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 :-
