COMMISSIONER OF INCOME TAX Vs. A C MAHESH

JUDGEMENT

(1.) AT the instance of the Department, the Tribunal has stated a case and referred the following question of law under s. 256(1) of the IT Act, 1961, for our consideration.

(2.) AT the outset, we must state that the referential s.41(2) of the IT Act, 1961 in the question of law referred to us is not accurate. There was no consideration of provisions of the applicability of s. 41(2) of the IT Act and there could not be applicability of the said provision to the facts of the case. Therefore, the question of law referred to us is reframed as under :

(3.) WE have carefully considered the rival submissions of learned counsel appearing for the parties. The Tribunal has decided the only question as to whether there was a transfer of capital asset when the assessee made over the buildings and land to the firm as his contribution and in that view of the matter the Tribunal has not decided any other point. The view of the Tribunal that there was no transfer is based on the decision of this Court in D. Kanniah Pillai's case (supra) and the Tribunal held that there was no transfer of (supra) the capital asset by the assessee when he contributed the assets to the firm at the time of formation of the firm. This view of the Tribunal is not legally sustainable in view of the subsequent decision of the Supreme Court in the case of Sunil Siddharthbhai cited supra, wherein the Supreme Court held 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 capital asset within the terms of s. 45 of the IT Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a shared interest. Therefore we are of the view that the Tribunal was not correct in holding that there was no transfer of the property when the partner introduced his capital asset as his capital contribution. The further question that remains is whether it is possible to evaluate the partner's interest by the credit of certain amount in the capital account as well as in the current account of the partners in the accounts of the firm. The Supreme Court in Sunil Siddharthbhai's case held that when the personal assets merge with the capital of the partnership and the corresponding credit entry is made in the partner's capital account in the books of the partnership firm, that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or when the partner retires. The question whether it is possible to reckon the partner's interest when certain amount is credited in the current account has not been gone into by the Tribunal and in the absence of any finding by the Tribunal, it is not possible for us to answer that part of the question whether the capital gains liability would be attracted when amounts are credited both in the capital account and current account of the accounts of the firm in favour of the partner who brought in his personal assets to the partnership firm as the property. Since the Tribunal has not gone into the question whether it is possible to reckon the partner's interest and whether any liability to capital gains would arise, when certain amounts were credited in the current account of the partners and the nature of the current account, we direct the Tribunal to decide the question in the light of the observations made by the Supreme Court in Sunil Siddharthbhai's case cited supra and dispose of the appeal accordingly. Subject to the above, the question of law referred to us is answered in the affirmative and in favour of the Revenue. However, as earlier stated, the Tribunal is directed to go in to the question whether it is possible to reckon the interest of the assessee when the amounts are credited both in the capital account as well as in the current account of the partnership firm and the liability to capital gains, if any, in the transaction in question. No costs.