INCOME TAX APPELLATE TRIBUNAL
Briefly stated the assessee is a Partner in the firm M/s Balachandra Laboratories. The firm had property at Thane on which development rights were transferred to M/s Friends Development Corporation (FDC) for an amount of Rs.17.00 crores. The said firm paid one third of consideration to legal heirs and Ms Balachandra laboratories claimed deduction in their assessment. The assessee happens to be one of the legal heirs of Late Shri C N Bhatavadekar. In the course of inquiry and assessment proceedings the issue relating to taxing of capital gains in the hands of the firm resulted in allowing the claim made to M/s Videocon Properties Ltd at Rs.95.00 lakhs paid to avoid civil litigation consequent to the compromise reached before the Bombay High Court. However, an amount of Rs.5.29 crores i.e. 1/3 rd of the total amount paid to legal heirs of Shri C N Bhatavadekar (who had 33% share in the property) was not allowed on the reason that it was an appropriation of the firm’s income. There were other issues with reference to the cost of acquisition etc., in the firm’s case which are not relevant for the issue in the present appeal.
Balachandra Bhatavadekar B-6 Yak & Yeti Society Bundgarden Road PUNE - 411001 PAN – AACPB 4121 D Appellant Vs ACIT Range-16(3)206 2nd Floor Matru Mandir Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL
"G" Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
and Shri V. Durga Rao, Judicial Member
ITA No. 478/Mum/2010
(Assessment Year: 2005-06)
B-6 Yak & Yeti Society
PUNE - 411001
PAN – AACPB 4121 D
206 2nd Floor
ITA No. 668/Mum/2010
(Assessment Year: 2005-06)
Dy. CIT Range-16(3)
Matru Mandir,Tardeo Road
Road B-6 Yak & Yeti Society
PUNE - 411001
PAN AACPB 4121 D
Assessee by: Shri Vijay Mehta, AR
Revenue by: Shri Pavan Ved, CIT (DR)
Date of Hearing: 07/02/2012
Date of Pronouncement: 24/02/2012
O R D E R
Per B. Ramakotaiah, A.M.
These are cross appeals by Assessee and Revenue against the order of the CIT (A)-27 Mumbai dated 30.11.2009. The issue in this appeal is whether the amount received by the legal heir of deceased partner on the sale of the property of the firm is taxable under the head capital gains or not. The assessee in his appeal has raised the following grounds:
“1. The learned Commissioner of Income Tax (Appeals) has erred in law and in facts in not holding that the Assessing Officer erred in issuing the notices and completing the assessment under section 143 (3) of the Act. Also, the notices issued by the Assessing Officer and the assessment order passed by him was bad in law, illegal, null and void.
2. The learned Commissioner of Income Tax (Appeals) has erred in law in not holding that the amount of Rs.1,05,93,000/- received by the appellant from M/s Balachandra Laboratory was a capital receipt not chargeable to tax.
3. The learned Commissioner of Income Tax (Appeals) ought to have appreciated that the said amount was received by the appellant for removing obstruction and granting consent to the sale of property by M/s Balachandra Laboratory as he was the legal heir of the deceased partner of the said firm.
4. The learned Commissioner of Income Tax (Appeals) has erred in law and in facts in not holding that the Assessing Officer erred in not referring the matter to the valuation officer in the course of assessment proceedings. The learned CIT (A) ought to have held that reference to Valuation Officer can be made in the course of assessment proceedings only and not during the course of Appellate Proceedings.
5. The learned Commissioner of Income Tax (Appeals) has erred in law and in facts in not accepting the valuation of registered valuer who had valued the fair market value of the property as on 1.4.1981 since the property was acquired prior to 1.4.1981.
6. The learned Commissioner of Income Tax (Appeals) has erred in law and in facts in directing the Assessing Officer to calculate capital gains on the basis of the value as on 1.4.1981 adopted by the District Valuation Officer at Rs.59,27,413/- as against Rs.1,61,48,700/- claimed by the appellant as per the report of Registered Valuer”.
