2010 (7) TMI 770 - HC - Income Tax

Deemed gift as per the provisions of the Gift-tax Act - Whether capital contribution of Rs. 11,59,375 by the assessee in favour of the partnership firm on 1st April, 1993, and subsequent retirement on August 31, 1993, after four months by receiving a sum of Rs. 22,84,375 the difference of Rs. 11,25,000 cannot be treated as deemed gift as per the provisions of the Gift-tax Act? - Whether the entire transaction was bona fide not for inadequate consideration and consequently does not attract gift-tax liability? - Held that - As assessee brought their landed properties into the partnership firm. The transaction is not a sham transaction, It is not a case of complete transfer of right of property in favour of the partnership firm. Partnership has admittedly not paid any consideration for such transfer when the properties were brought into the firm. When the partnership firm has not paid any consideration, when the amount mentioned in the books of account is only a notional value and when the partners even after transfer continue to have interest in the property and only on dissolution or retirement, the actual share of a partner could be ascertained and the value of the property is unascertainable on the day they were brought into the partnership firm, the question of holding it as a deemed gift under section 4(1)(a) is impermissible. That is precisely what the Tribunal has held on considering the various judgments on the point. In that view of the matter, no merit in the contention of the Revenue - substantial question of law is answered against the Revenue and in favour of the assessee.

Issues Involved:
1. Whether the capital contribution by the assessee to a partnership firm and subsequent retirement with a higher amount can be treated as deemed gift under the Gift-tax Act.
2. Whether the transaction amounts to a device adopted by the assessee to avoid tax.
3. Whether the Tribunal failed to record a finding that the transaction was bona fide and not for inadequate consideration, thereby attracting gift-tax liability.

Detailed Analysis:

Issue 1: Deemed Gift under the Gift-tax Act
The central issue is whether the difference between the book value of the property contributed by the assessee to the partnership firm and the amount received upon retirement can be treated as a deemed gift under Section 4(1)(a) of the Gift-tax Act. The Tribunal held that the transaction, although a transfer within the meaning of Section 2(xxiv) of the Gift-tax Act, does not attract gift-tax as the consideration is not ascertainable. The High Court affirmed this view, emphasizing that when a partner brings in his asset into a partnership firm, it amounts to a transfer of property. However, the consideration for this transfer is the right to share in the profits and assets of the partnership, which is not a monetary consideration. The book value is merely notional and does not reflect the market value of the property. Hence, Section 4(1)(a) is not applicable as there is no monetary consideration for the transfer.

Issue 2: Device to Avoid Tax
The Tribunal did not find sufficient evidence to conclude that the transaction was a device to avoid tax. The High Court supported this view, noting that the transaction was bona fide and not a sham. The properties were brought into the partnership firm, and the values mentioned in the books were for accounting purposes only. The actual share of a partner can only be determined upon dissolution or retirement, making it impossible to ascertain the value of the property at the time of its contribution to the partnership.

Issue 3: Bona Fide Transaction and Inadequate Consideration
The Tribunal's decision was challenged on the grounds that it failed to record a finding that the transaction was bona fide and not for inadequate consideration. The High Court clarified that the consideration for the transfer of property into a partnership firm is the partner's right to share in the profits and assets of the firm, which is not a monetary consideration. The book value is a notional value used for accounting purposes and does not reflect the market value of the property. Therefore, the transaction does not attract gift-tax liability under Section 4(1)(a) as the consideration is not inadequate.

Conclusion
The High Court dismissed the appeals, affirming the Tribunal's decision that the transaction does not attract gift-tax under Section 4(1)(a) of the Gift-tax Act. The substantial question of law was answered against the Revenue and in favor of the assessees. The transaction was found to be bona fide, and the book value of the property was deemed not to reflect its market value, thus not constituting a deemed gift.

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