2009 (9) TMI 644 - AT - Income Tax

Gift - Deemed gift - Whether on the facts and circumstances of the case, the order of the AO under s. 15(3) r/w s. 16 of the GT Act; 1958, proposing gift-tax on a sum of Rs. 60,14,109 be quashed or it may be held that provisions contained in s. 4(1)(a) of the GT Act were rightly invoked by the AO and the matter should be remanded back to the AO for computing the value of gift on the date of gift i.e., 1st April, 1994 in the manner laid down in Sch. II in the GT Act, 1958 - Held that - there is no deemed gift within the meaning of s. 4(1)(a) of the GT Act - the assessment order made under the GT Act imposing gift-tax on a sum of Rs. 60,14,409 should be set aside.

Summary

Issues Involved:
1. Error in law and facts by CIT(A) in confirming the addition under Section 45(3) of the IT Act.
2. Levy of interest under Sections 234A/234B/234C of the IT Act.
3. Initiation of penalty proceedings under Section 271(1)(c) of the IT Act.
4. Reopening of assessment under Section 16 of the GT Act.
5. Treating the amount as a gift under the GT Act.
6. Applicability of Section 47(iii) of the IT Act in relation to gift-tax.
7. Ignoring submissions and breach of natural justice.
8. Initiation of penalty proceedings under Section 17(1)(c) of the GT Act.

Issue-wise Detailed Analysis:

1. Error in Law and Facts by CIT(A) in Confirming the Addition under Section 45(3) of the IT Act:
The assessee's business was converted from a proprietorship to a partnership firm effective from 1st April 1994. The assets were revalued on 31st March 1995, and the revalued amount was credited to the partners' capital accounts. The AO deemed this revaluation as a 'transfer' under Section 45(3) and calculated capital gains based on the revalued figures. The CIT(A) upheld this view, stating that both the conversion and revaluation occurred within the same assessment year, making the capital gains chargeable. The Tribunal agreed, noting that the assets were recorded in the books at the revalued figures on 31st March 1995, thus applying Section 45(3).

2. Levy of Interest under Sections 234A/234B/234C of the IT Act:
The Tribunal directed the AO to recompute the interest under Sections 234A/234B/234C after giving effect to the order, indicating that the levy of interest is consequential and dependent on the final tax liability.

3. Initiation of Penalty Proceedings under Section 271(1)(c) of the IT Act:
The Tribunal dismissed this ground as premature, stating that the issue of penalty proceedings under Section 271(1)(c) is not ripe for adjudication at this stage.

4. Reopening of Assessment under Section 16 of the GT Act:
The Tribunal dismissed the ground regarding the reopening of assessment under Section 16 of the GT Act, noting that this issue was not raised before the first appellate authority and no arguments were advanced on this ground before the Tribunal.

5. Treating the Amount as a Gift under the GT Act:
The AO treated the difference between the revalued amount and the book value as a deemed gift under Section 4(1)(a) of the GT Act. The CIT(A) upheld this view. The Tribunal, however, found that the revaluation and subsequent credit to the partners' capital accounts did not constitute a gift. The Tribunal relied on the Rajasthan High Court's decision in CIT vs. Marudhar Hotel (P) Ltd., which held that the value of consideration in such cases is indeterminate at the time of transfer, thus negating the applicability of deemed gift provisions.

6. Applicability of Section 47(iii) of the IT Act in Relation to Gift-tax:
The Tribunal noted that the provisions of Section 45(3) of the IT Act, which were applied for capital gains tax, do not impact the interpretation of Section 4(1)(a) of the GT Act. The Tribunal emphasized that the same transaction cannot be treated differently for capital gains and gift-tax purposes, thus harmonizing the provisions to avoid contradictory results.

7. Ignoring Submissions and Breach of Natural Justice:
The Tribunal did not find merit in the assessee's claim that the lower authorities ignored various submissions and explanations, stating that the CIT(A) and AO had duly considered the relevant facts and legal provisions.

8. Initiation of Penalty Proceedings under Section 17(1)(c) of the GT Act:
The Tribunal did not specifically address this issue, as the primary focus was on the substantive tax liability under the GT Act.

Separate Judgments Delivered by Judges:
The Tribunal's decision in ITA No. 1229/Ahd/2003 was unanimous, dismissing the appeal and confirming the capital gains tax liability. However, in GTA No. 2/Ahd/2005, there was a dissenting opinion. The learned AM quashed the gift-tax assessment, while the learned JM upheld it but remanded the matter for valuation. The Third Member, Vice President R.V. Easwar, concurred with the AM, leading to the quashing of the gift-tax assessment.

Conclusion:
The Tribunal dismissed the appeal in ITA No. 1229/Ahd/2003, confirming the capital gains tax liability. In GTA No. 2/Ahd/2005, the Tribunal quashed the gift-tax assessment, holding that there was no deemed gift under Section 4(1)(a) of the GT Act. The levy of interest under Sections 234A/234B/234C was directed to be recomputed, and the initiation of penalty proceedings under Section 271(1)(c) was dismissed as premature. The reopening of assessment under Section 16 of the GT Act was also dismissed.