Commissioner of Income Tax vs Padma S. Acharya and Others

S. Parvatha Rao, J.—This Income Tax case is preferred by the Revenue u/s 256(2) of the Income Tax Act, 1961, for referring the following two question for the opinion of this court :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the onus to prove that the transfer was not effected as a device or ruse to convert the personal asset into money and evade tax on capital gains lies on the Revenue ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in not remitting the matter back to the file of the Income Tax Officer to examine whether the transfer was a device or ruse to convert personal asset into money and evade tax on capital gains ?"

Admittedly, the decision of the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, was rendered on September 27, 1985, after the order dated March 28, 1985, was made by the Income Tax Officer and after the assessee preferred the appeal before the Commissioner of Income Tax, i.e., during the pendency of that appeal. That appeal was disposed of on February 20, 1986, and the Commissioner did not advert to the portion of the judgment of the Supreme Court dealing with the question whether the firm was genuine or not and whether the transfer by the partner of his personal asset to the partnership firm represented "a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business". The Supreme Court pointed out as follows (at page 523 :

"If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to Income Tax on a capital gain, it will be open to the Income Tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The Income Tax Officer will be entitled to consider all the relevant indicia in this regard, whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the Income Tax Officer enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is sham of illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth."

Admittedly, a ground was taken before the Income Tax Appellate Tribunal whether the Commissioner ought to have set aside the assessment in view of that decision of the Supreme Court "to enable the Income Tax Officer to examine whether the transfer was a device or ruse to convert personal asset into money and evade tax on capital gains". With reference to this ground raised by the Revenue, the Tribunal observed as follows :

"Although the Income Tax Officer did not have the advantage of the Supreme Court''s decision in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, , as it was decided only on the 27th September, 1985, while the assessment order was passed on March 28, 1985, yet in view of the law as it existed at the time of the first appeal which was duly taken into account by the learned Commissioner (Appeals), we are of the opinion that the Revenue has no case. In a case like the present one, the onus is not on an assessee to plead that such a transfer was not effected as a device or ruse to convert personal asset into money and evade tax on capital gains which onus to allege and prove squarely lies on the Revenue, the transaction being permissible and not prohibited by law."

We are of the view that the two questions sought to be referred by the Revenue are questions of law and do arise out of the order of the Tribunal. The Tribunal is, therefore, directed to state the case and refer the following two questions to this court for its opinion, at the earliest :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the onus to prove that the transfer was not effected as a device or ruse to convert the personal asset into money and evade tax on capital gains lies on the Revenue ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in not remitting the matter back to the file of the Income Tax Officer to examine whether the transfer was a device or ruse to convert personal asset into money and evade tax on capital gains in the light of the observations of the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, ?"

The Income Tax case is, accordingly, allowed.