Back
1975 Supreme(Mad) 427
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE V. RAMASWAMY & THE HONOURABLE MR. JUSTICE V. SETHURAMAN
Commissioner of Income Tax, Madras I - Appellant
Versus
Rikadas Dhuraji and Another - Respondent
Case No : TC No. 166 and 168 of 1969
Decided On : 03 September 1975
The difference between the fair market value and the full value of the consideration received or accruing as a result of the transfer could not be taken into account as consideration deemed to have been received in computing the capital gain under section 148.
Headnote:
CAPITAL GAINS - TRANSFER OF PROPERTY - SECTION 45, 48, 52 OF THE INCOME TAX ACT, 1961 - INTERPRETATION - Whether the difference between the fair market value and the full value of the consideration received or accruing as a result of the transfer could be taken into account as consideration deemed to have been received in computing the capital gain under section 148.
Fact of the Case:
The assessee, a registered firm of partnership, purchased a house property in 1947 for Rs. 36,000. In 1962, three of the four partners executed a release deed, transferring their rights and interests in the property to the fourth partner for Rs. 64,000. The firm filed a return showing a capital gain of Rs. 18,353, calculated based on the difference between the book value of the property and the market value. The Income-tax Officer, with the approval of the Inspecting Assistant Commissioner, determined the market value at Rs. 1,05,000 and computed the capital gain at Rs. 41,000. The assessee and the individual partner filed appeals, which were allowed by the Appellate Assistant Commissioner and the Tribunal.
Finding of the Court:
The Tribunal held that there was no sale by the firm and that the release deed did not constitute a sale by the firm to a partner. The Tribunal also held that the property belonged to the firm and if there was to be a sale, it can only be by the firm as such or by one of the partners acting on behalf of others. The Tribunal further held that there was no document evidencing the transfer and that mere book entries would not operate to effect a transfer.
Issues: 1. Whether, on the facts and in the circumstances of the case, there was a transfer of the house property by the assessee-firm to a partner of the firm? 2. Whether, on the facts and in the circumstances of the case, capital gains was chargeable on the basis of the fair market value of the property as on the date of the transaction? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee's share of capital gains of Rs. 7,321 from the firm of M/s. Sanghvi Dhuraji Khusalji & Co. for the assessment year 1964-65 is not assessable in his hands?
Ratio Decidendi: 1. The release deed executed by the three partners was construed as a conveyance of the property from the firm to the individual partner, as the intention of the firm was to transfer the property to the individual partner and the entries in the accounts of the partnership showed that the firm was transferring the property to the individual partner. 2. Section 52(1) of the Income Tax Act, 1961, which allows the Income-tax Officer to take the fair market value of the capital asset as the full value of the consideration for the transfer, applies only to cases of under-statement of consideration and not to bona fide transfers where nothing more is received than that recited in the document itself. 3. The difference between the fair market value and the full value of the consideration received or accruing as a result of the transfer could not be taken into account as consideration deemed to have been received in computing the capital gain under section 148.
Final Decision: The Court answered the first question in the affirmative and against the assessee, the second question in the negative and against the revenue, and the third question in the affirmative and in favour of the assessee.
V. RAMASWAMI J.
The assessee is a registered firm of partnership consisting of four partners. Their names and the different shares held by them are given below 1. Dhuraji Khusalji ... 12/28 share
2. Rikadas Dhuraji ... 5/28 share
3. Devichand Dharmachand ... 4/28 share
4. Chaganlal Kesarimal ... 7/28 share
The firm had purchased a house property bearing No. 34, Perumal Mudali Street, Madras, on November 21, 1947, for Rs. 36, 000. It had effected some improvements and the total cost as per accounts as on November 1, 1962, amounted to Rs. 63, 327. This sum stood to the debit of the property account in the books of the firm. The income from this property was returned by the firm from the date of its purchase. On November 1, 1962, the 1st, 3rd and 4th partners executed what is styled as release deed by which they had released all their rights and interests in the said property in favour of the second partner. This deed also was registered under the Registration Act. The value of the property as per the release deed was Rs. 64, 000. In the accounts of the partnership the book value of the property, namely, Rs. 63, 327, was transferred to the debit of the second partner with the following narration
"Cost of Daya Sadan purchased from M/s. Dhuraji Khusalji & Co. on November 1, 1962." *
For the assessment year 1964-65, corresponding to the year ending October 17, 1963, the assessee-firm filed a return in which under the heading "Capital gains" a sum of Rs. 18, 353 was shown. This had been done by arriving at the net annual value of the property as Rs. 4, 084 and determining the market value at 20 times the annual value. From the resultant figure of Rs. 81, 680 it had deducted a sum of Rs. 63, 327 which is the value of the property as per books, and arrived at the capital gain of Rs. 18, 353. After making certain enquiries and considering the market condition and the rent the property fetched, the Income-tax Officer, with the approval of the Inspecting Assistant Commissioner, determined the market value at Rs. 1, 05, 000. He took the cost at a round figure of Rs. 64, 000 and thus computed the capital gain at Rs. 41, 000For the same assessment year 1964-65, corresponding to the year ending October 17, 1963, in the individual assessment of the second partner, Rikadas Dhuraji, the Income-tax Officer added a sum of Rs. 7, 321 as his share of the capital gains. The assessee-firm and the individual, Rikadas Dhuraji, filed appeals before the Appellate Assistant Commissioner. In the appeal, the assessee-firm contended that there was neither a sale nor a transfer of the property by the firm to one of the partners and that the release deed did not amount to a sale or transfer and that, therefore, no question of assessment to capital gains arose, though they themselves had voluntarily filed a return showing the transaction as sale and a capital gain of Rs. 18, 353. The Appellate Assistant Commissioner accepted this contention and held that there was no sale by the firm and that the release deed dated November 1, 1962, would not constitute a sale by the firm to a partner. In this view, the appeal was allowed and the Income-tax Officer was directed to modify the assessment. Consequently, the appeal filed by the individual partner in respect of the assessment of his share of capital gain was also allowed. The department filed two appeals to the Tribunal which were heard and disposed of together. The Tribunal dismissed the appeals. The view of the Tribunal on the point raised in their own words may be set out here as some arguments were advanced as to what exactly was the decision of the Tribunal. That passage reads as follows
"9. The point for consideration is whether there was a transfer by the firm in favour of one of the partners so as to attract capital gains. The department have proceeded on the assumption that a market value of the property transferred had to be adopted. There is no warrant for this. There is no finding that the transfer w
