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Commissioner of Income Tax -I Versus M/s Carlton Hotel Pvt Ltd.

2017 (1) TMI 1471 - ALLAHABAD HIGH COURT

Capital gain computation - consideration paid for free-hold -lawful right or interest in the property - Assessee transfers his land by way of "capital contribution" and becomes a partner in the firm, does it result in transfer in terms of Section 2 (47) of Act, 1961 or the term ''transfer' has to be construed in the light of Act, 1882 - Whether Tribunal has erred in law in holding that full value of consideration shall be determined as per Section 45 (3) and not under Section 50C of Act, 1961? .....

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ht or interest in the property in dispute which belonged to State of U.P. Even as per book value, cost of land determined and share profits determined between the parties and their capital contribution is so negligible, as it did not conform to even any normal business transaction entered into by a person of ordinary prudence, and, therefore, there existed all the facts and circumstances to show prima facie that entire transaction of contribution to partnership is a sham and fictitious transacti .....

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in the light of the fact that contribution of immovable property as partnership asset by a person is ''transfer' and has the effect of extinguishing or limiting rights and interest of the owner partner and, therefore, such a non-testamentary document is within the ambit of Section 17 (1)(b) of Indian Registration Act, 1908 - However, we find that the Tribunal has not looked into the matter with regard to colorable device and sham transaction of partnership, which was an issue directly rais .....

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dit Agarwal for respondent. 2. This is an appeal under Section260A of Income Tax Act, 1961 (hereinafter referred to as "Act, 1961") arising from judgment and order dated 14.11.2008, passed by Income Tax Appellate Tribunal, Lucknow Bench (hereinafter referred to as ''Tribunal') in I.T.A. No. 227/Luc/2008, relating to Assessment Year (hereinafter referred to as ''A.Y.') 2004-05. 3. Appellant has raised following substantial questions of law:- i. Whether Tribunal h .....

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ideration in respect of transfer of land shall be the amount recorded in the books of the firm only as per Section 45 (3) of Act, 1961? (iii) Whether Tribunal has erred in law in holding that provisions of Section 50C of Act, 1961 cannot be invoked if registration of land, transferred, has not taken place, and no stamp duty has been paid as in the instant case? iv. Whether Tribunal has erred in law in holding that cost of acquisition in respect of transfer of land of 10,000 Sq.ft. will be cost o .....

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land continued with Assessee. 6. In view of government policy for conversion of ''Nazul' into freehold, a sum of ₹ 8,94,94,944/- was paid and ''Nazul' land measuring 364937 Sq.ft. was converted into freehold vide Freehold Deed dated 31st March, 2002. The conversion rate comes to ₹ 245.234 per Sq.ft. 7. A portion of aforesaid land i.e. 10,000 Sq.ft. was sold by Assessee to M/s Sahara India Commercial Corporation Ltd. (hereinafter referred to as ''SICCL .....

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e for the purpose of stamp duty which was ₹ 11,600/- per Sq.mts. plus 15% addition for corner plot. 9. Return of the income was filed by Assessee for A.Y. 2004-05 on 01.11.2004 at a total income of ₹ 35,22,840, total loss amounting to ₹ 25,51,985/- from hotel business and long term capital gain of ₹ 60,74,821/-. 10. Further, on 31.03.2004, Assessee entered into a partnership in the name and style of "M/s India Housing" with SICCL, and one individual Sri I. Ahmad .....

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g Assessee to show cause why capital gain as per Section 50C of Act, 1961 be not charged on the transfer of land as "capital contribution" to partnership firm. 12. Assessee submitted reply stating that it was carrying a value of ₹ 11,89,03,440/- of 364937 Sq.ft. Land, (at the rate of ₹ 325.819 per Sq.ft.) under the head "land" reflected in the schedule of fixed assets in balance sheet filed along with return. During year in question, it entered into partnership an .....

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rought in by partners is chargeable to ''capital gain' in the hand of partnership who brings in such share as ''capital'. Section 45 (3) then says that for the purposes of Section 48, amount recorded in the books of accounts of Firm, as the value of "capital asset", shall be deemed to be the full value of consideration received or accruing as a result of transfer of capital asset. Section 50C would not be attracted, as claimed by Assessee. Section 50C would be a .....

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ed to Section 14 of Indian Partnership Act, 1932 (hereinafter referred to as ''Act, 1932'). Assessee asserts, when a partner contributed to the stock of firm, in the form of immovable property, no registration or document is necessary for such transfer. Interest of partner in a partnership asset cannot be regarded as a right or interest in immovable property within the meaning of Section 17 (1) of Indian Registration Act, 1908 (hereinafter referred to as ''Act, 1908'). As .....

