HAT BOTH THE AUTHORITIES BELOW HAVE RECORDED A FINDING OF FACT THAT THE LAND , WHICH WAS CONTRIBUTED BY THE ASSESSEE COMPANY TO A THE FIRM, WAS ITS STOC K IN TRADE, AND IT BECAME THE PARTNERS CAPITAL IN THE FIRM BEING THE ASSET RECEIVED IN LIEU OF CAPITAL OF THE PARTNER. BOTH THE AUTHORITIES BELOW HAVE ALSO ACCEPTED THE POSITION THAT THE LAND, WHICH WAS CONTRIBUTED BY AS SESSEE COMPANY AS ITS CAPITAL, WAS HELD AS STOCK IN TRADE BY THE PARTNERS HIP FIRM IN WHICH THE ASSESSEE BECAME A PARTNER. WE HAVE ALSO ACCEPTED T HIS POSITION THAT THE LAND IN QUESTION CONTRIBUTED BY ASSESSEE PARTNER TO A PARTNERSHIP FIRM AS ITS CAPITAL CONTRIBUTION WHEN THE ASSESSEE BECOME A PAR TNER, WAS HELD BY THE ASSESSEE AS STOCK IN TRADE BEFORE THE SAME WAS CONT RIBUTED AS ITS CAPITAL ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 115 OF 230 CONTRIBUTION TO A FIRM. THERE IS NO DISPUTE AS TO THE FACT THAT AFTER RECEIVING THE LAND IN QUESTION AS CAPITAL CONTRIBUT ION BY THE ASSESSEE PARTNER, THE FIRM TREATED THE SAME AS STOCK IN TRAD E OF ITS BUSINESS OF REAL ESTATE AND STARTED MAKING CONSTRUCTION THEREUPON FO R ITS BUSINESS OF REAL ESTATE DEVELOPMENT IN SUBSEQUENT YEARS. AT THE SAM E TIME, THE FACT THAT THE LAND IN QUESTION WAS CONTRIBUTED TO A FIRM AS C APITAL CONTRIBUTION BY THE ASSESSEE IN THE CAPACITY OF A PARTNER IS ALSO N OT IN DISPUTE. IN OUR OPINION, THE REAL CONTROVERSY, IN THE PRESENT CASE, IS NOT WITH REGARD TO THE NATURE OF ASSET BEFORE OR AFTER THE SAME WAS CONTRI BUTED TO THE PARTNERSHIP FIRM AS CAPITAL CONTRIBUTION BY THE ASSESSEE PARTNE R WHEN THE ASSESSEE BECAME A PARTNER, BUT IS WITH REGARD TO THE NATURE OF THE ASSET AT THE MATERIAL POINT OF TIME TIME WHEN THE SAME WAS CONTR IBUTED TO A PARTNERSHIP FIRM BY THE ASSESSEE PARTNER AS ITS CAP ITAL CONTRIBUTION WHEN HE BECAME A PARTNER IN THE FIRM. WHILE THE AO HAS CLA IMED THAT IT IS A CASE OF SALE OF STOCK IN TRADE FROM ONE ENTITY TO ANOTHER A ND THE SURPLUS RESULTED OUT THERE FROM IS A PROFIT FROM BUSINESS CHARGEABLE TO TAX, THE ASSESSEE HAS CONTENDED THAT IT IS A CASE WHERE STOCK IN TRADE HA S BEEN CONTRIBUTED TO A PARTNERSHIP FIRM BY THE ASSESSEE AS ITS CAPITAL CON TRIBUTION AND NO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 116 OF 230 COMMERCIAL OR TRADING TRANSACTION HAS TAKEN PLACE S O AS TO GIVE A RISE TO A SALE OR TRANSFER OF STOCK IN TRADE BY A PARTNER TO A FIRM. IN THE LIGHT OF THE CONTROVERSY SET OUT ABOVE, WE HAVE ADDRESSED OURSEL VES TO DETERMINE THE TRUE AND CORRECT NATURE OF THE TRANSACTION AND/OR THE AS SET EMPLOYED IN THE TRANSACTION UNDER WHICH THE ASSESSEE PARTNER CONTRI BUTED TOWARDS ITS CAPITAL ITS PERSONAL ASSET HELD BY IT AS STOCK IN TRADE BEF ORE THE SAME WAS CONTRIBUTED AS ITS CAPITAL TO A FIRM, IN WHICH THE ASSESSEE BEC AME A PARTNER. THIS QUESTION WHETHER THE LAND IN QUESTION WAS A CAPITAL ASSET OR STOCK IN TRADE IN NATURE AT THE TIME WHEN THE SAME WAS CONTRIBUTED BY THE ASSES SEE TO A PARTNERSHIP FIRM AS ITS CAPITAL CONTRIBUTION WHEN THE ASSESSEE BECAM E A PARTNER IN THAT FIRM, IS NOT ONE OF FACT: THOUGH IT IS DEPENDENT ON THE FACT S AND THE CIRCUMSTANCES OF THE PRESENT CASE, THE QUESTION DOES INVOLVE CONCLUS IONS OF LAW TO BE DRAWN FROM THOSE FACTS. WE, THEREFORE, DO NOT FIND ANY F ORCE OR MERIT IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACT ADMITTED BY THE REVENUE AUTHORITIES BELOW ARE NOW BEING CHANGED . WHETHER PARTICULAR INCOME ASSESSED BY THE AO UNDER ONE HEAD CAN BE BROUGHT TO TAX UNDER ANOTHER HEAD BY THE TRIBUNAL. 16.48 THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO CON TENDED BEFORE US THAT THE REVENUE HAS CHANGED ITS STAND WH EN AN ALTERNATIVE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 117 OF 230 ARGUMENT WAS ADVANCED BY THE LEARNED SPECIAL COUNS EL FOR THE REVENUE THAT IN THE EVENT THE TRIBUNAL COMES TO THE CONCLUS ION THAT THE TRANSACTION OF MAKING OVER PERSONAL ASSETS BY A PARTNER TO A PA RTNERSHIP FIRM AS ITS CAPITAL CONTRIBUTION IS A CASE OF CAPITAL ASSET BRO UGHT IN BY A PARTNER AS ITS CAPITAL CONTRIBUTION IN A FIRM IN WHICH IT BECAME A PARTNER, THE TRIBUNAL MAY ADJUDICATE THE QUESTION WHETHER THE PROFIT OR G AIN ARISING TO THE ASSESSEE AS A RESULT OF THE SAID TRANSACTION IS CHA RGEABLE TO TAX UNDER THE PROVISIONS OF SECTION 45(3) OF THE ACT EFFECTIVE FR OM 01.04.1988 EVEN IF NOT UNDER SECTION 28 OF THE ACT. BOTH THE PARTIES HAVE BEEN HEARD ON THIS ASPECT OF THE MATTER AND ALSO ON THE MERITS WHETHER THE SURPLUS ARISING FROM THE TRANSACTION INVOLVED IN THIS CASE COULD IN DEED BE ASSESSED AS CAPITAL GAIN. 16.48.1 THERE IS NO DISPUTE TO THE POSITION THAT THE PROFI TS OR GAINS OR BENEFITS ARISING TO THE ASSESSEE FROM SAID TRANSACT ION IN QUESTION HAS BEEN ASSESSED UNDER THE HEAD BUSINESS BY THE AO IN THE LIGHT OF THE VIEW THAT STOCK IN TRADE WAS SOLD OR TRANSFERRED BY THE ASSES SEE COMPANY TO A FIRM AT AN APPRECIATED PRICE. IT WAS THE CLAIM OF THE ASSE SSEE ITSELF THAT THE STOCK IN TRADE HELD BY IT WAS CONTRIBUTED TO A FIRM IN WH ICH THE ASSESSEE BECAME ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 118 OF 230 A PARTNER, AND IN THE LIGHT OF THE STAND SO TAKEN B Y THE ASSESSEE, THE AO BROUGHT THE SURPLUS TO TAX UNDER THE HEAD BUSINESS . IN THE LIGHT OF THE STAND TAKEN BY THE ASSESSEE THAT THE LAND TRANSFERR ED TO A PARTNERSHIP FIRM WAS STOCK IN TRADE AT THE TIME WHEN THE SAME WAS CO NTRIBUTED TO A FIRM, THE AO HAS TREATED THE TRANSACTION OF MAKING OVER THE L AND OF THE ASSESSEE TO A FIRM TO BE IN THE NATURE OF TRADING OR COMMERCIAL T RANSACTION REJECTING THE ASSESSEES CLAIM THAT IT WAS NOT LIABLE TO BE TAXED AS NO SALES HAD TAKEN PLACE. HOWEVER, WHEN AN ARGUMENT HAS BEEN ADVANCED SUPPORTED BY VARIOUS DECISIONS WHEN A PARTNER CONTRIBUTES ITS PE RSONAL ASSETS OF WHATEVER CHARACTER TO A FIRM TOWARDS ITS CAPITAL CO NTRIBUTION WHEN HE BECOMES A PARTNER, THE ASSET INVOLVED IN THE TRANSA CTION WOULD PARTAKE THE CHARACTER OF CAPITAL ASSET AT THAT MATERIAL POINT O F TIME. THE LEARNED STANDING COUNSEL FOR THE REVENUE ADVANCED AN ALTERN ATIVE ARGUMENT BASED ON SAME SET OF FACTS BUT ON DIFFERENT CONCLUSIONS O F LAW DRAWN FROM THOSE FACTS THAT IN CASE THE CONTRIBUTION OF LAND BY ASSE SSEE PARTNER TO A FIRM IS ACCEPTED TO HAVE BEEN MADE TOWARDS ITS CAPITAL CONT RIBUTION IN A FIRM AND THE LAND INVOLVED IN THE SAID TRANSACTION OF CAPITA L CONTRIBUTION TO A FIRM IS HELD TO BE OF A CAPITAL ASSET IN NATURE AT THE TI ME WHEN THE SAME WAS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 119 OF 230 CONTRIBUTED AS CAPITAL CONTRIBUTION, THE PROFIT OR GAIN ARISING FROM THE TRANSFER OF A LAND BY THE ASSESSEE TO A FIRM MAY BE TAXED UNDER SECTION 45(3) OF THE ACT INSERTED WITH EFFECT FROM A.Y. 198 8-89. THIS ALTERNATIVE ARGUMENT IS, IN OUR VIEW, UNDOUBTEDLY ARISING FROM THE SAME SET OF FACTS, AND IN RESPECT OF SAME ITEM OF INCOME ARISING FROM THE SAME TRANSACTION, WHICH HAVE BEEN CONSIDERED IN THE ASSESSMENT MADE B Y THE AO. FURTHER, THE PROVISIONS OF SECTION 2(14), 2(47) AND 45(3) OF THE ACT WERE VERY MUCH RELIED UPON BY THE AO WHILE ASSESSING THE ITEM TO TAX AS IS CLEAR FROM THE RESPECTIVE ORDERS OF THE AUTHORITIES BELOW AND FROM THE SUBMISSIONS OF THE ASSESSEE MADE BEFORE THE AUTHORI TIES BELOW AS WELL AS BEFORE US. IT IS NOT THE NEW SOURCE OF INCOME OR N EW ITEM OF INCOME THAT IS SOUGHT TO BE TAXED BY THE REVENUE AT THIS STAGE. IT IS THE SAME INCOME ASSESSED BY THE AO THAT IS NOW SOUGHT TO BE TAXED U NDER SECTION 45(3) OF THE ACT IN THE LIGHT OF THE LEGAL INFERENCES DRAWN FROM SAME OF SET OF FACTS, AS AGAINST THE BUSINESS PROFIT ASSESSED IN THE ASSE SSMENT MADE BY THE AO. THE SUBJECT MATTER OF APPEAL HAS NOT BEEN REALLY CH ANGED. THE CHANGE IS ONLY WITH REGARD TO THE CORRECT HEAD OF INCOME UNDE R WHICH IT IS TO BE ASSESSED UNDER THE INCOME TAX ACT. THUS, THE CONTE NTION OF THE ASSESSEE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 120 OF 230 IN THIS REGARD THAT THE DEPARTMENT HAS NO RIGHT TO TAKE AN ALTERNATIVE PLEA TO TAX THE PROFITS OR GAINS ARISING FROM TRANSFER OF L AND BY ASSESSEE TO A FIRM BY WAY OF CAPITAL CONTRIBUTION AS PER PROVISIONS OF SECTION 45(3) OF THE ACT IS NOT FOUND CONVINCING. 16.48.2 FURTHER, THE ANSWER TO A QUESTION THAT WHETHER THE LAND IN QUESTION HAD A CHARACTER OF CAPITAL ASSET OR STOCK IN TRADE AT THE TIME WHEN THE SAME WAS CONTRIBUTED AS CAPITAL TO A FIRM IN WH ICH THE ASSESSEE BECAME A PARTNER IS BASED ON A LEGAL CONCLUSION TO BE DRAWN FROM SAME SET OF FACTS. THE RELEVANT PROVISIONS OF LAW CONTAINED IN SECTION 2(14), 2(47) AND 45(3) WERE VERY MUCH RELIED UPON BY THE DEPARTM ENT AUTHORITIES BELOW TO BRING THE ITEM TO TAX THOUGH THE TAX HAS B EEN IMPOSED BY THE AO AND THE CIT(A) UNDER THE HEAD BUSINESS PROFIT. T HIS MAKES IT CLEAR THAT THE DEPARTMENT HAS NOT MADE OUT A NEW CLAIM FOR THE FIRST TIME BEFORE THE TRIBUNAL BY WAY OF AN ALTERNATIVE ARGUMENT MADE BEF ORE US. 16.48.3 IT IS NOT THE CASE WHERE ANY ENHANCEMENT OF INCOME IS SOUGHT FOR BY THE REVENUE. IT IS ALSO NOT THE CASE WHERE ANY BENEFIT ALREADY GRANTED TO THE ASSESSEE IS SOUGHT TO BE TAKEN BACK BY THE DEPARTMENT. THE ONLY POINT RAISED BY THE SR. STANDING COUNSEL FOR T HE REVENUE IS THAT IN ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 121 OF 230 CASE THE SURPLUS ARISING FROM THE TRANSACTION IS NO T FOUND TO BE ASSESSABLE UNDER THE HEAD BUSINESS, THE SAME MAY BE TAXED UN DER THE HEAD CAPITAL GAIN, AND IN THAT SITUATION THE TAX LIABILITIES OF THE ASSESSEE WOULD NOT INCREASE. ALL THE FACTS TO DECIDE THE QUESTION AS TO WHETHER THE SURPLUS IN QUESTION IS ASSESSABLE UNDER THE HEAD BUSINESS OR CAPITAL GAIN ARE AVAILABLE ON RECORD, WHICH HAS BEEN CONSIDERED BY T HE AUTHORITIES BELOW AND WHICH HAS BEEN REFERRED TO BY THE ASSESSEE. THE AO AS WELL THE ASSESSEE BOTH HAVE ADMITTED THE FACT THAT THE LAND WAS CONTRIBUTED AS CAPITAL CONTRIBUTION BY THE ASSESSEE IN THE CAPACIT Y OF A PARTNER. THE SUBJECT MATTER INVOLVED IN THIS ISSUE IS ALSO NOT B EING CHANGED IN AS MUCH AS IN THE LIGHT OF THE FACTS AVAILABLE ON RECORD AN D THAT WERE CONSIDERED BY THE AUTHORITIES BELOW AND ALSO RELIED UPON BY THE A SSESSEE, THE SAME VERY TRANSACTION OF CONTRIBUTING THE LAND BY A PARTNER T O A FIRM AS ITS CAPITAL CONTRIBUTION IS THE SOLE BASIS TO DECIDE THE ALTERN ATIVE CONTENTION RAISED BY THE REVENUE. BY ALLOWING DEPARTMENT TO RAISE THIS ADDITIONAL PLEA, WE DO NOT THINK THAT WE TRAVERSE BEYOND THE SUBJECT MATTE R OF DISPUTE BETWEEN THE PARTIES INVOLVED IN THIS CASE. THIS ALTERNATIV E PLEA RAISED BY THE REVENUE DOES NOT ALTOGETHER CHANGES THE COMPLEXION OF THE CASE, AND ONLY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 122 OF 230 CHANGE SOUGHT TO BE MADE IS TO DETERMINE THE CORREC T HEAD OF INCOME ON SAME SET OF FACTS. THE VARIOUS DECISION RELIED UPO N BY THE LD. COUNSEL FOR THE ASSESSEE ARE, THEREFORE, NOT APPLICABLE TO THE PRESENT CASE IN AS MUCH AS THOSE CASES WERE RENDERED EITHER IN THE SITUATION W HERE NEW FACTS WERE CONSIDERED, BENEFIT ALREADY GRANTED TO THE ASSESSEE WERE SOUGHT TO BE WITHDRAWN, THE SUBJECT MATTER OF THE APPEAL WAS COM PLETELY CHANGED AND THE ASSESSMENT WAS SOUGHT TO BE ENHANCED . 16.48.4 IN THIS CONNECTION, A RELIANCE WAS PLACED BY THE R EVENUE UPON THE DECISION OF SPECIAL BENCH OF INCOME TAX AP PELLATE TRIBUNAL, MUMBAI BENCH C (SB) IN THE CASE OF SUMIT BHATTACH ARYA VS. ACIT (2008) 112 ITD 1 (MUM)(SB), WHERE THE SPECIAL BENCH HAS TAKEN A VIEW THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. GILBERT & BARKER MANUFACTURING CO., U .S.A. [1978] 111 ITR 529 (BOM.) HAS HELD THAT THE TRIBUNAL IS COMPET ENT TO CHANGE THE HEAD OF INCOME EVEN AT THE INSTANCE OF THE RESPONDE NT WHEN ALL THE RELEVANT FACTS ARE ALREADY ON RECORD AS LONG AS BOT H THE PARTIES ARE HEARD ON ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 123 OF 230 THAT ISSUE. THIS DECISION OF SPECIAL BENCH IN THE CASE OF SUMIT BHATTACHARYA VS. ACIT (SUPRA) AND HONBLE BOMBAY HI GH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. GILBERT & BAR KER MANUFACTURING CO., U.S.A. (SUPRA) ARE DIRECTLY ON THE ISSUE THAT ARISES IN THE PRESENT CASE BEFORE US. IN THE CASE OF COMMISSIONER OF INCOME-T AX V. GILBERT & BARKER MANUFACTURING CO., U.S.A. (SUPRA), WHICH HAS BEEN R ELIED UPON BY THE TRIBUNAL IN THE CASE OF SUMIT BHATTARCHARYA VS. ACI T (SUPRA), THE HIGH COURT HAS HELD AS UNDER:- XXX XXX XXX XXX THE TRIBUNAL WOULD HAVE THE DISCRETION TO ALLOW ANY PARTY TO THE APPEA L, MAY BE THE APPELLANT OR THE RESPONDENT, TO RAISE A NEW POINT OR A NEW CONTENTION PROVIDED TWO THINGS ARE SATISFIED. FIRST, THAT FOR URGING SUCH A NEW POINT NO NEW FACTS ARE REQUIRED TO BE BROUGHT ON RECORD AND THE POINT IS CAPABLE OF BEING DISPOSED OF ON THE FA CTS WHICH ARE ALREADY ON RECORD AND, SECONDLY, AN OPPORTUNITY IS GIVEN TO THE OTHER SIDE TO MEET THAT POINT THAT IS BEING ALLOWED TO BE RAISED FOR THE FI RST TIME IN APPEAL. IN THE INSTANT CASE, IT CANNOT BE DISPUTED THAT ALL THE FACTS THAT WERE REQUIRED FOR DETERMINATION OF THE POINT AS TO WHETHER THE INCOME RETURNED SHOULD BE ASSESSED UNDER THE HEADING 'BUSINESS INCOME' OR NOT WERE ALREADY ON RECORD BEFORE THE TRIBUNAL AND NO FURTHER INVESTIGATION OF ANY OTHER FACTS WAS NECESSARY AND IT WAS ON THE BAS IS OF FACTS WHICH WERE ALREADY ON RECORD THAT THE RESPONDENT WANTED TO CANVASS THE POINT BEFORE THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 124 OF 230 TRIBUNAL THAT THE INCOME RETURNED BY IT SHOULD BE ASSESSED UNDER THE HEADING 'BUSINESS INCOME'. SECONDLY, THE ASPECT WHETHER A PARTICULAR INCOME RETURNED BY THE ASSESSES SHOULD BE BROUGHT TO TAX UNDER ONE OR THE OTHER HEADING OF INCOME SHOULD NOT BE REGARDED AS SUCH A NEW POINT AS TO MAKE THE OTHE R SIDE TAKEN BY SURPRISE, ESPECIALLY WHEN ALL THE FAC TS NECESSARY FOR THAT PURPOSE ARE ALREADY ON RECORD AN D IN THE INSTANT CASE THE DEPARTMENT WAS GIVEN FULL OPPORTUNITY BY THE TRIBUNAL TO MEET THE CONTENTION THAT WAS BEING PERMITTED TO BE RAISED BY THE RESPONDENT FOR THE FIRST TIME IN APPEAL. IN OUR VIE W, THEREFORE, THERE WAS NO QUESTION OF PLACING THE APPELLANT IN A WORSE POSITION, WHICH SEEMS TO BE TH E IMPLICATION OF THE QUESTION AS FRAMED. THE TRIBUNAL , IN OUR VIEW, WAS JUSTIFIED IN PERMITTING THE RESPON DENT TO AGITATE BEFORE IT ITS CONTENTION THAT ITS INCOME WAS ASSESSABLE UNDER THE HEADING 'BUSINESS INCOME' AND, ACCORDINGLY, THE FIRST QUESTION IS ANSWERED IN THE AFFIRMATIVE. 16.48.5 THE SPECIAL BENCH IN THE CASE OF SUMIT BHATTACHARY A VS. ACIT (SUPRA) HAS OBSERVED AND HELD AS UNDER(EXTRACT ED FROM HEAD-NOTE):- IT IS WELL-SETTLED THAT THE TRIBUNAL IS COMPETENT TO CHANGE THE HEAD OF INCOME EVEN AT THE INSTANCE O F THE RESPONDENT WHEN ALL THE RELEVANT FACTS ARE ALREADY ON RECORD AND AS LONG AS BOTH THE PARTIES ARE HEARD ON THAT ISSUE. IN THE INSTANT CASE, IT WAS THE ALTERNATE CO NTENTION OF THE REVENUE THAT IN THE EVENT THE TRIBUNAL CAME TO THE CONCLUSION THAT THE AMOUNT IN QUESTION WAS NOT TAXA BLE UNDER THE HEAD INCOME FROM SALARIES, THE TRIBUNAL MIGHT ALSO ADJUDICATE ON THE QUESTION WHETHER OR NO T ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 125 OF 230 THE IMPUGNED AMOUNT BE HELD AS INCOME FROM OTHER SOURCES. [PARA 47] THE SUPREME COURT IN THE CASE OF EMIL WEBBER V. CIT [1993] 200 ITR 483/67 TAXMAN 532 HAS HELD THAT MERELY BECAUSE AN EMPLOYMENT-RELATED INCOME/BENEFIT CANNOT BE TAXED UNDER THE HEAD INCOME FROM SALARIE S, SUCH A BENEFIT CANNOT GO OUTSIDE THE AMBIT OF TAXAB LE INCOME AND SUCH AN INCOME CAN BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. [PARA 50] THEREFORE, EVEN IF THE AMOUNT RECEIVED BY THE ASSESSEE ON REDEMPTION OF SHARE APPRECIATION RIGHTS WAS HELD TO BE NOT TAXABLE UNDER THE HEAD INCOME F ROM SALARIES, THIS FACT, BY ITSELF, WOULD NOT TAKE THE SAME OUTSIDE THE AMBIT OF TAXABLE INCOME. SINCE, IN SUCH AN EVENTUALITY AND FOLLOWING THE SUPREME COURTS JUDGMENT IN EMIL WEBBERS CASE (SUPRA), THE SAID AMOUNT WOULD BE TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. THEREFORE, EVEN IF IT WAS HELD THAT THE AMOUNT IN QUESTION WAS RECEIVED FROM A PERSON OTHER THAN THE EMPLOYER OF THE ASSESSEE, AND THAT IN ORDE R FOR AN INCOME TO BE TAXED UNDER THE HEAD INCOME FROM SALARIES IT IS A CONDITION PRECEDENT THAT THE SALA RY, BENEFIT OR THE CONSIDERATION MUST FLOW FROM EMPLOYE R TO THE EMPLOYEE, THE AMOUNT RECEIVED BY THE ASSESSEE O N REDEMPTION OF STOCK APPRECIATION RIGHTS WOULD STILL BE TAXABLE - THOUGH UNDER THE HEAD INCOME FROM OTHER SOURCES. THE PLEA RAISED BY THE ASSESSEE THAT THE AMOUNT IN QUESTION COULD NOT BE TAXED AS INCOME FR OM SALARIES WAS THUS IRRELEVANT. [PARA 51] 16.48.6 IN THE INSTANT CASE BEFORE US, ALL THE FACTS REQUI RED FOR DECIDING THE POINT AS TO WHETHER THE SURPLUS ARISIN G FROM THE TRANSACTION CAN BE ASSESSED UNDER THE HEAD CAPITAL GAIN OR NO T ARE ALREADY ON RECORD. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 126 OF 230 NO FURTHER INVESTIGATION OF ANY NEW FACT IS NECESSA RY. THE PROVISIONS CONTAINED IN SECTION 45(3), ON THE BASIS OF WHICH T HE INCOME CAN BE ASSESSED UNDER THE HEAD CAPITAL GAIN, HAS BEEN CO NSIDERED AND DELIBERATED UPON BY BOTH THE AUTHORITIES BELOW, AND ASSESSEE HAS ALSO FURNISHED ITS COMMENTS UPON THE APPLICABILITY OF PR OVISIONS CONTAINED IN SECTION 45(3) BEFORE THE AUTHORITIES BELOW AS WELL AS BEFORE US. IN THE COURSE OF HEARING OF THIS APPEAL, A QUERY WAS ALSO RAISED BY THE BENCH TO BOTH THE PARTIES TO EXPLAIN AS TO WHETHER THE INCOM E IN QUESTION CAN BE ASSESSED UNDER THE HEAD CAPITAL GAIN, AND BOTH TH E PARTIES HAVE ADVANCED THEIR ARGUMENTS. AS HELD BY THE HONBLE BOMBAY HIG H COURT IN THE CASE OF CIT VS. GILBERT & BARKER MANUFACTURING CO. (SUPR A), THE QUESTION WHETHER A PARTICULAR INCOME SHOULD BE BROUGHT TO TA X UNDER ONE OR OTHER HEAD CANNOT BE CONSIDERED TO BE ENTIRELY NEW POINT. THE ASSESSEE HAS BEEN GIVEN FULL OPPORTUNITIES TO MEET THE ALTERNATI VE CONTENTION RAISED BY THE DEPARTMENT BEFORE US. IN THE CASE OF THE SUMIT BHATTACHARYA VS. ACIT (SUPRA), THE SPECIAL BENCH HAD TAKEN A VIEW THAT TH E INCOME, WHICH WAS ASSESSED BY THE AO UNDER THE HEAD SALARY, COULD B E TAXED UNDER HEAD INCOME FROM OTHER SOURCES, AND THE ISSUE WAS DECI DED ACCORDINGLY BY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 127 OF 230 THE SPECIAL BENCH. IN THIS RESPECT, A RELIANCE MAY ALSO BE PLACED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F B.R. BAMASI V. COMMISSIONER OF INCOME-TAX [1972] 83 ITR 223 (BOM.) , WHERE NEW GROUND BEFORE THE TRIBUNAL DURING ARGUMENTS BY THE ASSESSEE IN ANSWER TO APPEAL WAS PERMITTED. THE DECISION OF HONBLE SUP REME COURT IN THE CASE OF HUKUMCHAND MILLS LTD. VS. CIT (1976) 63 ITR 232 (SC) HAS HELD THAT THE POWER OF THE TRIBUNAL IN DEALING WITH APPE ALS ARE EXPRESSED IN SECTION 254(1) IN THE WIDEST POSSIBLE TERMS, HOWEVE R, WITH A RESTRICTION OF ITS JURISDICTION TO THE SUBJECT MATTERS OF APPEAL. 