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1996 Supreme(Kar) 329
High Court Of Karnataka
R.V.Raveendran, S.Rajendra Babu JJ.
B.T. Patil Andamp; Sons
Versus
Commissioner Of Gift Tax
TRC 7 of 1994
Decided on : Jun 27,1996
G.Sarangan, M.V.Seshachala
The distribution of assets by a partnership firm to its partners during the subsistence of the firm constitutes a transfer of property and is liable to gift-tax under the GT Act.
Headnote:
GT Act - Partnership Firm - Sec. 26(1) - Distribution of assets by a partnership firm to its partners - GT Act, 1958 - Sec. 2(xii), Sec. 2(xxiv), Sec. 4(1)(a) - Distribution of assets by a partnership firm to its partners during the subsistence of the firm constitutes a transfer of property and is liable to gift-tax on the difference between the market value and the amount debited to the partners' account.
Fact of the Case:
The petitioner, a partnership firm, distributed machinery to its partners, who then contributed the machinery to a new firm and sold it for a higher price. The assessing authority treated the difference in value as a deemed gift by the petitioner firm and subjected it to gift-tax.
Finding of the Court:
The court found that the distribution of assets by the partnership firm to its partners during the subsistence of the firm constituted a transfer of property and was liable to gift-tax on the difference between the market value and the amount debited to the partners' account.
Issues: 1. Whether distribution of assets by a partnership firm to its partners during the subsistence of the firm constitutes a transfer of property. 2. Whether a partnership firm is liable to pay gift-tax under the GT Act.
Ratio Decidendi: The distribution of assets by a partnership firm to its partners during the subsistence of the firm constitutes a transfer of property as defined in the GT Act. A partnership firm is recognized as a distinct assessable entity for the purpose of taxation laws and is liable to pay gift-tax on the difference between the market value and the amount debited to the partners' account.
Final Decision: The court answered the reference in the affirmative, in favor of the Revenue and against the assessee.
Raveendran, J.
1. THIS is a reference under s. 26(1) of the GT Act, 1958 (Act, for short). The facts leading to the reference are briefly as follows :
1.1. The petitioner is a partnership firm with five partners (mother and four sons) carrying on business as civil engineering contractors. The firm owned several moveable assets (machinery). On 9th July, 1977, certain debits were made to the respective accounts of the five partners with the firm (i.e., Rs. 21,454, Rs. 22,981, Rs. 31,234, Rs. 22,370 and Rs. 27,996 aggregating to Rs. 1,26,035) stated to be the value of certain machinery distributed by the firm to the partners. While some machineries were given to the partners individually, one machine was given to all the five partners to be held by them jointly as co-owners. As a result, the firm ceased to be the owner of said machinery and the five partners became the owners of the machinery so distributed either individually or as co-owners. Shortly thereafter the five partners of the petitioner firm formed another partnership with three others under the name and style of B. P. Sales Corporation on 10th Oct., 1977 and contributed the said machinery (which were distributed to them by the petitioner firm) to the new firm by valuing the same as Rs. 1,86,000, Rs. 1,89,000, Rs. 1,92,500, Rs. 1,91,400 and Rs. 1,88,200 in all Rs. 9,48,100. Immediately thereafter, the new firm sold the said machinery, for a price of Rs. 10,76,220.
1.2 The assessing authority by order dt. 20th Jan., 1988 held that the distribution of assets was neither as a consequence of dissolution of the firm nor as a consequence of retirement of any partner of the firm and distribution of some of the assets of the firm to its partners, to enable them to hold the same as their own property, amounted to a transfer of such assets, by the firm to the partners. He held that the three transactions, i.e., the distribution of the machinery to the five partners by the assessee-firm at the book value of Rs. 1,26,035, the contribution of such assets by the said five partners immediately thereafter to another new firm by valuing them at Rs. 9,48,100 and sale thereof by the new firm at Rs. 10,76,220 constituted a device to avoid payment of capital gains tax. He, therefore, treated the difference between Rs. 10,76,220 (the price at which the machinery were sold by B. R. Sales Corporation) and Rs. 1,26,035 (the value at which the machinery were distributed by the petitioner firm to its partners) i.e., Rs. 9,50,125 as deemed gift by the petitioner firm and subjected the same to gift-tax.
1.3 Petitioner filed an appeal against the said order of the GTO. The appellate authority upheld the order of the assessing authority, by order dt. 16th Aug., 1988. However, instead of taking the market value of the assets as on the date of deemed gift (9th July, 1977) as Rs. 10,76,220, the appellate authority took the value as Rs. 9,48,100 (the value at which the machinery were contributed by the partners of the petitioner-firm to the new firm). The appellate authority, therefore, directed the GTO to complete the assessment by subjecting the difference between Rs. 9,48,100 and Rs. 1,26,035 to gift-tax.
1.4 Feeling aggrieved by the order of the appellate authority, the assessee as well as the Department filed appeals before the Tribunal. While petitioner challenged the determination of market value as Rs. 9,48,100 instead of Rs. 1,26,035 in GTA No. 45/Bang/88, the Department challenged the determination of the market value as Rs. 9,48,100 instead of Rs. 10,76,220, in GTA No. 47/Bang/88. Both the appeals were rejected by the Tribunal by a common order dt. 18th June, 1990 holding that the distribution of machinery on 9th July, 1977 was a transfer in the nature of sale, for a consideration of Rs. 1,26,035 and as it was less than the market value of Rs. 9,48,100, the difference between the market value and the specified consideration amounted to gift.
Reference/Points for consideration
2. ON an
