Per Shri A. R. Haldar, Judicial Member - this appeal by the assessee is directed against the order of the Commissioner (Appeals) relating to the assessment year 1978-79.
2. The first ground pertains to the disallowance of Rs. 50,400 being short-term capital loss on transfer of shares.
3. The assess-firm claimed to have purchased 34,050 shares of Sree Bihar Jute Twine Mills Ltd. in the names of its patrners, sometime in 1975. During the previous year relevant to the assessment year under appeal, the assessee claimed to have sold 6300 shares to its partners at the rate of Rs. 2 per share as against Rs. 10 per share. The assessee, therefore, claimed a short-term capital loss of Rs. 50,400. The ITO disallowed this claim of the assessee on the ground of unity of identity of a firm and its partners and the impossibility of dealing between the firm and its partners.
4. The assessee appealed to the Commissioner (Appeals) who confirmed the action of the ITO by relying on a number of decisions mentioned in his order and observing as under :
'In this case, in any case, the loss is purely notional. The shares were allotted to the firm on the conversion of the partnership business. The shares have been purported to be transferred to the partners by the firm at a notional rate, the so-called sale price having been merely debited was neither an actual purchase by the firm nor there is the an actual sale to the partners. One of the contentions of the assessee is that the sale is not in the profit sharing ration. This does not lead one anywhere. The partners themselves know the best why the so-called sale was effected as it is, four out of the five partners are involved in the transaction. There seems to be no change in respect of 7500 shares standing in the name of Shri Santosh Kr. Jhunjhunwalla. As regards Smt. Sulochana Jhunjhunwalla, all the 800 shares standing in her name are purported to be transferred to her. Out of 2500 shares in the name of Shri Suresh Kumar, 2000 are stated to have been sold to him. Out of 7750 shares held by the firm in the name of Shri Sajjan Kumar Jhunjhunwalla, 2500 are said to have been given over to him and out of 7000 shares standing in the name of Shri Subodh Kr. Jhunjhunwalla 1000 have been represented to be transferred out of the coffers of the firm. Thus, it would be observed that the shares were held by the different partners unequally. There was no transfer as regards the nominal shareholders as the shares transferred already stood in the names of the partners concerned. It has not been explained as to why there was unequal transfer of the shares. This unexplained phenomenon cannot be capitalised by the assessee to state that it is an indication of an actual sale. Four partners are brothers and the fifth partner is the wife of the fifth brother. The company in which the shares are held is their own company. The reason for not transferring all the shares has also not been mentioned. The firm and its partners are in a position to pass any entry they like. The entries are supposed to have been passed on the last day of the relevant accounting year. Thus, here there is no real loss apart from the legal position that a partner cannot make profit out of his transactions with the first, a firm cannot make profit out of the transactions with the firm and vice versa which rests on the well recognised principle that one cannot make a profit or loss out of himself. The case mentioned above also comprise the situations where the transactions involved have have multi-farious facets.
it is evident, on the facts and circumstance of this case that there was no actual sale in this case, the loss incurred by the firm is notional and the mala fide nature of the transactions is palpable. In the circumstance the disallowance of loss of Rs. 50,400 is upheld.'
5. Against the said order of the Commissioner (Appeals) the assessee preferred the present appeal before us. It was contended by the learned counsel for the assessee that the lower authorities were not justified in disallowing the assessees claim for short-term capital loss. He urged that the assessee-firm had acquired these shares out of its own funds and for all practical purposes the assessee was the owner of the shares although they were held in the names of its partners. He urged that in view of the clear provisions of section 2(47) of the Income-tax Act 1961 (the Act) the transfer of shares by the assessee-firm to its partners was valid transfer. He relied on the decision of the Bombay High Court in the case of CIT v. W. L. Dahnukar : 36ITR459(Bom) where the assessee contracted to purchase certain lands for Rs. 41,500. He entered into a partnership with another person, the partnership took over the land from the assessee at a price of Rs. 90,000, and the land was conveyed to the partnership by the vendor of the assessee. The profit that accrued to the assessee on the purchase of the land by the partnership was held to be income of the firm. Reliance was placed on the decision of the Karnataka High Court in the case of A. S. Krishna Setty & Sons v. Addl. CIT : 100ITR587(KAR) and that of the Gujarat High Court in the case of CIT v. Kartikey V. Sarabhai : 131ITR42(Guj) wherein the assets transferred by the firm to its partners were held to be a genuine transfer. The learned counsel for the assessee, therefore, submitted that the lower authorities should have allowed the assessees claim for short-term capital loss of Rs. 50,400. The learned departmental representative, on the other hand, highlighted the elaborate reasons given by the Commissioner (Appeals) for coming to the conclusion that there was no valid transfer of the shares by the assessee-firm to its partners. He relied on the decision of the Supreme Court in the case of CIT v. Hind Construction Ltd. : 83ITR211(SC) wherein it was held that a person by handing over his goods to a partnership of which he is a partner as his share of the capital cannot be considered as having sold the goods to the partnership. Reliance was placed on the decision of the Supreme Court in the case of CIT v. Bankey Lal Vaidya : 79ITR594(SC) wherein it was held that the arrangement between the partners of the firm for revaluation of the assets of the firm on its dissolution could not be regarded as transfer.
6. We have heard the submissions of both parties and considered the facts of the case. A perusal of the assessment order would show that the ITO has admitted to the effect that the shares of Shree Bihar Jute Twine Mills Ltd. had been acquired by the assessee-firm out of its own sources. It was not in dispute that the firm held those shares as its own assets. Under the partnership Act, 1932, a firm is an entity known to law and is capable of acquiring and owning property, both movable and immovable; so also under the Income-tax Act a person can own property and is liable to tax on the income therefrom. The definition of person under section 3(42) of the General Clauses act, 1897, includes any company or association or BOI, whether incorporated or not incorporated. Therefore, a firm is also a person under the provisions of the Income-tax Act. In the instant case, it was an undisputed fact that the assessee-firm acquired shares of Sree Bihar Jute Twine Mills Ltd. out of its own funds and the shares were held by the assessee-firm as its own assets, although these shares were held in the names of different partners. The law is fairly settled that during the subsistence of a partnership no partner can claim any of the properties belonging to the first in which he is a partner as his own property. The transfer of Property Act, 1882, contemplates a transfer from a person to himself or to himself and one or more other living person. In the instant case, the firm claimed to have transferred the shares belonging to it to its partners. This fact was not controverted by the revenue. In the instant case, the firm claimed to have transferred the shares belonging to it to its partners. This fact was not controverted by the revenue. In the case of R. B. Lachman Das Mohanlal & sons v. CIT : 54ITR315(All) , the partners of the firm constituted a limited company with themselves as shareholders. The entire assets of the firm the written down value of which was Rs. 5,34,185, were transferred to the company for a consideration of Rs. 30 lakhs. It was held by the Allahabad High Court that on the aforesaid transfer there arose a capital gain. In view of our aforesaid discussion, we are of the opinion that the transfer of shares by the assessee-firm to its partners was a genuine transfer and the loss arising from the aforesaid transfer was allowable as a short-term capital loss.
7 to 9. [These paras are not reproduced here as they involve minor issues.]
10, The appeal by the assessee is partly allowed.