Whether assets received on partition of property can be ipso facto be treated as capital assets?
CIT Vs C Ramaiah Reddy
ITA No.318 of 2012
Whether assets received on partition of property can be ipso facto be treated as capital assets?
– Revenue’s appeal dismissed: KARNATAKA HIGH COURT
Short Overview of the Case :
– The assessee, an individual engaged in the real estate business, filed returns for the relevant AY, declaring total income of about Rs 1.37 crores.
– In his P&L a/c, the assessee mentioned purchase and sale of sites and net profit of about Rs 1.13 crores was declared as business income.
– The assessee was asked to submit relevant documents to show how the cost of the site was worked out.
– The assessee submitted copies of memorandum of family arrangement and oral partition wherein the details of assets and properties, which devolved upon the assessee were mentioned.
– The lands received by the assessee under the family arrangement were treated as stock in trade in his books and were sold in previous year.
– Thereupon a query was made to the assessee that capital gains on sale of such properties is 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 were not computed.
– 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 of the properties as on the date of family arrangement held as stock in trade of real estate business of joint family.
– The AO held that once family partition takes place, the asset which comes in the share of the assessee par take the character of the assets in the hands of assessee as capital gains and therefore, conversion of capital assets into stock in trade and capital gains attracted provisions of Section 45(2).
– The AO determined the total income of Rs 8.61 crores.
– On appeal, such findings were sustained by the CIT(A).
– On further appeal, the Tribunal held there to be no conversion of capital assets into stock in trade by the assessee or by his joint family, in which case, the provisions of Section 45(2) were not to be invoked.
On appeal, the issue and observation by the High Court was as under :
On issue as to whether assets received on partition of property can be ipso facto be treated as capital assets, where there is no provision in the I-T Act to such effect, HC held No.
It was observed as under :
- From perusal of clause (iii) of memorandum of partition, it is axiomatic that asset, which were taken over were forming part of stock in trade of real estate business and continued to be in nature of stock in trade in the hands of the assessee.
- There is no iota of material on record 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 deeming provisions have been enacted by the Legislature.
- Section 45(2) of the Act are not applicable in the fact situation of the case as the asset received is stock in trade.
- Alternatively, it is worth noticing that there is nothing on record to indicate that any capital asset has been converted to stock in trade and provisions of Section 49(1) are not applicable to stock in trade.
- The definition of ‘capital asset’ in Section 2(14) expressly excludes stock in trade;
- 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. [SEE: SUDARSHAN SILKS AND SAREES VS. CIT] .
8. A three judge bench of the supreme court in SANTOSH HAZARI VS. PURSHOTTHAM TIWARI, while dealing with the expression ‘to be a question of law involving in the case’, there must be first a foundation for it laid in pleadings and the questions emerged from sustainable findings of fact arrived at by courts of fact and it must be necessary to decide that question of law for a just and proper decision of the case.
- In the instant case, it is pertinent to note that no factual foundation has been made in the pleading with regard to the findings of fact arrived at by the tribunal and no material has been placed on record to demonstrate that the findings of fact recorded by the tribunal are perverse.
- Therefore, the substantial question of law framed by a bench of this court in fact do not arise for consideration in this appeal as the matter is concluded by findings of fact.
