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2010 Supreme(Kar) 735
High Court of Karnataka
THE HONOURABLE MR. JUSTICE N. KUMAR & THE HONOURABLE MR. JUSTICE B.V. NAGARATHNA
The Commissioner of Income Tax & Another
Versus
Smt Jayalakshmamma
G.T.A. No.3 of 2005 C/w etc.
Decided on : 20-07-2010
For the Petitioner:M.V. Seshachala, Advocate.
For the Respondent:A. Shankar, Advocate.
Headnote:GIFT TAX ACT, 1958 - Section 4(1)(a): [N. Kumar & B.V. Nagarathna, JJ] Applicability of the provision - Pre-requisite - Contribution of assets to the partnership firm by the Assessee - On retirement, Assessee receives consideration in excess of book value of the assets contributed to the partnership firm - Whether the difference in amount could be deemed to be gift under Section 4(1)(a) of the Gift Tax Act - Held, When a partner brings in his asset into a partnership firm by way of contribution it amounts to transfer of property as defined under the Gift Tax Act. Though it amounts to transfer of property, as a consideration for that transfer, he becomes entitled to the profits in the partnership firm. It is not a case orf complete divesting of his interest in the property brought in as capital asset. Partially, the property is transferred and as a partner he continues to have interest in the said partnership asset. Not only he continues to have interest in the property brought by him to the partnership firm as a partner but if there are other partners who have brought in similar properties into the firm by way of asset, he will also have an interest in those properties. If at the time of constitution of partnership or at the time of his entry into the partnership, if a value is mentioned in the books of the partnership firm representing the interest he has brought into the partnership, id does not truly reflect the market value of the property which he has brought into the partnership firm. It is purely a notional value. The said notional value is only for the purpose of distributing the profits of the said partnership firm either at the time of dissolution or at the time of retirement. When a partner brings his property into the partnership firm, though the consideration is that he will acquire the status of a partner, and he continues to have interest in the partnership assets there is no monetary consideration for such transfer of the property and the book value mentioned is not the consideration for such transfer. Section 4 (1)(a) is attracted only in a case where there is a monetary consideration for transfer and that monetary consideration is lesser than the market value of the property, the difference in the amount being treated as a deemed gift under Section 4(1)(a). The share to which a partner is entitled to at the time of dissolution or retirement has no bearing on the question regarding the value of the property which he would have brought into the partnership at its inception. When there is transfer of property into a firm there isno 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.
In the instant case, all the three assessees brought their landed properties into the partnership firm. The transaction is not a sham transaction. 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 and such transfer when the properties were brought into the firm. When the partnership firm has not paid any consideration, when the amount mentioned in the books of accounts is only a notional value and when the partners even after transfer continues to have interest in the property and only on dissolution or retirement, the actual share of a partner could be ascertained and the value of the property is unascertainable on the day they were brought into the partnership firm, the question of holding it as a deemed gift under Section 4(1)(a) is impermissible. The finding of the Tribunal is justified.
Kumar, J
As the same question of law is involved in all these three appeals, they are taken up for consideration together and disposed of by this common order. The revenue has filed these appeals challenging the common order of the Tribunal.
2. The respondents in all these three appeals are assesses. They entered into a partnership with nine others in the name and style of M/s Amalgamated property Developers. Partnership came to be constituted on 01.04.1993. Each of the assesses contributed the land owned by them into the partnership firm as their contribution. After five months, i.e., on 31.08.1993 all the three assesses retired from the firm receiving certain amounts as their share in interest of the firm. The particulars of the book value of each of the assesses and the amount received by them at the time of retirement are as under:
Name of the Assessee Book Value Rs. Amount Received At retirement Rs. Difference amount Rs. Smt. Jayalakshmamma 11,69,375 22,35,375 11,25,000
N. Dayanad Reddy 28,26,250 69,59,250 Name of the Assessee Amount Received At retirement Rs.
Difference amount Rs.
Smt. Shamallamma
18,68,125
33,60,125
Smt. Jayalakshmamma
22,35,375
11,25,000
3. The Assessing Officer proceeded to hold that the assesses 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 assesses 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 assesses preferred an appeal to the Tribunal. The Tribunal relying on the judgment of this Court in the case of N. PRASANNA vs. COMMISSIONER OF GIFT TAX1 held that the partners introduced immovable property by way of land as capital contribution to the firm and that the said transaction is bonafide and though there is transfer within the meaning of Section 2(xxiv) of the Gift Tax Act, no gift tax is leviable thereof. Therefore, it allowed the appeal by setting aside the order passed by the authorities below and granted relief to the assesses. Aggrieved by the said order of the Tribunal, the revenue has preferred these three appeals.
4. At the time of admission, this Court framed the following substantial questions of law: In GTA No.3 of 2005
1. Whether the Tribunal was correct in holding that capital contribution of Rs.11,59,375/-by the assessee in favour of the partnership firm on 1-4-1993 and subsequent retirement on 31-8-1993 after four months by receiving a sum of Rs.22,84,375/-the difference of Rs.11,25,000/- cannot be tyr5eted as deemed gift as per the provisions of the Gift Tax Act?
2. Whether the Tribunal have recorded a finding that the capital contribution of Rs.11,59,375/- by the assessee in favour of the partnership firm on 1-4-1993 and subsequent retirement on 31-8-1993 after four months by receiving a sum of Rs.22,84,375/- amounts to a device adopted by the assessee in order to avoid tax?
3. Whether the Tribunal was correct in failing to record a finding that the entire transaction was bonafide not for inadequate consideration and consequently does not attract gift tax liability without passing a speaking order?
In GTA No.4 of 2005
1. Whether the Tribunal was correct in holding that capital contribution of Rs.28,26,250/-by the assessee in favour of the partnership firm on 1-4-1993 and subsequent retirement on 31-8-1993 after four months by receiving a sum of Rs. 69,59,250/-the difference of Rs.41,33,000/- cannot be treated as deemed gift as per the provisions of the Gift Tax Act?
2. Whether the Tribunal have recorded a finding that the capital contribution of Rs.28,26,250/- by the assessee in favour of the partnership firm on 1-4-1993 and subsequent retirement on 31-8-1993 after four months by receiving a sum of
