TMI Blog2009 (9) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... /Ahd/2003 for asst. yr. 1995-96: "1. Learned CIT(A) has erred in law and on facts in passing the order without properly appreciating the fact and related to the conclusion based on inaccurate facts and further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned orders. The impugned order is therefore, passed in gross violation of the principles of natural justice and therefore deserves to be quashed. 2. Learned CIT(A) has erred in law and on facts in confirming the addition of Rs. 64,05,788 made by AO under s. 45(3) of the Act. Under the facts and circumstances of the case, learned CIT(A) ought to have deleted the said addition. 3. Learned CIT(A) has erred in law and on facts in holding that the conversion of the proprietorship concern into partnership, entries recorded in the partnership firm for transfer of assets as well as revaluation of the same have been done in the previous year relevant to the assessment year under consideration. However, as a matter of fact the proprietary concern got converted into partnership firm w.e.f. 1st April, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Udyognagar which was converted into partnership firm w.e.f. 1st April, 1994. On 31st March, 1995 on revaluation of assets viz., land, factory, building and plant and machinery the amount of revaluation being Rs. 80,54,997 was transferred to the capital account of the partners of the firm in their profit sharing ratios through journal vouchers debiting assets and crediting the capital accounts of each partners. 4. The AO noted that as per the provisions of s. 45(3) when the assets are contributed or brought in the firm by a partner it shall be deemed to be 'transfer' and the value at which it is credited to partners account will be treated as 'consideration' accruing for transfer of the assets. The AO observed that since the amount of Rs. 80,54,997 credited as per the revalued figures as mentioned above would be deemed as sale consideration received/accruing and the capital gain attributable thereon is liable to tax on. In this context, the AO issued notice under s. 148 on 14th May, 1997, in response to which, the assessee filed the return of income on 14th July, 1998 declaring total income of Rs. 43,180. In statement of income 25 per cent share of profit from the firm was shown. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of revaluation portion transferred to your capital account 20,13,748 Less: Fixed assets of the proprietary business before revaluation 16,49,209 3,64,539 --------- (ii) Amount transferred to the capital accounts of partners in their profit sharing ratio (Rs. 80,54,997 - Rs. 20,13,748) 60,41,249 Amount of capital gain required to be added to the total income --------- 64,05,788 --------- The capital gain so worked out was treated as the income of the assessee chargeable under s. 45(3) of the Act. When the matter went before the CIT(A), the CIT(A) dismissed the appeal of the assessee and took the view that since the assessee has transferred his assets to a partnership firm during the same year and revaluation made also falls in the same year, accordingly, the AO was justified in brining the transactions in the purview of capital gain, by obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded in the books of account at the time of conversion is taken to be the sale consideration. The assessee firm has claimed depreciation only on the value as has been recorded at the time of conversion of proprietary concern into the partnership firm. Sec. 45(3) creates a deeming fiction for the purpose of computation of capital gains under s. 48 and, therefore, it has to be interpreted strictly. 7. The learned Departmental Representative, on the other hand, relied on the order of the AO as well as that of the CIT(A). He also relied on the decision of the Madras High Court in the case of S.V. Kumaragurupasamy vs. CIT (2003) 180 CTR (Mad) 227 : (2003) 260 ITR 127 (Mad). 8. We have carefully considered the rival submissions along with the order of the tax authorities below. We have also gone through pp. 30, 31 and 28 of the paper book which were referred to at the time of hearing. The undisputed facts in this case are that the assessee was carrying on the business in proprietorship since 1974 and as on 1st April, 1994 the proprietary concern was converted into the partnership firm by inducting 6 (six) partners for carrying on the same business. The revaluation of the land and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, factory building, plant and machinery and their respective value as has been recorded in the books of the firm as on 1st April, 1994, i.e., only for Rs. 64,05,788. This fact is also clear from the second voucher by which the capital accounts of the partners were credited. The capital accounts of the partners have also been credited by revalued figure of Rs. 80,54,997, not by the difference arising due to the revaluation, i.e., only by Rs. 64,05,788. Had the partners' accounts been credited earlier as on 1st April, 1994, the assessee's capital account would have not been credited by Rs. 