Hareshbhai Mathurbhai Zinzuwadia v. Assistant Commissione Of Income Tax Circle 2(1), Rajkot

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/SPECIAL CIVIL APPLICATION NO. 19093 of 2018 With R/SPECIAL CIVIL APPLICATION NO. 19068 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE J.B.PARDIWALA Sd/- andHONOURABLE MR. JUSTICE ILESH J. VORA Sd/- ============================================= =============================================HARESHBHAI MATHURBHAI ZINZUWADIA Versus ASSISTANT COMMISSIONE OF INCOME TAX CIRCLE 2(1), RAJKOT ============================================= Appearance: MR B S SOPARKAR(6851) for the Petitioner(s) No. 1MRS MAUNA M BHATT(174) for the Respondent(s) No. 1 ============================================= CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALAand HONOURABLE MR. JUSTICE ILESH J. VORA Date : 08/09/2021 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE ILESH J. VORA) 1. As the common questions of law and fact arise in thecaptioned writ applications with respect to different assesseesfor the same year i.e. A.Y. 2015-16, were heard analogouslyand are being disposed of by this common judgment andorder.captioned writ applications with respect to different assesseesfor the same year i.e. A.Y. 2015-16, were heard analogouslyand are being disposed of by this common judgment andorder. 2. By these writ applications under Article 226 of the Constitutionof India, the writ applicants seek to challenge the legality andvalidity of the Notice dated 28.03.2018 issued by therespondent under Section 148 read with Section 147 of theIncome Tax Act, 1961 (‘the Act’ for short), seeking to reopenthe writ applicants’ income tax assessment for the A.Y. 2015-16. of India, the writ applicants seek to challenge the legality andvalidity of the Notice dated 28.03.2018 issued by therespondent under Section 148 read with Section 147 of theIncome Tax Act, 1961 (‘the Act’ for short), seeking to reopenthe writ applicants’ income tax assessment for the A.Y. 2015-16. 3. Brief facts giving rise to filing present writ applications are asfollows:- follows:- -SCA No.19093/2018 (Hareshbhai Mathurbhai Zinzuvadia): 3.1The writ applicant being an individual assessee filed hisreturn of income on 23.09.2015 declaring total income atRs.3,73,32,220/-. The return of income was processed underSection 141 of the Act and no scrutiny assessment wasundertaken. SCA No.19068/2018 (Darshit Ashokbhai Zinzuvadia):- 3.2The writ applicant being an individual assessee filed hisreturn of income on 23.09.2015 declaring total income atRs.1,14,20,050/-. The return of income was processed underSection 141 of the Act and no scrutiny assessment was undertaken. 3.3 In both the cases, the Assessing Officer reopened theassessment under Section 147 of the Act by issuing impugnedNotice dated 28.03.2018 under Section 148 of the Act for theA.Y. 2015-16. The reasons for reopening were furnished toboth the assessee. Both the assessee raised variousobjections vide letter dated 04.06.2018 and 11.06.2018respectively and the same came to be disposed of by theRevenue vide order dated 28.08.2018. 3.4In both the cases, the assessment is sought to bereopened on the ground that, the applicants have transferredthe capital asset received by them in the form of gift, to thepartnership firm M/s. Radhika Jewelers by way of capitalcontribution at the market rate and therefore, they are liablefor capital gain under Section 45(3) of the Act. 4. Being aggrieved by the disposal of the objections against theNotice for reopening of the assessment, the writ applicantsare before this Court by filing present writ applications. Notice for reopening of the assessment, the writ applicantsare before this Court by filing present writ applications. 3.4In both the cases, the assessment is sought to bereopened on the ground that, the applicants have transferredthe capital asset received by them in the form of gift, to thepartnership firm M/s. Radhika Jewelers by way of capitalcontribution at the market rate and therefore, they are liablefor capital gain under Section 45(3) of the Act. 4. Being aggrieved by the disposal of the objections against theNotice for reopening of the assessment, the writ applicantsare before this Court by filing present writ applications. Notice for reopening of the assessment, the writ applicantsare before this Court by filing present writ applications. 5. We have heard Mr. Saurabh Soparkar, the learned SeniorCounsel assisted by Mr. Bandish S. Soparkar, the learnedcounsel for the writ applicants and Mr. Manish Bhatt, thelearned Senior Counsel assisted by Mrs. Mauna M. Bhatt, thelearned Standing Counsel appearing for the revenue. Counsel assisted by Mr. Bandish S. Soparkar, the learnedcounsel for the writ applicants and Mr. Manish Bhatt, thelearned Senior Counsel assisted by Mrs. Mauna M. Bhatt, thelearned Standing Counsel appearing for the revenue. 