1995 (7) TMI 99 - AT - Income Tax

Capital Asset, Capital Gains, Immovable Property, In Part, Movable Property, Partnership Firm

Summary

Issues Involved:
1. Whether the transaction in question constitutes a "transfer" under Section 2(47) of the Income Tax Act.
2. Applicability of Section 45(2) and Section 45(3) of the Income Tax Act to the transaction.
3. Validity of the capital gains tax computation by the Assessing Officer.
4. Relevance of the application for a certificate under Section 230A of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Whether the transaction in question constitutes a "transfer" under Section 2(47) of the Income Tax Act:
The Revenue argued that the transaction should be considered a transfer because the assessee applied for a certificate under Section 230A and had forgone all rights in favor of the firm M/s. Parul Developers. The assessee, however, contended that the immovable property was contributed as capital to the firm and not transferred. The CIT(A) and the Tribunal found that the mere application for a certificate under Section 230A does not imply a transfer within the meaning of Section 2(47). The Tribunal emphasized that the property was not converted into stock-in-trade and hence did not qualify as a transfer.

2. Applicability of Section 45(2) and Section 45(3) of the Income Tax Act to the transaction:
The Assessing Officer applied the provisions of Section 45(2) and Section 2(47) to levy tax, arguing that the revaluation of the property amounted to conversion into stock-in-trade. The Tribunal, however, found that there was no evidence to support that the property was converted into stock-in-trade. The Tribunal noted that Section 45(3), which deals with such contributions to a partnership firm, was effective only from AY 1988-89 and hence not applicable to AY 1986-87. The Tribunal relied on the Supreme Court judgment in Sunil Siddharthbhai v. CIT, which held that no tax on capital gains could be levied in such circumstances before the introduction of Section 45(3).

3. Validity of the capital gains tax computation by the Assessing Officer:
The Assessing Officer computed long-term capital gains by adopting the revalued price of Rs. 7 lakhs and deducting the original cost and other allowable deductions. The Tribunal, however, found that the computation was not justified because the revaluation did not constitute a transfer or conversion into stock-in-trade. The Tribunal held that the computation provisions relating to capital gains were not applicable as per the Supreme Court's judgment in Sunil Siddharthbhai.

4. Relevance of the application for a certificate under Section 230A of the Income Tax Act:
The Revenue argued that the application for a certificate under Section 230A implied acceptance of the transaction as a transfer. The Tribunal rejected this argument, stating that Section 230A is a procedural provision related to collection and recovery of taxes and does not define or imply a transfer. The Tribunal found that the application was made out of abundant caution and did not affect the nature of the transaction.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, ruling that the transaction did not constitute a transfer under Section 2(47) and that the provisions of Section 45(2) and Section 45(3) were not applicable. Consequently, no tax on capital gains could be levied for AY 1986-87. The appeal by the Revenue was dismissed.