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Issues: Whether the distribution of plant and machinery by a partnership firm to its partners constitutes a transfer of assets and if it amounts to a deemed gift by way of sale of assets at a consideration less than the market price.
Summary: The Supreme Court addressed the issue of whether the distribution of plant and machinery by a partnership firm to its partners constituted a transfer of assets and if it amounted to a deemed gift by way of sale of assets at a consideration less than the market price. The case involved a partnership firm engaged in excavating tunnels, which transferred machinery to its partners during the assessment year 1979-80. The partners then formed a new partnership and sold the machinery to a third party for a higher price. The Gift-tax Officer charged gift-tax on the basis that the original firm had made a gift to its partners at a value lower than the market price. The Commissioner of Gift-tax (Appeals) upheld the assessment, and the Tribunal also supported this decision. The High Court affirmed that the distribution of assets from a firm to a partner constituted a transfer of property, not an adjustment of capital. The Court considered the argument that distribution of assets to a partner during the subsistence of a partnership did not amount to a transfer, as it merely replaced shared interest with exclusive interest. However, the Court held that when an asset of the partnership becomes the asset of only one partner during the partnership, it constitutes a transfer, and if done at a value lower than the asset's worth, it is deemed a gift under the Gift-tax Act, 1958. In conclusion, the Supreme Court dismissed the civil appeal, emphasizing that no transfer is involved when a partner receives an asset upon dissolution or retirement, but during the partnership, a transfer occurs if an asset is distributed to an individual partner at a value lower than its worth, resulting in a deemed gift under the Gift-tax Act, 1958.
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