2. During the course of the arguments, Ground Nos.1, 4, 5 & 6 have not been pressed and the issues relating to Ground Nos.2 & 3 are only pressed and argued.
3. Briefly stated the assessee is a Partner in the firm M/s Balachandra Laboratories. The firm had property at Thane on which development rights were transferred to M/s Friends Development Corporation (FDC) for an amount of Rs.17.00 crores. The said firm paid one third of consideration to legal heirs and Ms Balachandra laboratories claimed deduction in their assessment. The assessee happens to be one of the legal heirs of Late Shri C N Bhatavadekar. In the course of inquiry and assessment proceedings the issue relating to taxing of capital gains in the hands of the firm resulted in allowing the claim made to M/s Videocon Properties Ltd at Rs.95.00 lakhs paid to avoid civil litigation consequent to the compromise reached before the Bombay High Court. However, an amount of Rs.5.29 crores i.e. 1/3 rd of the total amount paid to legal heirs of Shri C N Bhatavadekar (who had 33% share in the property) was not allowed on the reason that it was an appropriation of the firm’s income. There were other issues with reference to the cost of acquisition etc., in the firm’s case which are not relevant for the issue in the present appeal.
4. The assessee filed return of income, being the Partner of the firm having 45% but also as legal heir of Shri C.N. Bhatvadekar. Initially, the assessee filed return of income declaring his income at Rs.4,61,000/- and subsequently on 27.04.2007 revised return offering the capital gain on the amount received as a legal heir. In revised return, the assessee offered 1/5th of the 1/3rd share and claimed indexation of 1/5th of 1/3rd of the cost offering the income at Rs.59,38,350/- (AO wrongly considered receipt at Rs.1,13,33,333 in the assessment order as against Rs.1,05,93,000/- received by the assessee). In the course of the assessment of the assessee, the Assessing Officer, consequent to his stand taken in the case of the firm that the amount cannot be allowed as deduction, brought to tax the recomputed capital gains on a protective basis. The assessee grievance before the CIT (A) was about the stand taken by AO and also with reference to the denial of the cost of acquisition which was reworked out by the Assessing Officer. However, in the course of the appellate proceedings before the CIT (A), the assessee raised an additional ground that the amount is not taxable as the said amount was not received as legal heir, but was paid to avoid complications from the legal heirs in transfer of property which should be treated as amount paid for removing obstructions and granting consent, thereby the amount was not taxable. The CIT (A), however, considered the submissions of the assessee vide Para 5 onwards of the order and came to a conclusion that the amount was received as a legal heir and therefore, it is taxable as capital gain. He went on in re-determining the cost of acquisition and allowed the appeal partly. The assessee is aggrieved on various issues as raised in the grounds but at present confined only to the issue that the amount received was capital receipt not chargeable to tax as raised in Ground Nos.2 & 3.
5. Referring to the order of the Assessing Officer and the CIT (A) and further to the order of the ITAT in the firm’s case in ITA Nos.3558/Mum/2009 and 3730/Mum/2009 dated 30.9.2010, it was the contention of the learned Counsel that the assessee received the amount not as legal heir of the deceased partner, but on the advise of the legal Counsel of M/s Friends Development Corporation to avoid any future problems on the title and referred to the submissions before the CIT (A), the remand report etc., contending that the assessee received the amount as M/s FDC insisted the firm to obtain NOC from legal heirs and therefore, the amount cannot be treated as amount chargeable to tax. He referred to the submissions made before the CIT (A) extracted from Page-3 of the CIT (A) order to make the proposition that the amount is not an appropriation of the firms assets, not paid to the assessee as a legal heir but only to remove the obstructions and granting consent to the sale of property of M/s Balachandra Laboratories. He also placed document on record to support that the 5 legal heirs have signed the deed as consenting parties, therefore, the amount is a capital receipt but not exigiable to capital gain under the provisions of the Act. Moreover it was submitted that there is no cost to the assessee so as to compute working of the capital gain. Therefore, following the decision of the Hon'ble Supreme Court in the case of
CIT. vs. B. C. Srinivasa Shetty (128 ITR 294 SC) the amount is not taxable. It was further submitted that the payment was not received from the firm but was directly paid by the said buyer and therefore, the amount is not assessable to tax.