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he aforesaid order of ACIT, Assessee preferred appeal, being Appeal No. CIT(A)I/Lko/06-07/512/286 before Commissioner of Income Tax (Appeals) [hereinafter referred to as ''CIT(A)']. Though appeal was partly allowed, but with regard to application of Section 50C, CIT(A), vide order dated 14.02.2008, upheld the view taken by ACIT and computation of capital gain on 2,40,000 Sq.ft. land at ₹ 23,35,78,399/- was also upheld. With regard to computation of capital gain in respect of tr .....

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l was partly allowed, with which we are not concerned in the present appeal. 16. In respect of aspects adjudicated against Assessee by CIT(A), further appeal before Tribunal was taken by Assessee, which has been decided vide impugned judgment and order dated 14.11.2008. Tribunal has allowed appeal. It has held that neither Section 50C of Act, 1961 could have been invoked in the case in hand, nor Assessee could have been denied benefit of Section 55 (2) (b), since it is an option given to Assesse .....

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mad Nil (0%) 19. Some of the terms and conditions of partnership deed which have been noticed by CIT(A) in its order dated 14.02.2008, may also be reproduced as under :- i) The share of the assessee in profits is only 5% (clause 12 of the deed). ii) Mr. I. Ahmad is the Managing Partner (clause 5) and not the assessee through its director. iii) Construction on the plot is to be carried out by M/s Sahara India Commercial Corporation Ltd. (clause 7). iv) No civil, criminal or financial liability of .....

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ed in the project. (clause 16) viii) Decision of M/s Sahara India Commercial Corporation Ltd. regarding introduction of new partners shall be final. (clause 19) ix) There is no right to the assessee on the name and goodwill of the firm. It is exclusive right of M/s Sahara India Commercial Corporation Ltd. (clause 21) x) The assessee shall not make any change in the composition of Board controlling interest in its share capital. (clause 25) xi) Above all, in case of dispute, the same shall be ref .....

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Firm. The contribution of Assessee was 88% of total capital but it was assigned only 5% share in the Firm, while M/s SICCL whose contribution to capital was only 12%, assigned 90% share of profit. These conditions obviously are beyond normal business sense. Transfer of land to Firm is as good as sale. Instead of waiting for yearly profits, Assessee got one time market price of land which has not been disclosed. This is further fortified from the fact that payment of freehold charges was made by .....

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0C is that there is payment of stamp duty in respect of transfer of capital asset, being land or building or both, which will be required only when capital asset is registered under Registration Act, 1908 (hereinafter referred to as ''Act, 1908'). If payment of stamp duty for the purpose of transfer is not required, then there is no occasion to look into other conditions of Section 50C. It has also read Section 45 (3) in isolation and said that there is deeming fiction with regard to .....

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61 are mutually exclusive. He also contended, with regard to findings given by ACIT as well as CIT(A), that Assessee has adopted a device to evade capital gain tax by showing lower value of sale consideration in the books of Firm though actual market value of land is much higher. He also urged that though Tribunal has referred in paragraphs 9 to 11 of impugned judgment the argument regarding cloaked transaction to evade Tax, but while discussing merits of issues raised by Assessee, Tribunal has .....

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length, perused record as well as the relevant statutory provisions and perused judicial precedents on the subject, cited at the bar. 24. The facts taken from the pleadings and orders passed by various authorities below, show certain undisputed factual instances. 25. The land in dispute, has a total area of 364937 Sq.ft. It was a ''Nazul' land. ''Nazul' is a land vested in the State, not by way of purchase, acquisition, etc. but in its capacity of sovereign and in the rig .....

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icial pronouncements. In Sunni Central Board of Waqfs vs. Sri Gopal Singh Visharad and others 2010 ADJ (1) SFB) (LB) (in which one of us Sudhir Agarwal, J. was a member; rendered judgment which constituted majority on this aspect), this Court has observed as under : "4430. In the Legal Glossary 1992, fifth edition, published by the Legal Department of the Government of India at page 589, the meaning of the word "Nazul" has been given as "Rajbhoomi i.e. Government land". .....

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he authority of the Lt. Governor of North Western provinces, two orders were issued in October, 1846 and October, 1848 wherein after the words "Nazul property" its english meaning was given as "Escheats to the Government". Sadar Board of Revenue on 20th May, 1845 issued a circular order in reference to Nazul land and in para 2 thereof it mentioned "The Government is the proprietor of those land and no valid title to them can be derived but from the Government." The .....

