ITO, UDAIPUR V. M/s. Prem Ratan Hotel, UDAIPUR

ITA 74/JODH/2013

• Counselvise Citation: 7423314 RSA 2013
• Duration Of Justice: 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 13-11-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 14-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DEEPAK SEHGAL
• Keywords: Capital asset converted into stock in trade; Sale consideration of property below Jantri Value; Capital asset; Search and seizure; Additional evidence; Date of conversion
• Section: 45(2); 50C; 2(14); 131; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL JODHPUR BENCH, JODHPUR BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.K.SAINI, ACCOUNTANT MEMBER ITA NO. 74/JU/2012 [A.Y 2008-09] THE I.T.O VS. M/S PREM RATAN HOTEL WARD 1(1) RANA BAWRI, CHIRWA UDAIPUR PAN : AAKFP 4376 N (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AMIT KOTHARI SHRI G.K. GARGIEYA SHRI SARVESH BALDI DEPARTMENT BY : SHRI DEEPAK SEHGAL - DR DATE OF HEARING : 13.11.2013 DATE OF PRONOUNCEMENT : 28.11.2013 ORDER PER HARI OM MARATHA, J.M. THIS APPEAL BY THE REVENUE FOR A.Y. 2008-09 IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) JODHPU R, DATED 7.11.2012. 2 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A PARTNERSHIP FIRM WHO CARRIED ON HOTEL BUSINESS. FOR A.Y. 2008-09, IT FILED RETURN OF INC OME [ROI] ON 30.12.2008 DECLARING TOTAL INCOME OF RS. 4,38,14 5/-. THE RETURN WAS ACCOMPANIED WITH A COPY OF TAX AUDIT REPORT U/S 44AB OF THE INCOME-TAX ACT, 1961 [HEREIN AFTER REFERRED TO AS 'THE ACT', FOR SHORT] IN THE PRESCRI BED FORM NO. 3CB AND 3CD. THE PARTNERSHIP FIRM CONSISTS OF TWO PARTNERS; I.E. SHRI SURESH SUTHAR AND SHRI JITENDRA BABEL, HA VING THEIR EQUAL PROFIT/LOSS SHARING RATIO. THE ASSESSEE FURNISHED ITS RETURN OF INCOME CLAIMING THE BUSINESS OF PURCHASE AND SALE O F LAND AND BUILDING AND HAS SHOWN NET LOSS OF RS. 97,81,400/- IN ITS PROFIT AND LOSS ACCOUNT. FURTHER THE ASSESSEE HAS SHOWN A NOTI ONAL LONG CAPITAL GAIN ON TRANSFER OF LAND AND BUILDING AS STOCK IN TRADE TO THE TUNE OF RS. 99,62,485/- ALONGWITH A SHORT TERM CA PITAL GAIN ON SALE OF BUILDING AT RS. 2,59760/-. THE SET-OFF OF LOSS O F BUSINESS FROM LONG TERM AND SHORT TERM CAPITAL GAIN IS SHOWN AS U NDER: LOSS FROM BUSINESS AS ABOVE RS. 97,81,40 0/- LESS: SHORT TERM CAPITAL GAIN RS. 2,59, 760/- RS. 95,21,640/- 3 LESS: LONG TERM CAPITAL GAIN TO THE EXTENT OF BALANCE OF LOSS FROM BUSINESS RS. 9 9,62,485/- LONG TERM CAPITAL GAIN RS. 4,40, 845/- THE ASSESSEE HAD PAID THE TAX ON THE RESIDUAL LONG TERM CAPITAL GAIN OF RS. 4,40,845/- @ 20%. THE TWO PARTNERS HAD JOIN TLY PURCHASED TWO LANDS AT VILLAGE CHIRWA, NEAR RANA BAWRI, UDAIP UR. THE DETAILS OF WHICH ARE AS UNDER: S.N. DETAILS OF LAND PURCHASED FROM DATE OF PURCHASE PURCHASE CONSIDERAT ION 1 ARAGI NO. 4368 AREA .54 HECTRE SHRI ONKAR LAI S/O RAM LAL MENARIA 03.07.19 96 RS. 80,000/-+ REGISTRY CHARGES RS. 5,870/- ARAGI NO. 4386 AREA .03 HECTRE ARAGI NO. 4387 AREA .06 HECTRE ARAGI NO. 4388 AREA .05 HECTRE ARAGI NO. 4389 AREA .05 HECTRE TOTAL KITA NO. 5 AREA .73 HECTRE 2 ARAGI NO. 4390 AREA .07 HECTRE SHRI ONKAR LAL S/O RAM LAL MENARIA 26.09.19 95 RS. 25,000/-+ REGISTRY CHARGES RS. 2,500/- ARAGI NO. 4391 AREA .06 HECTRE ARAGI NO. 4392 AREA .06 HECTRE ARAGI NO. 4393 AREA .02 HECTRE TOTAL KITA NO. 4 AREA .21 HECTRE 4 ON 26.09.1996, A LAND DISTRIBUTION AGREEMENT WAS MA DE BETWEEN THESE TWO PARTNERS VIDE WHICH THEY DISTRIBUTED THE LAND IN THEIR RESPECTIVE FAVOUR AS THE LAND WAS PURCHASED JOINTLY . SHRI SURESH SUTHAR AND SHRI JITENDRA BABEL STARTED A PARTNERSHI P