6. In reply the learned Departmental Representative, however, submitted that the assessee had a legal right as legal heir of the deceased partner and that is the reason why the said buyer insisted on taking consent from the legal heirs and also referred to the order of the CIT (A) and the ITAT to submit that the assessee has received the amount as legal heir of the deceased partner of the said firm. Therefore, the amount was taxable. He supported the order of the CIT (A) to the extent it was confirmed in the hands of the assessee, as there are other issues which Revenue is contesting.
7. We have considered the issue and examined the rival contentions. As already stated, the assessee is not only a Partner in the firm of M/s Balachandra Laboratories having a share of 45% to himself, but also one of the 5 legal heirs of Shri Chintamani Neelkanta Bhatavadekar who died intestate having about 33% share in the firm at that point of time.
8. The facts in the case of Firm: It is relevant to examine and note the case of the firm M/s Balachandra Laboratories as it has a bearing on the present issue. A plot of land admeasuring 40876 sq. mtrs (including the additional area) situated at village Chitalsar, Majiwada, Taluka Ghodbunder Road, Thane was owned by the said firm along with a building structure standing thereon. The said plot was purchased by the firm from M/s Dayabhai & Co. Pvt. Ltd. Vide an agreement dtd. 14.9.1962 for a total consideration of Rs.1,38,977/-. During the year under consideration, the said property was sold by the firm for a total consideration of Rs.17 crores to M/s Friends Development Corporation vide an agreement dtd 24.5.04. In the return of income filed for the year under consideration on 30.8.05, the capital gain arising from the sale of the said property was declared by the firm at Rs.5,56,00,780/- after claiming the following deductions:
(i) Rs.5,29,65,000/- paid to the confirming parties of the sale agreement dtd. 24.5.04.
(ii) Rs.5,19,34,219/- being the indexed cost of acquisition of the 2/3rd portion of the property.
(iii) Rs.95 lacs paid to M/s Videocon Property for settlement of suit.
During the course of assessment proceeding, it was claimed by the firm that the said legal heirs were demanding the share of late Shri C.N. Bhatavadekar in the property of the partnership firm and it was not possible to sale/transfer the property in question without their consent. It was claimed that the amount of Rs.5,29,65,000/- being 33% of the total sales proceeds thus was paid to the said legal heirs in order to remove the encumbrance so that the property could be sold and the same therefore was deductible while computing long term capital gain from the sale of the property . Similarly, it was claimed that there was litigation between the firm and M/s Videocon Properties Ltd. going on at the relevant time wherein a suit was filed by the said company. It was stated that the claim made by M/s Videocon Properties Ltd. by way of the said suit was also an encumbrance on the property which was required to be removed before the same could be sold. It was claimed that the amount of Rs.95 lacs paid to M/s Videocon Properties Ltd. to settle the litigation thus was also deductible while computing the long term capital gain. After excluding 1/3rd share of the confirming parties, the indexed cost of acquisition of the property for the purpose of claiming deduction was taken by the firm at Rs.5,19,34,219/-. The A.O. allowed the deduction of Rs.95 lacs claimed by the firm on account of amount paid to M/s Videocon Properties Ltd. for settlement of suit holding that it was paid for the betterment of the title of the property. He, however, disallowed the claim of the firm for deduction of Rs.5,29,65,000/- paid to the legal heirs of the deceased partner holding that whatever the legal heirs of the deceased partner had to be paid should have been paid out of the net income of the firm after paying capital gain tax on sale of property. He held that the receipts in the hands of legal heirs of the deceased partners was basically the distribution of the income of the firm which could not be allowed as deduction for the purpose of computing long term capital gain in the hands of the firm. The long term capital gain arising from the sale of land and building thus was worked out by the A.O. at Rs.15,76,56,169/- after deducting the amount of Rs.95 lacs paid to M/s Videocon Properties Ltd. and
