COMMISSIONER OF INCOME-TAX VS A. C. MAHESH
2001 PTD 2189
[239 ITR 616]
[Madras High Court (India)]
Before N. V Balasubramanian and P. Thangavel, JJ
COMMISSIONER OF INCOME‑TAX
Versus
A. C. MAHESH
T.C No.961 of 1985 (Reference No.492 of 1985) decided on /01/.
th
November 1997. Income Tax----
‑‑‑Capital gains‑‑‑Firm‑‑‑Contribution of assets by partner constitutes transfer within the meaning of S.45‑‑‑Question whether capital gains arose when amount was credited in both capital account and current account of partner not considered by Tribunal‑‑‑Matter remanded‑‑‑Indian Income Tax Act, 1961, S.45.
The assessee was an individual and in the accounting year relevant to the assessment year 1977‑78, the assessee entered into a partnership agreement with two private limited companies. The assessee brought into the business of the partnership, buildings and lands valued at Rs.30,000 and Rs.1,50,000, respectively. The business of the partnership was stated to be m real estate, letting out or hiring of properties, construction of flats, shops, houses, etc. The partnership was to commence on April 1, 1976, and the partnership was dissolved on March 30, 1977. The partnership assets were allotted to the erstwhile partners. The Income‑tax Officer for the assessment year 1977‑78. assessed a sum of Rs.66,892 under the head "Capital gains" by deducting from the value of the land and building brought by the assessee to the partnership firm valued at Rs.1,80,000 the cost thereof which he determined at Rs.1,13,103. The Tribunal held that there was no transfer of capital assets when the assessee made over the capital assets to the firm as his contribution and, therefore, no liability under the capital gains arose in that transaction. On a reference:
Held that in Sunil Siddharthbai v . CIT (1985) 156 ITR 509 (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 capital asset within the terms of section 45 of the Act, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a shared interest. Therefore, the Tribunal was not correct in holding that there was no transfer of property when the partner introduced his capital asset as his capital contribution. The further question that remained was whether it was possible to evaluate the partner's interest by the credit of certain amount in the capital account as well as in the current account of .the partners in the accounts of the firm. The Supreme Court in Sunil Siddharthbai's case (1985) 156 ITR 509, held that, when the personal assets merge with the capital of the partnership and the corresponding credit entry is made in the partner's capital account in the books of the partnership firm that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or when the partner retires. The question whether it is possible to reckon the partner's interest when certain amount is credited in the current account had not been gone into by the Tribunal and in the absence of any finding by the Tribunal, it was not possible to answer that part of the question whether the capital gains liability would be attracted when amounts were credited in both in the capital account and current account of the firm in favour of the partner who brought in his personal assets to the firm.
Kanniah Pillai (D.) v. CIT (1976) 104 ITR 520 (Mad.) and Sunil Siddharthbhai v. CIT (1985) 156. ITR 509 (SC) ref.
C.V. Rajan for the Commissioner.
R. Mennakshisundaram for the Assessee.
JUDGMENT
N. V. BALASUBRAMANIAN, J.‑‑‑-At the instance of the Department, the Income‑tax Appellate Tribunal has stated a case and referred the following question of law under section 256(1) of the Income Tax Act, 1961, for our consideration:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that there can be no assessment of any excess under the provisions of section 41(2) and of capital gains?"
At the outset, we must state that the reference to section 41(2) of the Income Tax Act, 1961, in the question of law referred to us is not accurate. There was no consideration of the provisions of applicability of section 41(2) of the Income‑tax Act and there could not be applicability of the said provision to the facts of the case. Therefore, the question of law referred to us is refrained as under:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that there can be no assessment of any excess under the provisions of 'capital gains' under the Income Tax Act, 1961?"
The assessee is an individual and in the accounting year relevant to the assessment year 1977‑78, the assessee entered into a partnership agreement with two private limited companies. The assessee brought into the business of the partnership, building and lands valued at Rs.30,000 and Rs.1,50,000 respectively. The business of the partnership was stated to be real estate, letting out or hiring of properties, construction of flats, shops, houses, etc. The partnership was to commence on April 1, 1976, and the partnership was dissolved on March 30, 1977, on account of the fact that the business could not be carried on and no useful purpose would be served by continuing the partnership. The partnership assets were allotted to the erstwhile partners. The Income‑tax Officer for the assessment year 1977‑78, assessed a sum of Rs.66,892 under the head "Capital gains" by deducting from the value of the land and building brought by the assessee to the partnership firm valued at Rs.1,80,000. The Income‑tax Officer determined the cost of land and building at Rs.1,13,108 and brought to tax the sum of Rs.66,892 as capital gains.