FIRM W.E.F. 26.09.1995 AND FOR THE PURPOSE A PARTNERSHIP-DEED W AS WRITTEN ON 01.01.1996. THE LAND SO DISTRIBUTED WAS INTRODUCED AS CAPITAL OF THE PARTNERS IN THE FIRM. THE PARTNERSHIP-FIRM WAS NAM ED M/S PREM RATAN RESORTS, RANA BAWRI, CHIRWA AND THIS WOULD BE THE BUSINESS PLACE OF THE FIRM ALSO. ACCORDING TO CLAUSE-3, THE MAIN BUSINESS OF THE FIRM SHALL REMAIN HOTEL, RESTAURANT, TOURISM AN D OTHER RELATED ACTIVITIES. THIS PARTNERSHIP DEED WAS DULY SIGNED B Y BOTH THE PARTNERS, AGRICULTURAL LAND WAS INTRODUCED AS CAPIT AL OF THE PARTNERS IN THE FIRM. VIDE CLAUSE-1 OF THIS PARTNERSHIP DEED THE NAME OF THIS FIRM WILL BE M/S PREM RATAN RESORTS, RANA BAWRI, CH IRWA AND THIS WOULD BE THE BUSINESS PLACE OF THE FIRM ALSO. ACCOR DING TO CLAUSE-3, THE MAIN BUSINESS OF THE FIRM SHALL REMAIN HOTEL, R ESTAURANT, TOURISM AND OTHER RELATED ACTIVITIES. THIS PARTNERS HIP DEED WAS DULY SIGNED BY BOTH THE PARTNERS. 5 6. AFTER EXECUTION OF THIS PARTNERSHIP DEED A CONST RUCTION OF HOTEL BUILDING WAS CLAIMED TO BE STARTED BY THE PARTNERS BY MAKING FOLLOWING INVESTMENTS: FINANCIAL YEAR COST OF CONSTRUCTION 1996-97 RS. 11,85,650/- 1997-98 RS. 8,80,150/- 1998-99 RS. 5,24,440/- TOTAL RS. 25,90,240/ - 7. THEREAFTER, W.E.F. 01.04.2001, THE CAPITAL INTRO DUCED BY THE PARTNERS AS PER PARTNERSHIP DEED AND DISTRIBUTION D EED WAS CONVERTED INTO STOCK IN TRADE OF THE FIRM. DURING T HE RELEVANT F.Y. THIS STOCK IN TRADE WAS SOLD AS PER DETAILS HEREUND ER: CONSIDERATI ON S. N. DETAILS OF LAND SOLD ON PURCHASER CLAIMED TO BE DLC VALUE RECEIVED JITENDRA BABEL'S 1 SHARE OF LAND & BUILDING EARLIER INTRODUCED AS CAPITAL 24.01.20 08 M/S SURAJ SAGAR RESORT PVT LTD 41, 00,000/- 2,08,93,200/ - LATER CONVERTED INTO STOCK IN TRADE OF FIRM 6 SURESH SUTHAR'S SHARE 2 OF LAND & BUILDING EARLIER INTRODUCED AS CAPITAL LATER 11.03.20 08 M/S SURAJ SAGAR RESORT PVT LTD 31,00,000/- 1,51,71,600/ - CONVERTED INTO STOCK IN TRADE OF FIRM 8. THE A.O. DIRECTED THE ASSESSEE TO PRODUCE ALL TH E RELEVANT DOCUMENTS TO SUPPORT THE CONTENTION RAISED IN THE R ETURN OF INCOME. THE ASSESSEE DULY REPLIED AND SUPPLIED THE REQUIRED DOCUMENTS WHICH ARE AS UNDER: I) TWO PURCHASE DEEDS OF PURCHASE OF LAND II) PARTNERSHIP DEED DATED 01.01.1996 III) DISTRIBUTION OF LAND DEED 25.09.1996 IV) LAND CONVERSION ORDER OF THE COLLECTOR, UDAI PUR DATED 24.04.1998 V) REVISED PARTNERSHIP DEED DATED 01.04.2001 (O RIGINAL) VI) TWO SALE DEEDS OF THE LAND AND BUILDI NG DATED 24.01.2008 & 11.03.2008. VII) FINAL ACCOUNTS FROM F.Y. 1996-97 TO 2007-08. 7 9. DURING THIS PERIOD, A SEARCH AND SEIZURE OPERATI ON WAS CARRIED OUT IN THE GURPREET SONI GROUP (PURCHASER OF THE LA ND AND BUILDING IN THE CAPACITY OF DIRECTORS OF M/S SURAJ SAGAR RES ORT PVT. LTD.) ON 03.09.2008 I.E. BEFORE THE FILING OF RETURN OF INCO ME BY THE ASSESSEE. THE ASSESSEE FILED ITS RETURN OF INCOME A FTER THAT SEARCH ON 30.12.2008. IN THE CASE OF DEAL ENTERED INTO BET WEEN JITENDRA BABEL (IN THE CAPACITY OF PARTNER OF THE ASSESSEE) AND SHRI GURPEET SONI AND SMT. LABH KAUR SONI (IN THE CAPACITY OF DI RECTOR OF M/S SURAJ SAGAR RESORT PVT. LTD.), IT IS SEEN THAT AS P ER AGREEMENT TO SALE, RS. 65,51,000/- WAS PAID BUT AS PER REGISTERE D SALE DEED THE SALE CONSIDERATION IS SHOWN ONLY AT RS. 31,00,000/- . SO, THERE WAS A DIFFERENCE OF RS. 34,51,000/- WHICH WAS PAID IN CAS H BY THE GURPREET SONI GROUP TO SHRI JITENDRA BABEL AS ON MO NEY. IN HIS STATEMENT RECORDED U/S 132(4) OF THE ACT ON 04.09.2 008, SHRI GURPREET SINGH SONI ADMITTED THE EXCESS AMOUNT OF R S. 34,51,000/- AS HIS UNDISCLOSED INVESTMENT AND HAS SHOWN THIS