TMI Blog1997 (3) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner calling upon him to file his return. The petitioner filed a nil return on February 27, 1987. Thereafter, the Gift-tax Officer passed an order on March 31, 1987, assessing the gift-tax for the assessment year 1980-81 under section 15(3) of the Act, the valuation date being March 31, 1980. The Gift-tax Officer held that the contribution of the sites towards the capital of the firm amounted to a transfer and determined the value of the sites as Rs. 6,00,000. As the petitioner had contributed the sites to the firm valuing them at Rs. 1,35,000 he treated the difference in value, namely, Rs. 4,65,000 as a gift by the petitioner to the firm and made an assessment subjecting the same to gift-tax. Feeling aggrieved, the petitioner filed an appeal before the Commissioner of Income-tax (Appeals-III), Bangalore. The appellate authority by order dated September 28, 1987, allowed the appeal holding that no gift-tax was leviable. He held that there was nothing to prove that the fair market value was Rs. 6,00,000 and at best, the value can be taken as Rs. 4,50,000 as per the valuation adopted for wealth-tax purposes; that the other partners had also contributed Rs. 2,95,950 as against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case, there was a gift within the meaning of section 4(1)(a) of the Gift-tax Act by giving of the site worth Rs. 4,50,000 as the assessee's contribution to the firm constituted on July 1, 1979 ? (ii) If "Yes" whether it was taxable under the provisions of the Gift-tax Act ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the exemption under section 5(1)(xiv) of the Gift-tax Act was not available ? Re : Question (i) : Learned counsel for the petitioner submitted that contribution of a personal property of a partner towards the capital of the partnership cannot be considered as a gift as it was not a transfer without consideration as defined in section 2(xii). He also, contended that though the transfer was for consideration, having regard to the nature of such transfer, the consideration for such transfer is incapable of ascertainment in monetary terms ; and where the consideration is indeterminate, the question of inadequacy of consideration will not arise and consequently such a transaction cannot be treated as a deemed gift under section 4(1)(a) of the Act ; and that the transaction did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the other provisions contained in the Act, there shall be charged for every assessment year, a tax in respect of gifts made by a person during the previous year at the rates specified in the Schedule. Section 2(xii) defines "gift" as a transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section. Section 2(xxiv) defines "transfer of property" as any disposition, conveyance, assignment, settlement, delivery or other alienation of property and, without limiting the generality of the foregoing includes, among others, the grant or creation of any lease, mortgage, easement, licence, partnership or interest in the property, or any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person. Section 4(1) enumerates five categories of transfers which shall be deemed to be gifts for the purposes of the Act. What is relevant is only category (a) whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to have received any "consideration" as that expression is understood in the scheme of capital gains under the Income-tax Act, 1961, for such transfer and whether the credit given to the partner in his capital account as a consequence of such transfer can be said to be the consideration for such transfer, for computation of capital gains. The Supreme Court answered the first question in the affirmative and the second question in the negative. The reasoning given by the Supreme Court in Sunil Siddharthbhai's case [1985] 156 ITR 509 to hold that there is a transfer when a partner brings his personal asset into the partnership as his contribution to its capital, are apposite (page 517) : " In its general sense, the expression 'transfer of property' connotes the passing of rights in property from one person to another. In one case, there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, after the dissolution of the partnership or with his retirement from the partnership, to get the value of a share in the net partnership assets as on the date of the dissolution or retirement 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 a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner's account at the time of such transfer cannot represent the true value of the consideration. It, therefore, follows that if the consideration for the transfer of the capital assets by the partner to the firm is incapable of ascertainment at the time of such transfer, the question of inadequacy of consideration would not arise. Hence, there can be no deemed gift as contemplated under section 4(1)(a). Learned counsel for the Department, however, contended that the decision in Sunil Siddharthbhai [1985] 156 ITR 509 was inapplicable as that dealt with the capital gains under the Income-tax Act and not Gift-tax Act. He contended that though the sine qua non for a capital gain and gift is "transfer", the factors necessary for computing capital gain for purposes of capital gain tax are wholly different from the factors necessary to determine the value of the gift, for purposes of gift-tax; that to determine capital gains, the two relevant factors are the cost of acquisition of property and the consideration received for the transfer of the property, the capital gain being the difference between them; and that, on the other hand, neither the cost of acquisition nor the considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on" for transfer, which is very relevant to determine capital gains, has normally no relevance to a gift, which in the generally accepted sense is a transfer without consideration. But, we are concerned here not with a "gift" which is a transfer without consideration, but with a "deemed gift" created by a legal fiction under section 4(1)(a) of the Act. The transaction is not sought to be taxed as a transfer without consideration, but as a deemed gift arising under section 4(1)(a). To determine the extent of deemed gift, contemplated under section 4(1)(a), 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's case [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f in a given case, the Gift-tax Officer on an examination of the facts and circumstances, finds that the transaction is not genuine, but sham or illusory, and the amount credited to the partner's account is absurdly low, wholly disproportionate to the value of the asset and the obvious intention is to transfer the asset to the other partners without consideration and without payment of gift-tax, then he is entitled to treat the value of the capital asset recorded in the books of account of the firm as the consideration and proceed to examine the matter under section 4(1)(a). It is relevant to refer to the following observations in Sunil Siddharthbhai's case [1985] 156 ITR 509 (SC) (page 523) : " We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction, and that the transfer by the partner of his personal asset to the partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on does not include partnerships. He invited reference to the corresponding definition of "person" in section 2(31) of the Income-tax Act, which includes a partnership. This contention is without merit. Firstly, the question whether the recipient of a gift is a "person" as defined in the Act or not, is not relevant. Under the charging section, it is the person making the gift who is liable to pay gift-tax. In this case, the petitioner who is an individual and a "person" as defined under the Act, is transferring the asset, and not the firm. Secondly, even a partnership firm has been held to be a "person" within the meaning of that expression under the Gift-tax Act by this court in Khoday Eswarsa and Sons v. CGT [1990] 186 ITR 388, following the decision of the Allahabad High Court in CGIT v. S. B. Sugar Mills [1979] 120 ITR 126, and the decision of the Madras High Court in CIT v. Bharani Pictures [1981] 129 ITR 244. As the first question is answered in the negative, the second question, however, does not survive for consideration. Re : Question No. (iii) : During the relevant assessment year, section 5(1)(xiv) of the Act exempted gifts made by any person in the course of carryin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e presentations and give mementos of valuable articles to dignitaries who lay foundation stones for factories, cut the tapes for opening branches, or preside over jubilees. They may be presented with costly shawls, models of keys and trowels, building models and the like, made of silver, marble, ivory or other costly material. There may be various other presents by trades people both to customers and to officialdom; large-sized donations to political parties by industrial houses. Some even undertake to adopt villages. So far as the recipients of the benefits are concerned, they are pure gifts. From the point of view of the businessmen, however, who disburse them, the presents are made only with a view to a substantial return from the business. The return may not be apparent; it may not even be measurable in terms of money in the immediate present, but it will have long-term advantages in the enlargement of markets, the enhancement of goodwill and the like. Otherwise, businessmen will not be making these gifts at all. Apparently, in view of these larger economic considerations, Parliament has exempted these gifts from gift-tax, taking care, however, to stipulate that the gifts shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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