16.48.7 FURTHER, HAVING REGARD TO THE ACTUAL CONTROVERSY I NVOLVED IN THE PRESENT APPEAL, IN RESPONSE TO THE BENCHS SUGG ESTIONS, AND NOTINGS, THE HONBLE PRESIDENT VIDE HIS ORDER DATED 06.03.20 09, AFTER HEARING BOTH THE PARTIES, HAS DIRECTED THIS SPECIAL BENCH TO DEC IDE THE APPEAL IN ITS ENTIRETY WITHOUT CONFINING ITSELF TO THE QUESTION E ARLIER FRAMED IN THE PRESENT CASE, IN ACCORDANCE WITH THE LAW AND IN THE LIGHT OF THE FACTS OF THE CASE INCLUDING THE HIGH COURTS DIRECTION AS SO AGR EED BY BOTH THE PARTIES. THEREFORE, THE ALTERNATIVE PLEA RAISED BY THE REVEN UE TO THE EFFECT THAT THE SURPLUS ARISING TO THE ASSESSEE MAY OTHERWISE BE HE LD BE ASSESSABLE UNDER ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 128 OF 230 THE HEAD CAPITAL GAIN INSTEAD OF BUSINESS PROFIT IS ADMITTED FOR OUR CONSIDERATION SO THAT THE INCOME, IF FOUND US AS TO TAXABLE, CAN BE ASSESSED UNDER THE CORRECT HEAD OF INCOME UNDER THE PROVISIO N OF THE ACT. 16.48.8 BEFORE PARTING THIS ASPECT OF THE MATTER, WE WOULD LIKE TO MAKE A REFERENCE TO A DECISION OF HONBLE SUPREME C OURT IN THE CASE OF COMMISSIONER OF INCOME-TAX IN THE CASE OF RAM KUMAR AGGARWAL & BROS. [1994] 205 ITR 251 (SC) RELIED UPON BY THE LD . COUNSEL FOR THE ASSESSEE TO THE EFFECT THAT THE RESPONDENT IS NOT E NTITLED TO FOR THE FIRST TIME TO CLAIM BEFORE THE TRIBUNAL AND THE HIGH COURT THA T THE SHARES CEASED TO BE ITS STOCK IN TRADE ON THE CONVERSION OF THE COMP ANY FROM PUBLIC COMPANY TO A PRIVATE COMPANY. THIS CASE IS RENDERE D IN THE CONTEXT OF ALTOGETHER DIFFERENT SITUATION WHERE IT WAS AN ADMI TTED POSITION THAT THE ASSESSEE HELD THE SHARES OF COMPANY AS STOCK IN TRA DE OF HIS BUSINESS, AND HE RECEIVED THE MONEY IN LIEU OF HIS SHARE HOLDING IN THE COMPANY IN WHICH HE HAD HELD SHARES AS STOCK IN TRADE AND CLAI MED RELIEF AS SUCH IN EARLIER YEARS. THIS IS NOT THE CASE WHERE ASSESSEE HAS CONVERTED ITS STOCK IN TRADE INTO CAPITAL ASSET AT ANY POINT OF TIME. THE ASSESSEE WAS ALL ALONG CLAIMING THE BENEFIT AND BEING ASSESSED BY TREATING THE SHARES AS STOCK IN ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 129 OF 230 TRADE, AND THE SURPLUS RECEIVED BY THE ASSESSEE FRO M A LIQUIDATOR IN THE DISTRIBUTION OF ASSETS OF THE COMPANY, WAS, THUS, H ELD AS BUSINESS INCOME ASSESSABLE IN ASSESSEES HANDS, AND NOT AS A PROFI T FROM INVESTMENT. IN THIS CASE, THE ASSESSEE MADE A FRESH CLAIM BY CONTENDING THAT THE SHARES HELD BY IT AS STOCK IN TRADE SEIZED TO BE ITS STOCK IN TRADE O N THE CONVERSION OF THE COMPANY FROM A PUBLIC COMPANY TO A PRIVATE COMPANY OF WHICH THE ASSESSEE WAS HOLDING SHARES AS STOCK IN TRADE, THOUGH, IN TH E PRESENT CASE BEFORE US, IT IS THE CONDUCT OF THE ASSESSEE ITSELF THAT HE DECID ED TO CONTRIBUTE THE LAND IN QUESTION AS CAPITAL IN A PARTNERSHIP FIRM IN WHICH ASSESSEE BECAME A PARTNER, AND IT IS NOT THE CASE OF REALIZATION OF ANY MONEY BY THE ASSESSEE IN LIEU OF LAND IN QUESTION HELD BY IT AS STOCK IN TRADE BEFOR E THE SAME WAS CONTRIBUTED AS CAPITAL TO A FIRM. CONCLUSION 16.49 APPLYING THE PROPOSITIONS LAID DOWN BY THE HONBLE SURPEME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISS IONER OF INCOME-TAX (SUPRA) TO THE FACTS OF THE PRESENT CASE AND IN THE LIGHT OF THE VIEW WE HAVE EXPRESSED ABOVE, WE HOLD AS UNDER:- I. WHEN THE ASSESSEE MADE OVER THE SAID LAND IN QUESTI ON TO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL , WHAT RIGHT THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 130 OF 230 ASSESSEE HAS ACQUIRED, DURING THE SUBSISTENCE OF TH E PARTNERSHIP FIRM, IS TO GET ITS SHARES OF PROFITS FROM TIME TO TIME, AND AFTER DISSOLUTION OF THE PARTNERSHIP OR ON HIS RETIREMENT FROM THE PARTNERSHIP FIRM, TO RECEIVE THE VALUE OF THE SHARE IN THE NET PARTNERSHIP ASSET AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES. II. WHEN THE LAND IN QUESTION BEING THE PERSONAL ASSET OF THE PRESENT ASSESSEE WAS CONTRIBUTED BY THE ASSESSEE PARTNER TO A FIRM TOWARDS ITS CAPITAL, THE ASSESSEE REDUCED HIS EXCLU SIVE RIGHT IN THE LAND IN QUESTION TO SHARED RIGHTS IN IT WITH OT HER PARTNERS OF THE FIRM, AND TO THAT EXTENT TO WHICH THE ASSESSEE S EXCLUSIVE INTEREST IN THE SAID LAND IS REDUCED TO A SHARED IN TEREST, THERE WAS A TRANSFER OF INTEREST IN THE LAND NOTWITHSTANDING, THE FACT WHETHER THE LAND IN QUESTION WAS BEING HELD BY THE ASSESSEE AS ITS STOCK IN TRADE OR CAPITAL ASSET OR OTHERWISE BE FORE THE SAME WAS CONTRIBUTED TO A FIRM TOWARDS CAPITAL. III. HAVING REGARD TO THE NATURE OF RIGHT ACQUIRED BY TH E ASSESSEE IN CONSIDERATION OF HIS MAKING OVER HIS LAND TO A FIRM AS ITS CAPITAL ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 131 OF 230 CONTRIBUTION TO GET HIS SHARE OF THE PROFIT FROM TI ME TO TIME DURING THE SUBSISTENCE OF THE PARTNERSHIP, AND AFTE R THE DISSOLUTION OF THE PARTNERSHIP OR WITH HIS RETIREME NT FROM THE PARTNERSHIP, TO GET THE VALUE OF HIS SHARES IN THE NET PARTNERSHIP ASSET AS ON THE DATE OF THE DISSOLUTION OR RETIREME NT AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES, AS UNDE RSTOOD IN THE GENERAL LAW, THE LAND BROUGHT IN BY THE ASSESSEE BE CAME THE PROPERTY OF THE FIRM, WHICH WOULD VEST IN ALL THE P ARTNERS, AND IN THAT SENSE, EVERY PARTNER HAS AN INTEREST IN THE PR OPERTY OF THE PARTNERSHIP, AND DURING THE SUBSISTENCE OF THE PART NERSHIP, NO PARTNER CAN DEAL WITH ANY PORTION OF THE PROPERTY A S HIS OWN, AND THE ASSESSEES EXCLUSIVE RIGHT IN THE SAID LAND HAS REDUCED TO SHARED RIGHT IN IT. THIS POSITION IS UNDOUBTEDLY A PPLICABLE TO ALL NATURE OF ASSETS WHATSOEVER, BROUGHT IN BY ANY PART NER TO FIRM TOWARDS ITS CAPITAL CONTRIBUTION. IV. THE POSITION OF LAW WHICH ARISES WHEN A PERSONAL AS SET IS BROUGHT IN BY A PARTNER INTO A PARTNERSHIP AS HIS CONTRIBUTION TO THE PARTNERSHIP CAPITAL AND THAT WHICH ARISES WHEN ON DISSOLUTION ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 132 OF 230 OF THE FIRM OR ON RETIREMENT OF A PARTNER, SHARE IN THE PARTNERSHIP ASSET PASSES TO THE ERSTWHILE PARTNER, ARE DIFFEREN T TO EACH OTHER IN AS MUCH AS, IN THE CASE OF DISSOLUTION OR RETIRE MENT OF ANY PARTNER, IT IS THE REALIZATION OF PRE-EXISTING RIG HT AND THAT IS WHY IT HAS BEEN HELD THAT THERE IS NO TRANSFER THOUGH W HEN A PARTNER BRINGS HIS PERSONAL ASSET IN TO THE PARTNERSHIP FIR M AS HIS CAPITAL CONTRIBUTION TO ITS CAPITAL, AN EXCLUSIVE INTEREST OF A PARTNER IN HIS PERSONAL ASSET BEFORE THE PARTNER ENTERS THE PARTNE RSHIP REDUCED TO A SHARED INTEREST. THEREFORE, THE PROPOSITION L AID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF MALABAR FISHER IES CO. V. COMMISSIONER OF INCOME-TAX [1979] 120 ITR 49 (SC), WHICH WAS A CASE WHERE ON DISSOLUTION OF PARTNERSHIP FIRM , A PARTNER REALIZED OR RECEIVED HIS INTEREST IN THE PARTNERSHI P, HAS BEEN DISTINGUISHED BY THE HONBEL SUPREME COURT IN THE C ASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA) . THEREFORE, THE MEANING OF TRANSFER OF PROPERTY GI VEN BY THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHART HBHAI V. COMMISSIONER OF INCOME-TAX IN THE CASES WHERE PARTN ER BRING ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 133 OF 230 HIS PERSONAL ASSETS TO A FIRM TOWARDS CAPITAL CONTR IBUTION IS APPLICABLE TO ALL KINDS OF ASSETS BROUGHT IN BY THE PARTNERS TO A FIRM TOWARDS ITS CAPITAL CONTRIBUTION, AND NOT ONLY TO A CAPITAL ASSET HELD BY THE PARTNER BEFORE THE SAME WAS CONTR IBUTED IN THE PARTNERSHIP. THE ANALOGY OF REDUCING OF EXCLUSIVE INTEREST OF A PARTNER, TO SHARED INTEREST IN CASE PARTNER BRINGS IN HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL IS EQUALLY APPLICABLE TO ALL KINDS OF ASSETS BELONGING TO A PARTNER, AND THAT IS WHY THE HONBLE SUPREME COURT IN THE CA SE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA) HAS USED THE EXPRESSION PERSONAL ASSET WHILE LAYING DOWN A LAW THAT IT IS APPARENT, THEREFORE , THAT WHEN A PARTNERS BRING S IN HIS PERSONAL ASSET INTO A PARTNERSHIP AS HIS CONTRIBUTI ON TO ITS CAPITAL, AN ASSET WHICH ORIGINALLY WAS SUBJECT TO T HE ENTIRE OWNERSHIP OF THE PARTNER BECOMES NOW THE SUBJECT TO THE RIGHT OF OTHER PARTNERS IN IT XXX XXX XXX. THEREFORE, WHAT WAS THE EXCLUSIVE INTEREST OF A PARTNER IN HIS PERSONAL ASS ET IS, UPON ITS INTRODUCTION INTO THE PARTNERSHIP FIRM AS HIS SHARE TO THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 134 OF 230 PARTNERSHIP CAPITAL, TRANSFORMED INTO AN INTEREST SHARED WITH THE OTHER PARTNERS IN THAT ASSET. QUA THAT ASSET, THERE IS A SHARED INTEREST XXX XXX. (SEE AT PAGE 518 AND 519 OF THE REPORT). THE HONBLE SUPREME COURT HAS ALSO USED THE EXPRESSION PERSONAL ASSET WHILE DECIDING THE ISSUE WHETHER THERE IS A TRANSFER OF PROPERTY WHEN THE INDIVIDUAL PROPERTY OF A PARTNER IS CONTRIBUTED TO A FIRM TOWARDS CAPITAL CONTRIBUTION BY OBSERVING THAT THEREFORE, WHEN A PARTNER BRINGS IN HIS PERSONAL A SSET INTO THE CAPITAL OF THE PARTNERSHIP FIRM AS HIS CONTRIBUTIO N TO ITS CAPITAL, HE REDUCES HIS EXCLUSIVE RIGHTS IN THE ASSET TO SHA RED RIGHTS IN IT WITH THE OTHER PARTNERS OF THE FIRM (SEE AT PAGE 517 OF THE REPORT). IN THIS VIEW OF THE MATTER EVEN WITHOUT A PPLYING OF SECTION 2(47), WE MAY HOLD THAT THERE WAS A TRANSFE R OF PROPERTY WHEN ANY PERSONAL ASSET OF WHATEVER CHARACTER OF A PARTNER IS BROUGHT INTO A PARTNERSHIP FIRM BY THE PARTNER AS H IS CONTRIBUTION TO ITS CAPITAL IN AS MUCH AS THE EXCLUSIVE INTEREST OF A PARTNER IN THAT PROPERTY OR ASSET IS, UPON ITS INTRODUCTION IN TO THE PARTNERSHIP FIRM AS HIS SHARE TO THE PARTNERSHIP CA PITALS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 135 OF 230 TRANSFORMED INTO AN INTEREST SHARED WITH THE OTHER PARTNERS IN THAT PROPERTY OR ASSET. V. IF WE LOOK CAREFULLY TO THE JUDGMENT IN ITS ENTIRET Y IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX ( SUPRA), IT WOULD BE CLEAR THAT WHATEVER MAY BE THE CHARACTER O F THE PROPERTY IN THE HANDS OF A PARTNER BEFORE THE SAME IS BROUGHT IN BY THE PARTNER TO A FIRM, WHEN THE PARTNERSHIP IS F ORMED, THERE IS A TRANSFER OF A CAPITAL ASSET EITHER IN THE GENERAL SENSE OF THE TERM TRANSFER OF PROPERTY OR WITHIN THE MEANING OF SEC TION 45 OF THE ACT. THE HONBLE SUPREME COURT IN THAT CASE WAS CO NCERNED WITH TWO APPEAL OF TWO DIFFERENT ASSESSES. IN CIVI L APPEAL NO. 1841/1981, THE ASSESSEE MADE OVER CERTAIN SHARES OF LIMITED COMPANY WHICH WERE HELD BY HIM AS HIS CAPITAL ASSET TO A FIRM AS HIS CONTRIBUTION TO THE CAPITAL OF THE PARTNERSHIP FIRM. IN CIVIL APPEAL NO. 1777/1981, THE ASSESSEE INTRODUCED HIS S HARE HOLDINGS IN THE PARTNERSHIP FIRMS AS HIS CAPITAL CO NTRIBUTION. THE PARTNERSHIP FIRM CREDITED THE ACCOUNTS OF THE PARTN ERS WITH THE MARKET VALUE OF THE SHARES. IN CIVIL APPEAL NO. 18 41/1981, IT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 136 OF 230 HAS BEEN SPECIFICALLY OBSERVED BY THE HONBLE SUPRE ME COURT THAT SHARES WERE HELD BY THE PARTNER AS HIS CAPITAL ASSET, BUT IN CIVIL APPEAL NO.1777/1981 NOTHING IS MENTIONED ABOU T WHETHER SHARE HOLDINGS BY THE PARTNER WAS HELD AS CAPITAL A SSET OR AS TRADING ASSET. WHILE DECIDING THE ISSUE WHETHER THE RE WAS TRANSFER OF SHARES, THE HONBLE SUPREME COURT DECID ED THE ISSUE BY OBSERVING THAT WE HOLD THAT WHEN THE ASSESSEE BROUGHT THE SHARES OF THE LIMITED COMPANIES INTO THE PARTNERSHI P FIRM AS HIS CONTRIBUTION TO ITS CAPITAL, THERE WAS A TRANSFER O F A CAPITAL ASSET WITHIN THE TERMS OF SECTION 45 OF THE INCOME TAX AC T FROM THE SAID OBSERVATION AND DECISION OF HONBLE SUPREME CO URT, IT CANNOT BE SAID THAT THE ASSET BROUGHT INTO A FIRM B Y A PARTNER AS CAPITAL CONTRIBUTION SHOULD BE HELD BY HIM AS CAPIT AL ASSET EVEN BEFORE THE SAME WAS CONTRIBUTED IN ORDER TO TREAT T HE CONTRIBUTION OF ASSET BY A PARTNER TO A FIRM AS A TRANSFER OF CA PITAL ASSET WITHIN THE TERMS OF SECTION 45 OF THE INCOME TAX ACT. FURTHER, THE HONBLE SUPREME COURT REFERRED TO ITS OWN OBSERVATI ON IN THE CASE OF ADDANKI NARAYANAPA VS. BHASKARA KRISHANAPPA (SUPRA) ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 137 OF 230 WITH APPROVAL WHERE THIS COURT EXPLAINED THAT WHATEVER MAY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN B Y THE PARTNER WHEN THE PARTNERSHIP IS FORMED -------- , WHICH GOES TO SHOW THAT WHEN ANY PROPERTY OF WHATEVER CHARACTER HELD B Y A PARTNER IS BROUGHT IN TO A FIRM BY THE PARTNER, IT BECOMES THE PROPERTY OF THE FIRM, AND WHAT A PARTNER IS ENTITLED TO IS HIS SHARE OF PROFITS, IF ANY, IN THE PROFIT OF THE PARTNERSHIP FIRM, AND UPON THE DISSOLUTION OF THE PARTNERSHIP, A RIGHT TO SHARE IN THE MONEY REPRESENTING THE VALUE OF THE PROPERTY AFTER MEETIN G ALL THE LIABILITIES AND EXPENSES. FURTHER, WHILE STATING T HE WORDS OF CAUTION BY THE HONBLE SUPREME COURT IN THE SAID CA SE, THEY HAVE USED THE WORDS IF THE TRANSFER OF THE PERSONAL ASSET BY THE ASSESSEE TO A PARTNERSHIP IN WHICH HE IS OR BECOMES A PARTNER IS MERELY A DEVICE OR RUSE FOR CONVERTING THE ASSET IN TO MONEY, WHICH WOULD SUBSTANTIALLY REMAIN AVAILABLE FOR HIS BENEFIT WITHOUT LIABILITY TO INCOME TAX ON A CAPITAL GAIN , WHICH GOES TO SHOW THAT WHENEVER THE MATTER OF TRANSFER OF ASSETS BY A PARTNER TO THE PARTNERSHIP FIRM BY WAY OF CAPITAL CONTRIBUT ION WAS UNDER ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 138 OF 230 THEIR LORDSHIPS CONSIDERATION, THEIR LORDSHIPS USE D THE WORDS TRANSFER OF PERSONAL ASSET BY THE ASSESSEE TO A PA RTNERSHIP IN WHICH HE IS OR BECOMES A PARTNER BUT WHEN QUESTION HAD ARISEN WHETHER IT IS AN ATTEMPT TO AVOID LIABILITY TO INCO ME TAX, THEIR LORDSHIPS HAS USED THE WORDS LIABILITY TO INCOME TAX ON A CAPITAL GAIN OR EVADING TAX ON A CAPITAL GAIN . THIS GOES TO SHOW THAT IN ORDER TO DECIDE WHETHER THERE WAS AN A TTEMPT ON A PART OF A PARTNER TO AVOID LIABILITY TO INCOME TAX ON CAPITAL GAIN, WHAT IS TO BE SEEN WHETHER THE TRANSFER OF ANY PERS ONAL ASSET BY THE PARTNER TO A FIRM IN WHICH HE IS OR BECOMES A P ARTNER IS MERELY A DEVICE OR RUSE FOR CONVERTING HIS PERSONAL ASSET INTO MONEY, AND IT IS NOT NECESSARY THAT THERE SHOULD BE A TRANSFER OF CAPITAL ASSET ONLY INITIALLY HELD BY A PARTNER TO A FIRM. THIS PROPOSITION ABOUT AVOIDING LIABILITY TO INCOME TAX ON CAPITAL GAIN BY WAY OF TRANSFER OF ASSET BY A PARTNER TO A FIRM IS APPLICABLE TO ALL CLASSES OF ASSETS TRANSFERRED BY A PARTNER TO A FIRM. IT THUS MAKES IT CLEAR THAT WHATEVER MAY BE THE NATURE OF THE ASSET INITIALLY HELD BY A PARTNER BEFORE THE SA ME IS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 139 OF 230 CONTRIBUTED BY HIM AS CAPITAL CONTRIBUTION TO A PAR TNERSHIP FIRM, IT SHALL ASSUME THE CHARACTER OF A CAPITAL ASSET AT THE TIME WHEN IT IS CONTRIBUTED TO A FIRM AS CAPITAL CONTRIBUTION AN D ANY SURPLUS ARISING THERE FROM IS CHARGEABLE TO TAX AS CAPITAL GAIN. THEREFORE, FROM THIS ANGLE ALSO, WE HOLD THAT THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHART HBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA) IS APPLICABLE NO T ONLY TO THE CASES WHERE ANY CAPITAL ASSET OF A PARTNER IS T RANSFERRED BY A PARTNER TO A FIRM AS HIS CAPITAL CONTRIBUTION BUT, IT IS APPLICABLE TO ALL KINDS OF PERSONAL ASSETS OF THE PARTNER TRANSFE RRED BY HIM TO A PARTNERSHIP FIRM AS CAPITAL CONTRIBUTION, AND IN AL L SUCH CASES THE LIABILITY OF INCOME TAX ON CAPITAL GAIN WOULD ARISE . VI. THERE IS NO QUARREL AS TO THE PROPOSITION THAT NO I NCOME CHARGEABLE TO TAX WOULD ARISE ON MERE REVALUATION O F THE CLOSING STOCK AT A MARKET VALUE MORE THAN THE COST TO THE A SSESSEE AS IN SUCH A CASE THE PROFITS SHOWN ON REVALUATION IS ONL Y NOTIONAL. WE DO NOT FIND ANY DIFFICULTY IN ACCEPTING THIS CON TENTION RAISED ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 140 OF 230 BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THE LIGH T OF THE DECISION IN THE CASE OF SIR KIKABHAI PREMCHAND V. COMMISSIONER OF INCOME-TAX (SUPRA), CHAINRUP SAMPAT RAM V. COMMISSIONER OF INCOME-TAX (SUPRA), COMMISSIONER OF INCOME- TAX V. HIND CONSTRUCTION LTD (SUPRA), COMMISSIONER OF INCOME- TAX VS. BIRLA GWALIOR PVT. LTD. (SUPRA) AND SANJEEV WOOLLEN MILLS V. COMMISSIONER OF INCOME-TAX. HOWEVER, FACT S ARE DIFFERENT IN THE PRESENT CASE. IT IS NOT THE CASE WHERE INCREASE IN THE VALUE OF LAND CAN BE SAID TO BE NOTIONAL. IN T HE PRESENT CASE, THE ASSET HAS BEEN VALUED AT MARKET RATE, WHICH IS MORE THAN THE COST TO THE ASSESSEE, AND IT HAS BEEN CONTRIBUTED T O A FIRM AS CAPITAL CONTRIBUTION IN WHICH THE ASSESSEE BECAME A PARTNER, AND THE MARKET VALUE WAS CREDITED IN THE CAPITAL ACCOUN T OF THE ASSESSEE IN THE BOOKS OF THE FIRM, AND SIMILAR AMOU NT IS CREDITED IN THE BOOKS OF THE ASSESSEE AND SURPLUS HAS BEEN S HOWN AS INCOME IN THE PROFIT AND LOSS ACCOUNT OUT OF WHICH THE DIVIDEND WAS ALSO PAID. THEREFORE, DECISIONS RENDERED IN TH E CONTEXT OF THE FACT WHERE MERE REVALUATION OF ASSET WAS MADE I N BOOKS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 141 OF 230 WITHOUT ANYTHING MORE ARE NOT APPLICABLE TO THE FAC TS OF PRESENT CASE. VII. THE CONTRIBUTION OF LAND BY THE ASSESSEE TO A FIRM AS ITS CAPITAL CONTRIBUTION MAY IN ITSELF CANNOT BE CALLED AS SAL E. BUT THE SAME DOES NOT MEAN THAT IT IS ALSO NOT A TRANSFER BECAUSE, IN SUCH A CASE WHAT WAS THE EXCLUSIVE INTEREST OF THE ASSESSEE IN THE SAID LAND HAS, UPON ITS INTRODUCTION INTO THE PARTN ERSHIP FIRM AS ITS SHARE TO THE PARTNERSHIP CAPITAL, TRANSFORMED I NTO AN INTEREST SHARED WITH THE OTHER PARTNERS IN OR UPON THAT LAND . WHEN ONE TALKS OF THE PARTNERSHIP FIRMS PROPERTY OR FIRMS ASSETS ALL THAT IS MEANT IS PROPERTY OR ASSET IN WHICH ALL PARTNERS HA VE A JOINT OR COMMON INTEREST. ACCORDINGLY, UPON INTRODUCTION OF LAND BY THE ASSESSEE INTO THE PARTNERSHIP FIRM AS ITS SHARES TO THE PARTNERSHIP CAPITAL, THE LAND SO CONTRIBUTED BECOMES THE PROPER TY OF THE FIRM AND THE PARTNERSHIP PROPERTY WILL VEST IN ALL THE P ARTNERS AND IN THAT SENSE EVERY PARTNER HAS ACQUIRED AN INTEREST I N THE PROPERTY OF THE PARTNERSHIP FIRM. THEREFORE, THE ASSESSEES EXCLUSIVE RIGHT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 142 OF 230 IN THE SAID LAND HAS REDUCED TO A SHARED INTEREST, AND TO THAT EXTENT, THERE IS A TRANSFER OF LAND FROM ASSESSEE T O A FIRM. VIII. WHEN THE ASSESSEE CONTRIBUTES ITS PERSONAL ASSET HE LD BY IT TO A FIRM AS ITS CONTRIBUTION TOWARDS CAPITAL, THE ASSES SEE CANNOT BE SAID TO HAVE EFFECTED ANY TRADING OR COMMERCIAL TRA NSACTION, BUT THE TRANSACTION SHALL BE CONSIDERED TO HAVE BEEN EF FECTED ON CAPITAL FIELD. THEREFORE, THE NATURE AND CHARACTER OF LAND CONTRIBUTED BY THE PRESENT ASSESSEE TO A FIRM TOWAR DS ITS CAPITAL CONTRIBUTION SHALL ASSUME THE CHARACTER OF CAPITAL ASSET AT THE TIME WHEN IT WAS CONTRIBUTED TO A FIRM TOWARDS CAPI TAL CONTRIBUTION. IX. THERE IS NO QUARREL AS TO THE PROPOSITION THAT THER E IS NO TRANSFER ON MERE CONVERSION OF STOCK IN TRADE INTO CAPITAL A SSETS AND/OR ON REVALUATION THEREOF IN THE ASSESSEES BOOKS AND NO INCOME ARISING ON SUCH CONVERSION. IN OTHER WORDS, THERE COULD NOT BE ANY ACTUAL PROFIT OR LOSS ON WITHDRAWAL OF STOCK IN TRADE FROM A ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 143 OF 230 TRADING BUSINESS AND ITS CONVERSION INTO CAPITAL AS SET. THERE WAS NO DEEMING FICTION TO DEEM THE CONVERSION OF STOCK IN TRADE INTO CAPITAL ASSETS AS A TRANSFER OR TO DEEM THE FAIR MA RKET VALUE AS ON THE DATE OF CONVERSION AS THE COST OF ACQUISITION O F THE CAPITAL ASSETS. HOWEVER, A TRANSFER DOES TAKE PLACE WHEN A NY PERSONAL ASSET OF A PARTNER IS INTRODUCED INTO A FIRM AS HIS CAPITAL CONTRIBUTION, AND THE VALUE OF THE ASSET RECORDED I N THE BOOKS OF THE FIRM SHALL BE DEEMED TO BE FULL VALUE OF THE CO NSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF SUCH ASSET CONTRIBUTED BY THE PARTNER. CONSEQUENTLY, IN THE PRESENT CASE, THERE WAS NO TRANSFER OF LAND HELD BY THE ASSESSEE AS STOCK IN TRADE WHEN THE SAME WAS MERELY REVALUED AT A MARKET VALUE IN ITS BOOKS AND IT WAS CONVERTED INTO CAPITAL ASSET A ND NO PROFIT OR GAIN DID ACCRUE OR ARISE TO THE ASSESSEE MERELY ON ITS REVALUATION AT A HIGHER VALUE MORE THAN THE COST TO THE ASSESSE E IN ITS BOOKS OR ON ITS MERE CONVERSATION FROM STOCK IN TRADE TO A CAPITAL ASSET. IN SUCH A CASE, THE CONVERSION OF STOCK IN TRADE IN TO INVESTMENT HAS TO BE AT COST/BOOK VALUE. THUS, THE LEGAL PROP OSITION THAT NO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 144 OF 230 MAN CAN MAKE A PROFIT OUT OF HIMSELF OR THERE COULD NOT BE ANY ACTUAL OR REAL PROFIT OR LOSS ON WITHDRAWAL OF STOC K FROM A TRADING BUSINESS SHALL GOVERN THIS TYPE OF CASES. HOWEVER, THE POSITION WOULD BE DIFFERENT IN CASES WHERE ON OR AFTER CONVE RSION OF STOCK IN TRADE INTO A CAPITAL ASSET EITHER BY IMPLICATION OF LAW OR BY ACT OR CONDUCT OF THE ASSESSEE, OR OTHERWISE, THE ASSET IS CONTRIBUTED TO A FIRM AS CAPITAL CONTRIBUTION BY A PARTNER AT T HE VALUE MORE THAN THE COST TO THE ASSESSEE. IN SUCH A CASE, THE RE IS A TRANSFER OF ASSET BEING TAKEN PLACE AND THE VALUE OF THE ASSET RECORDED IN THE BOOKS OF THE FIRM SHALL BE DEEMED TO BE THE FULL VA LUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER OF THE ASSET. THEREFORE, IN THE PRESENT CASE, WHEN TH E LAND IN QUESTION WAS CONTRIBUTED BY THE ASSESSEE TO A FIRM AS ITS CAPITAL CONTRIBUTION, IN WHICH THE ASSESSEE BECAME A PARTNE R, A TRANSFER OF CAPITAL ASSET HAD TAKEN PLACE, AND THE AMOUNT RE CORDED IN THE BOOKS OF ACCOUNT OF THE FIRM AS THE VALUE OF THE LA ND SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE LAND, A ND THE PROFITS OR ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 145 OF 230 GAINS ARISING FROM SUCH TRANSFER OF A CAPITAL ASSET BY A PERSON TO A FIRM IN WHICH HE BECOMES OR IS A PARTNER BY WAY O F CAPITAL CONTRIBUTION OR OTHERWISE, SHALL BE CHARGEABLE TO T AX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TRANSFER TAKES PLACE. X. IN THE LIGHT OF THE VIEW WE HAVE TAKEN ABOVE, WE, T HEREFORE, HOLD THAT THE SURPLUS ARISING TO THE ASSESSEE FROM THE T RANSACTION OF CONTRIBUTION OF LAND HELD BY IT TO A FIRM AS CAPITA L CONTRIBUTION SHALL BE ASSESSABLE TO TAX AS PROFIT OR GAINS UNDER THE HEAD CAPITAL GAIN UNDER SECTION 45 OF THE INCOME TAX A CT, AND FOR THAT PURPOSE, THE AMOUNT OF 11.50 CRORE RECORDED IN THE BOOKS OF ACCOUNTS OF THE PARTNERSHIP FIRM AS THE VALUE OF TH E LAND SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE LAND AS SO PROVIDED UNDER SUB-SECTION (3) OF THE SECTION 45 OF THE ACT, EFFECTIVE FROM THE A.Y. 1988-89. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 146 OF 230 XI. EVEN OTHERWISE, THE SURPLUS ARISING TO THE ASSESSEE FROM THE TRANSACTION OF CONTRIBUTION OF LAND AS CAPITAL CONT RIBUTION TO A FIRM IN WHICH THE ASSESSEE BECAME A PARTNER SHALL B E CHARGEABLE TO TAX IN VIEW OF OUR FINDING GIVEN ABOVE THAT THE TRANSACTION OF TRANSFERRING THE LAND IN QUESTION TO THE PARTNERSHI P FIRM IS A DEVICE OR RUSE TO CONVERT THE LAND IN QUESTION INTO MONEY SUBSTANTIALLY FOR THE BENEFIT OF THE ASSESSEE AS TH E ASSESSEE HAS WITHDRAWN SUBSTANTIAL AMOUNT AS OBSERVED AND POINT ED OUT ABOVE IN PARA 16.19 TO 16.24 OF THIS ORDER, FOR ITS BENEFIT AS A PART OF ITS WELL DESIGNED AND CALCULATED COLOURABLE STRA TEGY TO CONVERT THE LAND INTO MONEY FOR ITS OWN BENEFIT. XII. WITHOUT PREJUDICE TO THE VIEW WE HAVE TAKEN ABOVE, WE FURTHER HOLD THAT EVEN IN CASE IT IS OTHERWISE HELD THAT TH E LAND CONTRIBUTED BY THE ASSESSEE TO A FIRM TOWARDS CAPIT AL CONTRIBUTION SHOULD BE TREATED AS STOCK IN TRADE EVEN DURING THE COURSE OF MAKING THE TRANSACTION OF TRANSFERRING OR CONTRIBUT ING THE LAND TO THE PARTNERSHIP FIRM AS CAPITAL CONTRIBUTION, THE S URPLUS ARISING TO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 147 OF 230 THE ASSESSEE FROM THE SAID TRANSACTION OF CONTRIBUT ING STOCK IN TRADE TO A FIRM SHALL THEN ASSESSABLE UNDER THE HEA D BUSINESS IN THE VIEW OF THE COLOURABLE DEVICE OR RUSE ADOPTED B Y THE ASSESSEE TO CONVERT STOCK IN TRADE INTO MONEY FOR ITS OWN BE NEFIT. 16.50 IN THE LIGHT OF OUR FINDING THAT THE TRANSFER OR C ONTRIBUTION BY THE ASSESSEE OF ITS PERSONAL LAND TO THE SHARE CAPI TAL OF THE FIRM REPRESENT A DEVICE OR RUSE FOR CONVERTING THE LAND INTO MONEY S UBSTANTIALLY WITHDRAWN BY THE ASSESSEE FROM THE FIRM FOR ITS BENEFIT AND E VEN OTHERWISE IN VIEW OF OUR FINDING THAT THE PROVISIONS CONTAINED IN SECTIO N 45(3) OF THE ACT INSERTED W.E.F. ASSESSMENT YEAR 1988-89, ARE APPLIC ABLE TO THE PRESENT CASE IN THIS ASSESSMENT YEAR 1992-93 UNDER CONSIDERATION AND IN VIEW OF OTHER FINDINGS WE HAVE GIVEN ABOVE, WE HOLD THAT THE EARL IER DECISIONS OF THE TRIBUNAL PASSED IN THE A.Y. 1985-86 IN THE ASSESSEE S CASE SHALL HAVE NO APPLICATION TO THE PRESENT CASE. WE, THEREFORE, RE JECT THE CLAIM OF THE ASSESSEE THAT THE ISSUE INVOLVED IN GROUND NO. 1.1 TO 1.7 SHOULD BE DECIDED IN THE TERMS OF EARLIER ORDER OF THE TRIBUNAL PASSE D IN THE A.Y. 1985-86. 16.51 FOR THE ABOVE REASONS, WE, THEREFORE, DIRECT THE A O TO COMPUTE THE CAPITAL GAIN ARISING FROM THE TRANSFER OF THE SAID LAND BY THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 148 OF 230 PRESENT ASSESSEE TO A PARTNERSHIP FIRM, IN WHICH IT BECAME A PARTNER, BY WAY OF CAPITAL CONTRIBUTION, AFTER TAKING THE VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF SUCH TRANSFER A T RS. 11.50 CRORES BEING THE AMOUNT RECORDED IN THE BOOKS OF ACCOUNT OF THE FIRM AS WELL AS IN THE BOOKS OF THE ASSESSEE. THE CAPITAL GAIN TO BE SO CO MPUTED SHALL BE CHARGEABLE TO TAX IN THE YEAR UNDER CONSIDERATION A S PER PROVISIONS OF COMPUTATION OF CAPITAL GAIN AND RATE OF TAX PROVIDE D IN THE ACT OR THE RESPECTIVE FINANCE ACT, AS THE CASE MAY BE. WE FUR THER OBSERVE THAT FOR THE PURPOSE OF DETERMINING THE YEAR OF ACQUISITION OF LAND OR RIGHT TO PURCHASE THE LAND, PERIOD OF ITS HOLDING, AND THE C OST OF ITS ACQUISITION, THE AO MAY TAKE INTO CONSIDERATION THE RATIO OF THE FOL LOWING DECISIONS AFTER PROVIDING AN OPPORTUNITY TO THE ASSESSEE TO HAVE IT S SAY IN THAT REGARD:- I. CIT V. JANNHAVI INVESTMENTS (P.) LTD. [2008] 304 IT R 276 (BOM.) (FOR COMPUTING THE CAPITAL GAINS TAX THE CO ST OF ACQUISITION AND NOT THE COST OR VALUE ON THE DATE ON WHICH THE ASSET WAS TREATED AS A CAPITAL ASSET IS RELEVAN T. COST OF ACQUISITION ON DATE ASSET ACTUALLY ACQUIRED AND NOT DATE ON ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 149 OF 230 DATE OF CONVERSION TO CAPITAL ASSET IS RELEVANT FOR THE PURPOSE OF COMPUTING CAPITAL GAIN.) II. KESHAVJI KARSONDAS V. CIT [1994] 207 ITR 737 (BOM) (FOR THE PURPOSE OF COMPUTING CAPITAL GAIN, THE COST OF ACQUISITION IS THE COST ON THE DATE WHEN THE ASSET WAS ACQUIRED AND NOT THE COST OR VALUE ON DATE WHEN ASSET BECAME CAPITAL ASSET.) III. RANCHHODBHAI BHAIJIBHAI PATEL V. CIT [1971] 81 ITR 446 (GUJ.) (THE ONLY CIRCUMSTANCES WHICH MUST BE SATISF IED IN ORDER TO ATTRACT THE CHARGE TO TAX ON CAPITAL GAINS U/S. 45 OF THE ACT IS THAT THE PROPERTY TRANSFERRED MUST BE A CAPITAL ASSET AT THE DATE OF TRANSFER AND IT IS NOT NECESSA RY IT SHOULD HAVE BEEN A CAPITAL ASSET ON THE DATE OF ACQUISITIO N BY THE ASSESSEE) IV. KALYANI EXPORTS AND INVESTMENTS PVT. LTD. VS. DY. C IT TAX 78 ITD 95 (TM) (PUNE) (WHAT IS RELEVANT FOR PURPOSE OF CAPITAL GAIN IS COST OF ACQUISITION AND NOT THE VAL UE ON DATE ON WHICH THE ASSET BECAME A CAPITAL ASSET.) ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 150 OF 230 17. GROUND NO. 2 IS IN RESPECT OF THE ISSUE WHETHER TH E INTEREST RECEIVED ON FDRS MADE FROM INTERNAL DEVELOPMENT ACCOUNT IS E LIGIBLE FOR DEDUCTION AND NOT TO BE INCLUDED IN ASSESSEES ASSE SSABLE INCOME. THIS ISSUE WAS DECIDED BY THE TRIBUNAL IN THE FIRST ROUN D BY REMITTING THE MATTER BACK TO THE FILE OF THE AO TO DECIDE THE ISS UE AFRESH BY COMPLYING WITH THE DIRECTIONS GIVEN BY THE TRIBUNAL IN OTHER YEARS AS DETAILED IN PARA 35 OF THE TRIBUNALS ORDER DATED 30.03.2007, PASS ED IN THE FIRST ROUND OF THIS APPEAL BEFORE THE TRIBUNAL. AT THIS STAGE, IT IS PERTINENT TO NOTE THAT THE ASSESSEE WENT IN APPEAL AGAINST THE AFORESAID O RDER DATED 30.03.2007 PASSED IN THE FIRST ROUND, BEFORE THE HONBLE HIGH COURT, AND NO GROUND WERE RAISED BY THE ASSESSEE IN RESPECT THIS ISSUE B EFORE THE HONBLE HIGH COURT AS WOULD BE CLEAR FROM THE MEMORANDUM OF APPE AL FILED BY THE ASSESSEE BEFORE THE HONBLE HIGH COURT. THUS, THIS GROUND NO. 2 STAND DECIDED IN THE TERMS OF ORDER DATED 30.03.2007 OF T HE TRIBUNAL PASSED IN THE FIRST ROUND OF THIS APPEAL. 18. SIMILARLY, THE ISSUE INVOLVED IN GROUND NO. 4, 5, 6, 7, 8, 9, AND 11 RELATING TO (II) THE DISALLOWANCE OF RS. 2,74,702/- BEING LOCAL CONVEYANCE AND OTHER INCIDENTAL EXPENSES, (II) THE DISALLOWANC E OF RS. 15,000/- U/S. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 151 OF 230 40A(12) OF THE ACT, (III) DISALLOWANCE OF RS.4,49,4 85/- BEING 10% FOR COMMON MAINTENANCE, (IV) AD-HOC ADDITION OF RS. 1,0 0,000/-, ON ACCOUNT OF GUEST HOUSE EXPENSES, (V) TAXABILITY OF RS. 1,35 ,850/- BEING THE ENHANCEMENT COMPENSATION RECEIVED ON ACQUISITION OF AGRICULTURAL LAND, (VI) AD-HOC DISALLOWANCE OF RS. 2,00,000/- OUT OF F OREIGN TRAVELLING EXPENSES AND (VIII) THE DISALLOWANCE OF RS. 2,55,00 0/- BEING SUBSCRIPTION PAID IN RESPECT OF COMPANIES SENIOR EMPLOYEES MEMBE RSHIP OF THE HEALTH CLUB OPERATED BY DLF HOTELS LTD., RESPECTIVELY SHAL L STAND DISPOSED OF IN THE TERMS OF THE TRIBUNALS EARLIER ORDER DATED 30. 03.2007, PASSED IN THE FIRST ROUND, IN AS MUCH AS, IN RESPECT OF THESE ISS UES, NO APPEAL WERE EITHER PREFERRED BY THE ASSESSEE OR BY THE REVENUE BEFORE THE HONBLE HIGH COURT. THE ORDER OF THE TRIBUNAL DATED 30.03.2007 SHALL, THEREFORE, BE APPLIED ACCORDINGLY IN SO FAR AS THE ISSUE INVOLVED IN THE AFORESAID GROUNDS NO. 4, 5, 6, 7, 8, 9, AND 11 ARE CONCERNED. 19. NOW, WE SHALL COME TO THE GROUND NO. 3, WHEREIN TH E ASSESSEE HAS CHALLENGED THE ORDER OF THE CIT(A) IN CONFIRMING TH E DISALLOWANCE OUT OF SALES AND BUSINESS PROMOTION EXPENSES OF RS. 5,30,2 58/-. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 152 OF 230 20. THIS ISSUE HAS BEEN DISCUSSED BY THE TRIBUNAL IN P ARA 38 TO 42 OF ITS ORDER DATED 30.03.2007 PASSED IN THE FIRST ROUND, W HEREBY THE TRIBUNAL HAS SUSTAINED THE ADDITION OF RS. 3,00,000/-, AND ALLOW THE BALANCE RELIEF TO THE ASSESSEE. ON THIS ISSUE, THE ASSESSEE HAD TAKEN A GROUND BEFORE THE HONBLE HIGH COURT AS COULD BE SEEN FROM THE MEMOR ANDUM OF APPEAL FILED BY THE ASSESSEE BEFORE THE HONBLE HIGH COURT . HOWEVER, THE HONBLE HIGH COURT HAS REMITTED THE MATTER BACK TO THE TRIBUNAL FOR FRESH CONSIDERATION ONLY IN RESPECT OF THE ISSUE WITH REG ARD TO THE ADDITION OF SURPLUS ARISING ON REVALUATION OF THE LAND, WHEN TH E SAME WAS CONTRIBUTED TO A PARTNERSHIP FIRM, IN WHICH THE ASSESSEE HAS BE CAME A PARTNER, AND THE ONLY QUESTION FRAMED BY THE HONBLE HIGH COURT WAS WITH REGARD TO THIS MATTER. NOTHING IS MENTIONED IN THE HONBLE HIGH C OURTS ORDER ABOUT THIS ISSUE OF CONFIRMING ADDITION TO THE EXTENT OF RS. 3,00,000/- LACS OUT OF SALES PROMOTION AND BUSINESS PROMOTION EXPENSES. H OWEVER, EVEN OTHERWISE, IN THE COURSE OF HEARING OF THIS APPEALI N THE SECOND ROUND, NOTHING NEW HAS BEEN SUBMITTED BY THE ASSESSEE. WE , THEREFORE, DECIDE THIS ISSUE IN THE LIGHT OF EARLIER ORDER DATED 30.0 3.2007 WHERE BY THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 153 OF 230 ADDITION OF RS. 5,30,258/- SUSTAINED BY THE CIT(A) HAS BEEN REDUCED TO RS. 3,00,000/- BY THE TRIBUNAL. WE ORDER ACCORDING LY. 21. GROUND NO. 10 IS WITH REGARD TO THE DISALLOWANCE O F RS. 1,03,505/- BEING THE AMOUNT WRITTEN OFF OUT OF ADVANCES AND DE POSITS. THIS ISSUE HAS BEEN DISCUSSED BY THE TRIBUNAL IN THE FIRST ROUND A T PARA 67 70 OF THE TRIBUNALS ORDER DATED 30.03.2007, WHEREBY THE TRIB UNAL HAS UPHELD THE ORDER OF THE CIT(A) ON THIS ISSUE IN THE LIGHT OF T HE TRIBUNALS ORDER IN THE CASE OF THIS VERY ASSESSEE IN THE A.Y. 1991-92. TH E ASSESSEE HAS RAISED THIS ISSUE IN THE APPEAL FILED BEFORE THE HONBLE H IGH COURT ABOUT TRIBUNALS ORDER DATED 30.03.2007 BUT NOTHING IS ME NTIONED IN HONBLE HIGH COURTS ORDER WHEREBY SOME OTHER MATTER HAS BE EN REMITTED TO TRIBUNAL FOR FRESH CONSIDERATION AS OBSERVED ABOVE. THUS, THIS GROUND STANDS DECIDED IN TERMS OF OUR ORDER DATED 30.03.20 07 PASSED IN THE FIRST ROUND, AND WE DO NOT FIND ANY REASON TO TAKE A VIEW OTHER THAN THE VIEW ALREADY TAKEN BY THE TRIBUNAL IN THE FIRST ROUND. THUS, THIS GROUND STANDS REJECTED. ITA NO. 2546/DEL/2001 : A.Y. 1997-98 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 154 OF 230 22. NOW WE SHALL COME TO THE APPEAL FILED BY THE ASSES SEE FOR THE A.Y. 1997-98, AGAINST THE ORDER DATED 14.05.2001, PASSED BY THE LD. CIT(A) IN THE MATTER OF AN ASSESSMENT MADE U/S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). 23. THE GROUND NO. 1 IS DIRECTED AGAINST THE CIT(A)S ORDER IN HOLDING THAT THE MERCANTILE METHOD OF ACCOUNTING FOLLOWED B Y THE ASSESSEE, IS SUCH THAT THE INCOME CANNOT PROPERLY BE DEDUCED THERE FR OM, AND THERE BY UPHOLDING THE ACTION OF THE AO IN INVOKING THE PROV ISIONS OF THE FIRST PROVISO TO SECTION 145(1) OF THE ACCT. IN THE COUR SE OF HEARING BOTH THE PARTIES HAVE SUBMITTED THAT THIS ISSUE IS COVERED B Y THE ORDER OF THE TRIBUNAL PASSED IN ITA NO. 1884/DEL/1998 FOR THE A. Y. 1994-95, WHICH HAS BEEN FOLLOWED BY THE TRIBUNAL IN SUBSEQUENT ASS ESSMENT YEARS 1995- 96, 1996-97, AND 20001-02. RESPECTFULLY FOLLOWING THE EARLIER DECISION OF THE TRIBUNAL, WHERE THE TRIBUNAL HAS HELD THAT T HE RECOURSE OF PROVISO TO SECTION 145 OF THE ACT IS UNCALLED AND BOOK RESULT ARE TO BE ACCEPTED. THUS, THIS GROUND IS DECIDED IN FAVOUR OF THE ASSES SEE. 24. GROUND NO. 2 IS DIRECTED AGAINST THE CIT(A)S ORDE R IN DISALLOWING THE LOSS OF RS. 97,51,324/- BY HOLDING THAT THE SAL E PRICE IN RESPECT OF THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 155 OF 230 CONSTRUCTED/BUILT-UP PROPERTY SHOULD BE ACCOUNTED F OR AT THE TIME OF HANDING OVER THE POSSESSION OR MAKING CONVENIENCE, WHICH IS EARLIER. IN THE COURSE OF HEARING OF THIS APPEAL, IT HAS BEEN P OINTED OUT BY THE REPRESENTATIVES OF BOTH THE PARTIES THAT THIS ISSUE IS COVERED BY THE EARLIER DECISION OF THE TRIBUNAL IN THE A.Y. 1994-95 IN ITA NO. 3232/DEL/2001, WHICH HAS BEEN FOLLOWED BY THE TRIBUNAL IN THE SUBS EQUENT ASSESSMENT YEARS 1995-96, 1996-97, AND 2001-02. RESPECTFULLY FOLLOWING THE TRIBUNALS EARLIER ORDER IN THE A.Y. 2004-05, WHERE THE TRIBUNAL HAS HELD THAT THE LOSS WAS DISALLOWED BY THE AO AFTER REJECT ING THE METHOD OF ACCOUNTING FOR BOOKING OF REVENUE AT THE TIME OF CO NVINCING ON BUILT-UP PROPERTY, AND IN THE LIGHT OF THE TRIBUNALS DECISI ON THAT THE DEPARTMENT WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SEC TION 145, AND IN REJECTING THE METHOD OF ACCOUNTING REGULARLY FOLLOW ING BY THE ASSESSEE, THE ADDITION MADE BY THE AO ON THIS ACCOUNT IS NOT JUSTIFIED, AND THE GROUND IS DECIDED IN FAVOUR OF THE ASSESSEE. WE AL LOW THIS GROUND RAISED BY THE ASSESSEE. 25. GROUND NO. 3 WITH SUB-GROUND (A) AND (B) IS WITH R EGARD TO THE RE- WORKING OF THE COST OF LAND AT THE AVERAGE PRICE OF THE COST OF THE LAND IN ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 156 OF 230 PHASE I TO III AND IV, QUTAB ENCLAVE COMPLEX, NOW K NOWN AS DLF CITY BY DIVIDING THE COST OF LAND ACQUIRED TILL END OF EACH YEAR BY SELLABLE IN EACH PHASE SEPARATELY AND TREATING THE AREA YEAR MARKED FOR SCHOOLS, HOSPITALS, CLUBS, AND OTHER COMMUNITY BUILDING AS SELLABLE ARE A. IN THE COURSE OF HEARING OF THIS APPEAL ITS HAS BEEN POINTED OUT BY THE PARTIES THAT IDENTICAL ISSUE HAS BEEN DECIDED BY THIS TRIBUNAL IN A.Y. 199 4-95 IN ITA NO. 3232/DEL/2001, WHICH HAS BEEN FOLLOWED IN SUBSEQUEN T YEARS I.E. ASSESSMENT YEARS 1995-96, 1996-97 AND 2001-02, AND THUS, IT IS TO BE DECIDED ACCORDINGLY. RESPECTFULLY FOLLOWING THE TR IBUNALS ORDER, WHERE THE TRIBUNAL HAS HELD THAT THE REVENUE WAS NOT JUST IFIED IN RESTRICTING WRITING OFF COST OF LAND PERTAINING TO PHASES I TO III OF QUTAB ENCLAVE, AND IN HOLDING THAT THE ASSESSEE WAS JUSTIFIED IN TAKIN G PHASES I TO IV AS ONE PROJECT, AND ACCORDINGLY WRITING OFF COST OF LAND, AND THE RE-WORKING DONE BY THE DEPARTMENT WAS SET ASIDE BY THE TRIBUNAL. R ESPECTFULLY FOLLOWING THE AFORESAID ORDER, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE IN THE TERMS OF TRIBUNALS ORDER FOR A.Y. 2004-05, WHICH H AS BEEN FOLLOWED IN ASSESSMENT YEARS 1995-96, 1996-97, AND 2001-02. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 157 OF 230 26. GROUND NO. 5 IS AGAINST THE CIT(A)S ORDER IN HOLD ING THAT INTEREST OF RS. 58,14,994/- ACCRUED ON FDRS MADE FROM INTERN AL DEVELOPMENT IS ASSESSABLE IN THE ASSESSEES HANDS. 26.1 IN THE COURSE OF HEARING OF THIS APPEAL, IT WAS PO INTED OUT BY BOTH THE PARTIES THAT THIS ISSUE HAS BEEN DECIDED B Y THE TRIBUNAL IN A.Y. 1994-95 IN ITA NO. 3232/DEL/2001, WHICH HAS BEEN FO LLOWED IN SUBSEQUENT ASSESSMENT YEARS 1995-96, 1997-98, AND 2 001-02. RESPECTFULLY FOLLOWING THE AFORESAID ORDER, WHERE I T HAS BEEN HELD THAT THE IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN THIS VERY ASSESSEES OWN CASE FOR THE A.Y. 1993-94, IN ITA NO. 6615/DEL/ 1996, WHEREIN THE MATTER HAS BEEN RESTORED BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH THE DIRECTIONS CONTAINED IN EARL IER ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, WE RESTORE THIS ISSUE TO TH E FILE OF THE AO, AND DECIDE THE ISSUE IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY THE TRIBUNAL IN EARLIER YEARS. 27. NOW WE COME TO THE GROUND NO. 4, WHICH IS DIRECTED AGAINST THE CIT(A)S ORDER IN CONFIRMING THE ADDITION OF RS. 14 ,36,41,533/- BEING THE SURPLUS ARISING ON LAND/RIGHTS IN LAND HELD AS STOC K IN TRADE BY THE ASSESSEE, ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 158 OF 230 AND BROUGHT INTO THE PARTNERSHIP FIRM M/S. REAL EST ATE BUILDERS AS CAPITAL CONTRIBUTION. 27.1 DURING THE RELEVANT YEAR CORRESPONDING TO THE A.Y. 1997-98, THE ASSESSEE BECAME A PARTNER IN THE NEWLY CONSTITU TED PARTNERSHIP FIRM, VIZ., M/S. REAL ESTATE BUILDERS WITH PROFIT/LOSS SH ARING RATIO AT 20%. THE ASSESSEE COMPANY CONTRIBUTED ITS OWNERSHIP IN 61 PL OTS OF LAND ADMEASURING 30148.340 SQ. MTRS. AS WELL AS ITS RIGH T TO PURCHASE 11 PLOTS OWNED BY ITS SUBSIDIARY COMPANY 6321.06 SQ. MTRS. I N QUTAB ENCLAVE COMPLEX, AS CAPITAL CONTRIBUTION IN THE SAID PARTNE RSHIP FIRM. THESE PLOTS OF LAND WERE CONVERTED AS CAPITAL INVESTMENT IN THE FIRM AT AN AGREED VALUE OF RS. 21.15 CRORES. THE TRANSFER VALUE OF 2 1.15 CRORES WAS CREDITED IN ASSESSEES CAPITAL ACCOUNT IN THE BOOKS OF THE F IRM. THE TRANSFER VALUE OF 21.15 CRORE RESULTED INTO THE SURPLUS OF RS. 14, 36,41,533/-, WHICH WAS NOT OFFERED TO TAX BY THE ASSESSEE BY GIVING A REAS ON THAT SAME IS NOT TAXABLE IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. HIND CONSTRUCTION LTD. 83 ITR 211 (SC). TH E ASSESSEE ALSO STATED BEFORE THE AO THAT IN A.Y. 1985-86, SUCH SURPLUS WA S HELD TO BE NOT TAXABLE. HOWEVER, THE AO AS WELL AS THE CIT(A) BRO UGHT THE SAID SURPLUS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 159 OF 230 TO TAX IN THE LIGHT OF THEIR VIEW TAKEN IN A.Y. 199 2-93 AFTER RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX[1985] 156 ITR509 (SC) AND AFTER MAKING A REFERENCE TO THE PROVISIONS CONTAINED IN SECTION 2(47) AND 45(3) OF THE ACT. 27.2 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIALS ON RECORD. 27.3 IT IS ADMITTED POSITION THAT THE ASSESSEE ENTERED INTO A PARTNERSHIP WITH 12 NOS. OF ITS SUBSIDIARY COMPANIES WITH A VIE W TO START AND CARRY ON THE BUSINESS OF CONSTRUCTING HOUSES ON 61 PLOTS AND 11 PLOTS OF LAND SITUATED IN THE DLF QUTAB COMPLEX, WHICH HAS BEEN I NTRODUCED BY THE ASSESSEE TO THE COMMON STOCK OF THE FIRM FOR ACHIEV ING THE AFORESAID PURPOSE OF THE FIRM. THE MEMORANDUM OF PARTNERSHIP WAS EXECUTED ON 25 TH DAY OF FEBRUARY, 1997. HOWEVER, IT HAS BEEN MADE EFFECTIVE FROM 31 ST DAY OF JANUARY, 1997. THE VALUE OF THE 61 NUMBERS OF PLOT OF LANDS BROUGHT IN BY THE ASSESSEE PARTNER TO A FIRM WAS MA DE AT RS. 17,60,00,000/-. IN THE PARTNERSHIP, IT WAS ALSO ST ATED THAT THE ASSESSEE WAS ALSO THE ABSOLUTE OWNER OR OTHERWISE WELL SUBSTANTI ALLY ENTITLED TO ANOTHER LOT OF 11 PLOTS JOINTLY WITH THE PARTIES OF 2 ND TO5 TH PARTS DESCRIBED IN THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 160 OF 230 DEED OF PARTNERSHIP, ADMEASURING ABOUT 6321.06 SQ. MTRS. SITUATED IN THE SAID COMPLEX, OUT OF WHICH THE ASSESSEE WAS THE OWN ER TO THE EXTENT AREA OF LAND ADMEASURING ABOUT 3036.78 SQ. MTRS AND THE BALANCE AREA OF 3257.28 SQ. MTRS. WAS OWNED BY THE PARTIES OF 2 ND TO 5 TH PARTS. THE ASSESSEE ALSO AGREED TO CONTRIBUTE HIS RIGHT IN THE SAID PLOTS TO THE EXTENT OF AREA ON LAND ADMEASURING ABOUT 3063.78 SQ. MTRS. TO A COMMON STOCK OF PARTNERSHIP, AND IN CONSIDERATION THEREOF THE SUM O F RS.1,80,00,000/- WAS CREDITED TO THE ACCOUNT OF THE ASSESSEE IN THE BOOK S OF THE PARTNERSHIP FIRM AS ON 31 ST DAY OF JANUARY, 1997. THE ASSESSEE HAD ALSO HAD I TS RIGHTS TO PURCHASE AREA OF LAND ADMEASURING ABOUT 3257.28, WH ICH WAS ALSO BROUGHT BY THE ASSESSEE IN TO THE COMMON STOCK ON PARTNERSH IP, AND IN CONSIDERATION THEREOF, THE SUM OF RS. 1,75,00,000/- WAS CREDITED TO THE ACCOUNT OF THE ASSESSEE IN THE ACCOUNT BOOKS OF THE PARTNERSHIP FIRM AS ON 31 ST JANUARY, 1997. THUS, TOTAL AMOUNT OF RS. 21,15,00 ,000/- (17,60,00,000/- + 1,80,00,000/- + 1,75,00,000/-) WA S CREDITED TO THE ASSESSEES ACCOUNT IN THE ACCOUNT BOOKS OF THE PART NERSHIP FIRM AS ON 31 ST DAY OF JANUARY, 1997. IT WAS FURTHER PROVIDED THAT W.E.F. 31 ST DAY OF JANUARY, 1997, THE SAID 61 PLOTS AN 11 PLOTS OF LAN D HAD BECAME ABSOLUTE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 161 OF 230 PROPERTY OF THE PARTNERSHIP FIRM. IT WAS FURTHER P ROVIDED THAT OUT OF THE AFORESAID AMOUNT OF RS. 21,15,00,000/- (RS. 21.15 C RORES) BEING VALUE OF THE PLOT OF LAND BROUGHT IN BY THE ASSESSEE TO A FI RM, THE SUM OF RS. 20,00,000/- (RS. 0.20 CRORES) WILL BE TREATED AS AS SESSEES CAPITAL AND SHALL CARRY NO INTEREST, AND THE REMAINING AMOUNT OF RS. 20,95,00,000/- (RS. 20.95 CRORES) WILL BE TREATED AS LOAN TO THE PARTNE RSHIP FIRM, WHICH MAY BE EITHER FREE OF INTEREST OR CARRY INTEREST AT SUCH R ATE AS MAY BE MUTUALLY AGREED UPON FROM TIME TO TIME. WE HOLD THAT THE SU RPLUS ARISING TO THE ASSESSEE FROM THE TRANSFER OF 61 PLOTS OF LAND AND 11 PLOTS OF LAND IS RS. 14,36,41,533/-, WHICH IS LIABLE TO BE TAXED IN THE LIGHT OF THE PROVISIONS CONTAINED IN SECTION 45(3) OF THE ACT FOR THE REASO NS GIVEN ON IDENTICAL ISSUE IN THE ASSESSMENT YEAR 1992-93. 27.4 EVEN OTHERWISE IN THE LIGHT OF THE WORD OF CAUTION EMPHASIZED BY THE HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDD HARTHBHAI V. COMMISSIONER OF INCOME-TAX (SUPRA), WHERE IT HAS BE EN EMPHASIZED THAT IF THE TRANSFER OF THE PERSONAL ASSET BY THE ASSESSEE TO A PARTNERSHIP IN WHICH HE IS OR BECOMES A PARTNER IS MERELY A DEVICE OR RU SE FOR CONVERTING THE ASSET INTO MONEY WHICH WOULD SUBSTANTIALLY REMAIN AVAILABLE FOR HIS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 162 OF 230 BENEFIT WITHOUT LIABILITY TO TAX, IT WILL BE OPEN T O THE INCOME TAX AUTHORITY TO GO BEHIND THE TRANSACTION AND EXAMINE, EVEN WHER E THE PARTNERSHIP IS GENUINE, WHETHER THE TRANSACTION OF TRANSFERRING TH E PERSONAL ASSET TO THE PARTNERSHIP FIRM REPRESENTS A REAL ATTEMPT TO CONTR IBUTE TO THE SHARE CAPITAL OF THE PARTNERSHIP FIRM FOR THE PURPOSE OF CARRYING ON THE PARTNERSHIP BUSINESS OR IS NOTHING BUT A DEVICE OR RUSE TO CONV ERT THE PERSONAL ASSET INTO MONEY SUBSTANTIALLY FOR THE BENEFIT OF THE ASS ESSEE WHILE EVADING TAX ON A CAPITAL GAIN. FROM THE FACTS OF THE PRESENT C ASE, IT IS MORE THAN CLEAR THAT THE TRANSACTION OF TRANSFERRING PLOTS OF LAND OWNED BY THE ASSESSEE TO THE PARTNERSHIP FIRM IS NOT A REAL ATTEMPT TO CONTR IBUTE TO THE SHARE CAPITAL OF THE FIRM FOR THE PURPOSE OF CARRYING THE PARTNER SHIP BUSINESS AS OUT OF THE TOTAL VALUE OF LAND, AMOUNTING TO RS. 21.15 CRO RES, WHICH HAS BEEN RECORDED AS VALUE OF LAND IN THE BOOKS OF THE PARTN ERSHIP FIRM, THE ONLY SUM OF RS. 20,00,000/- HAS BEEN ALLOCATED TOWARDS A SSESSEES CONTRIBUTION TO THE SHARE CAPITAL AND A SUBSTANTIAL PORTION AMOU NTING TO RS. 20,95,00,000/- (RS. 20.95 CRORES) HAS BEEN MADE AVA ILABLE WITH THE ASSESSEE FOR HIS BENEFIT IN THE NATURE OF LOAN PAYA BLE BY THE FIRM TO THE PARTNER. IT IS WELL KNOWN THAT THE ADVANCES GIVEN IN ADDITION TO THE CAPITAL ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 163 OF 230 BY A PARTNER TO A FIRM OCCUPIES A BETTER POSITION F OR THE BENEFIT OF A PARTNER AS COULD BE SEEN FROM SECTION 13(1)(C) VIS.-A-VIS. 13(1)(D) AND SECTION 48(B)(II) VIS.-A-VIS 48(B)(III) OF THE INDIAN PART NERSHIP ACT WHERE ADVANCES BY A PARTNER DISTINGUISHED FROM CAPITAL AR E PLACED ON BETTER FOOTING THAN THE CAPITAL CONTRIBUTED BY THE PARTNER FOR THE PURPOSE OF PARTNERS RIGHT TO RECEIVE INTEREST THEREUPON AND T O REALIZE OR RECOVER THE ADVANCES DISTINGUISHED FROM CAPITAL. MOREOVER, T HE ASSESSEE HAS INDULGED INTO A WELL DESIGNED AND COLOURABLE STRATE GY TO CONVERT ITS STOCK IN TRADE INTO MONEY BY CONSTITUTING VARIOUS PARTNER SHIP FIRMS YEAR AFTER AND CONTRIBUTING PART OF ITS LAND OUT OF TOTAL LAND HELD AS STOCK IN TRADE INTO VARIOUS FIRMS. THE VARIOUS PARTNERSHIP FIRMS CONSTI TUTED BY THE ASSESSEE FROM YEAR TO YEAR IN A.Y. 1992-93 AND THEN IN ASSES SMENT YEARS 1997-98 TO 2000-01, AND ALSO THE DETAILS OF TOTAL VALUE OF LAND CONTRIBUTED BY THE PARTNERS, THE TOTAL AMOUNT TREATED AS CAPITAL CONTR IBUTION, AND THE AMOUNT TREATED AS LOAN BY THE ASSESSEE TO A FIRM HAVE BEEN PLACED BEFORE US BY THE LD. COUNSEL FOR THE ASSESSEE, WHICH ARE ANNEXED AS ANNEXURE A TO THIS ORDER. THEREFORE, IN THIS VIEW OF THE MATTER, THE SURPLUS ARISING FROM THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 164 OF 230 TRANSACTION OF TRANSFER OF ASSESSEES PROPERTY TO A PARTNERSHIP FIRM IS CHARGEABLE TO TAX IN TERMS OF OUR ORDER FOR A.Y. 19 92-93. ITA NO. 3233/DEL/2001 : A.Y. 1998-99 28. NOW WE SHALL COME TO THE APPEAL FILED BY THE ASSES SEE FOR THE A.Y. 1998-99, DIRECTED AGAINST THE CIT(A)S ORDER DATED 13.06.2001, PASSED IN THE MATTER OF AN ASSESSMENT MADE U/S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) 29. GROUND NO. 1, 2, 3, AND 5 ARE IDENTICAL TO THE GRO UND NO. 1, 2, 3, AND 5 RAISED IN THE A.Y. 1997-98. THEREFORE, THESE GRO UNDS SHALL STAND DECIDED IN TERMS OF OUR ORDER DECIDING THE IDENTICA L GROUND IN A.Y. 1997- 98. THE DECISION GIVEN IN A.Y. 1997-98, ON THESE IS SUES SHALL APPLY TO THE IDENTICAL ISSUES INVOLVED IN THE A.Y. 1998-99. 30. GROUND NO. 4 IN A.Y. 1998-99 IS DIRECTED AGAINST T HE CIT(A)S ORDER IN CONFIRMING THE ADDITION OF RS. 17,12,17,55 4/- BEING THE SURPLUS AMOUNT ARISING ON LAND/RIGHTS IN LAND HELD AS STOC K IN TRADE AND BROUGHT INTO THE PARTNERSHIP FIRM AS CAPITAL CONTRIBUTION B Y THE ASSESSEE. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 165 OF 230 30.1 DURING THE PERIOD RELEVANT TO THE A.Y. 1998-99, TH E ASSESSEE COMPANY BECAME A PARTNER IN TWO NEWLY CONSTITUTED P ARTNERSHIP FIRMS VIZ., M/S. DLF OFFICE DEVELOPERS AND M/S. DLF PROPE RTY DEVELOPERS, WITH PROFIT/LOSS SHARING RATIO OF 12% IN EACH FIRM. THE ASSESSEE COMPANY CONTRIBUTED ITS RIGHT TO PURCHASE IN ONE PLOT OF LA ND OWNED BY ITS SUBSIDIARY COMPANIES AT ADMEASURING ABOUT 1.152 ACR ES IN PHASE-III DLF CITY, GURGAON, INTO THE COMMON STOCK OF THE PARTNER SHIP FIRM VIZ., M/S. DLF OFFICE DEVELOPERS. THE ASSESSEE COMPANY ALSO C ONTRIBUTED ITS OWNERSHIP OF NINE RESIDENTIAL PLOTS OF LAND IN PHAS E-II ADMEASURING 4631.17 SQ. METERS AS WELL ITS RIGHT TO PURCHASE 47 PLOTS OWNED BY ITS SUBSIDIARIES COMPANIES INTO THE COMMON STOCK OF PAR TNERSHIP FIRM VIZ., M/S. DLF PROPERTY DEVELOPERS. THESE PLOTS OF LANDS WERE CONVERTED AS A CAPITAL INVESTMENT IN THE FIRM AT AN AGREED VALUE O F RS. 24.62 CRORES, WHICH RESULTED IN SURPLUS OF RS. 17,12,17,554/- TO THE ASSESSEE. THE ASSESSEE CREDITED THIS SURPLUS TO THE PROFIT AND LO SS ACCOUNT BUT IT CLAIMED IT TO BE EXEMPTED FROM TAX IN THE LIGHT OF THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. HIND CONSTRUCTION LTD. 83 ITR 211 (SC), AND IN THE LIGHT OF THE DECISION TAKEN IN THE A.Y. 198 5-86. HOWEVER, THE AO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 166 OF 230 HAD BROUGHT THE SURPLUS TO TAX FOR THE REASON GIVEN IN THE A.Y. 1992-93 BY RELYING UPON THE DECISION OF OF HONBLE SUPREME COU RT IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCOME-TAX[1 985] 156 ITR509 (SC) AND AFTER MAKING A REFERENCE TO THE PROVISIONS CONTAINED IN SECTION 2(47) AND 45(3) OF THE ACT. 30.2 ON AN APPEAL, THE CIT(A) CONFIRMED THE AOS ORDER IN VIEW OF THE ORDER OF THE CIT(A) PASSED IN A.Y. 1992-93, WHICH HAS ALSO BEEN FOLLOWED BY THE CIT(A) IN A.Y. 1997-98 30.3 WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. 30.4 IN THIS A.Y. 1998-99 TWO PARTNERSHIP FIRMS VIZ., M /S. DLF OFFICE DEVELOPERS AND M/S. DLF PROPERTY DEVELOPERS WERE CONSTITUTED VIDE MEMORANDUM OF PARTNERSHIP EXECUTED ON 23RD DAY OF MARCH 1998 MADE EFFECTIVE FROM 24TH DAY OF FEBRUARY, 1998, WHE REIN THE ASSESSEE BECAME A PARTNER ALONGWITH EIGHT ITS SUBSIDIARIES AS PARTNERS IN M/S. DLF OFFICE DEVELOPERS AND WITH OTHER SIXTEEN ITS SUBSID IARIES AS PARTNERS IN M/S. DLF PROPERTY DEVELOPERS. THE ASSESSEE BROUGHT CERTAIN PLOT OF LAND ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 167 OF 230 HELD BY IT INTO THE COMMON STOCK OF PARTNERSHIP VAL UED AT 3,70,00,000/-, WHICH AMOUNT WAS CREDITED TO THE ACCOUNT OF THE ASS ESSEE IN THE ACCOUNT BOOKS OF THE PARTNERSHIP FIRM. OUT OF THE AFORESAI D AMOUNT OF RS. 3,70,00,000/-, THE SUM OF RS.12,00,000/- WAS TREATE D AS ASSESSEES CAPITAL CONTRIBUTION WITHOUT CARRYING ANY INTEREST, AND THE REMAINING AMOUNT OF RS. 3,58,00,000/- HAS BEEN TREATED AS A LOAN BY THE ASSESSEE TO A PARTNERSHIP FIRM, WHICH MAY BE EITHER FREE OF INTER EST OR CARRY INTEREST AT SUCH RATES AS MAY BE MUTUALLY AGREED UPON FROM TIME TO TIME. THE PROPERTY BROUGHT IN BY THE PARTNERS WERE TREATED AS A PROPERTY OF A PARTNERSHIP FIRM ON AND FROM 24TH DAY OF FEBRUARY, 1998. 30.5 SIMILARLY, IN THE FIRM UNDER NAME AND STYLE OF M/S . DLF PROPERTY DEVELOPERS, THE ASSESSEE BROUGHT CERTAIN P LOT OF LAND HELD BY IT INTO THE COMMON STOCK OF PARTNERSHIP, WHICH WERE VA LUED AT RS. 3,25,00,000/-, WHICH AMOUNT WAS CREDITED TO THE ACC OUNT OF THE ASSESSEE IN THE BOOKS OF THE PARTNERSHIP FIRM OF 24TH DAY OF FE BRUARY, 1998. THE ASSESSEE ALSO BROUGHT ITS RIGHT TO PURCHASE THE LAN D IN RESPECT OF CERTAIN 47 PLOTS OF LAND INTO THE COMMON STOCK OF THE PARTNERS HIP FIRM, WHICH WERE VALUED AT RS. 17,75,00,000/-. THUS, THE TOTAL AMOU NT CREDITED TO THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 168 OF 230 ASSESSEES ACCOUNT WAS 21 CRORES OUT OF WHICH SUM O F RS. 12 LACS WAS CREDITED TO THE CAPITAL ACCOUNT OF THE ASSESSEE AS ITS CAPITAL CONTRIBUTION WITHOUT CARRYING ANY INTEREST, AND THE REMAINING AM OUNT HAS BEEN TREATED AS LOAN BY THE ASSESSEE TO THE PARTNERSHIP FIRM, WH ICH MAY BE EITHER FREE OF INTEREST OR MAY CARRY INTEREST AT SUCH RATES AS MAY BE MUTUALLY AGREED UPON FROM TIME TO TIME. AS A RESULT OF THIS TRANSA CTION CREDITING THE ASSESSEES ACCOUNT BY MARKET VALUE OF THE PLOT OF L AND BROUGHT IN BY THE ASSESSEE IN A FIRM, THE SUM OF RS. 17,12,17,554/- R ESULTED AS SURPLUS TO THE ASSESSEE, WHICH WAS CREDIT TO THE PROFIT AND LOSS A CCOUNT OF THE ASSESSEE TO CLAIM AS EXEMPTED FROM TAX RELYING UPON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. HIND CONSTRUCT ION LTD. 30.6 IN THE LIGHT OF OUR DECISION IN THE A.Y. 1992-93 A ND 1997-98, WE HOLD THAT THE AMOUNT OF RS. 17,12,17,554/- BEING SURPLUS ARISING TO THE ASSESSEE IS CHARGEABLE TO TAX AS CAPITAL GAIN. THE AO IS DIRECTED TO COMPUTE CAPITAL GAIN AS PER LAW AS SO HELD BY US IN A.Y. 1992-93 AND 1997-98. 30.7 WE FURTHER HOLD THAT OUR VIEW IN PARA 27.4 IN THE A.Y. 1997-98 SHALL ALSO BE APPLICABLE TO THIS ISSUE ARISING IN THIS A.Y. 1998-99. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 169 OF 230 ITA NO. 267/DEL/2003 : AY 1999-2000 31. NOW WE SHALL TAKEN UP THE APPEAL FILED BY ASSESSEE FOR THE A.Y. 1999-2000, DIRECTED AGAINST THE ORDER DATED 25.10.2 002, PASSED BY THE LD. CIT(A) IN THE MATTER OF AN ASSESSMENT MADE U/S. 143 (3) OF THE INCOME TAX ACT, 1961 (THE ACT). 32. GROUND NO. 1 AND GROUND NO. 3 RELATING TO THE ISSUE ABOUT REWORKING OF COST OF LAND IN PHASES I TO III AND IV IN QUTAB ENCLAVE COMPLEX AND INTEREST ACCRUED ON FDRS MADE FROM INTERNAL DEVELOP MENT ACCOUNT INCLUDED IN ASSESSEES HAND ARE IDENTICAL TO THE GR OUND NO. 3 AND 5 RESPECTIVELY FOR THE A.Y. 1997-98. THEREFORE, IN T ERMS OF OUR ORDER ON THE IDENTICAL ISSUE PASSED IN THE A.Y. 1997-98 VIDE THI S COMMON ORDER, THIS ISSUE HAS BEEN DECIDED ACCORDINGLY. IN OTHER WORDS , THE DECISION ON THE IDENTICAL ISSUES RENDERED IN THE A.Y. 1997-98 SHALL ALSO APPLY TO THE IDENTICAL ISSUES RAISED IN THIS A.Y. 1999-2000. 33. GROUND NO. 2 IN A.Y. 1999-2000 AGAINST THE CIT(A) S ORDER IN CONFIRMING THE ADDITION OF RS. 54,82,91,077/- BEING SURPLUS ARISING ON CONTRIBUTION OF LAND HELD AS STOCK IN TRADE BY THE ASSESSEE AND CONTRIBUTED ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 170 OF 230 TO THE PARTNERSHIP FIRM AS CAPITAL CONTRIBUTION BY THE ASSESSEE IN THE CAPACITY OF A PARTNER. 33.1 IN THIS A.Y. 1999-2000, THE ASSESSEE BECAME A PAR TNER IN FIVE NEWLY CONSTITUTED PARTNERSHIP FIRMS. THE ASSESSEE COMPANY CONTRIBUTED ITS LAND AND RIGHT TO PURCHASE LAND OWNED BY ITS SU BSIDIARY COMPANIES IN DLF CITY, GURGAON TO THE PARTNERSHIP FIRMS AS CAPIT AL CONTRIBUTION. TOTAL VALUE OF ALL PIECE OF LANDS WERE DETERMINED AT AN A GREED VALUE OF RS. 78.55 CRORES. THESE PLOTS OF LANDS WERE CONTRIBUTE D BY THE ASSESSEE AS CAPITAL CONTRIBUTION IN THE AFORESAID FIVE NEWLY CO NSTITUTED PARTNERSHIP FIRM. AS A RESULT OF THIS TRANSACTION, A SURPLUS O F RS. 54,82,91,077/- HAD ARISEN TO THE ASSESSEE. THE ASSESSEE HAS CREDITED THIS SURPLUS TO ITS PROFIT AND LOSS ACCOUNT. THE FIRM ALSO CREDITED THE ASSES SEES CAPITAL ACCOUNT BY SUM OF RS.78.55 CRORES. HOWEVER, THE ASSESSEE CLAI MED THE SURPLUS TO BE EXEMPTED FROM TAX IN THE LIGHT OF OF THE DECISION O F HONBLE SUPREME COURT IN THE CASE OF CIT VS. HIND CONSTRUCTION LTD. 83 ITR 211 (SC). THE ASSESSEE ALSO STATED BEFORE THE AO THAT IN A.Y. 1985-86, SUCH SURPLUS WAS HELD TO BE NOT TAXABLE. HOWEVER, THE AO AS WEL L AS THE CIT(A) BROUGHT THE SAID SURPLUS TO TAX IN THE LIGHT OF THE IR VIEW TAKEN IN A.Y. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 171 OF 230 1992-93 AFTER RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI V. COMMISSIONER OF INCO ME-TAX[1985] 156 ITR509 (SC) AND AFTER MAKING A REFERENCE TO THE PRO VISIONS CONTAINED IN SECTION 2(47) AND 45(3) OF THE ACT. 33.2 WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. 33.3 IN THIS YEAR ALSO FIVE PARTNERSHIP FIRMS WERE NEWL Y CONSTITUTED IN WHICH THE ASSESSEE BECAME A PARTNER. THE ASSESSEE BROUGHT IN CERTAIN PLOT OF LAND IN THE COMMON STOCK OF THIS NEWLY CONSTITUTED FIRM AT A VALUE OF RS. 78.55 CRORES. THE AFORESAID AMOU NT OF RS. 78.55 CRORES WAS CREDITED IN THE ASSESSEES ACCOUNT IN THE BOOKS OF ACCOUNT OF THE PARTNERSHIP FIRMS. OUT OF THE AFORESAID AMOUNT OF RS. 78.55 CRORES CREDITED IN THE ASSESSEES ACCOUNT IN THE BOOKS OF THE FIRMS SUM OF RS. 9.50 WAS CREDITED ON ACCOUNT OF ASSESSEES CAPITAL CONTRIBUTION AND BALANCE AMOUNT OF RS. 69.05 CRORES (78.55 CRORES 9.50 CRORES) WAS TREATED AS LOAN BY THE ASSESSEE TO THE NEWLY CONSTI TUTED FIRMS. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 172 OF 230 33.4 IN THE LIGHT OF OUR DECISION IN THE A.Y. 1992-93, 1997-98 AND 1998-99, WE HOLD THAT THE AMOUNT OF RS. 54,82,91,07 7/- BEING SURPLUS ARISING TO THE ASSESSEE IS CHARGEABLE TO TAX AS CAP ITAL GAIN, AND THE AO IS DIRECTED TO COMPUTE CAPITAL GAIN AS PER LAW AS SO H ELD BY US IN A.Y. 1992- 93, 1997-98 AND 1998-99. 33.5 WE FURTHER HOLD THAT OUR VIEW IN PARA 27.4 IN THE A.Y. 1997- 98 SHALL ALSO BE APPLICABLE TO THIS ISSUE ARISING I N THIS A.Y. 1999-2000. ITA NO. 4986/DEL/2003 : AY 2000-2001 34. THE LAST APPEAL FILED BY THE ASSESSEE IS PERTAININ G TO THE A.Y. 2000- 01, DIRECTED AGAINST THE CIT(A)S ORDER DATED 13.09 .2003, PASSED IN THE MATTER OF A ASSESSMENT MADE U/S. 143(3) OF THE INCO ME TAX ACT, 1961 (THE ACT) BY THE AO. 35. GROUND NO. 1 IS ABOUT THE REJECTION OF THE METHOD REGULARLY EMPLOYED BY THE ASSESSEE BY THE AO, AND THEN CONFIR MING THE ADDITION ON ACCOUNT OF REWORKING OF THE COST OF LAND AT THE AVE RAGE PURCHASE PRICE OF ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 173 OF 230 LAND IN QUTAB ENCLAVE COMPLEX, AND THUS, MAKING ADD ITION OF RS. 34,30,308/-, AND ADDITION OF RS. 1,60,69,880/- ON A CCOUNT OF INTERNAL DEVELOPMENT EXPENSES. THIS ISSUE IS COVERED BY THE TRIBUNALS DECISION IN A.Y. 1994-95, WHICH HAS BEEN FOLLOWED IN A.Y. 1995- 96, 1996-97, AND 20001-02. THE AFORESAID DECISION OF THE TRIBUNAL H AS BEEN FOLLOWED BY US WHILE DECIDING THESE ISSUES IN THE A.Y. 1997-98, 19 98-99, AND 1999-2000. THEREFORE, THIS ISSUE IS DECIDED IN FAVOUR OF THE A SSESSEE IN TERMS OF OUR ORDER OF THE AFORESAID YEARS FOLLOWING THE DECISION OF TRIBUNAL PASSED IN A.Y. 1994-95. 36. GROUND NO. 2 IS WITH REGARD TO THE ADDITION OF RS. 6,27,000/- ON ACCOUNT OF ACCRUED INTEREST ON FDRS MADE AFTER WITH DRAWAL UNDER AUTHORITY OF HARYANA GOVERNMENT FROM INTERNAL DEVEL OPMENT BANK ACCOUNT. THIS ISSUE HAS ALSO BEEN CONSIDERED IN TH E A.Y. 1997-98, 1998- 99, AND 2000-01 ABOVE AFTER FOLLOWING THE EARLIER D ECISION OF THE TRIBUNAL. THEREFORE, THIS ISSUE HAS BEEN DECIDED ACCORDINGLY IN TERMS OF OUR ORDER PASSED IN THE A.Y. 1997-98, 1998-99, AND 2000-01. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 174 OF 230 37. GROUND NO. 3 IS DIRECTED AGAINST THE CIT(A)S ORDE R IN CONFIRMING ADDITION OF RS. 5,60,00,000/- BEING THE SURPLUS ARI SING ON LAND HELD AS STOCK IN TRADE BY THE ASSESSEE BUT CONTRIBUTED TO T HE PARTNERSHIP FIRM TOWARDS CAPITAL BY THE ASSESSEE. 37.1 DURING THE PERIOD RELEVANT TO THE A.Y. 2000-01, TH E ASSESSEE BECAME A PARTNER IN A PARTNERSHIP FIRM M/S. DLF PHA SE IV COMMERCIAL DEVELOPERS AND CONTRIBUTED CERTAIN LAND OWNED BY IT AS WELL AS ITS RIGHT OF PURCHASE OF LAND, TO THE AFORESAID FIRM TOWARDS ITS CAPITAL, AND SURPLUS OF RS. 5,60,00,000/-, BEING THE DIFFERENCE BETWEEN THE VALUE CREDITED IN ASSESSEES CAPITAL ACCOUNT, AND THE COST TO THE ASS ESSEE WAS CREDITED IN THE PROFIT AND LOSS ACCOUNT, BUT CLAIMED AS EXEMPTED FR OM TAX IN THE LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF COMMISSIONER OF INCOME-TAX V. HIND CONSTRUCTION LTD [1972] 83 IT R 211 (SC) AND IN THE LIGHT OF THE ORDER DECIDED IN ASSESSEES FAVOUR IN THE A.Y. 1985-86. HOWEVER, THE AO REJECTED THE ASSESSEES CLAIM IN TH E LIGHT OF THE ASSESSMENT ORDER FOR THE A.Y. 1992-93 AS WELL AS FO R A.Y. 1999-2000. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 175 OF 230 37.2 IN THE A.Y. 2000-01, A PARTNERSHIP FIRM UNDER NAM E AND STYLE OF M/S. DLF PHASE IV, COMMERCIAL DEVELOPERS, WAS CO NSTITUTED IN WHICH THE ASSESSEE BECAME A PARTNER. THE ASSESSEE BROUGH T IN CERTAIN PLOT OF LAND TO THE COMMON STOCK OF THE PARTNERSHIP FIRM. THESE PLOTS WERE VALUED AT RS. 8 CRORES, WHICH WAS CREDITED IN THE A SSESSEES ACCOUNT IN THE BOOKS OF THE FIRM. OUT OF THE AFORESAID AMOUNT OF 8 CRORES, THE SUM OF RS. 75,00,000/- HAS BEEN CREDITED IN THE CAPITAL ACCOUN T OF THE ASSESSEE AS ASSESSEE S CAPITAL CONTRIBUTION, AND THE BALANCE S UM OF RS. 7,25,00,000/- HAS BEEN TREATED A LOAN BY THE ASSESSEE TO THE FIRM . FROM THIS TRANSACTION A SURPLUS OF RS. 5,60,00,000/- HAD ARISEN TO THE ASSE SSEE, WHICH WAS CREDITED IN THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE BUT CLAIMED AS EXEMPTED IN THE RETURN OF INCOME FILED BY THE ASSESSEE. 37.3 IN THE LIGHT OF OUR DECISION IN THE A.Y. 1992-93, 1997-98 AND 1998-99, WE HOLD THAT THE AMOUNT OF RS. 5,60,00,000 /- BEING SURPLUS ARISING TO THE ASSESSEE IS CHARGEABLE TO TAX AS CAP ITAL GAIN, AND THE AO IS DIRECTED TO COMPUTE CAPITAL GAIN AS PER LAW AS SO H ELD BY US IN A.Y. 1992- 93, 1997-98, 1998-99 AND 19992000. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 176 OF 230 37.4 WE FURTHER HOLD THAT OUR VIEW IN PARA 27.4 IN THE A.Y. 1997- 98 SHALL ALSO BE APPLICABLE TO THIS ISSUE ARISING I N THIS A.Y. 2000-2001. 38. IN THE RESULT, ALL THESE APPEALS FILED BY THE ASSE SSEE ARE PARTLY ALLOWED IN THE MANNER AS INDICATED ABOVE 39. THIS DECISION IS PRONOUNCED IN THE OPEN COURT ON 4 TH JANUARY, 2010. (I.P. BANSAL) (C. L. SETHI) JUDICIAL MEMBER JUDICIAL MEMBER DATED: 4 TH JANUARY, 2010 *NITASHA COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2. RESPONDENT; 3. CIT; 4. CIT(A); 5. DR; 6. GUARD FILE BY ORDER DY. REGISTRAR ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 177 OF 230 ANNEXURE A ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 178 OF 230 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 179 OF 230 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 180 OF 230 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 181 OF 230 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 182 OF 230 PER DEEPAK R. SHAH, ACCOUNTANT MEMBER: 40. I HAVE PERUSED THE DRAFT ORDER PROPOSED BY MY E STEEMED COLLEAGUE. IN SO FAR AS THE APPEAL FOR A.Y. 1992-93 IS CONCERNED, I AM UNABLE TO CONCU R WITH THE PROPOSITION LAID DOWN AS REGARDS GROUND NO. 1 (DIVIDED INTO SUB-GROUND NO. 1 .1 TO 1.7). AS REGARDS OTHER GROUNDS I FULLY AGREE WITH THE FINDING GIVEN IN RELATION THER ETO. THEREFORE, I PROCEED TO HOLD AS UNDER IN RELATION TO GROUND NO. 1 FOR A.Y. 1992-93:- 40.1 IN THE DRAFT ORDER PROPOSED BY MY LEARNED BROT HER THE FACTS AND ARGUMENTS ARE ELABORATELY DISCUSSED AND HENCE I DO NOT PROPOSE TO COMMENT UPO N THE SAME. HOWEVER, IN PARA 16 OF THE DRAFT ORDER THE PROPOSITION IS LAID DOWN TO WHI CH I AM UNABLE TO AGREE AND HENCE I PROCEED TO HOLD AS UNDER. 