pri HC held contribution of Land by partner to Firm as SHAM transaction HC held contribution of Land by partner to Firm as SHAM transaction

Case Law Details

Case Name : CIT Vs M/s Carlton Hotel Pvt Ltd. (Allahabad High Court)
Appeal Number : Income tax appeal No. 31/2009
Date of Judgement/Order : 31/01/2017
Related Assessment Year : 2004-05

CIT Vs M/s Carlton Hotel Pvt Ltd. (Allahabad High Court)

Conclusion: The entire consideration for free-hold land was paid by M/s SICCL but in what capacity, was not known and transfer of same land by assessee to SICCPL at a consideration which had a vast difference than that was acquired by assessee after execution of free-hold deed 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 firm of assessee and SICCPL was a sham and fictitious transaction and an attempt to device a method to avoid tax on transfer of land.

Held: Assessee-company got a freehold land and the same land i.e. 10,000 Sq.ft. was sold by assessee to M/s SICCL for a certain consideration. It was mentioned in the said sale-deed that the amount paid towards conversion of land into freehold was actually paid by  ‘SICCL’. Assessee offered capital gain of Rs.60,74,821/- for taxation by adopting circle rate fixed by District Magistrate for the purpose of stamp duty which was Rs.11,600/- per Sq.mts. plus 15% addition for corner plot. Return of the income was filed by assessee declaring long term capital gain of Rs.60,74,821/-. Also, assessee entered into a partnership in the name and style of “M/s India Housing” with SICCL, and one individual Sri I. Ahmad. Towards capital contribution in the stock of firm, assessee contributed 2,40,000 Sq.ft. of land, valued as per books, at the cost of Rs.7,81,96,735/- i.e. at the rate of Rs.325.8 per Sq.ft. Assessing Authority issued a notice requiring assessee to show cause why capital gain as per Section 50C be not charged on the transfer of land as “capital contribution” to partnership firm. Assessee submitted that it was carrying a value of Rs.11,89,03,440/- of 364937 Sq.ft. Land, (at the rate of Rs.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 and contributed 2,40,000 Sq.ft. of land, valued as per books, at the cost of Rs.7,81,96,735/-, which was proportionate to cost vis-a-vis total area of land held by assessee. The value of land, in the account of firm, was also reflected to the same amount i.e. Rs.7,81,96,735/-. Assessee further said that under Section 45 (3), “capital contribution of immovable property” brought in by partners was chargeable to ‘capital gain’ in the hand of partnership who brings in such share as ‘capital’. ACIT, however, worked out capital gain of Rs.9,72,8,663/- on the transfer by sale of 10,000 Sq.ft. of land to SICCL. Similarly, capital gain on transfer of 2,40,000 Sq.ft. of land to firm “M/s India Housing” was worked out to Rs.23,35,78,399/- (i.e. Rs.973.24 per Sq.ft.). The asessment was completed for a total income of Rs.24,07,55,080/-. It was held entire consideration for free-hold was paid by M/s SICCL but in what capacity, was not known. A part of land was transferred by sale to M/s SICCL at a consideration which had 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 value, Tribunal failed to appreciate that the entire land came to be acquired by assessee only on 31st March, 2002. Prior thereto, it had no lawful right or interest in the property. Even as per book value, cost of land determined and share profits determined between the parties and their capital contribution was 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 was 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. Also, an attempt was made to 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. Tribunal has not looked into the matter with regard to colorable device and sham transaction of partnership, therefore, the matter required to be remanded to Tribunal.

FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT

1. Heard Shri Alok Mathur for the appellant and Shri Mudit Agarwal for respondent.

2. This is an appeal under Section 260A 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 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 without appreciating that transfer of land by Assessee, having only 5% share in the firm, is as good as transfer to M/s Sahara India Commercial Corporation Ltd., having a share of 90% in the firm and that such transfer of land to firm is only a colorable device to avoid payment of tax?

ii. Whether Tribunal has erred in law in holding that full value of consideration 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 of acquisition as on 1.4.81 whereas value of land in the books of Assessee was taken as NIL?

(emphasis added)

4. Before answering aforesaid questions, it would be appropriate to have a bird eye view of relevant facts giving rise to present dispute.

5. Assessee, M/s Carlton Hotel Pvt. Ltd., Ranapratap Marg, Lucknow was lessee in possession of a ‘Nazul’ land, (measuring 364937 Sq.ft.) under the lease deed dated 31st March, 1943. Lease expired on 31st March, 1990. However, possession of land continued with Assessee.

6. In view of government policy for conversion of ‘Nazul’ into freehold, a sum of Rs.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 Rs.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’), for a consideration of Rs.1,23,94,000/-, vide sale deed dated 13.11.2003. It was mentioned in the said sale-deed dated 13.11.2003 that the amount paid towards conversion of land into freehold was actually paid by M/s Sahara India Housing Ltd. (now known as ‘SICCL’). Assessee offered capital gain of Rs.60,74,821/- for taxation in the aforesaid transaction.