20,13,748 but only by the proportionate difference due to revaluation. Only on this ground itself, in our opinion, the assessee is not entitled for any relief as the provisions of s. 45(3) will clearly be applicable as the assessee has recorded the assets as on 31st March, 1995 when the capital accounts were credited. The amount recorded in the books of account of the assessee is Rs. 80.54.997 in respect of the capital assets transferred. The section clearly speaks of that for the purpose of s. 48 the amount recorded in the books of firm on the date of such transfer shall be deemed to be the ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a firm or by a member to an AOP or BOI or vice versa. In view of the practical difficulties in evaluating the consideration for transfer in such cases, the bill seeks to provide certain deeming provisions as well. Thus, in a case if transfer of a capital asset by a partner to a firm or by a member to AOP or BOI, the amount recorded in the books of accounts of firm, association or body as the value of the capital asset, shall be deemed to be the full value of consideration as a result of such transfer. By way of distribution of capital asset by a firm, AOP or BOI, the fair market value of the assets as on the date of transfer shall be deemed to be the full value of consideration as a result of such transfer consequential amendment to ss. 47 and 49 have also been proposed." The scope and effect of introduction of s. 45(3) was explained by the CBDT vide Circular No. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] under para 24.2 which reads as under: "With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987 has inserted new sub-s. (3) in s. 45. The effect of this amendment is that profits and gains arising from the transfer of a capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the books of account of the firm as the value of the capital asset shall be deemed to be the full value of consideration received or accrued as a result of transfer of the capital assets. This section does not state that the amount recorded in the books of account of the firm on the date or at the time when the person brought in the capital assets will be deemed to be the full value of the consideration. If during the previous year the amount has been recorded as the value of the capital assets, the same shall be treated to be the full value of the consideration received or accrued. The amount arising due to revaluation has been recorded during the previous year as the previous year in this case ends on 31st March, 1995. During the previous year in which the transfer has taken place the firm has recorded the capital assets at a revalued figure i.e., at Rs. 80,54,997. Accordingly the said value will be taken to be the full value of the consideration. This section defines full value of the consideration for the purpose of s. 48 but does not restrict the consideration to the extent it is credited in the capital account of the person who has contributed the capital assets. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id decisions it was vehemently contended that there will not be any gift-tax leviable on the amount of Rs. 64,05,788 and the case of the assessee is duly covered by the aforesaid decisions. 16. The learned Departmental Representative, on the other hand, contended that the gift-tax is clearly leviable as the consideration stated was not adequate and the assessee himself has transferred the assets to the firm at Rs. 80,54,997 while the WDV of the assets in the books of the proprietary concern of the assessee were only Rs. 16,49,209. 17. We have carefully considered the rival submissions and, perused the material on record along with the order of the tax authorities below. We have also gone through various case laws as relied from both the sides. The decision of the Hon'ble Kerala High Court in the case of CCT vs. A.C. Raghava Menon as relied upon by the learned Authorised Representative, in our opinion, is not applicable because in that case the partnership deed clearly provides that in case of dissolution of the firm or retirement of the partners, goodwill would remain exclusive properly of the assessee who has converted the proprietary concern into the firm with other partners. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s extent, the answer is clearly provided by two decisions of the Supreme Court in the negative that such market value of a right acquired by the contributor in consideration cannot be valued and determined as on the date the asset is so transferred. The Court clarified that the notional amount credited to the account of capital of the firm as contribution by a partner as a value of assets brought into the firm account does not represent the correct and true value of consideration because on that date, it is impossible to determine the value of consideration, which lies in the womb of the future. This value can only be computed in future when the partnership is dissolved or the partner retires and the assets of the firm are distributed to the partners on a future date. While creation of a shared interest in an asset by