Land received on HUF partition was itself stock in trade, hence there was no conversion of capital assets u/s 45(2) of Income Tax Act
ABCAUS Case Law Citation:
ABCAUS 3331 (2020) (07) HC
Important case law relied upon by the parties:
Kalooram Govindaram vs. CIT (1965) 57 ITR 335 (SC)
Udarshan Silks and Sarees vs. CIT 300 ITR 211 (SC)
Santosh Hazari vs. Purshottham Tiwari (2001) 3 SCC 179
In the instant case, appeal had been preferred by the Revenue against order passed by the ITAT in holding that the provisions of Section 45(2) and 49(1) of the Income Tax Act, 1961 (the Act) were not applicable in respect to the property received by assessee on partial partition of Hindu Undivided Family (HUF).
The assessee was an individual engaged in the real estate business. The return of the assessee was selected for scrutiny and a notice under Section 143(2) of the Act was issued.
The assessee had received lands under the family arrangement which had been treated as stock in trade in his books and were sold in the relevant previous year.
A query was made to the assessee that capital gains on sale of such properties was attracted under Section 45(2) of the Act and since, no capital gains were offered to tax, therefore, the assessee was asked to clarify why such capital gains be not taxed.
The assessee was further asked to furnish original cost of acquisition of land along with purchase deeds. The assessee submitted that the values were adopted as cost or fair market values (FMV) of the properties as on the date of family arrangement held as stock in trade of real estate business of joint family.
The Assessing Officer (AO) held that once family partition took place, the asset which came in the share of the assessee par took the character of the assets in the hands of assessee as capital gains and therefore, conversion of capital assets into stock in trade attracted capital gains u/s 45(2) of the Act.
The CIT(A) upheld the order passed by the AO and dismissed the appeal. However, the Tribunal held that properties, which were held as stock in trade by the joint family before they were allotted to the assessee on did not amount to conversion of capital assets to stock in trade either by the assessee or the joint family and therefore, the provisions of Section 45(2) of the Act were not attracted.
Being aggrieved, the revenue went in appeal before the Hon’ble High Court and contended that the provisions of Section 45(2) of the Act were attracted.
It was also submitted by the Revenue that the HUF neither filed any return or any books of accounts and also did not had any Permanent Account Number (PAN) and therefore, existence of HUF itself was doubtful and the assessee was unable to prove the existence of HUF before the authorities.
It was also submitted that the cost of acquisition of lands was low and cost or fair market values of the properties as on the date of family arrangement was highly inflated. The entire arrangement made by the assessee was designed to evade the tax liability.
Land received on HUF partition was itself stock in trade, hence no conversion u/s 45(2)
The Hon’ble High Court noted that as per Section 2(14) of the Act, stock in trade is excluded from the definition of capital asset and the explanation ‘transfer’ as defined under Section 2(47) relates to capital assets only and does not include stock in trade. Section 49(1) of the Act is applicable when the properties in question are capital assets. Also, section 45(2) of the Act is attracted only when there is a transfer by the owner of a capital asset by conversion into stock in trade.
The Hon’ble High Court observed that Hon’ble Supreme Court had held that except in the cases of fraud, collusion, inflation and deflation of values for ulterior purposes, cost of the asset to a divided member must necessarily be its cost to him at the time of partition whether mentioned in the partition deed or ascertained aliunde.
The Hon’ble High Court noted that as per memorandum of partition, asset, which were taken over were forming part of stock in trade of real estate business and continued to be in the nature of stock in trade in the hands of the assessee.
The Hon’ble High Court opined that there was no iota of material to show that the assets obtained by the assessee were capital assets. The character of assets received on partition did not change and there is no provision in the Act to indicate that assets received on partition are capital assets, as no such deeming provisions have been enacted by the Legislature.
The Hon’ble High Court held that Section 45(2) of the Act was not applicable in the fact situation of the case as the asset received was stock in trade. Alternatively, there was nothing on record to indicate that any capital asset had been converted to stock in trade and provisions of Section 49(1) was not applicable to stock in trade.
Regarding the allegation of the Revenue that the findings recorded by the tribunal were perverse, the Hon’ble High Court stated that it is well settled in law that the tribunal is a fact finding authority and a decision on the facts of the tribunal can be gone into by the high court only if a question has been referred to it, which says that the finding of the tribunal is perverse.
The Hon’ble High Court stated that no factual foundation had been made in the pleading with regard to the findings of fact arrived at by the tribunal and no material had been placed to demonstrate that the findings of fact recorded by the tribunal were perverse.
The Hon’ble High Court held that the substantial question of law framed did not arise for consideration in the appeal as the matter was concluded by findings of fact. Accordingly the appeal was dismissed.
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