1997 (7) TMI 207 - AT - Income Tax

Summary

Issues Involved:
1. Reopening of assessment under section 147(b) of the Income-tax Act, 1961.
2. Rejection of the claim for conversion of capital asset into stock-in-trade.
3. Treating the contribution of shares to a partnership firm as liable to capital gains tax.

Issue-Wise Detailed Analysis:

1. Reopening of Assessment under Section 147(b):

Facts and Background:
The assessee, an individual, filed a return for the assessment year 1980-81, declaring an income of Rs. 2,93,030. Before filing the return, the assessee informed the Income-tax Officer (ITO) about converting 5,500 equity shares of Bajaj Auto Limited into stock-in-trade. The assessment was completed on 22-12-1980 under section 143(3) of the Income-tax Act, without including any capital gains. On 20-2-1985, the ITO reopened the assessment under section 147(b) based on a Gujarat High Court decision in the case of Kartikey V. Sarabhai, which was received from the Inspecting Assistant Commissioner (IAC).

Arguments by Assessee:
The assessee contended that the reopening was invalid as it was based on a mere change of opinion. The Gujarat High Court's decision was not the first or only view on the matter, and similar views had been taken by the Kerala and Karnataka High Courts earlier. All material facts were already known to the ITO at the time of the original assessment. The reopening was based on mechanical application of mind without further examination of facts.

Arguments by Revenue:
The Revenue argued that the Gujarat High Court's decision constituted valid information for reopening the proceedings. The ITO had established that the assessee had employed a device to evade capital gains tax liability, and the CIT(Appeals) upheld this finding on merits.

Tribunal's Findings:
The Tribunal concluded that the reopening was based on a mere change of opinion and was therefore invalid. The ITO had not examined the genuineness of the transaction at the time of reopening and had mechanically relied on the Gujarat High Court's decision. The Tribunal emphasized that for reopening under section 147(b), the information must be reliable, credible, and valid, with a live nexus to the belief that income had escaped assessment. The Tribunal quashed the reassessment order dated 19-2-1986.

2. Rejection of the Claim for Conversion of Capital Asset into Stock-in-Trade:

Facts and Background:
The assessee converted 5,500 equity shares of Bajaj Auto Ltd. into stock-in-trade on 26-3-1979 and later contributed these shares as capital to the partnership firm M/s. Bajaj Trading Co. The ITO, during the reassessment proceedings, found that the assessee had employed a systematic device to evade capital gains tax liability.

Arguments by Assessee:
The assessee argued that the conversion was genuine and that the firm was a genuine entity. The assessee had been dealing in shares for several years, and the conversion was not a device to evade tax but to mitigate wealth-tax liability and maintain control over Bajaj Auto Ltd.

Arguments by Revenue:
The Revenue contended that the conversion and subsequent contribution to the firm were part of a device to avoid capital gains tax. The assessee systematically withdrew substantial amounts from the firm, indicating an intention to convert shares into money for personal benefit.

Tribunal's Findings:
The Tribunal upheld the Revenue's view that the conversion and contribution were part of a device to evade capital gains tax. The assessee's systematic withdrawal of funds from the firm supported this conclusion. The Tribunal applied the principles laid down by the Supreme Court in the case of McDowell & Co. Ltd. and Kartikeya V. Sarabhai, concluding that the transaction was a colourable device to escape tax liability.

3. Treating the Contribution of Shares to Partnership Firm as Liable to Capital Gains Tax:

Facts and Background:
The ITO treated the contribution of shares to the partnership firm as liable to capital gains tax, adding Rs. 18,26,340 as long-term capital gains to the assessee's total income.

Arguments by Assessee:
The assessee argued that the contribution of shares as capital to the firm did not attract capital gains tax as there was no consideration involved. The assessee relied on various judgments, including the Supreme Court's decision in Kartikeya V. Sarabhai, which held that no profit or gain accrued for the purpose of section 45 of the Act.

Arguments by Revenue:
The Revenue argued that the transaction was a device to convert personal assets into money without attracting capital gains tax. The ITO's findings on the systematic withdrawal of funds supported this view.

Tribunal's Findings:
The Tribunal held that the contribution of shares to the partnership firm was liable to capital gains tax. The Tribunal found that the assessee had employed a device to convert shares into money for personal benefit, thereby evading tax. The Tribunal upheld the ITO's addition of long-term capital gains to the assessee's total income.

Conclusion:
The Tribunal quashed the reassessment order on the ground of invalid reopening under section 147(b). However, on merits, the Tribunal upheld the Revenue's findings that the conversion of shares into stock-in-trade and their contribution to the partnership firm were part of a device to evade capital gains tax, and thus, the transaction was liable to capital gains tax.