S.B. Majmudar, J.
1. At the instance of the applicant-assessee, the following two questions are referred for our opinion by the Income-tax Appellate Tribunal, Ahmedabad Bench. The referred questions are as under :
'(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee did not convert the land as its stock-in-trade of the business of purchase and sale of immovable properties on and from June 1, 1975, and contributed the land as stock-in-trade to the partnership on June 16, 1975
(ii) Whether, on the facts and in the circumstances of the case, there was a transfer of the capital asset by the assessee under section 2(47) of the Income-tax Act, 1961, when it became a partner in the firm from June 16, 1975, and, therefore, became liable to pay capital gains under section 45 of the Income-tax Act, 1961 ?'
2. It will be profitable to have a look at the introductory facts. The assessee is a Hindu undivided family. The main source of income was dividend. The assessee was not doing money lending business. The relevant assessment year with which we are concerned is 1976-77. The assessee had received on final partition plot No. 6A, sub-plot No. 3, of Dariapur-Kazipur. Its area was 5,082 sq. yards. Out of this land, it was claimed by the assessee that an area measuring 4,273 sq. yards was converted into stock-in-trade of business of the land and the assessee revalued the same at Rs. 3,84,570 with effect from June 1, 1975, as against cost of Rs. 1,27,335. The Hindu undivided family consisted of Shri Jaykrishna Harivallabhdas (karta), his wife and the branch of Shri Rajesh Jaykrishna, son of Shri Jaykrishna Harivallabhdas. The assessee further claimed that, with the said stock-in-trade, he joined the firm of Messrs. Namrata Investors as a partner and his capital account was credited with Rs. 3,84,570. It was further claimed that the difference of Rs. 2,57,235 is neither taxable as income nor as capital gain within the meaning of section 45 of the Income-tax Act, 1961 (for short, 'the Act of 1961').
3. The Income-tax Officer was not satisfied with the contention of the assessee. According to him, there was no cogent material on record to show that the assessee ever converted his capital asset into stock-in-trade with effect from June 1, 1975. Disbelieving the version of the assessee, the Income tax Officer held that the said land remained as capital asset of the assessee between June 1, 1975, to June 15, 1975, and when it was brought as stock-in-trade in the firm of Messrs. Namrata Investors, there was a transfer of the capital asset attracting capital gains tax and the transaction was covered by section 45 of the Act. Accordingly, the Income-tax Officer completed the assessment. Being aggrieved by the said order/assessment, the assessee carried the matter in appeal. The learned Commissioner (Appeals), after considering the evidence on record, accepted the submissions on behalf of the assessee that, with effect from June 1, 1975, the land in question which was previously a capital asset of the assessee got converted into stock-in-trade. He further held that, in the present case, there could be no capital gains.
4. The Revenue carried the matter before the Tribunal. The Tribunal agreeing with the Revenue took the view that there was no conversion of the capital asset into stock-in-trade from June 1, 1975. The Tribunal further held that till June 16, 1975, the land in question remained a capital asset of the family of which the assessee was the karta. The Tribunal further held that the decision of Hind Construction Co. Ltd. relied upon by the assessee was not applicable to the facts of the present case. Accordingly, the Tribunal set aside the findings of the learned Commissioner (Appeals). As noted earlier, the said decision of the Tribunal had given rise to the referred question at the instance of the assessee. At the time of final hearing of this reference, Mr. Kaji, learned counsel of the assessee, contended that question No. 2 may be considered first as, in his view, it is covered in favour of the assessee by the decision of the Supreme Court in the case of Kartikeya V. Sarabhai v. CIT : [1985]156ITR509(SC) , and if question No. 2 is answered in favour of the assessee, then there would remain no occasion for him to press question No. 1 and it need not be answered. In view of the aforesaid stand taken by the assessee, we deem it fit in the present case to consider question No 2 first.