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t the British Company broke up in May, 1857 which is known as the first war of independence which very quickly angle a substantial part of north western provinces. After failure of the above revolution, the then Governor General Lord Canning on 15th May, 1858 issued a proclamation confiscating propriety rights in the soil with the exception of five or six persons who had given support and assistance to British Officers. This land was resettled first for a period of three years and then permanent .....

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usly being mentioned as Nazul. 4435. The claim of the muslim parties is that the entire territory which came in the control of Babar after defeating Ibrahim Lodhi and others became his land since king was the owner of the land and no system of private ownership was recognized and therefore, he was at liberty to direct for any kind of construction on such land and the land could not have been treated to be owned by any private individual or anyone else. 4436. Let us consider this aspect also in t .....

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land of the king but when a proclamation was issued for confiscating the land, meaning thereby the East India Company or the British Government did not follow the same principle. In our view, in such a matter, even the doctrine of "escheat" or "bona vacantia" may not be applicable 4437. The question as to who could have been owner of the land in 1528 AD when alleged that the disputed building was constructed by Babar through his Commander Mir Baqi, the concept sought to be ca .....

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t of ownership proceeded with possession and is recognized by the well known principle "possession follows title". The individual right of ownership therefore was well recognized in the various personal laws and the only right the king had to acquire the land in known valid means, namely by purchase or gift etc. The obligation upon the king is to protect the subject and his property from enemies and for that purpose he used to raise revenue from the subject in the form of tax and/ or s .....

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ng existed otherwise no private owner of the land in question would have been there within his suzerainty. 4439. The learned counsel for the parties in this aspect referred to the doctrine of Escheat/bona vacantia. We find that the right of the King to take property by escheat or as bona vacantia was recognized by common law of England. Escheat property was the lord's right of reentry on real property held by a tenant dying intestate without lawful heirs. It was an incident, of feudal tenure .....

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one else can claim property. In Dyke Vs. Walford 5 Moore PC 434 = 49613 ER 557 (580) it was said "it is the right of the Crown to bona vacantia to property which has no other owner." The right of the Crown to take as bona vacantia extends to personal property of every kind. Giving a notice at this stage that the escheat of real property of an intestate dying without heirs was abolished in 1925 and the Crown cannot take its property as bona vacantia. The principle of acquisition of pro .....

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ued by virtue of Section 54 of Government of India Act, 1858, Section 20(3)(iii) of Government of India Act, 1915 and Section 174 of the Government of India Act, 1935. After the enactment of the Constitution of independent India, Article 296 now provides : "Subject as hereinafter provided, any property in the territory of India which, if this Constitution had not come into operation, would have accrued to His Majesty or, as the case may be, to the Ruler of an Indian State by escheat or laps .....

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ssor. In this country escheat is not based on artificial rules of common law and is not an incident of feudal tenure. It is an incident of sovereignty and rests on the principle of ultimate ownership by the State of all property within its jurisdiction." 4442. The Apex Court placed reliance on Collector of Masulipatam Vs. C. Vencata Narainapah 8 MIA 500, 525; Ranee Sonet Kowar Vs. Mirza Himmut Bahadoor (2) LR 3 IA 92, 101, Bombay Dyeing & Manufacturing Co. Vs. State of Bombay (1958) SCR .....

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te AIR 1924 PC 216, Lord Dunedin said : "When a territory is acquired by a sovereign State for the first time, that is an act of State. It matters not how the acquisition has been brought about. It may be by conquest, it may be by cession following on treaty, it may be by occupation of territory hitherto unoccupied by a recognised ruler. In all cases the result is the same. Any inhabitant of the territory can make good in the municipal Courts established by the new sovereign only such right .....

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it be by conquest or cession." 4447. In Promod Chandra Deb Vs. State of Orissa AIR 1962 SC 1288, the Court said, " 'Act of State' is the taking over of sovereign powers by a State in respect of territory which was not till then a part of its territory, either by conquest, treaty or cession, or otherwise." 4448. To the same effect was the view taken by the Constitution Bench in Amarsarjit Singh Vs. State of Punjab AIR 1962 SC 1305 in para 12 as under : "It is settled .....

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s of a person being partly a sovereign and partly a subject and when once it is admitted that the Bhomicharas had acknowledged the sovereignty of Jodhpur their status can only be that of a subject. A subject might occupy an exalted position and enjoy special privileges, but he is none the less a subject ..." 4450. In State of Rajasthan and Others Vs. Sajjanlal Panjawat and Others AIR 1975 SC 706 it was held that the Rules of the erstwhile Indian States exercised sovereign powers, legislativ .....

