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

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 31^st 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.

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