TMI Blog2016 (10) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of a capital asset when the applicant company introduced its immovable property, shares and securities as its contribution to the capital of the partnership firm M/s. Bajaj Trading Company. See Sunil Siddharthbhai [1985 (9) TMI 7 - SUPREME Court]. No capital gain chargeable to tax arises on the amount contributed as capital into the partnership firm. This on the basis that at the relevant time, it did not give rise to receipt of any determinable consideration to the transferor as contemplated in Section 48 of the Act.In the above view, we have proceeded on the basis that the immovable property, stock and security were capital assets in the hands of the Applicant Company when introduced into the partnership firm – M/s. Bajaj Trading Company. Moreover, the Authorities have held that the partnership firm was genuine and not a colourable device. Therefore, the investment made in it, cannot be a device when seen in the light of the subsequent conduct of the partnership firm of dealing in immovable properties, stocks and securities as its stockintrade for the subsequent years. In fact, we are informed the firm continues to do so till date and is being assessed to tax as a deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they think fit and proper either itself or in partnership with others. (c) On 2nd May, 1979, the applicant assessee converted certain plots of land and shares hitherto held as investments into its stock in trade. On 8th May, 1979, the applicant assessee entered into the partnership firm with six others to trade in land, stock and shares by executing a partnership deed. The firm was styled M/s. Bajaj Trading Company. The applicant Company contributed total Capital of ₹ 1.23 crores consisting of ₹ 1.20 crores in the form of plot of land (immovable property), ₹ 1.13 lakhs in the form of shares in limited companies and ₹ 2 lakhs in the form of cash. Other parties also contributed in the same manner, resulting in initial Capital brought in by the partners to an aggregate of ₹ 2.49 crores. (d) On the aforesaid facts, the applicant assessee filed its Return of income for the subject assessment year declaring an income of ₹ 5.95 lakhs. However, the Assessing Officer while passing an Assessment Order dated 13th February, 1984 determined the income at ₹ 1.25 crores under Section 143(3) of the Act. This was on account of the fact that he held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al asset and not stock in trade; (ii) The contribution of the capital asset to the firm M/s. Bajaj Trading Company was a transfer within the meaning of Section 2(47) r/w Section 45 of the Act as held by the Apex Court in Sunil Siddharthbhai (supra); (iii) The applicant company had after three years withdrawn an amount of ₹ 1.16 crores from the firm M/s. Bajaj Trading Company. This amount of ₹ 1.16 crores was out of advances received by the firm M/s. Bajaj Trading Company as advances on the sale of plots; On the aforesaid facts, the Tribunal came to the conclusion that the effect of all the transactions taken together was that the applicant assessee was able to transfer its land to another entity i.e. partnership firm and received the market value of the same without having paid any tax. Thus, on application of paragraph 20 of the Supreme Court decision in Sunil Siddharthbhai (supra), the contribution of the capital asset into the firm was a device or ruse to convert a capital asset into money while evading capital gain tax. Thus, the appeal of the applicant company was dismissed. 5. Consequent to the above, the Tribunal has framed the substantial question of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain arises on account of transfer of the capital asset by the applicant assessee by way of its capital contribution to the partnership firm M/s. Bajaj Trading Company. We find substance in the submission of Mr. Mistri, learned Senior Counsel for the applicant assessee, that no capital gain chargeable to tax arises on the amount contributed as capital into the partnership firm. This on the basis that at the relevant time, it did not give rise to receipt of any determinable consideration to the transferor as contemplated in Section 48 of the Act. 9. We find that the Apex Court in Sunil Siddharthbhai (supra) has relied upon its earlier decision in Commissioner of Income Tax Vs. B.C. Srinivasa Setty, 128 ITR 294 to hold that where the computation provision fails then, the charging Section cannot be invoked. The consideration received for the transfer of assets into a partnership firm is only a right of the partner during the subsistence of the partnership firm to get his share of profits from the partnership firm and after dissolution of the partnership or on his retirement from the partnership, to get the value of his share in the net assets on the date of the dissolution or retire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of Section 45 only clarifies the existing position in law runs counter to Circular No.495 dated 22nd September, 1987 issued by the Central Board of Direct Taxes at the time of amendments made by Finance Act, 1987. The above Circular states that SubSection (3) of Section 48 of the Act was brought into the Act in view of the decision of the Apex Court in Sunil Siddharthbhai (supra) that conversion of any personal asset into an asset of a firm in which the individual is a partner would not give rise to capital gains tax for failure of consideration. It specifically provides that the amendment will come into force w.e.f. 1st April, 1988 and will accordingly apply for A.Y. 198889 and subsequent assessment years. In fact, the Apex Court in Commissioner of Income Tax Vs. Vatika Township (P) Ltd. 2015 (1) SCC 1 has held that Circulars issued by the CBDT at the time of amendment of the Act by the Finance Act, explaining the provisions, are binding upon the Revenue. 11. The Authorities under the Act have all along proceeded on the basis that the amounts contributed as capital in the partnership firm by the applicant assessee resulted in capital gains of ₹ 1.19 crores. This entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is a genuine firm. However, the Authorities have proceeded on the basis of the above observation in Sunil Siddharthbhai (supra) that even where the partnership is genuine and the transfer of any asset to a partnership firm is contribution to the share capital of the firm by the partner, yet on examination of all the facts, the Assessing Officer may come to a finding that the contribution to the firm is nothing but a device to convert an asset into money for the benefit of the assessee while evading tax on the capital gains. However, from the aforesaid paragraph of the Apex Court in Sunil Siddharthbhai (supra) quoted above, the tests are whether the asset contributed to the firm is sold soon after its transfer or whether the partnership has no real or substantial business which would require capital contribution from the assessee. In the present facts, it is an undisputed position that the partnership firm was a registered partnership firm under the Act and is assessed to tax as such. The partnership firm has continued its business of trading in land, shares and securities for all these years and even continues to exist today and is being assessed to tax. This itself indicates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny only with a view to engage in a new line of business i.e. trading in land, shares and securities so as to generate profits along with other persons who had equally contributed to the capital of the firm. Thus, in these facts, the contribution of capital asset into the partnership firm M/s. Bajaj Trading Company, cannot be said to fall within the mischief as indicated by the Apex Court in Sunil Siddharthbhai (supra) as extracted hereinabove. 14. In any case, at the time when the applicant assessee made its contribution of capital assets into the partnership firm, no consideration was received by the applicant assessee. If at all, the firm is held to be not genuine, then, the consideration received for transfer of the property was only 3 years down the line. Consequently, it would not be fair to bring it to tax in the A.Y. 1980-81. In the result, we hold that there is a transfer of capital asset by the applicant assessee to a partnership firm M/s. Bajaj Trading company and yet, the same would not result in capital gains which can be subjected to capital gains tax in the A.Y. 1980-81. 15. We may point out that whether the transferred asset was a capital asset or stock-in-trad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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