1986 (10) TMI 20 - HC - Income Tax

Retirement Income Taxable as Business Profit, Land Contribution Considered Transfer

The High Court held that the amount of Rs. 4,14,192 received by the assessee on retirement from the firm was chargeable to tax as business profits, ... Precedents, Ratio Decidendi Versus Observation Issues Involved:1. Whether the amount of Rs. 4,14,192 received by the assessee on retirement from the firm was chargeable to tax as business profit or capital gains.2. Whether the Tribunal was correct in concluding that the amount was not taxable as income.3. Whether the Tribunal was right in setting aside the order of the Commissioner of Income-tax.4. Whether the contribution of land by the assessee as capital in the partnership firm amounts to transfer of the asset within the meaning of section 2(47) of the Income-tax Act, 1961.Summary:Issue 1: Chargeability of Amount as Business Profit or Capital GainsThe Commissioner of Income-tax (CIT) found that the assessee, along with her mother and brother, purchased land with the intention of reselling it later at a substantial profit, not as an investment. The CIT considered the formation of the partnership and subsequent retirement from it as a device to avoid tax. The CIT held that the income was chargeable under the head 'Business' and directed the Income-tax Officer to enhance the assessment by Rs. 4,14,192. The Tribunal, however, disagreed, stating there was no organized activity indicating a business transaction and concluded that the amount was not taxable as business income.Issue 2: Tribunal's Conclusion on TaxabilityThe Tribunal held that the receipt of Rs. 4,14,192 was not established as income by the Revenue, relying on the Supreme Court's decision in Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532. The Tribunal concluded that there was no organized business activity and thus, the amount could not be taxed as profits and gains of business.Issue 3: Setting Aside the CIT's OrderThe Tribunal set aside the CIT's order, restoring the Income-tax Officer's order, which did not compute or assess any profit arising from the land transactions. The Tribunal found that the source of the income was not established and thus, the amount could not be taxed as capital gains.Issue 4: Contribution of Land as Transfer u/s 2(47)The question of whether the contribution of land as capital in the partnership firm amounts to a transfer of the asset within the meaning of section 2(47) was concluded by the Supreme Court in Kartikeya V. Sarabhai v. CIT [1985] 156 ITR 509. The Court held that such a contribution is indeed a 'transfer' within the meaning of section 2(47).Court's Conclusion:The High Court found that the Tribunal failed to consider the arguments and evidence presented by the Revenue, particularly the aspects indicating a device to avoid tax. The Court held that the amount of Rs. 4,14,192 received by the assessee was chargeable to tax as business profits. The Tribunal's conclusions were overturned, and the CIT's findings were upheld. The Court answered the questions against the assessee, affirming that the capital contribution by a partner in the firm amounts to a transfer.