COMMISSIONER OF INCOME TAX Vs. SUBODHCHANDRA S PATEL

JUDGEMENT

(1.) THIS reference under s. 256(2) of the IT Act, 1961 (the Act) is at the instance of the Revenue and the following three questions have been referred by the Tribunal, Ahmedabad Bench 'A' for our opinion :

(2.) THE assessee was holding certain investments in shares of limited companies which were shown as capital assets in its books of account. On 1st Nov., 1981, the assessee converted the said investments in shares into stock-in-trade and valued the said shares at market rate on the said day. THEreafter, the assessee contributed the said shares into a partnership firm in which the assessee became a partner during the accounting year and the said shares were shown a partner's capital in the books of the partnership firm. THE AO held that the conversion of capital assets into stock-in-trade was not genuine and only capital assets were transferred to the partnership firm and not stock-in-trade as claimed by the assessee. Accordingly, the AO taxed the difference in cost of the shares and market value of the shares at which they were transferred to the partnership firm and accordingly capital gains were assessed in the hands of the assessee.

(3.) THE assessee preferred a miscellaneous application being Misc. Appln. No. 5/Ahd/1987 contending that though the Tribunal had referred to the decision in case of Sunil Siddharthbhai (supra), the Tribunal had failed to apply the said decision of the Supreme Court in its entirety. THE case of the assessee in the application seeking rectification of the order was to the effect that the apex Court in the said decision had laid down two propositions of law. THE first one was that where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of s. 2(47) r/w s. 45 of the Act, because an exclusive interest of the partner in personal asset is reduced, on their entry into the firm into a share interest. THE second proposition is to the effect that the consideration for the transfer of the personal asset is the right which arises or accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and, after the dissolution of the partnership or with his retirement from the partnership, to get the value of his share in the net partnership assets on the date of dissolution or retirement, after deduction of liabilities and prior charges. THErefore, the consideration which a partner acquires on contributing an asset to the firm as capital cannot fall within the terms of s. 48 of the Act and in these circumstances as the computation machinery incorporated in the scheme relating to determination of the charge provided in s. 45 of the Act fails, such a case falls outside the scope of capital gains taxation.