AM OUNT IN HIS RETURN OF INCOME FOR A.Y. 2008-09. CONSEQUENTLY, ST ATEMENTS OF SHRI JITENDRA BABEL WERE ALSO RECORDED U/S 131 OF T HE ACT ON 26.09.2008 BY THE ACIT, - II, UDAIPUR, IN WHICH, VI DE ANSWER TO QUESTION SHRI BABEL ADMITTED THAT RS. 34,51,000/- W AS RECEIVED BY 8 HIM AS ON MONEY. A PERUSAL OF THE RETURN OF INCOME OF SHRI JITENDRA BABEL REVEALS THAT THE UNDISCLOSED INCOME HAS NOT B EEN SHOWN, NOR THE UNDISCLOSED INCOME WAS SHOWN IN THE RETURN OF T HE ASSESSEE AS WELL, RATHER A BUSINESS LOSS OF RS. 97,81,400/- WAS SHOWN. THE A.O. OBSERVED THAT ON A PRIMA FACIE PERUSAL OF FACTS, DO CUMENTS FILED BY THE ASSESSEE AND FROM THE COMPUTATION OF INCOME IT CAN BE JUDGED THAT THE ASSESSEE USED COLORFUL DEVICES TO EVADE TH E DUE TAX. IT INCREASES THE LIABILITY AND THAT NEITHER THE PARTNE RS NOR THE FIRM HAS FILED THE RETURN OF INCOME FOR A.Y. 2008-09 ON DUE DATE I.E. ON 31.07.2008 AND 30.09.2008 RESPECTIVELY. THE PARTNER , EVEN AFTER CONFESSION IN HIS STATEMENT RECORDED U/S 131 DID NO T SHOW THE UNDISCLOSED INCOME EITHER IN HIS RETURN OF INCOME O R IN THE RETURN OF INCOME OF THE ASSESSEE. THE ASSESSEE GOT SOME TI ME TO USE SUCH COLORFUL DEVICES TO EVADE TAX BEFORE FILING THEIR R ESPECTIVE RETURN OF INCOME. TO REACH THE BOTTOM OF THE TRUTH, CERTAIN E NQUIRIES WERE MADE. THE ASSESSEE WAS ASKED TO PRODUCE THE BOOKS OF ACCOUNTS FOR F.Y. 2001-02 ALONGWITH RELEVANT DOCUMENTS TO S UBSTANTIATE HIS CLAIM THAT THE CAPITAL CONTRIBUTION OF PARTNERS WER E CONVERTED INTO STOCK IN TRADE OF THE FIRM. IN REPLY DATED 14.10.20 10, THE AR OF THE ASSESSEE SUBMITTED AN ORIGINAL PARTNERSHIP DEED DA TED 01.04.2001 9 DULY SIGNED BY SMT. SAROJ SHARMA (NOTARY PUBLIC WIT H REG. NO. IT WAS STATED BY THE ASSESSEE THAT THE STAMP USED FOR THIS PARTNERSHIP DEED IS PURCHASED FROM SHRI MAHESH KOTHARI, THE STA MP VENDOR IN DISTRICT COURT UDAIPUR. NOTICE U/S 131 WAS ISSUED T O SMT. SAROJ SHARMA ON 22.11.2010 AND STATEMENTS WERE RECORDED O N 02.12.2010. SIMILARLY, NOTICE U/S 131 OF THE ACT WA S ISSUED TO SHRI MAHESH KOTHARI, THE STAMP VENDOR, FROM WHOM THE ALL EGED STAMP PAPER WAS CLAIMED TO BE PURCHASED. THE NOTICE WAS I SSUED ON 03.12.2010 AND STATEMENTS WERE RECORDED ON 10.12.20 10. THE ALLEGED REVISED PARTNERSHIP DEED DOCUMENT WAS PUT B EFORE HIM FOR INSPECTION. A SHOW CAUSE LETTER WAS ISSUED TO THE ASSESSEE ON 14.12.2010 AND SERVED ON THE PARTNER SHRI SURESH SU THAR, ENCLOSING THE STATEMENTS OF SMT. SAROJ SHARMA AND SHRI MAHESH KOTHARI WITH THE FOLLOWING QUERY: I) WHY SHOULD NOT THIS PARTNERSHIP DEED BE IGNORED AS YOUR WITNESS (BEING ILLEGAL) AS THE SAME DOCUMENT HAS NOT EVEN E NTERED IN THE STATUTORY REGISTER OF NOTARY PUBLIC AS ACCEPTED BY HER AND EXAMINED BY THE UNDERSIGNED U/S 131. 10 II) WHY SHOULD NOT THIS STAMP PAPER BE TREATED AS I LLEGAL IN THE EYES OF LAW AS NOT SIGNED BY PURCHASER. III) WHY THIS REVISED PARTNERSHIP DEED SHOULD NOT B E TREATED AS VOID AS IT HAS NOT BEEN MADE AFTER FOLLOWING THE LEGAL P ROCEDURE. THE ASSESSEE PRODUCED SHRI KANHAIYA LAI SHARMA WHO IN ANSWER TO QUESTION NO. 7, HE STATED THE SIGNATURES PUT-ON THA T DOCUMENT IS HIS BUT HE DOES NOT KNOW THE CONTENTS OF THE DOCUMENT. HOWEVER, AS PER ASSESSEE'S VERSION SHRI KANHAIYA LAL SHARMA WAS AN INDEPENDENT WITNESS BUT HE IS THE BROTHER IN-LAW OF ONE OF THE PARTNER SHRI SURESH SUTHAR. IN VIEW OF THE ABOVE, THE A.O. CONC LUDED THAT THE ASSESSEE MANAGED TO ARRANGE A BACK DATED STAMP OF R S. 500/-, PUT THE ALLEGED PARTNERSHIP DEED ON IT AND MANAGED TO G ET IT ATTESTED ON A BACK DATE I.E. ON 01.04.2001 JUST TO AVOID THE TAX LIABILITY. 