6. In assailing the impugned notice issued under Section 148 ofthe Act, the learned Senior Counsel Mr. Soparkar appearingfor the writ applicants urged the following submissions :-the Act, the learned Senior Counsel Mr. Soparkar appearingfor the writ applicants urged the following submissions :- (i) That, Mr. Ashok Zinzuvadia was the proprietor of M/s.Radhika Jewelers, engaged in the business of gold, goldornaments etc. and had opening stock of gold ornaments etc.valued at Rs.48,54,09,686/- as on 01.04.2014. Out of totalstock, Mr. Ashok Zinzuvadia gifted 135701.065 gms goldornaments, valued at Rs.14,48,64,958/- to his brother HareshZinzuvadia and also gifted 27076.450 gms. gold ornaments tohis son Darshit Zinzuvadia, valued at Rs.2,63,64,173/-.Thereafter, the proprietary concern M/s. Radhika Jewelers wasconverted into a partnership firm w.e.f. 01.07.2014 byintroducing 10 partners including Mr. Ashok Zinzuvadia, hisson Darshit Ashok Zinzuvadia and his brother HareshZinzuvadia. Both the writ applicants being the partners of thefirm, their gold stock gifted by Ashok Zinzuvadia wastransferred to the partnership firm by way of capitalcontribution at Rs.36,74,97,249/-. (ii) In the aforesaid background, the learned Senior Counselreferring to the reasons recorded, submitted that, theassessment is sought to be erroneously reopened on theground that, as both the writ applicants are said to havetransferred their capital assets received in the form of gift tothe partnership by way of capital contribution at the marketrate, they are liable for capital gain under Section 45(3) of theAct. In this context, the learned Senior Counsel submitted thatthe reasons recorded are completely erroneous in law, so faras the applicability of Section 45(3) of the Act is concerned.He urged that, Section 45(3) of the Act has no application atall in the facts of the present case. Referring to Section 45(3)of the Act, he submitted that, Section 45(3) of the Act isapplicable when a capital asset is introduced by a partnertowards credit in the capital account of the firm. In thepresent case, what is introduced is stock in trade and not capital assets. The learned Senior Counsel drawing theattention to the certificate of registration under the GujaratValue Added Tax (“VAT” for short) Act and the rulesthereunder, submitted that, both the writ applicants aretraders in gold and gold ornaments and they have beenregularly trading in the gold and gold ornaments, therefore,the gifted gold was treated as stock in trade by both the writapplicants and the same was brought in the books of both thewrit applicants before introducing as capital in the firm, whichclearly establishes that, they have transferred their stock intrade to the partnership firm, which cannot be taxed underSection 45(3) of the Act as the stock in trade was not a capitalasset to the writ applicants. In such circumstances, thelearned Senior Counsel vehemently submitted that, thereasons recorded for reopening lacks validity and arecompletely erroneous in law and therefore, the impugnedNotice has been issued without jurisdiction as the conditionprecedent for reopening the assessment under Section 147 ofthe Act is not satisfied. (iii) It was further submitted that, while recording the reasons,the AO has not applied his independent mind to form a beliefthat the capital gain as referred has escaped assessment. Inthis context, it was submitted that, the reasons for reopeninghaving been borrowed from the observations and findingsrecorded by the then AO while passing the order in case ofpartnership firm M/s. Radhika Jewelers, wherein, additionswere made on protective basis in the hands of the firm andthereafter, the impugned notice under Section 148 of the Acthas been issued. Thus, the AO has not applied his mindindependently so as to reach to a conclusion that income hasescaped assessment and therefore, the assumption ofjurisdiction by the AO on borrowed satisfaction is impermissible in law and on that ground, notice is bad in lawand requires to be set aside. (iv) Strong reliance is being placed on a decision rendered bythe Apex Court in a case of Sunil Siddharthbhai Vs. CIT[156 ITR 509 (SC)], to submit that, introduction is an assetby a person by way of capital contribution to a partnershipfirm on an occasion of his induction as a partner of that firm,though amounting to transfer, is not such transfer as to giverise to a capital gains exigible to capital gain’s tax since noconsideration is received. 7. In such circumstances referred to above, Mr. Soparkar praysthat the reopening of the assessment is without jurisdictionand hence, the impugned notice deserves to be quashed andset aside.that the reopening of the assessment is without jurisdictionand hence, the impugned notice deserves to be quashed andset aside. (iv) Strong reliance is being placed on a decision rendered bythe Apex Court in a case of Sunil Siddharthbhai Vs. CIT[156 ITR 509 (SC)], to submit that, introduction is an assetby a person by way of capital contribution to a partnershipfirm on an occasion of his induction as a partner of that firm,though amounting to transfer, is not such transfer as to giverise to a capital gains exigible to capital gain’s tax since noconsideration is received. 