Rs.28,43,831/- on account of indexed cost of acquisition from the total sale consideration of Rs.17 crores in the assessment completed u/s 143(3) vide an order dated 3.12.07. Against the order passed by the A.O. u/s 143(3), an appeal was filed by the firm before the ld. CIT(A) challenging the two additions made by the A.O. while computing the long term capital gain by way of disallowance of Rs.5,29,65,000/- paid to the legal heirs of the deceased partner and by restricting the indexed cost of acquisition of Rs.5,19,34,219/- claimed by the assessee to Rs.28,43,831/-. During the course of appellate proceeding before the ld. CIT(A), additional ground was also raised by the firm seeking to claim deduction of Rs.7,75,13,760/- on account of indexed cost of acquisition of the entire property as against Rs.5,19,34,219/- claimed originally being the indexed cost of acquisition of 2/3rd portion of the said property. In support of its claim for deduction of Rs.5,29,65,000/- paid to the legal heirs of the deceased partner to remove the encumbrance on the property sold, additional evidence was filed before the ld. CIT(A) in the form of a letter issued by M/s Friends Development Corporation confirming that they had demanded the NOC of the legal heirs before the agreement for sale, affidavit of Mrs. Kalindini D. Barot, legal heir of the deceased partner confirming that the legal heirs had demanded their respective share out of the consideration to be received from the sale of development rights, a copy of opinion from M/S Gagrat & Co. a solicitor advising M/s Friends Development Corporation to obtain NOC from the legal heirs in order to have a clear title of the property and the correspondence with Bank of Maharashtra wherein the legal heirs had specifically intimated the bank not to release the charge of the said property without seeking their consent as they were the rightful legal heirs of the deceased partner. The said additional evidence was forwarded by the ld. CIT(A) to the A.O. seeking his comments thereon. Accordingly, remand report submitted by the A.O. to the ld. CIT(A) offering his comments on the examination/verification of the additional evidence. The CIT(A) allowed the claim of deduction of amounts paid to legal heirs and also claim of cost of acquisition on entire value but reworked the amount of cost for working capital gains.
9. As seen from the order of the ITAT in the case of M/s Balachandra Laboratories, the assessee contested the issue of valuation which was restored to the file of the CIT (A). But in the Revenue appeal when the Revenue challenged the allowance of amount paid to the legal heir, the ITAT dismissed the grounds by holding as under:
“16. We have considered the submissions of both the sides and also perused the relevant material on record. It is observed that the deduction claimed by the assessee on account of an amount of Rs. 5,29,65,000/- paid to the legal heirs of the deceased partner while computing the long term capital gain was disallowed by the A.O. mainly on the ground that the said payment was basically in the nature of distribution of its income by the assessee firm which could not be allowed as deduction. The assessee’s case on this issue was that the said amount was paid to the legal heirs of the deceased partner in order to remove the encumbrance on the property before the same could be sold. To support and substantiate this case, the following additional evidence was filed by the assessee before the ld. CIT(A):-
1. A letter issued by M/s Friends Development Corporation confirming that they had demanded NOC of the legal heirs of the assessee’s partner before the execution of agreement for sale.
2. Affidavit of Mrs. Kalindini D.Barot, legal heir of the deceased partner, confirming that the legal heirs had demanded their respective share out of the consideration received from the sale of development rights.
3. A copy of opinion from Gagrat & Co., a solicitor advising M/s Friends Development Corporation to obtain NOC from the legal heirs in order to have clear tile of the property.
