VED PARKASH AGGARWAL Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) WHERE a partner, as his contribution towards the capital of the firm, makes over to it a capital asset owned by him, does it amount to a transfer of the asset and if so, docs the credit given for it in the books of the firm attract capital gains tax if such credit exceeds the price at which it had been acquired by the partner ? Herein lies the matter in issue in this reference.

(2.) ON August 25, 1972, the assessee, Ved Parkash, purchased a plot of land for Rs. 49,250. Later, on becoming a partner of the firm, Nirmal Construction and Finance Co. , Bombay, in April, 1973, he made over this plot to the firm as his contribution towards capital thereof, the credit given to the assessee, for this plot, in the books of the partnership being Rs. 1,29,120. Later, on November 20, 1973, the firm sold this plot, as also the nearby plots of the other partners, to the Bombay Municipal Corporation. The question then arose, as to whether the handing over of the plot in question by the assessee to the firm, Nirmal Construction and Finance Corporation, was a transfer attracting liability for payment of capital gains tax with reference to the credit given for it in the partnership capital account of the firm. The Income-tax Officer held this to be a transfer and taxed the profit as capital gains. This order was upheld in appeal by the Commissioner of Income-tax (Appeals) and also later by the Tribunal following in this behalf the judgment of the High Court of Gujarat in CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42. This is what led to the following question referred for the opinion of this court : "whether the Tribunal was right in law in holding that a transfer of a capital asset takes place when the property or asset, belonging to the assessee (partner), is brought in or introduced by the partner into a firm ?"

(3.) THE answer to the question posed is provided by the judgment of the Supreme Court in Kartikey V. Sarabhai v. CIT [1985] 156 ITR 509, where a similar question was raised, namely, "whether the capital contribution by a partner to the assets of a partnership firm, at an appreciated value, can be said to give rise to a capital gain in his hands, liable to income-tax ?" It was held that when the assessee brought the asset into the partnership firm as his contribution to its capital, there was a transfer of the capital asset within the meaning of the terms of Section 45 of the Income-tax Act, 1961, but the consideration which the partner acquires on making over his personal asset to the partnership firm, as his contribution to its capital, cannot fall within the terms of Section 48 and as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of charge provided in Section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. In holding so, the judgment of the High Court of Gujarat in Kartikey v. Sarabhai's case [1981] 131 ITR 42 was specifically overruled.