7. In such circumstances referred to above, Mr. Soparkar praysthat the reopening of the assessment is without jurisdictionand hence, the impugned notice deserves to be quashed andset aside.that the reopening of the assessment is without jurisdictionand hence, the impugned notice deserves to be quashed andset aside. 8. On the other hand, Mr. Manish Bhatt, the learned SeniorCounsel appearing for the revenue reiterating the standadopted by the respondent in the affidavit in reply as well asthe order disposing of the objections, submitted that theaction taken by the AO is just, legal and proper and does notwarrant any interference. He would urge that, in the presentcase, the return of income was processed under Section 143(1) of the Act and no assessment under Section 143 (3) of theAct has been framed and therefore, the only pre-requisite toreopen the assessment is that, there must be a reason tobelieve that the income chargeable to tax has escapedassessment and therefore, the AO has rightly formed arational belief that both the writ applications had transferredthe capital assets received by them in the form of gift to thepartnership firm by way of capital contribution at the marketCounsel appearing for the revenue reiterating the standadopted by the respondent in the affidavit in reply as well asthe order disposing of the objections, submitted that theaction taken by the AO is just, legal and proper and does notwarrant any interference. He would urge that, in the presentcase, the return of income was processed under Section 143(1) of the Act and no assessment under Section 143 (3) of theAct has been framed and therefore, the only pre-requisite toreopen the assessment is that, there must be a reason tobelieve that the income chargeable to tax has escapedassessment and therefore, the AO has rightly formed arational belief that both the writ applications had transferredthe capital assets received by them in the form of gift to thepartnership firm by way of capital contribution at the market rate and therefore, such transactions would be hit by theprovisions of Section 45(3) of the Act. Thus, when the scrutinyassessment has not taken place, the sufficiency of reasonscannot be gone into at this stage. 9. It was further contended by the learned Senior Counsel for therevenue that the gifted stock introduced by both thepetitioners in the firm as capital contribution is not reflectedas stock in trade in the trading account for the A.Y. 2015-16and therefore, the entire premise of challenge to reopeningthat the gifted stock was stock in trade and not a capital assetfalls on ground. The factum of stock in trade as claimed by thewrit applicants itself is a highly disputed question of fact andthe same cannot be gone into by this Court in exercise of writjurisdiction. revenue that the gifted stock introduced by both thepetitioners in the firm as capital contribution is not reflectedas stock in trade in the trading account for the A.Y. 2015-16and therefore, the entire premise of challenge to reopeningthat the gifted stock was stock in trade and not a capital assetfalls on ground. The factum of stock in trade as claimed by thewrit applicants itself is a highly disputed question of fact andthe same cannot be gone into by this Court in exercise of writjurisdiction. 10.It was further submitted by the learned Senior Counsel for therevenue that the decision of Sunil Siddharthbhai (supra) reliedupon by the writ applicants is not applicable to the facts ofpresent case as Section 45(3) has been introduced in theIncome Tax Act, 1961 by the Finance Act, 1987 w.e.f.01.04.1988. Thus, the profits or gains arising from the transferof a capital asset by the partners to a firm by way of capitalcontribution shall be chargeable to tax.revenue that the decision of Sunil Siddharthbhai (supra) reliedupon by the writ applicants is not applicable to the facts ofpresent case as Section 45(3) has been introduced in theIncome Tax Act, 1961 by the Finance Act, 1987 w.e.f.01.04.1988. Thus, the profits or gains arising from the transferof a capital asset by the partners to a firm by way of capitalcontribution shall be chargeable to tax. 11.In such circumstances referred to above, Mr. Manish Bhatt,the learned Senior Counsel for the revenue prays that therebeing no merit in the writ applications, those be dismissed.the learned Senior Counsel for the revenue prays that therebeing no merit in the writ applications, those be dismissed. 12.Having heard the learned counsel appearing for the respectiveparties and having gone through the material on record, theonly question that falls for our consideration is that, whetherparties and having gone through the material on record, theonly question that falls for our consideration is that, whether the revenue is justified in reopening the assessment for theyear under consideration ? 