Paragraph 3 of Instruction No 1063. - Income Tax - 1502/CBDT

INSTRUCTION NO. 1502/CBDT Dated: March 2, 1983 Attention is invited to Board's Instruction No. 942 dated 26th March 1976 (F.No. 331/2/73-GT), which was partly modified by Circular No. 219 and Instruction No. 1063 both dated 30th May, 1977 (F.No. 333/1/76-GT) on the above subject. In paragraph 3 of Instruction No 1063 the Board had clarified that Gift Tax officers should take into account the consideration flowing from the person in whose favour the interest in the firm has been transferred. It had further been clarified that the consideration could be in the form of capital introduced in the business or in the form of labour (as in the case of a working partner) or both and the Gift Tax Officer would have to examine the adequacy of the consideration before subjecting the transfer to gift tax. 2. It appears that this clarification is not being borne in mind in many cases. The Estimates Committee have, in paragraph 5.106 of their 29th Report 1981-82, expressed the view that probably there is some difficulty in interpreting the instructions and have, therefore, suggested that a further clarification should be issued. It is accordingly emphasised that when new partners are admitted to an existing firm or when there is a change in the profit sharing ratio amongst the existing partners, or when a sole proprietory concern is converted into a partnership and shares are allotted to the partners other than the one who was the sole proprietor, gift tax will be chargeable only if the case is not covered by section 5(1)(xiv) and the consideration flowing from the persons in whose favour the change has taken place is not adequate. The ambit of the exemption available under section 5(1)(xiv) has been discussed at length by the Supreme Court in Commissioner of Gift Tax, Kerala Vs. Cheevarghese (1972) 82 ITR 403 at pages 409 to 411. 3. These instructions may please be brought to the notice of all the officers working in your charge.