TMI Blog2005 (6) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs. 23,30,015 and the third party being Shri P.K. Usman was expected to bring his contribution in cash. The partners enjoyed profit sharing ratio of 50 per cent : 25 per cent : 25 per cent respectively. 2.2 The firm was reconstituted with effect from 10-4-1984 vide partnership deed of even date. By this reconstitution the company M/s. Bhuvaneshwari Hotels (P.) Ltd., represented by Shri A.K. Ahmed, one of the directors and Smt. Khamarunnisa Ahmed, w/o Sri A.K. Ahmed were included as partners and the partnership continued along with the earlier partners Sri A.K. Ahmed, Sri Machingal Mohammed and Sri P.K. Usman. Smt. Khamarunnisa Ahmed had purchased property at No. 2729 measuring 7002 sq. ft. and this was brought in as capital by her with a valuation of Rs. 2 lakhs. It was decided that M/s. Bhuvaneshwari Hotels (P.) Ltd. was required to bring in capital of Rs. 10 lakhs and was also decided that in the extent of dissolution or appreciation in value of the property, the same will go to the company M/s. Bhuvaneshwari Hotels (P.) Ltd. only. Further, other partners will have no right or title or interest in the future or further appreciation of the sites which have been brought as ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reason for initiation of gift tax proceedings in the case of the appellant. The following events documented in the returns of income filed by M/s. Mysore Hotel Complex substantiated initiation of gift tax proceedings for the assessment year 1993-94. (i) Along with the return of income for the assessment year 1992-93 there is a schedule of fixed assets wherein on 30-1-1993 the land and building which had book value of Rs. 20,90,305 and Rs. 18,78,964 respectively were revalued to Rs. 1,40,90,305 and Rs. 62,22,856. As such on that day the asset value was increased by Rs. 1,63,43,892. This appreciation was allocated amongst the partners in the profit sharing ratio of 45 per cent : 22.5 per cent : 22.5 per cent : 10 per cent. But for the reconstitution on 1-10-1992 the assessee would have had complete right over this appreciation of Rs. 1,63,43,892. (ii) On 1-2-1993 another reconstitution was effected to the firm wherein four more partners being Sri M.K. Potharaju, Smt. G. Kamala, Sri P. Sundar and Smt. Gowramma Sundar were inducted to the partnership and the profit sharing ratio was decided as under:- (1) A.K. Ahmed 38% (2) Machingal Mohammed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inuing in the firm since August, 1983. After withdrawing substantial sum in assessment year 1994-95, these three partners retired from the firm in assessment year 1995-96. 4. The Assessing Officer initiated gift tax proceedings against the appellant and reasons for initiation of such proceedings are mentioned in paras 13 and 14 of the Assessing Officer's order. These are reproduced as under:- "13. In view of above facts, but for the reconstitution of rights on 1-10-1992 the company M/s. Bhuvaneshwari Hotels (P.) Ltd. would have enjoyed 100 per cent of rights in the appreciation of value of assets in the event of dissolution or appreciation. This would be in addition to 50 per cent of rights in the book value of the assets. For that matter if the assessee's wealth in common parlance is to be determined as on 31-3-1992 the whole of the appreciation in value of the assets would be considered as assessee's wealth. Consequent to reconstitution on 1-10-1992 the assessee would enjoy only 10 per cent in the appreciation of the value of assets and therefore, there is a reduction of wealth consequent to the reconstitution. 14. In the reconstituted deed no new partners have been admitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 157 Balance maintained in current account exceeded Rs. 10 lakhs and therefore the company has fulfilled its contractual obligation of contributing Rs. 10 lakhs as capital for purpose of business. Closing current balance as on 31-3-1992 has been transferred to capital account and hence it is clear that balance in current account is transferable to capital account. (ii) As per partnership deed dated 10-4-1984, it was mentioned that all the partners will contribute capital to the extent of Rs. 31 lakhs and all further finance was to be arranged by the appellant. However, such requirement of arrangement of further capital by the appellant was omitted in the deed dated 12-10-1988. The appellant was to contribute only Rs. 10 lakhs as capital. The Assessing Officer relied on the following decisions in support of the finding that appellant is liable to gift tax:- B.T. Patil Sons v. CGT [2001] 247 ITR 588 (SC) Assets of firm transferred to partners at book value. If transfer is without inadequate consideration than there is gift chargeable to tax. CGT v. Ayyanadar [1969] 73 ITR 761 (Mad.) Redistribution of shares of partners without-any introduction of instruction of any fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. The learned CIT(A) held that in the instant case, there is material and hence, it is to be held that it is a case of gift. 12. The learned CIT(A) relied on ,the following case laws in support of the proposition that transfer of property or right for inadequate consideration will give rise to deemed gift:- (a) Khoday Eswarsa Sons v. CGT [1990] 186 ITR 388 (Kar.) (b) CGT v. B. Sathiar Singh [1975] 98 ITR 316 (Mad.) (c) Addl. CGT v. S.V.R. Cycle Mart [1977] 110 ITR 429 (Mad.) (d) CGT v. Bharani Pictures [1981] 129 ITR 244 (Mad.) (e) CGT v. Surender Paul 156 ITR 173 (Cal.) (sic) 13. Thus, it was held that