COMMISSIONER OF INCOME TAX Vs. MINAL RAMESHCHANDRA

JUDGEMENT

(1.) ADOPT a device and avoid payment of tax can such course be accorded approval of judicial process? In addition to the four questions referred to us (pages 516,517 infra), the aforesaid question is also required to be answered in the light of the facts that follow: The assessee is an individual deriving income from share of profits from M/s Star Radio Electric Company and M/s Alloys Metal Casting Corporation. The assessee also derives income from dividend and interest. The assessment year under consideration is 1971 72. The previous year is the year ending on March 31, 1971, for the assessment year in question. The assessee filed a return of income on November 30, 1971, and showed total income of Rs. 40,480. A notice under s. 143(2) of the IT Act, 1961 (hereinafter referred to as " the Act ") was issued by the ITO. During the course of assessment proceedings, it transpired that the assessee along with her mother and brother had become a partner in the firm of M/s Ashni Construction Company. In the firm, the assessee, her mother and brother had contributed land as their share of capital contribution. There were seven other partners who contributed no capital whatsoever. The book value of the land as on March 31, 1970, was Rs. 34,728. As on April, 1, 1970, the assessee in her books of account put the market value of the land at Rs. 4,45,929. The surplus of Rs. 4,11,192 was transferred to the capital account No. 2 of the assessee. It is an admitted position that similar entries were made in the books of account of her mother and brother also. It was claimed by the assessee that the surplus was not capital gain inasmuch as there was neither transfer of any capital asset nor was there any sale or exchange.

(2.) THE ITO found that only the assessee and two other partners (i.e., her mother and brother) had contributed capital in the form of land. The other seven partners had not contributed any capital whatsoever in the firm of M/s Ashni Construction Company which was formed on April 1, 1970. The three partners contributing land retired from the partnership w.e.f. August 31, 1970, by executing a deed of retirement dated October 24, 1970. The firm had not done any business of dealing in land. Therefore, the ITO held that all the transactions were sham and colourable and were intended to escape from the effect of capital gains tax. According to the ITO, the land being an immovable property, the transfer was required to be under a deed of conveyance. As there was no conveyance and as the assessee continued to show the value of the land in her wealth tax return for the asst. yr. 1971 72, the assessee continued to be the owner of the asset. As per the ITO's order in para 10, even the assessee stated that the land was not transferred to the firm and that she continued to be the owner of the asset. For these reasons, the ITO found that there was no transfer of the land whatsoever.

(3.) THE CIT, Gujarat IV, Ahmedabad called for the record and examined the same. He found that the ITO's order was erroneous as it was prejudicial to the interest of the Revenue. In his opinion, the income arising to the assessee on account of the land transactions during the previous year had not been Correctly computed or assessed. The CIT issued show cause notice under S. 263 of the Act and called upon the assessee to explain as to why an appropriate order should not be passed revising the order of assessment after properly computing capital gains arising to the assessee on account of the transfer of her interest in the land to the partnership firm. During the course of the proceedings, the learned Commissioner called upon the assessee to show as to why the surplus arising out of the transactions in question should not be taxed as business income in the hands of the assessee. For this purpose, adequate opportunity of making representations and submissions was given to the assessee. Before the CIT, the assessee contended that the land was firstly treated as stock in trade in the assessee's own books of account and then transferred to the firm as stockin trade and as capital contribution.