5. Before we proceed to deal with that question, it is necessary to note a few relevant statutory provisions holding the field. Section 2(47) of the Act, as it stood at the relevant time, defined 'transfer' as under :
'2. (47) 'Transfer' in relation to a capital asset, includes -
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.'
6. So far as 'capital asset' is concerned, it is defined by section 2(14) of the Act as under :
'2. (14) 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -
(i) any stock-in-trade, consumable stores or raw materials held for the purpose of his business or profession;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him.
Explanation. - For the purposes of this sub-clause, 'jewellery' includes -
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii) agricultural land in India, not being land situate -
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or
(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for urbanisation of that area and other relevant consideration, specify in this behalf by notification in the Official Gazette;
(iv) 6 1/2 per cent. Gold Bonds, 1977 or 7 per cent. Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991, issued by the Central Government.'
7. The charging section, so far as capital gains is concerned, is section 45. Relevant part thereof reads as under :
'45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D, 54E, 54F, 54G and 54H, be chargeable to income tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place.'
8. A conjoint reading of the provisions as aforesaid makes it clear that, before the charge on capital gains is attracted, it should be shown that, during the previous year, there has taken place a transfer of the capital assets of the assessee. The Tribunal has thus taken a view interpreting section 2(47) of the Act that, when the assessee converted his capital asset into stock-in-trade by joining the partnership of Messrs. Namrata on June 16, 1975, the assessee could be said to have entered into a transaction of transfer of his capital asset within the meaning of section 2(47). For that view, reliance was placed on the decision of this court as mentioned in paragraph 14 of the judgment of the Tribunal. Mr. Kaji, learned counsel for the applicant assessee, has vehemently contended that now the questions stands fully covered by the decision of the Supreme Court in the case of Kartikeya V. Sarabhai v. CIT : [1985]156ITR509(SC) , where the Supreme Court has taken the view that, when the assessee enters into a transaction by which he brings his capital asset as stock-in-trade of the partnership, even though the transaction is a transfer within the meaning of section 2(47) of the Act, such a transaction gets out of capital gains taxation as neither section 45 nor section 48 of the Act would apply to such transaction. He, therefore, submitted that question No. 2 may be answered in the light of the said decision by holding that though in such a case, there is transfer of a capital asset, under section 2(47), it would not be liable to capital gains tax under section 45 of the Act. It, therefore, becomes necessary to turn to the decision of the Supreme Court in the aforesaid case. In that case, the Supreme Court Bench, speaking through Justice Pathak, partly reversed the decision of the Gujarat High Court in the case of CIT v. Kartikey V. Sarabhai : [1981]131ITR42(Guj) , and held that, where the 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 of the Act because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest.
9. It was also held that the consideration for the transfer of the personal assets 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 as on the date of the dissolution or retirement after deduction of liabilities and prior charges. The credit entry made in the partner's capital account in the books of the partnership firm does not represent the true value of the consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate beforehand as to what will be the position in terms of monetary value of a partner's share on that date. At the time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot 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.
10. Accordingly, it was held that in such cases, when the partner of a firm made over to the firm certain shares in a company which were held by him, there was a 'transfer' of the shares, but, for that he received no consideration within the meaning of section 48 nor did any profit or gain accrue to him for the purpose of section 45.
11. In view of this authoritative pronouncement of the Supreme Court and in the light of the statutory scheme which existed at the relevant time, question No. 2 has to be answered in favour of the assessee and against the Revenue by holding that, by the transfer of the capital assets by the assessee under section 2(47) of the Income-tax Act, 1961, when he became a partner in the firm from June 16, 1975, the assessee did not become liable to pay capital gains tax under section 45 of the Income-tax Act on account of the said transfer.
12. Thus, the ultimate answer to question No. 2 would be in the negative, that is, in favour of the assessee and against the Revenue. However, before parting with this discussion, we may mention that in the case of Sunil Siddharthbhai v. CIT and Karthikeya V. Sarabhai v. CIT : [1985]156ITR509(SC) , the Supreme Court has made the following important observations in connection with such transaction. They are found at the end of the report as under :
'We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction and that the transfer by the partner of his personal asset to the partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. 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 represent 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 a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth.'
