The main legal point established in the judgment is that the transfer of personal assets to a partnership firm as a contribution to its capital does not attract capital gains tax under the Income Tax Act, 1961.

K. Shivashankar Bhat, J.—The question required to be answered by us as referred under section 256(2) of the Income Tax Act, 1961 ("the Act" for short), reads :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not liable to tax on capital gains without recording a finding about the existence of facts assumed by the Supreme Court in the case reported in Kartikeys V. Sarabhai Vs. Commissioner of Income Tax, AIR 1986 SC 368 ?"

2. We are concerned with the assessment year 1981-82, relating to the accounting period ending on March 31, 1981. The assessee was a co-owner of a property at Banglore along with two others. His share was one-third in the property. During the relevant accounting year, on July 2, 1980, this property was brought in as an asset of a firm called Messrs. Curzon Project, consisting of six partners, out of whom, three were the co-owners of the property in question. The property was contributed in lieu of the contribution of the three co-owners, each co-owner's contribution being Rs. 9 lakhs. Thus the property was obviously valued at Rs. 27 lakhs. The object of the firm was to engage in the business of developing property. The other three partners had not immediately contributed anything towards the share capital; but it was agreed as per the deed of partnership, that "further capital of the partnership will be provided by parties of fourth, fifth and sixth parts in such proportions as may be mutually agreed upon. The parties hereto of the first, second and third parts shall not be liable to bring any further capital". The parties of the fourth, fifth and sixth parts were the partners other than the three co-owners, who were parties 1 to 3, referred to in the deed of partnership. The partnership business was to execute building construction contracts, dealing in land, etc., Each partner was to share profits and losses equally, i.e., each had a one-sixth share, and for this purpose the share capital of the firm was taken as Rs. 54 lakhs.

3. On July 30, 1981, one of the partners, Mr. Wilfred D'Souza (who was a co-owner of the property earlier), retired from the firm and he received his share of Rs. 9 lakhs in the capital of the partnership; the firm was reconstituted. Accordingly, the share of the fifth partner (who is the present assessee in this reference) was declared to be one-ninth instead of the earlier one-sixth share. There was also a variation of the share of another partner (which was the sixth party in the first deed of partnership). On April 30, 1985 (nearly 4 years 9 months after the partnership was constituted initially), the assessee retired from the partnership. Along with him another partner, Mr. John D'Souza (who was one of the original co-owners) also retired. It was stated that earlier Wilfred D'souza had retired on health grounds, and the remaining partners found it difficult to carry on the business for the reasons stated in the deed of retirement and, consequently, the retiring partners sought retirement from the partnership.

4. In the meanwhile, on December 30, 1983, the assessee was assessed to Income Tax by the Income Tax Officer for the assessment year 1981-82. This order was proposed to be revised by the Commissioner of Income Tax, under section 263 of the Act, by issuance of a notice dated August 28, 1985. The said notice stated that, while the share of the assessee was reduced to one-ninth from one-sixth in the share capital of the partnership, he was paid a sum of Rs. 3 lakhs, which was received by the assessee from the firm. Thereafter, the notice stated :

"Where a property or asset belonging to an assessee is brought in or introduced by him into a firm in which he is a partner the property in question would belong to the firm and the assessee would no longer have any power to dispose of the whole or any part of it or any interest therein, as his property. The extinguishment of his title in respect of