1992 (3) TMI 107 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of the Supreme Court decision in Sunil Siddharthbhai v. CIT.
2. Determination of capital gains from the transfer of shares to partnerships.
3. Validity of conversion of shares from capital assets to stock-in-trade.
4. Genuineness of the partnerships and transactions.

Detailed Analysis:

1. Applicability of the Supreme Court decision in Sunil Siddharthbhai v. CIT:
The assessee argued that the Supreme Court's decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 should apply, contending that no capital gains arise when assets are transferred to a partnership as the transfer lacks definite consideration under section 48 of the IT Act. The Tribunal recognized that while the Supreme Court decision was relevant, it also noted that the decision allowed tax authorities to scrutinize transactions to determine if they were genuine or a device to avoid tax on capital gains.

2. Determination of capital gains from the transfer of shares to partnerships:
The Income Tax Officer (ITO) included capital gains of Rs. 49,68,530 in the assessee's total income, arguing that the transfer of shares to the partnerships constituted a "transfer" under section 45 read with section 2(47) of the IT Act. The CIT(Appeals) initially deleted this addition, holding that no capital gains arose as per the Supreme Court's decision in Sunil Siddharthbhai. However, the Tribunal disagreed, emphasizing that the transfer of shares to the partnerships was indeed a taxable event, as it involved a device to avoid tax on capital gains.

3. Validity of conversion of shares from capital assets to stock-in-trade:
The assessee converted shares from capital assets to stock-in-trade before transferring them to the partnerships. The ITO and CIT(Appeals) had differing views on the validity of this conversion. The Tribunal, however, upheld the ITO's stance, stating that the conversion was part of a device to avoid tax on capital gains. The Tribunal noted that the conversion and subsequent transfer to the partnerships were not genuine business transactions but were intended to evade tax.

4. Genuineness of the partnerships and transactions:
The assessee argued that both Bajaj Trading and Anant Trading were genuine partnerships, registered under section 185 of the IT Act, and that the transactions were bona fide. The Tribunal acknowledged the genuineness of the partnerships but scrutinized the transactions, concluding that they were devices to avoid tax on capital gains. The Tribunal emphasized that the genuineness of the partnerships did not preclude the possibility of the transactions being a ruse to evade tax.

Conclusion:
The Tribunal reversed the CIT(Appeals) decision, holding that the transfer of shares to the partnerships was a taxable event and constituted a device to avoid tax on capital gains. The Tribunal directed the CIT(Appeals) to reassess the quantum of capital gains after providing an opportunity for both parties to be heard. The appeal was partly allowed, reaffirming the ITO's inclusion of capital gains in the assessee's total income.