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TMI Blog1987 (10) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to a transfer within the meaning of section 2(47) of the IT Act. The ITO, therefore, brought to tax capital against by working out the difference between the fair market value of the property transferred which the ITO took at Rs. 8,39,100 and the cost of acquisition of property as on 1-1-1964 which the ITO took as per the wealth-tax records at Rs. 4,68,460. The ITO took as per the wealth-tax records at Rs. 4,68,460. The ITO made an addition on account of capital gains at Rs. 3,70,640. The ITO in making such assessment invoked the provisions of section 52(1) of the IT Act as, in his.opinion, the fair market value of the property was more than the consideration recorded in the accounts. The ITO further observed that the assessee had also received consideration by way of share to profit in the firm. This was a valuable consideration and there was therefore understatement of consideration shown by the assessee in the statement of income. After obtaining statutory approval of the IAC under section 52(1), he made the aforementioned computation of capital gains. The matter went in appeal to the CIT (Appeals) who referred to the decision of the Gujarat High Court in the case of CIT v. k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re shares were sold to a person connected at a price considerably less than the breaks-up value, the burden of proof that certain sales were effected with the object of avoidance or reduction of tax liability for capital gains was on the Department and it would not be enough that the explanation offered by the assessee was not acceptable and there was strong suspicion. Similarly, the ITAT, Jaipur Bench in ITA No. 869/JP/ 1982, dated 20-8-1983 have also held that the Income-tax Officer must prove the understatement of consideration even if the transfer is to a closely related person. In the present case, the Income-tax Officer has nowhere given a specific finding that the object of transferring the immovable property was the avoidance or reduction of the liability of the appellant under section 45 of the Income-tax Act. the basic prerequisite for the establishment of jurisdiction under section 52(1) has not been satisfied in this case." Thus, having held firstly that there was a transfer of property within the meaning of section 2(47) and that the excess of fair market value over substituted cost of acquisition as on 1-1-1964 would represent capital gains chargeable to tax, the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the house properties owned by him. the property was built prior to 1960. Its cost including that of the land appurtenant thereto was Rs. 6,19,076. After including the cost of tubewell (Rs. 4,439), electric fittings (Rs. 10,825) and furniture (Rs. 19,541), total amount of Rs. 6,53,881 was credited to the capital account of the assessee when he was introduced as a partner on 22-10-1979 i.e., at the beginning of S. Y. 2036 when a change in the constitution of the firm took place. The firm decided to accept the capital contribution in kind having regard to the potential value of the property since it consisted of land admeasuring 3520 sq. yds. and was situated in prime area of Malabar Hill at Narayan Dabholkar Road. Shri Inamdar further pointed out that no benefit was obtained by the assessee by transfer of this amount to the firm inasmuch as no part of the amount credited to the capital account being the cost of Madhukunj property was withdrawn or utilised by the assessee for his personal purpose. In support of this argument, Shri Inamdar has filed copies of the capital and current accounts of the assessee with the firm of Premchand Roychand & Sons for S. Y. 2036 to S. Y. 2041. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi v. CIT [1974] 97 ITR 213 and the two decisions of the Madras High Court in the case of Sundaram Industries (P.) Ltd. v. CIT [1969] 74 ITR 243 and Sivakami Co. (P.) Ltd. v. CIT [1973] 88 ITR 311 apart from relying on the decision of the Supreme Court in the case of K. P. Varghese v. ITO [1981] 131 ITR 597. 7. Shri Keshav Prasad, the learned Sr. Departmental Representative, relied on the orders of the authorities below, particularly that of the first CIT (A) and the two orders of the ITO dated 12-9-1983 and 27-3-1986. He argued that the first CIT (A) in his order dated 23-3-1984 had given an unequivocal finding to the effect that when the assessee introduced immovable property owned by him as capital contribution to the firm, there was a transfer of such property within the meaning of section 2(47) of the IT Act and the excess over the substituted cost of acquisition as on 1-1-1964 would represent the capital gains chargeable to tax. He pointed.out that in wealth-tax assessment the value of the same property for the assessment year 1979-80 was shown at Rs. 9,45,000. This was the value disclosed by the assessee in the wealth-tax return itself. On this basis, the ITO was justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, no such finding had been given in the firm's case by the departmental authorities. The transfer by the partner of his personal asset to the partnership represented a genuine intention to contribute to the partnership represented a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. This was evident from the fact that the capital asset was transferred at cost and was not inflated. thirdly, this was not a device or ruse for converting as asset into money as could be seen from the fact that firstly the property was transferred at cost and no benefit was sought to be obtained by the partner from the credit available to him to his capital account as a result of contribution of capital for this and subsequent year. The whole transaction represented a real attempt to contribute share capital for running the business of the firm and not to convert an asset into money for the benefit of the assessee. The subsequent event proved that the latter was not the intention. Finally, without prejudice and alternatively, Shri Inamdar pointed out that in the whole transaction the assessee did not receive any consideration whatso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no effort has been made to derive any benefit from the transfer of this asset by way of withdrawals from the capital account. we are, therefore, satisfied that the conditions laid down by the Supreme Court in Sunil Siddharthbhai's case at page 523 have been fulfilled and their observation would appear to support the assessee in the case made out on his behalf. It has not been established before us that the contribution of capital was merely a device or ruse for converting the asset into money which would substantially remains available for the assessee's benefit. This device is normally resorted to when the value of the asset so transferred is artificially inflated. In the present case, this has not been done. Further, we find that the assessee has not derived any benefit out of such transfer and no consideration has been received within the meaning of section 48 of the IT Act. Therefore, on the merits of the case, in our opinion, the assessee is entitled to succeed. As regards the finding of the CIT (A) regarding the applicability of section 52(1) in the second order of the CIT (A), which has been challenged by the department, the issue in question is covered by the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot challenged by the department nor were any cross-objections filed even when the assessee filed an appeal against that order. Further, it is not correct, as argued by the Departmental Representative, that the Supreme Court in K. P. Varghese's case was only dealing with section 52(2) of the IT Act. It specifically dealt with section 52(1) and the difference between subsection (1) and sub-section (2) of section 52 at pages 606 and 607 of the report. It also observed at pages 606 and 607 as under : "Now, it is necessary to bear in mind that when capital gains are computed by invoking sub-section(1) it is not any fictional accrual or receipt of income which is brought to tax. Sub-section(1) does not deem income to accrue or to be receive which in fact never accrued or was never received. It seeks to brig within the net of taxation only that income which has accrued or is received by the assessee as a result of the transfer of the capital asset." These observations clearly indicate that the Supreme Court did deal with section 52(1) of the IT Act. Therefore, there is not much substance in the argument of the department that the CIT(A)'s reliance on the Supreme Court decision was mispl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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