10. THE A.O. SOUGHT PERMISSION FROM THE OFFICE OF THE COLLECTOR, UDAIPUR WHO VIDE ORDER NO 12/3(3)RAJ/HOTEL/98/1093 -1100 DATED 24.04.1998 GRANTED PERMISSION TO USE THE LAND FOR H OTEL BUSINESS PURPOSE WITH SOME CONDITIONS. ORDER. VIDE CLAUSE-LL (L), IT IS 11 COMPELLING ON THE ASSESSEE THAT THE LAND USE CANNOT BE CHANGED WITHOUT THE FURTHER ORDER OF THE COMPETENT AUTHORIT Y WHO GRANTED THE PERMISSION AND IF IT IS DONE, THE ORDER OF USE OF LAND PASSED ORIGINALLY SHALL BE WITHDRAWN AND THE PREMIUM MONEY DEPOSITED BY THE USER OF THE LAND SHALL BE SEIZED. THEREFORE, TH E A.O. CONCLUDED THAT IN VIEW OF THE ABOVE FACT, IT IS CLEAR THAT EV EN IN THE EYES OF OTHER LAWS, THE CHANGE OF USE OF LAND IS NOT PERMIT TED. IN THIS CASE, THE PARTNERS INITIALLY PURCHASED THE LAND, PUT IT A S CAPITAL IN THE FIRM WHICH BECOMES THE CAPITAL ASSET OF THE FIRM AN D THEN CONVERTED THIS CAPITAL ASSET INTO STOCK IN TRADE, T HAT IS TOO AFTER IT IS FORESEEN BY THEM THAT HEAVY LIABILITY OF TAX IS GOI NG TO COME. THE A.O. OBSERVED FURTHER THAT ONE MORE EVIDENCE REGARD ING COLORFUL DEVICE OF EVADING THE TAX IS THAT THE PARTNERS OF T HE ASSESSEE FIRM PURCHASED THE LAND ON 03.07.1996 A 26.09.1995 JOINT LY WITH TWO SEPARATE PURCHASE DEEDS. THE ORIGINAL PARTNERSHIP D EED WAS PREPARED ON 01.01.1996 W.E.F. 26.09.1995. THE LANDS PURCHASED JOINTLY WERE DISTRIBUTED AMONG PARTNERS WITH DISTRI BUTION DEED DATED 26.09.1996. ON THE DATE 26.09.1995, THEY BECO ME THE PARTNER OF THE FIRM M/S PREM RATAN HOTEL WITH THEIR CAPITAL SHARE AS MENTIONED IN THE DISTRIBUTION DEED. IF THE VERSION OF THE ASSESSEE IS 12 CORRECT, THEN THEY MUST CALCULATE THEIR TAX AND FIL E THE RETURN OF INCOME UNDER THE PROVISIONS OF SECTION 45(3) OF THE ACT. THE PARTNERS OF THE FIRM NEVER FILED THEIR RETURN OF IN COME FOR F.Y. 1996-97 IN WHICH THE LAND INTRODUCED AS CAPITAL IN THE FIRM AT THE VALUE OF RS. 54,02,592/- WITH 50% SHARE OF RS. 27,0 1,296/- OF EACH PARTNERS. THE CASE OF THE ASSESSEE WAS THAT THE AG RICULTURAL LAND WAS PURCHASED BY THE PARTNERS AND WAS CONVERTED INT O CAPITAL IN THE ASSESSEE-FIRM AND THEREFORE, THEY ARE NOT LIABLE FO R ANY CAPITAL GAINS TAX. IN THE BALANCE SHEET AS ON 31.3.2007 BO TH THE PARTNERS OF THE ASSESSEE HAVE INTRODUCED RS. 5 LAKHS EACH. IN THIS BALANCE SHEET THE LAND WAS CONVERTED INTO CAPITAL THE ASSES SEE HAS ALREADY SHOWN CAPITAL WORK IN PROGRESS OF RS. 11,85,650/-. WHICH MEANS THAT THE ASSESSEE HAD ALREADY INVESTED RS. 11,85,65 0/- ON CONSTRUCTION OF BUILDING ON THAT LAND OUT OF TOTAL INVESTMENT OF RS. 25,90,240/- WHICH IS A SUBSTANTIAL AMOUNT. 11. A PERUSAL OF THE BALANCE-SHEETS FILED FROM F.Y . 1996-97 TO 2000-01, IT REVEALED THAT THE PARTNERS OF THE ASSES SEE FIRM INTRODUCED THE MONEY AND LOSS SHOWN AS FOLLOWS : 13 BALANCE SHEET FOR THE YEAR MONEY INTRODUCED LOSS DISTRIBUTED (-) SURESH CHANDRA SUTHAR JITENDRA BABEL SURESH CHANDRA SUTHAR JITENDRA BABEL 31. 03.1997 RS. 5,00,000/ - RS. 5,00,000/ - - - 31.03.1998 RS. 6,50,000/ - RS. 6,50,000/ - - _ 31.03.1999 RS. 3,50,000/ - RS. 3,50,000/ - RS. 10,648/ - RS. 10,648/ - 31.03.2000 - - RS. 75,692/ - RS. 75,692/ - 31.03.2001 RS. 2,75,000/ - RS. 2,75, 000/ - RS. 27,948/ - RS. 27,948/ - THE A.O. OBSERVED THAT THE ABOVE CHART SHOWS THAT T ILL THE TRANSFER OF CAPITAL INTO STOCK IN TRADE, THE ASSESSEE HAS DE LIBERATELY SHOWN THE LOSSES IN THE FIRM AND CONSEQUENTLY DISTRIBUTED AMONG THEM. THIS COLORFUL DEVICE IS MADE ONLY TO SHOW THE DEPAR TMENT THAT SINCE THE FIRM IS UNDER LOSS THEY ARE NOT LIABLE TO FILE ANY INCOME-TAX RETURN. ACCORDINGLY, THE A.O. COMPUTED THE LONG TERM CAPITAL GAIN AT RS. 3,58,55,748/- AND SHORT TERM CAPITAL GA IN AT RS. 17,34,987/-. AGGRIEVED, THE ASSESSEE WENT IN APPEA L BEFORE THE LD. CIT(A) WHO HAS DELETED THE SAME BY ADMITTING THE AD DITIONAL EVIDENCE U/R 46A OF THE INCOME-TAX RULES, 1962, THE C.I.T.(A) HAS CONSIDERED THE REQUEST AND EXPLANATION AND ADMITTED ADDITIONAL EVIDENCE OF THE ASSESSEE. 14 13. THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSIO NS OF THE ASSESSEE, HAS TAKEN THE FOLLOWING DECISION: I HAVE PERUSED THE MATERIAL AVAILABLE ON RECORD, CONSIDERED THE SUBMISSIONS OF THE APPELLANT, THE FINDINGS OF THE LD. A.O. THE REMAND REPORT OF THE L D. A.O AND THE REPLY FILED BY THE APPELLANT THEREON. T HE APPELLATE PROCEEDINGS WERE ATTENDED BY THE LD. AR O F THE APPELLANT AND LD. AO, THE ITO W-1 (1), UDAIPUR. AFTER HAVING CONSIDERED THE REMAND REPORT OF THE LD . A.O., THE ADDITIONAL EVIDENCES FILED IN THE FORM OF AFFIDAVIT AND PHOTO COPY OF BAAPI PATTA OF SHRI SUR ESH SUTHAR IS ADMITTED UNDER RULE 46A(1)( C) & (D) OF INCOME-TAX RULES, 1962 AS THE ADDITIONAL EVIDENCE F ILED IS RELEVANT TO DECIDE THE APPEAL. IT IS SEEN THAT PRIOR TO THE FORMATION OF THE APPEL LANT FIRM, THE PARTNERS NAMELY SV. SHRI JITENDRA BABEL S/O SHRI ROOP LAL BABEL & SURESH KUMAR S/O SHRI MANG ILAL JI SUTHAR PURCHASED TWO PIECE OF AGRICULTURAL LAN D MEASURING 0.21 & 0.73 SITUATED AT CHIRWA BEARIN G' AJARI NOS.4390, 4391, 4392 AND 4393 AND 4385 & 43 88 AND 4389 FROM SHRI ONKAR LAL S/O SHRI RAM LALJI AND 03.07.1996 RESPECTIVELY. THEREFORE, THE SAID 15 AGRICULTURAL LAND WAS MUTUALLY DISTRIBUTED AMONGST SHRI JITENDRA BABEL AND SURESH KUMAR ON 26.09.1996. AFTE R THIS, THEY FORMED PARTNERSHIP DEED BY INTRODUCING T HE AGRICULTURAL LAND RECEIVED BY THEM ON MUTUAL DISTRIBUTION AS THEIR CAPITAL ON 31.12.1996. THE PARTNERSHIP DEED WAS EXECUTED ON 01.01.1996. THE CAPITAL OF BOTH THE PARTNERS WAS SHOWN AT RS.54.03 LAKHS BEING THE VALUE OF THE AGRICULTURAL LAND. SUBSEQUENT TO ABOVE AND AFTER TRANSFERRING THE AGRICULTURE LAND TO THE FIRM, THE FIRM APPLIED FOR CONVERSION OF LAND TO CONSTRUCT HOTEL BUILDING AND THE LAND USE WAS CONVERTED VIDE ORDER NO. 12/3(3] /RAJ/HOTEL/98/1093-1100 DATED 24.04.1998. AFTER THI S, THE FIRM TOOK LOAN AMOUNTING TO RS.7.39 LAKHS FROM MEWAR ACHALIKE BANK GRAMIN BANK, BRANCH BHUWANA. IN SUPPORT OF THIS, THE APPELLANT HAS FILED COPY OF AN NUAL ACCOUNT FOR THE YEAR 1998-99 AND 1999-2000 ALONGWIT H COPY OF BANK STATEMENT. THIS GOES TO PROVE THAT TH E FINDING OF THE LD. A.O. THAT THE APPELLANT FIRM HAS NO BANK ACCOUNT IS WRONG. THE HOTEL BUSINESS WAS CONTINUED UPTO MARCH. DUE TO CONSISTENT LOSS IN THE HOTEL BUSINESS, THE BANK LOAN TAKEN BY THE APPELLA NT WAS COMPLETELY SQUARED UP IN THE MONTH OF MARCH,200 1 AND THE FIXED ASSETS OF THE HOTEL WAS CONVERTED IN TO STOCK IN TRADE UNDER SECTION 45(2) OF THE ACT AT TH E 16 PREVALENT DLC RATE BY EXECUTING SUPPLEMENTARY PARTNERSHIP DEED DATED 1.4.2001 THE APPELLANT DECLARED THE LONG TERM CAPITAL GAIN CALCULATED U/S 45(2) ON TRANSFER OF LAND FROM FIXED ASSETS TO STOCK IN TRADE AMOUNTING TO RS.99.62 LACS AND SHORT TERM CAPITAL GAIN ON TRANSFER OF BUILDING FRO M FIXED ASSETS TO STOCK IN TRADE AMOUNTING TO RS.2.50 LAKHS AND AFTER ADJUSTING THE LOSS FROM THE BUSINESS AND PROFESSION FROM SALE OF STOCK AMOUNTING TO RS.97.8 1 LAKHS, GROSS TOTAL INCOME AMOUNTING TO RS.4.41 LACS WAS DECLARED. THE APPELLANT SOLD THE STOCK INTO PIECE MEAL TO M/S SURAJ SAGAR RESORT PRIVATE LTD THROUGH SHRI JITENDR A BABEL AND SHRI SURESH SUTHAR THROUGH SALE DEED DATE D 10.03.2008 AND 22.01.2008 FOR A SUM OF RS.31 LAKHS AND RS.41 LAKHS