1994 (10) TMI 109 - AT - Income Tax

A Partner, Capital Asset, Deemed Gift, Dissolution Of Firm, Gift Tax Act, Market Value, Partnership Firm, Share In Firm, Transfer Of Property

Summary

Issues Involved:
1. Determination of whether there has been a transfer of a capital asset when the assessee contributed property to the firm as capital.
2. Applicability of section 4(1)(a) of the Gift-tax Act, 1958.
3. Evaluation of the consideration received by the assessee for the transfer.
4. Exemption under section 5(1)(xiv) of the Gift-tax Act, 1958.

Issue 1: Determination of Transfer of Capital Asset
The primary issue is whether the assessee's contribution of property to the partnership firm constitutes a transfer of a capital asset. The court noted that in a general sense, there is no transfer when a partner brings personal assets into the firm as capital because a partnership firm is not a separate legal entity. This view was supported by the Supreme Court in Malabar Fisheries Co. v. CIT and CIT v. Hind Construction Ltd. However, considering the definition of 'transfer' under clause (47) of section 2 of the Income-tax Act, 1961, the Supreme Court in Sunil Siddharthbhai v. CIT held that such a transaction, while not a sale, can be described as a transfer of some other kind. The court concluded that when a partner brings personal assets into the firm, it reduces his exclusive rights in the assets to shared rights with other partners, thereby constituting a transfer.

Issue 2: Applicability of Section 4(1)(a) of the Gift-tax Act, 1958
Section 4(1)(a) of the Gift-tax Act, 1958, deems a transfer to be a gift if it is made without adequate consideration. The court examined whether the transfer of property by the assessee to the firm was for adequate consideration. The court referred to the Supreme Court's decision in Sunil Siddharthbhai, which held that the consideration for such a transfer could not be evaluated immediately, as the value of a partner's interest is subject to future transactions of the partnership. Therefore, the court concluded that the provisions of section 4(1)(a) could not be invoked in this case because the consideration could not be determined at the time of the transfer.

Issue 3: Evaluation of Consideration Received by the Assessee
The court noted that the credit entry of Rs. 10 lakhs in the assessee's capital account did not represent the true value of the consideration. It was a notional value intended to be taken into account at the time of determining the value of the partner's share in the net partnership assets upon dissolution or retirement. Since the actual consideration could not be evaluated at the time of the transfer, the court held that it was impossible to ascertain whether the consideration was adequate.

Issue 4: Exemption under Section 5(1)(xiv) of the Gift-tax Act, 1958
Given the court's findings on the applicability of section 4(1)(a), it was unnecessary to address the assessee's claim for exemption under section 5(1)(xiv) of the Gift-tax Act, 1958. The court set aside the decisions of the CIT(A) and the Assessing Officer, allowing the appeal for statistical purposes.