1996 (6) TMI 54 - HC - Income Tax

Summary

Issues Involved:
1. Whether the distribution of plant and machinery by the assessee-firm to its partners during the subsistence of the firm constitutes a transfer of assets and hence a deemed gift.
2. Whether a partnership firm is a "person" that can be subjected to gift-tax u/s 3 of the Gift-tax Act.
3. If the distribution is considered a transfer, whether the firm is liable to pay gift-tax on the difference between the market value and the consideration.

Summary:

Re: Point (a):
The court examined whether the distribution of assets by the firm to its partners during the firm's subsistence amounts to a transfer or merely an adjustment of shares and capital. The court referred to the definitions of "gift" and "transfer of property" u/s 2(xii) and 2(xxiv) of the Gift-tax Act, respectively, and concluded that the distribution of assets by the firm to its partners constitutes a transfer of property. The court emphasized that during the subsistence of a partnership, partners do not have specific rights over the partnership assets. However, when the firm allots assets to a partner, the shared interest of the partners is replaced by the exclusive interest of the allottee. This transaction results in the extinguishment of the common interest of the partners and the creation of absolute ownership for the allottee, thereby constituting a transfer of property.

Re: Point (b):
The court addressed whether a partnership firm is a "person" that can be subjected to gift-tax u/s 3 of the Gift-tax Act. The definition of "person" u/s 2(xviii) includes a Hindu undivided family, a company, or an association or body of individuals or persons, whether incorporated or not. The court held that a partnership firm falls within the definition of "person" as it is an association or body of individuals. This view was supported by previous judgments, including Khoday Eswarsa's case and CIT v. Bharani Pictures.

Re: Point (c):
The court considered whether the firm is liable to pay gift-tax on the difference between the market value of the assets and the consideration for which the assets were transferred to the partners. The court noted that the machinery was distributed to the partners at a book value significantly lower than the market value. The appellate authority determined the market value of the machinery on the date of transfer, and the firm was held liable to pay gift-tax on the difference between the market value and the amount debited to the partners' accounts.

Conclusion:
The court answered the reference in the affirmative, holding that the distribution of assets by the assessee-firm to its partners constituted a transfer of assets and a deemed gift, making the firm liable to pay gift-tax on the difference between the market value and the consideration. The court ruled in favor of the Revenue and against the assessee.