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ther by conquest or by treaty or by cession or otherwise. It may have happened on a particular date by a public declaration or proclamation, or it may have been the result of a historical process spread over many years, and sovereign powers including the right to legislate in that territory and to administer it may be acquired without the territory itself merging in the new State." 4452. This decision has been followed later on in Biswambhar Singh & Anr. Vs. The State of Orissa & Or .....

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d in State for any reason whatsoever that is cession or escheat or bona vacantia, for want of rightful owner or for any other reasons and once land belong to State, it will be difficult to assume that State would acquire its own land. It is per se impermissible to acquire such land by forcible acquisition under Act, 1894, since there is no question of any transfer of ownership from one person to another but here State already own it, hence there is no question of any acquisition. (emphasis added .....

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also observed that lease of ''Nazul' land is governed in accordance with Government Grants Act, 1895 (hereinafter referred to as ''Act, 1895'). Section 2 and 3 thereto very specifically provide that provisions of Transfer of Property Act, 1882 (hereinafter referred to as ''Act, 1882') do not apply to Government land. Section 3 says that all provisions, restrictions, conditions and limitations ever contained in any such grant or transfer, as aforesaid, shall b .....

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Section 2 of Act, 1882, shall not be protected by any provision of Act, 1882. 29. Assessee got lease deed executed in respect of the aforesaid land on 31st March, 1943 and got lease rights over property in dispute. A lease right is short of title or ownership since ownership vested in State of U.P. Lease expired on 31.3.1990. The status of Assessee qua such land thereafter became that of ''unauthorized occupant.' 30. Dealing a similar question, i.e. status of possession over '&# .....

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been held by Supreme Court that even Principle of holding over under Section 116 of Transfer of Property Act, 1882(herein after referred to as Act, 1882") would have no application in such lease over land owned by State. 24. A question arose, when a lessee, after expiry of period of lease still continues to occupy lease land and even if rent is accepted by lessor, will it satisfy requirement of "Holding Over" within the meaning of Section 116 of Act, 1882, in Shanti Prasad Devi an .....

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riod. 28. Here we find answer in Uttar Pradesh Public Premises (Eviction of unauthorised Occupants) Act, 1972 (hereinafter referred to as "Act, 1972"). Section 2(g) defines the term "unauthorised occupation" and "Public Premises" is under Section 2(e) and read as under:- "2(g) "unauthorised occupation", in relation to any public premises, means the occupation by any person of the public premises without authority for such occupation, and includes the .....

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uthorised occupation." "2(e) "public premises" means any premises belonging to or taken on lease or requisitioned by or on behalf of the State Government, and includes any premises belonging to or taken on lease by or on behalf of-. (i) any company as defined in Section 3 of the Companies Act, 1956, in which not less than fifty-one per cent of the paid-up share capitals held by the State Government: or (ii) any local authority; or (iii) any Corporation (not being a company as .....

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on land belonging to the State Government after the entrustment of the land to that local authority, not being land vested in or entrusted to the management of a Gaon Sabha or any other local authority, under any law relating to land tenures): (ii) any premises acquired under the Land Acquisition Act, 1894 with the consent of the State Government for a company (as defined in that Act) and held by that company under an agreement executed under Section 41 of that Act providing for re-entry by the .....

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nauthorised occupant" of 'Nazul land' and could have been evicted from public premises under provisions of aforesaid Act, 1972. 31. Considering similar provision in the context of Uttar Pradesh Public Premises (Eviction of Unauthorized Occupants) Act, 1972, in Ashoka Marketing Ltd. And another vs. Punjab National Bank and others, 1990) 4 SCC 406, a Constitution Bench held that Act, 1972 being a special Act will override a general statute and a person who may have entered tenancy leg .....

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t;Thus, it is abundantly clear from the aforesaid legal statutory provisions of the DD Act and terms and conditions of the lease deed and the case law referred supra that there is no automatic renewal of lease of the property in question in favour of the original lessee" 36. Having said so, Court held that in absence of renewal of lease, status of original lessee in relation to disputed property was an "unauthorized occupant" in terms of Section 2(g) of Act, 1972. 37. It also said .....

