1995 (1) TMI 28 - HC - Income Tax

Summary

Issues:
Whether contribution of cut emeralds by the assessee in the partnership firm constitutes a transfer and is liable to capital gains tax under section 45 read with section 2(47) of the Income-tax Act, 1961?

Analysis:
The case involved a question of law arising from an order of the Income Tax Appellate Tribunal regarding the treatment of the contribution of cut emeralds by the assessee in a partnership firm for the assessment year 1978-79. The assessee had declared the cut emeralds under the Voluntary Disclosure of Income and Wealth Ordinance, 1975, indicating they were acquired between 1961-62 to 1970-71. The emeralds were later contributed as capital in a firm for a sum of Rs. 61,240, with the assessee claiming it as a capital contribution. However, the Income-tax Officer treated this transfer under section 2(47) of the Income-tax Act, 1961, and imposed capital gains tax, a decision upheld by the Appellate Assistant Commissioner and the Tribunal.

The assessee relied on the decision in CIT v. Hind Construction Ltd. [1972] 83 ITR 211, arguing that the contribution should not be taxed as capital gains. The Tribunal, considering precedents from Karnataka High Court and Gujarat High Court, held that the contribution to the firm constituted a transfer under section 2(47) of the Act and was subject to capital gains tax. The assessee then referred to the Supreme Court decision in Kartikeya Sarabhai v. CIT [1985] 156 ITR 509, where it was established that a partner's capital contribution can be considered a transfer, but taxable only if the firm is not genuine and the contribution is a device to avoid tax on capital gains.

The High Court noted that the genuineness of the firm and the nature of the capital contribution were not in dispute up to the Tribunal level. Referring to the decision in Jaykrishna Harivallabhdas (HUF) v. CIT [1993] 202 ITR 175, the court emphasized that the Revenue had not raised any concerns about the capital contribution being a tax avoidance device. As there was no evidence to suggest the firm was not genuine or the contribution was a tax-saving scheme, the court found no reason to remit the case to the Tribunal for further examination.

Therefore, based on the undisputed facts and in line with the Supreme Court's decision, the High Court ruled in favor of the assessee, concluding that the contribution of cut emeralds to the partnership firm did not attract capital gains tax. No costs were awarded in the matter.