TMI Blog1996 (3) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... fer' for purpose of capital gains under section 45 of the Income-tax Act, 1961, and accordingly no capital gains could be brought to tax on the sale of lands and building by the assessee to the partnership concern ? " The assessee is an individual. On May 1, 1969, he converted his proprietary business into a partnership consisting of himself and his three sons. On April 30, 1975, he transferred his immovable property consisting of land and building to the firm. He returned the capital gains of Rs. 26,098 as arising from the transfer. Later, by his letter dated November 12, 1976, he claimed that no chargeable capital gains arises for assessment in view of the decision of the Madras High Court in D. Kanniah Pillai v. CIT [1976] 104 ITR 520 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel appearing for the Department submitted that in the present case the partnership was constituted on May 1, 1969, but the immovable property was sold on April 30, 1975, for consideration. The assessee himself admitted the capital gains of Rs. 26,098. Even if the said entire sale consideration of Rs. 1,20,000 was said to be entered in the capital account of the assessee which is a partnership, inasmuch as there is capital gains, the Department is entitled to levy capital gains tax under section 45 of the Act. According to learned standing counsel, the decision in the case of D. Kanniah Pillai [1976] 104 ITR 520 (Mad) will not be applicable to the facts arising in the present case. In order to support his contention that there is transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, assets can be introduced by a partner of the firm either at the inception of the partnership or at a later stage. In both these stages when the partner brings his property to the partnership, it cannot be said that there is a transfer. In the present case, inasmuch as the entire sale consideration was credited in the capital account of the firm, the Department was not correct in stating that there is transfer and the difference between the sale consideration and the fair market value is exigible to capital gains tax. Learned counsel also placed reliance upon the decision in D. Kanniah Pillai's case [1976] 104 ITR 520 (Mad) in order to support his aforesaid contentions. We have heard learned standing counsel and learned counsel appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id and binding and would have all the incidents of a legal and binding transaction of sale, and the difference between the purchase price of the land and the selling price would be the profit that would accrue to the person who purchased and sold the land. In Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, the Supreme Court while considering sections 45 and 48 of the Income-tax Act, 1961, held that " where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of section 45 of the Income-tax Act, 1961, because the exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a shared inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to enforce his claim against the partnership, it does not mean that even for a limited purpose, the firm is treated as a legal entity. In cases where a partner is treated as a creditor while enforcing the claim, unless the partners agree, he would not be entitled to a decree against the partnership firm as such and it would be open to the defending partners to ask for a dissolution of the partnership instead of paying the credits of the partner. Even in such cases, it could not be stated that there was a legal sale within the meaning of the Sale of Goods Act. If there is no possibility of a transaction of sale when a proprietary concern is converted into a partnership, the mere fact that the parties choose to adopt a form which is in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT v. Bharani Pictures [1981] 129 ITR 244 (Mad)). In the general sense the expression "transfer of property" connotes the passing of rights in property from one person to another. In one case, there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case, there will be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which the exclusive interest is reduced to a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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