13.In order to appreciate the issue raised in both the writapplications, it is relevant to refer to the reasons recorded forreopening, which reads as under:- applications, it is relevant to refer to the reasons recorded forreopening, which reads as under:- Reasons recorded:- “2. Brief facts of the case are that initially Shri Ashok Kumar M.Zinzuvadia was the proprietor M/s. Radhika Jewelers upto 30.06.2014.As per claim of Shri Ashok Kumar Proprietor the said concern M/s.Radhika Jewelers was converted into the partnership firm w.e.f.01.07.2014 by introducing 10 partners in which name of Shri Ashok M.Zinzuvadia is included. The AO passed order in the case of firm M/s.Radhika Jewelers, Rajkot for the A.Y. 2015-16 under Section 143(3) on30.12.2017 and it is held that M/s. Radhika Jewelers is a new firmwhich is not a on going concern of the assessee as claimed by him.Hence, the AO considered the assets which are brought into the saidfirm as transfer of the assets, on which capital gain is chargeableconsidering the fair market value of assets on 01.07.2014 as full valueof consideration the profit in the hands of partners of the firm. In the said scrutiny assessment following additions have been madeon protective basis in the hands of the firm M/s. Radhika Jewelers. I.Capital gain assessed on transfer of stock : 43,41,73,329/- ii.Capital gain assessed from transfer of shop (show room) : 2,95,09,518/- ------------------ 46,36,88,847/- ------------------ 46,36,88,847/- As per said assessment order, substantial additions are required to bemade in the hands of the following partners of the above firm: I. Shri Ashok Kumar M. Zinzuvadia ii. Shri Haresh M. Zinzuvadia iii. Shri Darshit A. Zinzuvadia 3. Above issues are discussed as under:- It is observed that the assessee has shown the valuation of the stockin the partnership firm at Rs.77,75,10,150/- as on 01.07.2014 throughcapital account of the following partners: I.Capital gain assessed on transfer of stock : 43,41,73,329/- ii.Capital gain assessed from transfer of shop (show room) : 2,95,09,518/- ------------------ 46,36,88,847/- ------------------ 46,36,88,847/- As per said assessment order, substantial additions are required to bemade in the hands of the following partners of the above firm: I. Shri Ashok Kumar M. Zinzuvadia ii. Shri Haresh M. Zinzuvadia iii. Shri Darshit A. Zinzuvadia 3. Above issues are discussed as under:- It is observed that the assessee has shown the valuation of the stockin the partnership firm at Rs.77,75,10,150/- as on 01.07.2014 throughcapital account of the following partners: It is seen that in the grab of transfer of business of going concern, theassessee has inflated the value of stock from Rs. 34,33,30,821/to77,75,10,150/-. This stock has been brought in the partnership firm byway of capital contribution by the above 3 mentioned partners. Insuch case, the provision of section 45(3) are attracted and the valuerecorded in the books of the firm is treated as full value of saleconsideration for the purpose of computing capital gain. According,the capital gain is worked out at Rs. 43,41,79,329 (77,75,10,15034,33,30,821). The same has been taxed in the hands of the firm M/s.Radhika Jewellers on protective basis and consequential actions willbe taken in the hands of respective partners to tax the same onsubstantive basis. It is pertinent to note that as on 01.04.214, there was opening stockof Rs. 485490388/with Shri AShokkumar M Zinzuwadia. Out of this,Shri Ashok M. Zinzuwadia gifted stock of Rs. 26364173 to his son ShriDarshit Ashokkumar Zinzuwadia and he also gifted the stock of Rs.144864958/to his brother Shri Hareshbhai M Zinzuwadia, on10.04.2014. Later on both these donees became partners inpartnership firm M/s. Radhika Jewellers (w.e.f. 01.07.2014) and theyhave introduced the same stock (i.e. Gifted Stock) at market price inthe said partnership firm as their capital contribution. Details of sameare as under:- C/SCA/19093/2018 JUDGMENT DATED: 08/09/2021 In view of above, it is very much clear that both the above personshave transferred the capital assets received by them in 1 the form ofgift to partnership firm by the way of capital contribution at themarket rate and ~ therefore, they are liable for capital gain u/s. 45(3)of the Income Tax Act, 1961. In view of above, it is clear that capital on the transfer of gold to thefirm comes to Rs. 26,29,50,198/in the hands of the following partnersof the firm: Shri Darshit A. Zinzuwadia 4,03,17,907/- Shir Hareshbhai M. Zinzuwadia 22,26,32,291/-. In the light of above discussion it is seen that the assessee hassuppressed the income to the extent of Rs. 22,26,32,291/-. Therefore Ihave reason to believe that the assessee has concealed the income tothe extent of Rs. 22,26,32,291/during the year, which is an escapedassessment within the meaning of section 147 of the Income Tax Act1961. Hence it is a fit case for issuing notice u/s. 148. A photo copy ofthe assessment order relating to firm M/s. Radhika Jewellers, Rajkotfor the AY: 2015-16 is enclosed herewith for your reference. Issue notice u/s. 148 of the Income Tax Act, 1961.” 