4. The correspondence with Bank of Maharashtra wherein the legal heirs had specifically intimated the bank not to release the charge of the said property without seeking their consent as they were the rightful legal heirs of the deceased partner. The above documents were admitted by the ld. CIT(A) as additional evidence and the same were forwarded by him to the A.O. seeking his comments thereon. In the remand report submitted to the ld. CIT(A), a copy of which is placed at page No. 51 and 52, the A.O. after verifying the additional evidence accepted the fact that the amount in question was paid to the legal heirs of its deceased partner by the assessee firm only on the ground of creating encumbrance etc. and not on the basis of any legal sanctity. Since a similar payment of Rs.95 lacs made by the assessee to M/s Videocon Properties Ltd. for settlement of suit was allowed as deduction by the A.O. while computing the long term capital gain holding that it was made for the betterment of the title of the property and the legal heirs of the deceased partner to whom the amount in question was paid were admittedly not the partners of the assessee firm, the ld. CIT(A) held that the said amount was paid in order to remove the encumbrance on the property for the betterment of the title and the claim of the assessee for deduction of the said amount while computing the long term capital gain could not be denied as it was not a case of distribution of income of the assessee firm amongst the partners as alleged by the A.O. Having regard to all these facts of the case highlighted by the ld. CIT(A) and keeping in view the submissions made by the ld. representatives of both the sides before us, we do not find any infirmity in the impugned order of the ld. CIT(A) allowing the deduction claimed by the assessee on this issue. We, therefore, uphold the same and dismiss ground Nos. 1 to 3 of the Revenue’s appeal”.
10. Though the issue in the case of the firm is whether the amount is allowable as a deduction while computing the capital gain which the CIT (A) allowed as paid to the legal heir for improving the title, the fact is that the amount was received by the 5 legal heirs as they have the legal right to the said property in the share of Shri Chintamani Neelkanta Bhatavadekar who had 33% share and died intestate. In our opinion the issue whether the amount was paid as legal heirs or as encumberers was not before the Tribunal as in either case the amount was deductible in the computation of Capital Gains in the case of firm. Payment made to persons claiming to be legal heirs was considered as expenditure incurred in removing encumbrance to transfer and is held deductible in various case law. Therefore, the fact that the amount was allowed as payment for removing encumbrance in no way affect the decision in the hands of the legal heirs to consider whether the amount is subjected to capital gains tax. This issue is therefore, has to be examined independently on the legal principles.
11. Rights of Legal Heirs: As seen from the development agreement registered on 17.05.2004, placed on record, the following are the recitals:
(A). – The owners have informed the Developers that the daughters of their late Partner Shri Chintamani Nilkanth Bhatavadekar who was the Senior Partner in the said firm and who died intestate having……. Intestacy claimed a share by heirship in the estate of the deceased. The claims of the confirming parties as only heirs of the said deceased Partner Shri Chintamani Nilkanth Bhatavadekar in the partnership firm’s property have been amicably settled between the ownership and the confirming parties simultaneous with the amount payable to them under this Development Agreement having been paid to the accounts of the Owners and the Confirming Parties under clauses 2(b) and now there is no dispute between the owners and the confirming parties in respect of only the partnership property referred under the agreement and situated at Village Chitalsar-Manpada on S.V. Road, Ghodbunder Road, Majivade Taluka & District Thane and more particularly described in the schedule hereunder written (hereinafter referred to as the said “Property”). The owners and the confirming parties to this document on realization and credit in their individual accounts, the payments made under clause 2(c) or within 7 days from the date or whichever is earlier, agree to give to the Developers NOC and consent to perfect the title of the said property in favour of the said Developers or their nominees The share percentage and distribution of the said property finalized between the owners and the confirming parties will be as follows:
i) 33% to the deceased partner Chintamani Nilkanth Bhatavadekar’s share 6.6% each to Shri Balachandra alias Jayan; Chintamani Bhatavadekar, Mrs. Kalindi D. Barot, Miss Suniti Chintamani Bhatavadekar, Miss Shashikala Chintamani Bhatavadekar & Miss Vijaya Chintamani Bhatavadekar.
ii) 22% to Shri Hari Nilkanth Bhatavadekar
iii) 45% to Shri Balachandra Jayant Chintamani Bhatavadekar.
iv) 0% to Nilkanth alias Neel Balachandra Bhatavadekar
All disputes/differences (if any) among all the owners and the confirming parties have been amicably settled. Mr. Nilakanth alias Neel Balachandra Bhatavadekar also hereby gives his NOC and consent to this mutually agreed share percentage and distribution as mentioned above. The Developers are aware of this and have agreed to distribute the same accordingly”.