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and that after expiry of lease period the original lessee has become unauthorized occupant in terms of Section 2(g) of the said Act in the light of relevant statutory provisions and Rules referred to supra and law laid down by the Constitution Bench of this Court in the Case of Ashoka Marketing Ltd. and Another (supra), the concurrent findings of the courts below on the contentious issue is not only erroneous but also suffers from error in law and therefore, liable to be set aside. "31.The .....

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us, Point No.1 is answered in favour of the Appellant." 38. Thereafter, question-2 was considered by Court. It was held that compromise decree between original lessee and subsequent purchaser was void ab initio in law for the reason that original lessee in absence of renewal of lease in his favour himself has no right, title or interest at the time of execution of sale deed in respect of disputed property. Court said "It is well settled position of law that the person having no right, .....

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ence. Thus anything done between DDA and original lessee will also have no consequence. Court therefore, answered second question as under :- "The instant case having peculiar facts and circumstances, namely, after 10.08.1968 the lease stands terminated by efflux of time, which is further evidently clear from the termination notice dated 01.09.1972 and thereafter, the original lessee becomes an unauthorised occupant in terms of Section 2(g) of the Public Premises (Eviction of Unauthorised O .....

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;. This explains the reason why it has disclosed value of land in books of account, ''Nil' as on 31st March, 2002. 32. Land came to be validly possessed by Assessee only with execution of Freehold Deed on 31st March, 2002. In other words, Assessee being a ''lessee' under lease dated 31st March, 1943, ceased to have lease rights over land on 31.3.1990, and had no title during this period which vested in State of U.P. Even Lease rights came to an end on 31st March, 1990. Th .....

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/s SICCL). 33. Since land was acquired by Assessee, with valid possession and title, on the last date of Assessment Year 2002-03, value of aforesaid asset could have been disclosed in the accounts book of Assessee in the next F.Y./A.Y. 34. Market value of such property could not have been determined by freehold conversion charges paid by Assessee as per government policy. Nothing has been shown on record that freehold conversion charges were founded on market value of property at the time of exe .....

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artnership - ₹ 325.81per Sq.ft. (d) value of the total land acquired by Assessee vide deed dated 31st March, 2002, (as per circle rate ₹ 11,600 per Sq.Mt.) = ₹ 423.32692 crores Note: We have not added value of 15% applicable for corner plot for determining circle rate. 37. Evidently, rates determined by Assessee for the purpose of his accounts book, after acquiring land vide deed dated 31st March, 2002, was much less than the fair market value over which sale of land could have .....

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cted in the previous year, shall be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of previous year in which transfer took place. This is subject to otherwise provided in Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H. 40. There are some further additions by way of insertion of Section 1A by Finance Act, 1999, w.e.f. 01.04.2000; sub-section 2, w.e.f. 01.04.1985; sub section 2A, w.e.f. 20.09.1995. 41. For our purpose, it is sub-se .....

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transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body 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. (emphasis added) 42. The term "transfer" is defined in Section 2 (47) of Act, 1961 which reads as under:- (47) "transfer", in relation to a capital asset, includes,- (i) the sale, e .....

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in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.-For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the sa .....

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of the asset and the cost of any improvement thereto: Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition,expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign curr .....

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ong-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted: Provided also that nothing contained in the second .....

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r for the purposes of this section : Explanation.-For the purposes of this section,- (i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Management Act, 1973 (46 of 1973); (ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf; (iii) "indexed cost of acquisition&q .....

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sset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place; (v) "Cost Inflation Index", in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf." 44. "Ca .....

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and allots appropriate year for such charge. It also enacts a deeming provision, namely, "deemed income" which arises at a fixed point of time, i.e. on the date of transfer. 45. "Capital asset" is also defined in Section 2 (14), which says that property of any kind held by an Assessee, whether or not connected with his business or profession. But there are some exclusions in clauses (i) to (vi). Exclusionary provisions are not relevant for us. Relevant extract of definition o .....

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full value of consideration in certain cases. It reads as under : "50C. Special provision for full value of consideration in certain cases.- (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty i .....

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ue so adopted or assessed by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court, the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section .....

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ons contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.' 47. The first aspect under consideration would be whether sub-section 3 of section 45 of Act, 1961 is attracted in this case or not? This has to be exami .....

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t; 48. If these conditions are satisfied, for the purpose of evaluation of "capital asset", one would treat the full value of consideration received or accrued as recorded in the books of account of the firm. It is in respect of such ''capital asset', that profits or gains arising shall be chargeable to tax as such person's income of previous year in which such transfer takes place. 49. The first question would be, whether in the present case, when Assessee transfers hi .....