diminishing his own right to exclusive interest amounts to a "transfer of property", the value of consideration at which such person can be said to have transferred his property being incapable of valuation in praesenti, the essential requirement of finding the adequacy or inadequacy of consideration cannot exist. Hence, the contingency to invoke s. 4(1)(a) also canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. carried on the business for full year and later decided to revalue the assets of the firm on 31st March, 1995 i.e., asst. yr. 1995-96. The AO while framing the income-tax assessment for the asst. yr. 1995-96 brought the transaction in the purview of capital gain. The learned CIT(A) upheld the action of AO and on second appeal, the appeal of the assessee is dismissed in ITA No. 1229/Ahd/2003 in the proposed order of my learned Brother. 3. Under the GT Act, the AO framed the assessment under s. 15(3) r/w s. 16 of the GT Act, 1958 for the asst. yr. 1995-96 wherein he invoked the provisions contained in s. 4(1)(a) of the GT Act, 1958 and brought to tax revaluation so made and then credited to other partner's capital account to the extent of Rs. 60,41,249. It is pertinent to note that revaluation is based on valuation reports submitted by the assessee himself during the course of assessment proceedings. The valuer has valued all these properties as on 25th Dec., 1994. The assessee has transferred all the three assets at WDV as on 1st April, 1994 i.e., Rs. 16,49,209 whereas the value of the same as per valuation report of the assessee as on 25 Dec., 1994 is Rs. 80,54,994 as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal is dismissed being not pressed. 5. On merit, at the time of hearing Shri S.N. Soparkar, senior advocate appeared on behalf of the assessee, argued at length and also relied on the various decisions. In the proposed order, learned Brother after considering various decisions took the view that facts and circumstances of the assessee's case are duly covered by only one judgment of the Hon'ble Rajasthan High Court in the case of CIT vs. Marudhar Hotel (P) Ltd. However, in para 17 of the proposed order, the learned Brother took the view that the judgment of Hon'ble Kerala High Court in the case of CCT vs. A.C. Raghava Menon is not applicable because partnership deed clearly provides that in case of dissolution of the firm or retirement of partner goodwill would remain exclusive property of assessee who converted the proprietary concern into firm. In my opinion, the facts and circumstances of the Rajasthan High Court's case are identical with that of Hon'ble Kerala High Court in the case of CCT vs. A.C. Raghava Menon. In the case before Kerala High Court, cl. 10 of partnership deed clearly provides that in case of dissolution of the firm or retirement or cessation of a person a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the firm has been carried out during the accounting period from 1st April, 1994 to 31st March, 1995. Thereafter, it was converted into limited company under Chapter IX of the Companies Act, 1956. In this statement before the AO assessee has also admitted that revaluation portion i.e., Rs. 80,54,997 has been distributed amongst partners in their profit sharing ratio. Thus, shares of the company were issued to various partners on the basis of capital balance lying in their respective account after the amount of Rs. 80,54,997 distributed amongst the partners in their profit sharing ratio. In these circumstances, it cannot be said that consideration of Rs. 16,49,209 at which all the three assets were transferred are incapable of valuation in prasenti i.e., on the date of transfer i.e. on 1st April, 1994. These being the peculiar facts, which makes the case of the assessee different than the facts of the case in the case before the Hon'ble Rajasthan High Court in the case of Marudhar Hotel (P) Ltd., therefore, for this reason also, s. 4(1)(a) of the GT Act was rightly invoked by AO. 7. Now coming to the valuation, cl. (a) of sub-s. (1) of s. 4 at the relevant time when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e determined in the manner laid down in Sch. II to the GT Act. The scope and effect of amendment made in s. 4(1)(a) by Finance (No. 2) Act, 1991 have been elaborated in the Departmental Circular No. 621, dt. 19th Dec., 1991 [(1992) 101 CTR (St) 1], as under: "74. Rationalisation of the provisions relating to deemed gifts-Under the existing provisions of s. 4(1)(a) of the GT Act, where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property on the date of transfer exceeds the value of the consideration is deemed to be a gift made by the transferor. 74.1 Since, for the purposes of valuation of gifts, the concept of 'market value' has now been replaced by rules contained in Sch. II to the GT Act for determining the value of each category of gifted assets, s. 4(1)(a) has been amended so that deemed gift shall now be an amount by which the value of the transferred property determined in the manner laid down in Sch. II exceeds the value of the consideration. 