TMI Blog1995 (2) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... e of M/s Krishnaveni Ink Factory was carried in a house property situated at 751, Thiruvottiyur High Road, Madras-21. And in a statement of net wealth as on 31-3-1981 the said Sambasiva Rao had disclosed inter alia the said property valuing it at Rs. 3,63,000. 4. On 1-4-1981 the said Sambasiva Rao transferred the property in question to the firm, the transfer having been effected by means of entries in the books of account of the firm. The property was not valued separately for the purposes of the said transfer. But, it is a matter of record that the entries made in the books of account of the assessee had the effect of wiping out the balances aggregating Rs. 1,06,412 standing to the debit of the said Sambasiva Rao's (a) current account, (b) C.D.S. account, and (c) loan account. The capital account of Sambasiva Rao, containing a credit balance of Rs. 12,500 was left intact. 5. Taking note of the aforesaid entries, the Assessing Officer held that he had before him a case of deemed gift within the meaning of section 4(1)(a) of the Gift-tax Act, 1958. In this regard he was impelled by the following considerations:--- (i) In the return of wealth filed by him in individual capacit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Supreme Court in the case of K. P. Varghese v. ITO [1981] 131 ITR 597 is the authority for the proposition that " there is no deemed gift when the transaction took place for consideration though it comes within the purview of the provisions of I.T. Act, determining the capital gain ". (d) Again, in the case of CIT v. Hindustan Steel Industrial Agencies (P.) Ltd [1980] 4 Taxman 204 it has been held that a honest transaction either for settlement or for adjustment of mutual differences or for other conceivable reasons cannot give rise to deemed gift. (e) Relying on the Gujarat case of CIT v. Karnoji Lumbaji [1969] 74 ITR 343, it was contended that there was no transfer in this case. In any event, the Assessing Officer has not discharged the burden of proving that in this case there has been a transfer amounting to a gift or that the transfer was for consideration which is inadequate. (f) Even after the property was transferred to the firm, the assessee continued to hold 25% right in the property by virtue of his holding a 25% share in the profit/loss of the firm. Therefore, this is not a case of complete extinguishment of rights. (g) The acquisition proceedings in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V. Sarabhai is the authority for the proposition that when one transfers one's property to a firm, there is a transfer. The observations made by the Supreme Court in that regard will go to show clearly that the transfer before us is one that squarely falls within the pale of section 2(xiv)(d) of the Act. 11. Secondly, the consideration for the property transferred was also inadequate. It is a matter of record that, as the owner of the said property, Sambasiva Rao had disclosed the property in the return of net wealth filed by him and in that connection had valued the property at Rs. 3,63,000 as on 31-3-1981. He transferred the property the very next day, i.e., 1-4-1981, and did not receive from the firm Rs. 3,63,000. The net effect of the transfer which was made by recording entries in the books of account of the firm was that Sambasiva Rao's liability in an aggregate sum of Rs. 1,06,412 to the said firm stood wiped out. In other words, in terms of money, Sambasiva Rao had received only a sum of Rs. 1,06,412 for the said property, even though on his own showing the property was worth Rs. 3,63,000 on the immediately preceding date, viz., 31-3-1981. 12. Thirdly, the firm was dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in respect of the property were also dropped. The learned counsel for the assessee contended that property viewed the decision of the Supreme Court in the case of Kartikeya V.Sarabhai actually supported the assessee's case. This was because, even while holding that there was a transfer when a partner makes over his assets to the firm, the Supreme Court went on to observe that the amount actually credited to the partner's account in connection with the transfer, could not be regarded as the consideration for the transfer. Similarly, in the case before us also it will be wrong to regard that the sum of Rs. 1,06,412 as the consideration for the transfer of the property in question and on that basis to hold that the consideration was inadequate. 17. In view of the foregoing, therefore, Shri Sridharan urged that the impugned order of the CIT(A) does not invite any interference. 18. At the outset we may mention that certain queries from the Bench elicited the following facts :--- (a) The partnership deed dated 1-4-1977 does not contain anything to suggest that the property in question was to be treated as the property of the firm. (b) There was no separate documentation in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibuted by Sambasiva Rao. (e) At the time when Sambasiva Rao transferred his property to the firm, the other partners did not admittedly bring in any property or asset belonging to them, even though their current accounts also showed debit balances. The aforesaid factors, as we see it, lead to the one and only conclusion that the property was transferred in full satisfaction of the debt of Rs. 1,06,142 owed by Sambasiva Rao to the firm; and that, by the same token, the case before us is not one of additional capital contribution by a partner of the firm. Contrast with CIT v. Janab N.Hyath Batcha Sahib [1969] 72 ITR 528 (Mad.). 