1970 (2) TMI 12 - HC - Income Tax

Whether the transfer of the shares by the assessee-firm to the partners of the firm was made with the object of avoidance or reduction of the liability of the assessee under section 12B - question is answered in the negative

Summary

Issues:
1. Whether the distribution of shares amongst the partners of the assessee-firm amounts to a sale or transfer under section 12B of the Income-tax Act, 1922?
2. If the answer to the above question is in the affirmative, whether the distribution in question is covered by the first proviso to section 12B(2) of the Act?

Analysis:

The case involved a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the distribution of shares among the partners of an assessee-firm acting as managing agents of a company. The Income-tax Officer had held that the transaction was a device to avoid tax liability, specifically capital gains tax, and included the capital gains in the firm's income. The Appellate Tribunal, however, ruled in favor of the assessee-firm, stating that no transfer was involved as required under section 12B(2), and directed the deletion of the capital gains amount from the firm's income.

The main contention raised by the Income-tax Commissioner was that the transaction of transferring shares to partners constituted a relinquishment or transfer, and since the market value of the shares exceeded the cost price, it involved capital gains and was done to avoid tax liability under section 12B. The Commissioner argued that the intention to avoid tax liability could be inferred from the market value of the shares at the time of the transaction.

However, the Court rejected this argument, emphasizing that at the time of the transaction in April 1956, the provisions of section 12B, including the proviso, were not in effect. It was deemed impossible for the assessee to form an intention to avoid or reduce tax liability under section 12B when the section was not operative. The Court agreed with the assessee's position that there was no evidence of avoidance to support the tax officer's findings.

Ultimately, the Court found that the question of liability to pay capital gains tax was academic and unnecessary to decide, given the circumstances. Therefore, the first question was deemed unnecessary to answer. The second question was rephrased to inquire whether the transfer was made with the object of avoiding or reducing liability under section 12B, to which the Court answered in the negative. The Commissioner was directed to pay the costs of the respondent.