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2010 Supreme(Kar) 1202
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
N. Kumar and B.V. Nagarathna, JJ.
Commissioner of Income Tax and The Deputy Commissioner of Income Tax —Appellant
Vs.
Smt. Jayalakshmamma —Respondent
AND
The Commissioner of Income Tax and The Gift Tax Officer —Appellant
Vs.
Smt. Shamalamma N. —Respondent
G.T.A. Nos. 3 and 5 of 2005
Decided on : 20-07-2010
Advocate Appeared:
Mr. M.V. Seshachala, for the Appellant
Mr. A. Shankar, for the Respondent
The main legal point established in the judgment is that the transfer of property to a partnership firm by a partner as a capital contribution does not constitute a deemed gift under Section 4(1)(a) of the Gift Tax Act, as there is no monetary consideration for such transfer and the book value mentioned is not the consideration for such transfer.
Headnote:
Gift Tax Act - Partnership Firm - Section 4(1)(a), Section 2(xii), Section 2(xxiv), Section 3 - The court held that the transfer of property to a partnership firm by a partner as a capital contribution does not constitute a deemed gift under Section 4(1)(a) of the Gift Tax Act, as there is no monetary consideration for such transfer and the book value mentioned is not the consideration for such transfer. The court referred to various judgments to establish that the consideration for such a transfer is unascertainable until the dissolution of the partnership, and the value of the property is unascertainable at the time of its contribution to the partnership firm.
Fact of the Case:
The assessees contributed their land into a partnership firm as their capital contribution and later retired from the firm receiving amounts in excess of the book value of their contributions. The revenue levied gift tax on the difference amount, considering it as a deemed gift under Section 4(1)(a) of the Gift Tax Act.
Finding of the Court:
The court found that the transfer of property to a partnership firm by a partner as a capital contribution does not constitute a deemed gift under Section 4(1)(a) of the Gift Tax Act, as there is no monetary consideration for such transfer and the book value mentioned is not the consideration for such transfer.
Issues: The issues involved were whether the amounts received by the assessees at the time of retirement from the partnership firm, in excess of the book value of their contributions, could be deemed as gifts under Section 4(1)(a) of the Gift Tax Act.
Ratio Decidendi: The court held that the consideration for the transfer of property to a partnership firm by a partner as a capital contribution is unascertainable until the dissolution of the partnership, and the value of the property is unascertainable at the time of its contribution to the partnership firm. Therefore, it cannot be deemed as a gift under Section 4(1)(a) of the Gift Tax Act.
Final Decision: The court dismissed the appeals and held that the amounts received by the assessees at the time of retirement from the partnership firm, in excess of the book value of their contributions, do not constitute deemed gifts under Section 4(1)(a) of the Gift Tax Act.
N. 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 assessees. 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 assessees 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 assessees retired from the firm receiving certain amounts as their share in the interest of the firm. The particulars of the book value of each of the assessees and the amount received by them at the time of retirement are as under:
Name of the Assessee
Book Value
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
41,33,00
Smt. Shamallamma
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 Vs. Commissioner of Gift Tax, ILR (1997) KAR 2661 , 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 assessees. 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 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. 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 Rs. 69,59,250/ - amounts to a device adopted by the assessee in order to av