14.Before adverting to the rival contentions raised on either side,it is important to bear in mind that, Section 147 of the Actsubstituted w.e.f. 01.04.1989, empowered the AO to assess orreassess income chargeable to tax if the AO has reason tobelieve that income for any assessment year has escapedassessment. To confer the jurisdiction under Section 147 ofthe Act, two conditions have to be fully satisfied i.e. (i) the AOmust have reason to believe that income, profits or gainschargeable to income tax have escaped assessment and (ii) if Issue notice u/s. 148 of the Income Tax Act, 1961.” 14.Before adverting to the rival contentions raised on either side,it is important to bear in mind that, Section 147 of the Actsubstituted w.e.f. 01.04.1989, empowered the AO to assess orreassess income chargeable to tax if the AO has reason tobelieve that income for any assessment year has escapedassessment. To confer the jurisdiction under Section 147 ofthe Act, two conditions have to be fully satisfied i.e. (i) the AOmust have reason to believe that income, profits or gainschargeable to income tax have escaped assessment and (ii) if the reopening of assessment was after 4 years from the endof the relevant assessment year, the AO must also havereason to believe that such escapement had occurred byreason of either omission or failure on the part of theassessees to disclose fully or truly all the material factsnecessary for his assessment of that year. 15.In the present case, we have taken note of the followingundisputed facts. undisputed facts. (i) On 01.04.2014, Mr. Ashok Zinzuvadia, the proprietor of M/s.Radhika Jewelers had opening stock of Rs.48,54,90,388/-. (ii) On 10.04.2014, Mr. Ashok Zinzuvadia gifted stock ofRs.14,48,64,958/- to his brother -writ applicant Mr. HareshZinzuvadia and also gifted stock of Rs.2,63,64,173/- to his son– writ applicant Mr. Darshit Zinzuvadia. (iii) Later on, both the writ applicants being the brother andson respectively of Mr. Ashok Zinzuvadia became partners inthe partnership firm M/s. Radhika Jewelers (w.e.f. 01.07.2014)and they introduced their capital asset in the said partnershipfirm as their capital contribution. 16. In view of the aforesaid, the assessment is sought to bereopened on the ground that, the writ applicants being partnersof the partnership firm transferred their capital assets receivedby them in the form of gift to the partnership firm by way ofcapital contribution at a market rate and therefore, they areliable for capital gain to the extent of Rs.26,29,50,198/- (HareshZinzuvadia – Rs.22,26,32,691/- + Darshit ZinzuvadiaRs.4,03,17,907/-), under Section 45 (3) of the Act.reopened on the ground that, the writ applicants being partnersof the partnership firm transferred their capital assets receivedby them in the form of gift to the partnership firm by way ofcapital contribution at a market rate and therefore, they areliable for capital gain to the extent of Rs.26,29,50,198/- (HareshZinzuvadia – Rs.22,26,32,691/- + Darshit ZinzuvadiaRs.4,03,17,907/-), under Section 45 (3) of the Act. 17.On the other hand, it is contended by the writ applicants that, the provisions of Section 45 (3) of the Act get attracted only ina case where the capital asset is introduced by the partnerstowards credit in the capital account of the firm, whereas, inthe facts of the present case, both the writ applicants haveintroduced their stock in trade. Thus, the introduction of stockin trade to the firm cannot be said to be a capital asset and noliability would be attracted under Section 45(3) of the Act. 17.On the other hand, it is contended by the writ applicants that, the provisions of Section 45 (3) of the Act get attracted only ina case where the capital asset is introduced by the partnerstowards credit in the capital account of the firm, whereas, inthe facts of the present case, both the writ applicants haveintroduced their stock in trade. Thus, the introduction of stockin trade to the firm cannot be said to be a capital asset and noliability would be attracted under Section 45(3) of the Act. 18.In the facts of the present case, it has been submitted that,both the writ applicants are engaged in business of gold andgold ornaments and have introduced their stock in tradereceived as a gift to the partnership firm as their capitalcontribution and therefore, they cannot be taxed underSection 45(3) of the Act. Section 45(3) of the Act has beenintroduced in the Act by Finance Act, 1997 w.e.f. 01.04.1988.Section 45(3) states that, “the profits or gains from the transfer of acapital asset by a person to a firm or other association of persons or bodyof individuals (not being a company or a co-operative society) in which heis or becomes a partner of member, by way of capital contribution orotherwise, shall be chargeable to tax as his income of the previous year inwhich such transfer takes place and for the purposes of section 48, theamount recorded in the books of account of the firm, association or bodyas the value of the capital asset shall be deemed to be the full value of theconsideration received or accruing as a result of the transfer of the capital”both the writ applicants are engaged in business of gold andgold ornaments and have introduced their stock in tradereceived as a gift to the