1984 (2) TMI 156 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 52(2) of the Income-tax Act, 1961.
2. Determination of capital gains on the transfer of property as capital contribution to a partnership firm.
3. Interpretation of "transfer" under Section 2(47) of the Income-tax Act, 1961.

Detailed Analysis:

1. Applicability of Section 52(2) of the Income-tax Act, 1961:
The Income Tax Officer (ITO) concluded that the provisions of Section 52(2) of the Income-tax Act, 1961, were applicable due to the under-valuation of the property transferred as capital contribution to the partnership firm. The ITO proposed a revaluation of the property, which was upheld in principle by the Commissioner (Appeals). However, the Commissioner set aside the ITO's order to the extent of revaluation and directed the ITO to revalue the property after confronting the data to the assessee. The Tribunal, however, held that since there was no "transfer" within the meaning of Section 2(47) of the Act, Section 52(2) did not apply.

2. Determination of capital gains on the transfer of property as capital contribution to a partnership firm:
The ITO worked out the capital gains based on the revalued property and framed assessments accordingly. The Commissioner (Appeals) upheld the levy of capital gains in principle but directed a revaluation of the property. The Tribunal, however, concluded that there was no transfer of the property within the meaning of Section 2(47), and hence, no capital gains were assessable. The Tribunal emphasized that the shares of the co-owners in the property and the partnership firm remained the same, and there was no relinquishment or extinguishment of any rights.

3. Interpretation of "transfer" under Section 2(47) of the Income-tax Act, 1961:
The Tribunal relied on the Supreme Court's decision in Malabar Fisheries Co. v. CIT, which clarified that a partnership firm is not a distinct legal entity apart from its partners. The property contributed as capital to the firm remained jointly owned by the partners, and there was no transfer of assets as defined under Section 2(47). The Tribunal distinguished the present case from other cases cited by the Revenue, such as CIT v. Kartikey V. Sarabhai and CIT v. Smt. Dhirajben R. Amin, where the facts were different. In the present case, the co-owners contributed the property to the firm in the same ratio as their ownership, and there was no change in their shares or any involvement of outsiders.

Conclusion:
The Tribunal concluded that there was no transfer of property within the meaning of Section 2(47), and hence, no capital gains were assessable. The appeals of the assessees were allowed, and the impugned order of the Commissioner (Appeals) was reversed.