appellant is liable to gift tax as it has made a deemed gift. Against the finding of learned CGT(A), the appellant has filed an appeal. The effective grounds of appeal are as under:- (1) The order of reassessment is bad in law and void ab initio for want of requisite jurisdiction especially, the mandatory requirements to assume jurisdiction under section 16 of the Act did not exist and have not been complied with and consequently, the reassessment requires to be cancelled, without prejudice to the above. (2) The authorities below erred in holding that alterat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital account from 1984 to March, 1992. (iii) The amounts were advanced in current account by the appellant to the firm from the year ending 31-3-1988 to 31-3-1992. (iv) The learned AR drew our attention to the balance sheet of the appellant for the years ending 31-3-1987 and 31-31992. In the balance sheet the appellant has shown the amounts given to the firm under the head 'Loan and advances' and not under the head 'Investment'. (v) The learned AR drew our attention to the fact that appellant company had only subscribed capital of Rs. 200 only. 15. On the basis of the above facts, it was argued that since the appellant has not contributed capital as required under the partnership deed hence it did not have any vested right. As per sections 55 and 62 of Contract Act, the agreement was voidable. 16. During the subsistence of partnership, no partner has a specific right in any asset of the firm as held by the Supreme Court in the case of A. Naryanappa AIR 1966 SC 1300. The learned AR relied on the following judgments to explain the right of partner in the partnership firm. (i) CIT v. Dewas Cine Corpn. [1968] 68 ITR 240 (SC) (ii) Malabar Fisheries v. CIT [1979] 120 ITR 49 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icant in the appeal. As the alleged donee, the applicant is also served with a demand as gift, as made by the assessing authority. The donee is seeking an opportunity to be heard when the appeal is fixed for hearing. The applicant may kindly be allowed to intervene as an intervener in the above appeal." 21. All the three above persons filed power of attorney in favour of Shri S. Parthasarthy and others. Accordingly notices were issued to Shri S. Parthasarathy. Keeping in view the fact that notice was earlier issued to Shri S. Parthasarathy, opportunity was offered to Shri S. Parthasarathy to file his written submissions. Accordingly written submissions vide letter dated 26-5-2005 has been filed. Following submissions have been made in the letter filed before us: (a) The interveners supports the argument of the assessee. (b) The Supreme Court in the case of Sree Narayana Chandra Trust v. CIT [2003] 261 ITR 279 has held that there is no gift, when the share of profit is reduced on reconstitution. The Assessing Officer has not held that there was consideration, which was inadequate for reducing the share of the assessee-company in the firm. (c) When the firm M/s. Mysore Hotel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be adjusted in the books of the firm to such account treated as and agreed upon as capital contribution in kind. In the event of dissolution of the firm or the appreciation in value of the property as above said - contributed as capital, shall belong to Messers Sri Bhuvaneshwari Hotels Pvt. Ltd. only and the other parties of the continuing partners shall not have any right or title or interest in the future and further appreciation of the asset after the date on which it is so contributed as capital, asset in kind. All the future appreciation in the property owned by the firm shall belong to M/s. Bhuvaneshwari. Hotels Pvt. Ltd. from the date of this agreement and the other 'continuing partners' shall not have any right, title, interest in the future and further appreciation of the property owned by the firm after this date." 24. Smt. K. Ahmed retired from the firm vide deed dated 12-10-1988. Accumulated losses in her name to the extent of Rs. 1,51,988 were waived. This waiver is in consideration of her retiring from the firm. Thus, the firm consisting of the appellant company as partner gave consideration to the retiring partner and it can be said that firm treated that retire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners (other than the retiring one) are entitled to carryon the business and the right to a share in the asset of the retiring partner shall devolve upon them, the normal rule is that a retiring partner has a right to a share in the assets of the firm which will include goodwill at the time of retirement." 29. In the instant case, the right is available to continuing partners to carryon the business. Thus appellant company having absolute rights in appreciation and goodwill vide deed of 1988 relinquished such rights in deed executed in October, 1992. 30. Now let us consider the case laws quoted by learned AR: Sunil Siddharth Bhai's case - "During the subsistence of the partnership, no partner can deal with any portion of the property as own. The value at which asset is introduced is a national value and is 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." Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC) - "Distribution of assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Each case is to be judged on the basis of facts in each case. 32. The learned AR has heavily relied on the judgment of jurisdictional High Court in the case of D.C. Shah in support of the proposition that change in profit sharing ratio does not result in gift. The above referred judgment was approved by Supreme Court referred judgment of the Karnataka High Court was referred before the Supreme Court by the counsel of the taxpayer in the case of Sree Narayana Chandrika Trust. The learned Supreme Court observed at page 285. "The judgement in D.C. Shah's case 134 ITR 492 came to be appealed to this Court at the instance of revenue. The appeal came to be disposed off by this Court by a judgment in Civil Appeal Nos. 4551-56 of 1984 on 25-9-1996, wherein it was held: That the share of one partner is decreased and that of another partner correspondingly increased does not lead to the inference that the former had gifted the difference to the latter. The profit sharing ratio in a firm can vary for a number of reasons, among them, the ability of the partners to devote time to the business of the firm. The gift of a part of a partner's share to another partner has to be established by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the provision of section 4(1)(a) of the Gift-tax Act. 35. Keeping in view the above discussion, it cannot be held that reallocation of shares amongst partners will not result into transfer. In case such reallocation is with adequate consideration then there is no case of deemed gift. The onus is on the revenue to establish that such reallocation is without inadequate consideration after the assessee gives its explanation about the consideration which necessitated such reallocation. 36. It will be relevant to quote the following Head Note from the judgment of the Supreme Court in the case of Sunil Siddharthbai: "If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his-benefit without liability to income-tax on a capital gain, it will be open to the income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or sham transaction and even where the partnership is genuine, whether the transaction of transferring the personal asset to the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right over appreciation and goodwill is taken by the Director, who is also managing partner and got substantial benefit due to revaluation. His share increased to 45 per cent from 25 per cent. Thus, partners got converted the assets originally contributed and subsequently acquired into money and withdrew the same. They did not pay any tax on capital gain. One should appreciate that fresh partnership executed on 1-2-1993 may not be the result of one day negotiation. Revaluation of assets on 31-1-1993, execution of new deed dated 1-10-1992 and reconstitution of firm by admitting new partners is clearly a device or ruse to evade payment of due tax. The Assessing Officer was rightly justified in penetrating the veil. 38. Now let us consider the argument of the assessee that due to non-contribution of the capital, the share of the appellant was reduced. This was adequate consideration for effecting changes in various clauses of the partnership deed. As per partnership deed dated 10-4-1984, the appellant company was required to contribute Rs. 10 lakhs as capital. Further finances were required to be contributed by the appellant company. It is the submission of the learned AR that no ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also transferred the ownership of the company. Perusal of Schedule attached with balance sheet showed that advance for share capital contribution were received from the persons, who were partners in the firm as per deed dated April, 1984. This shows that appellant company was being controlled by the same persons, who were partners in the firm. 42. Book profit of the firm after debit of depreciation for various years is as under (up to 31-3-1987, expenses have been capitalized as construction work was in progress from financial year 1984-85): ----------------------------------------------------------- Year Profit/loss Depreciation Profit/Loss ending after dep- before dep- reciation reciation ----------------------------------------------------------- F.Y. 1987-88 (-) 15,19,889 15,56,999 (+) 37.1 10 F.Y. 1988-89 (-) 5,62,010 13,51,748 (+) 17,89,738 F.Y. 1989-90 (+) 1,28,219 11,06,410 12,34,629 F.Y. 1990-91 (+) 1,90,000 9,15,883 11,05,883 F.Y.1991-92 (+) 2,62,982 6,57,873 9,20,855 F.Y. 1992-93 (+) 8,62,567 5,21,159 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-company was not able to contribute sufficient capital as agreed upon for the expansion of the business. The share of the assessee company was reduced. The clause relating to the right of the assessee-company in future appreciation was omitted clause 20 of the partnership deed provides that goodwill of the firm belong to the firm while in earlier deed goodwill of the firm belonged to the assessee. As per clause 19 of the partnership deed continuing partners were given a right to continue the business in case any of the partners leave the firm on account of death, retirement, insolvency etc. (e) Assets were revalued on 30-1-1993 and accordingly capital accounts of the partners were credited in the profit sharing ratio. The assessee-company got only 10 per cent of appreciation though as per deed dated October, 1988, the assessee-company was entitled to the entire appreciation. (f) Fresh partnership deed was executed vide deed dated 1-2-1993 and 4 new partners were introduced. The new partners were father, his two sons and his daughter in law. In the financial year 1993-94, the 3 partners i.e., Shri A.K. Ahmed, M.M., Shri P.K. Usman withdrew a sum of Rs. 1.08 crore from the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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