IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 27 of 1991 Hon'ble MR.JUSTICE D.H.WAGHELA and Hon'ble MR.JUSTICE D.A.MEHTA ============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements? 2. To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO 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 concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus SUBODHCHANDRA S PATEL -------------------------------------------------------------- Appearance: MR MANISH R BHATT for Petitioner No. 1 MR MANISH J SHAH for Respondent No. 1 -------------------------------------------------------------- CORAM : MR.JUSTICE D.H.WAGHELA and MR.JUSTICE D.A.MEHTA Date of decision: 07/08/2003 ORAL JUDGEMENT (Per : MR.JUSTICE D.A.MEHTA) 1. This Reference under section 256(2) of the Income-tax Act, 1961 (the Act) is at the instance of the Revenue and the following three questions have been referred by the Income-tax Appellate Tribunal, Ahmedabad Bench "A" for our opinion: "1. Whether, in law and on facts, the Appellate Tribunal was justified in entertaining miscellaneous application filed by the assessee and allowing the same by quashing the order of the Commissioner (Appeals) by holding that the transaction did not result in taxable capital gains? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that there was no capital gains in the transaction in question? 3. Whether, when the Tribunal held under order dtd: 27-11-1986 that there was no genuine conversion of the shares and debentures into stock in trade before transferring the same into partnership firm, the Tribunal was right in law in entertaining the claim of the assessee that the transfer did not result into taxable capital gains?" The Assessment year is 1982-83 and the corresponding accounting period is Samvat year 2037. 2. The assessee was holding certain investments in shares of limited companies which were shown as capital assets in its books of account. On 1st November 1981 the assessee converted the said investments in shares into stock-in-trade and valued the said shares at market rate on the said day. Thereafter, the assessee contributed the said shares into a partnership firm in which the assessee became a partner during the accounting year and the said shares were shown as partner's capital in the books of the partnership firm. The Assessing Officer held that the conversion of capital assets into stock-in-trade was not genuine and only capital assets were transferred to the partnership firm and not stock-in-trade as claimed by the assessee. Accordingly, the Assessing Officer taxed the difference in cost of the shares and market value of the shares at which they were transferred to the partnership firm and accordingly capital gains were assessed in the hands of the assessee. 3. The assessee, being aggrieved from the aforesaid assessment order, carried the matter in appeal before Commissioner of Income-tax (Appeals), Rajkot. The CIT (Appeals), for the reasons stated in his order dated 19th February 1986, confirmed the order of the Assessing Officer placing reliance upon the decision of the Supreme Court of India in the case of Mcdowell & Co. Vs. C.T.O, (1985) 154 ITR 148. According to the CIT (Appeals), the entire exercise of conversion of capital assets into stock-in-trade was a legal device to avoid tax and hence the Assessing Officer had rightly treated the surplus arising from such transaction as income liable to capital gains tax. 4. The assessee carried the matter by way of Second Appeal before the Tribunal and the said appeal came to be registered as ITA No.1324/Ahd/1986. On 27th November 1986, the Tribunal upheld the orders of the Assessing Officer and CIT (Appeals) holding that there was no genuine conversion of the shares into stock-in-trade before transferring the same into partnership firm. The Tribunal also simultaneously held that the transaction would amount to a transfer within the meaning of section 2(47) of the Act in light of the decision of the Apex Court in case of Sunil Siddharthbhai Vs. C.I.T., (1985) 156 ITR 509 (SC). 5. The assessee preferred a Miscellaneous Application being Miscellaneous Application No.5/Ahd/1987 contending that though the Tribunal had referred to the decision in case of Sunil Siddharthbhai (supra), the Tribunal had failed to apply the said decision of the Supreme Court in its entirety. The case of the assessee in the application seeking rectification of the order was to the effect that the Apex Court in the said decision had laid down two propositions of law. The first one was 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 2(47) read with section 45 of the Act, because an exclusive interest of the partner in personal asset is reduced, on their entry into the firm into a share interest. The second proposition is to the effect that the consideration for the transfer of the personal asset is the right which arises or accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and, after the dissolution of the partnership or with his retirement from the partnership, to get the value of his share in the net partnership assets on the date of dissolution or retirement, after deduction of liabilities and prior charges. Therefore, the consideration which a partner acquires on contributing an asset to the firm as capital cannot fall within the terms of section 48 of the Act and in these circumstances as the computation machinery incorporated in the scheme relating to determination of the charge provided in section 45 of the Act fails, such a case falls outside the scope of capital gains taxation. 6. The Tribunal accordingly accepted the Misc. Application filed on behalf of the assessee holding that there was no taxable capital gains arising out of the transactions in question. 7. Mr. M.R. Bhatt, the learned Senior Standing Counsel appearing on behalf of the applicant-Revenue submitted that once the Tribunal had upheld the case of the revenue that the transaction relating to conversion of assets into stock in trade was not genuine, the Tribunal could not have firstly resorted to powers under section 254(2) of the Act, and secondly, even on merits the Tribunal ought not to have held that the transaction did not permit taxation of capital gains. It was submitted that the aforesaid decision in case of Sunil Siddharthbhai (supra) specifically proceeds on the assumption that the firm was genuine and once the Tribunal had held that the transaction of conversion was not genuine, it could not have proceeded to hold that despite there being a transfer, the same was not for consideration and did not result in taxable capital gains. 8. In relation to the powers of the Tribunal under section 254(2) of the Act it is not necessary to discuss in detail as the principles have been laid down by this Court in the case of Asst. C.I.T. Vs. Saurashtra Kutch Stock Exchange, (2003) 262 ITR 146. One of the basic principles laid down by this Court is that non-consideration of a judgement of the jurisdictional high court or the apex court would always constitute a mistake apparent from the record, regardless of the judgement being rendered prior to or subsequent to the order proposed to be rectified. In the present case, admittedly, the decision in the case of Sunil Siddharthbhai (supra) was referred to by the Tribunal while passing the order under section 254(1) of the Act dated 27th November 1986, but the Tribunal failed to record a finding in relation to the second proposition of law enunciated by the Supreme Court in the said decision. Hence, the Tribunal was perfectly justified in exercising its powers under section 254(2) of the Act while passing the impugned order dated 10th March 1987. 9. The contention regarding non-genuineness of the transaction requires to be stated only to be rejected. The revenue admits in no uncertain terms that the capital assets were transferred within the meaning of section 2(47) of the Act from the assessee to the partnership firm by way of capital contribution, and once this is so, it is not possible for the revenue to contend that the firm was not genuine. The moment revenue takes up that stand, there can be no transfer of the assets and there can be no movement of the assets from the assessee to other entity which would result in a transfer amenable to capital gains tax. In the circumstances, once it is held that there was a transfer of the assets from the assessee to the partnership firm, in light of ratio of the apex court's decision it is clear that the same was without consideration and in such circumstances, no tax on capital gains can be levied as the computation machinery feels/fails. 10. In these circumstances the three questions referred to us are answered as follows: Question No.1 in the affirmative i.e. in favour of the assessee and against the revenue, question no.2 in the affirmative i.e. in favour of the assessee and against the revenue and question no.3 in the affirmative i.e. in favour of the assessee and against the revenue. 11. The reference stands disposed of accordingly. There shall be no order as to costs. [D.H. WAGHELA J.] [D.A. MEHTA J.] *ar*