1. 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 assessee's case within the meaning of Section 2(47) read with Section 45 of the Income-tax Act, 1961 ?
2. 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 l/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. 1 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 with Section 2(47) of the Income-tax Act. It accordingly directed the amount of capital gains to be deleted. On a reference application being filed, the aforesaid question of law was referred. The High Court vide its judgment under appeal came to the conclusion that there was no transfer of assets and, therefore, no capital gains could be levied.
3. In Sunil Siddharthbhai v. CIT , this court had to consider a similar question. In that case also a partner had introduced capital assets into the firm and the question arose whether this amounted to there being a transfer of capital assets and, secondly, whether there was any capital gains which had resulted from this transfer. It was held by this court that inasmuch as the exclusive interest of a partner in personal asset was reduced and the said asset becoming an asset of the firm in which the other partners got an interest, there was a transfer of interest in law. It was, however, held that for such a transfer no consideration was received within the meaning of Section 48 and, therefore, no profit or gain had accrued to the transferor for the purposes of Section 45 of the Act. Therefore, there was no capital gains which could be taxed.
4. The position in the present case is similar. The exclusive business of the assessee has been imparted with a character of a partnership business with induction of two nephews of the assessee. This certainly would mean that there has been transfer of part of the assets at least by the assessee in favour of his two nephews. But as held by this court in Sunil Siddharthbhai's case , this transfer did not result in yielding any profit or gain to the assessee which could be subjected to tax under Section 45 of the Act. The question as framed by the Tribunal deals with only one aspect, namely, whether there was a transfer of the assets in the assessee's case and though the High Court has held that there was no liability under Section 45, having come to the conclusion that there was no transfer, the question of law as framed does not bring out this aspect of the case specifically. We would, therefore, frame an additional question. The original question would be regarded as question No. 1 and additional question would be question No. 2 as follows :
If the answer to question No. 1 is in the negative, then would such a transfer result in there being any gains or profit taxable under Section 45 of the Act ?
5. Following the decision of this court in Sunil Siddharthbhai's case , we would answer the reframed questions as follows :
Question No. 1 is answered in the negative and in favour of the Revenue and question No. 2 is also answered in the negative and in favour of the assessee. There will be no order as to costs.