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2000 (1) TMI 30 - HC - Income Tax

Issues:
1. Whether the assessee is liable to be taxed under the Gift-tax Act for converting a proprietary business into a partnership?

Analysis:
The case involved a question referred under section 26(3) of the Gift-tax Act, 1958 regarding the liability of the assessee to be taxed under the Act. The assessee converted a sole proprietorship business into a partnership, leading to the Gift-tax Officer levying tax on the perceived gift of goodwill and immovable assets. However, the Commissioner of Gift-tax (Appeals) and the Tribunal held that there was no liability for gift-tax based on the decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The Revenue contended that this decision was not applicable to the case, emphasizing the definition of "gift" under the Act.

The Revenue relied on the decision in CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 to argue for a deemed gift due to the conversion of the business into a partnership. However, previous judgments highlighted that the exigibility of gift-tax depends on the terms of the partnership deed or contract governing the transaction. The consideration for the transfer of personal assets to a partnership was deemed unascertainable until dissolution, as observed in Sunil Siddharthbhai's case [1985] 156 ITR 509. The Tribunal found no evidence to conclude that the assessee transferred the asset for inadequate consideration, thus rejecting the notion of a deemed gift.

The judgment emphasized that the credit entry in the capital account did not represent the true value of the consideration, and the Revenue failed to establish all necessary conditions for deeming a gift under section 4(1)(a) of the Act. The Tribunal rightly concluded that no gift was involved in the transaction. Therefore, the answer to the question posed was in favor of the assessee and against the Revenue, indicating that the assessee was not liable to be taxed under the Gift-tax Act for the conversion of the business into a partnership.

 

 

 

 

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