1987 (8) TMI 32 - HC - Income Tax

Court emphasizes assessing genuineness of share transfers to prevent tax evasion, remands matter for further proceedings.

Commissioner Of Income-Tax Versus Leena A. Sarabhai

The High Court held that the Tribunal erred in not considering whether the transfer of shares to a partnership firm was with or without consideration. ... Capital Gains, Firm Issues:1. Whether the contribution of shares to a partnership firm constitutes a transfer within the meaning of section 2(47) of the Income-tax Act.2. Whether the Tribunal erred in not considering whether the transfer was with or without consideration.Analysis:The judgment revolves around the issue of whether the contribution of shares to a partnership firm constitutes a transfer within the meaning of section 2(47) of the Income-tax Act. The assessee, an individual, contributed shares to a partnership firm after converting them into stock-in-trade. The Income-tax Officer held that this conversion was improper and deemed it as a transfer, making the assessee liable for capital gains tax. The Appellate Assistant Commissioner upheld this decision, stating that the contribution of shares was a camouflage for transferring them to other companies. However, the Income-tax Appellate Tribunal took a different view, emphasizing the right of the assessee to plan her affairs to avoid capital gains tax. The Tribunal ruled that there was no transfer of a capital asset, overturning the previous decisions.The Revenue, dissatisfied with the Tribunal's decision, sought a reference under section 256(1) of the Income-tax Act. The Tribunal made a reference on whether the capital gains were includible in the assessee's total income for the relevant assessment year. The High Court reframed the questions for determination, focusing on whether the contribution of shares amounted to a transfer within the Act and whether consideration was involved in the transfer. The High Court referred to the Supreme Court's decision in Sunil Siddharthbhai v. CIT, which concluded that such transactions constituted a transfer within the Act's definition.The High Court held that the Tribunal erred in not considering whether the transfer was with or without consideration. It emphasized that the Revenue could argue that the transactions were sham or illusory to avoid tax payment, based on the Supreme Court's ruling. The High Court clarified that its observations in a previous case did not conflict with the Supreme Court's decision and left it to the Tribunal to assess the genuineness of the transaction in the present case. Consequently, the matter was remanded back to the Tribunal for further proceedings in accordance with the law.