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al contribution to the firm, made over certain shares held by him, as capital asset. Book value of those shares shown in the account books was ₹ 1,49,849/-. However, when Assessee contributed shares to the firm, he revalued shares at market value of ₹ 1,60,279/- and credited the resulting difference of ₹ 10,460/- to his capital account. Assessing Authority while making assessment for A.Y. 1974-75, in respect of Assessee, did not include difference in the assessable income. CIT .....

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ot;capital gains" liable to tax. Then reference was made by Tribunal to Gujarat High Court, on the following two questions: "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that no capital gains resulted from the transfer of the shares held by the assessee to the partnership firm as his capital contribution, the cost of acquisition of the shares to the assessee being ₹ 1,49,819 and the market value of t .....

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appeal referred to Section 45 and 48 and found that under Section 48, income chargeable under the head ''Capital gains' shall be computed by deducting from full value of consideration received or accruing as a result of transfer of capital asset, the following amounts, namely :- "(i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of capital asset and cost of any improvement thereto." 52. Assessee therein argued that th .....

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m is not a distinct legal entity apart from partners, constituting it, and equally in law, the firm as such has no separate rights of its own in the partnership assets and when one talks of firm's property or firm's assets, all that is meant is property or assets in which all partners have a joint or common interest. 53. Court in Sunil Siddhartha Bhai (Supra) also held that in a genuine transaction, transfer of "capital assets" by a partner into partnership firm does not amount .....

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roperty. High Court referred to Section 14 of Indian Partnership Act, 1932 (herein after referred to as "Act, 1932") and following observation was made :- "When a partnership is formed for the first time and one of the members of the partnership brings into the firm assets, they become the property of the firm, not by any transfer, but by the very intention of the parties evinced in the agreement between them to treat such property belonging to one or more of the members of the pa .....

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inclusive and does not exhaust other kinds of transfer. Court held that Madras High Court in CIT Vs. Abdul Khader Motor and Lorry Service (supra) and in another judgment in CIT Vs. Rajan and Kannan, [1984] 149 ITR 545 (Mad.), confining meaning of word ''transfer' to only sale, overlooked the inclusive character of definition of ''transfer' under Section 2 (47) of Act, 1961. 55. Having said so, Court proceeded to observe that in general sense, the expression "transfe .....

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exclusive interest in property is a larger interest than a shared interest in that property. To the extent to which the exclusive interest is reduced to a shared interest, it would seem that there is a transfer of interest. Therefore, when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive rights in the asset to shared rights in it with other partners of firm. While he does not lose his rights in the asset .....

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rmed or which may be acquired in the course of the business of the partnership, it becomes property of the firm and what a partner is entitled to is, his share of property, if any, accruing to the partnership from the realisation of this property, and upon dissolution of partnership, to a share in the money representing value of the property. No doubt, since a firm has no legal existence, partnership property will vest in all the partners and in that sense, every partner has an interest in the p .....

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ion 48. 57. In Addanki Narayanappa Vs. Bhaskara Krishnappa (supra), Court said :- "whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including 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 trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint .....

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8. Taking clue from the above view, Court in Sunil Siddharthbhai Vs. CIT (supra), then proceeded to hold, when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was not subject to the rights of other partners become joint asset. It is not an interest which can be evaluated immediately. It is an interest which is subject to the operation of future transactions of partnership. It may diminish in value depending on accumulat .....

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the partnership agreement. Court held that because of that interest, existed already before dissolution, the distribution of asset on dissolution does not amount to a transfer to the erstwhile partners, as held in Malabar Fisheries Co. Vs. CIT (supra). The partner gets, upon dissolution or upon retirement, realisation of a pre-existing right or interest. In this backdrop, Court said :- "Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction i .....

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he dissolution of the firm or upon the partner's retirement." (emphasis added) 59. Court also drew a distinction between realisation of pre-existing right by the partner on dissolution of firm or retirement and when such partner brings in his personal asset into the partnership firm as his contribution to capital. In the former case, there is no transfer for the reason that his shared interest in all the assets of the firm which is pre-existing before dissolution of the firm or retireme .....

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sole subject of consideration. An exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest. 60. This resulted into the partnership firm, his contribution to its capital. Hence there is a transfer of "capital asset" within the meaning of terms of Section 45 of Act, 1961. Court very categorically said in Sunil Siddharthbhai Vs. CIT (supra) as under :- "Accordingly, we hold that when the assessee brought the shares of the limited comp .....

