Commissioner of Income Tax vs H. Rajan and H. Kannan

Sethuraman, J.—This reference is at the instance of the Commissioner and is u/s 256(1) of the income tax Act, 1961 (''the Act''). The following question has been referred: "Whether, on the facts and in the circum stances of the case, it has been rightly held that there was no transfer of assets in the assessee''s case within the meaning of section 2(47), read with section 45 of the income tax Act, 1961?"

The assessment year under consideration is 1968-69, for which the previous year ended on 31-3-1968. One Damodaran Nair was carrying on business in bus service under the name and style of Andavar Transports, Devakottai, till 31-3-1967. On 1-4-1967, he converted the individual business into a partnership business in which he and his two nephews, H. Rajan and H. Kannan Unni, were the partners. Damodaran Nair had a half share in the firm and others had one-fourth share each. The ITO was of the view that the buses along with routes had been transferred by Damodaran Nair to the partnership at the same value as they stood in the books of Damodaran Nair. The ITO was of the opinion that the transfer was for less than the market value. He took the (market) value of the buses at Rs. 3 lakhs as against the book value of Rs. 2,46,260, for which the buses had been taken over by the firm. This difference of Rs. 53,740 was brought under the head ''Capital gains''. In addition, the route permits were valued at Rs. 1 lakh and this amount was also brought under the head ''Capital gains''. The total capital gains thus arrived at amounted to Rs. 1,53,740. The AAC, on appeal, while upholding the validity of the assessment reduced the quantum of the capital gains as assessed by the ITO. The assessee took the matter on appeal to the Tribunal contesting the levy of capital gain. The Tribunal, following the decision of this Court in Commissioner of Income Tax Vs. Janab N. Hyath Batcha Sahib, came to the conclusion that there was no transfer as envisaged in section 45 read with section 2(47) of the Act. In this view, the amount of capital gain assessed was directed to be deleted. It is this order of the Tribunal that has given rise to the question extracted already.

In Janab N. Hyath Batcha Sahib''s case (supra), the assessee was carrying on business as an individual in forest contracts. He converted the same into a partnership with another. In addition to the capital contributed by each partner, the capital account of the assessee was credited with a further sum of Rs. 15,000 being the agreed value of three lorries owned by the assessee and taken over by the firm. As the written down value of the lorries was only Rs. 2,558, the ITO treated the difference of Rs. 12,442 as profit of the assessee u/s 10(2)(vii) of the Indian income tax Act, 1922 (''the 1922 Act''). In considering the applicability of this provision, this Court held that there was no sale of the lorries and that there was no profit made by the assessee.

The applicability of this decision to the interpretation of the provisions of the 1961 Act, came up for consideration in D. Kanniah Pillai Vs. Commissioner of Income Tax, . In that case, there was a conversion of the joint family business into a partnership business and the assets were taken over by the partner ship firm. The question was, whether the pro visions of sections 41(2) and 45 of the Act were applicable to the assets taken over by the firm from the joint family. This Court, held with reference to section 45 that no question of capital gains arose. The reasons for this conclusion were the same as those which applied to profit u/s 41(2) which corresponds to section 10(2)(vii) of the 1922 Act. Section 45 envisages levy of tax on profits and gains arising from the transfer of a capital asset effected in the previous year. The expression ''transfer'' has been defined in section 2(47) and it runs as follows:

(47) ''transfer'', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition there of under any law;

As held in Janab N. Hyath Batcha Sahib''s case (supra), there is no sale in a case like this. There is no exchange either. Nor is there any relinquishment of the asset or any extinguishment of any rights therein. In a partnership, a partner does not completely divest himself of his rights in the property, which is a partner ship asset, so as to result in relinquishment. He has a community of interest in the assets of the firm and, therefore, these expressions, viz., ''relinquishment of the asset or the extinguishment of any rights therein'' cannot apply. It will, consequently, follow that there is no ''transfer'' as contemplated by section 2(47) attracting the liability u/s 45 also. Following these decisions, we answer the question referred to us in the affirmative and in favour of the assessee. There will be no order as to costs.