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Shri C. Ramaiah Reddy Versus The Deputy Commissioner of Income Tax

2015 (5) TMI 468 - ITAT BANGALORE

Long term capital gain on sale of long term capital assets - chargeabilty to tax u/s. 45(2) - the assets received by the assessee at the time of partition are capital assets or stock-in-trade? - Held that:- From the above decision of the Tribunal in the assessee’s own case [2012 (6) TMI 56 - ITAT BANGALORE] it is seen that the assessee in block assessment proceedings claimed that all the properties held by him and the income arising therefrom belong to the joint family (HUF) and not to him in hi .....

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a capital asset into stock-in-trade. As already observed by us, there is no material on record to support the view taken by the Assessing Officer that the assessee received certain capital assets on partition of the joint family which were later converted to stock-intrade by the assessee. A perusal of both the order of the Tribunal in the assessee’s case in the block assessment coupled with the Memorandum of Family Arrangements and Oral Partition dt.6.3.2004 clearly establishes that the erstwhil .....

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of the matter, we hold that the provision of section 45(2) of the Act are not applicable in the instant case and consequently the computation of capital gains made by the Assessing Officer is cancelled.

From the ratio of the judgment of Kallooram Govindam v CIT [1965 (3) TMI 26 - SUPREME Court ] it is clear that the value of the properties fixed at the time of partition or determined aliunde would be the cost to be adopted in the hands of the recipient of the properties. However, th .....

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s, viz. stock-in-trade etc., the ratio of the judgment of the Hon'ble Apex Court would be applicable and it is the cost at which the assessee acquired the property in the partition that has to be taken. Therefore, the judgment of the Hon'ble Apex Court would be squarely applicable to the facts of the instant case and the assessee is justified in adopting the said cost for computing income from business.Thus hold that the provisions of section 45(2) of the Act are not applicable to the fa .....

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tion was filed. In our view, when the quantum of jewellery found and the valuation is not disputed, the value as per the valuation report ought to have been offered as income on account of excess jewellery found. The valuation is done only as on the date of search. Therefore, the revenue authorities were justified in making the impugned addition. We, therefore, confirm the order of the CIT(Appeals) - Decided against assessee. - ITA Nos. 1778 & 1779/Bang/2013 - Dated:- 10-4-2015 - Shri N.V. Vasud .....

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apital assets accrued to the assessee during the A.Ys. 2011-12 & 2012-13 chargeable to tax u/s. 45(2) of the Act. 3. The appeal for A.Y. 2011-12 arises out of an order passed by the AO u/s. 143(3) r.w.s. 153A of the Act, while the appeal for A.Y. 2012-13 arises out of the order passed by the AO u/s. 143(3) of the Income-tax Act, 1961 [ the Act ]. 4. In the appeal for A.Y. 2011-12, the assessee has also challenged the validity of initiation of search on the assessee u/s. 132 of the Act, based .....

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he joint family included the real estate business and stock-in-trade of the real estate business were valued at fair market value and based on the same, properties were allotted to the members of the HUF. The assessee continued carrying the real estate business in his individual capacity. The stock-in-trade of the HUF real estate business which was allotted to the assessee was also treated as stock-in-trade of the business of real estate carried on by the assessee in his individual capacity. 6. .....

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of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (1A) …….. (2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or it .....

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assessee obtained on partition of the stock-in-trade of the HUF was a capital asset in the hands of the assessee in his individual capacity and the Act by which the assessee treated the said assets received on partition as stock-in-trade of the business of real estate carried on by him amounted to a transfer within the meaning of section 45(2) of the Act. Such transfer will be charged to tax only when the capital asset converted as stock-in-trade of business is ultimately sold by the assessee. .....

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view to avoid taxes legitimately payable. Though such a stand has been taken by the AO in the order of assessment, ultimately while computing the capital gains u/s. 45(2) of the Act, the AO took the cost of acquisition as per the values determined in the Deed of Partition on 6.3.2004. 9. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. Hence these appeals by the assessee before the Tribunal. 10. At the time of hearing of the appeals, the ld. counsel for the assessee br .....