RESPECTIVELY. HOWEVER, DURING THE COURS E OF SEARCH CONDUCTED AT THE RESIDENCE OF SHRI GURUPREET SONI, THE PURCHASER OF THE STOCK OF THE APPELLANT F IRM, IT WAS NOTICED FROM AGREEMENT THAT ONE HALF PORTION OF THE STOCK IN TRADE SOLD THROUGH ONE OF THE PARTNERS SHRI JITENDRA BABEL FOR RS.65 LAKHS INSTEAD OF RS.31 LAK HS SHOWN IN THE SALE DEED. THE APPELLANT HAS ACCOUNTED FOR THE RECEIPT OF OWN MONEY IN ITS BOOKS OF ACCOUNT ALONGWITH THE SALE PROCEEDS AS PER THE SALE DEED, 17 ENTERED RECEIPT OF THE OWN MONEY HAS BEEN ACCOUNTED FOR. THIS IS CLEAR FROM THE PAGE 69/86 OF THE PAPER BOOK WHICH IS COPY OF AUDITED PROFIT AND LOSS ACCOUNT FO R THE YEAR 31.03.2008. IT CLEARLY PROVES THAT THE FINDING OF THE LD. A.O. THAT THE APPELLANT HAS NOT DECLARED TH E RECEIPT OF OWN MONEY ON ACCOUNT OF SALE OF LAND AND THE BOOKS OF ACCOUNT MAINTAINED ARE NOT RELIABLE. AS REGARDS THE FINDINGS OF THE LD. A.O. THAT THE LA ND PURCHASED BY THE PARTNERS AND BROUGHT AS THEIR CAPI TAL IS NOT BE MENTIONED HERE THAT THIS OBSERVATION IS APPARENTLY WRONG BECAUSE AFTER TRANSFERRING THE SAI D LAND TO THE FIRM, THE APPELLANT FIRM HAS GOT THE LA ND CONVERTED INTO NON AGRICULTURAL LAND AND STARTED TH E HOTEL BUSINESS. THEREFORE, IT CANNOT BE SAID THAT T HE LAND PURCHASED AND BROUGHT BY THE PARTNERS AS THEIR CAPITAL IS NOT AGRICULTURAL LAND. AS REGARDS THE FINDINGS OF THE ASSESSING OFFICER TH AT THE APPELLANT FIRM IS NOT ENTITLED TO DO ANY OTHER BUSI NESS EXCEPT HOTEL BUSINESS IS FACTUALLY INCORRECT AS IS EVIDENT FROM CLAUSE 3 OF THE PARTNERSHIP DEED DATED 01.01.1 996 WHICH READS AS UNDER: 18 ' THE MAIN BUSINESS OF THE FIRM WILL BE THE HOTEL, RESTAURANT, TOURISM AND BUSINESS RELATED DIRECTLY OR INDIRECTLY WITH THE ABOVE AND ANY OTHER BUSINESS AS MAY BE MUTUALLY DECIDED BY THE PARTNER' FROM TIME TO TIME WITH OR WITHOUT EXISTING BUSINESS.' FROM THE AFOREMENTIONED CLAUSE IT MAY BE SEEN THAT THE ONLY CONDITION TO CHANGE OR DO OTHER THAN THE HOTEL , RESTAURANT AND TOURISM IS THE MUTUAL AGREEMENT OF T HE PARTNERS OF THE ASSESSEE FIRM. IN THE CASE OF THE APPELLANT, BOTH THE PARTNERS MUTUALLY DECIDED AND AGREED TO DO THE REAL ESTATE BUSINESS. IT IS SETTLE D LAW THAT REVENUE AUTHORITIES CANNOT DECIDE WHAT BUSINES S AN ASSESSEE SHOULD CARRY OUT. IT IS ALWAYS OPEN TO ASS ESSEE TO CHANGE HIS BUSINESS. THE REVENUE CANNOT FORCE TH E ASSESSEE TO CONTINUE WITH LOSS MAKING VENTURE. SO F AR AS THE FINDING THE OF LD. AO IS CONCERNED WITH REGARD TO TAKING PERMISSION FROM THE COLLECTOR FOR CHANGE O F BUSINESS FROM HOTEL BUSINESS TO REAL ESTATE J BUS INESS IS MISCONCEIVED. IT MAY BE MENTIONED THAT AS PER THE CONVERSION ORDER, SUCH RESTRICTION IS ONLY FOR TWO YEARS FROM THE DATE OF CONVERSION OF LAND. HOWEVER, IN TH E CASE OF THE APPELLANT THE LAND WAS CONVERTED ON 24.04.1998 AND WAS THROWN INTO STOCK IN TRADE IN MA RCH, 2001. MOREOVER, THIS CANNOT BE MADE A BASIS FOR 19 TREATING THE SALE PROCEEDS TO CHARGE CAPITAL GAIN U NDER SECTION. THE A.O. HAS TREATED THE SALE PROCEEDS OF THE STOCK IN TRADE AS SALE PROCEEDS OF CAPITAL ASSETS AND CHARGE D CAPITAL GAIN TAX ALSO ON THE BASIS THAT THE STAMP P APER PURCHASED FOR EXECUTION OF SUPPLEMENTARY PARTNERSHI P DEED TO CONVERT THE FIXED ASSETS OF THE APPELLANT F IRM INTO STOCK IN TRADE HAS BEEN BACK DATED TO AVOID LI ABILITY OF THE CAPITAL GAIN TAX. SUCH INFERENCES WERE DRAWN ON THE BASIS OF THE STATEMENT OF ONE SHRI MAHESH KOTHA RI, STAMP VENDOR RECORDED BY THE LD. A.O. U/S 131 OF TH E ACT ON 10.12.2010 WHEREIN THE STAMP VENDOR DENIED T O HAVE SOLD ANY STAMP PAPER TO THE APPELLANT. SIMILAR LY, THIS INFERENCE WAS ALSO ASKED UPON THE STATEMENT OF SMT. SAROJ SHARMA, NOTARY PUBLIC RECORDED BY THE A. O. U/S 131 OF THE ACT ON 02.12.2010 WHEREIN SHE HAD ST ATED THAT SHE USED TO DO THE ATTESTATION ON BACK DATE. HOWEVER, BOTH THE ABOVE STATEMENTS HAVE BEEN AFORESAID PERSONS BY WAY OF AFFIDAVITS AND ALSO BY THE STATEMENT RECORDED BY THE A.O. DURING THE COURSE OF REMAND PROCEEDINGS WHERE BOTH THE ABOVE PERSONS HAV E CATEGORICALLY STATED THAT THEY COULD NOT UNDERSTAND THE QUESTION ASKED BY THE A.O. AT THE TIME OF EARLIER STATEMENT. SO, PROPER REPLY COULD NOT BE GIVEN. THE 20 APPELLANT HAS PURCHASED THE STAMP PAPER FROM SHRI MAHESH KOTHARI, STAMP VENDOR IS EVIDENT FROM THE PHOTO COPY OF THE REGISTER MAINTAINED FOR SALE OF T HE STAMP PAPER WHICH IS RECEIVED ALONGWITH THE REMAND REPORT OF THE LD. A.O. AS PER THIS PAGE, THE STAMP PAPER OF RS.500 WAS SOLD TO THE APPELLANT HAS BEEN ENTERE D AT SL. NO.38 BEFORE 24.3.2001 WHEREAS THE SUPPLEMENTAR Y DEED WAS EXECUTED ON1.4.2001 BE SAID THAT THE SAID PARTNERSHIP DEED HAS BEEN BACK DATED. AS REGARDS TH E ATTESTATION ON BACK DATE, IT MAY BE MENTIONED HERE THAT SMT. SHARMA HAS STATED THAT SHE USED TO DO THE ATTESTATION ON BACK DATE, BUT SHE NEVER STATED THAT THE PARTNERSHIP DEED OF THE APPELLANT HAS BEEN ATTESTED ON BACK DATE. FURTHER, AS PER THE DETAILS FILED, THERE IS NO MUCH BENEFIT TO THE APPELLANT IN BACKDATING THE PARTNERS HIP DEED. AS REGARDS THE FINDING OF THE A.O. REGARDING NON FI LING OF THE RETURN BY THE PARTNERS, IT MAY BE MENTIONED HERE THAT AS MATERIALS AVAILABLE ON RECORD, THE INCOME O F THE PARTNERS WAS BELOW TAXABLE LIMIT. FURTHER, AS PER T HE PROVISIONS SECTION 2(14) OF THE ACT AGRICULTURAL LA ND IS NOT A CAPITAL ASSET. 21 FROM ABOVE DISCUSSIONS, IT IS CONCLUDED THAT THE LD . AO HAS NOT PLACED THE UNREBUTTABLE MATERIAL ON RECORD IN SUPPORT OF HIS FINDING THAT PROPERTY IN QUESTION REMAINED FIXED ASSETS OF THE APPELLANT FIRM AND CONVERSION INTO STOCK IN TRADE WAS SHAM. IN THE ABS ENCE OF SUCH MATERIAL CAPITAL GAIN TAX CAN BE LEVIED ON TRANSFER OF STOCK IN TRADE OF THE APPELLANT FIRM. THEREFORE, THE LD. A.O. WAS NOT JUSTIFIED IN APPLYI NG THE PROVISIONS OF SECTION 50C OF THE ACT. IN THIS V IEW OF THE MATTER LD. A.O. IS DIRECTED TO TREAT THE SALE PROCEEDS AS SALE PROCEEDS OF STOCK IN TRADE AND THEREFORE DELETE THE ADDITION OF RS. 3,30,05,748/-. IN THE RESULTS, THE GROUND NO.1 & 2 IS ALLOWED. 14. BEFORE US, BOTH THE PARTIES HAVE REITERATED THE IR EARLIER STANDS. THE LD. A.R. HAS SUBMITTED HIS SUBMISSIONS WITH A LENGTHY PAPER BOOK RUNNING INTO NUMEROUS PAGES. WE HAVE GO NE THROUGH THE ENTIRE RECORD. IT HAS BEEN ARGUED BY THE LD. A. R. THAT CONVERTING OF CAPITAL ASSET BY THE PARTNERS OF A FIRM INTO STO CK IN TRADE IS PERMISSIBLE UNDER THE LAW AND IF IT IS SO DONE IT D OES NOT ATTRACT ANY TAX LIABILITY ON THE ASSESSEE. THE LD. D.R. HAS HE AVILY RELIED ON THE A.O.S ORDER AND DOCUMENTS FOUND DURING SEARCH ALON GWITH STATEMENTS OF VENDORS AND NOTARY PUBLIC. THE LD. A .R. HAS 22 CONTROVERTED THE RELIANCE OF LD. D.R. ON THE STATEM ENTS OF THE STAMP VENDOR AND NOTARY PUBLIC WHICH ARE STATED TO HAVE BEEN RETRACTED BY BOTH OF THEM DURING THE REMAND PROCEED INGS. IT IS FOUND FROM THE RECORDS FOR A FACT THAT PRIOR TO FOR MATION OF THE FIRM, THE PARTNERS HAD PURCHASED TWO PIECES OF AGRI CULTURAL LAND SITUATED IN THE REVENUE ESTATE OF CHIRWA, UDAIPUR. THERE IS NO DISPUTE REGARDING THE NOMENCLATURE AND SITUATION OF THIS LAND. THESE PIECES OF LAND WERE PURCHASED FROM SHRI OMKAR LAL ON 26.9.1995 AND 3.7.1996 RESPECTIVELY. THESE PIECES WERE MUTUALLY DISTRIBUTED AMONGST THEM