Transfer of a capital asset by a partner to a partnership firm as his contribution towards capital does not attract capital gains tax under section 45 of the Income Tax Act, 1961.

JUDGMENT :

S.B. Majmudar, J.

At the instance of the applicant-assessee, the following two questions are referred for our opinion by the Income-tax Appellate Tribunal, Ahmedabad Bench. The referred questions are as under :

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee did not convert the land as its stock-in-trade of the business of purchase and sale of immovable properties on and from June 1, 1975, and contributed the land as stockin-trade to the partnership on June 16, 1975 ?

(ii) Whether, on the facts and in the circumstances of the case, there was a transfer of the capital asset by the assessee under section 2(47) of the Income Tax Act, 1961, when it became a partner in the firm from June 16, 1975, and, therefore, became liable to pay capital gains under section 45 of the Income Tax Act, 1961 ?"

2. It will be profitable to have a look at the introductory facts. The assessee is a Hindu undivided family. The main source of income was dividend. The assessee was not doing money-lending business. The relevant assessment year with which we are concerned is 1976-77. The assessee had received on final partition plot No. 6A, sub-plot No. 3, of Dariapur-Kazipur. Its area was 5,082 sq. yards. Out of this land, it was claimed by the assessee that an area measuring 4,273 sq. yards was converted into stock-in-trade of business of the land and the assessee revalued the same at Rs. 3,84,570 with effect from June 1, 1975, as against cost of Rs. 1,27,335. The Hindu undivided family consisted of Shri Jaykrishna Harivallabhdas (karta), his wife and the branch of Shri Rajesh Jaykrishna, son of Shri Jaykrishna Harivallabhdas. The assessee further claimed that, with the said stock-in-trade, he joined the firm of Messrs. Namrata Investors as a partner and his capital account was credited with Rs. 3,84,570. It was further claimed that the difference of Rs. 2,57,235 is neither taxable as income nor as capital gain within the meaning of section 45 of the Income Tax Act, 1961 (for short, "the Act of 1961").

3. The Income-tax officer was not satisfied with the contention of the assessee. According to him, there was no cogent material on record to show that the assessee ever converted his capital asset into stock-in-trade with effect from June 1, 1975. Disbelieving the version of the assessee, the Income- tax officer held that the said land remained as capital asset of the assessee between June 1, 1975, to June 15, 1975, and when it was brought as stockin-trade in the firm of Messrs. Namrata Investors, there was a transfer of the capital asset attracting capital gains tax and the transaction was covered by section 45 of the Act. Accordingly, the Income-tax officer completed the assessment. Being aggrieved by the said order/assessment, the assessee carried the matter in appeal. The learned Commissioner (Appeals), after considering the evidence on record, accepted the submissions on behalf of the assessee that, with effect from June 1, 1975, the land in question which was previously a capital asset of the assessee got converted into stock-in-trade. He further held that, in the present case, there could be no capital gains.

4. The Revenue carried the matter before the Tribunal. The Tribunal agreeing with the Revenue took the view that there was no conversion of the capital asset into stock-in-trade from June 1, 1975. The Tribunal further held that till June 16, 1975, the land in question remained a capital asset of the family of which the assessee was the karta. The Tribunal further held that the decision of Hind Construction Co. Ltd. relied upon by the assessee was not applicable to the facts of the present case. Accordingly, the Tribunal set aside the findings of the learned Commissioner (Appeals). As noted earlier, the said decision of the Tribunal had given rise to the referred questions at the instance of the assessee. At the time of final hearing of this reference, Mr. Kaji, lear