2017 (11) TMI 917 - HC - Income Tax

Taxability of gifts - Transaction involved gift in terms of Section 4(1) (a) of the Gift Tax Act 1958 to attract any tax liability - Held that - In the present case, over and above the additional capital contribution of ₹ 1,23,750/- the partner Suman Vijoo, who got more shares pursuant to the reduction of shares of the assessee, on reallocation, had admittedly provided collateral security to the financial transactions of the firm. It is also an undisputed fact that, the said partner by name Suman Vijoo had offered personal guarantee for various financial transactions of the firm and this being the position, it has to be taken together to assess the worth of the said person and the consideration brought in for such reallocation of the shares. The mere arithmetical figures with reference to the total profit in the year in question, which came to be reduced and reduction in the probable portion of profit of the assessee as worked by the appellant/Revenue do not reflect the correct picture in this regard. The more important aspect with reference to the collateral security furnished by the person concerned and the personal guarantee offered by her have not been taken into consideration or dealt with by the Revenue. We are of the view that the first appellate authority as well as the Tribunal were perfectly justified in passing Annexures B and C orders; holding that there was no instance of gift coming within the purview of section 4 (1) of the Act; in turn setting aside Annexure A order passed by the assessing authority. As it stands so, we are of the view that the substantial questions raised are not liable to be answered in favour of the Revenue and they stand answered in favour of the assessee. Appeal fails

Issues Involved:
1. Whether the reallocation of shares in the partnership firm constituted a "gift" under Section 4(1)(a) of the Gift Tax Act, 1958.
2. Whether the reallocation was for inadequate consideration, thus attracting tax liability under the Gift Tax Act.

Detailed Analysis:

1. Reallocation of Shares as a Gift:
The Revenue challenged the decision of the Income Tax Appellate Tribunal, which upheld the Commissioner of Income Tax (Appeals) order that the reallocation of shares did not constitute a gift under Section 4(1)(a) of the Gift Tax Act, 1958. The assessee's share in the firm M/s Leo Rubbers was reduced from 19.5% to 11.25%, while another partner's share increased by 8.25%. The assessing authority initially treated this reallocation as a gift, but the appellate authority and Tribunal disagreed, leading to the current appeal.

2. Inadequate Consideration:
The Revenue argued that the additional capital contribution of ?1,23,750 by the partner Suman Vijoo and her obligations to the firm were inadequate consideration for the reallocation of shares. The assessee contended that Suman Vijoo's additional contributions, including collateral security and personal guarantees for financial transactions, were adequate consideration.

Factual and Legal Analysis:
- Supreme Court Precedents: The Revenue relied on the Supreme Court's decision in Sree Narayana Chandrika Trust vs. CIT, which held that a reallocation of shares could be considered a transfer but not necessarily for inadequate consideration. The Supreme Court had previously ruled in D.C. Shah's case that the mere reduction of one partner's share and the corresponding increase of another's did not automatically constitute a gift unless there was evidence of inadequate consideration.
- Tribunal's Findings: The Tribunal found that Suman Vijoo's contributions, including collateral securities and personal guarantees, were adequate consideration. The Tribunal's decision was based on the factual matrix and the legal principles established by the Supreme Court.

Revenue's Arguments:
- The Revenue argued that the factual situation in the present case differed from the precedents cited. They emphasized that Suman Vijoo was already a partner and her additional capital contribution was minor compared to the firm's total profit, rendering the consideration inadequate.
- The Revenue highlighted the significant reduction in the assessee's profit share and the corresponding increase in Suman Vijoo's profit share, arguing that the reallocation resulted in a substantial financial benefit to Suman Vijoo, thus constituting a gift.

Assessee's Defense:
- The assessee maintained that the reallocation was made in the firm's best interest and not as a gift. They emphasized the additional contributions and obligations undertaken by Suman Vijoo, arguing that these constituted adequate consideration.
- The assessee relied on the Supreme Court's rulings, which required the Revenue to prove inadequate consideration with relevant evidence, a burden the Revenue failed to meet.

Court's Conclusion:
- The Court found no factual disputes regarding the contributions and obligations undertaken by Suman Vijoo. The additional capital, collateral security, and personal guarantees provided by Suman Vijoo were considered adequate consideration.
- The Court upheld the Tribunal's decision, affirming that the reallocation of shares did not constitute a gift under Section 4(1)(a) of the Gift Tax Act. The Court emphasized that mere arithmetical calculations of profit shares were insufficient without considering the overall contributions and obligations.
- The Court dismissed the Revenue's appeal, concluding that the substantial questions raised were answered in favor of the assessee.

Final Judgment:
The appeal was dismissed, and the Court directed the Registry to forward a copy of the judgment to the Income Tax Appellate Tribunal as per the relevant provisions of law.

← Previous Next →