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income-tax Officer Vs. M.L. Apte - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)12ITD491(Mum.)
Appellantincome-tax Officer
RespondentM.L. Apte
Excerpt:
.....rights therein means the extinguishment of all the rights, which is not a case when a partner of a firm transfers his own property as his capital contribution to the firm, of which he is a partner, where his interest extends over all the property and assets of the firm. it was also pointed out by him that where two views are possible, a view favourable to the assessee should be taken. summing up, shri inamdar justified the order of the commissioner (appeals) that on the transfer of shares by the assessee to the firm, v.s. apte & sons, of which he was a partner, there was no question of any capital gain and the addition on this account was unjustified.5. we have carefully considered the rival submissions. in the case of d. kanniah pillai (supra), their lordships of the hon'ble madras.....
Judgment:
1. This is an appeal filed by the revenue against the order of the Commissioner (Appeals).

2. The assessee is an individual, who was a partner in the firm, V.S.Apte & Sons. On 2-4-1974, the assessee transferred 2500 shares of Laxmi Vishnu Textile Mills Ltd. to the firm as capital contribution at the prevailing market rate of Rs. 212.50 per share. The ITO did not accept the assessee's claim that the transfer of shares by the assessee to the firm, of which he was a partner, as his capital contribution, did not amount to a 'transfer' within the meaning assigned to it under Section 2(47) of the Income-tax Act, 1961 ('the Act'), and, therefore, there could be no capital gain arising out of this transfer. The ITO, therefore, worked out the capital gain on the transfer of these shares at the rate of Rs. 61.50 per share and worked out the capital gains at Rs. 1,53,750. Since the shares were held for less than 60 months before the transfer, the capital gain was treated as short-term capital gain and was added to the assessee's other incomes. When the matter went up in appeal, the Commissioner (Appeals) held that since the assessee, who was a partner in the firm, had transferred the shares to the partnership firm for credit to his capital account by way of his contribution to the capital of the partnership, there was no extinguishment of the assessee's interest in the shares as a result of the transfer and, therefore, there is no question of any capital gain arising from this transaction. The addition on account of short-term capital gains of Rs. 1,53,750 made by the ITO was, therefore, deleted.

The revenue is aggrieved and has, therefore, come up with the first point of dispute in the present appeal before us.

3. The learned departmental representative, Shri Kumar, cited before us the rulings of the Hon'ble Gujarat High Court in the cases of CIT v.Kartikey V. Sarabhai [1981] 131 ITR 42 and CWT v. H.H. Maharaja F.P.Gaekwad [1983] 144 ITR 304 in support of the contention that where a property is introduced as capital contribution in a firm, in which the assessee is a partner, the property ceases to be his individual property and becomes the property of the firm and, therefore, there is a relinquishment or extinguishment of the assessee's rights or interest in the property. It was also pointed out by him that against the later decision of the Hon'ble Gujarat High Court in the case of H.H. Maharaja F.P. Gaekwad (supra), where their Lordships have followed their earlier decision in the case of Kartikey V. Sarabhai (supra), even a special leave petition to appeal against the order of the Hon'ble High Court was dismissed by the Hon'ble Supreme Court. Summing up, Shri Kumar vehemently argued before us that on the transfer of the shares by the assessee as a capital contribution to the firm, of which he was a partner, there was a capital gain liable to tax and the Commissioner (Appeals) wrongly held that there was no capital gain on this transfer.

4. On the other hand, the assessee's learned Counsel, Shri Inamdar, cited before us three rulings, two of the Hon'ble Madras High Court in the cases of D. Kanniah Pillai v. CIT [1976] 104 ITR 520 and CIT v. H.Rajan and H. Kannan [1984] 149 ITR 545 and another of the Hon'ble Andhra Pradesh High Court in the case of CIT v. A.V. Bhanoji Rao [1983] 142 ITR 706 in support of the contention that the transfer by a partner to the firm, by way of capital contribution, does not amount to a transfer within the meaning of Section 2(47). Proceeding further, he submitted that the expression extinguishment of any rights therein means the extinguishment of all the rights, which is not a case when a partner of a firm transfers his own property as his capital contribution to the firm, of which he is a partner, where his interest extends over all the property and assets of the firm. It was also pointed out by him that where two views are possible, a view favourable to the assessee should be taken. Summing up, Shri Inamdar justified the order of the Commissioner (Appeals) that on the transfer of shares by the assessee to the firm, V.S. Apte & Sons, of which he was a partner, there was no question of any capital gain and the addition on this account was unjustified.

5. We have carefully considered the rival submissions. In the case of D. Kanniah Pillai (supra), their Lordships of the Hon'ble Madras High Court were dealing with the issue of whether a sale takes place within commercial parlance or within the meaning of the Indian Sale of Goods Act, 1930, when a partner converts his proprietary concern into a partnership, of which he is a partner, and they did not consider whether this amounts to extinguishment of rights or interest in the property converted by the sole proprietor into a partnership property.

Similarly, in the case of A.V. Bhanoji Rao (supra) their Lordships were dealing with the issue of whether the execution of a deed was necessary for transfer of property by a partner to the partnership firm and when the transfer took place. Both of these cases will, therefore, be of no help on the facts of the present case, where the issue is whether there was an extinguishment of the rights or interest of a partner in a property transferred by him to a firm as his capita! contribution. It is also necessary here to point out that the ruling of the Hon'ble Gujarat High Court in the case of Kartikey V. Sarabhai (supra) was not only followed by their Lordships in the case of H.H. Maharaja F.P.Gaekwad (supra), the special leave petition against the judgment of the Hon'ble High Court in the case of H.H. Maharaja F.P. Gaekwad (supra) was dismissed by the Hon'ble High Court in 140 ITR (St.) 23. With very great respect, therefore, to the ruling of the Hon'ble Madras High Court in the case of H. Rajan and H. Kantian (supra), we would prefer to follow the ruling of the Hon'ble Gujarat High Court in the case of Kartikey V. Sarabhai (supra). We, therefore, hold that on the transfer of shares by the assessee to the partnership firm, V.S. Apte & Sons, as his capital contribution to the firm, of which he was a partner, a 'transfer' within the meaning of Section 2(47) took place, and the surplus resulting from this transfer amounted to capital gains within the meaning of Section 45 of the Act. No arguments were advanced before us that the capital gain on this transaction was not rightly worked out by the ITO. On the issue of capital gains on the transfer of shares, therefore, the order of the Commissioner (Appeals) is reversed, while the order of the ITO is restored.

6. The next grievance in this appeal is against the direction of the Commissioner (Appeals) that the share of loss of the assessee's wife from the firm, V.S. Apte & Sons, in which the assessee was also a partner, should be taken into account while working out the assessee's total income. Both the learned departmental representative, Shri Kumar, as well as the assessee's learned Counsel, Shri Inamdar, submitted to us that the identical issue also cropped up in the appeals relating to the assessment years 1973-74 and 1974-75 in IT Appeal Nos. 1381 and 1382 (Bom.) of 1975-76 and the facts relevant to the point at issue, as well as the arguments of both the sides, were the same as were before the Tribunal in the appeals relating to the assessment years 1973-74 and 1974-75.

7. We have carefully considered the rival submissions. Following with respect the order of the Tribunal in the appeals relating to the assessment years 1973-74 and 1974-75, we uphold the direction of the Commissioner (Appeals) that the share of loss of the assessee's wife from the firm, V.S. Apte & Sons, in which the assessee is also a partner, should also be taken into account while working out the assessee's total income.


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