1988 (6) TMI 62 - AT - Income Tax

Land contribution to partnership firm deemed transfer of capital asset, attracting capital gains tax liability.

The tribunal upheld the decision of the CIT(A) and rejected the appellant's appeal, determining that the contribution of land to the partnership firm ... A Partner, Assessment Year, Capital Asset, Capital Gains Tax, Market Value, Partnership Firm Issues Involved:1. Whether the act of contribution of land by the appellant to the partnership firm amounts to a transfer of property.2. Whether the contribution amounts to a transfer of capital asset or merely a transfer of stock-in-trade.3. Whether such transfer attracts capital gains tax and, if so, the quantum of such gains.4. Whether the conversion of land and shares into stock-in-trade was genuine or a device to avoid tax.5. Whether the transfer of assets to the firm was a transfer within the meaning of section 2(47) read with section 45.6. Whether the series of transactions was a device to avoid tax on capital gains.Detailed Analysis:1. Transfer of Property:The IAC posed the question of whether the act of contribution of land by the appellant to the partnership firm amounts to a transfer of property. The IAC concluded that there was, in effect, a transfer of a capital asset of the company into the partnership firm, giving rise to capital gains liable to tax.2. Transfer of Capital Asset vs. Stock-in-Trade:The appellant argued that the conversion of land and shares into stock-in-trade was a genuine act and that what was brought in by way of capital was stock-in-trade, not a capital asset. The CIT(A) held that the conversion of shares and land into stock-in-trade cannot be called a sham or a bogus act and that the assets reverted to their original character as capital assets just before the transfer. The CIT(A) concluded that the transfer of the assets to the firm amounted to a transfer within the meaning of section 2(47) read with section 45.3. Capital Gains Tax:The IAC held that the transfer was for consideration resulting in capital gains liable to tax. The CIT(A), however, held that the transfer was not for any consideration within the meaning of section 48 and therefore no capital gains arose out of these transactions. The CIT(A) further held that the contribution of the assets to the firm did not give rise to any capital gains in light of the decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC).4. Device to Avoid Tax:The CIT(A) held that the appellant had arranged through a sequence of actions to have access to the moneys arising out of the revaluation while trying to avoid due taxation on the capital gains. The CIT(A) concluded that this was not a single-step tax planning device but a complex series of transactions spanning a period of years, leading to the conclusion that the appellant's case fell squarely within the reservations expressed by the Supreme Court in Sunil Siddharthbhai's case.5. Transfer within the Meaning of Section 2(47) and Section 45:The CIT(A) held that there was a transfer within the meaning of section 2(47) and section 45, and it was seen that the real purpose of the transfer was only to convert the personal asset of the partner into money for his own benefit while avoiding liability to tax on the capital gains.6. Series of Transactions as a Device to Avoid Tax:The CIT(A) examined the series of transactions and concluded that the appellant had managed to secure a substantial portion of the money value of the land for investment or use without having to pay tax on it. The CIT(A) found that the whole transaction was entered into with the intention of recouping the money value of the capital asset, thus confirming the assessment of capital gains.Conclusion:The tribunal confirmed the order of the CIT(A) and dismissed the assessee's appeal, holding that there was a transfer of a capital asset, and such transfer was effected when the appellant-company became a partner of Bajaj Trading Co. by contributing capital in specie. The value of the assets transferred was realized by the assessee, and the reservation expressed by the Supreme Court in Sunil Siddharthbhai's case applied.