The Tax Publishers2020 TaxPub(DT) 4692 (Hyd-Trib)

INCOME TAX ACT, 1961

Section 2(24) Section 56(1)

Where assessee originally was a partnership firm (SFS) engaged in business of financing and holding investments and subsequently a Mumbai based company (PEL) decided to join assessee-firm as partner and issue was as regards taxability of capital contribution made by PEL in assessee-firm which was kept partly in capital account and partly in capital reserve account in books of the assessee firm, it was held that transactions did not fall within ambit of definition of 'income' under section 2(24) in any manner, whatsoever, as entire transactions were only in capital field.

Income - Chargeability - Assessee, originally as a partnership firm (SFS), engaged in business of financing and holding investments and subsequently a Mumbai based company (PEL) decided to join assessee firm as partner - Taxability of capital contribution made by PEL in assessee firm which was kept partly in capital account and partly in capital reserve account

Assessee originally was a partnership firm (SFS) engaged in business of financing and holding investments. Thereafter, a Mumbai based company (PEL) decided to acquire SCL by joining SFS as a partner with substantial investments. Issue was as to whether capital contribution made by PEL in assessee firm which was kept partly in capital account and partly in capital reserve account in books of the assessee-firm, was correct and balance lying in capital reserve account could be brought to tax as income from other sources under section 56(1) or alternatively under section 56(2)(viia). Held: Assessee, partnership-firm, was subsequently converted into a private limited company, and the capital reserve lying in books of assessee firm was duly credited as such in the financial statements of successor company under the head reserves and surplus. Reconstituted partnership deed also provided clause about subsequent event which may happen regarding the fact of conversion of the partnership firm into a private limited company or limited liability partnership (LLP). Arguments of revenue that capital reserve belonged to firm and not to the partners was dismissed. There could not be any allegation that can be levelled on the assessee in the instant case that the capital reserve was created as part of a scheme to avoid tax liability and was part of any colourable device. The entire transactions carried out by the assessee, PEL and SCL, did not fall within ambit of definition of income under section 2(24) in any manner, whatsoever, as the entire transactions were only in the capital field. These transactions did not have any incidence of taxation at all. It was not in dispute that PEL actually made capital contribution in assessee firm, which was partly kept in capital account and partly kept in capital reserve account. Thus, there could not be any gift of capital by a partner to the partnership firm as PEL would not like to lose its rights and interest in partnership firm for the capital contributed by them. Thus, it would be totally unfair and baseless to state that PEL actually gifted or parted with its capital lying in capital reserve to the firm. Further, it was not a case of AO that money received was without any consideration or for inadequate consideration, therefore, provisions of section 56(2)(viia), could not be made applicable to facts of assessee's case.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2014-15 & 2015-16


INCOME TAX ACT, 1961

Section 56(2)(viia) Section 45(3)

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