1997 (5) TMI 80 - AT - Income Tax

Tribunal: Genuine asset transfer to partnership firm not tax evasion.

Akays Exportos India (Pvt.) Limited. Versus Deputy Commissioner Of Income-Tax.

Akays Exportos India (Pvt.) Limited. Versus Deputy Commissioner Of Income-Tax. - ITD 064, 061, Issues:1. Whether the transfer of assets by the assessee's company to a partnership firm constitutes a chargeable event for capital gain tax.2. Whether the transaction is a genuine contribution to the share capital of the firm or a device to avoid capital gain tax.Analysis:1. The assessee contended that the transfer of assets to the firm did not result in a chargeable event for capital gain tax. The revenue authorities argued that the transfer led to a monetary gain taxable under section 45 of the Act. The issue revolved around the interpretation of the transaction as a genuine contribution or a tax avoidance scheme. The assessee cited precedents like the decision in Sunil Siddharthbhai v. CIT to support their case, emphasizing the genuine nature of the firm and the lack of tax evasion intent.2. The Tribunal examined the facts and legal principles, focusing on the decision in Sunil Siddharthbhai's case. The Court held that the transfer of personal assets to a partnership firm constitutes a transfer of a capital asset under section 45 of the Income-tax Act. However, it clarified that no income or gain arises if the transfer is a genuine contribution to the firm's share capital for conducting business. The Tribunal assessed the genuineness of the firm, considering factors like the composition of partners, continuity of assets in the firm, and business operations. It highlighted that a transaction could be deemed a sham if it is a device to convert assets into money for the individual's benefit while evading tax.3. Analyzing the specific case, the Tribunal noted that the partnership involved unrelated parties and the transferred assets remained with the firm without being sold off. The firm continued its business operations smoothly, indicating a genuine purpose for the capital contribution. The Tribunal found no evidence of the transaction being a sham or a tax avoidance scheme. It emphasized that the transaction occurred before the relevant tax provision was introduced, further supporting the assessee's position. Consequently, the Tribunal ruled in favor of the assessee, allowing the appeal and deleting the addition of capital gain tax.In conclusion, the Tribunal's decision hinged on the determination of whether the transfer of assets to the partnership firm was a genuine contribution to its capital or a scheme to evade capital gain tax. By analyzing the facts, legal precedents, and the nature of the transaction, the Tribunal concluded that the transfer in this case did not warrant the imposition of capital gain tax.