1990 (9) TMI 143 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of section 4(1)(b) of the Gift-tax Act.
2. Determination of fair market value and adequacy of consideration.
3. Exemption under section 5(1)(xiv) of the Gift-tax Act.
4. Valuation of partner's interest in the firm and its impact on deemed gift.

Detailed Analysis:

1. Applicability of section 4(1)(b) of the Gift-tax Act:
The GTO argued that the difference between the fair market value of the property (Rs. 4,50,000) and the amount credited in the assessee's capital account (Rs. 1,35,000) constituted a deemed gift under section 4(1)(b) of the Gift-tax Act. The CIT(A) disagreed, stating that the GTO failed to prove the inadequacy of consideration and that the value should be balanced by other factors, such as the contributions of other partners. The Tribunal found that section 4(1)(b) was not applicable as there was no consideration at all, aligning with the decision in Sunil Siddharthbhai.

2. Determination of fair market value and adequacy of consideration:
The GTO assessed the fair market value of the property at Rs. 6,00,000 based on Rs. 600 per sq. yd., which was contested by the assessee as excessive and without basis. The CIT(A) found this valuation arbitrary and unsupported, suggesting Rs. 4,50,000 as the fair market value. The Tribunal agreed, stating that the GTO's valuation lacked material basis and should be restricted to Rs. 4,50,000.

3. Exemption under section 5(1)(xiv) of the Gift-tax Act:
The assessee claimed exemption under section 5(1)(xiv), arguing that the property transfer was made in the course of business. The CIT(A) accepted this, stating that the transfer was for business purposes. However, the Tribunal disagreed, noting that the business had not commenced at the time of the transfer, and thus, the exemption under section 5(1)(xiv) was not applicable.

4. Valuation of partner's interest in the firm and its impact on deemed gift:
The assessee argued that the amount credited to the capital account was not the true consideration but a notional value, as per the Supreme Court's decision in Sunil Siddharthbhai. The Tribunal agreed, stating that the entire property value should be considered a gift as no actual consideration was received. However, the Tribunal directed the GTO to exclude the assessee's share in the firm's profits and losses from the taxable gift computation.

Conclusion:
The Tribunal reversed the CIT(A)'s order, restoring the GTO's assessment with modifications. The fair market value was set at Rs. 4,50,000, and the GTO was directed to recompute the taxable gift, excluding the assessee's share in the firm's profits and losses. The appeal by the revenue was allowed.