1986 (2) TMI 81 - AT - Income Tax

Summary

Issues Involved:
1. Whether the land transferred to the partnership firm by the assessee was held as stock-in-trade or as a capital asset.
2. Whether the transaction of transferring the land to the partnership firm attracted the provisions of Section 2(47) of the Income Tax Act, 1961, thereby making it liable to capital gains tax.

Issue-wise Detailed Analysis:

1. Nature of the Land Transferred:
The primary issue was whether the land transferred by the assessee to the partnership firm was held as stock-in-trade or as a capital asset. The assessee argued that the land was a trading asset, not a capital asset, and thus, should not attract capital gains tax. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) had both previously determined that the land was a capital asset. The AAC relied on the Gujarat High Court decision in CIT vs. Kartikey V. Sarabhai, which held that when an asset is introduced by a partner into a firm, it amounts to a transfer of property liable to capital gains tax.

However, the Accountant Member of the Tribunal found that the land was stock-in-trade, as evidenced by the partnership deed and other documents showing the land was intended for business purposes. The Accountant Member noted that the assessee had taken steps such as appointing architects and obtaining municipal approvals, which indicated a business activity. The Third Member agreed with the Accountant Member, concluding that the land was indeed stock-in-trade and not a capital asset.

2. Applicability of Section 2(47) of the IT Act:
The second issue was whether the transaction of transferring the land to the partnership firm attracted the provisions of Section 2(47) of the Income Tax Act, 1961, which defines "transfer" in relation to capital assets. The assessee contended that even if the land was considered a capital asset, there was no "extinguishment of rights" in the property, and thus, the transaction did not constitute a transfer under Section 2(47).

The Judicial Member initially rejected this argument, again relying on the Gujarat High Court decision in CIT vs. Kartikey V. Sarabhai, which held that such a transaction constitutes a transfer. The Third Member, however, cited the Supreme Court decision in Sunil Siddharthbhai vs. CIT, which clarified that even if an asset is contributed to a partnership firm and is considered a capital asset, it would not attract capital gains tax as the consideration for the transfer is not capable of evaluation.

Conclusion:
- The Tribunal, by majority decision, concluded that the land transferred by the assessee to the partnership firm was held as stock-in-trade and not as a capital asset.
- Consequently, the provisions of Section 2(47) of the Income Tax Act, 1961, were not attracted, and the transaction did not result in a capital gains tax liability.

Final Order:
The appeal was partly allowed, with the ITO directed to modify the assessment in accordance with the majority decision that the land was stock-in-trade and not subject to capital gains tax.