1991 (9) TMI 70 - HC - Income Tax

No Capital Gains Tax on Partner's Property Contribution; s.45 Inapplicable Where s.48 Computation Impracticable, s.263 Revision Fails

HC held that the assessee was not liable to capital gains tax on contribution of a personal immovable asset as capital to a partnership firm in the ... Appeal To Tribunal - levy of tax on capital gains - concept of 'transfer' u/s 2(47) - Whether, the Tribunal was justified in law in holding that the assessee was not liable to tax on capital gains without recording a finding about the existence of facts assumed by the Supreme Court in the case reported in Sunil Siddharthbhai v. CIT [1985 (9) TMI 7 - SUPREME COURT] ? - HELD THAT:- The sole basis of the notice issued under section 263 was that the contribution of the share in the immovable property, as contribution to the share capital of the partnership resulted in a 'transfer' of an asset and in the said process whatever gain was earned was liable to capital gains tax under section 45. The assessee contended that since a partner was also holding the assets of the partnership along with other partners, the contribution of the personal asset towards the share capital did not involve any transfer. This broad proposition was negatived by the Supreme Court, pointing out that the larger interest of the assessee in his personal asset got reduced when he contributed it to the partnership ; on such contribution, other partners (who had no interest in this asset) also got some interest in the asset contributed, since the asset became the asset of the firm. This is a proceeding initiated under section 263 of the Act. The scope of the proceeding has to be ascertained with reference to the purpose and the basis of the initiation of the proceedings. While initiating the proceeding, the Commissioner has nowhere doubted the genuineness of the transaction in question. It was not his case that the contribution towards the share capital made by the assessee was only a ruse or device for converting the asset into money. He sought to revise the assessment order, purely on the basis of the law as he understood it; he proceeded that there was an element of transfer in the transaction of contributing the personal asset as the share capital in the firm. Partially, the Commissioner was justified in this assumption. However, the inapplicability of section 48 of the Act and the impracticability of evaluating the capital gain were not realised by the Commissioner. The notice issued by the Commissioner proceeds as if there was a valid transfer under a genuine situation. The basis of the initiation of the proceedings by the Commissioner cannot be altered by the Appellate Tribunal ; the scope of the proceedings has to be the same as the one envisaged by the Commissioner having regard to the peculiar nature of the revisional jurisdiction under section 263. Secondly, the Appellate Tribunal has given a definite finding that the transaction in question cannot be suspected to be a sham one. This finding actually wipes out the very question raised by the Revenue as baseless. We are of the opinion that the Appellate Tribunal was justified in not acceding to the request of the Revenue to remand the proceedings to the Income-tax Officer. Question of assuming any fact asserted by the Revenue does not arise in the circumstances of the case. The question referred to us is answered in the affirmative and against the Revenue. Issues Involved:1. Whether the Tribunal was justified in holding that the assessee was not liable to tax on capital gains without recording a finding about the existence of facts assumed by the Supreme Court in Sunil Siddharthbhai v. CIT.2. Whether the contribution of property to a partnership firm constitutes a 'transfer' u/s 2(47) of the Income-tax Act, 1961.3. Whether the transaction was genuine or a sham to evade capital gains tax.Summary:1. Tribunal's Justification on Capital Gains Tax:The Tribunal held that the assessee was not liable to tax on capital gains without recording a finding about the existence of facts assumed by the Supreme Court in Sunil Siddharthbhai v. CIT. The Tribunal followed the Supreme Court's decision, which stated that even though the contribution of property towards the capital of the firm involved a transfer, there was no provision to apply the capital gains tax.2. Contribution of Property as 'Transfer' u/s 2(47):The Commissioner of Income-tax issued a notice u/s 263, stating that the contribution of the share in the immovable property to the partnership resulted in a 'transfer' of an asset, and any profits or gains arising from such transfer were chargeable to tax as capital gains. The Commissioner held that the concept of 'transfer' u/s 2(47) was wider and directed the Income-tax Officer to recompute the total income by including the capital gains arising from the transfer.3. Genuineness of the Transaction:The Revenue contended that the transaction was a sham and a device to overcome the levy of capital gains tax. However, the Appellate Tribunal found no evidence to hold that the transaction was sham. The Tribunal noted that the assessee entered into a partnership with others, and there was no indication that the transaction was a device to convert the asset into money while evading tax. The Tribunal's finding was that the transaction was genuine.Legal Precedents and Observations:The Supreme Court in Sunil Siddharthbhai's case observed that if the transfer of a personal asset to a partnership is a device to evade tax, the Income-tax authorities could scrutinize the transaction. However, the Tribunal found no such indication in this case. The Punjab and Haryana High Court in CIT v. Jagadhri Electric Supply and Industrial Co. and the Gujarat High Court in CIT v. Harikishan Jethalal Patel emphasized that the Commissioner must base his revision on the grounds mentioned in the notice and cannot alter the basis during the proceedings.Conclusion:The High Court held that the Appellate Tribunal was justified in not remanding the proceedings to the Income-tax Officer. The question referred was answered in the affirmative and against the Revenue. The Tribunal's decision to not levy capital gains tax on the assessee was upheld.