TMI Blog1991 (9) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... of whom, three were the co-owners of the property in question. The property was contributed in lieu of the contribution of the three co-owners, each co-owner's contribution being Rs. 9 lakhs. Thus the property was obviously valued at Rs. 27 lakhs. The object of the firm was to engage in the business of developing property. The other three partners had not immediately contributed anything towards the share capital ; but it was agreed as per the deed of partnership, that "further capital of the partnership will be provided by parties of fourth, fifth and sixth parts in such proportions as may be mutually agreed upon. The parties hereto of the first, second and third parts shall not be liable to bring any further capital". The parties of the fourth, fifth and sixth parts were the partners other than the three co-owners, who were parties 1 to 3, referred to in the deed of partnership. The partnership business was to execute building construction contracts, dealing in land, etc. Each partner was to share profits and losses equally, i.e., each had a one-sixth share, and for this purpose the share capital of the firm was taken as Rs. 54 lakhs. On July 30, 1981, one of the partners, Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in loss of revenue." Hence, he proposed to make an appropriate order under section 263 to make good the loss of revenue for the assessment year 1981-82. Thus it is clear that the sole basis of the notice issued under section 263 was that the contribution of the share in the immovable property, as contribution to the share capital of the partnership resulted in a "transfer" of an asset and in the said process whatever gain was earned was liable to capital gains tax under section 45. After hearing the assessee, the Commissioner made an order on October 28, 1985. He held that the concept of "transfer" under section 2(47) of the Act was wider (as held by this court in Addl. CIT v. M. A. Y. Vasanaik, reported in [1979] 116 ITR 110).He held further that: "In the circumstances, I hold that the Income-tax Officer was clearly in error in not bringing to tax the capital gains on the conversion of the individual property at No. 37, Cubbon Road, Bangalore, which was brought into partnership. 1, therefore, direct the Income-tax Officer to recompute the total income and the tax payable by including the capital gains arising on the above transfer in computing the assessee's total incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards its share capital being sham under certain circumstances and in such a situation, the Income-tax Officer was entitled to scrutinise the entire transaction to unearth the real nature of the transaction. At page 523 (of 156 ITR), the Supreme Court observed : "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 income-tax on a capital gain, it will be open to the income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The Income-tax Officer will be entitled to consider all the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner retiring from the firm. We think it necessary to state that what is envisaged here is merely the right to realise the interest and receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership-firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement. It is because that interest exists already before dissolution, as was held by this court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC), that the distribution of the assets on dissolution does not amount to a transfer to the erstwhile partners. What the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest." However, it is not possible to evaluate the gain, if any, to the partner by the transfer involved while contributing the personal asset to the firm's capital. Hence, the question of levying tax on capital gains would not arise. In this regard, at page 520, it was held : "The second question is, whether the assessee can be said to have received any consideration as that expression is understood in the scheme of capital gains under the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtner acquires on making over his personal asset to the partnership firm as his contribution to its capital can fall within the terms of section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether." Therefore, normally when a person enters into a partnership and contributes his property as part of his share capital, even though there is an element of transfer in it, it is incapable of evaluation and, consequently, this transfer does not attract the levy of capital gains tax. The Revenue contends that if the very constitution of the firm is not genuine transaction or the apparent contribution of the asset as the share capital is actually a make-believe device, though in reality it is a transfer of the asset capable of being taxed for capital gains, then, the above proposition is not applicable, but the Income-tax Officer has to scrutinise the entire transaction to ascertain the truth ; therefore, it is necessary to remand the proceedings to the Income-tax Officer. There ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vide Dhirajben R. Amin v. CIT [1988] 174 ITR 307 (SC). The peculiar nature of the proceedings under section 263 was brought out in a case decided by the Punjab and Haryana High Court in CIT v. Jagadhri Electric Supply and Industrial Co. [1983] 140 ITR 490. At page 502, the Bench held: "The jurisdiction vested in the Commissioner under section 263(1) of the Act is of a special nature or, in other words, the Commissioner has the exclusive jurisdiction under the Act to revise the order of the Income-tax Officer if he considers that any order passed by him was erroneous in so far as it was prejudicial to the interests of the Revenue. Before doing so, he is also required to give an opportunity of being heard to the assessee. If after hearing the assessee in pursuance of the notice issued by him under section 263(1) of the Act, he is not satisfied, he may pass the necessary orders. Of course, the order thus passed will contain the grounds for holding the order of the Income-tax Officer to be erroneous, as contemplated under section 263(1) of the Act. Feeling aggrieved therefrom, the assessee may file an appeal against the same, as provided under section 253(1)(c) of the Act. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Supreme Court in Sunil Siddharthbhai's case [1985] 156 ITR 509. The Revenue's contention was rejected. A. M. Ahmadi J., speaking for the Bench, held, at page 478 : "In the present case, it must be realised that the Income-tax Officer never doubted the genuineness of the firm or the genuineness of the transaction in question. If he had doubted the genuineness of the firm or the genuineness of the transaction, there would have been no occasion for him to vary the income of the assessee by adding the amount of capital gains for working out the net taxable income for the assessment year 1976-77. If the firm was not genuine or if the transaction was not genuine, there would be no question of the assessee having earned profit which could be brought to tax as capital gains within the meaning of section 45 read with section 48 of the Act. It was only because the Income-tax Officer thought that the transaction in question was a genuine transaction and the agricultural land was transferred to the firm, the genuineness whereof was not in doubt, that the Income-tax Officer, after deducting the cost of acquisition of the land, computed the capital gain at Rs. 1,32,172 and added the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
