JUDGMENT
R.C. Lahoti, J.
1. For the assessment years 1982-83 to 1986-87, the Revenue seeks a mandamus to the Tribunal for drawing up a statement of
case and referring the following questions of law for the opinion of the High Court :
“(1) Whether, on the facts and circumstances of the case, the learned Income-tax Appellate Tribunal, Delhi Bench-A, New Delhi, was justified in directing to take value of assets on the date of dissolution of the old firm for purposes of calculating depreciation for the period relevant to the assessment years 1982-83 to 1986-87 ?
(2) Whether, on the facts and circumstances of the case, the learned Income-tax Appellate Tribunal, Delhi Bench-A, New Delhi, was correct in holding that for purposes of working out profit on the sale of flats adjusted value as worked out at the time of dissolution of the firm and reflected in the capital account of the partners of the newly constituted firm would form the basis for the period under consideration ?
(3) Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal, Delhi Bench A, New Delhi, was justified in holding that surplus on the sale of showrooms would be the capital gains and not business profits for the period relevant to the assessment year 1982-83 ?
(4) Whether, on the facts and circumstances of the case, the learned Income-tax Appellate Tribunal, Delhi Bench-A, New Delhi, was justified in holding that the showrooms sold by the assessee did not form part of the stock-in-trade for the period relevant to the assessment year 1982-83 ?”
The relevant facts in brief. Hansalaya Properties, the assessee, is a partnership firm which came into existence on August 8, 1970, through a deed of partnership duly executed. The object of the partnership was to construct a multi-storeyed commercial building. The firm was dissolved on March 17, 1979, on completion of the project for which it was constituted. For the assessment years 1972-73 to 1977-78, it was held by the Income-tax Appellate Tribunal that the assessee was engaged in the real estate business and, therefore, the land held by it was its stock-in-trade. Up to March 17, 1979, nearly half of the building constructed by the assessee had been sold. The income from the sale of portions of the building was being assessed as income from business and not as income by sale of capital assets.
2. On March 19, 1979, there was a change in the constitution of the firm. The then existing firm was dissolved. Hotel Home Pvt. Ltd., one of the partners of the then firm, disassociated itself and the remaining partners constituted a new firm. A deed of dissolution (of the old firm) and a deed of partnership (for the new firm), were executed on the same day. Various assets and liabilities of the erstwhile firm were revalued for the purpose of distribution amongst the partners. The multi-storeyed building was valued at a price mutually agreed upon by the partners inter se. What was distributed to the partners was ploughed back as capital of the partners contributed in the new firm at the same valuation at which it was
distributed in the final accounts of the previous firm. Incidentally, it may be noted that till March 17, 1979, stock-in-trade was valued by the then firm as per book value, i.e., the actual cost of land plus the total amount spent on construction. The valuation agreed upon between the partners by mutual consent was at variance with the figure of book value.
3. For the period relevant to the assessment year 1982-83 certain showrooms in the building were sold and the question arose whether the income/gain on the sale of showrooms was liable to be treated as business income or capital gains. The Assessing Officer held that the show-rooms sold constituted the stock-in-trade in the business of the assessee and for the purpose of computing the business profit on the sale of these showrooms, written down value of these show-rooms in the books of the old firm was liable to be taken into consideration for the purpose of determining the business income of the assessee. The Assessing Officer further opined that the valuation as recorded in the books of dissolution on March 17, 1979, was merely an adjustment entry made only to settle the accounts with the retiring partners.
4. The assessee went in appeal before the Commissioner of Income-tax (Appeals) who held that the value shown in the books of account in the existing firm should be taken as the value and not the written down value of the assets shown in the old firm.
5. The Department went in appeal before the Tribunal which held that the surplus on the sale of the show-rooms was to be treated as capital gains and not as business income.
6. The Revenue sought for reference under Section 256(1) of the Act which has been rejected. Hence, this petition.
7. Learned senior standing counsel for the Revenue submitted that several orders placed on the record go to show that for the assessment year 1980-81, the assessee filed one single return in accordance with the provisions of Section 187 of the Act. The profit and loss account and the balance-sheet were prepared for two blocks, i.e., January 1, 1978, to March 17, 1979 and March 18, 1979 to October 31, 1979. The assessee had himself recorded the case to be one of change in the constitution of the old firm and not a case of dissolution and constitution of a new firm. What had taken place on March 17, 1979, was a mere change in the constitution of the firm. This is additionally borne out from a fact and a circumstance. The fact is that on June 29, 1983, the Income-tax Officer has passed an order under Section 185 read with Sections 184(8) and 187 of the Act recognising a change in the constitution of the firm. The circumstance is that if the previous firm had stood dissolved on March 17, 1979, then the assessee and its partners would have been liable to pay capital gains tax in case any income resulted from conversion of stock-in-trade into capital earning/capital distribution by the partners.
8.
Learned counsel for the assessee has forcefully opposed the submission so made on behalf of the Revenue and submitted that a new firm had come into existence which was duly recognised and approved by the Income-tax Officer. Placing reliance on Kalooram Govindram v. CIT , it was submitted that the law laid down by the Supreme Court was that if the valuation of the property for the purpose of partition was not notional but was real and that was the basis for allocating properties to different members, the cost of a property allotted to a member cannot be that at which it was purchased by the joint Hindu family. The principle was accepted and applied to the case of partnership in Raj Narain Agarwala v. CIT [1970] 75 ITR 1 (Delhi). It was held that the valuation of the assets at the time of dissolution would be the actual cost to the assessee of the assets on the date of partition. It was, therefore, submitted that the question of valuation was no more a question available for reconsideration. It was a question of fact merely and certainly did not arise as a question of law from the order of the Tribunal.
9. Counsel for the Revenue submitted placing reliance on the Supreme Court decision in A. L. A. Firm v. CIT [1991] 189 ITR 285 (page 300), that the principle of valuing the closing stock of a business at cost or market price at the option of the assessee was not final and binding on the Revenue. It was also submitted, placing reliance on Saharanpur Electric Supply Co. Ltd. v. CIT , that for the purpose of working out the written down value of an asset the Assessing Officer must determine its actual cost and he was not bound by the cost computed for the purpose of previous year. Learned counsel for the Revenue also submitted that in tax matters the principle of res judicata did not strictly apply and did not operate against the Revenue for it can be shown that what was done in a previous assessment year was not supportable in law.
10. Learned counsel for the Revenue also relied on CIT v. Water and Power Development Consultancy Services (India) Ltd. [1987] 163 ITR 329 (Delhi), in support of the submission that whether a particular income earned by the assessee during the relevant year is liable to be taxed under one or the other head is a question of law. Reference was made to Bihar State Co-operative Bank Ltd. v. CIT , in support of the submission that the income must be taxed under an appropriate head and the term given by the assessee to a particular income for a particular period was not determinative of its nature or its assessability under a particular head of income.
11. Learned counsel for the assessee submitted referring to a decision of the Delhi High Court in CIT v. Shree Ram Memorial Foundation [1986] 158 ITR 3, that even if res judicata did not apply to tax matters, the rule of consistency has to be followed failing which there will be complete chaos. The
Revenue should not be permitted to reagitate the same issue year after year and for determination frequently.
12. Having heard learned counsel for the parties, we are of the opinion that at the stage of deciding whether a statement of case to the High Court is required to be called for or not, the only questions relevant are whether the suggested questions are questions of law and whether they do arise from the order of the Tribunal. Once these tests are satisfied which way the questions will be ultimately answered cannot be of much relevance at this stage.
13. Having gone through the record and having appreciated the suggested questions in the light of the submissions of learned counsel for the parties, we are of the opinion that the suggested questions do arise as questions of law from the order of the Tribunal. Still we are of the opinion that the suggested questions as framed do not reflect the crux of the controversy and the questions need to be recast. We do so by refraining and setting out the questions in the operative part of this order.
14. The petition is allowed. The Tribunal shall draw up a statement in the case and refer the following questions for the opinion of the High Court as arising for the assessment years 1882-83 to 1986-87 :
“(1) Whether the Income-tax Appellate Tribunal was correct in assessing income from sale of portions of the building (known as Hansalaya), at Rs. 4,33,685 under the head ‘Capital gains’ and in holding that the said building is not stock-in-trade of the assessee and income from sale is not assessable as income from business ?
(2) Whether the Income-tax Appellate Tribunal was correct in holding that the valuation made on March 17, 1979, is the actual cost relevant for the purposes of calculating depreciation for the period relevant to the assessment years 1982-83 to 1986-37 ?
(3) Whether the Income-tax Appellate Tribunal was correct in working out capital gains on the basis of valuation made by the approved valuer on March 17, 1979, and taking cost price at Rs. 28,17,565 instead of actual cost of construction, i.e., Rs. 3,40,231 ?”
