Capital assets introduced into a partnership firm may count as transfer, yet no capital gains tax arose on the contribution.

Precious stones disclosed under the Voluntary Disclosure Scheme, 1975 were treated as capital assets, not stock-in-trade, because the assessee had not established a business in cut emeralds and the partnership's trading activity did not by itself convert the disclosed assets into business stock. Their introduction into a partnership firm was treated as a transfer of capital asset within section 2(47) of the Income-tax Act, 1961. However, applying the governing principle on partnership contributions, no taxable capital gain arose under section 45 on that transfer.

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Issues: (i) Whether the precious stones disclosed under the Voluntary Disclosure Scheme, 1975, were stock-in-trade or capital assets within the meaning of section 2(14) of the Income-tax Act, 1961; (ii) Whether bringing the precious stones into the partnership firm amounted to transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, 1961 and attracted capital gains tax under section 45 of the Income-tax Act, 1961.

Issue (i): Whether the precious stones disclosed under the Voluntary Disclosure Scheme, 1975, were stock-in-trade or capital assets within the meaning of section 2(14) of the Income-tax Act, 1961.

Analysis: The finding that the assessee had not established any business in cut emeralds was treated as a finding of fact supported by the record. The mere fact that the partnership firm carried on business in precious stones did not establish that the assessee's disclosure represented concealed business income from the same line. On that basis, the disclosed precious stones were not treated as stock-in-trade.

Conclusion: The precious stones were capital assets and not stock-in-trade; this issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether bringing the precious stones into the partnership firm amounted to transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, 1961 and attracted capital gains tax under section 45 of the Income-tax Act, 1961.

Analysis: By applying the principle that introduction of an assessee's asset into a firm constitutes a transfer for the purposes of section 2(47), the contribution of the precious stones to the firm was treated as a transfer of capital asset. However, following the governing principle on capital gains arising from such partnership contribution, no taxable gain was held to arise for the purpose of section 45.

Conclusion: There was a transfer within section 2(47), but no liability to capital gains tax arose under section 45; this issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered by holding that the disclosed precious stones were capital assets and that their contribution to the firm constituted a transfer, but the assessee was not liable to capital gains tax.

Ratio Decidendi: Where an asset introduced by a partner into a firm is not shown to be stock-in-trade, it is a capital asset and its introduction into the firm amounts to transfer, but no capital gains tax is attracted under section 45 on that transaction.

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