The assessee preferred an appeal before the Commissioner of Income‑tax (Appeals) and contended that no capital gain arose by allotment of immovable property to the two limited companies on the dissolution of the firm as per the dissolution agreement. The Commissioner of Income‑tax (Appeals) held that the properties were allotted at the time of dissolution of the firm and, therefore, no capital gain arose and in that view of the matter, allowed the appeal preferred by the assessee.
The Revenue carried the matter in appeal before the Income‑tax Appellate Tribunal and it was contended on behalf of the Revenue that the Commissioner of Income‑tax (Appeals) failed to appreciate that what the Revenue sought to tax was the capital gains arising from the assessee's original contribution of immovable property as his share of capital, and not the capital gains arising to the assessee on dissolution of the partnership deed. It was contended on behalf of the Revenue that there was a transfer of the capital assets by the assessee to the firm and the immovable properties were transferred to the firm when the partnership was formed. The Appellate Tribunal, however, placing reliance on the decision of this Court in the case of D. Kanniah Pillai v. CIT (1976) 104 ITR 520, held that there was no transfer of the capital assets when the assessee made over the capital assets to the firm as his contribution and, therefore, no liability under the capital gains arose in that transaction. The above order of the Appellate Tribunal is the subject‑matter of this tax case reference and Mr. C.V. Rajan, learned counsel for the Revenue, submitted that the view of the Appellate Tribunal is not sustainable in law in view of the later decision of the Supreme Court in the case of Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 and submitted that there was a transfer of the capital assets when the assessee transferred the buildings and land to the partnership firm. He also submitted that the decision of the Supreme Court would be applicable to the extent of the capital contribution of Rs.5,000 by the assessee and so far as the amount credited in the current account in favour of the assessee a sum of Rs.1,75,000 is concerned, there was a transfer of capital assets for consideration and to this extent, the capital gains liability would be attracted.
Mr. M.R. Meenakshisundaram, learned counsel for the assessee, however, did not seriously dispute the position that there was transfer of the capital asset when the assessee transferred the capital asset to the firm as his contribution. He also submitted that it is not possible to evaluate the value of the consideration though the amount was credited current account of the firm.
We have carefully considered the rival submissions of learned counsel appearing for the parties. The Tribunal has decided the only question as to whether there was a transfer of capital asset when the assessee made over the buildings and land to the firm as his‑contribution and in that view of the matter the Tribunal has not decided any other point. The view of the Tribunal that there was no transfer is based on the decision of this Court in D. Kanniah Pillai's case (1976) 104 ITR 520 and the Tribunal held that there was no transfer of the capital asset by the assessee when he contributed the assets to the firm at the time of formation of the firm. This view of the Appellate Tribunal is not legally sustainable in view of the subsequent decision of the Supreme Court in the case of Sunil Siddharthabhai v. CIT (1985) 156 ITR 509, wherein 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 section 45 of the Income Tax Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a shared interest. Therefore, we are of the view that the Tribunal was not correct in holding that there was no transfer of the property when the partner introduced his capital asset as his capital contribution. The further question that remains is whether it is possible to evaluate the partner's interest by the credit of certain amount in the capital amount as well as in the current account of the partners in the account of the firm. The Supreme Court in Sunil Siddharthbhai's case (1985) 156 ITR 509, held that when the personal assets merge with the capital of the partnership and the corresponding credit entry is made in the partner's capital account in the books of the partnership firm, that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or, when the partner retires. The question whether it is possible to reckon the partner's interest when certain amount is credited in the current account has not been gone into by the Appellate Tribunal and in the absence of any finding by the Appellate Tribunal, it is not possible for us to answer that part of the question whether the capital gains liability would be attracted when the amounts are credited both in the capital account and current account of the accounts of the firm, in favour of the partner who brought in his personal assets to the partnership firm as the property. Since the Tribunal has not gone into the question whether it is possible to reckon the partner's interest and whether any liability to capital gains would arise, when certain amounts were credited in the current account of the partners and the nature of the current account we direct the Appellate Tribunal to decide the question in the light of the observations made by the Supreme Court in Sunil Siddharthbhai's case (1985) 156 ITR 509, and dispose of the appeal accordingly. Subject to the above, the question of law referred to us is answered in the affirmative and in favour of the Revenue. However, as earlier stated, the Tribunal is directed to go into the question whether it is possible to reckon the interest of the assessee when the amounts are credited both in capital account as well as in the current account of the partnership firm and the liability to capital gains, if any; in the transaction in question. No costs.
M.B.A./256/FC?????????????????????????????????????????????????????????????????????????????????? Case remanded.