1997 (7) TMI 683 - HC - Income Tax

Property Contribution to Firm's Capital Not Taxable as Transfer

Shiv Mohan Lal & ors. Versus Commissioner of Income Tax

The Tribunal determined that the contribution of property by the assessee towards the firm's capital constituted a transfer under s. 2(47) of the IT Act, ... - Issues:1. Whether the contribution of property by the assessee towards the capital of the firm amounts to transfer within the meaning of s. 2(47) of the IT Act, 1961, thereby attracting the provisions of s. 45 of the ActRs.Analysis:The case involved the assessee, a partner in the firm M/s Ganeshi Lal & Sons, Agra, who contributed his property towards the capital of the firm. The primary issue was whether this contribution constituted a transfer within the scope of the Income Tax Act, attracting capital gain tax. The Income Tax Officer (ITO) contended that there was indeed a transfer of property by the assessee to the firm, triggering the capital gain tax. However, the Appellate Authority Commissioner (AAC) disagreed, ruling that no transfer occurred by the contribution of property to the firm. Subsequently, the Tribunal, following a Full Bench decision, determined that the transaction amounted to a transfer under s. 2(47) of the IT Act, thereby attracting capital gain tax.In the landmark case of Sunil Siddharthbhai vs. CIT [1985] 156 ITR 509 (SC), 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 s. 45 of the IT Act. The Court emphasized that such transfers result in a reduction of the partner's exclusive interest in personal assets to a shared interest. Additionally, the Court clarified that if the transfer is a mere device to convert assets into money for the partner's benefit while evading capital gain tax, tax authorities can scrutinize the transaction's genuineness. However, in the present case, the Tribunal did not find any evidence to suggest that the property transfer towards the firm's capital was a device or ruse.Based on the legal principles established by the Supreme Court and the absence of evidence suggesting a sham transaction, the Court concluded that although the transfer of property towards the firm's capital constituted a transfer, it did not fall within the scope of capital gain tax in the specific circumstances of the case. Therefore, the Court held that the contribution of property by the assessee towards the firm's capital was not subject to capital gain tax, resolving the reference accordingly.