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Sunil Siddharthbhai Vs. CIT (supra). 62. With reference to Section 17 of Act, 1908, Court observed that the registration of transfer by a partner of his asset to the capital of the firm is not necessary, since no document for such transfer is required. 63. Having said so, Court further said that such transfer of asset to the firm's capital as "capital contribution" by a partner would not necessarily result in receipt of any consideration by Assessee so as to attract Section 45 and .....

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ion to its capital, can fall within the terms of Section 48. Since section 48 is fundamental to the computation machinery incorporated in the scheme relating to determination of charge provided in Section 45, such a case must be regarded as falling outside the scope of "capital gains" taxation altogether. 64. Another aspect considered by Court is whether it can be said that any profit or gain has arisen to a partner, when it brings in his personal assets into firm as its contribution t .....

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65] 57 ITR 521 (SC); CIT Vs. Biral Gwalior (P.) Ltd.[ 1973] 89 ITR 266 (SC). 65. When a partner makes over his personal asset to the partnership firm, as its contribution to firm's capital, the consideration, partner receives, is his right as a partner during subsistence of partnership to get his share of profit from time to time and after dissolution of partnership or retirement, to receive value of the share in the net partnership asset as on the date of dissolution or retirement after ded .....

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wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital account is credited. But having regard to the nature and quality of the consideration which the partner may be said to acquire on introducing his personal asset into partnership firm, as his contribution to its capital, it cannot be said that any income or gain arises or accrues to Assessee in the true "commercial sense" which a businessman would understand as real .....

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foresaid judgment would have been a complete answer to the questions posed above but matter does not rest here. When Sunil Siddharthbhai Vs. CIT (Supra) was decided, sub-section 3 of Section 47 was not in existence since it came to be inserted w.e.f. 1.4.1988. Subsequently, w.e.f. 1.4.2003, legislature inserted special provision for full value of consideration in certain cases. Whether subsequent enactments in Act, 1961 had resulted in any substantial change or not, has also to be examined. 68. .....

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n part. The words denote that a title in property has passed from transferror to the transferee. No transfer can be said to be effected until all formalities for vesting of title in the transferee are completed. Hence, it is the date of transfer which is relevant, so that the assessment year would be the accounting year during which a taxable income falls. 69. In relation to acquisition of land, it was held that on the date of publication of notification for acquisition, property vest absolutely .....

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1989) 180 ITR 32 (Punjab and Haryana)] 70. Sub section 3 of Section 45, was inserted with a view to shut down the escape route to an individual by entering into a sham transaction with a firm. In one matter where Assessee entered into a partnership and an individual brought in her land as her share capital contribution to partnership firm, but firm did not bring in capital and individual retired after three months. Bombay High Court in Smt. Nayantara G. Agrawal Vs. CIT, (1994) 207 ITR 639, has h .....

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ITR St.) 13, paras 37.1 to 37.4, which read as under :- "37. Computation of capital gains in real estate transactions.- 37.1 The Finance Act, 2002, has inserted a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property. 37.2 It provides that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or a .....

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disputed the value so adopted or assessed in any appeal or revision or reference before any authority or court, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A of the Income-tax Act. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the Assessing Officer may take such fair market value to be the full value of consideration. However, if the fair market valu .....

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er basic evaluation register, on the basis of which stamp duty is reckoned. Tribunal has excluded application of Section 50C and finds it sufficient to look into the declaration made by Assessee in the partnership deed about value of immovable property, put in the share, assessed by firm, by holding that there is no consideration, no requirement of payment of stamp duty hence no registration is compulsory under Section 17 of Act, 1908. 73. In Sanjiv Lal Vs. CIT, 2015 (5) SCC 775, Court construed .....

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interest, in immovable property worth more than one hundred rupees, to be registered. Section 17 (1) (b) of Act, 1908 reads as under: "other non-testamentary instruments which purport or operate to create, declare assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immoveable property" (emphasis added) 75. Calcutta High Court in Prem Raj Brahmin Vs. Bhani Ram .....

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rship law and Partnership Act of U.S.A. and took same view. 77. We, however, do not find consideration of language of Section 17 (1) (b) of Act, 1908 in these authorities which requires registration of a non-testamentary document, which acts to the effect of extinguishing or limiting a right, title or interest in any immovable property of an individual. Non execution of a document for transfer of immovable property in partnership stock by one of the partners is one thing and its requirement of r .....

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ire registration under Section 17 of Act, 1908. But here is a situation where partnership is being brought into existence wherein one of the partners contributes his entire immovable property as partnership stock and that is how transfer is made to the partnership Firm, consisting of more than one partners. Apparently contributing partner is limiting his interest in immovable property and creating interest of others therein. 78. A distinction has to be made about share of a partner in the assets .....

