The transfer of personal assets into a partnership firm constitutes a transfer of a capital asset, but no real income or gain arises in the true commercial sense.

R. Jayasimha Babu, J.

The assessees were partners in the firm-T. T. Krishnamachari and Company, which came into existence on May 1, 1957. On June 30, 1976, one of the partners retired and the firm was reconstituted.

The four partners of the reconstituted firm executed a memorandum of agreement on October 14, 1976, as follows :

"This records the unanimous agreement of all partners to treat their personal assets consisting of shares in the joint stock companies as fully described in the annexure hereto, as the property of the partnership firm as on and from October 1, 1976. Adjustments of the value of shares will be taken at the face value or at the break up value of shares whichever is higher.

The value of shares as worked out above shall be credited to the individual partner's current account and this will, therefore, be treated as investments by the firm entitling the firm to have all the benefits including dividend, bonus, shares, etc.

Due intimation to the respective companies will also be given by the individual partners for the shares treated as holdings of the firm."

Pursuant to the agreement the assessees transferred their holdings in the T. T. K. group of companies to the firm and the shares were to be held thereafter by the firm. As against the face value of Rs. 22, 04, 090, the market value thereof credited to the share of the partner, T. T. Narasimhan, was Rs. 86, 72, 708. The amount credited to the account of the partner, Padma Narasimhan, was Rs. 12, 10, 308 while the face value of the shares transferred by her was Rs. 4, 39, 000. The amount credited to the account of the partner, T. T. Vasu, was Rs. 8, 24, 456 as against the face value of Rs. 2, 72, 960 for the shares transferred by him to the firm.

The Income-tax Officer took the view that there was a transfer of a capital asset by each of the assessees and the difference between the face value and the market value of the shares less the cost of acquisition was chargeable to tax as capital gains. The Commissioner, on appeal by the assessees, held that no capital gains tax was leviable. The Tribunal, to which the appeal was carried by the Revenue, having agreed with the Commissioner who had held that there was no transfer when the partners brought the shares individually held by them in the joint stock companies into the stock of the firm and that no real profits had accrued to the assessees, at the instance of the Revenue, the following three questions have been referred to us by the Tribunal. The assessment year is 1977-78.

"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that there was no transfer of capital asset within the meaning of section 2(47) read with section 45 of the Income-tax Act, 1961, when the assessees transferred their shares to the firm in which they were partners ?

2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that no profit accrued to the assessees on the transfer of their shares to the firm in which they were partners ?

3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that no capital gains has arisen to the assessee within the meaning of section 45 of the Income-tax Act, 1961 ?"

The Supreme Court in the case of Sunil Siddharthbhai v. CIT after considering questions similar to those before us, has held that when a partner makes over shares in joint stock companies standing in his/her name to the firm to be treated henceforth as an asset of the company, there is an abridgment of the right of such a partner in the shares which had till then been exclusively held by him or her and the exclusivity of the ownership of the shares being reduced to joint holding of the same along with other partners all of whom are to have rights in the shares henceforth, and there is a transfer within the meaning of that expression under section 2(47) of the Income-t