JUDGMENT
Mankad, J.
1. The Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) has referred to use for our opinion the following questions under section 256(1) of the Income-Tax Act, 1961 (hereinafter referred to as “the Act”) :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the Central Government Notification dated February 6, 1973, did not have the effect of converting the agricultural land in question into a capital asset within the meaning of section 2(14) of the Income-tax Act with effect from a date prior to May 2, 1970 ?
2. Whether, on the facts and in circumstances of the case, the Tribunal was right in holding that the transfer of the asset in question by the assessee in May 1, 1970, did not give rise to any surplus assessable under the head ‘Capital Gains’ ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the valuation of the land in question (namely, non-cash capital contributed by the assessee) in the firm’s book at a figure higher than the price for which it was originally purchased by the assessee did not give rise to any receipt assessable under the head ‘Profits and gains of business’ or under the head ‘Income from other sources’ ?
4. Whether, on the facts and in the circumstances of the case, the contribution of the land in question by the assessee as capital in the partnership firm amounts to a transfer of the asset within the meaning of section 2(47) of the Income-tax Act, 1961 ?”
2. The facts leading to this reference are as follows. The assessee is an individual. The assessment year under reference is 1971-72, the previous year being Samvat year 2026, which ended on October 30, 1970. The assessee purchased jointly with her mother and sister, land admeasuring 9 acres 32 gunthas bearing Survey No. 164, situated at Muthia, near National Highway and estate of Gujarat Industrial Development Corporation at Naroda, for Rs. 65,000 on March 2, 1970. The assessee’s share in the land was 9/20 and she contributed Rs. 29,250 as her share in the purchase price. On May 1, 1970, the assessee became a partner in a partnership firm in the name and stylejof Mamta Pratiksha Corporation and contributed her aforesaid 9/20 share in the land as her share in the capital of the firm. The assessee’s share in the capital was valued at Rs. 96,050 in the books of the firm. The Income-tax Officer, in the course of assessment proceedings for the assessment year 1971-72, held that the assessee’s contribution to the capital of the firm was only a share transaction and, as such, it did not give rise to a transfer of a capital asset. The Income-tax Officer completed the assessment on a total income of Rs. 38,549 as against returned income of Rs. 32,505.
3. On an examination of the record of the assessment, the Commissioner of Income-tax considered the aforesaid findings of the Income-tax Officer to be prejudicial to the interests of the Revenue and to that extent erroneous. He therefore, initiated proceedings under section 263 of the Act and issued a notice to the assessee to show cause why the Income-tax Officer should not be directed to revise the assessment order after including capital gains arising out of the transfer of her share to the partnership firm, M/s Mamta Pratiksha Corporation in her total income. The assessee appeared in response to this notice and opposed the proposed action. It was contended that the land in question was agricultural land and therefore, it could not constitute a “capital asset”, transfer of which would have given rise to capital gains. It was further contended that the assessee’s share in the land in question had been converted into stock-in-trade before it was contributed as capital to the partnership firm. It was also contended that the contribution of share by a partner in the partnership firm did not amount to a transfer within the meaning of section 2(47) of the Act. The Commissioner, however, rejected the contentions raised on behalf of the assessee and concluded that because of the notification date February 6, 1973 (see [1973] 89 ITR (St.) 145), the asset in question, though agricultural land, constituted a capital asset. He further held that contribution of the assessee’s share in the land as her share of the capital in the partnership firm, amounted to a transfer within the meaning of section 2(47) of the Act. The Commissioner further held that even if such contribution to the capital of the partnership firm did not amount to a transfer of capital asset, Rs. 66,800 being the difference between the market value of the assessee’s share in the land as on March 2, 1970, and the purchase or book value thereof in the books of the partnership firm as on May 1, 1970, was taxable under the head “Income from other sources” or “Profits and gains of business”. In the result, the Tribunal allowed the assessee’s appeal and set aside the order of the Commissioner.