partnership firm as their capitalcontribution and therefore, they cannot be taxed underSection 45(3) of the Act. Section 45(3) of the Act has beenintroduced in the Act by Finance Act, 1997 w.e.f. 01.04.1988.Section 45(3) states that, “the profits or gains from the transfer of acapital asset by a person to a firm or other association of persons or bodyof individuals (not being a company or a co-operative society) in which heis or becomes a partner of member, by way of capital contribution orotherwise, shall be chargeable to tax as his income of the previous year inwhich such transfer takes place and for the purposes of section 48, theamount recorded in the books of account of the firm, association or bodyas the value of the capital asset shall be deemed to be the full value of theconsideration received or accruing as a result of the transfer of the capital”asset. 19.There need not be a debate with regard to the proposition oflaw as laid in the case of Sunil Siddharthbhai (supra), thatwhere a partner of a firm makes over capital assets which areheld by him to a firm as his contribution towards capital, thereis a transfer of asset within the terms of Section 45 of theI.T.Act, 1961 because an exclusive interest of the partner inpersonal asset is reduced, on their entry into the firm, into ashare interest. The Supreme Court further held thatlaw as laid in the case of Sunil Siddharthbhai (supra), thatwhere a partner of a firm makes over capital assets which areheld by him to a firm as his contribution towards capital, thereis a transfer of asset within the terms of Section 45 of theI.T.Act, 1961 because an exclusive interest of the partner inpersonal asset is reduced, on their entry into the firm, into ashare interest. The Supreme Court further held that consideration, which a partner acquires on making over apersonal asset to the firm as his contribution to its capitalcannot fall within the terms of Section 48 and as thatprovision is fundamental to the computation machinery,incorporated in the scheme relating to the determination ofthe charge provided in Section 45 of the Act, such a casemust be regarded as falling outside the scope of capital gaintaxation altogether. consideration, which a partner acquires on making over apersonal asset to the firm as his contribution to its capitalcannot fall within the terms of Section 48 and as thatprovision is fundamental to the computation machinery,incorporated in the scheme relating to the determination ofthe charge provided in Section 45 of the Act, such a casemust be regarded as falling outside the scope of capital gaintaxation altogether. 20.However, the Supreme Court also observed therein that thedetermination of the appeal on the assumption that, thepartnership firm in question is a genuine firm and not theresult of sham and unreal transaction, and that the transfer bythe partner of his personal asset to the partnership firmrepresents a genuine intention to contribute to the sharecapital of the firm for the purpose of carrying on thepartnership business would not be proper. If the transfer ofpersonal asset by the assessees to a partnership firm in whichhe is or becomes a partner is merely a device or ruse forconverting the asset into money which would substantiallyremain available for his benefit without liability to income taxon a capital gain, it will be open to the income tax authority togo behind the transaction and examine whether thetransaction of creating the partnership firm is genuine orsham transaction and , even where the partnership isgenuine, the transaction of transferring the personal asset tothe partnership firm represent a real attempt to contribute tothe share capital of the partnership firm for the purpose ofcarrying on the partnership business or is nothing, but deviceor ruse to convert the personal asset into money substantiallyfor the benefit of the assessees while evading tax on capitalgain. The income tax officer will be entitled to consider all therelevant indicia in this regard, whether the partnership is formed between the assessees and his wife and children orsubstantially limited to them, whether personal asset is soldby the partnership firm soon after it is transferred by theassessees to it, whether the partnership firm has nosubstantial or real business or the record shows that therewas no real need of partnership firm for such capitalcontribution from the assessees. All these and other pertinentconsiderations may be taken into consideration when theincome tax officer enters upon a scrutiny of the transactionfor in the task of determining whether the transaction is shamor illusory or device or ruse he is entitled to penetrate the veilcovering it and ascertain the truth. 21.The claim of the writ applicants is that, they are engaged inthe trading of gold and gold ornaments and hold the VATregistration and are maintaining day to day accounts of theirbusiness. It is their specific case that, the gifted stockreceived from Mr. Ashok Zinzuvadia was treated stock in tradeand have transferred it to the partnership firm and therefore,stock in trade is not capital asset.the trading of gold and gold ornaments and hold the VATregistration and are maintaining day to day accounts of theirbusiness. It is their specific case that, the gifted stockreceived from Mr. Ashok Zinzuvadia was treated stock in tradeand have transferred it to the partnership firm and therefore,stock in trade is not capital asset. 22.In the aforesaid context, the question that falls for ourconsideration is, whether the writ applicants were engaged intrading business of gold and gold ornaments before thepartnership firm came into existence ?consideration is, whether the writ applicants were engaged intrading business of gold and gold ornaments before thepartnership firm came into existence ? 22.In the aforesaid context, the question that falls for ourconsideration is, whether the writ applicants were engaged intrading business of gold and gold ornaments before thepartnership firm came into existence ?consideration is, whether the writ applicants were engaged intrading business of gold and gold ornaments before thepartnership firm came into existence ? 23.Upon perusal of the order disposing of the objections againstthe reopening of the proceedings, it appears that, the AO hastaken into consideration the fact that the alleged stock intrade introduced in the firm on 01.07.2014 ofRs.36,74,97,429/- has not been reflected in the tradingaccount of both the writ applicants for the A.Y. 2015-16. It wasthe reopening of the proceedings, it appears that, the AO hastaken into consideration the fact that the alleged stock intrade introduced in the firm on 01.07.2014 ofRs.36,74,97,429/- has not been reflected in the tradingaccount of both the writ applicants for the A.Y. 2015-16. It was further observed by the AO while rejecting the objections that,in the capital account, there is no credit of the value of thegift received from Mr. Ashok Zinzuvadia. Both the writapplicants failed to submit the balancesheet as on 01.07.2014and 30.06.2014 respectively, as a result of which, consideringthe huge mismatch in the stock introduced in the firm andstock received as a gift, by reasoned order, the objectionscame to be rejected. 24.Upon perusal of the documentary evidence, it appears that, atthe time of filing the writ applications as well as at the time offiling the objections against reopening, both the writapplicants failed to submit their stock register (productledger) and the same was submitted for the first time withAffidavit in Rejoinder, without any explanation as to why thesame had not been submitted at the time of filing of thepresent petitions. 25.After careful examination of the ledger product (stockregister), annual return under VAT Act, profit and balanceaccount and other documentary evidence produced before us,we are convinced that there was cogent and overwhelmingmaterial before the AO to initiate proceedings under Section147 of the Act. We take notice of the followings:- (I) In both the cases, the writ applicants were employees ofthe proprietary concern M/s. Radhika Jewelers and their salaryhad been debited in the books of accounts of the firm (page43); (ii) Upon bare perusal of the copy of ledger product, it appearsthat on 10.04.2014, there was entry of the gifted stock. Thus,prior to the alleged gift, in absence of opening balance of thestock, it prima facie appears that the assesse as such did not enter into any transaction of buying and sale. (iii) We are unable to find the entry of gift in the balancesheet, as observed by the revenue while disposing of theobjections. (iv)In view of Nil opening balance, the annual return underthe VAT (at page 34) showing the annual turnover for thewhole year becomes suspicious as no monthly sales havebeen mentioned or reflected from it. (v) Both the assessees had their investments in land andmutual funds etc. and have shown expenses in the accounttowards the school fees etc. (vi) For the preceding year i.e. A.Y. 2013-14 & 2012-13, theassessees failed to show that they are traders in gold and goldornaments; (vii) The inter-se gift transaction is amongst the familymembers i.e. the like son and brother respectively; enter into any transaction of buying and sale. (iii) We are unable to find the entry of gift in the balancesheet, as observed by the revenue while disposing of theobjections. (iv)In view of Nil opening balance, the annual return underthe VAT (at page 34) showing the annual turnover for thewhole year becomes suspicious as no monthly sales havebeen mentioned or reflected from it. (v) Both the assessees had their investments in land andmutual funds etc. and have shown expenses in the accounttowards the school fees etc. (vi) For the preceding year i.e. A.Y. 2013-14 & 2012-13, theassessees failed to show that they are traders in gold and goldornaments; (vii) The inter-se gift transaction is amongst the familymembers i.e. the like son and brother respectively; 26.In view of the aforesaid facts, it cannot be said that thereasons for reopening are merely based on the observationsmade by the AO while framing the assessment of thepartnership