22. Before considering the legal consequences of the transaction in question, we may clear the decks as it was by examining the basic contentions of both the assessee and the department. The department's case is that, as has been laid down by the Supreme Court in the case of Kartikeya V. Sarabhai, when a partner of a firm makes over his personal assets to the firm, there is transfer of property. This proposition is not seriously disputed by the assessee's counsel but his contention is that in the very case of Kartikeya V. Sarabhai the Supreme Court has h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... va Rao did not make over the property in question to the firm as his contribution to the capital of the firm. Even on 1-4-1981 when, through the medium of book entries, the property was transferred by Sambasiva Rao to the firm, there was no documentation whatsoever. It is well-settled that property belonging to the partners or to any one of them does not become partnership merely because it is used for the purposes of business. A personal asset of a partner will become partnership property only if it is shown either with reference to the partnership agreement or with reference to subsequent agreement that the intention was that the property should form part of the joint estate. Again, as has been pointed out by the Madras High Court in the case of CIT v. Dadha Co. [1983] 142 ITR 792, " the book entries do not make a conversion of any kind known to law .... they cannot by their own force effect any conveyance, release, partition, or other transfer of immovable properties ". True, it was the firm which defrayed the expenses on municipal taxes and maintenance of the property in question and claimed deduction in respect thereof which was allowed in its Income-tax assessment. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of its business. As elucidated by Pollock and Mulla in their commentary on the Indian Partnership Act, the principle of sub-section (c) of section 13 is that a partner, as regards the capital brought by him into the business, is not a creditor of the firm but an adventurer and, therefore, any agreed interest on such capital is, unless the contrary is clearly expressed, is a payment in lieu of or on account of profits and accordingly chargeable to profits only. An advance by a partner to a firm, on the contrary is not treated as an increase of capital. As respects the sums advanced by him to the firm, a creditor-debtor relationship is brought into being between the partner and the firm. This is precisely the reason why there is no stipulation in section 13(d) to the effect that the interest on such advances must be paid only out of profits. When a partner advances money to it over and above the capital, he has agreed to subscribe, and when the advance is made for the purposes of its business, then, so far as the firm is concerned, the interest payable by it on the sums advanced by the partner is a regular revenue expenditure which must necessarily be taken into reck ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the money-lending business carried on by him, one of the questions that arose for consideration was whether or not the advances made by a-person to a firm of which he is a partner constituted money-lending business. That question arose this way. The assessee's case was that he was taking interest-bearing loans and was using the sums so borrowed for making interest-bearing advances. - to two firms in which he was a partner. - initially to one Kotrika family and, on its partition, to the three divided brothers; and - to one Lingam Venkata Subbiah; and that the said activities constituted money-lending business. The sums advanced to the three divided brothers of the Kotrika family became bad and consequently the debt in question was revenue deductible. The assessee was unsuccessful before the Income-tax Officer, the Appellate Assistant Commissioner, and also before the Tribunal. On the question whether the sums advanced by the assessee to the two firms in which he was a partner amounted to money-lending business, the Tribunal observed : ". . . As far as financing of the firm was concerned, it could not be treated as part of the money-lending business, as it was in the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was the owner of a property at No. 20, G.N. Chetty Road, Madras. During the previous year relevant to the assessment year 1976-77 the assessee made a declaration to the effect that the said property would, thenceforth, be the property of the firm. The consideration agreed to was Rs. 1,20,000 as against the book cost of Rs. 76,000. The declaration was followed by book entries by which the assessee's account in the firm was credited with the sum of Rs. 1,20,000, while a corresponding debit entry was made in the books of the firm. In the course of the assessment proceedings relating to the assessment year 1976-77 the Assessing Officer brought the differential amount of Rs. 44,000 to charge on the ground that a capital gain had arisen as a result of the transaction. The first appellate authority allowed the assessee's appeal on the ground that the property in question had not been conveyanced through a registered document. According to him, declaration executed by the assessee on a stamp paper of the value of Rs. 5 and the entries made in the books of account of the firm could not effectively transfer the title of the property to the firm. 40. Thereupon, the department appealed to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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