COMMISSIONER OF INCOME TAX Vs. RANGASWAMY NAIDU R

JUDGEMENT

(1.) AT the instance of the Department, the Tribunal referred the following question for the opinion of this court under section 256(1) of the Income-tax Act, 1961 :

(2.) THE assessee is an individual. On May 1, 1969, he converted his proprietary business into a partnership consisting of himself and his three sons. On April 30, 1975, he transferred his immovable property consisting of land and building to the firm. He returned the capital gains of Rs. 26,098 as arising from the transfer. Later, by his letter dated November 12, 1976, he claimed that no chargeable capital gains arises for assessment in view of the decision of the Madras High Court in D. Kanniah Pillai v. CIT . THE Income-tax Officer computed the capital gains arising out of the transfer at Rs. 26,098 as returned. He noted that the transfer by such sale was by one of the partners to the firm by a registered sale deed for consideration and, therefore, capital gains was exigible to tax. On appeal, the Appellate Assistant Commissioner found that the assessee had been collecting rent for the property from the firm prior to the conveyance. THE assessee pleaded that by the conveyance he was only throwing his individual property into the stock of the firm in which he was a partner and, therefore, applying the decision of the Madras High Court in the case of D. Kanniah Pillai , the conveyance did not amount to a transfer within the meaning of section 2(47) of the Income-tax Act and, therefore, there can be no capital gains exigible to tax. THE Appellate Assistant Commissioner did not accept the contention in view of the fact that the decision of the Madras High Court has not considered the effect of the definition in section 2(47) of the Act which included the extinguishment of rights and he, therefore, confirmed the assessment. On further appeal, the Appellate Tribunal found that the facts in this case were on all fours with the decision of the Madras High Court in D. Kanniah Pillai's case . THE Appellate Tribunal accordingly allowed the claim of the assessee and excluded the capital gains from the total income assessable to tax.

(3.) IN W.L. Dahanukar's case [1959] 36 ITR 459, the Bombay High Court held that it is competent to a person in law to sell his property to a partnership consisting of himself and another. Such a transaction would be valid and binding and would have all the incidents of a legal and binding transaction of sale, and the difference between the purchase price of the land and the selling price would be the profit that would accrue to the person who purchased and sold the land.