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Interpretation of the term "transfer" under section 2(47) of the Income Tax Act, 1961 in relation to conversion of individual business into a partnership business and the tax implications of such conversion. Detailed Analysis: The judgment in question involves a reference made by the Commissioner of Income-tax, Tamil Nadu IV, Madras, under section 256(1) of the Income Tax Act, 1961. The primary issue revolves around determining whether there was a transfer of assets in the assessee's case within the meaning of section 2(47) read with section 45 of the Income Tax Act, 1961. The case pertains to the assessment year 1968-69, where an individual, Damodaran Nair, converted his individual bus service business into a partnership business with his two nephews. The dispute arose when the Income Tax Officer (ITO) valued the transfer of buses and routes to the partnership at a value different from the book value, resulting in a capital gains assessment. The Appellate Assistant Commissioner (AAC) upheld the assessment, albeit with a reduced quantum of capital gains. The Tribunal, however, relying on a previous decision, concluded that there was no transfer as envisaged in the Income Tax Act, leading to the deletion of the assessed capital gains. In a precedent case, CIT v. Janab N. Hyath Batcha Sahib, the Madras High Court had dealt with a similar scenario where an individual's business was converted into a partnership, and the value of assets transferred was in question. The court held that there was no sale of assets, and thus, no profit was deemed to have been made by the assessee. This decision was crucial in the current judgment's analysis of the term "transfer" under the Income Tax Act, 1961. Furthermore, the applicability of the Janab N. Hyath Batcha Sahib case was reiterated in the case of D. Kanniah Pillai v. CIT, where a joint family business was converted into a partnership, and the assets were taken over by the partnership firm. The court held that no capital gains arose from such a transfer, aligning with the interpretation that a mere conversion into a partnership does not constitute a transfer attracting tax liability under section 45 of the Income Tax Act, 1961. The court in the present judgment emphasized that in a partnership, a partner does not completely divest himself of rights in the property, thereby negating the elements of transfer as defined under section 2(47) of the Income Tax Act, 1961. Since there was no sale, exchange, relinquishment, or extinguishment of rights in the assets during the conversion from an individual business to a partnership, the court ruled in favor of the assessee, concluding that no transfer attracting capital gains tax liability had occurred. In light of the precedents and the specific circumstances of the case, the court answered the referred question in the affirmative and in favor of the assessee, thereby dismissing the tax implications related to the conversion of the individual business into a partnership.
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