firm vide order dated 31.12.2017. It is pertinent tonote that, against the assessment order dated 31.12.2017,the firm is in appeal before the appellate authority and theappeal is still pending. Thus, while recording the reasons, theAO has considered the relevant facts like issue of stock intrade, the way in which the stock of proprietary concern cameto be gifted to the family members by proprietor Mr. AshokZinzuvadia. It could be said that there was proper applicationof mind on the part of the AO while recording the reasons forreopening. When the return of income of both the assesseeswas processed under Section 143(1) of the Act and not underSection 143 (3) of the Act, the AO is justified in arriving at thereasons for reopening are merely based on the observationsmade by the AO while framing the assessment of thepartnership firm vide order dated 31.12.2017. It is pertinent tonote that, against the assessment order dated 31.12.2017,the firm is in appeal before the appellate authority and theappeal is still pending. Thus, while recording the reasons, theAO has considered the relevant facts like issue of stock intrade, the way in which the stock of proprietary concern cameto be gifted to the family members by proprietor Mr. AshokZinzuvadia. It could be said that there was proper applicationof mind on the part of the AO while recording the reasons forreopening. When the return of income of both the assesseeswas processed under Section 143(1) of the Act and not underSection 143 (3) of the Act, the AO is justified in arriving at the conclusion that the income has escaped assessment. It hasbeen held by the Apex court in the case of Central ProvincesManganese Ore Company Ltd. [(1991) 191 ITR 662 (SC)];Rajesh Jhaveri [(2008) 14 SCC 208], that the word “reason” inthe phrase “reason to believe” in Section 147 would meancause or justification. If the AO has cause or justification toknow or suppose that income has escaped assessment, hecan be said to have reason to believe that income hasescaped assessment. The expression cannot be read to meanthat the AO should have finally ascertained the fact by legalevidence or conclusion. conclusion that the income has escaped assessment. It hasbeen held by the Apex court in the case of Central ProvincesManganese Ore Company Ltd. [(1991) 191 ITR 662 (SC)];Rajesh Jhaveri [(2008) 14 SCC 208], that the word “reason” inthe phrase “reason to believe” in Section 147 would meancause or justification. If the AO has cause or justification toknow or suppose that income has escaped assessment, hecan be said to have reason to believe that income hasescaped assessment. The expression cannot be read to meanthat the AO should have finally ascertained the fact by legalevidence or conclusion. 27.Our attention has been invited to a decision of the Apex Courtin the case of Sunilbhai Vs. Commissioner of Income Tax(AIR 1996 SC 368). In that case, the appellant assessee wasa partner in M/s. Suvas Trading Company and had introducedhis shares as capital asset in the firm as capital contributionand during the assessment proceedings, the Commissioner ofIncome Tax was of the view that the difference between themarket value of the shares and cost of acquisition of theshares was liable to be taxed in view of Section 45 of the Act.The assessees appealed to the Income Tax Appellate Tribunal.The Appellate Tribunal allowed the appeal and set aside theorder of the ITO and thereafter, reference was made to theHigh Court on the question of law. The High Court answeredthe question in favour of the revenue and against theassessees. The assessees challenged the same before theApex Court. In the present case, no assessment proceedingshad taken place. Thus, in view of the observations made bythe Apex Court in the case of Sunil Siddharthbhai (supra), theissue of stock in trade is required to be examined for whichthe AO is convinced that the amount has escapedassessment. 28.In view of the aforesaid, we are convinced that there wastangible material before the AO to initiate the proceedingsU/s. 147 of the Act. In our view, the AO is justified inreopening the assessment of both the assessees and it cannotbe said that the impugned Notice is without jurisdiction orcontrary to Section 147 of the Act.tangible material before the AO to initiate the proceedingsU/s. 147 of the Act. In our view, the AO is justified inreopening the assessment of both the assessees and it cannotbe said that the impugned Notice is without jurisdiction orcontrary to Section 147 of the Act. 29.For the foregoing reasons, we are convinced that no case ismade out by the writ applicants for interference. In the result,both the writ applications fail and are hereby rejected. Noticestands discharged in both the writ applications. The interimrelief granted earlier stands vacated. made out by the writ applicants for interference. In the result,both the writ applications fail and are hereby rejected. Noticestands discharged in both the writ applications. The interimrelief granted earlier stands vacated. Sd/-(J. B. PARDIWALA, J) SUCHIT -Sd/(ILESH J. VORA,J)