2003 (2) TMI 7 - HC - Income Tax

Gift Tax Act, 1958 - Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that there could be no element of deemed gift whereby sustaining the order of the Commissioner of Gift-tax (Appeals) and dismissing the departmental appeal? - we answer the question referred to us in the affirmative, that is to say in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Whether the contribution of a capital asset to a partnership amounts to a transfer.
2. Whether the difference between the book value and market value of the contributed asset constitutes a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958.

Detailed Analysis:

1. Whether the Contribution of a Capital Asset to a Partnership Amounts to a Transfer:
The court examined whether the contribution of an immovable asset to partnership capital amounts to a transfer. It was established that, according to the Supreme Court's decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, when a partner brings in his capital assets as his contribution to the firm capital, there is indeed a transfer. The term "transfer of property" under section 2(xxiv) of the Gift-tax Act, 1958, includes the creation of any partnership or interest in property. Therefore, bringing an asset into a partnership reduces the exclusive rights of the partner to shared rights, which constitutes a transfer.

2. Whether the Difference Between the Book Value and Market Value of the Contributed Asset Constitutes a Deemed Gift:
The court then considered whether the difference between the book value and the market value of the asset contributed to the partnership constitutes a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958. The Commissioner of Income-tax (Appeals) and the Tribunal had both held that there could be no deemed gift in such a scenario, relying on the Supreme Court's decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The court noted that the consideration for the transfer of the asset to the partnership is the partner's right to share in the profits and losses of the firm and the value of his share in the net partnership assets upon dissolution or retirement. This consideration is not immediately determinable and lies in the future, making it impossible to ascertain the adequacy or inadequacy of the consideration at the time of the transfer.

The court emphasized that the notional amount credited to the partner's capital account does not represent the true value of the consideration. Since the value of the consideration cannot be determined immediately, the essential requirement of finding adequacy or inadequacy of consideration cannot be met. Consequently, section 4(1)(a) of the Gift-tax Act cannot be invoked, and no deemed gift arises.

Conclusion:
The court concluded that the contribution of an asset to a partnership does amount to a transfer. However, the difference between the book value and the market value of the contributed asset does not constitute a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958, as the value of the consideration is not determinable at the time of the transfer. The question referred to the court was answered in the affirmative, in favor of the assessee and against the Revenue. There were no orders as to costs.