Ita/318/2012 Of Commissioner Of Income Tax v. Sri C Ramaiah Reddy

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 25 DAY OF JUNE 2020. PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE M.NAGAPRASANNA_ LT.A. NO.318 OF 2012 BETWEEN: 1.COMMISSIONER OF INCOME TAX.(CENTRAL), C.R. BUILDINGS ~(CENTRAL), C.R. BUILDINGS ~ QUEENS ROAD, BANGALORE 560 OO1. 2.DEPUTY COMMISSIONER OF INCOME TAXCIRCLE 7(1), BANGALORE. CIRCLE 7(1), BANGALORE. ... APPELLANTS (BY SRI. JEEVAN J. NEERALGI, ADV., FOR|SRI. E.I. SANMATHI, ADV.,)SRI. E.I. SANMATHI, ADV.,) AND: SRI. C. RAMAIAH REDDYRAMAIAH REDDY COLONYSECTOR D, BASAVANAGARMARATHAHALLI, BANGALORE 560 037. .. RESPONDENT (BY SRI. A. SHANKAR, SR. ADV., A/W| SRI. M. LAVA, ADV.,) | THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,1961 ARISING OUT OF ORDER DATED 25/05/2012 PASSED IN ITA}NO.122/BANG/2011, FOR THE ASSESSMENT YEAR 2006-07,|PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: (1) FORMULATE THE QUESTION OF LAW STATED THEREIN. (II) SET ASIDE THE APPELLATE ORDER DATED 25/5/2012 PASSED BY THE ITAT, ‘A’ BENCH, BANGALORE, IN APPEAL|PROCEEDINGS ITA NO.122/BANG/2011, AS SOUGHT FOR IN THIS|APPEAL. THISLIACOMINGONFOR.HEARING,THISALOK ARADHE J.,DELIVERED THE FOLLOWING: DAY, JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act,|for short) has been filed by the revenue. The subject.matter of appeal pertains to Assessment year 2006- O07. The appeal was admitted by a bench of this court vide order dated 08.07.2013 on the following. substantial questions of law: (1)Whether in the facts and circumstancesof the case, the tribunal was correct in law in holding that the provisions ofSection 45(2) and 49(1) of the Income|Tax Act are not applicable in respect tothe property received by assessee on)partial partition of Hindu Undivided|Family and thereby deleting the longterm capital gain of RS.6,78,41,691/-?.of the case, the tribunal was correct in law in holding that the provisions ofSection 45(2) and 49(1) of the Income|Tax Act are not applicable in respect tothe property received by assessee on)partial partition of Hindu Undivided|Family and thereby deleting the longterm capital gain of RS.6,78,41,691/-?. (iI)Whether In the facts and circumstancesof the case, the tribunal was correct in|law in holding that the cost of the)properties received in partial partition of|HUF to be adopted as claimed by the)assessee under Section 37 (1) of the[Income Tax Act as deduction whilecomputing the income under the head‘ProfitandGalnsofBUSINESSOrProfession’, ignoring the fact that the|assessee did not incur any cost on such|properties other than the cost incurred|by the HUF at Rs.9,09,050/-?|of the case, the tribunal was correct in|law in holding that the cost of the)properties received in partial partition of|HUF to be adopted as claimed by the)assessee under Section 37 (1) of the[Income Tax Act as deduction whilecomputing the income under the head‘ProfitandGalnsofBUSINESSOrProfession’, ignoring the fact that the|assessee did not incur any cost on such|properties other than the cost incurred|by the HUF at Rs.9,09,050/-?| 2 |Facts giving rise to filing of the appeal innutshell are that assessee is an individual engaged in.the real estate business. The assessee filed return ofincome on 20.11.2006 declaring total income ofRs.1,37,71,300/-. The case was selected for scrutinyand a notice under Section 143(2) of the Act was issued.The assessee in the profit and loss account had shownpurchase|andsaleofsitesandnetprofit ofRs.1,13,18,182/- was shown and was declared as 2 |Facts giving rise to filing of the appeal innutshell are that assessee is an individual engaged in.the real estate business. The assessee filed return ofincome on 20.11.2006 declaring total income ofRs.1,37,71,300/-. The case was selected for scrutinyand a notice under Section 143(2) of the Act was issued.The assessee in the profit and loss account had shownpurchase|andsaleofsitesandnetprofit ofRs.1,13,18,182/- was shown and was declared as income from business. Thereupon a query was madeas to how the cost of the site was worked out and the|assessee was asked to submit relevant documents. The'§aSS@SSCECvidecommunication dated18.17.7008|submitted copy of memorandum of family arrangementand oral partition dated 06.03.2004 wherein the detailsof assets and properties, which devolved upon theassessee were mentioned. The lands received by theassessee under the family arrangement were treated asstock in trade in his books and were sold in previousyear. Thereupon a query was made to the assessee thatcapital gains on sale of such properties is attractedunder Section 45(2) of the Act and since, no capitalgains were offered to tax, therefore, the assessee wasasked to clarify why such capital gains were notcomputed. The assessee was further asked to furnishOriginal cost of acquisition of land along with purchasedeeds. The assessee submitted that the values wereadopted as cost or fair market values of the properties as on the date of family arrangement held as stock in.trade of real estate business of joint family. Theassessing officer by an order dated 31.12.2008 interalia held that once family partition takes place, the assetwhich comes in the share of the assessee par take thecharacter of the assets in the hands of assessee ascapital gains and therefore, conversion of capital assetsinto stock in trade and capital gains attract theprovisions of Section 45(2) of the Act. The assessingofficer determined the total income of Rs.8,61,37,451/-.after making an addition of RS.6,78,41,691/- on accountof long term capital gains under Section 45(2) of the Acton sale of lands and other assets. 