12. Vide Para-E and F in Page 6 of the document, it was stated as under:-
“…E). Title deeds of the said property are at present lying with and are in custody of the Bank of
Maharashtra (hereinafter referred to as “the said Bank”). On realization & credit in their individual accounts of the payments made under clause 2(c)(i) to 2(c)(iii) or within 7 days from the date hereof whichever is earlier, the Owners hereby irrevocably authorize the Developers to execute further papers/documents as required and to collect the said title Deeds from the said Bank and the receipt given by the Developers will give the said Bank full discharge. The said confirming parties will, on realization and credit in their individual accounts of the payments made under clause 2(c)(iv) or within 7 days from the date hereof whichever is earlier, write all letters as required to the said Bank withdrawing their objection or mandate and hereby give their No Objection & consent to the said Bank to handover the said documents and title deeds to the Developers and also irrevocably authorize the Developers to execute such deeds/ papers/documents as required and collect the said title deeds from the said Bank and receipt given by the Developers will give the said Bank full discharge.
F. In or about the year 1994, the then Partners of the said firm namely Shri Chintamani Nilkanth Bhatavadekar, Shri Hari Nilkanth Bhatavadekar and Shri Balachandra alias Jayant Chintamani Bhatavadekar i.e. then owners had agreed to sell to Videocon Properties Ltd., a portion of the said property described in the schedule hereunder written and more particularly described in the schedule thereunder written by Agreement for Sale dated 13.05.1994 (hereinafter referred to as “the said Agreement”) which was lateron terminated on 27th September, 1999 by the said Videocon Properties Ltd., the deposit of earnest money of Rs.38,00,000/- (Rupees Thirty Eight lakhs only).
J. The Owners and the Confirming Parties have at the…… Developers agreed to give/grant full and complete development rights to the Developers to develop the said entire property however, arising & of whatsoever nature and the Developers have agreed to develop the said property entirely at their own risk and responsibility and expected at or for the consideration and on certain terms and conditions mutually agreed upon by and between the Owners and the Confirming Parties and the Developers.”
13. Further, it was agreed vide Para c-iv of the agreement as under:-
“(c)(iv) 33% (Thirty Three Percent) i.e. Rs.5,29,65,000) (Five Crores Twenty Nine Lakhs & Sixty-five Thousand only) in equal shares i.e. Rs.1,05,93,000/- (Rupees One Crore Five Lakh Ninety-three thousand only) to each of the confirming parties and the same should be immediately distributed non-refundable at any time, on any ground whatsoever free from any liability & debts free from any charges forever that is Rs.1,05,93,000/- to Shri Balachandra alias Jayant Chintaman Bhatavadekar, Rs.1,05,93,000/- to Mrs. Kalindi D. Barot, Rs.1,05,93,000/- to Miss Suniti Chintaman Bhatavadekar, Rs.1,05,93,000/- to Miss Shashikala Chintaman Bhatavadekar and Rs.1,05,93,000/- to Miss Vijaya Chintaman Bhatavadekar being the share due to them receivable as only heirs of Mr. Chintaman N. Bhatavadekar in full and final settlement of
their claims as only heirs of the said deceased Mr.Chintaman N. Bhatavadekar in respect of the said Partnership Property only. All the owners and the Confirming parties agree and declare that now they have no disputes, if any, and the same now stand settled amicably among all of them and they all give their no objection and consent to this Agreement”.
14. All the above do indicate that not only the assessee but other four legal heirs of late Chintamani N. Bhatavadekar received the amount as legal heirs only. In fact the recitals do indicate that during the life time of Shri Chintamani N. Bhatavadekar, they entered into sale agreement way back in May, 1994 for sale of property to M/s Videocon Properties Ltd which dispute was ultimately settled by way consent before the Hon'ble Bombay High Court vide the terms dated 15-03-2004 on payment of Rs.95 lakhs. This indicates that Shri Chintamani Neelkanth Bhatavadekar had rights on the property having been the erstwhile deceased partner of
the firm having 33% share. It is on record that Shri C.N. Bhatavadekar expired intestate on 12.2.1996 i.e. after entering into agreement with M/s Videocon Properties Ltd for sale but before the termination of the agreement in 1999. Consequently, since the matter was pending in the Court of law, the legal heirs also became parties to the dispute and naturally the present buyer insisted on getting the NOC from the legal heirs. As seen from the recitals it is very clear that the claims were made as legal heirs only to the intestate property of Late C N Batavadekar. Therefore, the amounts received by the assessee has to considered as received in the capacity of legal heir of the erstwhile deceased partner in the property of the firm.