4. The Revenue being dissatisfied with the order passed by the Tribunal the questions set out above are referred to us for our opinion at its instance.
5. So far as questions Nos. 1 and 2 referred to us are concerned, they are directly covered by a decision of the Division Bench of this court (to which one of us was a party) in CIT v. Jitendra Ramniklal, Income-tax Reference No. 123 of 1978 decided on June 19, 1981 (p. 371 supra). As held by this court in the said decision, since the notification dated February 6, 1973 ([1973] 89 ITR (St.) 145), was not in existence at the relevant time, it could not be said that the land in question would fall within the definition of “capital asset”. Following the said decision, questions Nos. 1 and 2 have to be answered in the affirmative and against the Revenue.
6. So far as question No. 4 is concerned, it does not appear to have been properly framed. As pointed out above, the Tribunal held that the contribution of the land in question by the assessee as capital in thejpartnership firm amounted to a transfer of a capital asset within the meaning of section 2(47) of the Act. The Tribunal, however, held that no consideration at all from the partnership firm flowed to the assessee and, therefore, there was no scope of any surplus arising under the head “Capital gains”. Question No. 4, it would appear, only partly covers the controversy and that question is already answered by the Tribunal in favor of the Revenue. We think that what was intended to be referred to us for our opinion was whether the Tribunal was right in holding that as consideration flowed from the partnership firm to the assessee, there was no scope of any surplus arising under the head “Capital gains”. Therefore, in order to bring out the real controversy in issue, we reframe question No.4 as follows :
“Whether, on the facts and in the circumstances of the case, though the contribution of the land in question by the assessee as capital in the partnership amounts to a transfer of capital asset within the meaning of section 2(47) of the Income-tax Act, 1961, the Tribunal was right in holding that as no consideration flowed from the partnership firm to the assessee, there was no scope of any surplus arising under the head ‘Capital gains’ ?”
7. The question as reframed is directly covered by a decision of the Supreme Court in Sunil Siddharthbhai v. CIT ([1985] 156 ITR 509). Respectfully following the said decision, the said question No. 4 shall have to be answered in the affirmative and against the Revenue.
8. This leaves for our consideration question No. 3. As pointed out above, the Commissioner in the alternative held that an amount of Rs. 66,800 being the difference between the purchase price of Rs. 29,250 and the valuation in the firm’s books at Rs. 96,050 was assessable under the head “Income from other sources” or “Profits and gains of business”. The Tribunal disagreed with the view of the Commissioner and it is, therefore, at the instance of the Revenue, that question No. 3 has been referred to us for our opinion.
9. We are unable to see as to how the aforesaid difference of Rs. 66,800 was taxable under the head “Income from other sources” or “Profits and gains of business”. The partnership firm to which the assessee contributed here share in the land had not commenced business and it is not disputed that the aforesaid difference did not arise on account of any business done by the partnership. It was not the assessee’s business to make such contributions to partnership firms or become partner in various firms by making such contributions and, therefore, we fail to see how the aforesaid difference could be treated as “business income” or “Profits and gains of business” of the assessee. In fact, no income is derived by the assessee by valuation of her share in the land in the books of the firm. What is valued is the capital contribution made by the assessee in the partnership firm and by no stretch of imagination could the difference between the value of capital contribution in the books of the firm and the price paid by her be treated as business income of the assessee. As pointed out above, no income has been derived by the assessee as a result of the valuation of her capital contribution in the books of the partnership firm. Therefore, the aforesaid difference of Rs. 66,800 could not have been included in the total income under the head “Income from other sources” also. In our opinion, therefore, the Commissioner was not right in including the said amount of Rs. 66,800 in the assessee’s total income and directing the Income-tax Officer to revise the assessment order accordingly. In the light of the above observations, we answer question No. 3 in the affirmative and against the Revenue.
10. Reference answered accordingly with no order as to costs.