1987 (3) TMI 173 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reopening the assessment under section 147(a).
2. Applicability of capital gains tax on the transfer of assets to the firm.
3. Disclosure of material facts by the assessee.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147(a):
The appeal by the revenue concerns the assessment year 1976-77. The assessee, a partner in "M/s Naidu's Continental Packers," filed the original income-tax return in August 1976, and the assessment was completed on 23-5-1978. The wealth-tax return was filed on 31-3-1976, indicating the transfer of certain personal properties to the firm. The ITO initiated proceedings under section 147(a) on 31-3-1982, citing the assessee's failure to disclose the transfer of properties in the income-tax return, leading to escapement of assessable income under capital gains. The CIT (A) annulled the reassessment, holding that there was no failure to disclose material facts and that the reopening was without jurisdiction. The department appealed, arguing that the Supreme Court's decision in Sunil Siddharthbhai v. CIT, which declared that such transfers constituted a transfer, should apply retroactively. The Tribunal held that the initiation of proceedings was valid, considering the Supreme Court's declaration of the law as it always stood, even though the assessee could not have been aware of this position when filing the return.

2. Applicability of Capital Gains Tax on the Transfer of Assets to the Firm:
The ITO brought to tax capital gains on the transfer of properties to the firm. The CIT (A) held that no capital gains tax was leviable, referencing the Madras High Court's decision in D. Kanniah Pillai v. CIT, which stated that section 45 did not apply when a partner brought personal assets into the firm. The Tribunal noted that, at the time of filing the return, the prevailing legal position in Madras was that such transfers did not attract capital gains tax. However, the Supreme Court's later decision in Sunil Siddharthbhai's case declared that such transfers did constitute a transfer. The Tribunal concluded that the matter needed to be reconsidered in light of the Supreme Court's observations, particularly whether the transaction was genuine or a device to evade tax.

3. Disclosure of Material Facts by the Assessee:
The assessee argued that all material facts were disclosed in the wealth-tax return and that there was no omission in the income-tax return. The Tribunal acknowledged that the assessee disclosed the transfer in the wealth-tax proceedings but noted that this did not absolve the assessee from disclosing the same in the income-tax return. The Tribunal referenced the Supreme Court's decision in Kantamani Venkata Narayana & Sons v. First Addl. ITO, which held that disclosure in wealth-tax proceedings was insufficient for income-tax purposes. The Tribunal concluded that, given the binding Madras High Court decision at the time, the assessee could have reasonably believed there was no need to disclose the transfer in the income-tax return. However, the subsequent Supreme Court declaration necessitated a re-evaluation of whether there was a deemed omission.

Conclusion:
The Tribunal reversed the CIT (A)'s finding that the initiation of proceedings under section 147(a) was without jurisdiction. It also set aside the CIT (A)'s finding that no capital gains tax was leviable on merits. The matter was remanded to the CIT (A) for a fresh decision, considering the Supreme Court's observations in Sunil Siddharthbhai's case and determining whether any capital gains tax was assessable for the assessment year in question. The appeal was allowed for statistical purposes.