1993 (1) TMI 60 - HC - Income Tax

High Court rules property a capital asset, no taxable transfer occurred, no capital gains tax.

The High Court ruled in favor of the assessee, confirming that the property represented a capital asset of the firm under section 2(14) of the Income-tax ... Capital Gains, Transfer By Book Entries Issues Involved:1. Whether the Tribunal misdirected itself in law regarding the ownership and transfer of the immovable property at Behala.2. Whether the interest and rights of the assessee-firm in the property represented a capital asset under section 2(14) of the Income-tax Act, 1961.3. Whether the Tribunal misdirected itself in law regarding the transfer of a capital asset under section 45 of the Income-tax Act, 1961.4. Whether any income chargeable to Income-tax under the head 'Capital gains' arose to the assessee-firm.Issue-wise Detailed Analysis:Issue 1: Ownership and Transfer of Immovable PropertyThe Tribunal found that the property at Behala was purchased with the firm's funds but registered in the name of the senior partner, Shri Kedar Nath Poddar. The Tribunal held that the property was part of Poddar's contribution to the firm's share capital and that the firm was never the legal owner. The Tribunal concluded that the firm could not transfer the property as no registered deed of conveyance was executed. The High Court agreed that the firm had no legal transfer of the property without a registered deed, citing CIT v. Bhurangya Coal Co. [1958] 34 ITR 802 (SC), which states that rights in immovable property are neither created nor extinguished by book entries alone.Issue 2: Capital Asset under Section 2(14)The High Court affirmed that the property was treated as an asset of the firm, following the principle in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, where the Supreme Court held that property brought into a partnership becomes a trading asset of the firm. Therefore, the property at Behala was considered a capital asset of the firm under section 2(14) of the Income-tax Act, 1961.Issue 3: Transfer of Capital Asset under Section 45The Tribunal held that there was no transfer of a capital asset within the meaning of section 45 of the Income-tax Act, 1961, as no formal transfer occurred. The High Court supported this view, stating that the transfer of property to a partner by book entries alone, without a registered deed, does not constitute a legal transfer. The court emphasized that formalities of registration are required for the transfer of immovable property.Issue 4: Income Chargeable under 'Capital Gains'The Tribunal concluded that no income chargeable under 'Capital gains' arose to the firm, as there was no legal transfer of the property. The High Court agreed, stating that section 45 was not attracted because there was no effective transfer. The court noted that even if the firm had ownership of the property, the transfer to the partner without a registered deed did not constitute a taxable event under section 45.Final Conclusion:The High Court answered the questions as follows:- Question 1: In the negative, indicating that the Tribunal did not misdirect itself in law regarding ownership and transfer.- Question 2: In the affirmative, confirming that the property represented a capital asset.- Questions 3 and 4: In the negative, in favor of the assessee, concluding that there was no transfer and no income by way of 'capital gains' arose to the firm.The High Court upheld the Tribunal's ultimate conclusion that no taxable transfer occurred and no capital gains tax was applicable. There was no order as to costs.