ON 26.9.1996. THEREAFTER, BOTH OF THEM FORMED A PARTNERSHIP FIRM BY INTRODUCING AGRICULTUR AL LAND RECEIVED BY THEM ON MUTUAL DISTRIBUTION AS THEIR CAPITAL CON TRIBUTION ON 31.12.1996. THIS PARTNERSHIP DEED WAS EXECUTED ON 1.1.1996. CAPITAL OF BOTH THE PARTNERS HAS BEEN SHOWN AT RS.5 4.03 LAKHS BEING VALUE OF AGRICULTURAL LAND. THEREAFTER, THE FIRM A PPLIED FOR CONVERSION OF LAND TO CONSTRUCT HOTEL BUILDING AND THE LAND USE WAS CHANGED VIDE ORDER DATED 24.4.1998. THEREAFTER THE FIRM TOOK A LOAN OF RS. 7.35 LAKHS FROM MEWAR ACHALIK BANK [GRA MIN BANK BRANCH], BHUWANA. THIS FACT IS SUPPORTED BY COPIES OF ANNUAL ACCOUNTS FILED FOR A.Y. 1998-99 AND 1999-2000 ALONG WITH COPIES OF 23 BANK STATEMENTS. THE FIRM HAS BANK ACCOUNT AS WELL . HOTEL BUSINESS WAS CONTINUED UPTO MARCH 2001 AND DUE TO H EAVY LOSSES, IT WAS CLOSED DOWN AND THE BANK LOAN TAKEN WAS SQUARED UP IN THE MONTH OF MARCH 2007 AND FIXED ASSETS OF THE HOTEL W ERE CONVERTED AT THE PREVALENT DLC RATES BY EXECUTING SUPPLEMENTA RY PARTNERSHIP DEED ON 1.4.2001. THE ASSESSEE-FIRM DECLARED LONG TERM CAPITAL GAIN CALCULATED U/S 45(2) ON THE TRANSFER OF LAND F ROM FIXED ASSETS TO STOCK IN TRADE AMOUNTING TO RS. 99.62 LAKHS AND SHORT TERM CAPITAL GAIN ON TRANSFER OF BUILDING FROM FIXED ASS ETS TO STOCK IN TRADE AMOUNTING TO RS. 2.50 LAKHS AND AFTER ADJUSTI NG THE LOSS FROM THE BUSINESS AND PROFESSION FROM SALE OF STOCK AMOU NTING TO RS. 97.81 LAKHS, GROSS TOTAL INCOME AMOUNTING TO RS. 4. 41 LACS WAS DECLARED. THIS STOCK WAS SOLD IN PIECE MEAL TO M/S SURAJ SAGAR RESORT P. LTD THROUGH SHRI JITENDRA BABEL AND SHRI SURESH SUTHAR THROUGH SALE DEED DATED 10.3.2008 AND 22.1.2008 FOR A SUM OF RS. 31 LAKHS AND 41 LAKHS RESPECTIVELY. AS DISCUSSED ABOVE, DURING SEARCH IN SHRI GURPREET CASE, WHO IS A PURCHASER OF THIS STOCK OF THE ASSESSEE FIRM, ON MONEY PAYMENT WAS TAKEN INTO ACCO UNT ALONGWITH SALE PROCEEDS AS PER THE SALE DEED. THE LAND IN QU ESTION WAS AGRICULTURAL AND ITS USER HAS BEEN GOT CONVERTED. AS PER THE 24 PARTNERSHIP DEED, THE ASSESSEE FIRM COULD PURSUE AL LIED BUSINESS AS DISCUSSED ABOVE. HOWEVER, IT COULD BE DONE BY MUTU AL AGREEMENT OF THE PARTNERS OF THE FIRM. IN THIS CASE, BOTH TH E PARTNERS HAD MUTUALLY AGREED TO DO REAL ESTATE BUSINESS. SO THI S CANNOT BE AN AREA OF CONTROVERSY BY THE REVENUE. IT IS FOUND TH AT THE LAND WAS CONVERTED ON 24.4.1998 AND WAS THROWN INTO STOCK IN TRADE IN THE MONTH OF MARCH 2001. THEREFORE, SECTION 50C OF THE ACT WOULD NOT APPLY. AS WE HAVE DISCUSSED ABOVE THE STATEMENTS O F THE STAMP VENDOR, NAMELY, SHRI MAHESH KOTHARI AND SMT. SAROJ SHARMA, NOTARY PUBLIC WOULD NOT HELP THE REVENUE IN THE GIVEN SCEN ARIO WHERE THEY HAVE CLEARLY EXPLAINED THEIR EARLIER VERSION WHICH AMOUNT TO JUST RETRACTING OR EXPLAINING THE EARLIER STATEMENT. TH ESE STATEMENTS STAND RETRACTED BY WAY OF AN AFFIDAVIT FILED BY BOT H OF THEM. THE RETURNS COULD NOT BE FILED BY THE PARTNERS BECAUSE THEY HAD BELOW TAXABLE LIMIT INCOME AND ARE ABSOLVED FROM FILING T HE SAME IN TERMS OF SECTION 2(14) OF THE ACT. ACCORDINGLY, THE DELE TION OF ADDITION OF RS. 3,30,05,748/- BY THE LD. CIT(A) IS QUITE IN ORD ER AND CANNOT BE DISTURBED BY US. ACCORDINGLY, WE CANNOT ALLOW THIS APPEAL OF THE REVENUE WHICH IS LIABLE TO BE DISMISSED. 25 15. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 28 TH NOVEMBER, 2013. SD/- SD/- (N.K.SAINI) [HARI OM MARATHA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 28 TH NOVEMBER, 2013 VL/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT BY ORDER 4. THE CIT(A) 5. THE DR ASSISTANT REGISTRAR ITAT, JODHPUR