1982 (9) TMI 184 - AT - Income Tax

Summary

Issues Involved:
1. Whether the introduction of shares by the assessee into the firm as capital contribution resulted in a "transfer" under Section 2(47) of the IT Act.
2. Whether there was "consideration" involved in the transaction, making it liable for capital gains tax under Section 45 of the IT Act.

Detailed Analysis:

Issue 1: Transfer of Shares
The primary issue revolves around whether the introduction of shares by the assessee into the firm as capital contribution constitutes a "transfer" under Section 2(47) of the IT Act. The assessee argued that no capital gains arose from the transaction as the shares were revalued in her books before being introduced into the firm. The ITO, however, contended that the assessee extinguished her individual rights in the shares, and these shares became the property of the firm, thus constituting a transfer. The AAC disagreed with the ITO, stating that there was no "transfer" as there was no "consideration" involved. The AAC held that the firm was not a legal entity but a collective name for the partners, and the extinguishment of rights contemplated absolute loss of right, which did not occur in this case.

Upon appeal, the Tribunal considered the facts and circumstances, noting that the assessee was not a dealer in shares before or after the transaction. The Tribunal upheld the ITO's finding that the shares were capital assets. The Tribunal further analyzed whether the transaction amounted to a "transfer" under Section 2(47) of the IT Act. It concluded that the assessee's rights in the shares were extinguished when she introduced them into the firm as capital, thus satisfying the criteria for a transfer under Section 2(47).

Issue 2: Consideration for the Transfer
The second issue was whether there was "consideration" involved in the transaction, making it liable for capital gains tax under Section 45 of the IT Act. The AAC held that the right the assessee received in the firm did not amount to "consideration." However, the Tribunal disagreed, stating that the partner's right to share the profits of the firm and the right to share in the surplus on the realization of the firm's assets upon dissolution constituted valuable consideration. Therefore, the Tribunal found that the transaction satisfied the criteria for consideration under Section 45 of the IT Act.

Conclusion:
The Tribunal concluded that the transaction involved both the transfer of shares and valuable consideration, making it liable for capital gains tax under Section 45 of the IT Act. The AAC's order was reversed, and the ITO's order was restored, allowing the revenue's appeal.