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Issues Involved:
1. Assessability of deemed gift in the property transferred to minor partners upon their retirement. 2. Applicability of Gift-tax Act provisions on the difference between market value and book value of the transferred property. Detailed Analysis: Issue 1: Assessability of Deemed Gift The primary issue revolves around whether the transfer of immovable properties to retiring minor partners constitutes a transfer attracting the provisions of the Gift-tax Act, 1958. The court examined the scenario where the credit balance in the capital account of a retiring partner is settled by transferring immovable properties belonging to the firm. The Income-tax Appellate Tribunal (ITAT) and the Commissioner of Gift-tax (CGT) held that this transaction constituted a transfer under the Gift-tax Act. However, the court referred to established legal principles stating that a partnership firm is not a distinct legal entity separate from its partners. Any reference to the firm's property is, in substance, a reference to the property in which all partners have a joint or common interest. The court cited several judgments, including the Supreme Court's decision in CCT v. T. M. Louiz and Jagatram Ahuja v. CGT, which clarified that the allotment or adjustment of assets upon a partner's retirement does not amount to a transfer of property. The court concluded that the distribution of assets to retiring partners is a mutual adjustment of rights and does not constitute a transfer under section 2(47) of the Income-tax Act or the Gift-tax Act. Issue 2: Applicability of Gift-tax Act Provisions The second issue addressed whether the difference between the market value and the book value of the property transferred to the retiring minor partners could be assessed as a deemed gift under section 4(1)(a) of the Gift-tax Act. The ITAT upheld the CGT's view that the difference constituted a deemed gift. However, the court analyzed the provisions of section 30 of the Indian Partnership Act, 1932, which allows minors to be admitted to the benefits of partnership and entitles them to a share of the property and profits. The court emphasized that upon severance of a minor's connection with the firm, the settlement of accounts should follow the rules in section 48 of the Partnership Act. This involves a mutual adjustment of rights and does not amount to a transfer of property. The court also referred to the Supreme Court's judgment in B. T. Patil and Sons v. CGT, distinguishing between the dissolution of a firm and the retirement of a partner. The court held that the principles applicable to partners upon retirement or dissolution equally apply to minors admitted to the benefits of partnership. The court concluded that the transfer of property to a minor upon severance from the firm is an adjustment of rights and does not constitute a transfer or gift under the Gift-tax Act. The court dismissed the Revenue's contention that the condition in the dissolution deed for recovering any balance if the capital balance and accrued profit were inadequate to meet the book value of the property indicated a transfer. The court likened this condition to a provision of "owelty" in partition cases, which does not contradict the established legal principles. Conclusion: The court answered both questions in the negative, ruling in favor of the assessee and against the Revenue. The court held that there is no transfer within the meaning of clause (xxiv) of section 2 of the Gift-tax Act, nor is there a gift under the Act in the case where property is transferred to a minor upon severance from the firm in settlement of accounts. Consequently, the three appeals were allowed, the orders of the ITAT were set aside, and the tax levied by the assessing authority was deleted. No order as to costs was made.
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