74.2 This amendment will take effect from 1st April, 1992, and will, accordingly, apply in relation to the asst. yr. 1992-93 and subsequent years." None of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts have been narrated exhaustively in the dissenting orders passed by the learned Members. To recapitulate briefly, the assessee was carrying on the business in the manufacture of machinery and equipment since 1974 in the name of Oswal Machinery Equipment Company. It was the assessee's proprietary concern. This concern was converted into a partnership in April, 1974. A deed of partnership was drawn up. Altogether six partners' were taken in. Under cl. 5 of the deed of partnership all the incoming partners were to contribute capital in different amounts. Under cl. 7 all the partners were to share the profits and losses. The assessee was to share the profits and losses at 25 per cent. His two sons who were taken in as partners were to share the profits and losses at 15 per cent each. The partner by name Gulabchand Bharmal Shah took 15 per cent in the profits and losses and the other three partners took 10 per cent each therein. Under cl. 9 all the partners had to take part in the business activities by mutual understanding and for the common aim of the firm. On 31st March, 1995 there was a revaluation of the assets of the partnership such as land, factory, building and plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he carried on the business as sole proprietor upto 1st April, 1994 and thereafter the business was converted into a partnership which carried on the business upto 31st March, 1995, and thereafter the firm was converted into a limited company under Chapter IX of the Companies Act, that the revaluation portion mainly Rs. 80,54,997 was distributed amongst the partners in their profit sharing ratio and that shares of the company were issued to the partners on the basis of the capital balance lying in their accounts after the distribution and that in these circumstances it cannot be said that the consideration at which the assets were transferred on 1st April, 1994 was incapable of valuation. In this view of the matter the learned JM rejected the contention of the assessee that the consideration at which the assets were transferred to the partnership firm cannot be valued and if that is so, the adequacy or otherwise thereof cannot also be determined. He accordingly confirmed the assessment to gift-tax. However, for the purposes of finding out the proper valuation, he remitted the matter to the file of the GTO with directions that the taxable gift shall be computed in the manner laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el the gift-tax assessment. According to him, in the case before the Rajasthan High Court the hotel building was in fact to revert to the assessee in case of dissolution of the firm and thus there was no transfer at all which could give rise to gift-tax. A similar distinction was sought to be made between the facts before the Kerala High Court in the decision cited supra and the facts of the present case. It was further agued by the learned CIT-Departmental Representative that the decision of the Supreme Court in the case of Sunil Siddharthbhai can no longer apply because of the amendment made by the Finance Act, 1987 by inserting s. 45(3) to the IT Act w.e.f. 1st April, 1988. It was pointed out that the fact that the capital gain tax has been charged on the same transaction was irrelevant for the purpose of charging gift-tax under s. 4(1)(a) of the GT Act. It was thus contended that the order of the learned JM has to be upheld. 7. In my opinion, the contentions advanced on behalf of the assessee should prevail. In the case of Sunil Siddharthbhai it was held by the Supreme Court that when a partner introduces his assets into the partnership firm as his capital contribution, his e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inadequate consideration. This is one more aspect of the case which has to be borne in mind. Otherwise, there will be a contradictory result-for income-tax purposes the assessee would be deemed to have received the revalued figures for the transfer of the assets but for gift-tax purposes he would still be assessed on the footing that the assets were transferred for inadequate consideration. Both the provisions should be construed harmoniously in order to avoid any contradiction. 8. It is also noteworthy that when the proprietary business was converted into a partnership the six incoming partners, of which two were the assessee's sons, had brought in capital and this is mentioned in cl. 5 of the partnership deed. The incoming partners also shared in the losses of the partnership as per cl. 7 and as per cl. 9 they were also to take part in the business activities with mutual understanding and in furtherance of the common aim of the firm. All these constitute adequate consideration. In the case of Karnaji Lumbaji the Hon'ble Gujarat High Court has held that where the incoming partners are required to take part and attend the business of the firm without any remuneration paid to them ..... X X X X Extracts X X X X X X X X Extracts X X X X
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