Income Tax Appellate Tribunal vs P.S. Varghese

Kochu Thommen, J.—The following question has been, at the instance of the revenue, referred to us by the Tribunal, Cochin Bench :

"Whether, on the facts and in the circumstances of the case, was the Tribunal justified in holding that the income tax Officer could not be considered to have, in actual fact, invoked the provisions of section 52(2) of the income tax Act, 1961 when he has taken action u/s 52(1)?"

The assessment year in question is 1974-75. The assessee is a medical practitioner. He brought the assets and liabilities of his dispensary after closing down the practice and discharging the staff into a partnership firm when he became its partner. The other partners are his close relatives. The ITO found that there was transfer of assets, but insofar as only the book value was shown in the accounts of the firm as the value of the assets brought in by the assessee, there was suppression of a portion of the actual value so as to attract the provisions of section 52(1) of the income tax Act, 1961 (''the Act''). On appeal by the assessee the AAC found that the fact that only the book value was shown in the books of account of the firm did not justify the inference that section 52(1) was attracted. This finding was, on appeal by the revenue, confirmed by the Tribunal.

The facts stated by us clearly attract the principle laid down by the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, where it is stated:

"...In the circumstances, we are unable to hold that the consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital can fall within the terms of section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether.

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In as much as we are of opinion that the consideration received by the assessee on the transfer of his shares to the partnership firm does not fall within the contemplation of section 48 of the income tax Act and further that no profit or gain can be said to arise for the purposes of the income tax Act, we hold that these cases fall outside the scope of section 45 of the Act altogether." (pp. 521-523)

This principle shows that when the assets were transferred by the assessee to the partnership firm on his entry as a partner none of the provisions relating to capital gains was attracted, and there was, therefore, no scope for the application of any provision of section 52. In the circumstances, it is unnecessary for us to answer the question. We decline to answer the same.

We direct the parties to bear their respective costs in this tax referred case.