1994 (10) TMI 27 - HC - Income Tax

Transfer of shares to partnership firm not taxable under Income Tax Act; no consideration received by assessee.

The High Court of Gujarat held that the contribution of shares by the assessee to a partnership-firm constituted a transfer of capital assets under ... Question Of Law, Valuation Of Land, Wealth Tax Reference Issues:1. Whether the contribution in the form of shares by the assessee in the partnership-firm amounted to transfer within the meaning of section 2(47) of the Act resulting in capital gains chargeable to taxRs.2. Whether the transfer of shares to the partnership firm was for consideration within the meaning of section 45 read with section 48Rs.Analysis:The High Court of Gujarat addressed a consolidated reference concerning three different assessees. The court directed the registration of three separate references and dispensed with the preparation of additional paper books. The key questions of law referred to the High Court pertained to the nature of the contribution in the form of shares by the assessee in a partnership-firm and its tax implications. The court noted that the questions were similar to those addressed in a previous Supreme Court decision in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. In that case, the Supreme Court held that when a partner transfers capital assets to a firm as a contribution towards capital, it constitutes a transfer of a capital asset under section 45 of the Income-tax Act, 1961. The Supreme Court emphasized that such a transfer does not result in any profit or gain to the assessee at the time of contribution. The consideration for the transfer is the right of the partner to receive profits during the partnership and a share in the net assets upon dissolution or retirement. The court reiterated the Supreme Court's ruling that there was a transfer of shares when the assessee contributed them to the partnership-firm, but no consideration was received by the assessee under section 48 of the Act, and no profit or gain accrued for the purpose of section 45. Consequently, the High Court disposed of the reference accordingly, with no order as to costs.