Shiv Mohan Lal and ors. Vs. Commissioner of Income Tax

At the instance of the assessee, the Tribunal, Delhi Bench, New Delhi referred the following question for the opinion of this Court :

‘Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the contribution of the property by the assessee towards the capital amounted to transfer within the meaning of s. 2(47) of the IT Act, 1961 thereby attracting the provisions of s. 45 of that Act ?’

2. Facts are that the assessee-a partner in the firm : M/s Ganeshi Lal & Sons, Agra – contributed his property towards the capital of the firm. The contention of the assessee was that no transfer of property was involved attracting the provisions of capital gain tax. The ITO rejected the contention of the assessee and held that there was a transfer by the assessee of his property to the firm and that the transfer attracted the capital gain tax.

On appeal, the AAC accepting the contention of the assessee held that no transfer took place by contribution of his property by the assessee to the firm. He, therefore, deleted the capital gain tax, levied by the ITO.

On further appeal, the Tribunal following a Full Bench decision held that the transaction in question is transfer under s. 2(47) of the IT Act, 1961 (briefly, the Act) and that attracted capital gain tax.

The question for determination is whether the said property can be subjected to capital gain tax.

3. In Sunil Siddharthbhai vs . CIT : [1985]156ITR509(SC) the Supreme Court 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 s. 45 of the IT Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest. The Supreme Court further held that the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of s. 48. And as that provision is fundamental to the computation machinery, incorporated in the scheme relating to the determination of the charge provided in s. 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether.

The Supreme Court further held that 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 genuine or a sham transaction and, even where the partnership is genuine, whether 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.

4. There is no finding by the Tribunal that transferring the property towards the capital was a device or a ruse.

In view of the above authority, it must be held that making over the property to the firm by the assessee as his contribution towards its capital cannot fall within the terms of s. 48 and that such a case must be regarded as falling outside the scope of capital gain tax altogether.

We, therefore, hold that though the transfer of the property by the assessee towards capital of the firm amounts to transfer but on the facts and circumstances of the case, that cannot be subjected to capital tax. The reference is answered accordingly