1983 (7) TMI 112 - AT - Income Tax

Summary

Issues:
- Appeal by revenue against CIT(A) order on capital gains chargeability.
- Transfer of shares to strangers and tax implications.
- Applicability of Supreme Court ruling on goodwill to the case.
- Determining if right to receive shares qualifies as an asset under IT Act.

Analysis:
The appeal before the Appellate Tribunal ITAT Jaipur involved a revenue challenge against the CIT(A) order regarding the chargeability of capital gains for the Asst. yr. 1977-78. The case revolved around the transfer of shares by the assessee to strangers, where the CIT(A) held that no capital gains were chargeable. The assessee had a 20p share in a firm and transferred 19p share to five individuals. The entire receipt from the transfer was brought to tax as capital gain by the ITO, leading to the appeal.

Upon appeal, the CIT(A) accepted the assessee's argument based on a Supreme Court ruling in the case of CIT vs. B.C. Srinivasa Setty, which held that the right to receive a share by goodwill was not an asset under section 45 of the IT Act. The Tribunal analyzed the applicability of this ruling to the current case and found that the Supreme Court's reasoning on goodwill not being a capital asset under section 45 was relevant. The Tribunal compared goodwill and the right to receive shares, noting that while the date of acquisition of goodwill is uncertain, the date of acquisition of the right to receive shares is known under an agreement.

The Tribunal concurred with the assessee's representative that as no cost was paid for acquiring the right to receive shares upon becoming a partner in the firm, it cannot be considered an asset under section 45. The Tribunal emphasized that the lack of a cost of acquisition for the right to receive shares distinguished it from other assets, following the Supreme Court's decision. It was highlighted that the partnership agreement did not mandate a specific contribution of capital corresponding to the share acquired, further supporting the conclusion that the right to receive shares did not qualify as an asset under the IT Act.

Ultimately, the Tribunal dismissed the appeal, affirming that the right to receive shares was not an asset within the meaning of section 45 of the IT Act, and therefore, no capital gain could arise from its transfer, leading to the conclusion that it could not be brought to tax.