Background:

In CIT v. Hind Construction Ltd., the issue was whether the revaluation and contribution of machinery by Hind Construction Ltd. to a partnership firm amounted to a “sale” for income tax purposes. The company had initially acquired machinery jointly, later revalued its share from ₹2.06 lakhs to ₹6.06 lakhs, and contributed it as capital to the firm. The Income Tax Department claimed the ₹4 lakh difference represented taxable business profit, while the company argued no sale occurred. The Supreme Court was tasked with deciding if the transaction triggered tax liability as a sale.

Issues:

1. Whether the revaluation and contribution of machinery by Hind Construction Ltd. to a partnership firm, at a higher book value than its original cost, amounted to a “sale” and thereby gave rise to taxable business profit under the Income Tax Act?

Observations:

The Court made the following observations:

• 1. A valid sale requires transfer of goods for a price between two distinct persons. In this case, the company transferred assets to a partnership where it was a partner—hence, no distinct buyer existed.
• 2. A valid sale requires transfer of goods for a price between two distinct persons. In this case, the company transferred assets to a partnership where it was a partner—hence, no distinct buyer existed.
• 3. Merely increasing the book value of assets does not result in real income or profit. It is an internal accounting adjustment and not a taxable event.
• 4. Income tax is levied on real income, not on notional or book profits. Tax liability arises only from actual transactions that generate income.
• 5. The Court acknowledged earlier rulings but clarified that the facts of this case were different, and no diversion of stock or personal benefit was involved.

Decision:

The Supreme Court dismissed the appeal filed by the Income Tax Department. It held that:

• • The Court held that there was no "sale" involved in the transaction where Hind Construction Ltd. contributed revalued machinery to a partnership firm in which it was a partner.
• • It ruled that the revaluation surplus of ₹4 lakhs was not taxable as business profit under the Income Tax Act.
• • The Court emphasized that a partner contributing assets to a firm does not amount to a sale, and without an actual transfer of goods to an independent entity, no taxable profit arises.

Why this case matters?

This case is significant because it clearly defines that the contribution of assets by a partner to a firm does not amount to a sale, as there is no transfer to a separate legal entity. It establishes that revaluation of assets in the books does not create taxable income, and that introducing revalued assets as capital does not result in taxable business profit. The ruling protects against tax overreach by preventing tax authorities from treating internal transactions as income. Additionally, it serves as an important precedent guiding business structuring, especially in matters related to partnership formation and asset transfers within business groups.