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2016 (10) TMI 59 - BOMBAY HIGH COURT

2016 (10) TMI 59 - BOMBAY HIGH COURT - TMI - Transfer of capital assets - contribution of capital asset into the firm - capital gain computation - selection of assessment year - Held that:- So far as the character of immovable property, shares and securities invested by the applicant company into the partnership firm M/s. Bajaj Trading Company as a stock in trade as contended by the applicant or capital asset as held by the Tribunal is concerned, the same need not be examined. This for the reaso .....

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been invested in the partnership firm by the applicant assessee was a capital asset in the hands of the applicant assessee. - There is a transfer 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 partners .....

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le 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 dealer in immovable property, stocks and securities. In the circumstances, when the transaction is looked at in its entirety, the investment made cannot be sa .....

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ulted in capital gains, which can be subjected to capital gain tax in the subject assessment year, is answered in the negative, i.e. in favour the of the applicant assessee and against the Revenue. - Income Tax Reference No. 225 of 1999 - Dated:- 27-9-2016 - M. S. Sanklecha And S. C. Gupte, JJ. Mr. J. D. Mistri, Senior Counsel i/b Ms. V.B. Patel for the applicant None for the respondent JUDGMENT ( Per M. S. Sanklecha, J. ) 1. None appears for the Revenue inspite of the service being completed in .....

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in the hands of the applicant for the Assessment Year 1980-81 ? 3. The assessment year relevant to the present proceedings is A.Y. 1980-81, for which the accounting year ended on 21st October, 1979. 4. Briefly, the facts leading to the above substantial question of law are as under : (a) The applicant company was incorporated in the year 1937 to carry on investment business. (b) On 23rd April, 1979, the applicant Company at its General Body meeting of shareholders decided to commence a new busi .....

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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 .....

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Company resulted in long term capital gains of ₹ 1.19 crores. (e) Being aggrieved by the assessment order dated 13th February, 1984, the applicant assessee filed an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) by order dated 11th November, 1985 inter alia held that : (i) The conversion of investment in the form of immovable property and shares into stock in trade was not a sham or bogus act; (ii) The setting up of the partnership firm M/s. Bajaj Trading company w .....

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mmissioner of Income Tax, reported in 156 ITR 509. However, he proceeded to hold that as no consideration was received within the meaning of Section 48 of the Act, no capital gains arose; (v) However, the applicant company had so arranged its affairs that when it is taken as a whole, it was device / scheme to evade capital gains tax and would squarely fall within the caution set out in paragraph 20 of Sunil Siddharthbhai (supra). In the aforesaid circumstances, the CIT(A) concluded that there wa .....

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o stock in trade by the applicant company before investing the same in the partnership firm M/s. Bajaj Trading Company, was in fact, a part of a device so as to evade payment of tax. Consequently, it held that what was contributed to the partnership firm was a capital 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 Siddhar .....

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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 law hereinabove for our consideration. The af .....

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crores to be subjected to capital gains tax in the hands of the applicant assessee and (d) If yes, then whether the capital gain is taxable in the A.Y. 1980-81 ? 6. So far as the character of immovable property, shares and securities invested by the applicant company into the partnership firm M/s. Bajaj Trading Company as a stock in trade as contended by the applicant or capital asset as held by the Tribunal is concerned, the same need not be examined. This for the reason that applicant company .....

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rtnership firm by the applicant assessee was a capital asset in the hands of the applicant assessee. 7. So far as the second issue which arises in the question as formulated, namely, whether the contribution of capital asset into the firm is a transfer of a capital asset within the meaning of section 2(47) r/w Section 45 of the Act is concerned, the same is no longer res integra in view of the decision of the Apex Court in Suil Siddharthbhai (supra). This is also not disputed by the applicant co .....

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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 o .....

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e of the dissolution or retirement. The Apex Court had held that the credit entry in the partners' capital account does not represent the true value of the consideration received / receivable. It is only a notional value. Therefore, it is not possible to predicate the share of a partner in the partnership firm as on the date of dissolution or retirement, as a share which is presently payable or ascertainable. This is particularly so, as we are concerned with a period prior to A.Y. 198889 whe .....

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rship firm. Consequently, the capital gains earned by the applicant assessee cannot be determined in terms of Section 48 of the Act. Therefore, as held by the Apex Court in B.C. Srinivasa Setty (surpa), where the computation provision is not workable, the charge itself fails. 10. Further reliance is placed by the applicant assessee upon the Apex Court decision in Sunil Siddharthbhai (supra) to contend that on the date of the contribution of capital to the partnership firm, it cannot be said that .....

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ital asset shall be deemed to be the full value of the consideration, as a result of the transfer, and that capital gains so arrived at shall be chargeable to tax in the year in which the transfer takes place. As we are dealing with the period prior to the introduction of Section 45(3) of the Act, the same will not govern the present proceedings. Thus, the obiter (not the basis of the order) by the Tribunal that subsection (3) of Section 45 only clarifies the existing position in law runs counte .....

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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 contribut .....

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ents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to incometax on a capital gain, it will be open to the incometax authorities to go behind the transaction and examine whethe .....

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The Income Tax Officer will be entitled to consider all the relevant indicia in this regard, whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the asse .....

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ding Company 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 assess .....

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ax 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 that the contribution by the applicant assessee into the partnership firm as capital was required by the firm to carry on its business is not a device to evade tax which would have otherwise been payable. In fact, the Authorities under the Act also record the fact that at the commencement of .....

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withdrew its capital to the extent of ₹ 1.16 crores. On the basis of this fact, the Authorities conclude that the applicant assessee had received the value of the capital contribution made by it into the partnership firm by receiving the value of the immovable property from the firm. Thus, the entire exercise was a mere device to evade capital gains tax. However, the Revenue is completely ignoring the finding of fact recorded by the Tribunal to the effect that the amount of ₹ 1.16 c .....

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ss in the partnership firm with others by contributing an amount of ₹ 1.23 crores as its capital while other partners also contributed varying amounts resulting in an aggregate balance in the partnership capital account of ₹ 2.49 crores. Thus, it was a decision taken by the applicant assessee to pool its resources along with other persons who have contributed over 50% of the total capital in the partnership firm. This itself is a further indication of the fact that a decision was tak .....

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nil 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 .....

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