15. The fact is also that the assessee and other 4 legal heirs got exactly 1/3rd of the amount equal to 33% share of the deceased partner and all the five legal heirs got equal portion directly from the firm do indicate that the amount was received only as a legal heir consequent to surrendering their rights in the property. The contention that buyer paid the consideration has no effect on the issue as there are legal principles that even if money is received from third party, the same can also be considered as sale consideration. However, the aspect of the rights of legal heir in the property was not examined by the AO as the assessee offered the capital gains by filing the revised return.
16. A property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others. The definition of capital assets means property of any kind both tangible as well as intangible assets. As there is no definite meaning to define the ‘property’ in the Act, but property must be construed in its plain natural meaning subject to a context in which that expression occurs (JK Trust vs. CIT/EPT, 23 ITR 143, 150 (Bom.) The word property does not mean merely physical property but also means the rights, title or interests in it. It was held in V. Rangaswamy Naidu vs. CIT 31 ITR 711 (Mad.) that the share of a partner in a partnership concern to be a capital asset. Further the Hon’ble Supreme Court in the case of CED vs. Mrudula Naresh Chandra 160 ITR 342 took the view that the share of the deceased in the goodwill will pass on to legal heir together with other assets and that it should be valued in the manner contemplated under Rule 7C of the Estate Duty Rules. Even though the said decision was rendered in the context of Estate Duty, the principle is that the right of the deceased partner will devolve on the legal heirs.Therefore, we are of the view that the legal heirs had a right in a property and consequent to transfer of that legal right, provisions of sec.45 towards capital gains get attracted. Our view is supported by the decision of the Hon.ble Gauhati High Court in the case of Commissioner of Wealth Tax vs. Subimal Sain and others 195 ITR 574 (Gau.) 195 ITR 574 (Gau.) wherein their Lordships held since a partnership firm has no existence, the partnership property will vest in all the partners and, in that sense, every partner has an interest in\ the property of the partnership. The interest of a partner in the partnership firm belongs to him and would be includible in the “asset” and will have to be taken into account while computing the net wealth of the individual. Where the individual assessee is a partner in a firm, the interest of the partner in the immovable property of the partnership is to be included in computing his net wealth. He would be entitled to exemption of the proportionate share of the interest in the building belonging to the firm u/s 5(1)(iv) of the Wealth Tax Act, 1957. Therefore, on principles of law it is to be considered that the legal heirs have a right in the share of the deceased partner which they have transferred consequent to the sale of the immovable property. However, this aspect of rights in the property and considering it for the purpose of definition of ‘transfer’ were not examined by the AO. Assessee also has not advanced any arguments on this issue about the legal rights. The only argument raised was that there was no cost of acquisition for acquiring the rights and hence on the ratio of the Hon’ble Supreme Court in the case of B.C.Srinivasa Shetty 128 ITR 294, the capital gains is not susceptible to computation. Therefore, no capital gain can be levied.
17. These issues cannot be decided by us as these aspect of arguments were not examined by Assessing Officer or CIT(A).. As held by the Hon’ble Karnataka High Court in the case of CIT vs. PR Seshadri 329 ITR 377 (Karn.) the ratio of a case can be applied only when the Tribunal primarily records a finding about the facts and circumstances of the case and finds that the ratio is attracted to the facts and circumstances and therefore, the question is covered and the issue can be decided by applying the ratio of the case as enunciated by the High Court or the Supreme Court. In the absence of examination of facts and circumstances of the case, there is no way the Tribunal could directly apply the ratio of the High Court or the Supreme Court.