8. Capital gain was calculated on sale of 10000 Sq.ft. land by adopting circle rate fixed by District Magistrate for the purpose of stamp duty which was Rs.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 Rs.35,22,840, total loss amounting to Rs.25,51,985/- from hotel business and long term capital gain of Rs.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. Towards capital contribution in the stock of Firm, Assessee contributed 2,40,000 Sq.ft. of land, valued as per books, at the cost of Rs.7,81,96,735/- i.e. at the rate of Rs.325.8 per Sq.ft. This value was claimed, proportionate to cost of total land area, held by Assessee.

11. Assessing Authority i.e. Assistant Commissioner of Income Tax, Lucknow Range (hereinafter referred to as ‘ACIT’) issued a notice dated 21st March, 2006, under Section 142 (1) of Act, 1961, requiring 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 Rs.11,89,03,440/- of 364937 Sq.ft. Land, (at the rate of Rs.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 and contributed 2,40,000 Sq.ft. of land, valued as per books, at the cost of Rs.7,81,96,735/-, which was proportionate to cost vis-a-vis total area of land held by Assessee. The value of land, in the account of firm, was also reflected to the same amount i.e. Rs.7,81,96,735/-. There was no difference in value shown in the book of accounts of Assessee as well as Firm.

13. Assessee further said that under Section 45 (3) of Act, 1961, “capital contribution of immovable property” brought 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 attracted only to those cases of transfer of immovable property where process of registration and payment of stamp duty, as per Stamp Valuation Authority is necessary. Transfer of immovable property by partners as contribution, as share capital, in the partnership Firm does not call for any registration for which stamp duty is required to be paid or assessed by any authority of State Government, nor was any such duty adopted or assessed by any authority of State Government. Reliance was also placed 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’). Assessee therefore requested to drop proceedings.

14. ACIT, however, did not agree and vide order dated 8th December,  2006 and worked out capital gain of Rs.9,72,8,663/- on the transfer by sale of 10,000 Sq.ft. of land to SICCL. Similarly, capital gain on transfer of 2,40,000 Sq.ft. of land to firm “M/s India Housing” was worked out to Rs.23,35,78,399/- (i.e. Rs.973.24 per Sq.ft.). The asessment was completed for a total income of Rs.24,07,55,080/-.

15. Aggrieved by the 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 Rs.23,35,78,399/- was also upheld. With regard to computation of capital gain in respect of transfer of 10,000 Sq.ft. of land to SICCL, Assessee claimed benefit of Section 55 (2)(b) of Act, 1961 stating that land was acquired by it before 01.04.1981 but this plea was negated by CIT(A) observing that Assessee has shown value of land in the books of accounts ‘Nil’ as on 31st March, 2002, hence, cannot claim benefit under Section 55 (2)(b) of Act, 1961. CIT(A) relied on Supreme Court judgment in Commonwealth Trust Ltd. Vs. CIT, 228 ITR 1 (SC). With regard to other points, appeal 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 Assessee to adopt either actual cost of acquisition of asset or paid market value of asset as on 01.04.1981, as the cost of asset under partnership.

17. As per partnership deed of the Firm, shares of profits of three partners were provided as under :-

i.  M/s SICCL 90%
ii.  M/s Carlton Hotel Pvt. Ltd. 05%
iii. Shri I. Ahmad 05%

gdfh

18. Capital contribution of three partners in the Firm is as under :-

1. M/s SICCL Rs. 1,36,37,700 (12%)
2. M/s Carlton Hotels (P) Ltd. Rs. 7, 81,96,735 (88%)
3. Mr. I. Ahmad 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 the assessee (clause 8).

v) Business of partnership to be exclusively carried out by M/s Sahara India Commercial Corporation Ltd. (clause 12)

vi) Bank account can be independently operated only by the other two partners but the assessee can operate only with joint signatures of other two partners (clause 13). Only Sahara India Commercial Corporation is entitled to vary the withdrawals. (clause 14)

vii) The assessee unequivocally undertakes that it has not created any liability against land booked 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 referred to the Arbitrator viz., Mr. Subrat Roy Sahara. (clause 27)

(Emphasis added)

20. Learned counsel for Revenue argued that CIT(A) has examined various aspects of the matter including partnership deed of the Firm and conditions stipulated therein. It has clearly recorded a finding that transfer of land by Assessee to the Firm was not its contribution but a plain and simple transfer of land to M/s SICCL. To avoid necessity of transfer by sale, Assessee was introduced as a nominal partner in the 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 controlling partner i.e. SICCL on behalf of Assessee. Partnership deed shows that Assessee has a little role in partnership business, which proves that it has already settled its score and alleged partnership was a cloak to otherwise deed of sale. The entire transaction is colourable and fraudulent. It is submitted that Tribunal while allowing appeal of Assessee, has ignored all these aspects and after discussing Section 50C of Act, 1961, has held that one of the ingredients to invoke Section 50C 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 value of capital asset which has to be given full effect. Sri Mathur submits that Tribunal has not appreciated the matter in correct perspective. The element of fraud with Revenue, i.e. a cloaked transaction to evade Tax Liability has not been considered at all. It is a case of evasion of Tax and not avoidance by prudent tax management.

21. Sri Mathur, learned counsel for Revenue has also contended that Tribunal has committed a mistake in law by observing that Sections 50C and 45 (3) of Act, 1961 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 completely ignored to consider these aspects of the matter raised by Revenue.

