Madras High Court
Commissioner Of Income-Tax vs Padma Narasimhan And Ors. on 3 September, 2001
Equivalent citations: [2002]255ITR441(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. The assessees were partners in the firm--T.T. Krishnamachari and Company, which came into existence on May 1, 1957. On June 30, 1976, one of the partners retired and the firm was reconstituted.
2. The four partners of the reconstituted firm executed a memorandum of agreement on October 14, 1976, as follows :
"This records the unanimous agreement of all partners to treat their personal assets consisting of shares in the joint stock companies as fully described in the annexure hereto, as the property of the partnership firm as on and from October 1, 1976. Adjustments of the value of shares will be taken at the face value or at the break up value of shares whichever is higher.
The value of shares as worked out above shall be credited to the individual partner's current account and this will, therefore, be treated as investments by the firm entitling the firm to have all the benefits including dividend, bonus, shares, etc. Due intimation to the respective companies will also be given by the individual partners for the shares treated as holdings of the firm."
3. Pursuant to the agreement the assessees transferred their holdings in the T. T. K. group of companies to the firm and the shares were to be held thereafter by the firm. As against the face value of Rs. 22,04,090, the market value thereof credited to the share of the partner, T. T. Narasimhan, was Rs. 86,72,708. The amount credited to the account of the partner, Padma Narasimhan, was Rs. 12,10,308 while the face value of the shares transferred by her was Rs. 4,39,000. The amount credited to the account of the partner, T.T. Vasu, was Rs. 8,24,456 as against the face value of Rs. 2,72,960 for the shares transferred by him to the firm.
4. The Income-tax Officer took the view that there was a transfer of a capital asset by each of the assessees and the difference between the face value and the market value of the shares less the cost of acquisition was chargeable to tax as capital gains. The Commissioner, on appeal by the assessees, held that no capital gains tax was leviable. The Tribunal, to which the appeal was carried by the Revenue, having agreed with the Commissioner who had held that there was no transfer when the partners brought the shares individually held by them in the joint stock companies into the stock of the firm and that no real profits had accrued to the assessees, at the instance of the Revenue, the following three questions have been referred to us by the Tribunal. The assessment year is 1977-78.
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that there was no transfer of capital asset within the meaning of Section 2(47) read with Section 45 of the Income-tax Act, 1961, when the assessees transferred their shares to the firm in which they were partners ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that no profit accrued to the assessees on the transfer of their shares to the firm in which they were partners ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that no capital gains has arisen to the assessee within the meaning of Section 45 of the Income-tax Act, 1961 ?"
5. The Supreme Court in the case of Sunil Siddharthbhai v. CIT after considering questions similar to those before us, has held that when a partner makes over shares in joint stock companies standing in his/her name to the firm to be treated henceforth as an asset of the company, there is an abridgment of the right of such a partner in the shares which had till then been exclusively held by him or her and the exclusivity of the ownership of the shares being reduced to joint holding of the same along with other partners all of whom are to have rights in the shares henceforth, and there is a transfer within the meaning of that expression under Section 2(47) of the Income-tax Act. The court observed (page 518) :
"It is apparent, therefore, that when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the rights of other partners in it."
6. The court proceeded to hold (page 520) :
"Accordingly, we hold that when the assessee brought the shares of the limited companies into the partnership firm as his contribution to its capital, there was a transfer of a capital asset within the meaning of the terms of Section 45 of the Income-tax Act."
7. We must therefore answer the first question referred to us in favour of the Revenue and against the assessee and the question is so answered.
8. So far as the second and the third questions are answered they are also similar to the questions considered by the apex court in the aforementioned decision (Sunil Siddharlhbhai v. CIT . The court held that when the personal asset of a partner merges into the capital of the partnership firm, a corresponding credit entry is made in the partner's capital account such entry is made merely for the purpose of adjusting the rights of the part-
ners inter se when the partnership firm is dissolved or a partner retires. That court further observed (page 522) :
"It evidences no debt due by the firm to the partner. Indeed, the capital represented by the notional entry to the credit of the partners 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 asset 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."
9. Having regard to this settled position of law, the second and the third questions are required to be and are answered in favour of the assessee and against the Revenue.