1985 (11) TMI 76 - AT - Income Tax

Summary

Issues Involved:
1. Transfer of property as capital contribution to a firm.
2. Determination of capital gains and their nature (short-term or long-term).
3. Genuine nature of the partnership firm and the transaction.

Detailed Analysis:

Transfer of Property as Capital Contribution to a Firm:
The primary issue revolved around whether the contribution of property by the assessees to the partnership firm constituted a transfer under section 2(47) of the Income-tax Act, 1961. The Income Tax Officer (ITO) and the Commissioner (Appeals) held that such a contribution indeed involved a transfer, following the Gujarat High Court decision in CIT v. Kartikey V. Sarabhai. The Supreme Court's decision in the same case was also considered, which stated that contributing a personal asset to a partnership firm constitutes a transfer but the consideration received does not fall within section 48, thus falling outside the scope of capital gains taxation.

Determination of Capital Gains and Their Nature:
The ITO computed the capital gains based on the market value of the property on the date of dissolution of the firm, reduced by 10% to reflect its value on the date of entering the partnership. The authorities below treated these gains as short-term capital gains. However, the Tribunal found that the authorities erred in this regard, ignoring section 2(42A)(b), which necessitates considering the holding period of the previous owner. Since the property was held by the donor and her predecessors for over 30 years, the gains should be classified as long-term capital gains.

Genuine Nature of the Partnership Firm and the Transaction:
A critical issue was whether the partnership firm and the transaction were genuine or merely a device to avoid capital gains tax. The Tribunal examined evidence, including efforts to obtain clearance under the Urban Land Ceiling Act and attempts to get construction plans approved. Despite these efforts, the Tribunal concluded that the firm was not genuine. The partnership was dissolved within a short period (five months and four days), with no substantial business activity, leading to the inference that the firm was a ruse to transfer the land without incurring capital gains tax. The Tribunal emphasized that the formation and dissolution of the firm appeared to be a camouflage for transferring the land to the other party, a known developer, thus evading tax.

Conclusion:
The Tribunal upheld the ITO's and Commissioner (Appeals)'s findings regarding the computation of capital gains but reversed the finding on the nature of the gains, classifying them as long-term rather than short-term. The appeals were partly allowed, recognizing the genuine intention behind the transaction and the appropriate classification of the gains.