22. Sri Mudit Agarwal, learned counsel for respondent/Assessee has submitted that Section 45 (3) creates a deeming fiction hence same could not have been ignored by considering any other aspect. Section 50C could not have been imported and Tribunal has rightly allowed appeal. He urged that questions raised by Revenue in this appeal deserve to be answered against it.

23. We have heard learned counsel for the parties at 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’ Nazul’ is a land vested in the State, not by way of purchase, acquisition, etc. but in its capacity of sovereign and in the right of bona vacantia, which has no other owner, or by escheat or cession. No private person can claim ownership right over Nazul land so long as its status as Nazul continue. It would be appropriate to understand the concept of Nazul at this stage which may have some bearing on the issues in question.

26. A ‘Nazul’ land is owned by State, though it may have vested in the State for various reasons. Nature of ‘Nazul’ land has been discussed by this Court in some of the judicial 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”. It is an Arabic word and it refers to a land annexed to Crown. During the British Regime, immoveable property of individuals, Zamindars, Nawabs and Rajas when confiscated for one or the other reason, it was termed as “Nazul property”. The reason being that neither it was acquired nor purchased after making payment. In the old record, we are told when they used to be written in Urdu, this kind of land was shown as “Jaidad Munzabta”.

4431. For dealing with such property under the 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 Nazul land was also termed as confiscated estate. Under circular dated 13th July, 1859, issued by the Government of North Western Provinces, every Commissioner was obliged to keep a final confiscation statement of each district and lay it before the Government for orders. The kingdom of Oudh was annexed by East India Company in 1856. It declared the entire land as vested in the Government and thereafter settled the land to various individuals Zamindars, Nawabs etc.

4432. At Lucknow revolt against 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 propriety rights were given to certain Talukdars and Zamindars by grant of ‘Sanad’ under Crown Grants Act. In the meantime we all know that under the Government of India Act, 1858 the entire Indian Territory under the Control of East India Company was placed under Crown w.e.f. First November, 1858. A kind of first settlement in summary we undergone in Oudh in 1861 wherein it appears that the land in dispute was shown as Nazul and since then in the records, the nature of land is continuously 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 the context of the theory of ‘Nazul’. Such kind of land cannot be a Nazul land. If the entire territory during Mughal regime would that of a king, as soon as the territory annexation or otherwise changed its hand with the East India Company, they would have entered into the shoes of the Mughal king and got the same rights, obligations, privileges etc. on the land. The status of the land would not have changed in such a manner. Such a land could not be confiscated since it was already the 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 canvassed is that law, whether Islam or Hindu Shastras, do not recognise any personal right of ownership upon immoveable property. The entire property within the suzerainty of the king belong to him, who had right to tax its subject in the form of tax or otherwise by realising share in the agricultural or other income in the immoveable property. The percentage of share may differ and that may not be relevant for our purpose.

4438. The second aspect of the matter is that since ancient time the right 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 share from the income of the property etc. It is said that the King, by virtue of its authority, was not the sole owner of the entire immoveable property within his suzerainty but though the immoveable property was subject to his suzerainty, the individual right of the owner on the property continued to be recognized. Besides, the fact that the land could have been acquired by the king by valid means like purchase, gift etc., meaning thereby other modes of acquisition of immoveable property by King 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 and based on the want of a tenant to perform the feudal services. On the tenant dying intestate without leaving any lawful heirs, his estate came to an end and the lord was in by his own right and not by way of succession or inheritance from the tenant to reenter the real property as owner. In most of the cases the land escheated to the Crown as the lord paramount, in view of the gradual elimination of intermediate or mesne lords since 1290 AD. The Crown takes as bona vacantia goods in which no 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 property by escheat i.e right of the Government to take on property by escheat or bona vacantia for want of a rightful owner was enforced in the Indian territory during the period of East India Company by virtue of statute 16 and 17 Victoriae, C. 95, Section 27.

4440. We may recollect having gone through the history that several estates were taken over by British Company by applying the doctrine of lapse like Jhansi which was another kind of the above two principles. The above provisions had continued 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 lapse, or as bona vacantia for want of a rightful owner, shall if it is property situate in a State, vest in such State, and shall, in any other case, vest in the Union.”

4441. The Apex Court in Pierce Leslie and Co. Ltd. (supra) has considered the above principles in the context of sovereign India as it stands under its constitution after independence and has observed that “in this country the Government takes by escheat immoveable as well as moveable property for want of an heir or successor. 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 1122, 1146, Legal Remembrancer Vs. Corporation of Calcutta (1967) 2 SCR 170, 204.

4443. The Judicial Committee in Cook Vs. Sprigg 1899 AC 572 discussing what is an act of state, observed :

“The taking possession by Her Majesty, whether by cession or by any other means by which sovereignty can be acquired, was an act of State.”

4444. This decision has been followed in Raja Rajinder Chand Vs. Mst. Sukhi and others AIR 1957 S.C. 286.

4445. In Vajesingji Joravarsingji Vs. Secretary of State 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 rights as that sovereign has, through his officers, recognised. Such rights as he had under the rule of predecessors avail him nothing.”