13. Relying on these observations, learned counsel for the Revenue submitted that, while answering question No. 2 in favour of the assessee, we may clarify that it will be open to the Income-tax Officer to find out whether the transaction in question was genuine or not. It is difficult to appreciate this contention. It has to be kept in mind that, despite these observations found in the ultimate paragraph of the report as aforesaid, the Supreme Court in that case did not order any remand of the proceedings to the Income-tax Officer for such inquiry but even that apart, on the facts of the case, there never was the stand of the Revenue that the transaction in question of bringing the capital asset as stock-in-trade in the firm was a mere camouflage or shame. It has to be kept in view that there was no such case all throughout. We find that the case from the Income-tax Officer level is that the theory of the assessee that on June 1, 1975, it converted its capital asset into stock-in-trade of the business of the Hindu undivided family was not acceptable and that, according to the Revenue, this capital asset got transferred to the firm of Messrs. Namrata Company on June 16, 1975. On this transaction, capital gains tax was attracted. Thus, according to the Revenue, what happened on June 1, 1975, was unreal but what happened on June 16, 1976, was sham and subsequent transfers effected by Messrs. Namrata Construction Investors in favour of third parties was in substance the transaction of transfer of the capital asset by the assessee being the real owner to those third parties through Namrata Investors which was a camouflage. Such a case was never put forward by the Revenue at any stage. In fact, in short there was even no whisper of such case by the Revenue against the assessee at any point of time and, therefore, there remains no occasion for us to permit any such inquiry in connection with the transaction in question. In fact, such a similar contention on the part of the Revenue was repelled by the Division Bench of this court in the case of CIT v. Harikishan Jethalal Patel : [1987]168ITR472(Guj) . In that case the Division Bench of this court rejected the request of the Revenue to order any remand and permit such an inquiry about the genuineness of the transaction of transferring the capital asset to the partnership on the basis of the general observations found in the report : see : [1985]156ITR509(SC) . However, learned counsel for the Revenue took us to the latest decision of the Division Bench of this court in the case of CIT v. Leena A. Sarabhai : [1988]171ITR86(Guj) . In that case, the Division Bench of this court found on the facts that it was earlier decided by the appellate authority that the transfer of the so-called capital asset to the transferee was a camouflage and the subsequent transfers could be treated to be transfers by the assessee to the subsequent transferee. As such, a germ of case was there, on behalf of the Revenue as seen from the record, such inquiry was found permissible in the aforesaid decision. So far as the facts and circumstances of this case are concerned, they are clearly covered by the decision of this court in CIT v. Harikishan Jethalal Patel : [1987]168ITR472(Guj) , as on such stand is discernible from the record of the case so far as the submission of learned counsel is concerned. Even that apart, the very phraseology of question No. 2 suggests that it was the Revenue's own case that the assessee had become a partner in the firm from June 16, 1975, and in fact, that was the basis on which section 45 was sought to be attracted against the assessee. Consequently, it is not open to the Revenue to now urge to the contrary placing reliance on the general observations found in the decision of the Supreme Court in Sunil Siddharthbhai v. CIT : [1985]156ITR509(SC) . In fact, any such attempt would be counterproductive as, if it is suggested by the Revenue in the alternative that on June 16, 1975 the assessee had not become a genuine partner in the firm the question whether there was any transfer of the capital assets of the firm would not survive. Consequently, it will not be open to the Revenue to take such a somersault in its existing stand throughout the proceedings before the authorities below.
14. Question No. 2, therefore, stands answered as aforesaid. In view of our answer to question No. 2 as aforesaid, we do not answer question No. 1 as learned counsel for the assessee has not pressed the same for our decision. The reference accordingly stands disposed of with no order as to costs.