COMMISSIONER OF INCOME TAX Vs. JEHANGIR B JEEJEEBHOY

JUDGEMENT

(1.) THE questions of law referred to this court for opinion under section 256(1) of the Income -tax Act, 1961, at the instance of the Revenue are :

(2.) THE assessee had entered into an agreement on August 27, 1962, with Vazifdar Jeejeebhoy Property Development Corporation for purchase of 12,140 square yards of land situated at Tardeo for Rs. 22,50,000. There cropped up some disputes and differences between the parties. The dispute was referred to Sir Jamshedjee Kanga for arbitration, who gave an award on October 28, 1963. In terms of the award, the parties were required to enter into a partnership in which the assessee shall be a partner. He shall bring in his three plots, that is, plots Nos. 1, 2 and 3, by way of his share capital in the partnership of which the constitution will be :

(3.) THE first issue involved herein is now covered by the Supreme Court decision in the case of Sunil Siddharthbhai v. CIT : [1985]156ITR509(SC) . It has been held in that case 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 section 45 read with section 2(47) of the Income -tax Act, 1961. However, such a partner would still not be liable to capital gains tax on the surplus, as when a partner contributes his assets in the firm by way of share capital, the consideration is not merely the notional value of such assets credited to his account, it is also the share in the profits and losses of the firm to which he will be entitled during the period he remains a partner and also to a share in the assets of the firm on the date of its dissolution which will depend upon the deduction from the value of the assets of the liabilities and prior charges existing on the date of the dissolution or his retirement. Since it is not possible to predicate beforehand what will be the position in terms of monetary value of the partner's share up to that date and all that will lie within the womb of the future, it is not possible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership by way of capital contribution.