Law: Income Tax Act, 1961

Section: 45

Income-tax---Capital gains---Firm---Conversion of proprietary business into firm--¬There is transfer of interest of proprietor to other partners---No consideration is received for such transfer---No capital gains arise, which could be taxed--¬Indian Income Tax Act, 1961, S.45. Where a proprietary business is converted into a partnership the exclusive interest of the proprietor is reduced and the business assets becoming assets of the firm in which other partners get an interest, there is a transfer of interest in law. However, for such a transfer no consideration is received within the meaning of section 48 of the Income Tax Act, 1961, and, therefore, no profit or gain accrues to the transferor for the purposes of sec¬tion 45 of the Act. Therefore, there is no capital gains which could be taxed. Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC) fol. JUDGMENT In respect of the assessment year 1968-69, the Income-tax Tribunal had referred the following question of law to the High Court (see (1984) 149 ITR 545. 546): "Whether, on the facts and in the circumstances of the case, it has been rightly held that there was no transfer of assets in the "Assessees case within the meaning of section 2(47) read with section 45 of the Income Tax Act, 1961. " It appears that one Damodaran Nair was carrying on business as an individual till March 31, 1967. On April 1, 1967, he converted the individual business into a partnership business in which he admitted two of his nephews as partners giving them 1/4th share each. The Income-tax Officer was of the view that there was transfer of the assets for less than the market value and the business being of a transporter, the Income-tax Officer valued the buses at Rs.3 Lakhs as against the book value of Rs.2,46,260 and taxed the difference of Rs.53,740 as capital gains. He also added Rs.l lakh to this figure as representing the value of the route permit. The Appellate Assistant Commissioner reduced the quantum of the capital gains but the Tribunal, on a further appeal by the assessee came to the conclusion that on conversion of individual business into a partnership it did not result in any transfer as envisaged by section 45 read…

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