Commissioner of Income Tax vs Raja Vikramaditya Singh

G.G. Sohani, J.—By this reference u/s 256A of the Income Tax Act, 1961- (hereinafter referred to as "the Act"), the Income Tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :

On behalf of the Department :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee is entitled to the deduction of interest of Rs. 22,355 in respect of the assessment year 1971-72 ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally justified in holding that provisions of Sub-section (2) of Section 52 of the Act were not applicable to the facts of the assessee''s case on the sale of Rasoda building ?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the firm, M/s. Madho Associates, Kota, commenced its business from July, 1971, and the assessee was entitled to the deduction of interest for the full accounting year relevant to the assessment year 1972-73 and not proportionate interest from July, 1971, to March, 1972 ? "

On behalf of the assessee :

"(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in rejecting the assessee''s claim that M/s. Madho Associates did the business of construction of cinema houses and thereby the interest paid by the assessee on money, borrowed for investment in the firm as partner was not an allowable deduction ?

(2) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in rejecting the assessee''s claim for Rasoda building, being part of Rajgarh Palace, which was exempt from Income Tax by virtue of the Board''s Notification No. 31 dated May 14, 1954, S.R.O. No. 1619 issued under Part B States (Taxation Concessions) Order, 1950, was not liable to tax on capital gains on sale ?

(3) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in upholding the valuation adopted by the Income Tax Officer in respect of Rasoda building ?"

The material facts giving rise to this reference, briefly, are as follows :

The assessee is assessed in the status of an individual and the relevant assessment years are 1971-72 and 1972-73. In the return filed by the assessee, he claimed deduction on account of payment of interest on the amount borrowed by him for investing in the firm, M/s. Madho Associates, Kota, of which the assessee was a partner. The Income Tax Officer held that as the said firm was, during the relevant assessment years, constructing a cinema building and had not carried on any business activity during that period, the investment made by the assessed could not be held to be investment for any business purpose. The Income Tax Officer held that till the commencement of the business activity, the assessee was not entitled to deduction on account of payment of interest on loan taken by the assessee for investing in the firm. The Income Tax Officer also held that the sale by the assessee of Rasoda building at Rajgarh to his mother for a sum of Rs. 45,000 was understated ; that the fair market value of the said building was Rs. 2,00,000 ; that the difference between the sale price and the fair market value was more than I 5% and, therefore, u/s 52(2) of the Act, the fair market value of Rasoda building would be Rs. 2,00,000 and the assessee was accordingly liable to tax on capital gains. The Income Tax Officer also rejected the contention advanced by the assessee that the capital gains arising from the sale of Rasoda building was not taxable as Rasoda building was part of the palace of the assessee, the erstwhile Ruler of Rajgarh, in view of the provisions of Section 15 of the Part B States (Taxation Concessions) Order, 1950. The appeal preferred by the assessee in this behalf was dismissed by the Appellate Assistant Commissioner. On further appeal before the Tribunal, the Tribunal held that in view of the fact that the firm, M/s. Madho Associates, had commenced its business from July, 1971, disallowance of payment of interest by the assessee on the amount borrowed by the assessee for investment in the firm, for the assessment year 1972-73 was not justified. The Tribunal further held that as regards the assessment year 1971-72, though it could not be held that the firm, in which the assessee had invested the amount borrowed by him, was carding on business, interest paid by the assessee, who was a partner, on the capital borrowed by him for the purpose of investment in the firm was, by virtue of Sub-section (3) of Section 67 of the Act, deductible in computing his total income. The Tribunal also held that Section 52(2) of the Act was not attracted in the instant case in so far as the sale of Rasoda building was concerned. The Tribunal, however, upheld the finding of the Income Tax Officer and the Appellate Assistant Commissioner that capital gains arising from sale of Rasoda building could not be held to be exempt from levy of tax under the Act. Aggrieved by the order passed by the Tribunal, the Department as well as the assessee sought reference. This is how the aforesaid questions of law have been referred to this court for its opinion.

Now, as regards question No. (1) referred at the instance of the Department, the material facts are that in the assessment year 1971-72, the assessee claimed deduction on account of payment of interest to the bank on the loan taken by the assessee for investing in the firm, M/s. Madho Associates, of which the assessee was a partner. Sub-section (3) of Section 67 of the Act reads as under :

"Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head ''Profits and gains of business or profession'' in respect of his share in the income of the firm, be deducted from the share."

The aforesaid provisions are in terms attracted in the instant case. Learned counsel for the Revenue was unable to point out any reason for holding that the aforesaid provisions were not applicable in the instant case. The Tribunal, in our opinion, was, therefore, right in holding that the assessee was entitled to the deduction of interest of Rs. 22,355 in respect of the assessment year 1971-72. Our answer to question No. (1) referred at the instance of the Departrnant is, therefore, in the affirmative and against the Revenue.

Regarding question No. (2) referred -at the instance of the Department, the matter is covered by the decision of the Supreme Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, . In that case, the Supreme Court has held that Sub-section (2) of Section 52 of the Act can be invoked only where the consideration for the transfer of a capital asset has been understated by the assessee or, in other words, the full value of the consideration in respect of the transfer is shown at a lesser figure than that actually received by the assessee. In the instant case, it is not the finding of the Income Tax Officer or the Appellate Assistant Commissioner that the consideration received by the assessee was more than that shown in the sale deed. Under the circumstances, the Tribunal, in our opinion, was right in holding that the provisions of Section 52(2) of the Act were not applicable to the sale of Rasoda building. Our answer to question No. (2) referred at the instance of the Department is in the affirmative and against the Revenue.

Regarding question No. (3) referred at the instance of the Department, learned counsel for the parties agreed that in view of our answer to question No. (1) referred at the instance of the Department, it would not be necessary to answer this question. We, therefore, decline to answer this question.

Regarding question No. (1) referred at the instance of the assessee, learned counsel for the assessee agreed that in view of our answer to question No. (1) referred at the instance of the Department, it was not necessary to answer this question. We, therefore, decline to answer this question.

As regards question No. (2) referred at the instance of the assessee, learned co''Unsel for the assessee agreed that the matter was covered by a decision of this court in 0. In view of that decision, it must be held that the Tribunal was right in rejecting the assessee''s claim for exemption from tax on capital gains on account of the sale of Rasoda building. Our answer to question No. (2) referred at the instance of the assessee is, therefore, in the affirmative and against the assessee.

As regards question No. (3) referred by the Tribunal at the instance of the assessee, learned counsel for the parties agreed that that question was not rightly framed so as to bring out the real controversy in issue. We, therefore, reframe that question as follows :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in going into the question of valuation of Rasoda building, having held that the provisions of Sub-section (2) of Section 52 of the Act were not applicable ?"

Now, the Tribunal having rightly held that the provisions of Section 52(2) of the Act were not attracted to the case of sale of Rasoda building, it was not necessary at all to go into the question of valuation of Rasoda building. Our answer to the question ref ramed by us as aforesaid is in the negative and in favour of the assessee.

Reference answered accordingly.

In the circumstances of the case, parties shall bear their own costs of this reference.