4446. In Dalmia Dadri Cement Co. Ltd. Vs. Commissioner of Income tax AIR 1958 SC 816, the Court said :

“The expression ‘act of State’ is, it is scarcely necessary to say, not limited to hostile action between rulers resulting in the occupation of territories. It includes all acquisitions of territory by a sovereign State for the first time, whether 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 law that conquest is not the only mode by which one State can acquire sovereignty over the territories belonging to another State, and that the same result can be achieved in any other mode which has the effect of establishing its sovereignty.”

4449. In Thakur Amar Singhji Vs. State of Rajasthan AIR 1955 SC 504, in para 40, the Court said :

“The status of a person must be either that of a sovereign or a subject. There is no tertium quid. The law does not recognise an intermediate status 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, legislative, executive and judicial. Their firmans were laws which could not be challenged prior to the Constitution. The Court relied on its earlier two decisions in Director of Endowments, Govt. of Hyderabad Vs. Akram Ali AIR 1956 SC 60, and Sarwarlal Vs. State of Hyderabad AIR 1960 SC 862.

4451. In Promod Chandra Deb Vs. State of Orissa A.I.R. 1962 S.C. 1288 “act of the State” was explained in the following words:

“an “act of State” may be the taking over of sovereign powers either 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 & Ors. 1964(1) Supreme Court Journal 364.

16. Thus, a territory acquired by a sovereign State is an Act of State but the land comprising territory does not become the land owned by State. The land owned by State may come to it in various ways, like confiscation, purchase, escheat or bona vacantia, gift etc. In such a case the ownership vests in State, like any other individual and State is free to deal with the same in a manner like any other owner may do so.

17. Thus ‘Nazul’ is a land vested 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)

27. Presently various provisions dealing ‘Nazul’ land have been compiled, in the State of U.P., in “Nazul Manual”. In the context of Nazul land and Nazul Manual, recently in State of U.P. Vs. United Bank of India & others, 2016 (2) SCC 257, Court has observed that land and building in question is ‘Nazul’ property being property of Government maintained by State authorities in accordance with Nazul Rules but not administered as a State property. Court has 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 be valid and take effect according to their tenor, any rule of law statute or enactment of the Legislature to the contrary notwithstanding. Thus the stipulations in “Lease deed” shall prevail and govern entire relation of State Govt. and lessee.

28. After expiry of lease, if lessee continued in possession, he cannot ask for advantage of principle of holding over, recognized under Act, 1882, for the reason that his continued possession thereafter would become unauthorized, and in view of 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 ‘Nazul’ land by lessees, after expiry of period of lease, in Mrs G.S.J. Shapoorjee Vs. Allahabad Development Authority and others, Writ-C-No.7176 of 1981, decided on 18.04.2016, this Court has said as under, in paras 23, 24, 28 to 31 & 35 to 38:-

“23. Status of lessees after expiry of period of lease is that of “unauthorised occupants”. Lease stands terminated by efflux of time after expiry of original period of lease. There is no automatic or temporary renewal. It has 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 and another vs. Shanker Mahto and others, (2005) 5 SCC 543. Therein Trial Court decided issue in favour of lessee and held that without terminating lease under Section 116 of Act, 1882 suit for ejectment could not have been filed but first Appellate Court reversed this judgment. The lessee also lost second appeal before High Court and thereafter matter came before Supreme Court where it held that mere acceptance of rent would not signify assent of continuance of lease even after expiry of lease period.

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 continuance in occupation by any person of the public premises after the authority (whether by way of grant or any other mode of transfer) under which or the capacity in which he was allowed to hold or occupy the premises has expired or has been determined for any reason whatsoever and also includes continuance in occupation in the circumstances specified in sub-section (1) of Section 7 and a person shall not, merely by reason of the fact that he had paid any amount as rent, be deemed to be in authorised 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 defied in Section 3 of the Companies Act, 1956 or a local authority) owned or controlled by the State Government: or

(iv) any society registered under the Societies Registration Act, 1860, the governing body whereof consists, under the rules or regulations of the society, wholly of public officers or nominees of the State Government or both: and also includes-

(i) Nazul land or any other premises entrusted to the management of local authority (including any building built with Government funds 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 State Government in certain conditions:”

(emphasis added)

29. Definition of “unauthorized occupation” clearly includes occupation of a public premises by a person after expiry of authority to occupy such land which includes a person whose period of lease has expired and still he or she is continuing in possession. “Public Premises” includes any premises belonging to or taken on lease including “nazul land”.

30. Thus, after expiry of lease, lessee became “unauthorised 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 legally may become “unauthorized occupant” subsequently after expiry of lease period.

35. In Delhi Development Authority vs. Anant Raj Agencies Pvt. Ltd. (supra) Court considered that land vested in DDA was a ‘Nazul land’ and that being so, power has been conferred upon DDA to grant lease which includes renewal of lease but in absence of said renewal of lease of property as required in law, original lessee cannot claim an automatic renewal in his favour. Court held as under:-

“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 that any act on the part of DDA in respect of other communication would make no difference, since a “Public Premises” is to be dealt with by relevant statutory provisions including Act, 1971, Nazul Land Rules and DDA Act, 1957. Thus question-1 was answered by Court as under:-

“30. Without examining the case in the proper perspective that the property in question being a Public Premises in terms of Section 2(e) of the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 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 grant of perpetual injunction by the Trial Court in favour of original lessee, restraining the DDA from taking any action under the said termination notice dated 01.09.1972, on the ground that the termination notice dated 01.09.1972 being illegal, arbitrary and without jurisdiction and the affirmation of the same by both the first appellate court, i.e. by the learned ADJ and further by the High Court by its impugned judgment and order are not only erroneous but also suffers from error in law. Thus, 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, title or interest in the property cannot transfer the same by way of sale deed.” Thus original lessee could not transfer a valid right to subsequent purchaser. Further, fact that subsequent purchaser deposited conversion charges in the office of DDA, also would make no difference. Original lessee in absence of renewal of lease, himself having become an “unauthorized occupant” of property and a transaction between original lessee and subsequent purchaser would have no legal consequence. 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 Occupants) Act, 1971 and consequently, not entitled to deal with the property in question in any manner. The very concept of conversion of leasehold rights to freehold rights is not applicable to the fact situation.”

31. In the light of above exposition of law, when lease expired on 31 st March, 1990, from 1st April 1990, Assessee became an “unauthorized occupant” of land in question. There was no occasion for him to maintain aforesaid land as part of its ‘capital asset’. 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. Thereafter Assessee got title over land on execution of Free Hold deed on 31st March, 2002, i.e. Financial Year (hereinafter referred to as ‘F.Y.’) 2001-02 and A.Y. 2002-03. Thus Assessee got a valid and legal title over property in dispute only on 31 st March, 2002 when deed for freehold was executed in favour of Assessee by State. Freehold conversion charges paid by Assessee were Rs.8,94,94,944/-, (though as a matter of fact the said charges were paid on behalf of Assessee, by M/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 execution of such conversion deed.

35. Assessee then entered into a sale deed dated 13.11.2003 in favour of M/s SICCL, for a consideration of Rs.1,23,94,000/-.

36. Facts disclosing transactions above, show rates of land, at different stages, as under :-

(a) freehold conversion charge – Rs.245.23 per Sq.ft.
(b) rate of land sold to M/s SICCL vide sale deed dated 13.11.2003 – Rs.1239.40 per Sq.ft.
(c) rate of land assessed by Assessee as per his books of account towards capital contribution in partnership – Rs.325.81per Sq.ft.
(d) value of the total land acquired by Assessee vide deed dated 31st March, 2002, (as per circle rate Rs.11,600 per Sq.Mt.) = Rs.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 been made. Similarly, in the sale deed dated 13.11.2003 also consideration was much less than circle rate applicable for the purposes of stamp duty.

38. In this backdrop, we have to examine applicability of Section 50C, vis-a-vis, mutual relationship of execution or harmonious consideration of Section 45 (3), 48 and 50C of Act, 1961.

39. Section 45 (1) of Act, 1961 deals with ‘capital gains’ and says that any profit or gains arising from “transfer of a capital asset” effected 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-section (3) of Section 47 which is relevant and came to be inserted by Finance Act, 1987, w.e.f. 01.04.1988 which reads as under:-

“47(3). The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such 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, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to 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 same meaning as in clause (d) of section 269UA;

43. Section 48 talks of “mode of computation of capital gains” and reads as under:-

“48. The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition 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 currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company :

Provided further that where long-term capital gain arises from the transfer of a long-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 proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government :

Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer 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” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;

(iv) “indexed cost of any improvement” means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset 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. “Capital gains” is artificial income. It is created by Act, 1961. Profits arising from transfer of capital asset is made chargeable to income tax under Section 45 (1) Act, 1961. From the scheme of Act, 1961, it is clear that “capital gains” is not an income which accrues on day-to-day during specific period but it arises on a fixed point of time, namely, on the date of transfer. Section 45, in effect, not only defines “capital gains” but makes same chargeable to income tax 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 of “capital asset” reads as under:

“capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include —

46. In Chapter IV of Act, 1961 some additions were made as special provisions for different purposes. For our purpose, it is Section 50C, inserted by Finance Act, 2002 w.e.f. 01.04.2003, made as a special provision, for 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 in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

(2) Without prejudice to the provisions of sub-section (1), where-

(a ) the assessee claims before any Assessing Officer that the value adopted or assessed by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer;

(b ) the value 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 (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act.

Explanation.— For the purposes of this section, “Valuation Officer” shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).

(3) Subject to the provisions 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 examined in the light of the aforesaid provisions and also some of the authorities considering various shades of Section 45 (3). In order to attract Section 45 (3), the necessary requirements are :-

“(i) there is a transfer of capital asset.

(ii) such transfer is by a person;

(iii) such transfer is to a firm; and

(iv) the firm is such in which the person is or becomes a partner or member.

(v) Such partner or membership of the person in the firm is by way of capital contribution or otherwise.”

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 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.

50. We find answer to this question in Sunil Siddharth Bhai Vs. CIT, [1985] 156 ITR 509. Therein, Assessee was a partner in a firm M/s Suvas Trading Company, a partnership firm constituted under a deed of partnership dated 27 September, 1973. Assessee, as its capital 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 Rs.1,49,849/-. However, when Assessee contributed shares to the firm, he revalued shares at market value of Rs.1,60,279/- and credited the resulting difference of Rs.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 was of the opinion that difference between market value of the share and cost of acquisition of shares to Assessee should have been brought to tax as “capital gains” in view of Section 45 of Act, 1961, and, exercised revisional jurisdiction and reopened assessment. Appeal preferred to Tribunal by Assessee was decided in favour of Assessee and it held that transaction did not amount to “transfer” within the meaning of section 2 (47) of Act, 1961, hence it did not result in “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 Rs.1,49,819 and the market value of the shares being Rs.1,60,279?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that there was a transfer within the meaning of clause (47) of section 2 of the Income-tax Act, 1961, of the shares contributed by the assessee as capital to the partnership firm in which he was a partner?

51. Gujrat High Court vide judgment dated April 30, 1981/May 1, and 4, 1981 answered questions in favour of Revenue and against Assessee. Supreme Court in 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 there was no “transfer” in general sense of that term when a partner brings his personal assets into firm as his contribution towards its capital, partnership firm is not a separate legal entity and assets owned by the partnership are collectively owned by the partners. Referring to the judgment in Malabar Fisheries Co. Vs. CIT, [1979] 120 ITR 49(SC), Court held that there is no reason not to accept the aforesaid proposition advanced by learned counsel for Assessee that a partnership firm 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 to sale. Relying upon an earlier judgment in CIT Vs. Hind Construction Ltd., [1972] 83 ITR 211 (SC), Court observed, when Assessee made over its machinery to the partnership firm, there was no sale and Assessee did not derive any income. Similar view was taken by Madras High Court in CIT Vs. Janab N. Hyath Batcha Sahib, [1969] 72 ITR 528 (Mad.) that when a partner introduces his property into a partnership firm as his contribution to its capital, the transaction does not involve a sale of the property. 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 partnership as that of the firm.”

54. Similar view taken by this Court in Kackkar Vs. CIT, [1973] 92 ITR 87, Kerala High Court in CIT Vs. Kunhammed, [1974] 94 ITR 179 and Madras High Court in CIT Vs. Abdul Khader Motor and Lorry Service, [1978] 112 ITR 360 were also affirmed. But then Court proceeded to hold that transfer of “capital asset” by partner to the firm still can be a transfer, if not sale. For this purpose, it referred to Section 2 (47) of Act, 1961. The definition is 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 “transfer of property” connotes, passing of rights in property from one person to another. In one case, there may be a passing of the entire bundle of rights from the transfer or to the transferee. In another case, transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property, and in a third case, there may be a reduction of exclusive interest in the totality of rights of original owner into a joint or shared interest with other persons. An 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 altogether, what he enjoys now is an abridged right which cannot be identified with the fullness of the rights which he enjoyed in the asset before it entered the partnership capital.

56. Court in Sunil Siddharthbhai Vs. CIT (supra), in taking above view, also relied and referred to its earlier decision in Addanki Narayanappa Vs. Bhaskara Krishnappa, AIR 1996 SC 1300, wherein it was observed that whatever may be the character of property which is brought in by the partners when partnership is formed 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 property of the partnership. During the subsistence of partnership, however, no partner can deal with any portion of property, as his own. Nor can he assign his interest in a specific item of partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time, and upon dissolution of the firm, to a share in the assets of the firm which remain after satisfying liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 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 venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. His right during subsistence of partnership is to get his share of profits from time to time as may be agreed upon among the partners.”

(emphasis added)

58. 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 accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner’s interest takes place only when there is a dissolution of firm or upon his retirement from it. On dissolution of the firm or retirement of partner, he has right to realise interest and receive its value. It is the realization of interest which partner enjoys in the assets during subsistence of partnership firm by virtue of his status as a partner and in accordance with the terms of 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 into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner’s interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the 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 pre­existing before dissolution of the firm or retirement of the partner, is replaced by an exclusive interest in an asset of equal value. It is nothing but realisation of pre-existing right. But, when a partner brings his personal asset into the partnership; firm as his contribution to its capital changes its position and even rights of the partner underwent substantial change. A property which was, till the date of such bringing in, as firm’s capital, was an individual asset, after bringing in becomes a shared asset. An individual asset is the 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 companies into the partnership firm as his contribution to its capital, there was a transfer of a capital asset within the meaning of the terms of Section 45 of the Income-tax Act.”

(emphasis added)

61. While making above observation, Court approved the judgment of Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works Vs. CIT [1977] 110 ITR 595 (FB); Karnataka High Court in Addl. CIT Vs. M.A. J. Vasanaik [1979] 116 ITR 110; and Gujarat High Court in the judgment in appeal, i.e. in 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 the credit entry made in partner’s capital account in the books of partnership firm does not represent the true value of consideration. It is a notional value only, intended to be taken into account at the time of determining value of partner’s share in the net partnership assets on the date of dissolution or on his retirement. Court held that it is not correct to hold that consideration which a partner acquires on making over his personal asset to the partnership firm, as his contribution 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 to “capital”. It was held that under Act, 1961, profit or gains must be understood in the sense of real profits or gains, on the basis of ordinary commercial principles on which actual profits are computed, a sense in which no commercial man would misunderstand, and this has been regarded as a principle of general application, recognized in Calcutt Company Ltd. Vs. CIT [1959] 37 ITR 1 (SC); CIT Vs. Bai Shirinbai K. Kooka[ 1962] 46 ITR 86 (SC); Poona Electric Supply Co. Ltd. Vs. CIT [ 1965] 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 deduction of liability. When personal asset of the partner merges into capital of partnership firm, a corresponding entry is made in partner’s capital account, in the books of partnership firm. But that entry is made merely for the purposes of adjusting rights of the partners inter se when partnership is dissolved or the partner retires. It evidences that no debt is due by the firm to the partner. The capital represented by notional entry to the credit of partner’s account may be completely 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 income or gain.

