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TMI Blog2016 (10) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... ading to the above substantial question of law are as under : (a) The applicant company was incorporated in the year 1937 to carry on investment business. (b) On 23rd April, 1979, the applicant Company at its General Body meeting of shareholders decided to commence a new business activity inter alia of dealing / trading in immovable properties, shares and securities. Besides, the General Body of shareholders authorized its Board of Directors to do the said business as they think fit and proper either itself or in partnership with others. (c) On 2nd May, 1979, the applicant assessee converted certain plots of land and shares hitherto held as investments into its stock in trade. On 8th May, 1979, the applicant assessee entered into the partnership firm with six others to trade in land, stock and shares by executing a partnership deed. The firm was styled M/s. Bajaj Trading Company. The applicant Company contributed total Capital of Rs. 1.23 crores consisting of Rs. 1.20 crores in the form of plot of land (immovable property), Rs. 1.13 lakhs in the form of shares in limited companies and Rs. 2 lakhs in the form of cash. Other parties also contributed in the same manner, resulting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further appeal to the Tribunal. By its order dated 16th July, 1988, the Tribunal rendered the following findings : (i) That the conversion of capital asset into stock in trade by the applicant company before investing the same in the partnership firm M/s. Bajaj Trading Company, was in fact, a part of a device so as to evade payment of tax. Consequently, it held that what was contributed to the partnership firm was a capital asset and not stock in trade; (ii) The contribution of the capital asset to the firm M/s. Bajaj Trading Company was a transfer within the meaning of Section 2(47) r/w Section 45 of the Act as held by the Apex Court in Sunil Siddharthbhai (supra); (iii) The applicant company had after three years withdrawn an amount of Rs. 1.16 crores from the firm M/s. Bajaj Trading Company. This amount of Rs. 1.16 crores was out of advances received by the firm M/s. Bajaj Trading Company as advances on the sale of plots; On the aforesaid facts, the Tribunal came to the conclusion that the effect of all the transactions taken together was that the applicant assessee was able to transfer its land to another entity i.e. partnership firm and received the market value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rthbhai (supra). This is also not disputed by the applicant company before us. In the result, we hold that there is a transfer of a capital asset when the applicant company introduced its immovable property, shares and securities as its contribution to the capital of the partnership firm M/s. Bajaj Trading Company. 8. The third issue which arises for our consideration is whether any capital gain arises on account of transfer of the capital asset by the applicant assessee by way of its capital contribution to the partnership firm M/s. Bajaj Trading Company. We find substance in the submission of Mr. Mistri, learned Senior Counsel for the applicant assessee, that no capital gain chargeable to tax arises on the amount contributed as capital into the partnership firm. This on the basis that at the relevant time, it did not give rise to receipt of any determinable consideration to the transferor as contemplated in Section 48 of the Act. 9. We find that the Apex Court in Sunil Siddharthbhai (supra) has relied upon its earlier decision in Commissioner of Income Tax Vs. B.C. Srinivasa Setty, 128 ITR 294 to hold that where the computation provision fails then, the charging Section cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e full value of the consideration, as a result of the transfer, and that capital gains so arrived at shall be chargeable to tax in the year in which the transfer takes place. As we are dealing with the period prior to the introduction of Section 45(3) of the Act, the same will not govern the present proceedings. Thus, the obiter (not the basis of the order) by the Tribunal that subsection (3) of Section 45 only clarifies the existing position in law runs counter to Circular No.495 dated 22nd September, 1987 issued by the Central Board of Direct Taxes at the time of amendments made by Finance Act, 1987. The above Circular states that SubSection (3) of Section 48 of the Act was brought into the Act in view of the decision of the Apex Court in Sunil Siddharthbhai (supra) that conversion of any personal asset into an asset of a firm in which the individual is a partner would not give rise to capital gains tax for failure of consideration. It specifically provides that the amendment will come into force w.e.f. 1st April, 1988 and will accordingly apply for A.Y. 198889 and subsequent assessment years. In fact, the Apex Court in Commissioner of Income Tax Vs. Vatika Township (P) Ltd. 2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth." (emphasis supplied) 12. In the present facts, both the CIT(A) as well as the Tribunal have concurrently recorded a finding of fact that the partnership firm M/s. Bajaj Trading Company is a genuine firm. However, the Authorities have proceeded on the basis of the above observation in Sunil Siddharthbhai (supra) that even where the partnership is genuine and the transfer of any asset to a partnership firm is contribution to the share capital of the firm by the partner, yet on examination of all the facts, the Assessing Officer may come to a finding that the contribution to the firm is nothing but a device to convert an asset into money for the benefit of the assessee while evading tax on the capital gains. However, from the aforesaid paragraph of the Apex Court in Sunil Siddharthbhai (supra) quoted above, the tests are whether the asset contributed to the firm is sold soon after its transfer or whether the partnership has no real or substantial business which would require capital contri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision taken by the applicant assessee to pool its resources along with other persons who have contributed over 50% of the total capital in the partnership firm. This itself is a further indication of the fact that a decision was taken by the applicant assessee to enter into a partnership firm and form the firm M/s. Bajaj Trading company only with a view to engage in a new line of business i.e. trading in land, shares and securities so as to generate profits along with other persons who had equally contributed to the capital of the firm. Thus, in these facts, the contribution of capital asset into the partnership firm M/s. Bajaj Trading Company, cannot be said to fall within the mischief as indicated by the Apex Court in Sunil Siddharthbhai (supra) as extracted hereinabove. 14. In any case, at the time when the applicant assessee made its contribution of capital assets into the partnership firm, no consideration was received by the applicant assessee. If at all, the firm is held to be not genuine, then, the consideration received for transfer of the property was only 3 years down the line. Consequently, it would not be fair to bring it to tax in the A.Y. 1980-81. In the result, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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