USMANBHAI I MEMON vs. COMMISSIONER OF INCOME-TAX

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ITR/161/1983HC GujaratGJHC24011632198314 October 1996Author: HONOURABLE MR. JUSTICE S.M.SONI,HONOURABLE MR. JUSTICE A.N.DIVECHA4 pages
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What did the High Court hold?

The High Court addressed the third question first, reframing it to ascertain if the contribution of land to a firm by a partner constituted a 'transfer' under Section 2(47) and resulted in taxable capital gain. Citing the Supreme Court decision in Sunil Siddharthbhai vs. CIT (156 ITR 509), the Court held that the transfer of land by the assessee to the firm, where the firm acquired exclusive interest and the assessee's interest was reduced to a shared interest, indeed constituted a 'transfer' within the meaning of Section 2(47). However, applying the same Sunil Siddharthbhai judgment, the Court further held that while there was a transfer, it did not result in taxable capital gain because the assessee received no consideration within the meaning of Section 48, nor did any profit or gain accrue to him for the purpose of Section 45. Therefore, the question was answered partly in favour of the revenue (on the point of transfer) and partly in favour of the assessee (on the point of taxable capital gain). Consequently, questions 2 and 3 were rendered academic and did not require an answer. The reference was disposed of accordingly.

What were the facts?

The assessee, Usmanbhai I Memon, is challenging the Income Tax Appellate Tribunal's decision for the assessment year 1974-75. The Tribunal had referred three questions of law to the High Court for its opinion. The core of the dispute involves a transaction where the assessee transferred land to a newly formed partnership firm, M/s Usmangani & Co., in which he was a partner. The assessee contended that this transfer did not amount to a 'transfer' attracting capital gains tax. The revenue, represented by the Commissioner of Income-tax, argued otherwise. The High Court was asked to rule on the validity of the initiation of action under Section 147(a), the date of transfer for capital gains, and whether contributing land to a firm constitutes a 'transfer' under Section 2(47).

What were the issues?

The High Court was asked to decide the following questions: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the action under section 147(a) of the Income-tax Act was validly initiated by the Income-tax Officer? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the date of transfer for the purpose of determining the liability to the capital gain should be on the date of execution of the sale deeds and not the date of registration of the sale deeds? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that when a Partner contributed capital in the form of land to the firm the transaction amounted to 'transfer' within the meaning of section 2(47) of the Act? Assessee's Contentions: - The transfer of land to the firm did not amount to 'transfer' so as to attract capital gains, citing the Supreme Court decision in Hind Construction Limited. Revenue's Contentions: - Not recorded in the judgment. The third question was reframed by the High Court to clarify whether the transfer resulted in taxable capital gain.

Which sections of the Income-tax Act were involved?

Section 147(a),Section 2(47),Section 48,Section 45

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 161 of 1983

Hon'ble MR.JUSTICE S.M.SONI

And MR.JUSTICE Y.B.BHATT ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge?

-------------------------------------------------------------- USMANBHAI I MEMON Versus COMMISSIONER OF INCOME-TAX -------------------------------------------------------------- Appearance: MR JP SHAH for Petitioner MR BJ SHELAT FOR MR MANISH R BHATT for Respondent

--------------------------------------------------------------

CORAM : MR.JUSTICE S.M.SONI and MR.JUSTICE Y.B.BHATT Date of decision: 25/10/96

ORAL JUDGEMENT(Per S.M. Soni J.)

1.

At the instance of the assessee the Income-Tax Appellate Tribunal, Ahmedabad Bench has referred, for our opinion, the following questions:

"

1.

Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the action under section 147(a) of the Income-tax Act was validly initiated by the Income-tax Officer?".

"

2.

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the date of transfer for the purpose of determining the liability to the capital gain should be on date of execution of the sale deeds and not the date of registration of the sale deeds?"

"

3.

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that when a Partner contributed capital in the form of land to the firm the transaction amounted to `transfer' within the meaning of section 2(47) of the Act?"

2.

The assessment year involved is 1974-75. For proper appreciation of the contentions raised by the parties, we reframe the question no.3 as under:

"Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that when a partner contributed capital in the form of land to the firm, the transaction amounted to transfer within the meaning of section 2(47) of the Act resulting into taxable capital."

3.

We would like to consider this third question first. The assessee had entered into a partnership on 7th September 1973 with nine other parties forming a firm styled as "M/s Usmangani & Co.". The business of the new firm was to acquire land and property and sell buildings. The assessee had transferred the land belonging to him in favour of the said firm which according to the assessee did not amount to `transfer' so as to attract capital of the said firm is a `transfer'. The question involved in the said case was of transfer of certain shares and the Supreme Court held:

"In its general sense, the expression "transfer of property" connotes the passing of rights in property from one person to another. In one case, there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which the exclusive interest is reduced to a shared interest, there is a transfer of interest.

In the instant case on transfer of the property and transfer of the land belonging to the assessee in favour of the firm, the same has become the property of the firm. Thus, the exclusive interest in land is reduced to a shared interest in land. Thus, there is a transfer of land.

5.

The question is whether the said transfer is resulting into taxable capital gain or not. In the case of Sunil Siddharthbhai (supra) the Supreme Court held that when an assessee, a partner in a firm, made over to the firm certain shares in a company which were held by him, there was a "transfer" of the shares, but that he received no consideration within the meaning of section 48. Nor did any profit or gain accrue to him for the purpose of section 45. Thus, though there is a transfer, the same is not resulting into capital gain. In view of this legal position, question no.3 as amended is answered as under:

6.

There is a transfer within the meaning of section 2(47) of the Act, but the transfer is not resulting into taxable capital gain. Thus, so far as question of transfer is concerned, the question is answered in favour of the revenue, but so far as whether it is resulting into capital gain, it is answered in favour of the assessee. Thus the question is answered accordingly.

7.

In view of our answer to question no.3 we are of the opinion that question nos.2 and 3 have rmained academic and we need not answer the same.

8.

This reference stands disposed of accordingly.

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