1987 (10) TMI 85 - AT - Income Tax

Issues Involved:
1. Whether the introduction of an asset by way of capital contribution to a partnership firm constitutes a transfer under section 2(47) of the Income-tax Act.
2. Applicability of section 52(1) of the Income-tax Act in the assessment of capital gains.
3. Determination of the fair market value and the cost of acquisition for the purpose of computing capital gains.
4. Validity of the assessment orders and directions given by the CIT(A).

Detailed Analysis:

1. Transfer of Asset as Capital Contribution:
The assessee introduced immovable property as a capital contribution to a partnership firm. The ITO held that this constituted a transfer under section 2(47) of the Income-tax Act, leading to capital gains tax. The CIT(A) referred to the Gujarat High Court decision in CIT v. Kartikey V. Sarabhai and affirmed that the introduction of property as capital contribution was indeed a transfer. However, the Tribunal found that the transaction did not involve a transfer leading to capital gains, as no consideration was received by the assessee. This conclusion was supported by the Supreme Court decision in Sunil Siddharthbhai v. CIT, which stated that such contributions do not result in capital gains since no consideration is received.

2. Applicability of Section 52(1):
The ITO applied section 52(1) of the Income-tax Act, asserting that the fair market value of the property was higher than the consideration recorded. The CIT(A) found that the ITO did not establish that the transfer was made with the object of avoiding or reducing tax liability. The Tribunal agreed with this finding, citing the Supreme Court decision in K. P. Varghese v. ITO, which clarified that section 52(1) requires proof of understatement of consideration with the intent to avoid tax. The Tribunal held that the ITO failed to prove such intent or understatement, thereby making the application of section 52(1) invalid.

3. Fair Market Value and Cost of Acquisition:
The ITO initially computed the capital gains by taking the fair market value as Rs. 8,39,100 and the cost of acquisition as Rs. 4,68,460. Upon revision, the ITO obtained a valuation from the Valuation Officer, who determined the fair market value at Rs. 17,56,000. The CIT(A) directed the ITO to compute capital gains using the credit figure given to the assessee in the firm's books as the sale consideration. The Tribunal found that the property was transferred at cost and no benefit was derived by the assessee, thus supporting the assessee's claim that no capital gains arose from the transaction.

4. Validity of Assessment Orders and Directions by CIT(A):
The first CIT(A) set aside the ITO's assessment order, directing a reference to the Valuation Officer and a reassessment. The Tribunal held that the CIT(A) was justified in setting aside the assessment order and directing a reference to the Valuation Officer, despite finding section 52(1) inapplicable. The Tribunal did not accept the assessee's claim that the CIT(A) should have allowed the appeal entirely based on the finding regarding section 52(1). The Tribunal concluded that the contribution of capital did not result in capital gains and allowed the assessee's appeals while dismissing the departmental appeal.

Summary of Findings:
1. The introduction of an asset as capital contribution to a partnership firm, though amounting to a transfer, does not give rise to capital gains tax as no consideration is received.
2. The application of section 52(1) was not established, as the ITO failed to prove the intent to avoid tax or the understatement of consideration.
3. The property was transferred at cost, and no benefit was derived by the assessee, negating the capital gains.
4. The CIT(A) was justified in setting aside the assessment order and directing a reference to the Valuation Officer, and the Tribunal upheld this decision.

Final Orders:
1. The assessee's first appeal (ITA No. 3493/Bom./84) is allowed in part.
2. The assessee's second appeal (ITA No. 5106/Bom./86) is allowed in full.
3. The departmental appeal (ITA No. 5752/Bom./86) is dismissed.

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