66. Court, therefore, categorically held in Sunil Siddharthbhai Vs. CIT (Supra) as under :-

“the consideration received by the assessee on the transfer of his shares to the partnership firm does not fall within the contemplation of section 48 of the Income-tax Act and further that no profit or gain can be said to arise for the purposes of the Income-tax Act, we hold that these cases fall outside the scope of section 45 of the Act altogether.”

(emphasis added)

67. The aforesaid 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. One of the relevant aspects here is the “year of charge”. By depiction, ‘income’ under the head “Capital gains” is deemed to be the income of previous year in which transfer, i.e. vesting of title is fixed. Any income by way of capital gains is assessed in the assessment year corresponding to the previous year in which transfer takes place. A transfer does not take place merely because an agreement is entered into or consideration is paid there under in whole or in part. The words denote that a title in property has passed from transferr or 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 in Government, hence, that is the date of transfer for the purpose of capital gains as held in M.Omer Khan Vs. CIT (Addl.), 1992 196 ITR 269, whereby judgment of Andhra Pradesh High Court in Addl.CIT Vs. G.M. Omarkhan, [1979] 116 ITR 950 (AP) was followed. Mere declaration in the books entries has not been held sufficient for transfer of immovable property by individual to a firm. [See CIT Vs. T.M.B.Mohamed Abdul Khader, (1987) 166 ITR 207 (Mad.) and CIT Vs. Bharati Engineering Corporation, (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 Nayantara G. Agrawal Vs. CIT, (1994) 207 ITR 639, has held that the transaction was a sham.

71. When we go through the object of insertion of Section 50C, we find that it was inserted to tackle unaccounted income by practice of under-statement of consideration in acquisition of a property. Whether stamp duty is payable or not, is not a factor relevant for attracting section 50C and this is clear from the circular of Central Board of Director Taxes (herein after referred to as “CBDT”), Circular No. 8/2002, dated 27 August, 2002: (2002) 258 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 assessed by any authority of a State Government for the purpose of payment of stamp duty in respect such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration, and capital gains shall be computed accordingly under section 48 of the Income-tax Act.

37.3 It is further provided that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, and he has not 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 value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty purposes, the Assessing Officer shall not adopt such fair market value and shall take the full value of consideration to be the value adopted or assessed for stamp duty purposes.

37.4 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003­-04 and subsequent years.

(emphasis added)

72. Section 50C requires adoption of value or as per 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 definition of “transfer” under Section 2 (47) of Act, 1961 and observed, when a right in respect of any “capital asset” is extinguished and that right is transferred to someone, it would amount to transfer of a “capital asset”.

74. Thus law on this aspect is very clear. Section 17 (1) (b) of Registration Act, 1908 (hereinafter referred to as ‘Act, 1908’) requires a document of non-testamentary instruments, if it limit or extinguish, any right, title or 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 Brahmin, [1946] ILR 1946 1 Cal 191, said that neither a written document nor even a registration is necessary to bring separate properties of partners into partnership stock and for this purpose reference was made to Section 14 and 46 of Act, 1932. It was held that this kind of transfer is neither prohibited by Act, 1982 or Act, 1908. This is a different issue.

76. Similarly, Patna High Court in Firm Ram Sahay Mall Rameshwar Dayal Vs. Bishwanath Prasad, AIR 1963 Pat 221, relied on English Partnership 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 registration is another thing. What document would require registration is specified in Section 17 of Act, 1908. If conditions stated therein are satisfied the document has to be registered. It is no doubt true that once a partnership has come into existence, the stock whether immovable or movable, as narrated into share of individual partner in the partnership firm, such share of the partner in the asset of partnership which also have immovable property and assignment of such share does not require 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 of partnership which has immovable properties and its assignment of movable property. Where immovable property itself is put in the stock, reducing interest of a partner, owning property, and creating rights of other partners therein, it would be covered by Section 17 (1) (b) of Act, 1908. Here, we may refer to decision in T. Patil Vs. Commissioner of Gift Tax, 2003 9 SCC 172, wherein it was held that allotment or distribution of an asset or some of the assets of a Firm, by the Firm, to a partner 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 transfer has also been recognized by Section 45 (3) of Act, 1961, and, therefore, Section 45 (3) of Act, 1961 has been inserted by Finance Act, 1987. In normal course, therefore, the case in hand could have been dealt by Section 45 (3) of Act, 1961 itself, unless other things as apprehended by AICT and CIT(A) would not have been existing. These facts were brought to the notice of Tribunal also but unfortunately it has completely ignored the same.

