1987 (7) TMI 74 - HC - Income Tax

Summary

Issues:
Assessment under Gift-tax Act for the year 1969-70, deemed gift due to partnership formation, valuation of gift, deduction of devaluation profits from total value of deemed gift.

Analysis:
The case involved an assessment under the Gift-tax Act for the year 1969-70 where the assessee, an individual with a proprietary business, converted it into a partnership firm on January 1, 1968. The Gift-tax Officer deemed a gift since the right to future profits was surrendered to incoming partners. The assessment order was dated June 18, 1970. The Appellate Assistant Commissioner upheld the levy of gift-tax but had doubts regarding valuation, ordering a remit on that aspect. Subsequently, the Appellate Tribunal upheld the gift-tax levy and directed the Appellate Assistant Commissioner to consider the assessee's objections comprehensively. The Appellate Assistant Commissioner then determined the taxable value of the gift by multiplying super profit by 2. The assessee contended that devaluation profits should be excluded from the total value of the gift, citing them as windfall profits and not ordinary profits.

Regarding the deduction of devaluation profits, the Appellate Tribunal found that the devaluation was not an extraordinary circumstance leading to profits, as it affected every transaction post the devaluation date. The Tribunal held that the devaluation profits were part of trading profits and should be considered in valuing the gift. The court agreed with the Tribunal's findings, stating that devaluation profits were not exceptional and continued to impact subsequent years, representing part of the trading profit. Consequently, the court rejected the assessee's plea to exclude devaluation profits from the valuation of the deemed gift.

In conclusion, the court answered the question referred to it in the affirmative, favoring the Revenue and rejecting the assessee's claim to deduct devaluation profits from the total value of the deemed gift. The judgment highlighted that devaluation profits were not extraordinary and constituted trading profits, thus should be included in valuing the gift.