41. THE FACTS WHICH ARE NEVER IN DISPUTE ARE THAT T HE ASSESSEE WAS HOLDING CERTAIN LAND AS ITS STOCK-IN-TRADE. THE LANDS WERE BROUGHT IN BY THE A SSESSEE AS ITS CAPITAL CONTRIBUTION IN A FIRM WHEN THE PARTNERSHIP FIRM WAS CONSTITUTED. THE PAR TNERSHIP DEED WAS CONSTITUTED ON 23/03/1992 BUT MADE EFFECTIVE FROM 16/03/1992. THE COST OF THE SAID LAND IN THE HANDS OF ASSESSEE WAS 5.49 CRORES. AT THE TIME OF INTRODUCT ION OF THE SAID LAND THE MARKET VALUE WAS DETERMINED AT 11.5 CRORES. THE AMOUNT CREDITED TO THE ACCOUNT OF PARTNER IN THE BOOKS OF FIRM WHEN THE LAND WAS CONTRIBUTED WAS TAKEN AS 11. 5 CRORES. THE DIFFERENCE OF RS. 6.01 ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 183 OF 230 CRORE WAS CREDITED BY THE ASSESSEE TO ITS PROFIT AN D LOSS ACCOUNT. THE ASSESSEE CLAIMED THE DIFFERENCE AS NOT EXIGIBLE TO TAX, RELYING ON THE D ECISION OF THE HONBLE SUPREME COURT IN THE CASE OF HIND CONSTRUCTION LIMITED (83 ITR 211). TH E ASSESSING OFFICER TREATED THE DIFFERENCE AS CHARGEABLE INCOME UNDER THE HEAD PROFITS AND GA INS OF BUSINESS OR PROFESSION. LEARNED CIT(A) ALSO CONFIRMED THE SAME AND HELD IN PAGE 24 OF HIS ORDER AS UNDER : 4) SINCE THE LAND SO TRANSFERRED REPRESENTED THE S TOCK-IN-TRADE, THE PROFITS WERE CHARGEABLE U/S 28 OF THE ACT WHICH STANDS ON A DIFF ERENT FOOTING THEN THE GAINS ARISING FROM TRANSFER OF A CAPITAL OR FIXED ASSET. IN LIGHT OF THE ABOVE UNDISPUTED FACTS THE ISSUE WH ICH ARISES FOR CONSIDERATION IS WHETHER THE SURPLUS CREDITED TO THE PROFIT AND LOSS ACCOUNT ON INTRODUCTION OF THE LAND AS ITS CAPITAL CONTRIBUTION, HELD BY THE ASSESSEE AS STOCK-IN-TRAD E IS CHARGEABLE TO TAX OR NOT. 42. THE QUESTION IS REGARDING TAXABILITY OF THE LAN D HELD BY ASSESSEE AS ITS STOCK-IN-TRADE AND INTRODUCED IN THE PARTNERSHIP FIRM AS ITS CAPITAL C ONTRIBUTION WHEN THE ASSESSEE BECAME PARTNER OF THE SAID FIRM. THE WORDS FIRM, PARTN ER AND PARTNERSHIP ARE DEFINED UNDER THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS T HE ACT) IN SECTION 2(23) OF THE ACT. AS PER THE SAID DEFINITION THE WORDS FIRM, PARTNER AND PAR TNERSHIP HAVE THE MEANING RESPECTIVELY ASSIGNED TO THEM IN THE INDIAN PARTNERSHIP ACT 1932 AND THE EXPRESSION PARTNER SHALL ALSO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 184 OF 230 INCLUDE ANY PERSON WHO BEING A MINOR HAS BEEN ADMIT TED TO THE BENEFITS OF PARTNERSHIP. THEREFORE, IT IS CLEAR THAT THE RELATION OF FIRM AN D PARTNER ARE THE SAME AS COMMONLY UNDERSTOOD UNDER THE PARTNERSHIP ACT. THE FIRM IS NOT A SEPARATE LEGAL ENTITY BUT ONLY FOR THE PURPOSE OF INCOME TAX ACT IT IS A SEPARATE TAXABLE ENTITY. THEREFORE, UNDER NORMAL PROVISION THE PARTNER AND FIRM ARE NOT SEPARATE. A PERSON IN DIVIDUALLY IS A PARTNER AND COLLECTIVELY IS CALLED A FIRM. THE FIRM IS NOT DISTINCT AND SEPARA TE FROM THE PARTNERS CONSTITUTING IT. THEREFORE WHEN ANY TRANSACTION TAKES PLACE IN NORMA L COURSE BETWEEN A PARTNER AND A FIRM, NO NEW RIGHTS ARE CREATED. THE FULL BENCH OF HONB LE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI VS CIT (156 ITR 509) MADE OBSERVATION AS TO THE RIGHT OF PARTNER WHEN THE PARTNER INTRODUCES HIS ASSETS AS ITS CAPITAL CONTRI BUTION IN THE FIRM. THESE OBSERVATIONS ARE ELABORATELY NOTED IN PARA 16.30, 16.31, 16.32, 16.3 3, 16.35, 16.36 AND 16.37 OF THE DRAFT ORDER PROPOSED BY MY LEARNED BROTHER. VARIOUS PROP OSITIONS LAID DOWN BY HONBLE SUPREME COURT IN THE SAID CASE IS ALSO SUMMARIZED IN PARA 1 6.38 OF THE DRAFT ORDER. IN PARA 16.28 OF THE DRAFT ORDER THE EFFECT OF INTRODUCTION OF THE A SSET BY A PARTNER TO A FIRM IN WHICH HE BECOME THE PARTNER HAS BEEN SUMMARIZED AS TO GIVE F OLLOWING RIGHTS ACCRUING IN FAVOUR OF A PARTNER AT THE TIME OF SO INTRODUCTION: I. RIGHT TO GET HIS SHARE OF PROFIT FROM TIME TO TIME DURING THE SUBSISTENCE OF THE PARTNERSHIP; AND ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 185 OF 230 II. ON THE DISSOLUTION OF PARTNERSHIP OR WITH HIS RETIR EMENT FROM THE PARTNERSHIP, THE RIGHT TO GET THE VALUE OF HIS SHARES IN THE NET PARTNERSH IP ASSET AS ON THE DATE OF DISSOLUTION OR RETIREMENT AFTER DEDUCTION OF LIABILITIES AND PR IOR CHARGES. 42.1 AS PER THE RATIO LAID DOWN BY VARIOUS COURTS I NCLUDING HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPRA), THE AMOUNT CREDITED TO THE ACCOUNT OF PARTNER IN THE BOOKS OF THE FIRM AND THE RESULTANT SURPLUS WILL NOT AMOUNT TO ANY INCOME ACCRUING OR ARISING TO THE PARTNER FOR THE REASON THAT 1. THE FIRM IS NO SEPARATE LEGAL ENTITY THAN THE PARTN ERS CONSTITUTING IT. 2. THE PARTNER IS NOT LEGALLY ENTITLED TO CLAIM THE AM OUNT STANDING TO THE CREDIT OF HIS CAPITAL ACCOUNT AS DEBT DUE BY THE FIRM IN FAVOUR OF THE PA RTNER. 3. THE RIGHT IS MERELY TO SHARE PROFITS FROM TIME TO T IME DURING SUBSISTENCE OF PARTNERSHIP AND ONLY ON DISSOLUTION OR ON RETIREMENT TO GET THE VALUE OF HIS SHARE IN THE NET PARTNERSHIP ASSET. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 186 OF 230 THUS IT WILL BE INCORRECT TO HOLD THAT THE AMOUNT O F RS. 11.5 CRORES CREDITED TO THE ACCOUNT OF THE PARTNER IN THE BOOKS OF THE FIRM IS GIVING RISE TO ANY INCOME CHARGEABLE TO TAX IN THE HANDS OF THE PARTNER WHEN HE INTRODUCED HIS STOCK-IN-TRAD E AS HIS CAPITAL CONTRIBUTION. 42.2 HONBLE SUPREME COURT IN THE CASE OF SUNIL SID DHARTHBHAI (SUPRA) HELD THAT WHEN THE ASSESSEE, A PARTNER IN A FIRM, MADE OVER TO THE FIR M CERTAIN SHARES IN A COMPANY WHICH WERE HELD BY HIM AS CAPITAL ASSET, THERE WAS A TRANSF ER OF THE SHARES, BUT THAT HE RECEIVED NO CONSIDERATION WITHIN THE MEANING OF SECTION 48. NO R DID ANY PROFIT OR GAIN ACCRUE TO HIM FOR THE PURPOSE OF SECTION 45. TO OVERCOME THE SITUATI ON THE INCOME TAX WAS AMENDED WHEREBY SUB SECTION (3) WAS INSERTED IN SECTION 45 OF THE A CT BY FINANCE ACT 1987 W.E.F. 01/04/1988. ACCORDING TO SECTION 45 (3) THE PROFIT OR GAIN ARIS ING OUT OF THE TRANSFER OF A CAPITAL ASSET BY A PERSON TO A FIRM IN WHICH HE BECOMES A PARTNER BY W AY OF CAPITAL CONTRIBUTION OR OTHERWISE SHALL BE CHARGEABLE TO TAX AS HIS INCOME. SECTION 45 IS A SECTION TO CHARGE THE CAPITAL GAIN ARISING ON TRANSFER OF A CAPITAL ASSET AFFECTED IN THE PREVIOUS YEAR. THE PHRASE CAPITAL ASSET HAS BEEN DEFINED IN THE ACT IN SECTION 2 (14) OF TH E ACT. ACCORDING TO THE DEFINITION CAPITAL ASSET MEANS PROPERTY OF ANY KIND HELD BY AN ASSESS EE BUT DOES NOT INCLUDE ANY STOCK-IN- TRADE HELD FOR THE PURPOSE OF HIS BUSINESS OR PROF ESSION. THUS WHEN STOCK-IN-TRADE IS SPECIFICALLY EXCLUDED FROM THE DEFINITION OF CAPIT AL ASSET THE CHARGING PROVISION OF SECTION 45 AND THE COMPUTATION PROVISION CONTAINED IN SECTION 48 CANNOT BE APPLIED IN RELATION TO STOCK- ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 187 OF 230 IN-TRADE. AS PER SECTION 2 (47) THE WORD T RANSFER IN RELATION TO A CAPITAL ASSET IS DEFINED TO INCLUDE VARIOUS TYPES OF TRANSACTIONS. HOWEVER, THE SAID DEFINITION OF TRANSFER IS ONLY IN RELATION TO A CAPITAL ASSET AND SINCE THE P HRASE CAPITAL ASSET EXCLUDES STOCK-IN- TRADE, THE DEFINITION CONTAINED IN SECTION 2 (47) CANNOT BE APPLIED TO A STOCK-IN-TRADE. WHEN THE PROFITS OF BUSINESS IS TO BE COMPUTED UNDE R SECTION 28 OF THE ACT, THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION SHALL BE OF ANY BUSINESS OR PROFESSION WHICH WAS CARRIED ON BY THE ASSESSEE AT ANY TIME DURING THE PREVIOUS YEAR. THE BUSINESS CAN BE CARRIED ON BY THE PERSON EITHER ALONE OR IN PARTNERSHIP WITH OTHER PARTNERS. HOWEVER, WHEN THE ASSET HELD BY THE PART NER INDIVIDUALLY IS INTRODUCED BY HIM AS ITS CAPITAL CONTRIBUTION, IT CANNOT BE SAID THAT TH E ASSESSEE HAS CARRIED ON BUSINESS WITH THE FIRM IN WHICH HE BECAME THE PARTNER. THEREFORE, ME RELY BECAUSE THE SURPLUS WAS CREDITED IN THE PROFIT AND LOSS ACCOUNT DUE TO INTRODUCTION OF THE STOCK-IN-TRADE IN THE FIRM, WILL NOT BE ASSESSABLE AS PROFITS AND GAINS OF BUSINESS OR PRO FESSION. IN THE DRAFT ORDER IN PARA 16.24 IT HAS BEEN AGREED THAT THE PARTNERSHIP FIRM AS SUCH I S GENUINE. IT IS ALSO A MATTER OF RECORD THAT ALL ALONG THE PARTNERSHIP FIRM HAS BEEN ASSESS ED TO TAX AND IT IS ALSO FOUND THAT AFTER THE LAND WAS CONTRIBUTED BY THE ASSESSEE IN THE PARTNER SHIP FIRM AS ITS CAPITAL CONTRIBUTION, THE SAID LAND WAS DEVELOPED BY THE FIRM AND PROFIT WAS EARNED BY THE FIRM WHICH HAS BEEN ASSESSED AS SUCH. THIS FACT HAS BEEN REITERATED IN PARA 16.25 OF THE DRAFT ORDER ALSO. EVEN IN PARA 16.20 OF THE DRAFT ORDER IT HAS BEEN ACCEPTED AS UNDER : ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 188 OF 230 FROM THE MATERIAL PLACED ON RECORD, WE FIND THAT TH E PARTNERSHIP FIRM SO CONSTITUTED HAS BEEN ASSESSED TO TAX AS SUCH FROM Y EAR TO YEAR BY THE DEPARTMENT, AND THE DEPARTMENT HAS NOT CONSIDERED THE FIRM AS B OGUS OR SHAM. THUS, WE DO NOT FIND ANY MATERIAL TO HOLD THAT THE VERY TRANSAC TION OF CREATING THE PARTNERSHIP ITSELF IS NOT GENUINE BUT A SHAM TRANSACTION. IF THIS FACTUAL SITUATION PREVAILS THEN IT CANNOT B E SAID THAT WHEN THE ASSESSEE INTRODUCED ITS STOCK-IN-TRADE AS ITS CAPITAL CONTRIBUTION IN THE F IRM AT THE TIME WHEN IT BECAME THE PARTNER GIVES RISE TO ANY PROFIT OR GAINS CHARGEABLE TO TAX UNDER THE HEAD BUSINESS INCOME. 42.3 THIS PROPOSITION HAS BEEN LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF CIT VS. HIND CONSTRUCTION LIMITED (83 ITR 211). WHILE DISMISSIN G THE CIVIL APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF HONBLE CALCUTTA HIGH COURT RE PORTED IN CIT VS. HIND CONSTRUCTION LIMITED (78 ITR 664), HONBLE SUPREME COURT HELD : IF A PERSON REVALUES HIS GOODS AND SHOWS A HIGHER V ALUE FOR THEM IN HIS BOOKS, HE CANNOT BE CONSIDERED AS HAVING SOLD THESE GOODS AND MADE PROFITS THEREFROM. NOR CAN A PERSON BY HANDING OVER HIS GOODS TO A PAR TNERSHIP OF WHICH HE IS A PARTNER AND THAT AS HIS SHARE OF CAPITAL BE CONSIDE RED AS HAVING SOLD THE GOODS TO THE PARTNERSHIP. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 189 OF 230 (EMPHASIS SUPPLIED) IT IS ALSO USEFUL TO REFER THE PROPOSITION LAID DOW N BY HONBLE CALCUTTA HIGH COURT IN HIND CONSTRUCTION CASE (SUPRA) WHEREIN AFTER REFERRING T O VARIOUS CASE LAWS ON THE SUBJECT IT WAS HELD: IN OUR VIEW, THE TAXABILITY OF A SUM AS INCOME OR PROFIT WOULD DEPEND UPON THE REAL CHARACTER OR THE SUBSTANCE OF THE TRANSACT ION WHICH YIELDS SUCH INCOME OR PROFIT. IN THE INSTANT CASE, WE CANNOT AG REE WITH THE CONTENTION THAT ANY TRANSFER OR SALE HAS TAKEN PLACE BETWEEN T HE ASSESSEE-COMPANY AND THE PARTNERSHIP FIRM. THE TRANSFER OR SALE IS A BIL ATERAL TRANSACTION AND THERE MUST BE AT LEAST TWO PERSONS-THE TRANSFEROR OR THE VENDOR ON THE ONE HAND AND THE TRANSFEREE OR THE PURCHASER ON THE OTHER. I N THE FACTS OF THIS CASE, THE ASSESSEE-COMPANY'S SHARE OF THE MACHINERY WAS VALUE D ORIGINALLY AT RS. 2,06,745. BEFORE THE ASSETS WERE TRANSFERRED TO THE PARTNERSHIP FIRM, THE ASSESSEE'S SHARE OF THE MACHINERY WAS REVALUED AT R S. 6,06,372 AND THE SAID AMOUNT WAS ENTERED IN THE ASSESSEE'S BOOKS OF ACCOU NT BEFORE THE TRANSFER. WHETHER THIS APPRECIATED VALUE IS THE MARKET VALUE OR NOT, WE DO NOT KNOW. THE ASSESSEE MIGHT HAVE INCREASED THE VALUE FOR FUT URE ADVANTAGE. THE ASSESSEE-COMPANY FORMED A PARTNERSHIP IN WHICH THE ASSESSEE-COMPANY HAD A HALF SHARE. WHATEVER INTEREST THE ASSESSEE HAD IN ITS OWN SHARE OF THE MACHINERY WAS TRANSFERRED AT THE SAID APPRECIATED V ALUE OF RS. 6,06,372 OF THE ASSESSEE'S SHARE OF THE CAPITAL IN THE PARTNERS HIP FIRM. THUS, THE ASSESSEE IS REALLY INVESTING OR DEPOSITING ITS OWN ASSETS IN A PARTNERSHIP FIRM WHICH WAS CONSTITUTED BY IT AND IN WHICH IT HAS SUBSTANTI AL CONTROL. IN DOING THE SAME, IT HAS ONLY APPRECIATED THE VALUE OF THE MACH INERY. WHETHER THE APPRECIATION OF THE SHARES HAS BEEN DONE BEFORE THE TRANSFER OR AFTER THE TRANSFER, THERE IS NO QUESTION OF ANY PURCHASE OR S ALE OF MACHINERY. NOR CAN IT BE SAID THAT THERE WAS ANY PROFIT MOTIVE IN IT. A NOTIONAL OR FICTIONAL INCOME MIGHT HAVE BEEN CAUSED IN THE RECORDS OF THE COMPANY OR IN THE RECORDS OF THE FIRM. BUT NO REAL INCOME WAS RECEIVE D BY THE ASSESSEE. THE NATURE AND THE CHARACTER OF THE TRANSACTION IS SUCH THAT IT IS IMPOSSIBLE TO BELIEVE THAT THERE IS ANY QUESTION OF PROFIT HAVING BEEN RECEIVED IN THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 190 OF 230 ACCOUNTING YEAR. AS A RESULT OF THE APPRECIATION OF THE VALUE OF THE MACHINERY THE ASSESSEE AS A PARTNER IN THE PARTNERS HIP FIRM MIGHT GET A FUTURE ADVANTAGE. BUT, AS THE SUPREME COURT HAS SAI D IN KIKABHAI'S CASE (SUPRA), TAX CANNOT BE IINPOSED ON THE FUTURE ADVAN TAGE WHICH MIGHT BE AVAILABLE TO THE ASSESSEE. FURTHER, THERE IS NO QUE STION OF WITHDRAWAL OF A PART OF THE STOCK-IN-TRADE, IN THE INSTANT CASE, AS IT TOOK PLACE IN SHARKEY V. WERNHER [1956] AC 58; 29 ITR 962 (HL). IN FACT, IN THE LATTER CASE, REDUCTION OF STOCK-IN-TRADE TOOK PLACE BUT THE ORIG INAL BUSINESS WITH ITS REDUCED STOCK-IN-TRADE WAS CARRIED ON BY THE ASSESS EE. IN THE INSTANT CASE, THE ASSESSEE HAS TRANSFERRED THE ENTIRE VALUE OF TH E MACHINERY TO THE PARTNERSHIP FIRM WITH THE WHOLE OBJECT OF INCREASIN G THE CAPITAL OF THE PARTNERSHIP FIRM. THE ASSESSEE HAS TRANSFERRED ITS OWN PROPERTY TO HIS PARTNERSHIP ACCOUNT IN THE FIRM. THE FACTS AND CIRC UMSTANCES IN WHICH THE TRANSACTION TOOK PLACE REPEL THE IDEA OF A TRANSFER FOR CONSIDERATION OR A SALE. IN THE INSTANT CASE ALSO, THE MARKET VALUE OF THE DISPOSAL MACHINERY WAS NOT GONE INTO AT ALL. THE NEXT POINT WHICH REPELS THE CONTENTION OF THE R EVENUE IS THAT THERE IS NO QUESTION OF ANY TRANSFER OR SALE IN THE INSTANT CAS E BECAUSE THE FIRM IS NOT A JURISTIC PERSON. THE PARTNERSHIP HAS BEEN DEFINED I N SECTION 4 OF THE INDIAN PARTNERSHIP ACT, 1932, WHICH READS AS FOLLOWS: 'PARTNERSHIP IS THE RELATION BETWEEN PERSONS WHO HA VE AGREED TO SHARE THE PROFITS OF A BUSINESS CARRIED ON BY ALL OR ANY OF T HEM ACTING FOR ALL. PERSONS WHO HAVE ENTERED INTO PARTNERSHIP WITH ONE ANOTHER ARE CALLED INDIVIDUALLY 'PARTNERS' AND COLLECTIVELY 'A FIRM' A ND THE NAME UNDER WHICH THEIR BUSINESS IS CARRIED ON IS CALLED THE FIRM NAM E'. IT APPEARS FROM THIS DEFINITION THAT A FIRM CANNOT BE CALLED A SEPARATE ENTITY. THE SAME PERSONS WHO ARE INDIVIDUALLY CALLED PARTNE RS ARE COLLECTIVELY KNOWN AS THE FIRM FOR THE PURPOSE OF THEIR BUSINESS . THE FIRM ALWAYS CONSISTS OF PARTNERS AND THE PARTNERS ALWAYS ARE PARTS OF TH E FIRM. PROCE-DURALLY AND FOR LIMITED PURPOSE A FIRM HAS BEEN SEPARATELY DESC RIBED, BUT IN NO SENSE, CAN A FIRM BE CALLED A JURISTIC ENTITY LIKE A LIMIT ED COMPANY. THE NAME OF A FIRM IS THE BUSINESS NAME OF THE PARTNERS AND, THUS , WHEN A PERSON IN INDIVIDUAL CAPACITY TRANSFERS HIS ASSETS TO HIS OWN FIRM, IT CANNOT BE SAID THAT THE PARTNER IS TRANSFERRING HIS ASSETS TO A DI STINCT PERSON. WE AGREE WITH MR. PAL THAT A FIRM MAY HAVE A CHARACTER DISTINCT F ROM A PARTNER BUT SUCH ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 191 OF 230 DISTINCTION IS NOT BECAUSE THE FIRM AND THE PARTNER S ARE DIFFERENT ENTITIES. THE DISTINCTION IS FOR A LIMITED PURPOSE BECAUSE A FIRM IS ONLY A DESCRIPTIVE NAME OF THE BUSINESS OF THE PARTNERS. TO ILLUSTRATE , ORDINARILY, A FIRM COMES TO AN END WITH THE DEATH OF A PARTNER, BUT THERE MA Y BE CASES WHERE A FIRM CAN CONTINUE ALTHOUGH THE OLD PARTNERS HAVE DIED AN D THE NEW PARTNERS HAVE JOINED THE FIRM. THAT CONTINGENCY OCCURS WHERE THE TERMS OF THE PARTNERSHIP AGREEMENT PROVIDE THAT ON THE DEATH OF A PARTNER TH E FIRM WILL NOT BE DISSOLVED. JURISTICALLY SPEAKING, A PERSON IS ONE W HICH IS CAPABLE OF RIGHTS AND DUTIES. IN ANALYSING THE CONCEPT OF 'RIGHT', IT APPEARS THAT A 'PERSON' IS A SUBJECT AND OBJECT OF 'RIGHT'. SUCH A 'PERSON' MA Y BE NATURAL OR LEGAL OR ARTIFICIAL. A NATURAL PERSON, LIKE A HUMAN BEING, I S A BEING TO WHOM LAW ATTRIBUTES PERSONALITY IN ACCORDANCE WITH THE REALI TY AND TRUTH. A LEGAL AND ARTIFICIAL PERSON, HOWEVER, IS A PERSONA REAL OR IM AGINARY TO WHOM LAW ATTRIBUTES PERSONALITY BY WAY OF FICTION, WHEN THER E IS NONE IN FACT. THUS, NATURAL PERSON IS A PERSON IN FACT AS WELL AS IN LA W, WHEREAS A LEGAL OR ARTIFICIAL PERSON IS A PERSON IN LAW BUT NOT IN FAC T. A FIRM ACCORDINGLY IS NEITHER A NATURAL NOR AN ARTIFICIAL PERSON. IT IS N OT NATURAL, BECAUSE A FIRM REPRESENTS ONLY A RELATIONSHIP OR ARRANGEMENT BETWE EN PERSONS WHO CARRYON BUSINESS WITH A VIEW TO PROFIT. IT IS NOT A LIVING BEING. IF A FIRM REPRESENTS INDIVIDUAL PARTNERS AND, AS SUCH, IS CAL LED A NATURAL PERSON, THERE IS A RELATIONSHIP OF IDENTITY BETWEEN PARTNERS AND THEIR FIRM. NOR CAN IT BE CALLED A LEGAL OR ARTIFICIAL PERSON BECAUSE THERE I S NO GENERAL LAW BY WHICH ITS PERSONALITY IS RECOGNIZED. IT IS SUGGESTED THAT BECAUSE A FIRM CARRIES ON BUSINESS IN ITS FIRM NAME AND BECAUSE A FIRM CAN SU E AND BE SUED, UNDER THE CODE OF CIVIL PROCEDURE, IT HAS A DISTINCT PERSONAL ITY. SUCH PERSONALITY CAN AT BEST BE A MATTER OF PROCEDURAL LAW. IN SUBSTANCE , THE FIRM NAME IS ONLY THE BUSINESS NAME OF PARTNERS. IT IS ALLOWED TO SUE AND BE SUED AS A MATTER OF PROCEDURAL LAW BY WAY OF CONVENIENCE OR EXPEDIEN CY. IT IS NOT A CORPORATE BODY WITH THE RIGHT OF PERPETUAL SUCCESSI ON NOR ITS EXISTENCE DEPENDS UPON SUBSTANTIVE LAW. THE CREATION, CONTINU ATION AND EXTENSION OF A FIRM IS PURELY CONTRACTUAL AND DEPENDS ON THE AGREE MENT BETWEEN THE PARTNERS. IT IS IN THAT SENSE THAT MR. D. N. PRITT IN THE LATEST EDITION OF POLLOCK & MULLA'S THE SALE OF GOODS ACT AND THE PAR TNERSHIP ACT, 3RD EDITION, HAS MADE THE FOLLOWING OBSERVATIONS: 'A FIRM IS CURRENTLY REGARDED AS SOMETHING DISTINCT FROM ITS MEMBERS; THEY MAY HAVE CLAIMS ON THE FIRM'S PROPERTY BUT IT IS NO T THEIRS; IT HAS SEPARATE ACCOUNTS, AND IS THEIR DEBTOR AND CREDITOR. QUITE P OSSIBLY SOME PERSON WHO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 192 OF 230 IS NOT A MEMBER OF THE FIRM MAY HAVE AUTHORITY TO D O CERTAIN THINGS IN ITS NAME WHICH SOME OR ONE OF THE PARTNERS HAVE NOT. IN SHORT, THE FIRM IS TREATED VERY MUCH AS IF IT WERE A CORPORATION; IT I S AN ARTIFICAL OR 'MORAL' PERSON FOR BUSINESS PURPOSES ... '. THUS, A PARTNERSHIP FIRM IN INDIA, ALTHOUGH FOR LIM ITED PURPOSES, IS AN INDIVIDUAL OR PERSON OR AN ENTITY, A LEGAL PERSONAL ITY CANNOT BE ATTRIBUTED TO IT. IN THIS CONNECTION REFERENCE MAY BE MADE TO A J UDGMENT OF THE SUPREME COURT IN DULICHAND LAXMINARAYAN V. COMMISSIONER OF INCOME-TAX [1956] 29 ITR 535; [1956] SCR 154(SC), WHERE S. R. DAS C. J., AFTER DISCUSSING THE JURISTIC CHARACTER OF A PARTNERSHIP FIRM, HELD THAT A FIRM IS NOT AN ENTITY OR A PERSON IN LAW BUT MERELY A PERSON OR INDIVIDUA L AND A FIRM NAME IS THE COLLECTIVE NAME OF THESE INDIVIDUALS WHO CONSTITUTE THE FIRM. THE JUDICIAL COMMITTEE ALSO HAS HELD IN BHAGWANJI MORARJI GOCULD AS V. ALEMBIC COMMERCIAL WORKS [1948] LR 75 IA 147; AIR [1948] PC 100, THAT INDIAN LAW HAS NOT GIVEN LEGAL PERSONALITY TO A FIRM APART FROM ITS PARTNERS. THIS VIEW IS ALSO SUPPORTED BY ANOTHER DECISION OF THE S UPREME COURT IN COMMISSIONER OF INCOME-TAX V. A. W. FIGGIES & CO. [ 1953] 24 ITR 405; [1954]SCR 171 (SC) JAMES MACKINTOSH IN HIS BOOK ON ROMAN LAW IN MODERN PRACTICE (TAGORE LAW LECTURES, 1933) AT PAGE 126, HAS MADE THE FOLLOWING OBSERVATIONS: 'IN SCOTLAND AND ON THE CONTINENT GENERALLY THE FIR M IS RECOGNISED AS A PERSON DISTINCT FROM THE PARTNER; IN ENGLAND IT IS NOT AND HERE ENGLISH AND ROMAN LAWS ARE IN ACCORD. THE LATTER HELD THE PERSO NS ENGAGED IN ORDINARY PARTNERSHIP (SOCIETAS) OR JOINT ADVENTURE ARE JUST SO MANY INDIVIDUALS ACTING TOGETHER UNDER CONTRACT; THE PROPERTY THEY CONTRIBU TE OR ACQUIRE IS THEIR JOINT PROPERTY; EVERY DEBT DUE TO THE FIRM BELONGS IN RATEABLE SHARES TO THE VARIOUS PARTNERS, AND THEY ARE INDIVIDUALLY LIABLE FOR THE DEBTS OWING BY THE FIRM'. THUS, IT IS OBVIOUS THAT UNLIKE A COMPANY WHERE THE RE IS PERPETUAL SUCCESSION A FIRM, ALTHOUGH AN ENTITY FOR A LIMITED PRPOSE, CANNOT BE CONSIDERED AS A JURISTIC PERSON. IN THE INSTANT CAS E, THE ASSESSEE HAS GOT 50 PER CENT. SHARE IN THE FUND AND THE OTHER PARTNER, PATEL ENGINEERING CO., WHO ALSO OWNED THE REMAINING 50 PER CENT. SHARE IN THE DISPOSAL MACHINERY ALSO TRANSFERRED HIS SHARE IN THE PARTNERSHIP CAPIT AL. THUS, THE ASSESSEE AND PATEL ENGINEERING CO. HAVE ONLY TRANSFERRED THEIR R ESPECTIVE INTERESTS IN THE DISPOSAL MACHINERY TO THEIR OWN FIRM. THE TRANSFER, IF AT ALL, IS A TRANSFER TO ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 193 OF 230 ITSELF OR TO ITS OWN ACCOUNT. WE ARE CONVINCED THAT THE NATURE OF THE TRANSACTION COULD AT BEST BE DESCRIBED AS A READJUS TMENT OF THEIR ASSETS IN SUCH A WAY THAT THEY CAN DO THEIR BUSINESS IN A DIF FERENT WAY. THERE IS NO QUESTION OF OWNERSHIP BEING TRANSFERRED FROM ONE DI STINCT PERSON TO ANOTHER NOR WAS THERE ANY CONSIDERATION RECEIVED BY ONE IND IVIDUAL FROM THE OTHER. THUS, THERE IS NO QUESTION OF THE ASSESSEE MAKING A NY PROFIT OR GAIN AND, THEREFORE, THE MERE FACT THAT THE ASSESSEE TRANSFER RED ITS INTEREST TO THE ASSESSEE'S FIRM AT AN APPRECIATED VALUE DOES NOT MA KE THE ASSESSEE LIABLE TO PAY TAX ON THE DIFFERENCE BETWEEN THE ORIGINAL PRIC E AND THE APPRECIATED PRICE. 42.4 UNDER THE INCOME TAX ACT WHAT IS CHARGEABLE TO TAX IS THE INCOME ACCRUING TO THE ASSESSEE. THE INCOME CAN BE SAID TO HAVE ACCRUED PROVIDED THE ASSESSEE EITHER RECEIVES THE SUM OR ANY LEGALLY ENFORCEABLE RIGHT IS ACQUIRED. SUCH RIGHT SHOULD BE ACCRUING IMMEDIATELY AND SHOULD NOT BE INCHOATE OR CONTINGENT. THE AMOUNT CREDITED TO THE ACCOUNT OF THE PARTNER IS NOT A DEBT DUE BY THE FIRM TO THE PARTNER. THE PARTNER C ANNOT LEGALLY ENFORCE THE CLAIM TO RECEIVE THE AMOUNT STANDING TO THE CREDIT TO HIS ACCOUNT IN THE BOOKS OF THE FIRM. THUS THE AMOUNT DUE BY THE FIRM TO THE PARTNER STANDING TO THE CRED IT OF PARTNERS ACCOUNT WHETHER BY WAY OF CAPITAL OR BY WAY OF LOAN WILL NOT BE A LEGALLY ENF ORCEABLE RIGHT IN FAVOUR OF PARTNER AGAINST THE FIRM OR THE OTHER PARTNERS CONSTITUTING SUCH FIRM. FOR THIS PURPOSE THE ENTRIES MADE IN THE BOOKS OF ACCOUNT OF THE ASSESSEE ARE NOT THE CRITER IA. THIS VIEW HAS BEEN REITERATED BY VARIOUS COURTS TIME AND AGAIN INCLUDING SUPREME COU RT. IN THE CASE OF TUTICORIN ALKALIES CHEMICALS & FERTILISERS LIMITED VS. CIT (227 ITR 17 2) THE FULL BENCH OF HONBLE SUPREME COURT OBSERVED : ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 194 OF 230 IT IS TRUE THAT THE SUPREME COURT HAS VERY OFTEN R EFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MADE BY A COMPANY OR VA LUE OF THE ASSETS OF A COMPANY. BUT WHEN THE QUESTION IS WHETHER A RECEIP T OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FROM THE RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIP LES OF LAW AND NOT IN ACCORDANCE WITH ACCOUNTANCY PRACTICE. ACCOUNTING P RACTICE CANNOT OVERRIDE SECTION 56 OR ANY OTHER PROVISION OF THE ACT. SINCE THE FACTS ADMITTED ARE THAT THE LAND HELD BY THE ASSESSEE WAS HELD AS STOCK-IN-TRADE TILL IT WAS INTRODUCED IN THE PARTNERSHIP FIRM AND SINCE THE SAID TRANSACTION AS ALSO THE FIRM SO CONSTITUTED ARE FOUND TO BE GENUINE, BY INTRODUCTIO N OF SUCH STOCK-IN-TRADE NO INCOME ACCRUES TO THE ASSESSEE AS CHARGEABLE UNDER THE HEA D PROFITS AND GAINS OF BUSINESS OR PROFESSION. 42.5 THE REASON GIVEN IN THE DRAFT ORDER FOR HOLDIN G THAT SURPLUS IS CHARGEABLE TO TAX AS BUSINESS INCOME IS BECAUSE OF: 1. THE AMOUNT IS CREDITED IN THE PROFIT AND LOSS ACCOU NT OF THE ASSESSEE. 2. THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F MCDOWELL AND CO. LTD. 154 ITR 148 APPLIES. 3. THE ASSESSEE HAS WITHDRAWN SUBSTANTIAL SUM FROM THE FIRM IN SUBSEQUENT YEARS. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 195 OF 230 42.5.1 AS DISCUSSED EARLIER THE ENTRIES IN THE BOO KS OF ACCOUNTS ARE NOT THE DETERMINATIVE FACTOR FOR COMPUTATION OF INCOME UNDER THE INCOME T AX ACT. FOR THIS PROPOSITION, FURTHER RELIANCE IS PLACED ON FOLLOWING DECISIONS: I. KEDARNATH JUTE MFG. CO. LTD. V. COMMISSIONER OF INC OME TAX [1971]82 ITR 363 (SC). II. SUTLEJ COTTON MILLS LTD. VS. CIT (1979) 116 ITR 1 (S C). III. UNITED COMMERCIAL BANK VS. COMMISSIONER OF INCOME T AX [1999] 240 ITR 355 (SC). IV. KARNATAKA SMALL SCALE INDUSTRIES DEVELOPMENT CORPN. LTD. VS. COMMISSIONER OF INCOME TAX [2003] 258 ITR 770 (SC). 42.5.2 AS REGARDS APPLICABILITY OF DECISION OF HON BLE SUPREME COURT IN THE CASE OF MCDOWELL AND CO. (SUPRA), THE FACTS IN THE SAID CASE ARE ENT IRELY DIFFERENT THAN THE FACTS OF THE PRESENT CASE. IN THE SAID CASE THE TRANSACTION WAS FOUND A S A COLOURABLE DEVICE, WHEREAS IN THE PRESENT CASE THE TRANSACTION IS NOT FOUND TO BE A C OLOURABLE DEVICE. THE ASSESSEE IS GENUINE; THE LAND WAS HELD BY IT AS STOCK-IN-TRADE AND IS AL SO FOUND TO BE GENUINE. THE FIRM CONSTITUTED WHEREIN THE LAND WAS BROUGHT IN AS CAPITAL CONTRIBU TION IS ALSO FOUND TO BE GENUINE. THEREFORE, THERE IS NO REASON TO HOLD THAT MERELY B ECAUSE HIGHER AMOUNT WAS RECORDED IN THE CAPITAL ACCOUNT OF THE ASSESSEE PARTNER, THE TRANSA CTION BECOMES A COLOURABLE DEVICE. ON THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 196 OF 230 CONTRARY VALUE OF THE LAND AS AGREED BY THE PARTNER S ON THE BASIS OF VALUATION REPORT AT THE TIME OF FORMATION OF THE FIRM WAS 11.5 CRORES. THE REFORE WHEN IDENTICAL AMOUNT IS CREDITED TO THE ACCOUNT OF ASSESSEE AS PARTNER IN THE BOOKS OF ACCOUNT OF FIRM, SUCH TRANSACTION CANNOT BE BRANDED AS COLOURABLE DEVICE SO AS TO BRING THE SURPLUS AS CHARGEABLE TO TAX AS BUSINESS INCOME. THEREFORE THE RATIO LAID DOWN BY HONBLE S UPREME COURT IN THE CASE OF MCDOWELL & CO. CANNOT BE APPLIED. HONBLE SUPREME COURT ITSEL F IN ITS LATER DECISIONS IN THE CASE OF CWT VS. ARVIND NAROTTAM (173 ITR 479) HELD : 9. IT IS VEHEMENTLY URGED BY DR. GAURI SHANKER THAT THE APPROACH TO BE ADOPTED IN THIS CASE IS NOT THAT WHICH FINDS FAVOUR UNDER THE INCOME-TAX LAW, AND DIFFERENT CONSIDERATIONS PREVAIL UNDER THE ACT. AS I AM PROC EEDING ON THE BASIS OF THE TRUE CONSTRUCTION OF THE DEEDS OF SETTLEMENT, I FAIL TO SEE ANY SUBSTANCE IN THAT CONTENTION. RELIANCE WAS ALSO PLACED BY THE LEARNE D COUNSEL FOR THE REVENUE ON MCDOWELL & CO. LTD. VS CTO [1985] 154 ITR 148 (SC). THAT DECISION CANNOT ADVANCE THE CASE OF THE REVENUE BECAUSE THE LANGUAG E OF THE DEEDS OF SETTLEMENT IS PLAIN AND ADMITS OF NO AMBIGUITY. JUSTICE MUKHERJEE AGREEING WITH THE JUDGMENT OF HONB LE CHIEF JUSTICE FURTHER OBSERVED : 2. DR. V. GAURI SHANKER APPEARING ON BEHALF OF THE REVENUE MADE AN APPEAL BEFORE US STATING THAT WE SHOULD REALLY CONSTRUE TH E THREE TRUST DEEDS TOGETHER AND SEE THE GAME OF THE HIDDEN PURPOSE BEHIND THESE T RUST DEEDS WHICH WERE IN FACT, FOR THE SOLE AND EXCLUSIVE BENEFIT OF THE ASSESSEE. HE DREW OUR ATTENTION TO THE OBSERVATIONS OF JUSTICE CHINNAPPA REDDY, WITH WHICH OTHER LEARNED JUDGES OF THE FULL BENCH AGREED IN MCDOWELL & CO. LTD.S CASE (SU PRA). HE INVITED US THAT HAVING ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 197 OF 230 REGARD TO THE TAXING STATUTE THE TAX AVOIDANCE DEVI CE SHOULD BE EXPOSED. JUSTICE CHINNAPPA REDDY HAS NOTICED THE CHANGE IN JUDICIAL A TTITUDE TO THE TAX AVOIDANCE DEVICES. JUSTICE REDDY MENTIONED THAT IN THE COUNT RY OF ITS BIRTH THE PRINCIPLES OF WESTMINSTER OF CONDONING TAX AVOIDANCE HAVE BEEN GI VEN A DECENT BURIAL. IN THAT VERY COUNTRY, THE PHRASE TAX AVOIDANCE IS NO LONG ER CONDONED OR LOOKED UPON WITH SYMPATHY. 3. IT IS TRUE THAT TAX AVOIDANCE IN ANY UNDER-DEVE LOPED DEVELOPING ECONOMY SHOULD NOT BE ENCOURAGED ON PRACTICAL AS WELL AS ID EOLOGICAL GROUNDS. ONE WOULD WISH, AS NOTED BY REDDY, J. THAT ONE COULD GET THE ENTHUSIASM OF JUSTICE HOLMES THAT TAXES ARE THE PRICE OF CIVILIZATION AND ONE WO ULD LIKE TO PAY THAT PRICE TO BUY CIVILIZATION. BUT THE QUESTION WHICH MANY ORDINARY TAXPAYERS VERY OFTEN IN A COUNTRY OF SHORTAGES WITH OSTENTIOUS CONSUMPTION AN D DEPRIVATION FOR THE LARGE MASSES ASK IS, DOES HE WITH TAXES BUY CIVILIZATION OR DOES HE FACILITATE THE WASTES AND OSTENTIOUSNESS OF THE FEW. UNLESS WASTES AND O STENTIOUSNESS IN THE GOVERNMENTS SPENDING ARE AVOIDED OR ESCHEWED, NO A MOUNT OF MORAL SERMONS WOULD CHANGE PEOPLE ATTITUDE TO TAX AVOIDANCE. 4. IN ANY EVENT, HOWEVER, WHERE THE TRUE EFFECT ON THE CONSTRUCTION OF THE DEED IS CLEAR, AS IN THIS CASE, THE APPEAL TO DISCOURAGE TA X AVOIDANCE IS NOT A RELEVANT CONSIDERATION. BUT SINCE IT WAS MADE IT HAS TO BE NOTED AND REJECTED. WITH THESE OBSERVATIONS I AGREE THE OBSERVATION OF HONBLE SUPREME COURT IN MCDOWEL L & CO. LIMITED (SUPRA) HAS BEEN FURTHER WATERED DOWN BY HONBLE SUPREME COURT ITSEL F IN ITS LATER DECISIONS IN THE CASE OF ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 198 OF 230 UNION OF INDIA VS. AZADI BACHAO ANDOLAN (263 ITR 70 6), [2003] 132 TAXMAN 373 (SC) WHEREIN THE RULE IN MCDOWELL CASE (SUPRA) HAS BEEN EXPLAINE D IN FOLLOWING WORDS : FAR FROM BEING EXORCISED IN ITS COUNTRY OF ORIGIN, IRC VS. DUKE OF WESTMINSTER [1936] AC 1 CONTINUES TO BE ALIVE AND KICKING IN EN GLAND. INTERESTINGLY, EVEN IN MCDOWELL, THOUGH CHINNAPPA REDDY, J., DISMISSED THE OBSERVATIONS OF J.C. SHAH, J. IN CIT VS. A. RAMAN & CO. [1968] 67 ITR 11 (SC) BASED ON DUKE OF WESTMINSTERS CASE (SUPRA) AND IRC VS. FISHERS EXECUTORS [1926] AC 95, IT DOES NOT APPEAR THAT THE REST OF THE JUDGES OF THE CONSTITUTIONAL BENCH CONTRIBUTED TO THIS RADICAL THINKING. [PARA 130]. THE BASIC ASSUMPTION MADE IN THE JUDGMENT OF CHINNAP PA REDDY, J. IN MCDOWELL & CO. LTD.S CASE (SUPRA) THAT THE PRINCIPLE IN DUKE OF WESTMINSTERS CASE (SUPRA) HAS BEN DEPARTED FROM SUBSEQUENTLY BY THE HOUSE OF LORD S IN ENGLAND, IS NOT CORRECT. [PARA 131]. ONE CANNOT AGREE WITH THE VIEW THAT DUKE OF WESTMIN STERS CASE (SUPRA) IS DEAD, OR THAT ITS GHOST HAS BEEN EXORCISED IN ENGLAND. T HE HOUSE OF LORDS DOES NOT SEEM TO THINK SO, THE PRINCIPLE IN DUKE OF WESTMINSTERS CASE (SUPRA) IS VERY MUCH ALIVE AND KICKING IN HE COUNTRY OF ITS BIRTH. AND AS FAR AS INDIA CONCERNED, THE OBSERVATIONS OF SHAH, J., IN A RAMAN & CO. (SUPRA) ARE VERY MUCH RELEVANT EVEN TODAY. [PARA 132]. ONE MAY USEFULLY REFER TO THE JUDGMENT OF THE MADRAS HIGH COURT IN M.V. VALLIAPPAN VS. CIT [1988] 170 ITR 238/37 TAXMAN 46 WHICH HAS RIGHTLY READ AS LAYING DOWN THAT EVERY ATTEMPT AT TAX PLANNING IS I LLEGITIMATE AND MUST BE IGNORED, OR THAT EVERY TRANSACTION OR ARRANGEMENT W HICH IS PERFECTLY PERMISSIBLE UNDER LAW, WHICH HAS THE EFFECT OF REDUCING THE TAX BURDEN OF THE ASSESSEE MUST BE LOOKED UPON WITH DISFAVOUR. THOUGH THE MADRAS HIGH COURT HAD OCCASION TO REFER ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 199 OF 230 TO THE JUDGMENT OF THE PRIVY COUNCIL IN IRC VS. CHAL LENGE CORPN. LTD. [1987] 2 WLR 24, AND DID NOT HAVE THE BENEFIT OF THE HOUSE OF LO RDSS PRONOUNCEMENT IN CRAVEN VS. WHITE [1988] 3 ALL ER 495, THE VIEW TAKEN BY TH E MADRAS HIGH COURT APPEARS TO BE CORRECT [PARA 132]. NOT ONLY IS THE PRINCIPLE IN DUKE OF WESTMINSTERS CASE (SUPRA) ALIVE AND KICKING IN ENGLAND, BUT IT ALSO SEEMS TO HAVE ACQUIRED JUDICIAL BENEDICTION OF THE CONSTITUTIONAL BENCH IN INDIA, NOTWITHSTANDING THE TEMPORARY TURBULENCE CREATED IN THE WAKE OF MCDOWELL & CO. LTD.S CASE (SUPRA). [PARA 135]. IN WAMAN RAO VS. UNION OF INDIA [1981] 2 SCC 362 AN D MINERVA MILLS LTD. VS. UNION OF INDIA [1980] 3 SCC 625 THE COURT CONSIDERE D THE IMPORT OF THE WORD DEVICE WITH REFERENCE TO ARTICLE 31B WHICH PROVID ES THAT THE ACTS AND REGULATIONS SPECIFIED IN NINTH SCHEDULE SHALL NOT BE DEEMED TO BE VOID OR EVEN TO HAVE BECOME VOID ON THE GROUND THAT THEY ARE INCONSISTENT WITH THE FUNDAMENTAL RIGHTS. THE USE OF THE WORD DEVICE WAS NOT PEJORATIVE, BUT TO DESCRIBE A PROVISION OF LAW INTENDED TO PRODUCE A CERTAIN LEGAL RESULT. [PARA 143]. IF THE COURT FINDS THAT NOTWITHSTANDING A SERIES OF LEGAL STEPS TAKEN BY AN ASSESSEE, THE INTENDED LEGAL RESULT HAS NOT BEEN ACHIEVED, TH E COURT MIGHT BE JUSTIFIED IN OVERLOOKING THE INTERMEDIATE STEPS, BUT IT WOULD NO T BE PERMISSIBLE FOR THE COURT TO TREAT THE INTERVENING LEGAL STEPS AS NON EST BAS ED UPON SOME HYPOTHETICAL ASSESSMENT OF THE REAL MOTIVE OF THE ASSESSEE. T HE COURT MUST DEAL WITH WHAT IS TANGIBLE IN AN OBJECTIVE MANNER AND CANNOT AFFORD TO CHASE A WILL-O-THE-WISP. THE JUDGMENT OF THE PRIVY COUNCIL IN BANK OF CHETTIN AD LTD. VS. CIT [1940] 8 ITR 522 (PC), WHOLEHEARTEDLY APPROVING THE DICTA IN THE PA SSAGE FROM THE OPINION OF LORD RUSSEL IN DUKE OF WESTMINSTERS CASE (SUPRA), WAS THE LAW IN INDIA WHEN THE CONSTITUTION CAME INTO FORCE. THIS WAS THE LAW IN FORCE HEN, WHICH CONTINUED BY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 200 OF 230 REASON OF ARTICLE 372. UNLESS ABROGATED BY AN ACT OF PARLIAMENT, OR BY A CLEAR PRONOUNCEMENT OF THE COURT, THIS LEGAL PRINCIPLE WO ULD CONTINUE TO HOLD GOOD. HAVING ANXIOUSLY SCANNED MCDOWELL & CO. LTD.S CASE (SUPRA), ONE FINDS NO REFERENCE THEREIN TO HAVING DISSENTED FROM OR OVERR ULED THE DECISION OF THE PRIVY COUNCIL IN BANK OF CHETTINADS CASE (SUPRA). IF AN Y, THE PRINCIPLE APPEARS TO HAVE BEEN REITERATED WITH APPROVAL BY THE CONSTITUTIONAL BENCH OF THE COURT IN MATHURAM AGRAWAL VS. STATE OF MADHYA PRADESH [1999] 8 SCC 667. THUS, ONE CANNOT ACCEPT THE CONTENTION OF THE RESPONDENTS THA T THERE HAS BEEN A VERY DRASTIC CHANGE IN THE FISCAL JURISPRUDENCE, IN INDIA, AS WOU LD ENTAIL A DEPARTURE. FROM DUKE OF WESTMINSTERS CASE (SUPRA) TO BANK OF CHETT INADS CASE (SUPRA) TO MATHURAM AGRAWALS CASE (SUPRA), DESPITE THE HICCUP S OF MCDOWELL, THE LAW HAS REMAINED THE SAME [PARA 145]. ONE COULD NOT ACCEPT THE SUBMISSION THAT AN ACT WHI CH IS OTHERWISE VALID IN LAW CAN BE TREATED AS NON EST MERELY ON THE BASIS OF SO ME UNDERLYING MOTIVE SUPPOSEDLY RESULTING IN SOME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INTERESTS, AS PERCEIVED BY THE RESPONDENTS. [PARA 1 46]. THEREFORE, THE SURPLUS CANNOT BE BROUGHT TO TAX AS BUSINESS INCOME APPLYING THE RATIO LAID DOWN IN THE CASE OF MCDOWELL & CO. (SUPRA). 42.5.3 ANOTHER REASON ASCRIBED IS THAT THE ASSESSE E HAS WITHDRAWN HUGE SUM FROM THE FIRM IN SUBSEQUENT YEARS AND THE FIGURES ARE NOTED IN PARA 16.21 OF THE DRAFT ORDER. FROM THE FIGURES AS NOTED ITSELF, IT IS CLEAR THAT TILL 31/03/1996 T HE ASSESSEE HAS WITHDRAWN ONLY SO MUCH OF THE SUM AS IS EVEN LESS THAN THE COST OF LAND INTRODUCE D AS ITS CAPITAL CONTRIBUTION. SUBSTANTIAL ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 201 OF 230 SUM IS WITHDRAWN ONLY DURING FINANCIAL YEAR RELEVAN T TO ASSESSMENT YEAR 1997-1998. HOW THE AMOUNT WITHDRAWN FIVE YEARS AFTER THE INTRODUCTION OF CAPITAL WILL DETERMINE THE NATURE OF TRANSACTION AS A COLOURABLE DEVICE IN THE YEAR WHEN SUCH LAND WAS CONTRIBUTED AS CAPITAL CONTRIBUTION IN THE FIRM. WHAT IS TO BE TAXED IS T HE INCOME ACCRUING OR ARISING DURING THE YEAR AND THE TRANSACTION CANNOT BE VIEWED AT THAT POINT OF TIME ON THE BASIS OF LIKELY EFFECT FIVE YEARS AFTER THE TRANSACTION HAS BEEN EFFECTED. THE REFORE IN MY HUMBLE OPINION THE WITHDRAWAL BY THE ASSESSEE FROM THE FIRM DURING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT 1997-1998 WILL NOT DETERMINE THE NATURE OF TRANSACT ION ON 23/03/1992 WHEN THE LAND WAS CONTRIBUTED AS CAPITAL CONTRIBUTION IN THE FIRM IN WHICH THE ASSESSEE BECAME PARTNER. 42.5.4 THE WORD OF CAUTION AS GIVEN BY HONBLE S UPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPRA) WHICH HAS BEEN HEAVILY RELIED UPON IN THE DRAFT ORDER IS IN THE WORDS OF HONBLE SUPREME COURT ITSELF IN FOLLOWING CONTEXT A S OBSERVED IN PAGE 523 OF THE REPORT AS EXTRACTED HEREIN WE HAVE DECIDED THESE APPEALS ON THE ASSUMPTION TH AT THE PARTNERSHIP FIRM IN QUESTION IS A GENUINE FIRM AND NOT THE RESULT OF A SHAM OR UNREAL TRANSACTION AND THAT THE TRANSFER BY THE PARTNER OF HIS PERSONAL AS SET TO PARTNERSHIP FIRM REPRESENTS A GENUINE INTENTION TO CONTRIBUTE TO THE SHARE CAPITAL OF THE FIRM FOR THE PURPOSE OF CARRYING ON THE PARTNERSHIP BUSINESS. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 202 OF 230 IN THE PRESENT CASE, THE FACT, AS ALSO THE DRAFT OR DER REVEAL THAT THE FIRM IS GENUINE AND EVEN THE TRANSFER BY THE PARTNER OF HIS ASSET TO THE PAR TNERSHIP FIRM IS A GENUINE INTENTION TO CONTRIBUTE TO THE CAPITAL OF THE FIRM FOR THE PURPO SE OF CARRYING ON THE PARTNERSHIP BUSINESS. IT IS NOT A CASE THAT THE LAND WAS NOT CONTRIBUTED IN THE FIRM FOR THE INTENDED PURPOSE BUT MERELY TO WALK AWAY WITH THE FUND INTRODUCED BY OTH ER PARTNERS. ON THE CONTRARY THE LAND HAS BEEN DEVELOPED BY THE FIRM BY CONSTRUCTING BUIL DING THEREON AND ALSO SUBSEQUENT SALE THEREOF. THEREFORE, NEITHER THE FIRM IS INGENUINE NOR THE TRANSACTION OF CONTRIBUTING TO THE CAPITAL OF THE FIRM IS AN INGENUINE INTENTION. THE ASSESSEE HOLDING THE LAND CAN EITHER DEVELOP IT ITSELF OR THE LAND CAN BE DEVELOPED BY T HE FIRM IN WHICH THE ASSESSEE IS A PARTNER. IN BOTH THE CASES THE INTENDED PURPOSE OF DEVELOPIN G THE LAND BY THE ASSESSEE IS CARRIED ON AND CANNOT BE VIEWED WITH SUSPICION OR TO HOLD IT A S A COLOURABLE DEVICE. 42.6 AFTER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI (SUPRA) THE LAW AS REGARDS CHARGING OF CAPITAL GAIN HAS BEEN AM ENDED BY INTRODUCTION OF SECTION 45 (3) OF THE ACT. EVEN THE DEFINITION OF WORD TRANSFER IN SECTION 2(47) OF THE ACT IS SUBSTITUTED W.E.F. 01/04/1985 BUT THE DEFINITION IS ONLY IN RELATION T O A CAPITAL ASSET AND NOT FOR STOCK-IN- TRADE. THE DEFINITION OF CAPITAL ASSET ITSELF E XCLUDES THE STOCK-IN-TRADE. IN ABSENCE OF ANY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 203 OF 230 SPECIFIC PROVISION IN THE INCOME TAX ACT TO TAX SUC H NATURE OF TRANSACTION WITHIN THE AMBIT OF TAXATION, THE TAX CANNOT BE IMPOSED MERELY ON THE G ROUND OF MORALITY. IF THE CHARGE FAILS, NO WORDS OF MORALITY OR EQUITY CAN BRING TO TAX A TRAN SACTION, AS HELD IN THE FOLLOWING CASES : I. COMMISSIONER OF INCOME TAX VS. KESHAVLAL LALLUBHAI PATEL [1965]55 ITR 637 (SC). II. SMT. MOHINI THAPAR VS. COMMISSIONER OF INCOME TAX [ 1972] 83 ITR 208 (SC). III. COMMISSIONER OF INCOME TAX VS. C.P. SARATHY MUDALIA R [1972] 83 ITR 170 (SC). I THEREFORE HOLD THAT THE ABOVE NATURE OF TRANSACTI ON CANNOT BE CONSIDERED AS CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. 43. IN THE DRAFT ORDER IT IS ALSO HELD THAT WHAT WA S TRANSFERRED WAS A CAPITAL ASSET AND HENCE IN VIEW OF SECTION 45(3) OF THE ACT THE SURPLUS IS ALS O TAXABLE UNDER THE HEAD CAPITAL GAINS. IN PARA 16.39 IT HAS BEEN CONCLUDED AS UNDER : IN OTHER WORDS, WHATEVER MAY BE THE CHARACTER OF T HE PROPERTY IN THE PARTNERS HAND BEFORE THE SAME IS BROUGHT IN BY THE PARTNER A S CAPITAL CONTRIBUTION WHEN A PARTNERSHIP IS FORMED AND HE BECOMES A PARTNER, THE PROPERTY BROUGHT IN PARTAKES THE CHARACTER OF A CAPITAL ASSET, ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 204 OF 230 SIMILARLY IN PARA 16.40 IT HAS BEEN CONCLUDED THAT - IN THE PRESENT CASE, WHEN THE ASSESSEE WITHDRAWS S OME PLOT OF LAND BEING PART OF STOCK-IN-TRADE FOR MAKING CONTRIBUTION TO A PARTNER SHIP FIRM AS ITS CAPITAL AT THE TIME WHEN HE BECAME A PARTNER, THERE IS A CONVERSIO N ON WITHDRAWAL OF STOCK-IN- TRADE INTO CAPITAL ASSET IN AS MUCH AS, AS ALREADY DISCUSSED ABOVE, THE ACT OF CONTRIBUTING PERSONAL ASSET INTO A PARTNERSHIP FIRM AS ITS CAPITAL WHEN ASSESSEE BECOMES A PARTNER IN A FIRM IS A TRANSACTION ON CAP ITAL FIELD. IN VIEW OF THE ABOVE FINDING IN THE DRAFT ORDER THE SURPLUS IS TREATED AS CAPITAL GAIN AND BROUGHT TO TAX UNDER SECTION 45(3) OF THE ACT. I AM UNABLE TO CONCUR WITH THE ABOVE FINDING FOR TH E REASONS STATED BELOW: 43.1 WHAT WAS TRANSFERRED WAS WHETHER A CAPITAL ASS ET OR STOCK-IN-TRADE WAS NEVER THE SUBJECT MATTER OF DISPUTE BEFORE THE AUTHORITIES BELOW. ON THE CONTRARY THE CONCURRENT FINDING BY THE ASSESSING OFFICER AND BY CIT(A) IS THAT WHAT WA S INTRODUCED BY THE PARTNER WAS ITS STOCK- IN-TRADE AND WAS CHARGED TO TAX ONLY UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. EVEN IN THE DRAFT ORDER IT HAS BEEN A CCEPTED THAT THE LAND WAS HELD BY THE ASSESSEE AS ITS STOCK-IN-TRADE IMMEDIATELY BEFORE I T WAS INTRODUCED AS ITS CAPITAL CONTRIBUTION ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 205 OF 230 IN THE FIRM OF WHICH IT BECAME THE PARTNER. IT IS NEVER DEMONSTRATED OR CLAIMED BY THE ASSESSEE THAT SUCH LAND WAS EVER CONVERTED FROM STO CK-IN-TRADE TO CAPITAL ASSET. WHEN THE ASSESSEE HELD THE LAND AS STOCK-IN-TRADE, HE COULD DEAL WITH SUCH LAND EITHER HIMSELF ALONE OR IN PARTNERSHIP WITH OTHER PARTNERS. THE PARTNERSHI P IS NOT A DISTINCT LEGAL ENTITY FROM THE PARTNERS CONSTITUTING IT. THE ASSESSEE CHOSE TO DE AL WITH THE LAND IN PARTNERSHIP. IN SUCH A SITUATION THE ASSESSEE CONTINUES TO DEAL WITH SUCH LAND AS ITS STOCK-IN-TRADE ONLY. A PARTNER MAY CONTRIBUTE HIS PART OF CAPITAL IN ANY FORM AND BRINGING DIFFERENT NATURE OF ASSETS WHETHER STOCK-IN-TRADE OR CAPITAL ASSET. BUT IN ABSENCE OF ANY SPECIFIC ACTION ON THE PART OF ASSESSEE TO CONVERT SUCH LAND FROM STOCK-IN-TRADE TO CAPITAL ASSET, THE TRIBUNAL IS NOT COMPETENT TO CHANGE SUCH NATURE WHEN IT WAS NEVER AN ISSUE BEFOR E IT. 43.2 THE DRAFT ORDER WHILE HOLDING THAT IT HAS WIDE ST POWER U/S 254(1) SO AS TO PASS SUCH ORDERS THEREON AS IT THINKS FIT FAIL TO NOTICE THAT THE P OWERS ARE LIMITED BY THE WORDS THEREON CONTAINED IN SECTION 254(1) OF THE ACT ITSELF. APPEAL ON THE ISSUES INVOLVED HAS BEEN FILED BY THE ASSESSEE ONLY. THERE IS NO CROSS APPEAL OR CROSS OBJECTIONS BY THE DEPARTMENT. SO DEPARTMENTS ROLE IS ONLY TO DEFEND THE ORDERS OF AO OR FOR THAT MATTER CIT(A). ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 206 OF 230 THE ISSUE TO BE DECIDED BY THE ITAT SHOULD ARISE FR OM THE ORDERS OF THE AUTHORITIES BELOW. THE ASSESSEE CANNOT BE PUT INTO ANY ADVERSE SITUATI ON AT THIS STAGE OF THE APPEAL AS IS A SETTLED LAW ON THIS MATTER. VARIOUS AUTHORITIES WHILE DEALING WITH THE POWERS O F ITAT, IN AN APPEAL BEFORE IT, HAS HELD AS UNDER: - HONBLE BOMBAY HIGH COURT IN THE CASE OF THE MOTOR UNION INSURANCE CO. LTD. VS. CIT (13 ITR 272), HAS HELD AS UNDER : - THE WORD THEREON USED IN SECTION 33(4) OF THE IN DIAN INCOME TAX ACT ONLY MEANS ON THE APPEAL WHICH MUST MEAN ON THE GROUND S RAISED IN THE APPEAL. THE SUB SECTION ONLY GIVES POWER TO THE APPELLATE TRIBU NAL TO GIVE ITS DECISION AND PAS ORDERS IN RESPECT OF ALL GROUNDS URGED ON BEHALF OF THE APPELLANT IN RESPECT OF THE DECISION APPEALED AGAINST. IN DECIDING THOSE GROUN DS IT CAN PASS APPROPRIATE ORDERS. BUT IT IS NOT OPEN TO THE TRIBUNAL ITSELF TO RAISE A GROUND OR PERMIT THE PARTY, WHO HAS NOT APPEALED TO RAISE A GROUND, WHIC H WILL WORK ADVERSELY TO THE APPELLANT. THE WORDS OF THE SECTION ARE NOT WIDE ENOUGH TO I NCLUDE A POWER TO ENHANCEMENT, WITHOUT AN APPEAL BY THE COMMISSIONER. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 207 OF 230 RULE 21 OF THE APPELLANT TRIBUNAL RULES, IN TERMS, LIMITS THE APPELLANT TO THE GROUNDS URGED IN HIS MEMORANDUM OF APPEAL AND PRESC RIBES THAT IF HE WISHES TO RAISE ANY FURTHER GROUND, HE HAS TO DO SO AFTER OBT AINING THE LEAVE OF THE TRIBUNAL. THE PROVISION ONLY SAYS THAT THE TRIBUNAL IS NOT OB LIGED TO REST ITS DECISION ON THE GROUNDS URGED BY THE APPELLANT AND DOES NOT ENLARGE THE POWERS OF THE TRIBUNAL TO RAISE GROUNDS OF APPEAL AGAINST THE APPELLANT. IT RECOGNIZES THE PRINCIPLE THAT THE JUDGMENT OF THE LOWER COURT MAY BE SUPPORTED ON ANY GROUNDS, EVEN THOUGH IT IS NOT RAISED IN THE MEMORANDUM OF APPEAL. THAT, HOWE VER, DOES NOT ALLOW THE TRIBUNAL TO SUGGEST ANOTHER MODE OF ASSESSMENT ALTO GETHER. (EMPHASIS SUPPLIED) HONBLE BOMBAY HIGH COURT IN INDIRA BALAKRISHNA, MA NAGER OF ESTATE OF BALAKRISHNA PURSHOTTOM PURANI VS. CIT (30 ITR 320), HAS HELD AS UNDER:- HELD FURTHER, THAT IN GIVING FINDINGS AND EXPRESSI NG OPINIONS THE TRIBUNAL MUST CONFINE ITSELF TO THE QUESTIONS THAT REALLY ARISE I N THE APPEAL BEFORE IT, AND SHOULD NOT TRAVEL OUTSIDE THE AMBIT OF ITS JURISDICTION AND EXPRESS OPINIONS PREJUDICIAL TO THE ASSESSEE ON MATERS WHICH DO NOT REALLY ARISE FO R DECISION IN THE APPEAL BEFORE IT, WHICH MAY HELP THE DEPARTMENT IN TAKING PROCEED INGS AGAINST THE ASSESSEE E.G. UNDER SECTION 34 OF THE ACT. HONBLE BOMBAY HIGH COURT IN THE CASE OF POKHRAJ HIR ACHAND VS. CIT (49 ITR 293), HAS HELD AS UNDER :- ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 208 OF 230 THOUGH THE POWERS OF THE TRIBUNAL IN DEALING WITH AN APPEAL UNDER SECTION 33 ARE VERY WIDE, THEY ARE NOT ABSOLUTE. THE EXPRESSION THEREON OCCURRING IN SUB-SECTION ( 4) OF SECTION 33 MEANS THE SUBJECT-MATTER OF THE APPEAL SO SECTION 33(4) GIVE S POWER TO THE TRIBUNAL TO CONSIDER ONLY THE SUBJECT-MATTER OF THE APPEAL. THE SUBJECT-MATTER OF THE APPEAL BEFORE THE TRIBUNAL IS HE GROUNDS OF APPEAL RAISED BY THE APPELLANT IN HIS MEMORANDUM OF APPEAL, THE GROUNDS WHICH THE TRIBUNA L ALLOWS HIM TO RAISE AND THE CONTENTIONS RAISED BY THE RESPONDENT BEFORE THE TRIBUNAL IN SUPPORT OF THE ORDER MADE BY THE APPELLATE ASSISTANT COMMISSIONER BY CHALLENGING THE ADVERSE FINDING AGAINST HIM. (EMPHASIS SUPPLIED) HONBLE SUPREME COURT IN THE CASE OF ESTATE OF KERA LA VS. VIJAYA STORES (116 ITR 15),, HAS HELD AS UNDER : - APART FROM STATUTE, IT IS ELEMENTARY THAT IF A PAR TY APPEALS, HE IS THE PARTY WHO COMES BEFORE THE APPELLATE TRIBUNAL TO REDRESS A GR IEVANCE ALLEGED BY HIM. IF THE OTHER SIDE HAS ANY GRIEVANCE, HE HAS A RIGHT TO FIL E A CROSS-APPEAL OR CROSS- OBJECTIONS. BUT, IF NO SUCH THING IS DONE, THE OTHE R PARTY, IN LAW, IS DEEMED TO BE SATISFIED WITH THE DECISION. HE IS, OF COURSE, ENT ITLED TO SUPPORT THE JUDGMENT OF THE FIRST OFFICER ON AY GROUND OPEN TO HIM, BUT HE IS NOT ENTITLED TO RAISE A GROUND SO AS TO WORK ADVERSELY TO THE APPELLANT AND IN HIS FAVOUR. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 209 OF 230 HONBLE MYSORE HIGH COURT IN THE CASE OF PATHIKONDA BALASUBBA SETTY (DECEASED) VS. CIT (65 ITR 252) HELD : THE EFFECT OF PROVISION OF SECTION 33(4) OF ACT 19 22 AND SECTION 254(1) OF THE 1961 THE APPELLATE TRIBUNALS POWERS WERE LIMITED TO PAS SING SUCH ORDERS AS THEY MAY THINK FIT ON THE APPEAL. THE EXPRESSION ON ON THE APPEAL CLEARLY AND INDUBITABLY POINTS TO THE CONCLUSION THAT THE POWERS OF THE APP ELLATE AUTHORITY, THE TRIBUNAL, ARE LIMITED TO THE SUBJECT-MATTER OF THE APPEAL. THIS NECESSARILY SO BECAUSE EVERY POINT DEALT WITH BY THE LOWER APPELLATE COURT, THE AAC, NEED NOT BE THE SUBJECT OF ATTACK BEFORE THE TR IBUNAL. THE INTERESTS OF THE REVENUE ARE SUFFICIENTLY PROTECTED BY THE EXTENSIVE POWERS GIVEN TO THE FIRST APPELLATE AUTHORITY, THE AAC. AT THAT STAGE, THE O NLY APPELLANT WOULD BE THE ASSESSEE, NOT THE DEPARTMENT, ALTHOUGH IT IS ENTITL ED TO BE REPRESENTED BY AN OFFICER OF THE DEPARTMENT IN SUPPORT OF THE ORDER O F THE ORIGINAL COURT. A MISTAKE, IF ANY, COMMITTED BY THE ORIGINAL AUTHORITY, WHICH IS ADVERSE TO THE INTERESTS OF THE ASSESSEE, WILL BE CANVASSED BY THE ASSESSEE BEFORE THE AAC. A MISTAKE, IF ANY, COMMITTED BY THE ORIGINAL ASSESSING AUTHORITY WHICH IS DETRIMENTAL TO THE INTERESTS OF THE REVENUE IS CAPABLE OF BEING CORRECTED BY THE AAC EVEN WITHOUT AN APPEAL HAVING BEEN PRESENTED BY THE DEPARTMENT. AT THE NE XT STAGE OF SECOND APPEAL TO THE TRIBUNAL, THE LIBERTY IS GIVEN TO BOTH THE SIDE S TO GO UP IN APPEAL TO THE TRIBUNAL AND WHEN THE TRIBUNAL COMES TO DEAL WITH THE MATTER , THE LAW REGARDS IT SUFFICIENT TO LEAVE IT TO THE PARTIES GOING UP AS APPELLANTS B EFORE THE TRIBUNAL TO LIMIT THEIR ATTACK ON THE ORDER OF THE FIRST APPELLATE AUTHORIT Y AND TO SEEK THE INTERVENTION OF THE TRIBUNAL ONLY TO THE EXTENT NECESSARY TO CORREC T THE ERRORS IN THE ORDER OF THE AAC ACCORDING TO THE CASE OF THE APPELLANT. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 210 OF 230 IT SHOULD BE NOTED THAT IN COMPARISON TO THE SECTIO NS DESCRIBING THE POWER OF THE AAC, THE SECTIONS WHICH DESCRIBE THE APPELLATE POWE RS OF THE TRIBUNAL DO NOT MAKE ANY REFERENCE TO A POWER TO ENHANCE THE ASSESSMENT OR TO ENHANCE THE TAX IN THE SAME WAY AS THE AAC IS EMPOWERED TO DO WHILE DEALIN G WITH AN APPEAL AGAINST THE ORDER OF THE ASSESSING AUTHORITY. AS THE APPELLATE POWER IS A POWER WHICH IS CONFERRE D BY STATUTE, BOTH ITS EXISTENCE AS WELL AS ITS EXTENT HAS TO BE GATHERED FROM THE R ELEVANT STATUTORY PROVISION. THE FUNDAMENTAL IDEA IS THAT AN APPELLANT SEEKS A RELIE F FROM AN APPELLATE COURT, AND NOT DETRIMENT TO HIMSELF. EVEN UNDER THE GENERAL P ROVISIONS OF THE LAW OF PROCEDURE, THE WORST DETRIMENT WHICH AN APPELLATE C OURT MAY VISIT ON AN APPELLANT IS TO DISMISS THE APPEAL WITH A DIRECTION IN AN APP ROPRIATE CASE TO PAY COSTS TO THE OPPOSITE SIDE. AN ORDER ADVERSE TO THE INTERESTS O F THE APPELLANT ADVERSE IN THE SENSE THAT IT TAKES AWAY FROM HIM A BENEFIT WHICH H E HAS ALREADY ACQUIRED UNDER THE ORDER APPEALED FROM IS POSSIBLE ONLY BY MEANS OF AN ORDER MADE EITHER UPON A CROSS-APPEAL FILED BY THE OTHER SIDE OR ON THE BA SIS OF A MEMORANDUM OF CROSS- OBJECTIONS PRESENTED BY HIM WHEREVER THE LAW PERMITS HIM TO DO SO. IN LIGHT OF THE ABOVE, I AM OF THE OPINION THAT THE TRIBUNAL CANNOT GO INTO THE QUESTION WHETHER THE ASSET INTRODUCED IN THE FIRM AS CAPITAL CONTRIBUTION WAS A CAPITAL ASSET OR NOT. 43.3 IN THE DRAFT ORDER IT HAS BEEN HELD THAT THE L AND HELD AS STOCK-IN-TRADE BEFORE THE SAME WAS CONTRIBUTED TO A FIRM AS CAPITAL HAS BEEN CONVERTED INTO A CAPITAL ASSET AT THE TIME WHEN THE SAME WAS CONTRIBUTED AS A CAPITAL CONTRIBUTION TO A FIRM IN WHICH THE ASSESSEE BECAME A ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 211 OF 230 PARTNER. THERE IS NO BASIS TO HOLD THAT THE NATURE OF ASSET CHANGED ITS COLOUR FROM STOCK-IN- TRADE TO CAPITAL ASSET. THE ADMITTED POSITION B Y AUTHORITIES BELOW AS ALSO IN THE DRAFT ORDER IS THAT THE LAND HELD BY THE ASSESSEE WAS STOCK-IN- TRADE IMMEDIATELY BEFORE IT WAS INTRODUCED AS CAPITAL CONTRIBUTION. IF THAT BE SO THERE IS NO CHANGE IN THE CIRCUMSTANCES OR ANY FACTORS AFFECTING THE HOLDING OF LAND. IN SUCH CIRCUMSTANC ES, ON INTRODUCTION OF SUCH LAND AS CAPITAL CONTRIBUTION DO NOT CHANGE ITS CHARACTER FROM STOCK -IN-TRADE TO CAPITAL ASSET. JUST AS THE ASSESSEE CAN HOLD THE LAND AS STOCK-IN-TRADE AND DE AL WITH THE SAME EITHER INDIVIDUALLY, HE CONTINUES TO HOLD AS STOCK-IN-TRADE IN THE CAPACITY AS PARTNER OF THE FIRM. IN BOTH THE CASES THE PERSON HOLDING THE LAND CAN BE SAID TO DEAL WIT H SUCH LAND ONLY IN CAPACITY OF TRADER AND NOT IN THE FORM OF CAPITAL ASSET. THE ADMITTED FAC T IS ALSO THAT THE FIRM WAS ALSO TREATING THE LAND AS ITS STOCK-IN-TRADE AND AFTER THE LAND WAS D EVELOPED AND SOLD WITH BUILDING THEREON, THE PROFIT WAS ALSO ASSESSED AS BUSINESS INCOME IN THE HAND OF FIRM. THEREFORE IF IT IS HELD THAT THE LAND HELD BY ASSESSEE AS STOCK-IN-TRADE BE FORE THE SAME WAS CONTRIBUTED TO A FIRM HAS BEEN CONVERTED INTO A CAPITAL ASSET, ON INTRODU CTION OF SAME AS CAPITAL CONTRIBUTION BY PARTNER THERE WILL BE CONVERSION OF SUCH LAND AT TW O POINT OF TIME I.E. FIRSTLY AT THE TIME WHEN ASSESSEE INTRODUCED AS CAPITAL CONTRIBUTION WHEN TH E ASSET GETS CONVERTED INTO CAPITAL ASSETS AND SECONDLY WHEN THE FIRM RECEIVES THE LAND AND AT THAT POINT OF TIME IS RECONVERTED INTO STOCK IN TRADE. IN ABSENCE OF ANY MATERIAL TO HOLD THAT THAT LAND WAS AT ALL CONVERTED FIRSTLY ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 212 OF 230 INTO CAPITAL ASSET AND RECONVERTED INTO STOCK IN TR ADE, THE FINDING GIVEN IN THE DRAFT ORDER IS CONTRARY TO THE FACTS ON RECORD. 44. THE TRIBUNAL WHILE DECIDING THE QUESTION AS TO WHETHER IT HAS POWER TO CHANGE THE HEAD OF INCOME, THE DRAFT ORDER HOLDS THAT THE TRIBUNAL HAS SUCH POWER UNDER SECTION 254(1) AND FOR THIS PURPOSE RELIANCE IS PLACED ON THE DECISION OF SPECIAL BENCH OF TRIBUNAL IN THE CASE OF SUMIT BHATTACHARYA WHICH IN TURN HAS RELIED UPON TH E DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GILBERT AND BARKER MFG. COMP ANY 111 ITR 529. THE ISSUE BEFORE THE SPECIAL BENCH WAS WHETHER THE AMOUNT RECEIVED BY AS SESSEE ON REALIZATION OF STOCK APPRECIATION RIGHTS WHICH WAS PER SE INCOME BUT WHETHER CHARGEABLE UNDER THE HEAD SALARIES. THERE WAS NO DISPUTE AS TO THE NATURE OF RECEIPT WHICH WAS IN THE FORM OF INCOME. IN SUCH A SITUATION HAVING FOUND THAT WHEN THE AMOU NT RECEIVED WAS INCOME PER SE , THE TRIBUNAL WITHIN ITS POWER U/S 254(1) MAY BRING IT T O TAX UNDER ANY HEAD OF INCOME. HOWEVER IN THE PRESENT CASE IT IS NOT AN ISSUE REGARDING CH ANGE OF HEAD OF INCOME BUT ISSUE IS REGARDING WHETHER THERE WAS TRANSFER OF STOCK IN TR ADE OR CAPITAL ASSET I.E. NATURE OF ASSET. 44.1 WITH REGARD TO THE RIGHTS OF THE DEFENDANT IN APPEAL BEFORE THE TRIBUNAL AND THE SCOPE OF POWERS OF THE TRIBUNAL, I MAY REFER TO THE RECENT D ECISION OF THE HONBLE SPECIAL BENCH, ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 213 OF 230 MUMBAI IN THE CASE OF MAHINDRA & MAHINDRA LTD. VS. DCIT, AS REPORTED IN (2009) 122 TTJ 577. IN THAT CASE ALSO, THE DEPARTMENTAL REPRESENTATIVE WANTED TO SET UP A TOTALLY NEW CASE ON FACTS, WHICH REQUIRED A DIFFERENT FINDING OF FACT F ROM WHAT THE AO AND THE CIT(A) HAS FOUND. THE TRIBUNAL IN PARA 19.6 AT PAGE 635 OF THE SAID JU DGMENT HAS HELD AS UNDER : - AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSI NG THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE AO HAS UNDOUBTEDLY EXAMINED THE PROVISIONS OF DTAA BETWEEN INDIA AND UK FOR DECIDING THE TAXABILITY OR OTHERWISE OF THE SUMS PAID TO THE NON-RESIDENT. THE ASSESSEE VIDE ITS LETTER DAT ED 6 TH FEB, 199, REPRODUCED ON P. 9 ONWARDS OF THE ASSESSMENT ORDER, CATEGORICALLY STATED IN PARA 5.3 THAT THE DTAA BETWEEN INDIA AND UK WAS APPLICABLE. THE AO H AS ALSO NOT DISPUTED THIS FACT. HE HAS REFERRED TO VARIOUS ARTICLES OF DTAA BETWEEN INDIA AND UK AT SEVERAL PLACES OF HIS ORDER VIZ. PARAS 49, 50, 52 AND 55 ET C. AT NO STAGE IT HAS BEEN DENIED BY THE AO THAT DTAA BETWEEN INDIA AND UK WAS NOT APPLICABLE. IN SUCH A SITUATION IT IS IMPERMISSIBLE FOR THE LEARNED DEPAR TMENTAL REPRESENTATIVE TO COME OUT WITH A SUBMISSION CONTRARY TO THE FINDING OF TH E AO THAT DTAA WITH UK WAS NOT RELEVANT AS BOTH THE LEAD MANAGERS WERE RESIDEN T OF COUNTRIES OTHER THAN UK. IN VIEW OF THE ADMISSION OF THE AO AND THE FURTHER ELABORATION OF THE POINT IN THE LIGHT OF DTAA BETWEEN INDIA AND UK, WE CANNOT PERMI T THE LEARNED AUTHORISED REPRESENTATIVE TO TAKE CONTRARY STAND FROM THE ONE TAKEN BY THE AO. IN OUR CONSIDERED OPINION THE LEARNED DEPARTMENTAL REPRESE NTATIVE HAS NO JURISDICTION TO GO BEYOND THE ORDER PASSED BY THE AO OR CIT(A). HIS SCOPE OF ARGUMENTS IS CONFINED TO SUPPORTING OR DEFENDING THE IMPUGNED OR DER. HE CANNOT SET UP AN ALTOGETHER DIFFERENT CASE. IF THE LEARNED DEPARTME NTAL REPRESENTATIVE IS ALLOWED TO TAKE UP A NEW CONTENTION DE HORS THE VIEW TAKEN BY THE AO HAT WOULD MEAN THE LEARNED AUTHORISED REPRESENTATIVE (SIC-DEPARTME NTAL REPRESENTATIVE) STEPPING INTO THE SHOES OF THE CIT EXERCISING JURISD ICTION UNDER S. 263. WE, THEREFORE, DO NOT PERMIT THE LEARNED DEPARTMENTAL R EPRESENTATIVE TO TRANSGRESS THE BOUNDARIES OF HIS ARGUMENTS. SIMILAR VIEW HAS BEEN TAKEN BY THE JODHPUR ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 214 OF 230 BENCH OF THE TRIBUNAL IN THE CASE OF KAWAL PRO EXPO RTS VS. ASST. CIT (2007) 109 TTJ (JD) 869 : (2008) 110 ITD 59 (JD). THIS CONTEN TION IS THEREFORE REPELLED AS DEVOID OF ANY PERMIT. 44.2 I ALSO FIND THAT ALMOST SIMILAR ISSUE AROSE BE FORE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RAM KUMAR AGGARWAL AND BROS. 205 ITR 251 (SC). IN THE SAID CASE THE FACTS AS NOTED BY THE HONBLE SUPREME COURT IN PARA 2 AND 3 AS UNDER 2. THE ASSESSEE IS A PARTNERSHIP FIRM. THE ACCOUNT ING YEAR RELEVANT TO ASST. YR. 1956-57 WAS THE YEAR ENDING ON 31 ST DEC, 1995. THE ITO MADE AN ASSESSMENT ON A TOTAL INCOME OF RS. 36,41,544 WHICH INCLUDED A SUM OF RS. 32,25,550 REPRESENTING THE SURPLUS WHICH HE ASSESSEE RECEIVED DURING THE P REVIOUS YEAR FROM THE LIQUIDATOR OF CHRESTIAN MICA CO. LTD. WHICH WENT IN TO VOLUNTARY LIQUIDATION IN THE YEAR 1955. THE ASSESSEE PREFERRED AN APPEAL TO THE AAC OBJECTING TO THE INCLUSION OF THE SAID SURPLUS AMOUNT. THE APPEAL WAS DISMISS ED. BUT ON FURTHER APPEAL, THE TRIBUNAL AGREED WITH ITS CONTENTION. 3. THE ASSESSEE WAS A REGULAR DEALER IN SHARES. I N THE YEAR 1945, IT PURCHASED ALL THE EQUITY SHARES OF CHRESTIAN MICA CO. LTD. WHICH WAS HEN A PUBLIC LIMITED COMPANY. THE ASSESSEE TOOK OVER ITS MANAGEMENT. I N 1947, THE COMPANY WAS CONVERTED INTO A PRIVATE LIMITED COMPANY. FOR THE ASST. YR. 1949-50, THE ASSESSEE CLAIMED A TRADING LOSS OF RS. 20,88,735 STATED TO B E THE LOSS SUFFERED ON ACCOUNT OF DEPRECIATION O THE VALUE OF THE SHARES OF THE SAID COMPANY. THIS CLAIM WAS MADE ON THE BASIS THAT ALL THE SHARES OF THE COMPANY WER E HELD BY IT AS STOCK-IN-TRADE. ITS CLAIM WAS ALLOWED BY THE TRIBUNAL ON APPEAL. IN ALL THE SUBSEQUENT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 215 OF 230 ASSESSMENTS, THE SAID SHARES WERE CREATED AS ITS ST OCK-IN-TRADE AND VALUE OF THOSE SHARES AS CLAIMED BY THE ASSESSEE WAS ADOPTED. IN THE ASSESSMENT PROCEEDINGS RELATING TO THE ASSES SMENT YEAR CONCERNED HEREIN (1956-57), THE ASSESSEE ADMITTED THAT THE SHARES OF THE SAID COMPANY WERE HELD BY IT AS STOCK-IN-TRADE. ON THAT BASIS, THE SAID S URPLUS AMOUNT RECEIVED BY IT FROM THE LIQUIDATOR WAS INCLUDED IN ITS TOTAL INCOME BY THE ITO AND HE AAC. ON APPEAL, HOWEVER, THERE WAS A DIFFERENCE OF OPINION BETWEEN THE JUDICIAL MEMBER AND THE ACCOUNTANT MEMBER WHEREUPON THE MATER WAS REFERRED TO THE VICE-PRESIDENT. HE UPHELD THE ASSESSEES PLEA. THEN FOLLOWED HE REFER ENCE TO THE HIGH COURT. THE HIGH COURT ANSWERED THE QUESTION IN FAVOUR OF A SSESSEE. AT THE INSTANCE OF REVENUE FURTHER APPEAL WAS FILED BEFORE HONBLE SUPREME COU RT AND FOLLOWING QUESTIONS WERE REFERRED FOR THE OPINION OF THE HONBLE SUPREME COU RT. (1) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS JUSTIFIED IN INVESTIGATING THE NATURE OF THE SHARES HELD BY THE ASSESSEE IN CHRESTIAN MICA CO. LTD. WHEN BOTH THE ASSESSEE AND HE IT AUTH ORITIES HAD TREATED THEM AS THE STOCK-IN-TRADE OF THE ASSESSEE AS A DEALER IN S HARE FOR EVERY ASSESSMENT YEAR SINCE 1949-50 AND PROCEEDED ON THE SAME BASIS FOR T HE INSTANT ASSESSMENT YEAR? (2) WHETHER, ON THE FACTS AND IN HE CIRCUMSTANCES O F THE CASE, THE TRIBUNAL WAS JUSTIFIED IN LAW IN HOLDING THAT THE SHARES HELD BY ASSESSEE IN CHRESTIAN MICA CO. LTD. WERE NOT ITS STOCK-IN-TRADE FOR DEALING IN SHA RES? ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 216 OF 230 (3) IF THE ANSWER TO QUESTION (2) BE IN THE NEGATI VE THEN WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, HE TRIBUNAL WAS R IGHT IN HOLDING THAT THE SUM OF RUPEES THIRTY TWO LACS TWENTY FIVE THOUSAND AND FIV E HUNDRED AND FIFTY WAS NOT ASSESSABLE IN THE HANDS OF THE ASSESSEE? HONBLE SUPREME COURT HELD AS UNDER : - 6. WHETHER SHARES OF A COMPANY HELD BY A PERSON CON STITUTE HIS CAPITAL OR HIS STOCK-IN-TRADE, IS NOT A PURE QUESTION OF LAW BUT E SSENTIALLY ONE OF FACT . WHILE ONE PERSON MAY HOLD THE SHARES OF A COMPANY BY WAY OF I NVESTMENT, THE OTHER MAY HOLD THEM AS HIS STOCK-IN-TRADE. IN THIS CASE, IT IS CLEAR BEYOND ANY DOUBT THAT THE ASSESSEE HAS BEEN HOLDING THE SHARES OF THE AFORESA ID COMPANY AS IS SOCK-IN-TRADE. IN THE EARLIER YEARS, IT CLAIMED A TRADING LOSS ON THE FOOTING THAT THEY REPRESENTED ITS STOCK-IN-TRADE. EVEN IN THE PRESENT ASSESSMENT PROCEEDINGS FOR THE ASST.YR. 1956-57 (CONCERNED HEREIN), IT TOOK THE VERY SAME S TAND THOUGH AT THE STAGE OF TRIBUNAL AND HIGH COURT, IT SOUGHT TO WRIGGLE OUT O F THE SAID ADMISSION UNSUCCESSFULLY. THE HIGH COURT HAS HELD RIGHTLY TH AT IT CANNOT DO SO AND THAT IT IS BOUND BY ITS ADMISSION AND ITS COURSE OF CONDUCT OV ER THE PAST SEVERAL YEARS. THE HIGH COURT, IT MAY BE RECALLED, HAS ALSO REJECTED IT S FURTHER SUBMISSION THAT THE SAID SHARES CEASED TO BE ITS STOCK-IN-TRADE ON THE CONVERSION OF THE COMPANY FROM A PUBLIC LIMITED COMPANY TO A PRIVATE LIMITED COMPA NY. IF SO, IT FOLLOWS THAT IF THE ASSESSEE RECEIVES ANY SURPLUS AMOUNT IN LIEU OF THE SAID SHARES, IT MUST BE HELD TO BE A REVENUE RECEIPT IN HIS HANDS. IT CANNOT BE DE NIED THAT THE AMOUNT RECEIVED BY THE ASSESSEE FROM THE LIQUIDATOR IN THIS CASE WAS I N LIEU OF ITS SHAREHOLDING. IN EFFECT AND IN TRUTH, THE AMOUNT RECEIVED BY IT REPR ESENTED HE RECOMPENSE FOR ITS SHARES, EVEN THOUGH IT IS TRUE THERE WAS NO TRANSFE R OF SHARES FROM THE ASSESSEE TO THE LIQUIDATOR OR TO ANY ONE ELSE. IT WAS A CASE O F RETURN FOR THE MONEY PAID BY THE ASSESSEE FOR ACQUIRING THE SAID SHARES. IN ONE CAS E, THE RETURN MAY BE MORE THAN WHAT THE HOLDER PAID FOR THEM WHILE IN ANOTHER IT M AY BE LESS; THE CHARACTER OF THE RECEIPT REMAINS THE SAME. THE HIGH COURT HAS HOWEV ER HELD IN FAVOUR OF THE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 217 OF 230 ASSESSEE OPINING THAT (I) WHATEVER IS RECEIVED BY T HE SHAREHOLDER ON A LIQUIDATION OF A COMPANY IS NO INCOME OF THE PROPERTY BUT THE PROPERTY ITSELF; (II) THAT WHATEVER IS DISTRIBUTED IN A LIQUIDATION IS CAPITAL , WHATEVER MAY HAVE BEEN ITS SOURCE, AS HELD IN BROGAN VS. STAFFORD COAL AND IRO N CO. LTD. 41 TAX CASES 305; (III) IN THE COURSE OF LIQUIDATION OF THE COMPANY THE LIQ UIDATOR SELLS COMPANY IS LIQUIDATED AND THE LIQUIDATOR DISTRIBUTES THE SURPL US ASSETS, THERE IS NO TRANSACTION IN THE TRADING SENSE BETWEEN THE LIQUIDATOR AND THE SHAREHOLDERS. BY VIRTUE OF HIS HOLDING, A SHAREHOLDER IS ENTITLED TO SURPLUS ASSET S ON THE LIQUIDATION OF THE COMPANY AND SUCH SURPLUS ASSETS ARE IN THE NATURE O F AN ACCRETION TO THE SHARES HELD BY HIM. THE QUESTION IS WHETHER THE OPINION OF THE HIGH COU RT IS CORRECT IN LAW? WE FIND IT DIFFICULT TO SAY SO. SEC. 511 OF THE COMPANIES ACT APPLIES TO EVERY VOLUNTARY WINDING UP. IT SAYS HAT SUBJECT TO THE PROVISIONS OF THIS ACT AS TO PREFERENTIAL PAYMENTS, THE ASSETS OF A COMPANY SHALL, ON ITS WIN DING UP, BE APPLIED IN SATISFACTION OF ITS LIABILITIES PARI PASSU AND, SUB JECT TO SUCH APPLICATION, SHALL UNLESS THE ARTICLES OTHERWISE PROVIDE, BE DISTRIBUTED AMON G THE MEMBERS ACCORDING TO THEIR RIGHTS AND INTERESTS IN THE COMPANY. THE CO NCLUDING WORDS OF THIS SECTION INDICATE THAT THE ASSETS OF A COMPANY, ON ITS LIQUI DATION, SHALL BE DISTRIBUTED AMONG THE SHAREHOLDERS ACCORDING TO THEIR RIGHTS AN D INTERESTS IN THE COMPANY WHICH NECESSARILY MEANS ACCORDING TO THEIR SHAREHOL DING. WHAT EACH SHAREHOLDER GETS IS PROPORTIONATE TO HIS SHAREHOLDING IN THE CO MPANY. ONCE THE DISTRIBUTION TAKES PLACE, HE SHARES AND THE SHAREHOLDING COME TO AN END. THE FACT THAT THE SHARES MAY TECHNICALLY CONTINUE UNTIL THE NAME OF T HE COMPANY IS STRUCK OFF THE REGISTER OF THE COMPANY IS OF LITTLE SIGNIFICANCE. AFTER THE DISTRIBUTION OF THE ASSETS, NOTHING REMAINS OF THE SHARES. TO SAY THAT THE ASS ETS A SHAREHOLDER RECEIVES ON THE LIQUIDATION OF THE COMPANY ARE UNRELATED TO HIS SHAREHOLDING IS TO BE BLIND TO THE REALITY. SUCH AN ARGUMENT IGNORES THE BASIC RE ALITY RECOGNIZED BY S. 511 OF THE COMPANIES ACT. THE SAME COMMENT HOLDS GOOD ABOUT T HE ARGUMENT THAT THE AMOUNT RECEIVED IS AN ACCRETION TO THE SHARES. IT IS TRUE THAT A LIQUIDATOR DOES NOT SELL THE SHARES. IT IS EQUALLY TRUE THAT THERE IS NO TRANSFER OF SHARES BY THE SHAREHOLDER TO THE LIQUIDATOR OR TO ANY OTHER PERSO N. THAT IS NOT REALLY NECESSARY. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 218 OF 230 SO LONG S MONEY IS RECEIVED IN LIEU OF SHARES, THER E IS A RECEIPT AND WHERE AN ASSESSEE IS A DEALER IN SHARES, ANY SURPLUS AMOUNT RECEIVED BY HIM CONSTITUTES HIS INCOME. AS STATED ABOVE, WHERE A COMPANY GOES INTO LIQUIDATION AND THE LIQUIDATOR DISTRIBUTES THE ASSETS OF THE COMPANY AM OUNT THE SHAREHOLDERS, WHAT EACH SHAREHOLDER GETS IS IN LIEU OF HIS SHAREHOLDIN G. THAT IS THE WORTH, THE VALUE AND THE PRICE OF HIS SHAREHOLDING. A SHAREHOLDER P ARTICIPATES IN THE DISTRIBUTION OF THE ASSETS OF A COMPANY ON ITS LIQUIDATION BY VIRTU E OF AND BECAUSE OF HIS SHAREHOLDING. WE THEREFORE, FIND IT DIFFICULT TO A GREE WITH THE HIGH COURT THAT A SHAREHOLDER PARTICIPATES IN THE DISTRIBUTION OF ASS ETS ON THE LIQUIDATION OF THE COMPANY DE HORS HIS SHAREHOLDING. ONCE THIS IS SO, IT FOLLOWS THAT THE MONEY RECEIVED BY THE ASSESSEE IN LIEU OF ITS SHAREHOLDIN G PARTAKES THE SAME CHARACTER IN WHICH HE HELD THE SHARES. IF HE HELD THE SHARES AS STOCK-IN-TRADE, THE MONEY RECEIVED BY IT REPRESENTS HIS INCOME, I.E. A REVENU E RECEIPT IN ITS HANDS. IF IT HELD THEM BY WAY OF INVESTMENT, THE MONEY IT RECEIVES RE PRESENTS A CAPITAL RECEIPT BY IT. (EMPHASIS SUPPLIED) IN THE CONCLUDING PARAGRAPH HONBLE SUPREME COURT S ET ASIDE THE JUDGMENT OF THE HIGH COURT AND ANSWERED ALL THE THREE QUESTIONS REFERRED IN TH E NEGATIVE I.E. IN FAVOUR OF REVENUE AND AGAINST THE ASSESSEE. 44.3 WHAT FOLLOWS FROM THE ABOVE DECISION OF HONBL E SUPREME COURT IS THAT WHEN BOTH THE ASSESSEE AND THE INCOME TAX AUTHORITIES HAD TREATED THE NATURE OF SHARES HELD BY ASSESSEE AS STOCK-IN-TRADE AND PROCEEDED ON THE SAME BASIS FOR THE RELEVANT ASSESSMENT YEAR, THE TRIBUNAL WAS NOT JUSTIFIED IN INVESTIGATING THE NATU RE OF THE SHARES HELD BY THE ASSESSEE SO AS ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 219 OF 230 TO HOLD THE SAME AS NOT PART OF STOCK-IN-TRADE. TH US IT WAS CONCLUDED THAT THE ADMITTED POSITION OF THE NATURE OF ASSET BETWEEN THE ASSESSE E AND THE REVENUE AUTHORITIES CANNOT BE ALLOWED TO BE CHANGED BY THE TRIBUNAL IN VIEW OF TH E PLEA RAISED BEFORE IT. APPLYING THE SAME PRINCIPLE IN THE PRESENT CASE ALSO SINCE THERE IS N O DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE REGARDING NATURE OF ASSET BEING STOCK-IN-TR ADE, THE TRIBUNAL IS NOT CALLED UPON TO GIVE A FINDING AS TO WHETHER SUCH ASSET WAS AT ALL CONVE RTED TO CAPITAL ASSET AND WHETHER SUCH LAND IS PART OF CAPITAL ASSET OR NOT. 44.4 THERE IS A DIFFERENCE BETWEEN CHANGING THE HEA D OF INCOME IN RESPECT OF RECEIPT WHICH ARE INCOME PER SE AND CHANGING THE NATURE OF ASSET ITSELF. WHILE TH E RECEIPT WHICH IS INCOME PER SE MAY BE BROUGHT TO TAX UNDER A DIFFERENT HEAD, THE TRIBUNAL WILL EXCEED ITS JURISDICTION IF IT DECIDES THE NATURE OF ASSET ITSELF IN A DISPUTE RAI SED FOR THE FIRST TIME AT THE INSTANCE OF RESPONDENT. THE COUNSEL FOR THE RESPONDENT REPRESE NTS THE ASSESSING OFFICER AND HENCE HIS ROLE IS CONFINED TO THE DISPUTE BEFORE THE ASSESSIN G OFFICER AND THE COUNSEL FOR THE RESPONDENT CANNOT FOR THE FIRST TIME RAISE A FRESH ISSUE BEFORE THE TRIBUNAL WHICH IS NOT A SUBJECT MATTER OF DISPUTE. SECTION 254(1) OF THE INCOME TAX ACT READS AS UNDER :- ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 220 OF 230 S.254(1) THE APPELLATE TRIBUNAL MAY, AFTER GIVING BOTH THE PARTIES TO THE APPEAL, AN OPPORTUNITY OF BEING HEARD, PASS SU CH ORDERS THEREON AS IT THINKS FIT. THE POWERS OF THE INCOME TAX APPELLATE TRIBUNAL ARE IN THE WIDEST TERMS. THE ONLY RESTRICTION ON THE POWERS OF THE HONBLE TRIBUNAL I S CONTAINED IN THE WORD THEREON. THE WORD THEREON HAS BEEN INTERPRETED TO MEAN THE SUB JECT MATTER OF THE CONTROVERSY BEFORE THE TRIBUNAL. (REF: HUKAM CHAND MILLS LTD. VS. CIT 63 ITR 232 AT PAGES 236-237). THE APPELLATE TRIBUNAL CAN DEAL WITH ONLY THAT PART OF THE ORDER OF THE FIRST APPELLATE AUTHORITY WHICH HAS BEEN MADE THE SUBJECT MATTER OF ATTACK IN THE APPEAL BEFORE IT. IT IS NOT OPEN TO THE TRIBUNAL TO ADJUDICATE OR GIVE A FINDING ON A QUESTION WHICH IS NOT IN DISPUTE AND WHICH DOES NOT FORM THE SUBJECT MATTER O F THE APPEAL BEFORE IT AS HELD IN INDIRA BALAKRISHNA V. CIT, (1956) 30 ITR 320, 327 (BOM), A FFIRMED, CIT V. INDIRA BALAKRISHNA, (1960) 39 ITR 546 (SC); M.R.M. PERIANNAN CHETTIAR V. CIT (19 60) 39 ITR 159 (MAD.); V. RAMASWAMY IYENGAR V. CIT, (1960) 40 ITR 377 (MAD.) POKHRAJ HIR ACHAND V. CIT, (1963) 49 ITR 293 (BOM); J.B. GREAVES V. CIT, (1963) 49 ITR 107 (BOM.), PATH IKONDA BALASUBBA SETTY V. CIT, (1967) 65 ITR 252 (MYS); P.R. MUKHERJEE V. CIT. (1979) 116 ITR 554(CAL). ON THE SAME REASONING, WHERE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 221 OF 230 THE CONTROVERSIES IS PRECISELY LIMITED TO A NARROWE R COMPASS, THE TRIBUNAL IS NOT COMPETENT TO SO WIDEN IT AS TO TRAVERSE BEYOND THE SUBJECT MATTE R WHICH WAS TO DISPUTE BEFORE THE INCOME TAX AUTHORITIES (R.L. RAJGHARIA V ITO, (1977) 107 IT R 347 (CAL), AFFIRMED IN ITO V R.L. RAJGHARIA (1979) 119 ITR 872 (CAL.). THE TRIBUNAL CAN DECIDE ONLY ISSUES WHICH WERE THE SUBJECT MATTER OF THE APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. AN ADDITIONAL PLEA WHIC H ALTOGETHER CHANGES THE COMPLEXION OF THE CASE AS ORIGINALLY BROUGHT BEFORE THE FIRST APPELLA TE AUTHORITY AND THE TRIBUNAL IN SECOND APPEAL CANNOT BE PERMITTED TO BE RAISED AT THE STAG E OF HEARING OF THE TRIBUNAL APPEAL AS HELD IN INDIAN STEEL & WIRE PRODUCTS LTD. V. CIT, 208 IT R 740, 743 (CAL). THE SUPREME COURT IN THE CASE OF MALIK & SONS 74 IT R AT PAGES 1 AND 5 HELD AS UNDER:- THE UNDERTAKING MUST THEREFORE BE IGNORED. UNDER SECTION 33 (4) OF THE INDIAN INCOME TAX ACT, 1922, THE INCOME-TAX APPELLATE TRIB UNAL MAY, AFTER GIVING BOTH PARTIES TO THE APPEAL AN OPPORTUNITY OF BEING HEARD , PASS SUCH ORDERS THEREON AS IT THINKS FIT. THE POWER CONFERRED BY THAT SUB-SECTIO N IS WIDE, BUT IT IS STILL A JUDICIAL POWER WHICH MUST BE EXERCISED IN RESPECT OF MATTERS THAT ARISE IN THE APPEAL AND ACCORDING TO LAW. THE TRIBUNAL IN DECIDING AN APPE AL BEFORE IT MUST DEAL WITH QUESTIONS OF LAW AND FACT WHICH ARISE OUT OF THE OR DER OF ASSESSMENT MADE BY THE INCOME-TAX OFFICER AND THE ORDER OF THE APPELLATE A SSISTANT COMMISSIONER. IT ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 222 OF 230 CANNOT ASSUME POWERS WHICH ARE INCONSISTENT WITH TH E EXPRESS PROVISIONS OF THE ACT OR ITS SCHEME. IT CAN, THEREFORE, BE CONCLUDED THAT THE INCOME TAX APPELLATE TRIBUNAL CANNOT DECIDE AN ISSUE WHICH DOES NOT ARISE OUT OF THE ORDERS OF THE APPEL LATE AUTHORITIES BELOW. IN THIS CASE, BOTH THE AO AND THE CIT (APPEALS) HAVE HELD THAT THE ASS ET CONTRIBUTED BY THE APPELLANT TO THE PARTNERSHIP FIRM WAS STOCK-IN-TRADE AND THE ASSETS CONTINUED TO BE HELD AS STOCK-IN-TRADE IN THE PARTNERSHIP FIRM. THERE IS NO DIFFERENCE OF OPI NION BETWEEN THE AUTHORITIES BELOW ON THIS ISSUE AND A FINDING OF FACT RECORDED BY BOTH THE AU THORITIES BELOW IS NOT UNDER CHALLENGE IN THE APPEAL FILED BEFORE THE TRIBUNAL BY THE APPELLA NT OR THE REVENUE. I THEREFORE, HOLD THAT - (A) THE NATURE OF ASSET WHEN CONTRIBUTED BY ASSESS EE WAS AND CONTINUED TO REMAIN AS STOCK-IN-TRADE ONLY AND WAS NEITHER INTENDED TO BE CONVERTED AS CAPITAL ASSET NOR THERE IS ANY MATERIAL ON RECORD TO HOLD THAT THE ASSET CO NTRIBUTED WERE CAPITAL ASSET. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 223 OF 230 (B) SINCE THERE WAS NEVER A DISPUTE BETWEEN ASSESS EE AND REVENUE AUTHORITIES REGARDING NATURE OF ASSET OF LAND BEING STOCK-IN-TRADE, THE T RIBUNAL CANNOT GO INTO THE QUESTION WHETHER THE ASSET CONTRIBUTED WAS CAPITAL ASSET OR NOT. 45. IN THE DRAFT ORDER IT IS PROPOSED THAT PRIMARIL Y THE SURPLUS IS CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAINS AND ALSO HELD THAT IN THE SITUATION THAT IT IS NOT CHARGEABLE AS CAPITAL GAIN, IT IS TAXABLE AS BUSINESS INCOME ALSO. THIS IS SO OPINED IN SUB PARA (XII) OF PARA 16.49 WHEREIN THE CONCLUSION IS ARRIVED AT. THE TRIBUNAL IS A FINAL AUTHORITY ON THE FINDING OF FACTS. THE TRIBUNAL IS NOT AN ASSESSING AUTHORITY BUT AN APPELLATE AUTH ORITY. THEREFORE, THE TRIBUNAL IS REQUIRED TO GIVE A FINDING OF FACTS FINALLY AND NOT TO GIVE AN ALTERNATIVE FINDING. THIS WILL BE AGAINST THE BASIC LAW GIVING POWER TO THE TRIBUNAL TO DECIDE AS FINAL FACT FINDING AUTHORITY. IN THE DRAFT ORDER BEFORE DECIDING REGARDING HEAD OF INCOME, IN THE CONCLUDING PORTION OF PARA 16.47 OF THE DRAFT ORDER IT HAS BEEN HELD : THIS QUESTION WHETHER THE LAND IN QUESTION WAS A CAPITAL ASSET OR STOCK IN TRADE IN NATURE AT THE TIME WHEN THE SAME WAS CONTRIBUTED BY THE ASSESSEE TO A PARTNERSHIP FIRM AS ITS CAPITAL CONTRIBUTION WHEN T HE ASSESSEE BECAME A PARTNER IN THAT FIRM, IS NOT ONE OF FACT: THOUGH IT IS DEPENDE NT ON THE FACTS AND THE CIRCUMSTANCES OF THE PRESENT CASE, THE QUESTION DOE S INVOLVE CONCLUSIONS OF LAW TO BE DRAWN FROM THOSE FACTS. WE, THEREFORE, DO NO FI ND ANY FORCE OR MERIT IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACT ADMITTED BY THE REVENUE AUTHORITIES BELOW ARE NOW BEING CHANGED. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 224 OF 230 THE AFORESAID FINDING IS CONTRARY TO THE RULING OF HONBLE SUPREME COURT IN THE CASE OF CIT VS RAM KUMAR AGGARWAL & BROS. 205 ITR 251 WHEREIN AT P ARA 6 OF THE DECISION IT WAS HELD : WHETHER SHARES OF A COMPANY HELD BY A PERSON CONSTI TUTE HIS CAPITAL OR HIS STOCK- IN-TRADE, IS NOT A PURE QUESTION OF LAW BUT ESSENTI ALLY ONE OF FACT . 45.1 I THEREFORE HOLD THAT THE TRIBUNAL SHOULD HAVE RESTRICTED ITSELF TO THE CONTROVERSY AS RAISED BY THE APPELLANT AND TO GIVE A FINDING ONLY TO THE EXT ENT WHETHER THE SURPLUS REALIZED ON INTRODUCTION OF LAND BEING HELD BY IT AS STOCK-IN-T RADE IN THE FORM OF ITS CAPITAL CONTRIBUTION WAS CHARGEABLE AS BUSINESS INCOME OR NOT. SINCE I HAVE EARLIER HELD THAT SUCH INTRODUCTION DO NOT AMOUNT TO GIVING RISE TO BUSINESS INCOME AS NO LEGAL RIGHT IS ACCRUING IN FAVOUR OF ASSESSEE BECAUSE OF THE CREDIT TO THE ACCOUNT OF PARTNER BY THE FIRM, NO INCOME CAN BE BROUGHT TO TAX. THE LAW LAID DOWN BY HONBLE SUPREME COURT IN THE C ASE OF HIND CONSTRUCTION 83 ITR 211 AND THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F SUNIL SIDDHARTHBHAI (SUPRA) ARE SQUARELY APPLICABLE. SINCE THE LAND WAS ALWAYS HELD AS STOC K IN TRADE, WHICH CONTINUED TO BE STOCK IN TRADE EVEN AT THE TIME OF INTRODUCTION AND SUBSEQUE NTLY BY THE FIRM ALSO, SECTION 45(3) WHICH IS APPLICABLE IN RESPECT OF THE CAPITAL ASSET CANNO T BE APPLIED TO THE STOCK-IN TRADE HELD BY THE ASSESSEE AND INTRODUCED AS CAPITAL CONTRIBUTION. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 225 OF 230 46. THE ISSUE WHICH ARISES IN APPEAL FOR A.Y. 1992- 93 IN RELATION TO GROUND NO. 1 ALSO ARISE S IN APPEALS FOR A.Y. 1997-98, 1998-99, 1999-2000 AND 2000-01. THE DISCUSSION IN RELATION THERETOIN THE DRAFT ORDER IS TABULATED BELOW : - ASSESSMENT YEAR GROUND NO. PARAGRAPH NO. OF DRAFT ORDER 1997-98 4 27 TO 27.4 1998-99 4 30 TO 30.6 1999-2000 2 33 TO 33.5 2000-01 3 37 TO 37.4 46.1 IN RELATION TO OTHER GROUNDS IN APPEALS FOR A. Y. 1997-98, 1998-99, 1999-2000 AND 2000-01, I AM IN COMPLETE AGREEMENT WITH THE VIEW IN THE DRAFT ORDER. HOWEVER, I AM UNABLE TO AGREE IN RELATION TO ISSUE REGARDING TAXABILITY OF SURPLU S ARISING ON INTRODUCTION OF LAND INTO PARTNERSHIP FIRM AS CAPITAL CONTRIBUTION BY THE ASS ESSEE AS DISCUSSED IN TABLE REFERRED ABOVE. 47. FOR ALL THESE YEARS IT HAS BEEN HELD THAT IN VI EW OF THE FINDING GIVEN IN PARA 16 OF THE DRAFT ORDER PERTAINING TO A.Y. 1992-93 IS BEING FOLLOWED AND SINCE I AM UNABLE TO CONCUR WITH FINDING GIVEN IN PARA 16 OF THE DRAFT ORDER AND IN RESPECT OF WHICH I HAVE PROPOSED A SEPARATE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 226 OF 230 ORDER, MY FINDING FOR ALL THESE YEARS IN RELATION T O THE ABOVE REFERRED ISSUE WILL BE THE SAME. THEREFORE, IN VIEW OF MY FINDING GIVEN FOR A.Y. 199 2-93, THE SURPLUS IS NOT CHARGEABLE TO TAX. 47.1 FOR A.Y. 1997-98 TO 2000-01, THERE IS ONE MORE ASPECT. IN RELATION TO A.Y. 1997-98 IN PARA 27.4 OF THE DRAFT ORDER, REFERENCE IS MADE TO SECTI ON 13(C) AND 13(D) AS ALSO TO SECTION 48(B)(II) AND 48(B)(III) OF THE INDIAN PARTNERSHIP ACT, 1932 TO HOLD THAT THE ADVANCES BY PARTNER IS DISTINCT FROM CAPITAL AND ARE PLACED ON BETTER FOOTING THAN THE CAPITAL CONTRIBUTED BY THE PARTNER FOR THE PURPOSE OF PARTNERS RIGHT T O RECEIVE INTEREST THEREUPON AND TO REALIZE OR RECOVER THE ADVANCE DISTINGUISHED FROM CAPITAL. SECTION 13 OF THE PARTNERSHIP ACT IS EXTRACTED HEREIN : - 13. SUBJECT TO CONTRACT BETWEEN THE PARTNERS (A) XX XX; (B) XX XX; (C) WHERE A PARTNER IS ENTITLED TO INTEREST ON THE CAPITAL SUBSCRIBED BY HIM SUCH INTEREST SHALL BE PAYABLE ONLY OUT OF PROFITS; (D) A PARTNER MAKING, FOR THE PURPOSES OF THE BUSIN ESS, ANY PAYMENT OR ADVANCE BEYOND THE AMOUNT OF CAPITAL HE HAS AGREED TO SUBSC RIBE, IS ENTITLED TO INTEREST THEREON AT THE RATE OF SIX PERCENT, PER AN NUM; ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 227 OF 230 (E) XX XX; 47.2 AS PER SECTION 13(C), SUBJECT TO THE CONTRACT B ETWEEN THE PARTNERS, A PARTNER IS ENTITLED TO INTEREST ON THE CAPITAL SUBSCRIBED BY HIM AND SUCH INTEREST IS PAYABLE ONLY OUT OF PROFITS. SIMILARLY AS PER SECTION 13(D) A PARTNER IS ALSO EN TITLED TO INTEREST IF SO AGREED ON THE ADVANCE BEYOND THE AMOUNT OF CAPITAL HE HAS AGREED TO SUBSC RIBE. HOWEVER, IN BOTH THE CASES THE AMOUNT CONTRIBUTED BY PARTNER WHETHER BY WAY OF CAP ITAL OR BY WAY OF ADVANCE DO NOT PARTAKE THE CHARACTER OF DEBT DUE BY FIRM TO THE PA RTNER. SECTION 13 ONLY REGULATES ONLY RELATION OF THE PARTNER INTER SE. SECTION STARTS W ITH THE WORDS SUBJECT TO THE CONTRACT BETWEEN THE PARTNERS I.E. IF THE PARTNERS AGREE AM ONGST THEMSELVES, A PARTNER IS ENTITLED TO INTEREST ON THE CAPITAL AS ALSO ON THE ADVANCE BEYO ND THE AMOUNT OF CAPITAL. HOWEVER, IN EITHER CASE, IT DOES NOT AMOUNT TO A DEBT BY THE FI RM TO THE PARTNER AND IN THE EVENT OF DISSOLUTION THE FIRM IS NOT OBLIGED TO PAY SUCH SUM TO THE PARTNER. THIS PROPOSITION WILL BE CLEAR ON READING SECTION 48 OF THE PARTNERSHIP ACT AS EXTRACTED HEREIN : - '48. IN SETTING THE ACCOUNTS OF A FIRM AFTER DISSOL UTION, THE FOLLOWING RULES SHALL, SUBJECT TO AGREEMENT BY THE PARTNERS BE OBSERVED: ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 228 OF 230 (A) LOSSES, INCLUDING DEFICIENCIES OF CAPITAL, SHA LL BE PAID FIRST OUT OF PROFITS, NEXT TOUT OF CAPITAL, AND, LASTLY, IF NECESSARY, BY THE PARTNERS INDIVIDUALLY IN THE PROPORTIONS IN WHICH THEY WERE ENTITLED TO SHARE PR OFITS. (B) THE ASSETS OF THE FIRM, INCLUDING ANY SUMS CON TRIBUTED BY THE PARTNERS TO MAKE UP DEFICIENCIES OF CAPITAL, SHALL BE APPLIED I N THE FOLLOWING MANNER AND ORDER:- (I) IN PAYING THE DEBTS OF THE FIRM TO THIRD PARTIE S; (II) IN PAYING TO EACH PARTNER RATEABLY WHAT IS DU E TO HIM FROM THE FIRM FOR ADVANCES AS DISTINGUISHED FROM CAPITAL; (III) IN PAYING TO EACH PARTNER RATEABLY WHAT IS D UE TO HIM ON ACCOUNT OF CAPITAL; AND (IV) THE RESIDUE, IF ANY, SHALL BE DIVIDED AMONG T HE PARTNERS IN THE PROPORTIONS IN WHICH THEY WERE ENTITLED TO SHARE PROFITS.' 47.3 SECTION 48 OF THE PARTNERSHIP ACT PROVIDES FOR THE MANNER IN WHICH THE ACCOUNTS OF THE PARTNERS ARE TO BE SETTLED AFTER DISSOLUTION. SECTI ON 48 SETS OUT PRIORITY IN ORDER OF WHICH THE PARTNERSHIP ASSETS ARE TO BE DISTRIBUTED. FIRSTLY, IT GOES TO PAY THE LOSSES. NEXT IT GOES TO PAY THE DEBTS TO THE THIRD PARTIES. ONLY AFTER THE DEBT S ARE PAID TO THIRD PARTIES, THE PRIORITY WILL BE FIRST ACCORDED TO THE ADVANCES GIVEN BY THE PART NER OVER AND ABOVE HIS SHARE OF CAPITAL. ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 229 OF 230 THEREFORE, IF THERE ARE NO ASSETS LEFT AFTER PAYING OF THE LOSSES AND DEBTS TO THE THIRD PARTY, A PARTNER WILL NOT RECEIVE ANY AMOUNT EITHER TOWARDS HIS CAPITAL OR TOWARDS ADVANCE GIVEN OVER AND ABOVE HIS CAPITAL. IN EITHER CASE IT IS NOT DEB T DUE BY THE FIRM TO THE PARTNER WHICH IS LIKE DEBT DUE TO THIRD PARTIES. THEREFORE, MERELY BECAUS E PART OF THE VALUE OF LAND BROUGHT IN AS CAPITAL CONTRIBUTION IS TREATED AS LOAN OVER AND AB OVE THE CAPITAL AGREED UPON, IT WILL NOT HAVE AN EFFECT OF CREATING A RIGHT IN FAVOUR OF ASSESSEE AT THE TIME OF ENTERING INTO PARTNERSHIP TO RECEIVE SUCH SUM SO AS TO TREAT THE SURPLUS AS INCO ME ACCRUING IN FAVOUR OF THE PARTNER. 47.4 IT IS ALSO TO BE NOTED THAT IN THESE YEARS THE RE IS NO FINDING THAT ANY AMOUNT WAS WITHDRAWN BY THE ASSESSEE FROM THE FIRM EVEN THOUGH THE ACCOU NTS OF THE FIRM RECORDS THE CAPITAL OF THE ASSESSEE AS BROUGHT IN. ON THE CONTRARY, THE FACTS REMAIN THAT AFTER INTRODUCTION OF LAND HELD AS STOCK-IN-TRADE AS CAPITAL CONTRIBUTION, NO PART OF THE AMOUNT CREDITED TO CAPITAL ACCOUNT HAS BEEN WITHDRAWN TILL DATE. THEREFORE, THE SITUAT ION IN THIS YEAR IS DISTINCT THAN THE SITUATION PREVAILING FOR A.Y. 1992-93 WHICH HAS BEEN EXTENSIV ELY DISCUSSED IN PARA 16.21 OF THE DRAFT ORDER AND HEAVILY RELIED UPON TO HOLD THAT THE TRAN SACTION IS A COLORABLE DEVICE. THUS EVEN THE WORD OF CAUTION AS FOUND IN THE CASE OF SUNIL SIDDHARTHBHAI CASE (SUPRA) ARE NOT APPLICABLE IN ALL THESE YEARS WHICH ARE HEAVILY REL IED UPON TO HOLD THE INTRODUCTION OF CAPITAL AS COLORABLE DEVICE AND FOR APPLYING THE RATIO OF M CDOWELL CASE (SUPRA). THIS FACTUAL SITUATION IS ABSENT IN RELATION TO APPEAL FOR A.Y. 1997-98, 1 998-99, 1999-2000 AND 2000-01. THEREFORE ITA NOS. 3622/D/95, 2546/D/01, 3233/D/01, 267/D/03, 4986/D/03 PAGE 230 OF 230 EVEN THE FINDING FOR 1992-93 GIVEN IN PARA 16 OF TH E DRAFT ORDER WILL NOT APPLY IN RELATION TO OTHER YEARS AS THE FACTUAL SITUATION DIFFERS MATERI ALLY. IN VIEW OF ABOVE DISCUSSION, THE SURPLUS IS NOT CHA RGEABLE TO TAX FOR A. Y. 1997-98, 1998- 99,1999-2000 AND 2000-01.ACCORDINGLY GROUNDS RAISED IN THIS REGARD AS TABULATED ABOVE ARE ALLOWED AND ARE DECIDED IN FAVOUR OF THE ASSESSEE. (DEEPAK R. SHAH) ACCOUNTANT MEMBER DATE: 31 ST DECEMBER 2009.