79. In Shiv Mohan La! and others Vs. CIT, 1998 144 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 genuine, whether transaction of transferring personal asset to the partnership firm represents a real attempt to contribute to the share capital of partnership firm for the purpose of carrying on partnership business or is nothing but a device or ruse to convert personal asset into money, substantially for the benefit of Assessee, while evading tax on a capital gain is the cardinal issue, which has to be considered.

80. In this case we find that this point was specifically appreciated by ACIT and CIT(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 held, when Assessee made over its machinery to partnership firm, there was no sale, and Assessee did not derive any income. This view has been taken by various High Courts, including this Court also in CIT Vs. Janab N. Hyath Batcha Sahib, [1969] 72 ITR 528 (Mad). Court held, when a partner introduces his property into a partnership firm as his contribution to its capital, the transaction does not involve a sale of property. Referring to Section 14 of Act, 1932, Court said, when a partnership is formed 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 Kackkar Vs. CIT, [1973] 92 ITR 87 (All.), holding that a partner when hands over a business asset to a partnership firm as his contribution to its capital, he cannot be said to have effected a sale. Kerala High Court in CIT Vs. Kunhammed, [1974] 94 ITR 179 and Madras High Court in CIT Vs. Abdul Khader Motor and Lorry Service, [1978] 112 ITR 360, also took same view.

83. But that is not enough. Even if said transaction does not result in a sale, can it be said to be a transfer of another kind, effecting those exigencies, limiting or assigning rights, interest of the owner to another person. This question, we find, is more 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 of exclusive interest in the totality of rights of original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which 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 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. Pati! and sons Vs. Commissioner of Gift Tax, 2003 9 SCC 172, and CIT Vs. H. Rajan and H. Kannan, [1999] 236 ITR 42 (SC), a distinction, therefore, has been carved out by Courts i.e. when a partner receives his share in the partnership, and when partnership is dissolved or partner retires. Where share interest in the entire asset of the firm is replaced by an exclusive interest in an asset of equal value, it can be said that there is no transfer. It is the realisation of a pre-existing right. But the position would be different when a partner brings 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 Suni! 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 by insertion of sub-section 3, but yet this aspect will depend on the fact that partnership firm is genuine, there is no sham or unreal transaction, and assets of the Firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business.

85. In CIT Vs. H.H. Maharani Sethu Parvathi Bayi, [1998] 232 ITR 678, Court held , when such an issue is raised, Tribunal should have enquired into the real nature of transaction. It is the bounden 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 value, Tribunal failed to appreciate that the entire land came to be acquired by Assessee only on 31st March, 2002. Prior thereto, it had no lawful right 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 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 majority by Hon’ble Ranganath Mishra, J., observed that tax avoidance may be legal, but tax evasion is illegal. Commenting on this, His Lordship said that a time has come to depart from the Westminster principle as emphatically as the British courts have done and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare 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 side. There is a sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it. The ethics of transferring burden of tax liability to the shoulders of guideless, good citizens from those of the “artful dodgers” is per se We live in a welfare State, whose finances are founded on the tax collected by State from its people. Tax must be paid in accordance with law. Law must be respected and honoured in words 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 than honest payment of taxation.

89. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether transaction is such that judicial process may accord its approval to it.

90. In the present case, in the garb of entering into a partnership and taking recourse to some earlier laws, an attempt was made to 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 document is within the ambit of Section 17 (1)(b) of Act, 1908. The judgment of Patna High Court in Firm Ram Sahay Mall Rameshwar Dayal Vs. Bishwanath Prasad (supra) has also been referred in Sunil Siddharthbhai Vs. CIT (supra), but Court has not appreciated the same by observing that judgment proceeded not on the basis that there was no transfer, but that no document or transfer was required, and, therefore, registration was not necessary. However, Court expressly appreciated the view taken by Kerala High Court in Abdul Rahim (A.), Travancore Confectionery Works Vs. CIT, [1977] 110 ITR 595 (Ker) [FB], and Karnataka High Court in CIT (Addl.) Vs. Vasanaik (M.A.J.), [1979] 116 ITR 110 (Kar.), to hold that there was a transfer of capital asset within the meaning of Section 45 of Act, 1961. It is true that no specific view has been taken by Supreme Court in Sunil Siddharthbhai Vs. CIT (supra) on the effect of Section 17 (1)(b) of Act, 1908, since that was not directly in consideration but in view of ratio laid down therein, we are of the view that Section 17 (1)(b) of Act, 1908 would be attracted.

91. 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 raised by Revenue right from the stage of ACIT and onwards, and for that purpose matter requires to be remanded to Tribunal.

92. At this stage we propose to answer question no.1 in favour of Revenue and against Assessee. We refrain ourselves from answering questions 2, 3 and 4, since all these questions can be appropriately examined by Tribunal when it redecides the entire issues in the light of observations made above. Therefore, these aspects shall also be considered and decided by Tribunal afresh.

93. Appeal is accordingly allowed. Judgment and order dated 14.11.2008 passed by Tribunal is hereby set aside. Matter is remanded to Tribunal to rehear and decide it afresh, in the light of observations made above and in accordance with law, expeditiously, and in any case within six months from the date of production of certified copy of the judgment.

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