1979 (2) TMI 72 - HC - Income Tax

Summary

Issues involved: The judgment involves the question of whether a profit could arise on the transfer of shares of a company by an assessee-firm to its partners.

Details of the Judgment:

Assessment Year 1958-59:
The assessee-firm, consisting of seven partners, sold 111 shares of a company through brokers, realizing a taxable profit. Subsequently, the firm transferred the remaining 2,365 shares to its partners at the average purchase price. The Income Tax Officer (ITO) added the difference between the market price and the transfer price as profit, considering it an understatement. The Appellate Assistant Commissioner (AAC) held in favor of the assessee, stating that the distribution of shares among partners did not amount to a sale and no notional profit should be added. The Income-tax Appellate Tribunal upheld the AAC's decision, viewing the transfer as an arrangement for withdrawal of firm assets rather than a trading profit.

Arguments and Legal Principles:
The revenue contended that a firm is a distinct assessable entity, citing relevant case law. The assessee's counsel argued that the firm and partners were indistinguishable, and any profit should not be taxed unless actually earned. Referring to Supreme Court decisions, it was highlighted that arranging commercial affairs to minimize tax liability is permissible. The court emphasized that while a firm is a separate legal entity for tax purposes, transactions with partners may not always be equivalent to those between separate entities.

Conclusion:
The court disagreed with both extreme positions, stating that transactions between a firm and its partners should be assessed based on specific facts and circumstances. While the transfer of shares could potentially attract tax, notional or fictional profits should not be automatically taxed without proper factual basis. The court answered the question against the assessee, directing the Tribunal to consider additional aspects and facts in the case.

Outcome:
The question was answered in the negative against the assessee, with the Tribunal instructed to further examine the case based on the court's guidance. Each party was directed to bear their own costs for the reference.