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TMI Blog2010 (7) TMI 770X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs.) Amount received at retirement (Rs.) Difference amount (Rs.) Smt. Jayalakshmamma 11,69,375 22,35,375 11,25,000 N. Dayanand Reddy 28,26,250 69,59,250 41,33,000 Smt. Shamalamma 18,68,125 33,60,125 14,92,000 3. The Assessing Officer proceeded to hold that the assessees have adopted a device in order to avoid tax. The difference in the aforesaid amount is the deemed gift and, therefore, it falls under section 4(1) of the Gift-tax Act (hereinafter referred to as "the Act") and accordingly he levied gift-tax on the said deemed gift. Aggrieved by this order, all the three assessees preferred an appeal to the Commissioner of Gift-tax. The appellate authority dismissed the appeal by affirming the assessment orders.Against the said order, the assessees preferred an appeal to the Tribunal. The Tribunal relying on the judgment of this court in the case of N. Prasanna v. CGT reported in [1997] 228 ITR 427 (Karn), held that the partners introduced immovable property by way of land as capital contribution to the firm and that the said transaction is bona fide and though there is transfer within the meaning of section 2(xxiv) of the Gift-tax Act, no gift tax is leviable thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no gift despite the assessee having entered into a partnership by contributing property worth Rs. 18,68,125 and retiring after 4 months by receiving a sum of Rs. 33,30,544 which would amount to a deemed gift ? 2. Whether the Tribunal should have taken into consideration the finding recorded by the Appellate Commissioner which clearly showed that if the market value of the property was taken into consideration the deemed gift of Rs. 34,69,375 was liable to tax as held by the Appellate Commissioner ? 3. Whether the Tribunal should have independently considered the facts and circumstances of the assessee's case and recorded a categorical finding instead of clubbing this matter with other cases ?" 5. Though, three substantial questions of law are framed, in substance, the substantial question of law involved in this appeal is as under : "Whether in a case of an assessee contributing his immovable property to a partnership firm towards his contribution, receives at the time of retirement from the partnership firm, consideration in excess of the book value mentioned at the time of contributing the assets to the partnership firm, the difference in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer and determined in the manner laid down in Schedule II, exceeds the value of the consideration shall be deemed to be a gift made by the transferor :" 11. Therefore, for application of section 4(1)(a), the pre-requisite is that there should be a transfer for consideration. If that consideration is inadequate, the difference in that value of property is deemed to be deemed gift under section 4(1)(a) of the Act and gift-tax is leviable under section 3 of the Act. In this regard it is useful to refer to two judgments dealing with transfer of immovable property by a person to a partnership firm and consequence flowing therefrom. The apex court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), has held as under (pages 518-520, 522) : ". . . when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the rights of other partners in it. It is not an interest which can be evaluated immediately, it is an interest which is subject to the operation of future transactions of the partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t after deduction of liabilities and prior charges. The credit entry made in the partner's capital account in the books of the partnership firm does not represent the true value of the consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate beforehand what will be the position in terms of monetary value of a partner's share on that date. At the time when a partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither the date of dissolution or retirement can be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration is the relevant factor, as a deemed gift under the said provision arises where the property is transferred otherwise than for adequate consideration, that is for inadequate consideration. When the question relates to the extent or adequacy of consideration for the transfer arising from a transaction where a partner contributes his individual property to the partnership, the decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), which holds that the consideration for such a transfer is unascertainable until the dissolution of the partnership becomes relevant and applicable. The principles laid down relating to consideration in the said decision with reference to transfer of an asset by a partner to the firm, as a capital contribution apply with equal force in this case . . . it is impermissible to treat the amount entered as the value of the capital asset in the books of account of the firm, as the consideration for the transfer for purposes of section 4(1) of the Act... though a contribution by a partner of his individual property towards the capital of the firm, amounts to 'transfer of property' for the purpose of the Gift-tax Act, there cannot be a deemed g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners or it is the right lesser than the full right in the asset ? Upon transfer of interest in such property, right to be enjoyed jointly comes into existence, but it cannot be equated with the transfer of whole property in absolute in as much the contributor retains right to enjoy the property at best jointly as much as other partners also retain right to share partnership property including the one brought in by him on dissolution of the firm or on his retirement. The aforesaid principle clearly indicates that bringing in of assets by a partner as his capital contribution to the firm is not a transfer of asset in wholesome value, but such transfer brings into existence a right which arises or accrues to the contributory partner, namely, during the subsistence of the partnership to get his share in profit or loss of the firm from time to time and after dissolution of the partnership or with his retirement from the partnership, to get the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges as per law relating thereto. That is the right, that a partner gets in consideration. This i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of property into a firm there is no consideration and the book value mentioned is a notional value. The share to which a partner is entitled to at the time of retirement from or dissolution of a partnership firm depends upon various other factors. The quantification of a partner's share cannot by any stretch of imagination be taken into consideration to hold that there is inadequacy of consideration at the time of the partner bringing in the property into the partnership firm. On that basis it cannot be held the difference in the consideration constitutes a consideration for the deemed gift. 15. In the instant case, all the three assessees brought their landed properties into the partnership firm. The transaction is not a sham transaction. In the books of account the value of the property is mentioned. It does not reflect the actual value of the properties, in other words, the market value of the properties. It is not a case of complete transfer of right of property in favour of the partnership firm. Partnership has admittedly not paid any consideration for such transfer when the properties were brought into the firm. When the partnership firm has not paid any considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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