High Court Of Bombay
CIT vs. Jehangir
Sections 2(47), 45, 271(1)(a)
Asst. Year 1964-65
B. JeejeebhoyBharucha & Sugla, JJ.
IT Ref. No. 368 of 1975
23rd March, 1987
G.S. Jetly with Mrs. Manjula Singh & C.K. Krishnan, for the Revenue : S.E. Dastur with B.D. Damodar, for the Assessee
The questions of law referred to this Court for opinion under s. 256(1) of the IT Act, 1961, at the instance of the Revenue are: “(1) Whether, on the facts and in the circumstances of the case, the present case falls within the four corners of s. 2(47) of the IT Act, 1961, and capital gain is exigible against the assessee for the asst. yr. 1964-65 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the ITO to recompute the penalty under s. 271(1)(a) of the IT Act, 1961, on the basis of the reduced total income, that is, after deletion of the capital gains ? “
2. The assessee had entered into an agreement on August 27, 1962, with Vazifdar Jeejeebhoy Property Development Corporation for purchase of 12,140 square yards of land situated at Tardeo for Rs. 22,50,000. There cropped up some disputes and differences between the parties. The dispute was referred to Sir Jamshedjee Kanga for arbitration, who gave an award on October 28, 1963. In terms of the award, the parties were required to enter into a partnership in which the assessee shall be a partner. He shall bring in his three plots, that is, plots Nos. 1, 2 and 3, by way of his share capital in the partnership of which the constitution will be: Sl. Name Shares in the profits and No. losses Jehangir B. Jeejeebhoy assessee 28 per cent Vazifdar Builders Pvt. Ltd. 48 per cent Mrs. Homi Jehangir Byramji Jeejeebhoy (wife) 8 per cent Rusi Jehangir Byramji Jeejeebhoy (son) 8 per cent Vacas Jehangir Byramji Jeejeebhoy (son) 8 per cent
3. The value of the said plots was taken and credited to the capital account of the assessee at Rs. 33,75,000. The question arose whether the assessee was liable to be taxed under the head ” Capital gain income “. Observing that the contribution of the plots Nos. 1, 2 and 3 by the assessee in the partnership firm by way of his capital amounted to a ” transfer ” within the meaning of s. 2 (47) of the IT Act, 1961, the ITO held that the assessee was liable to be taxed under the head ” Capital gain income “. The capital gain was worked out after deducting the estimated market value of the plots as on January 1, 1954, being Rs. 8,19,544 from Rs. 33,75,000 at Rs. 25,55,456. The AAC confirmed the order whereas the Tribunal allowed the assessee’s appeal on the ground that bringing in plots of land bearing Nos. 1, 2 and 3, in the partnership firm by way of share capital did not amount to a transfer within the meaning of s. 2(47) and the surplus was not exigible to capital gains tax under s. 45 of the IT Act, 1961.
4. The first issue involved herein is now covered by the Supreme Court decision in the case of Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 72:(1985) 156 ITR 509(SC). It has been held in that case 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 r/w s. 2(47) of the IT Act, 1961. However, such a partner would still not be liable to capital gains tax on the surplus, as when a partner contributes his assets in the firm by way of share capital, the consideration is not merely the notional value of such assets credited to his account, it is also the share in the profits and losses of the firm to which he will be entitled during the period he remains a partner and also to a share in the assets of the firm on the date of its dissolution which will depend upon the deduction from the value of the assets of the liabilities and prior charges existing on the date of the dissolution or his retirement. Since it is not possible to predicate beforehand what will be the position in terms of monetary value of the partner’s share up to that date and all that will lie within the womb of the future, it is not possible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership by way of capital contribution.
5. It may not be out of place to mention that their Lordships of the Supreme Court have decided the aforesaid case on the assumption that the partnership in question is a genuine firm. However, there being not even a suggestion in this case that the partnership firm is not genuine, we hold that the assessee’s case is covered by the Supreme Court decision in Sunil Siddharthabhai vs. CIT (supra), following which we hold in relation to the first question that the case of the assessee falls within the four corners of s. 2(47) of the IT Act, 1961, and capital gain is not exigible against the assessee for the asst. yr. 1965-66. In the view we have taken as regards the first question, the second question of law has to be answered in the affirmative and against the Revenue. No order as to costs.
[Citation : 169 ITR 552]