1991 (1) TMI 227 - AT - Income Tax

Summary

Issues:
1. Whether the transfer of business from a partnership firm to a company constitutes a deemed gift under the Gift-tax Act.
2. Whether the valuation of closing stock at cost, less than market value, results in a deemed gift under section 4(1)(a) of the Act.

Detailed Analysis:
1. The appeal challenged the order confirming the assessment of gift-tax on the transfer of business from a partnership firm to a company. The firm, consisting of 11 partners, transferred its business to a newly incorporated company. The Gift-tax Officer treated the transfer of closing stock at cost as a transfer for inadequate consideration, resulting in a deemed gift under section 4(1)(a) of the Act. The CIT (Appeals) upheld this assessment based on the re-valuation of the closing stock. The main contention was whether a firm can be assessed under the Gift-tax Act and if the transfer was truly for inadequate consideration to constitute a deemed gift.

2. The Tribunal analyzed the transaction and concluded that the transfer of the business from the firm to the company did not result in inadequate consideration. The partners of the firm, who became shareholders of the company, continued to hold the same property in the form of shares. The balance sheet of the company reflected the value of the business as shares issued to the shareholders. The Tribunal emphasized that the consideration was the shares issued, which needed to be evaluated. The break-up method was applied to assess the net wealth of the company and the value of shares. Even if the closing stock's value was enhanced, the value of shares would automatically adjust accordingly. The Tribunal cited a precedent where the shares allotted encompassed all assets, including embedded profits. Therefore, it was concluded that the consideration for the transfer was not inadequate, and no deemed gift existed under section 4(1)(a) of the Gift-tax Act.

In summary, the Tribunal allowed the appeal, annulling the assessment of a deemed gift on the transfer of the business from the partnership firm to the company. The judgment clarified that the consideration in the form of shares was adequate, considering the valuation methods applied and the legal precedents cited.