Commissioner of Income Tax vs Jehangir B. Jeejeebhoy

Sugla, J.—The questions of law referred to this court for opinion u/s 256(1) of the Income Tax Act, 1961, at the instance of the Revenue are :

"(1) Whether, on the facts and in the circumstances of the case, the present case falls within the four corners of section 2(47) of the Income Tax Act, 1961, and capital gain is exigible against the assessee for the assessment year 1964-6 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Income Tax Officer to recompute the penalty u/s 271(1)(a) of the Income Tax Act, 1961, on the basis of the reduced total income, that is, after deletion of the capital gain ?"

The assessee had entered into an agreement on August 27, 1962, with Vazifdar Jeejeebhoy Property Development Corporation for purchase of 12,140 square yards of land situated at Tardeo for Rs. 22,50,000. There cropped up some disputes and differences between the parties. The dispute was referred to Sir Jamshedjee Kanga for arbitration, who gave an award on October 28, 1963. In terms of the award, the parties were required to enter into a partnership in which the assessee shall be a partner. He shall bring in his three plots, that is, plots Nos. 1, 2 and 3, by way of his share capital in the partnership of which the constitution will be :

----------------------------------------------------------------- Sl. Name Share in the profits No. and losses ------------------------------------------------------------------ 1. Jehangir B. Jeejeebhoy, assessee 28% 2. Vazifdar Builders Pvt. Ltd. 48% 3. Mrs. Homi Jehangir Byramji Jeejeebhoy (wife) 8% 4. Rusi Jehangir Byramji Jeejeebhoy (son) 8% 5. Vacas Jehangir Byramji Jeejeebhoy (son) 8% -----------------------------------------------------------------

The value of the said plots was taken and credited to the capital account of the assessee at Rs. 33,75,000. The question arose whether the assessee was liable to be taxed under the head "Capital gain income". Observing that the contribution of the plots Nos. 1, 2 and 3 by the assessee in the partnership firm by way of his capital amounted to a "transfer" within the meaning of section 2(47) of the Income Tax Act, 1961, the Income Tax Officer held that the assessee was liable to be taxed under the head "Capital gain income". The capital gain was worked out after deducting the estimated market value of the plots as on January 1, 1954, being Rs. 8,19,544 from Rs. 33,75,000 at Rs. 25,55,456. The Appellate Assistant Commissioner confirmed the order whereas the Tribunal allowed the assessee''s appeal on the ground that bringing in plots of land bearing Nos. 1, 2 and 3, in the partnership firm by way of share capital did not amount to a transfer within the meaning of section 2(47) and the surplus was not exigible to capital gains tax u/s 45 of the Income Tax Act, 1961.

The first issue involved herein is now covered by the Supreme Court decision in the case of Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, . It has been held in that case that where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of section 45 read with section 2(47) of the Income Tax Act, 1961. However, such a partner would still not be liable to capital gains tax on the surplus, as when a partner contributes his assets in the firm by way of share capital, the consideration is not merely the notional value of such assets credited to his account, it is also the share in the profits and losses of the firm to which he will be entitled during the period he remains a partner and also to a share in the assets of the firm on the date of its dissolution which will depend upon the deduction from the value of the assets of the liabilities and prior charges existing on the date of the dissolution or his retirement. Since it is not possible to predicate beforehand what will be the position in terms of monetary value of the partner''s share up to that date and all that will lie within the womb of the future, it is not possible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership by way of capital contribution.

It may not be out of place to mention that their Lordships of the Supreme Court have decided the aforesaid case on the assumption that the partnership in question is a genuine firm. However, there being not even a suggestion in this case that the partnership firm is not genuine, we hold that the assessee''s case is covered by the Supreme Court decision in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, , following which we hold in relation to the first question that the case of the assessee falls within the four corners of section 2(47) of the Income Tax Act, 1961, and capital gain is not exigible against the assessee for the assessment year 1965-66. In the view we have taken as regards the first question, the second question of law has to be answered in the affirmative and against the Revenue. No order as to costs.