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tner or partners, during its subsistence, so as to enable such partner to hold the asset in his or their individual capacity, was a transfer of property and not an adjustment of capital. In our case, assets of an individual has been transferred to become asset of a partnership in which other partners will also have interest. That is how the rights and interest of contributing partner are reduced or stands transferred to others. This situation that transfer of capital assets in partnership is a t .....

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CTR 6 (Allahabad), this Court held, if transfer of personal asset by Assessee to a partnership, in which he is or becomes a partner, is merely a device or ruse for converting the asset into money, which would substantially remain available for his benefit without liability to Income Tax on a capital gain, it will be open to Income Tax authorities to go behind the transaction and examine whether transaction of creating partnership is genuine or a sham transaction. Even where partnership is genui .....

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(A) and also raised before Tribunal but they have not recorded any finding thereon. 81. Sri Mudit Agarwal, appearing for Assessee, contended that bringing of personal asset into Firm, as contribution towards capital by a person does not amount to a ''sale'. This proposition, we find unexceptionable. 82. In CIT Vs. Hind Construction Ltd., [1972] 83 ITR 211 (SC), Assessee entered into a partnership. As its share of capital, it transferred stock of machinery to partnership firm. Court h .....

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ormed for the first time and one of the members of the partnership brings into firm's assets, they become property of the firm, not by any transfer, but by the very intention of parties evinced into the agreement between them, to treat such property belonging to one or more of the members of partnership as that of the firm. Similar view was taken by this Court in Dr. Kackkar Vs. CIT, [1973] 92 ITR 87 (All.), holding that a partner when hands over a business asset to a partnership firm as his .....

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re specifically considered in Sunil Siddharthbhai Vs. CIT (supra). It held that in general sense, the expression "transfer of property" connotes, the passing of rights in property from one person to another. In one case, there may be a passing of 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 estates comprising totality of rights in the property. In a third case, there may be a reduction .....

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he asset to shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital. (emphasis added) 84. In the light of above discussion, and the authorities which have been followed subsequently in various authorities including B.T. Patil and sons Vs. Commissioner of Gift Tax, 2003 .....

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ings his asset into the partnership Firm as his contribution to its capital. An exclusive interest in it before it enters the partnership, is reduced on such entry into a shared interest. In Sunil Siddharthbhai Vs. CIT (supra), Court also observed that transfer of personal asset to partnership firm need not result in capital gains to such partner within the contemplation of Section 48 of Act, 1961 so as to attract Section 45 of Act, 1961. This is why Section 45 of Act, 1961 stood amended in 1987 .....

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unden duty of Tribunal to make appropriate enquiry in such matter when such an issue is raised by the Revenue. 86. In the present case as we have already discussed, entire consideration for free-hold was paid by M/s SICCL but in what capacity, is not known. A part of land was transferred by sale to M/s SICCL at a consideration which has a vast difference than that was acquired by Assessee after execution of free-hold deed. For the purpose of contributing to partnership firm and applying book val .....

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xisted all the facts and circumstances to show prima facie that entire transaction of contribution to partnership is a sham and fictitious transaction and an attempt to device a method to avoid tax. Even the terms and conditions of partnership fortify the above inference. 87. We may remind, at this stage, observations of a Constitution Bench in McDowell and Co. Ltd. Vs. Commercial Tax Officer, [1985] 154 ITR 148. Hon'ble O. Chinnappa Reddy, J. in concurrent judgment delivered on behalf of ma .....

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elfare state like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. 88. Then there is "the large hidden loss" to the community by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the tax-gatherer and his perhaps not no skillful advisers on the other s .....

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and spirit. No equity, no sympathy, no leniency is called for a person engaged by devoting not only substantial time and money of himself but by engaging other experts in the field to find out ways and means for shirking away from the responsibility of payment of tax. We should recognize that behind taxation laws, there is as much moral sanction as behind any other welfare legislation. It is a pretense to say that avoidance of taxation is not unethical and that it stands on no less a moral plane .....

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avoid execution of a registered document which would have needed stamp duty to the State and, as a result thereof, there could have been an occasion for payment of tax under the Act, 1961. The requirement of registration needs consideration in the light of the fact that contribution of immovable property as partnership asset by a person is ''transfer' and has the effect of extinguishing or limiting rights and interest of the owner partner and, therefore, such a non-testamentary docum .....

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