COMMISSIONER OF INCOME TAX Vs. RAJA VIKRAMADITYA SINGH

JUDGEMENT

(1.) BY this reference under Section 256(1) of the Income-tax Act, 1961- (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :

(2.) ON behalf of the Department :

(3.) THE assessee is assessed in the status of an individual and the relevant assessment years are 1971-72 and 1972-73. In the return filed by the assessee, he claimed deduction on account of payment of interest on the amount borrowed by him for investing in the firm, M/s. Madho Associates, Kota, of which the assessee was a partner. THE Income-tax Officer held that as the said firm was, during the relevant assessment years, constructing a cinema building and had not carried on any business activity during that period, the investment made by the assessed could not be held to be investment for any business purpose. THE Income-tax Officer held that till the commencement of the business activity, the assessee was not entitled to deduction on account of payment of interest on loan taken by the assessee for investing in the firm. THE Income-tax Officer also held that the sale by the assessee of Rasoda building at Rajgarh to his mother for a sum of Rs. 45,000 was understated ; that the fair market value of the said building was Rs. 2,00,000 ; that the difference between the sale price and the fair market value was more than I 5% and, therefore, under Section 52(2) of the Act, the fair market value of Rasoda building would be Rs. 2,00,000 and the assessee was accordingly liable to tax on capital gains. THE Income-tax Officer also rejected the contention advanced by the assessee that the capital gains arising from the sale of Rasoda building was not taxable as Rasoda building was part of the palace of the assessee, the erstwhile Ruler of Rajgarh, in view of the provisions of Section 15 of the Part B States (Taxation Concessions) Order, 1950. THE appeal preferred by the assessee in this behalf was dismissed by the Appellate Assistant Commissioner. On further appeal before the Tribunal, the Tribunal held that in view of the fact that the firm, M/s. Madho Associates, had commenced its business from July, 1971, disallowance of payment of interest by the assessee on the amount borrowed by the assessee for investment in the firm, for the assessment year 1972-73 was not justified. THE Tribunal further held that as regards the assessment year 1971-72, though it could not be held that the firm, in which the assessee had invested the amount borrowed by him, was carding on business, interest paid by the assessee, who was a partner, on the capital borrowed by him for the purpose of investment in the firm was, by virtue of Sub-section (3) of Section 67 of the Act, deductible in computing his total income. THE Tribunal also held that Section 52(2) of the Act was not attracted in the instant case in so far as the sale of Rasoda building was concerned. THE Tribunal, however, upheld the finding of the Income-tax Officer and the Appellate Assistant Commissioner that capital gains arising from sale of Rasoda building could not be held to be exempt from levy of tax under the Act. Aggrieved by the order passed by the Tribunal, the Department as well as the assessee sought reference. This is how the aforesaid questions of law have been referred to this court for its opinion.