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n capital gain was challenged by the Assessee before the Tribunal. The Tribunal in ITA No.122/Bang/2011 for A.Y. 2006-07 in its order dated 25.5.2012 considered the above issue and came to the conclusion that the provisions of section 45(2) of the Act are not attracted to the case of the assessee. The Tribunal also held that the provisions of section 49(1) will also not apply. The Tribunal in para 8 of its order came to the conclusion that there was no evidence to show that there was conversion .....

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n, the assets of the joint family including the stock-in-trade were valued at fair values and based on the same, allotment of properties were made. Thirdly, it is also not in dispute that the assessee is continuing to carry on the real estate business carried on by the erstwhile joint family and that the income from the sale of properties is to be assessed under the head business income . It is in this background of undisputed facts, that we have to see as to whether liability under section 45(2 .....

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ved on partition constitutes capital assets. Such a proposition is, however, incorrect. This is because of the nature of assets held by the joint family is certainly relevant and in fact the same is material to resolve and decide the dispute. 7.7 In order to ascertain the nature of assets held by the erstwhile joint family of the assessee, it is necessary to consider the background of the assessee and the issues arising in the assessee s case in the earlier years. In the paper book furnished by .....

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lands / constructions are carried on by the assessee only by ploughing back the wealth he obtained from HUF nucleus. From the facts it is also well founded that there was no other income to the assessee from any other source, other than from HUF. The learned City Civil Judge also held that the properties mentioned in the schedule to the suit are joint family properties. We have, therefore, no hesitation in holding that the entire properties are only HUF properties including the value declared i .....

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Tribunal after consideration of the material placed before it, held that the entire properties held by the assessee belonged to his joint family, as the same were ancestral in character and any purchase and sale of property was only by ploughing back the wealth obtained from the HUF nucleus. The assessee in his individual capacity did not have income from any source. In fact, in the course of search proceedings, it was also stated by the assessee that he was doing real estate business and this .....

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ached by us is further corroborated and fortified by the recitals in the Memorandum of family arrangement and oral partition dt.6.3.2004 (page 103 of assessee s paper book), which is relied on by the Assessing Officer and learned CIT(A) in order to hold that the assets received by the assessee on partition were capital assets while computing the capital gains under section 45(2) of the Act. It is relevant to reproduce clause (2) of the Memorandum of Family Arrangement and Oral Partition which re .....

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ed rights in all the assets of the family to ward of all possible litigations and bickering among the members thereof in future. From a reading of the aforesaid clause (2), it becomes clear that all properties of the joint family, especially the capital of the family in the real estate business in the Memorandum dt.6.3.2004. It is only thereafter that the assessee was allotted the balance of the capital of the family in the real estate business in accordance with the terms and conditions of clau .....

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to No.5 in the oral family arrangement and partition towards their respective shares to be owned and enjoyed by him in severality to the exclusion of parties No.2 to No.5 absolutely. ………….. …………… 7.9 We also find from a perusal of the terms and conditions of clauses 4 to 7 of the Memorandum of Family Arrangement and Oral Partition dt.6.3.2004 that the following persons were allotted substantial sums towards their share and rights in .....

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allotted the balance of the capital of the family in real estate business after providing for the allotment to be made to the other four members of joint family as listed out above. It is also seen that this capital of the family in real estate business has been arrived at after making a fair market valuation of all the assets forming part of stock-in-trade of the real estate business of the erstwhile joint family. Therefore, it is clear that the cost of the assets allotted to the assessee is by .....

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e decision of this Tribunal in the assessee s own case for the block period, referred to earlier in this order. We, therefore, hold that the assessee, on partition of the joint family, had received the balance capital of the family in the real estate business comprising various assets, which were in the nature of stock-in-trade and it cannot be considered that the various assets or properties received by the assessee on partition are capital assets and these capital assets were converted into st .....

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acted only when there is a conversion of a capital asset into stock-in-trade. As already observed by us, there is no material on record to support the view taken by the Assessing Officer that the assessee received certain capital assets on partition of the joint family which were later converted to stock-intrade by the assessee. A perusal of both the order of the Tribunal in the assessee s case in the block assessment coupled with the Memorandum of Family Arrangements and Oral Partition dt.6.3.2 .....

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ssessee or the joint family. In this view of the matter, we hold that the provision of section 45(2) of the Act are not applicable in the instant case and consequently the computation of capital gains made by the Assessing Officer is cancelled. (emphasis supplied) 11. In para 9 of its order, the Tribunal came to the conclusion that the provisions of section 49(1) of the Act will have no application to the case of the assessee. The following were the relevant observations of the Tribunal:- 9. The .....

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total or partial partition of the HUF. Section 49(1) of the Act will have no application in case the assets received on partition are not capital assets in the hands of the HUF, as in the instant case where they are stock-in-trade. We have already held that the view of the Assessing Officer, that the assets received by the assessee on partition were capital assets is not borne out by any material on record and therefore the provisions of section 49(1) of the Act are not applicable. In this regar .....

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he previous owner is deemed as the cost of acquisition of the asset. It is apparent from the language of sub-s. (1) itself which opens with the words Where the capital asset became the property of the assessee and after enumerating certain situations, provides that the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. The phrase the asset used in the later part of the provision relates to the capital asset which became the p .....

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tion of the property at the time of partition was dealt with by the Tribunal and the Tribunal came to the conclusion that the valuation as adopted at the time of partition was correct and had to be accepted. The following were the relevant observations of the Tribunal:- 10. Finally for consideration is whether the assessee was justified in adopting the cost of assets sold at the values fixed at the time of partition. In this connection, the Hon'ble Apex Court in the case of Kalooram Govindra .....

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rought about by an unambiguous declaration of their intention to divide, i.e. by a conscious alteration of their status. Such a declaration brings about a division in status. At that stage the members of an erstwhile joint family become tenants-in-common. The next step is the division by metes and bounds whereunder separate properties are allotted towards the said definite shares of the individuals. Whether the said process involves transfer or not within the meaning of the Transfer of Property .....

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far. Take the following illustration : A and B were members of a joint Hindu family in 1930 and continued to be so till 1960, when a partition was effected between them. They had 4 houses in4 villages; and the original cost of each of the houses was ₹ 100. If a partition had taken place in 1930 or thereabout, each one of the two brothers would have got 2 houses each, and the partition would have been equitable and fair. But during these 30 years one village developed into a town and the va .....

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e original cost of the house at the time it was built or purchased was only ₹ 100. Because of the uneven rise in prices of the different houses, instead of two houses he got only one house at the partition. The cost to him, therefore, would be the cost at which the property was valued at the partition or at which it was auctioned for the purpose of partition. Take another illustration : Instead of partitioning the properties by evaluation thereof, the houses were sold to a third party. So .....

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ast. Other illustrations may be visualized. Barring the cases of fraud, collusion and inflation and deflation of values for ulterior purposes, cost of an asset to a divided member must necessarily be its cost to him at the time of partition, whether mentioned in the partition deed or ascertained aliunde. From the ratio of the judgment of the Hon'ble Apex Court cited above, it is clear that the value of the properties fixed at the time of partition or determined aliunde would be the cost to b .....

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provisions of section 49(1) of the Act, does not apply to other assets, viz. stock-in-trade etc., the ratio of the judgment of the Hon'ble Apex Court would be applicable and it is the cost at which the assessee acquired the property in the partition that has to be taken. Therefore, the judgment of the Hon'ble Apex Court would be squarely applicable to the facts of the instant case and the assessee is justified in adopting the said cost for computing income from business. (emphasis suppl .....

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s of the case can be adopted as such as cost of acquisition of the property and whether the decision of Hon ble Supreme Court in the case of Kallooram Govindam v CIT (MP) 57 ITR 335 can be applied in this regard under the circumstances of the case? (iii) Whether section 45(2) is to be applied? Whether any benefit of long term capital gain is to be allowed u/s 45(2)? (iv) Whether under the circumstances of the case, the decision of Hon ble ITAT for A.Y. 2006-07 dated 25.05.2012 can be applied in .....

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on at all and therefore the discussion of the CIT(Appeals) on the above issues, in our view, is not relevant. 16. Respectfully following the decision of the Tribunal referred to above, we hold that the provisions of section 45(2) of the Act are not applicable to the facts of the case and therefore there cannot be any long term capital gain that can be brought to tax under those provisions for A.Ys. 2011-12 & 2012-13. The relevant grounds of appeal are allowed. 17. As we have observed, the ot .....

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