18. The issue to be considered is whether the transfer of property attracts capital gain and if so, whether there is any cost of acquisition to assessee or not. In the returns filed, both the firm as well as the assessee took a similar stand as far as the cost is concerned. In the hands of the firm, as the firm paid 1/3rd of the proceeds to the legal heirs, the cost of acquisition was restricted to the value of 2/3rd of the property. Accordingly, the assessee claimed 1/5th of the 1/3rd of the property in his individual return. However, both the firm and the partner in appeals before the CIT (A) took a different stand consequent to the action of the Assessing Officer in denying the payments to the legal heirs. The firm claimed the entire cost of acquisition in the hands of the firm by changing its stand that the amount was paid not as legal heir but as encumber for improving the title of the property. The CIT (A) allowed the claim in the hands of the firm. In the hands of the individual, however, the assessee claimed originally 1/5th of the 1/3rd share as cost of acquisition. Consequent to his stand that the amount is not received as legal heir, the contention was that the amount was not taxable at all. Before us also as discussed above, the contention was that the amount was capital receipt not exigiable to tax. With reference to the cost of acquisition, the assessee has not pressed the grounds regarding the cost of the acquisition. It is noticed that the cost of acquisition issue was restored in the hands of the firm to the CIT (A) for adjudication.
19. The issue of cost to the legal heirs has to be examined afresh by AO keeping mind the provisions of Sec. 49 of the Act. The provision is as under:
“49. [(1)] Where the capital asset became the property of the assessee—
(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;
(ii) under a gift or will;
(iii) (a) by succession, inheritance or devolution or
(c) …….., or
(d) …….., or
(e) ………. ];”
As already stated, assessee received the right by way of ‘succession, inheritance or devolution’, in the property of the late Shri Chintamani Neelkanth Bhatavadekar, we are of the view that the cost is to be determined according to the provisions of the Act. That may be the reason assessee also originally offered the amount claiming the cost of acquisition/indexation.
20. Since these aspects were not examined and also the contention that there is no cost was also raised before us which require examination of record, we in the interest of justice, restore these issues to the file of the Assessing Officer to determine whether provisions of Sec 45 will apply and if so to determine the cost of acquisition/indexation and compute the capital gains accordingly, keeping in mind the provisions of the act and also the decision of the Hon'ble Supreme Court in the case of Shri B.C. Srinivasa Setty (128 ITR 294). With these directions, the issue of computation of capital gain is restored to the file of the Assessing Officer. Needless to say that assessee should be given adequate opportunity to support his contentions and free to furnish necessary evidence in support of various contentions. Accordingly the ground Nos. 2 & 3
are allowed partly.
20. Revenue has raised the following grounds:
“1. The learned CIT (A) erred in directing the Assessing Officer not to tax the capital gain of Rs.5,29,65,000/- arising out of sale of property at Kolshet, Thane in the hands of the assessee ‘protectively’, as the same has been taxed in the hands of firm ‘substantively’.
2. The learned CIT (A) failed to appreciate that the disallowance made in the case of the firm has yet to attain finality.
3. The learned CIT (A), in the case of the firm has deleted the disallowance made of Rs.5,29,65,000/- erred in accepting the claim of the assessee that same are expenses incurred for betterment of the title of the property, even though the Department has not accepted the decision and filed appeal to the Hon'ble ITAT”.
21. Consequent to the orders of the ITAT in the case of the firm, the issues raised by the Revenue in this appeal does not survive. Since in the case of the firm the amount was directed to be allowed as expenses incurred for betterment of title of the property, Ground No.3 is not applicable at all to this case and with reference to Ground No.1 & 2, we do not find any reason to interfere with the directions of the CIT (A) to assess the amount in the hands of the individual substantially. Accordingly the Revenue grounds are rejected and the appeal is dismissed.
22. In the result, assessee’s appeal is considered partly allowed for statistical purposes and the Revenue’s appeal is dismissed.
Order pronounced in the open court on 24th February, 2012.
(V.Durga Rao) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 24th February, 2012.
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR,“ G“ Bench, ITAT, Mumbai
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI