2018 (12) TMI 645 - HC - Income Tax

Gift assessable under the GT Act - Whether on the proprietorship being converted into a partnership firm, the shares allotted to the sons of the appellant/assessee could be treated as a gift assessable under the GT Act? - Whether there would be a gift and the difference between the market value and the book value could be assessed under Section 4(1)(a) of the GT Act? - Held that - Question arose would be answered in favour of the assessee. Though there was a transfer of the asset in favour of the firm, there cannot be any gift tax assessed on the differential value between the market value and book value. The value shown in the capital account of the firm is only the notional value and as long as the firm holds the property, there cannot be said to be any surrender of rights in the property by the assessee, in favour of the firm, since as a partner, she holds the properties along with the others. As long as the partnership subsists, there cannot be any claim raised by either of the partners as to separate right in the property in accordance with their respective shares. During the subsistence of the firm, the right of the partners is only to claim their share of the profits, in accordance with their respective shares and nothing more. We, having found that there is no gift, though there is a transfer of property, do not see any necessity to set aside the order of the Tribunal which only finds that there is a transfer of property in the name of the firm, which we have found to be not capable of being assessed under the GT Act. The Income Tax Appeal also would stand disposed of, since we have already found that there can be no gift found in the transaction.

Summary

Issues:
1. Whether shares allotted to sons of appellant could be treated as a gift assessable under the Gift Tax Act.
2. Whether there could be a gift based on the difference between book value and market value when property is brought into a partnership firm.

Analysis:
1. The case involved a Gift Tax Appeal arising from a Tribunal order that found a transfer of building from the assessee to a partnership firm. The primary issue was whether this transaction constituted a gift under the Gift Tax Act. The assessee had converted two proprietary concerns into a partnership firm, allotting shares to her sons. The Assessing Officer assessed gift tax under Section 4(1)(c) based on the shares surrendered to the sons. However, the Tribunal's orders were inconsistent in addressing the crucial question of whether the transfer constituted a gift under the Act.

2. The Tribunal's handling of the case was criticized for its lack of clarity and coherence in addressing the core issue of whether there was a gift involved in the transfer of property to the partnership firm. Despite various orders and appeals, the Tribunal failed to provide a definitive answer on the gift tax implications of the transaction. The Tribunal's confusion and errors in recalling previous orders further complicated the matter, leading to significant delays in resolving the appeal.

3. The High Court, in its analysis, referred to a relevant precedent involving a similar question of assessing gift tax on property transferred to a partnership firm. The Court cited the decision in Commissioner of Income Tax v. Jacobs (P) Ltd., emphasizing that the value shown in the capital account of the firm is notional and does not constitute a surrender of rights in the property by the assessee. The Court concluded that while there was a transfer of property to the firm, no gift tax could be assessed on the difference between market value and book value, as long as the partnership subsisted.

4. Ultimately, the High Court disposed of both appeals, ruling in favor of the assessee. The Court held that no gift tax could be levied on the transfer of property to the partnership firm, as the value in the capital account was notional and did not signify a surrender of rights by the assessee. The Court's decision aligned with the precedent cited, emphasizing that during the partnership's existence, partners only had rights to claim profits based on their respective shares, with no separate property rights. The judgment clarified the gift tax implications of transferring property to a partnership firm, providing a definitive resolution to the long-pending appeal.