TMI Blog1977 (7) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... credited to the firm's account and debited to the capital account of the assessee in consideration for the above land. According to the learned CIT the contribution of the land in lieu of the capital by the assessee to the said firm amounted to 'Transfer of capital asset' within the meaning of s. 2(47) of the Act. Therefore, the surplus on transfer of the said land was chargeable to capital gains in the hands of the assessee. Since the ITO while making the assessment had failed to assess the capital gains arising out of the said transfer and to include the said in determining the total income of the assessee for the assessment year under appeal, the said order of the ITO was found to be erroneous inasmuch as it was prejudicial to the interest of the Revenue. The learned CIT, therefore, invoked the powers vested in him under s. 263 of the Act and issued a show cause notice on 16th Jan., 1976 to the assessee requiring it to explain why the said order should not be modified so as to direct the ITO to compute the capital gains and include the same in the total income. In response to the said show cause notice the assessee sent a reply by its letter dated NIL February, 1976 and raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be sustained because it was not established that the assessee, HUF was at any time prior to the transfer of the land was dealer in land itself. Even the firm in which the assessee had become partner had not dealt in the land transactions since its inception. The mere entry in the books of account converting the capital asset into stock-in-trade would not make assessee a dealer in land where in reality the assessee never dealt in any transaction of purchase and sale of land. Therefore, the above contention of the assessee that it was a transfer of stock-in-trade to the partnership firm cannot be sustained. The objection of the assessee based on the decision of the Supreme Court in Hindu Construction Co. was also not valid inasmuch as in that case the question which came up for consideration before. Their Lordships was whether the difference between the book value of goods and the enhanced value for capital contribution constituted income of the assessee. The question whether the surplus was taxable to the capital gains in such transfer was not considered at all. According to the learned CIT the question which fell for consideration was whether the transaction in question amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject matter of appeal before the Tribunal. We may, at this stage that this contention raised by the learned Advocate General was not seriously canvassed before us. 4. Amplifying the first contention, the learned Advocate General referred to the definition of expression 'capital asset' under s. 2(14) of the Act and pointed out that as result of the amendment made w.e.f. 1st April, 1970, all agricultural and did not pre-se become capital asset but only such agricultural land which were covered by provision of s. 2(14)(iii)(b) of the Act were excluded from the expression 'agricultural land' in India. According to the aforesaid provision, such lands in respect of which notification in Official Gazette issued by the Central Government which were situate at a distance of more than 8 kms. from the local limits of Municipal Cantonment etc. were ceased to become agricultural land. Consequently, such lands were included in the definition of expression 'capital asset'. The learned Advocate General stated that the relevant notification was issued on 6th Feb., 1973 Notification No. 77(E). Thus, on the date on which the said notification was published that the land in question ceased to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as his capital contribution. Second aspect of the matter was that in order to bring to charge any amount to capital gains consideration must be received or receivable or must have accrued or arose to a partner as a result of a transfer. In the instant case no consideration could be said to have been received by the assesse as a result of the transfer or extinguishment of right, if any, and, therefore, in above view of the matter, the decision of the learned CIT to revise the order of the ITO was not sustainable in law. 5. Shri Kothari, on behalf of the Revenue, dealing with the first point raised by the learned Advocate General pointed out that the land in question ceased to be agricultural land from 1st April, 1970 as rightly held by the learned CIT. In this connection he placed reliance on the conclusion reached by the learned CIT. Shri Kothari then next pointed out that the assessee had made claim for treating the said land as agricultural land, no evidence sought to be produced to support the claim that the said land was agricultural land. On the contrary, according to the report of the authorised valuer, the land in question was described as N.A. land or Non-agricultura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration received by the assessee would be taxable to capital gains. He accordingly supported the decision of the learned CIT. 6. We have carefully considered the rival submissions as pointed out earlier it is not necessary for us to go into the question of jurisdiction of the learned CIT to revise the order of the ITO as learned Advocate General has fairly not, made any submission to support the contention raised by him. Any way, this aspect of the matter is concluded by the decision of the Gujarat High Court in case of Karsandas Bhagvandas Patel vs. G.V. Shah, ITO 98 ITR 255 (Guj) against the assessee. Therefore, the contention raised in this must fail. Now coming to the next sub-mission raised by the learned Advocate General, we are in respectful agreement with the decision of the Tribunal cited supra on this point and for the reasons as pointed out in the said order, we agree with the learned Advocate General that the notification did not have any retrospective effect but would be applicable only on the date when the said notification was published i.e. 6th Feb., 1973. The learned Departmental Representative as pointed out earlier stated before us that if we were to ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the firm, he did not transfer any right in the property, which was his to the firm nor was there any relinquishment of such rights, and as such the essential element of a transfer was absent and as such neither s. 34(4)(b) of the Act nor s. 155(5) of the Act would be applicable and as such the order of the ITO was bad in law. The Revenue's contention, on the other hand, was that there was extinguishment of some of the rights of the assessee in the asset which was brought in by him for the purpose of the business of the firm. Upholding the decision of the Tribunal, Their Lordship observed thus. "It is thus clear that every partner has an interest in the property of the partnership. What is more, the person who brought in the property for the purpose of the business of the firm would not be able to claim or exercise any exclusive right over the property. Such a situation can arise only if there was an extinguishment of some right of the partner in the property which was exclusively his and which was brought in for the purpose of the business of the firm. Without such extinguishment, it is inconceivable that the other partners could get an interest in that property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership assets which remain after satisfying the liabilities set out in cl. (a) and sub-cls. (i), (ii) and (iii) of cl. (b) of s. 48. When therefore, a partner retires from the partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of a notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any price for sale of his interest in the partnership. His share in the partnership. is worked out by taking accounts in the manner prescribed by relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of sale; the retiring partner does not sell his interest in the partnership to the continuing partners. He, on the contrary, carves out his interest and takes it away by evaluating it. This is exactly what happened in the present case. The three partners retired from the firm and their respective share in the partnership at the date of retirement were ascertained on taking accounts and the amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e outside the pale of chargeability to capital gains tax. It is not every transfer of a capital asset which attracts the charge of capital gains tax. Sec. 45 which is the charging section, undoubtedly, provided that any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head 'capital gains'. But s. 48 shows that the transfer that is contemplated by s. 45 is a transfer as a result of which consideration is a transfer by the assessee or accrues to the assessee. Sec. 48 provides the mode of computation of capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset' the following amounts, namely; (1) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the capital asset and the cost of any improvements thereto. The amounts so recited in cls. (i) and (ii) are to be deducted from the 'consideration received or accruing as result of the transfer of the capital asset' for the purpose determining the profits or gains chargeable to tax. It is, therefore, clear that the transfer of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of his interest in a particular partnership asset." In Mohanbhai Pamabhai's 91 ITR 398 (Guj) case the question which arose for consideration of the Hon'ble Gujarat High Court related to the liability to capital gains of the amount received by a partner from the firm on his retirement. It was firstly held that there was no transfer of interest in partnership asset when partner retires from the firm. After coming to that conclusion, the Court proceeded to, consider whether there was extinguishment and whether the amount would still be liable to capital gains. It is in this connection that the Court held as above. 7. We may state at this stage that the decision of the Gujarat High Court in case of CIT vs. R.M. Shah Amin 1977 CTR 27 : 106 ITR 368 (Guj) has since been upheld by the Supreme Court. Thus, even if we were to accept the contention raised on behalf of the Revenue based on the decision of the full Bench of Kerala High Court, that there was a transfer of the capital asset as result of extinguishment of proprietary right in asset when the said asset was contributed as capital contribution to the firm, the further question still falls for decision is whether there is a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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