3.The.aSS@C@SSCfiledan)appealbeforeCommissionerofIncome.Tax!(Appeals).TheCommissioner of Income Tax (Appeals) vide order dated26.11.2010 upheld the order passed by the assessingofficer and dismissed the appeal. Being aggrieved, the.Income Tax Appellate Tribunal by an order dated 25.05.2012 inter alia held that properties, which wereheld as stock in trade by the joint family before theywere allotted to the respondent on partition. It wasfurther held that the respondent continued to carry onreal estate business even after partition. Thus, it washeld that there was no conversion of capital assets tostock in trade either by the assessee or the joint family.and therefore, the provisions of Section 45(2) of the Actwere not attracted to the fact situation of the case.|Accordingly, the order passed by the assessing officer.was set aside and the appeal preferred by the assesseewas allowed. Being aggrieved, the revenue is in appealbefore US. 4Learned counsel for the revenue submittedthat the tribunal ought to have appreciated that lands.belong to joint family which were subjected to partitionand were allotted to the assessee and sold by him andthat such a sale gives rise to capital gains and therefore,provisions of Section 45(2) of the Act are attracted. Itis 4Learned counsel for the revenue submittedthat the tribunal ought to have appreciated that lands.belong to joint family which were subjected to partitionand were allotted to the assessee and sold by him andthat such a sale gives rise to capital gains and therefore,provisions of Section 45(2) of the Act are attracted. Itis further submitted that the HUF neither filed any returnnor any books of accounts and also did not Nave anyPermanent Account Number and therefore, existence ofHUF itself was doubtful and the assessee was unable to.prove the existence of HUF before the authorities. It isalso submitted that the cost of acquisition of lands waslow and cost or fair market values of the properties ason the date of family arrangement was highly inflated.The entire arrangement made by the assessee wasdesigned to evade the tax liability. It is also urged thattne findings recorded by the tribunal are perverse as thefindings recorded by the assessing officer as well as theCommissioner of Income Tax (Appeals) have beenreversed witnout there being any material on record. Itis alSo argued that the findings recorded by the tribunalare without any basis. © 5.|On the other nand, learned Senior Counselfor the assessee submitted that not an iota of material|was bDrougnt on record by the assessing officer to indicate that the assets obtained were capital assets. Itwas further pointed out that from perusal of Clause 3 ofMemorandum of Partition it is evident that asset takenover were forming part of stock in trade of real estate.business. It is also urged that material on record clearlyestablishes that taking over of the running businessincluding stock in trade is a pure question of fact and.not question of law. It is also pointed out that even inthe memo of appeal the revenue has not averred anyperversity and no material has been placed on record todemonstrate that finding of fact recorded by the tribunalis perverse. It is contended that provisions of Section45(2) of the Act are applicable only when there is atransfer of capital asset by the owner by way ofconversion into stock in trade and the aforesaidcondition of conversion of capital asset into stock tradeis not fulfilled in the case of the assessee, therefore,provisions of Section 45(2) do not apply. It is furthercontended that assessee was allotted stock in trade from the erstwhile joint family and the same continued to beheld as stock in trade in the real estate business of therespondent. It is also submitted that since, theproperties in question are not capital assets, therefore,provisions of Section 49(1) of the Act are not applicableto be fact situation of the case. It is also argued thatfrom conjoint reading of Section 2(14) and Section45(2) of the Act, it is clear that Section 45(2) is notapplicable to tne facts of the case and therefore, Section49(1) of the Act does not apply to the fact situation ofthe case. In support of aforesaid submissions, referencenas been made to decision of the supreme court in“KALOORAM GOVINDARAM VS. CIT’, (1965) 57 ITR335 (SC),6.|We have considered the submissions madeon both the sides and nave perused the record. Beforeproceeding further, it is apposite to take note of therelevant provisions of the Act viz., Section 2(14), 2(47),45(2) and 49(1) of the Act, which are reproduced below for the facility of reference: 2(14) “capital asset" means— | (a) property of any kind held by anassessee, whether or not connected with his—business or profession; (D) Xxxx| but does not Include— hy|stock-in-tradefotherthanthesecurities referred to in sub-clause (b)I/J,consumable stores or raw meterlals held forthe purposes of his business or profession ; XXXXX XX 2(47) “transfer”,means in relation to acapital asset, includes,- for the facility of reference: 2(14) “capital asset" means— | (a) property of any kind held by anassessee, whether or not connected with his—business or profession; (D) Xxxx| but does not Include— hy|stock-in-tradefotherthanthesecurities referred to in sub-clause (b)I/J,consumable stores or raw meterlals held forthe purposes of his business or profession ; XXXXX XX 2(47) “transfer”,means in relation to acapital asset, includes,- 45(2)Notwithstanding|anythingcontained in sub- section (1), the profits orgains arising from thetransfer by way ofconversion by the owner of a Capitalasset into, or its treatment by him as,|stock- in- trade of a business carried on byhim shall be chargeable to income- tax as hisincome of the previous year in which suchStock-|In- tradeISSoldOrotherwise transferred by him and, for the purposes ofsection 48, the fair market value of the asset.on the date of such conversion or treatmentShall be deemed to be the full value of theconsideration received or accruing as a resultof the transfer of the capital asset.” 49(1)Where thecapital asset' became the property of the assessee-- (i)On any distribution of assets on|the total or partial partition of aHindu Undivided family;the total or partial partition of aHindu Undivided family; the cost of acquisition of the assetShall be deemed to be the cost for which|the previous owner of the_ propertyacguired it ............., aS the case m JFrom perusal of Section 2(14) of the Act, it is evident that stock In trade has been excluded from the|definition of capital asset and the explanation ‘transfer’ as defined under Section 2(47) relates to capital assetsonly and does not include stock in trade. Section 49(1)of the Act is applicable when the properties in questionare capital assets. 8.|From close scrutiny of Section 45(2) of theAct, it is axiomatic that it is attracted only when there isa transfer by the owner of a capital asset by conversioninto stock in trade. Three conditions which are sine quanon are required to be complied with in order to attractthe application of Section 45(2) of the Act. (I)There has to be a transfer by way ofconversion.conversion. (iI)The conversion has to be by the owner. (iI)The conversion must be of a capitalasset Into stock in trade.asset Into stock in trade. omThe.SupremeCourtInKALOORAMGOVINDARAMsupra has held that except in the casesof fraud, collusion, inflation and deflation of values forulterior purposes, cost of the asset to a divided member must necessarily be its cost to him at the time ofpartition whether mentioned in the partition deed orascertained aliunde. 10. In the backdrop of aforesaid well settled legalposition, the facts in hand may be seen. From clause(iii) of Memorandum of family arrangement and oralpartition reads as under: crThe FIRST PARTY has been allotted|the balance of the capital of the family to|real estate business being excess of assets|over liabilities (after taking revaluation of allthe assets forming part of stock-in-trade of|real estate business along with the other|assets pertaining to the sale business like|cash in hand, bank balances etc., after.allotting and providing a portion of such|capital to parties No.2 to No.5 in the oral|family arrangement and partition towards|their respective snares to enjoyed by him in|severally to the exclusion of parties No.2 to No.5 absolutely. 10. In the backdrop of aforesaid well settled legalposition, the facts in hand may be seen. From clause(iii) of Memorandum of family arrangement and oralpartition reads as under: crThe FIRST PARTY has been allotted|the balance of the capital of the family to|real estate business being excess of assets|over liabilities (after taking revaluation of allthe assets forming part of stock-in-trade of|real estate business along with the other|assets pertaining to the sale business like|cash in hand, bank balances etc., after.allotting and providing a portion of such|capital to parties No.2 to No.5 in the oral|family arrangement and partition towards|their respective snares to enjoyed by him in|severally to the exclusion of parties No.2 to No.5 absolutely. 11. Thus,fromperusalofclause.