COMMISSIONER OF INCOME TAX Vs. LEENA A SARABHAI

JUDGEMENT

(1.) THE assessee, an individual, had income from dividends as sole beneficiary of certain trusts. She an the trusts of which she was the sole beneficiary contributed the shares to M/s Kalpna, a partnership, after converting the said capital into stock in trade. She and the trusts thus contributed various shares of companies as capital contribution to the said firm. The entries were made in the books of account of the assessee to the effect that the said shares were converted into stock in trade. The ITO held that the conversion was not proper as the said shares were not easily marketable. He, therefore, came to the conclusion that the assessee had transferred her shares to the partnership of M/s Kalpna within the meaning of S. 2(47) of the IT Act, 1961, and had, therefore, made herself liable for capital gains tax which he levied as per the assessment order finalised by him. He took the same view in regard to the contribution made by the trusts of which he was the sole beneficiary.

(2.) FEELING aggrieved by the order passed by the ITO, the assessee preferred an appeal before the AAC, Ahmedabad. The AAC came to the conclusion that the so called conversion of shares into stock in trade was not acceptable as there was no evidence to support the same and on account of non marketability of the shares in question, the firm of M/s Kalpna had not done any business worth the name and as the only transaction appears to be in regard to the sale of the so called share contribution to the associated companies, the share contribution can be said to be a camouflage for transferring the shares from the assessee to the other companies, in fact that the real transaction was the transfer of shares from the assessee to the other companies and even if it is presumed that the business was genuine and the shares were genuinely contributed as capital, capital gains tax would be attracted. He, therefore, came to the conclusion that the ITO was justified in levying capital gains tax on the share contribution. The appeal of the assessee, therefore, failed to the above extent.

(3.) THE Revenue, feeling aggrieved by this order, sought a reference under S. 256(1) of the IT Act. The Tribunal has made a reference on the following two points: