1988 (3) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Whether there is a transfer of property when an individual throws his property into the common stock of a partnership firm of which he is a partner.
2. Whether the definition contained in section 2(47) of the Income-tax Act, 1961, applies to cases other than those relevant for determining capital gain.
3. Whether there is a transfer of property within the extended meaning of section 2(47) when an individual throws his property into the common stock of a partnership firm.
4. Whether development rebate already granted can be withdrawn under section 155(5) of the Income-tax Act.

Issue-wise Detailed Analysis:

Issue 1: Transfer of Property According to General Law
The court examined whether there is a transfer of property when an individual contributes his assets to a partnership firm. The Kerala High Court in CIT v. C. M. Kunhammed [1974] 94 ITR 179 held that there is neither a sale nor a transfer when assets are contributed to a partnership. The Calcutta High Court in CIT v. Hind Construction Ltd. [1970] 78 ITR 664 and the Supreme Court in CIT v. Hind Construction Ltd. [1972] 83 ITR 211 supported this view, stating that such transactions are merely a readjustment of assets and not a transfer. The Madras High Court in CIT v. Janab N. Hyath Batcha Sahib [1969] 72 ITR 528 also held that there is no transfer when assets are contributed to a partnership.

Issue 2: Applicability of Section 2(47) Definition
The court considered whether the definition in section 2(47) of the Income-tax Act, which relates to the transfer of a capital asset, applies to cases other than those relevant for determining capital gain. The Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik [1979] 116 ITR 110 held that the transaction amounts to a transfer even under general law, without relying on the extended definition in section 2(47). The Kerala Full Bench in A. Abdul Rahim v. CIT [1977] 110 ITR 595 held that the extended definition in section 2(47) applies to such transactions, thus making them transfers.

Issue 3: Transfer within the Extended Meaning of Section 2(47)
The Supreme Court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 drew a distinction between the distribution of partnership assets on dissolution and the contribution of assets to a partnership. The court agreed with the Karnataka and Kerala High Courts that such transactions involve a transfer of interest. The court indicated that there is a transfer when an individual's exclusive interest is reduced to a shared interest in a partnership.

Issue 4: Withdrawal of Development Rebate under Section 155(5)
The court held that the Revenue is justified in withdrawing the development rebate under section 34(3)(b) read with section 155(5) when assets are transferred to a partnership. The court disagreed with the assessee's contention that both sections 155(5) and 154 must be satisfied, stating that section 155(5) confers an unfettered power to withdraw the rebate once a transfer is established.

Conclusion:
The court answered both questions in favor of the Revenue, holding that there is a transfer of property when assets are contributed to a partnership, and that the development rebate can be withdrawn under section 155(5). The court granted leave to appeal to the Supreme Court.