(tit)|ofmemorandum of partition, it is axiomatic that asset,which were taken over were forming part of stock intrade of real estate business and continued to be Innature of stock In trade in tne nands of tne assessee.There is no jota of material on record to show that theassets obtained by the assessee were capital assets. Thecharacter of assets received on partition did not changeand there is no provision in the Act to indicate thatassets received on partition are capital assets, as nodeemingprovisionshave|been|enactedby theLegislature. Section 45(2) of the Act are not applicablein the fact situation of the case as the asset received isstock in trade. Alternatively, it is worth noticing thatthere is notning on record to indicate that any capitalasset has been converted to stock in trade andprovisions of Section 49(1) are not applicable to stock Intrade. The definition of ‘capital asset’ in Section 2(14)expressly excludes stock in trade. | 12. The substantial questions of law framed by.this court are in fact questions of fact and the findingson the questions involved in this appeal have beenarrived at by the tribunal on the basis of meticulousappreciation of material on record. The relevant extractof the order passed by the tribunal reads as under: 7.10 From the facts and circumstances|of the case on this issue, as discussed in the.preceding paragraphs, 7.5 onwards and the.clear wording of the Memorandum of FamilyArrangement and Oral Partition, we are of theconsideredvVIeEthattheadSSCSSCEWasallotted the family’s real estate Dusiness. In.coming to this view, we are fortified by the.decision of this tribunal in the assessee’s owncase for the block period referred to earlier inthis order. We, therefore, hold that the.assessee, on partition of the joint family, hadreceived the balance capital of the family in-the real estate Dusiness comprising variousassets, which were in the nature of stock in-trade and it cannot be considered that the various assets or properties received by theassessee on partition are capital assets andthese capital assets were converted into stockin trade of the real estate when the assesseecontinued to carry on the business of theerstwhile joint family. We also find as rightlycontended by the assessee, that if at all therewas any capital asset received on partition,such a capital asset would be the real estatebusiness carried on by the erstwhile family. 8.|The Assessing officer’s applicationof the provisions of Section 45(2) of the Act tothe instant case is to be examined. Theprovisions of Section 45(2) of the Act areattracted only when there is a conversion of acapital asset into stock in trade. As alreadyobserved by us there is no material on recordto support the view taken by the assessingofficer that the assessee received certaincapital assets on partition of the joint familywhich were later converted to stock in tradeby the assessee. A perusal of both the orderof the Tribunal in the assessee’s case in theblockassessmentcoupledwith.theMemoranaum of Family Arrangements and 8.|The Assessing officer’s applicationof the provisions of Section 45(2) of the Act tothe instant case is to be examined. Theprovisions of Section 45(2) of the Act areattracted only when there is a conversion of acapital asset into stock in trade. As alreadyobserved by us there is no material on recordto support the view taken by the assessingofficer that the assessee received certaincapital assets on partition of the joint familywhich were later converted to stock in tradeby the assessee. A perusal of both the orderof the Tribunal in the assessee’s case in theblockassessmentcoupledwith.theMemoranaum of Family Arrangements and OralPartitiondated06.03.7004clearly|establishes that the erstwhile joint family ofthe assessee was carrying on real estatebusiness and was holding several propertiesas stock in trade. These properties which were_hitherto being held as stock in trade, wereallotted to the assessee on partition. It is also-evident that the assessee continued to carryon the said real estate business after thepartition. In these circumstances, it is clearthat there is no conversion of capital assets toStock in trade either by the assessee or thejoint family. In this view of the matter, we.hold that the provision of Section 45(2) of theAct are not applicable in the instant case andconsequently the computation of capital gainsmade by the assessing officer is cancelled. 13. It is well settled in law that the tribunal is a.fact finding authority and a decision on the facts of thetribunal can be gone into by the high court only if aquestion has been referred to it, which says that thefinding of the tribunal is perverse.[SEE: ‘SUDARSHANSILKS AND SAREES VS. CIT’, 300 ITR 211 (SC)]Al three judge bench of the supreme court in.‘SANTOSHHAZARI VS. PURSHOTTHAM TIWARI’, (2001) 3SCC 1/7while dealing with the expression ‘to be a|question of law involving in the case’, there must be firsta foundation for it laid in pleadings and the questionsemerged from sustainable findings of fact arrived at bycourts of fact and it must be necessary to decide thatquestion of law for a just and proper decision of thecase. In the instant case, it is pertinent to note that nofactual foundation has been made in the pleading withregard to the findings of fact arrived at by the tribunaland no material has been placed on record todemonstrate that the findings of fact recorded by thetribunalareDerverse.|Therefore,thesubstantialquestion of law framed by a bench of this court in factdo not arise for consideration in this appeal as thematter is concluded by findings of fact. — �E���4�?-1A�9:�8,1�061715-4C�/4/2>.-."�8,1�/001/2� :/-2.�/45�-.�,161=>�5-.;-..15�� ��#$%��������#$%�������..