1996 (2) TMI 168 - AT - Income Tax

Summary

Issues Involved:
1. Exigibility to capital gains tax on the transfer of property by the assessee to a partnership firm.
2. Genuineness of the partnership firm and the transaction.
3. Applicability of the Supreme Court decision in the case of Sunil Siddharthbhai v. CIT.
4. Comparison with other relevant case laws.

Detailed Analysis:

1. Exigibility to Capital Gains Tax:
The primary issue is whether the transfer of property by the assessee to the partnership firm attracts capital gains tax. The Income Tax Officer (ITO) argued that the property, initially valued at Rs. 80,000 in the wealth-tax return, was later contributed to the firm at a value of Rs. 5 lakhs, resulting in capital gains of Rs. 4,20,000. The ITO charged the assessee to capital gains tax based on this valuation difference.

2. Genuineness of the Partnership Firm and the Transaction:
The ITO contended that the partnership firm, formed by the assessee-HUF along with the karta's wife and daughter, did not conduct substantial business activities and was merely a device to convert the asset into money, thereby avoiding capital gains tax. The CIT(A), however, found the partnership to be genuine, noting that the firm intended to construct flats but faced unavoidable issues with contractors, preventing business activities.

3. Applicability of the Supreme Court Decision in Sunil Siddharthbhai v. CIT:
The assessee argued that the transfer should not attract capital gains tax based on the Supreme Court decision in Sunil Siddharthbhai v. CIT. The ITO, however, interpreted the Supreme Court's judgment as allowing scrutiny of whether the partnership was a genuine business venture or merely a device to avoid tax. The Tribunal examined the relevant extract from the Supreme Court judgment, which allows the Income-tax authorities to look behind the transaction to determine its genuineness.

4. Comparison with Other Relevant Case Laws:
The learned DR cited two cases to support the contention that the transaction was a device to avoid capital gains tax:
- ITO v. Ramkrishna Bajaj: The ITAT, Bombay Bench, held that the transaction was a device to avoid capital gains tax, despite the partnership being genuine.
- Smt. Nayantara G. Agrawal v. CIT: The Bombay High Court found that the transaction was a device to transfer land to a company, avoiding capital gains tax.

Tribunal's Findings:
The Tribunal noted two mitigating factors:
- The long gap of over seven years between the formation of the partnership and the eventual sale of the property by the assessee.
- The property was not sold by the partnership firm but was returned to the assessee, who then sold it.

The Tribunal concluded that the assessee did not alienate the property through the partnership firm and that the ultimate sale by the assessee itself would attract capital gains tax. The Tribunal found that the ITO's action of considering the Rs. 5 lakhs as the value of consideration was untenable, as per the Supreme Court's decision in Sunil Siddharthbhai.

Conclusion:
The Tribunal agreed with the CIT(A) that capital gains tax was not exigible on the transfer of the property to the partnership firm. The departmental appeal was dismissed.