Rajdoot Hotel Enterprises Corpn. vs Commissioner of Income Tax

G,G, Sohani, Actg. C.J.

In pursuance of the directions given by this Court in Miscellaneous Civil Case No. 359 of 1976. The Tribunal, Indore Bench has referred the following question of law to this Court for its opinion:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in reaching the conclusion that the cost of acquisition of land incurred by the assessee-firm was Rs. 1.25 lakhs and not Rs. 2 lakhs?

The material facts, as set out in the statement of case, are briefly as follows : The assessee is a registered firm consisting of eight partners and was constituted by a deed dated 23-2-1967. The assessment year in question is 1971-72, for which the accounting period ended on 5-2-1970. The partners of the assessee-firm had purchased a piece of land on 9-9-1965 for a sum of Rs. 1.25 lakhs. As the assessee-firm required a parcel of land to enable it to carry on its business, the partners of the assessee-firm agreed to transfer the aforesaid land to the assessee-firm. A land account was opened in the books of the firm to which the sum of Rs. 2 lakhs was debited and corresponding credit was given to the capital accounts of the eight partners to the extent of the share of each partner in the ownership of the land. On 5-2-1970, the said land was sold by the assessee for a consideration of Rs. 2 lakhs to Rajdoot Hotel Enterprises Corpn. (P.) Ltd., Bhopal. The ITO held that this transaction of sale had resulted in a saving- of Rs. 75,000 to the assessee which was liable to be taxed. The ITO worked out this gain by taking the purchase price of land at Rs. 1.25 lakhs. Aggrieved by the order passed by the ITO, the assessee-firm preferred an appeal before the AAC who found as follows:

The cost of acquisition should be taken to be the one which was incurred by the appellant firm itself and not by others, because it is the appellant firm in whose case the question has arisen whether or not there was a gain on transfer of plot on 5-2-1970. The entries in the account books of the appellant firm provide adequate evidence to accept the cost of Rs. 2 lakhs. These entries were accepted by ITO as genuine. There is no material brought on record to disbelieve them.

The AAC, therefore, upheld the contention of the assessee that the cost of acquisition of the land was Rs. 2 lakhs and deleted the addition of Rs. 75,000 to the income of the assessee made by the ITO. Aggrieved by the order of the AAC, the revenue preferred a second appeal before the Tribunal which held that the partners of the assessee-firm had valued the land at Rs. 2 lakhs as against the actual price of Rs. 1.25 lakhs paid by them; that they had thus inflated the cost of the land by Rs. 75,000 and that the transaction of sale of the land by the assessee to Rajdoot Hotel Enterprises Corpn. (P.) Ltd. had resulted in a gain of Rs. 75,000 to the assessee-firm. The Tribunal, however, did not decide the nature of the gain as the AAC had not dealt with that aspect of the matter. The Tribunal, therefore, set aside the finding of the AAC regarding deletion of Rs. 75,000 from the income of the assessee and remanded the case to the AAC for deciding the question as to what was true nature of the gain made by the assessee-firm. Aggrieved by this order of the Tribunal, the assessee submitted an application for making a reference to this Court which was rejected by the Tribunal. On an application made by the assessee to this Court u/s 256(2) of the income tax Act, 1961 (''the Act'') the Tribunal was directed to refer the aforesaid question of law to this Court and to state the case. That is how the aforesaid question of law has come up before this Court for consideration.

Having heard the learned counsel for the parties, we have come to the conclusion that this reference has to be answered in favour of the assessee and against the revenue. As rightly observed by the AAC, the cost of acquisition of land incurred by the assessee should be that which was incurred by the assessee itself and not by others because it is in the case of the assessee that the question has arisen as. to whether there was or was not a gain of Bs. 75,000 on sale of the land by the assessee to the company. Now the entries In the account books of the assessee showing the cost of acquisition of the land as Rs. 2 lakhs were held to be genuine by the ITO and this finding has not been set aside by the AAO or by the Tribunal. In face of this finding, it is difficult to appreciate the view of the Tribunal that the purchase price of the land has to be determined at Rs. 1.25 lakhs. The decision in Commissioner of Income Tax, West Bengal Vs. Hind Construction Ltd., relied on by the Tribunal is not attracted in the circumstances of this case. That decision lays down that a person by handing over his goods to a partnership of which he is a partner, as his share of the capital, cannot be considered as having sold the goods to the partnership firm. As held by the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, When a partner brings his personal asset into the partnership firm as his contribution to the capital. there is a transfer of a capital asset. In the instant case, all the eight partners of the assessee brought the parcel of land of which they were co-owners, into the partnership firm, as their contribution to the capital. The amount of such contribution to be credited into the account of each partner was agreed upon by all the partners and this transaction has been found to be a genuine transaction. The cost of acquisition of land incurred by the assessee cannot but be held to be Rs. 2 lakhs. In our opinion, therefore, the Tribunal was not right in law in reaching the conclusion that cost of acquisition of land incurred by the assessee-firm was Rs. 1.25 lakhs and not Rs. 2 lakhs. For all these reasons, our answer to the question referred to this Court is in the negative and against the revenue. In the circumstances of the case, parties shall bear their own costs of reference.