K.K. Desai, J.
1. In this reference under section 66(1) of the Indian Income-tax Act, 1922, two questions of law referred to us are as follows :
'(1) Whether the distribution of shares amongst the partners of the assessee-firm amounts to a sale or transfer under section 12B of the Income-tax Act, 1922
(2) If the answer to the above question is in the affirmative, whether the distribution in question is covered by the first proviso to section 12B(2) of the Act ?'
2. The facts appear in the statement of the case.
3. The respondent is the assessee-firm which acted as the managing agents of Messrs. India United Mills Ltd. The assessment year in question is 1957-58, the financial year being S.Y. 2012 Maru (November, 1955, to October, 1956). Prior to May 23, 1955, the assessee-firm earned a very large amount of commission from the above mills company. On May 23, 1955, out of the Commissioner earned, the assessee-firm purchased 63,550 ordinary shares and 6,100 deferred shares of the mills company for the aggregate price of Rs. 7,15,399. On April 26, 1956, all the shares purchased were transferred to each of the partners of the assessee-firm in the proportion of each partner's share in the profits and losses of the firm and, in that connection, the price debited to each of the partners was calculated at book value, i.e., the actual cost incurred by the assessee-firm. In connection with this transaction, the Income-tax Officer considered the question of the liability of the assessee-firm to pay capital gains tax. He held that the transaction was made in order to avoid the tax liability on the assessee-firm, both capital gains tax as well as the tax on registered firm. He held that this transaction was a device when the shares were transferred at cost. He made a finding that to this transaction the provisions of section 12B(2) of the Income-tax Act applied. He recorded :
'The assessee in the instant case is directly connected with the persons who have acquired the capital asset and I have reason to believe that the transfer has been effected with the object of avoidance of or reduction of the liability to capital gains tax and tax on the registered firm by the assessee.'
4. He ascertained that the market value of the shares on April 26, 1956, was Rs. 8,03,080. He held that the difference of Rs. 87,681 was capital gains of the assessee in respect of the shares and included this amount of Rs. 87,681 as income in computing the liability of the assessee-firm in respect of income-tax.
5. The above findings of the Income-tax Officer were confirmed by the Appellate Assistant Commissioner in appeal filed by the assessee-firm. The Income-tax Appellate Tribunal by its appellate order, dated August 10, 1962, held in favour of the assessee-firm that a transfer was not involved in the transaction mentioned above as required under the provisions of section 12B(2). For that reason, the Appellate Tribunal directed that the above sum of Rs. 87,681 treated as capital gains be deleted from the income of the assessee.
6. In connection with the above transaction, the questions mentioned above have been referred to us for decision.
7. To appreciate the contentions made by Mr. Joshi for the applicant (Income-tax Commissioner), it is necessary to notice the relevant provisions of section 12B, which run as follows :
'12B. Capital gains. - (1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place : .........
(2) The amount of a capital gain shall be computed after making the following deductions ...
Provided that where a person who acquires a capital asset from the assessee, whether by sale, exchange, relinquishment or transfer, is a person with whom the assessee is directly or indirectly connected, and the Income-tax Officer has reason to believe that the sale, exchange, relinquishment or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section, the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall, with the prior approval of the Inspecting Assistant Commissioner of Income-tax, be taken to be the fair market value of the capital asset on the date on which the sale, exchange, relinquishment or transfer took place : ...'
8. Now, having regard to the contents of the above quoted proviso, Mr. Joshi made the following contentions :
(1) The transaction of transfer of the above shares effected on April 26, 1956, by the assessee-firm in favour of each of the partners of the firm in law involved relinquishment or transfer and was a transaction with the parties who were directly connected with the assessee-firm. The findings to the contrary made by the Appellate Tribunal should be set aside.
(2) Since at the date of the transaction on April 26, 1956, the market value of the shares was in excess of the cost price by Rs. 87,681, the transaction involved capital gains. The direct result of this fact was that the assessee-firm effected the transaction with the object of avoidance or reduction of the liability of the assessee-firm under section 12B.
9. In developing his second contention, Mr. Joshi repeatedly emphasised that the intention in effecting the transaction could justifiably be inferred by loosing at the prevalent market value of the capital asset transferred at the date of the transaction. His emphatic submission was that in the event of the market value being higher than the cost price at the date of the transaction, the revenue would always be legitimately entitled to hold that the object of the transaction was to avoid liability of the assessee under section 12B. In reply to the contention made by Mr. Kaka for the assessee-firm that in respect of transactions made prior to the enactment of the present section 12B by the Finance Act III of 1956, on December 21, 1956, it would be physically impossible that an assessee can formulate any intention of avoiding tax liability under section 12B, Mr. Joshi contended that such a construction of the provisions in the section would render the contents of the proviso entirely nugatory in respect of such prior or antecedent transactions. He admitted that the present section 12B was enacted by the Finance Act III of 1956, and became law on December 21, 1956. He admitted that section 12B as re-enacted by this Finance Act came into effect and was operative as from April 1, 1957. He rightly submitted that upon section 12B coming into effect from April 1, 1957, the liability to capital gains tax under section 12B became enforceable in respect of all transactions effected in the financial year and/or accounting year which became completed prior to April 1, 1957. In respect of the transaction in question which had been made on April 26, 1956, admittedly, the provisions of section 12B were applicable. He, therefore, submitted that the proviso was liable to be applied to the transaction with full rigour and the submission made by Mr. Kaka as mentioned above was unjustified and untenable.
10. Now, it is quite clear that having regard to the contents of the proviso quoted above, in respect of capital assets transferred by the assessee to a person directly or indirectly connected with the assessee, capital gains tax would be payable, i.e., the provisions in section 12B would be applicable, in the event of its being proved that the transaction was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. But Mr. Kaka is right in his submission that to formulate an intention and/or object of avoidance or reduction of the liability under section 12B, the assessee should be aware that the provisions imposing the liability were in existence. He is right in his submission that on April 26, 1956, when the present transaction was effected, the proviso quoted above and section 12B imposing capital gains tax was not operative and was not in existence. By the Finance Act, III of 1956, the capital gains tax was imposed and section 12B was made operative as from April 1, 1957. It is extremely difficult to accept Mr. Joshi's submission that, though the Finance Act, III of 1956, made section 12B an operative part of the Income-tax Act on December 21, 1956, the assessee had effected the above transaction (in April, 1956) with the object of avoidance or reduction of the liability of the assessee under section 12B. The section was not operative at the date of the transaction. In the nature of things, therefore, it was impossible for the assessee to form an intention at the date of the transaction of avoiding or reducing the liability to pay capital gains tax under section 12B.
11. Mr. Kaka is also right in his submission that there is no avoidance whatsoever on record which could enable the tax officers to make a finding that the transaction was made by the assessee-firm with the object of avoidance or reduction of its liability under section 12B.
12. Now, the above discussion appears to us to be sufficient to dispose of a the question of liability of the assessee-firm to pay capital gains tax. In our view, question No. 1 is rendered academic and we accordingly do not deem it necessary to give any answer in respect of question No. 1.
13. In the result, question No. 1 is answered as follows :
'Academic and unnecessary for decision.'
14. Question No. 2 is reformulated as follows :
'Whether the transfer of the shares on April 26, 1956, by the assessee-firm to the partners of the firm was made with the object of avoidance or reduction of the liability of the assessee under section 12B ?'
15. The question is answered 'in the negative'.
16. The Commissioner will pay costs of the respondent.