Gujarat High Court
Ambalal Sarabhai D. Trust vs Commissioner Of Income-Tax on 11 October, 1994
Equivalent citations: [1995]213ITR263(GUJ)
JUDGMENT Rajesh Balia, J.
1. Since a consolidated reference has been made in respect of three different assessees, the office is directed to register three separate reference. Preparation of additional paper books is dispensed with.
2. The following common questions of law arising out of the combined order dated June 30, 1981, of the Income-tax Appellate Tribunal, Ahmedabad Bench "A" (hereinafter referred to as "the Tribunal"), along with the statement of the case, have been referred for the opinion of the High Court :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the contribution in the form of shares by the assessee in the partnership-firm amounted to transfer within the meaning of section 2(47) of the Act resulting in capital gains chargeable to tax ?
(2) If the answer to question No. 1, is in the affirmative and against the assessee, whether the Tribunal was justified in law in holding that such a transfer was for consideration within the meaning of section 45 read with section 48 ?"
3. Learned Counsel for the parties candidly pointed out that the answer to the questions is squarely covered by the decision of the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, wherein the Supreme Court has 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 assets within the terms of section 45 of the Income-tax Act, 1961. The Supreme Court, while considering the question whether any profit or gain can be said to accrue or arise to the assessee when he makes over his personal assets to the partnership-firm as his contribution to its capital, observed as under (at page 522) :
"The consideration, as we have observed, is the right of a partner during the subsistence of the partnership to get his share of profits from time to time and after the dissolution of the partnership or with his retirement from the partnership, to receive the value of the share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges, When his personal asset merges into the capital of the partnership-firm, a corresponding credit entry is made in the partner's capital account in the books of the partnership-firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or the partner retires. It evidences no debt due by the firm to the partner. Indeed, the capital represented by the notional entry to the credit of the partner's account may be completely wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital account is credited. Having regard to the nature and quality of the consideration which the partner may be said to acquire on introducing his personal assets into the partnership-firm as his contribution to its capital, it cannot be said that any income or gain arises or accrues to the assessee in the true commercial sense which a businessman would understand as real income or gain."
4. By laying down the aforesaid principles, the Supreme Court answered the questions referred to it as under (at page 524) :
"1. There was as transfer of the shares when the assessee made them over to the partnership-firm as his capital contribution.
2. When the assessee transferred his shares to the partnership firm, he received no contribution within the meaning of section 48 of the Income-tax Act, 1961, nor did any profit or gain accrue to him for the purpose of section 45 of the Income-tax Act, 1961."
5. In view of the aforesaid decision, our answer to question No. 1 is that there was a transfer of shares when the assessee made them over to the partnership-firm as his capital contribution. The answer to question No. 2 is that when the assessee transferred his share to the partnership-firm he received no consideration within the meaning of section 48 of the Income-tax Act, 1961, not did any profit or gain accrue to him for the purpose of section 45 of the Income-tax Act, 1961. The reference is accordingly disposed of with no order as to costs.