1996 (8) TMI 155 - AT - Income Tax

A Firm, Assessing Officer, Assessment Year, Bona Fide, Deemed Gift, Market Value, Partnership Deed

Issues Involved:

1. Whether the reconstitution of the firm on 1-10-1982 amounted to a gift under the Gift-tax Act.
2. Whether the retirement of the partners and the transfer of the firm's assets to a Limited company on 31-12-1982 constituted a deemed gift.
3. Applicability of section 5(1)(xiv) of the Gift-tax Act for exemption.
4. Valuation of the firm's property for gift tax purposes.

Issue-wise Detailed Analysis:

1. Reconstitution of the Firm on 1-10-1982:

The GTO concluded that the reconstitution of the firm by admitting a Limited company as a partner with a 60% share amounted to a gift. However, the CGT(A) vacated the levy of gift tax on this reconstitution, stating that the value of the partners' interest while the firm is subsisting cannot be assigned, and therefore, no gift tax is leviable in respect of the reduction in profit-sharing ratio suffered by the existing partners. The assessees did not contest this part of the order.

2. Retirement of Partners and Transfer of Assets on 31-12-1982:

The GTO held that the retirement of the partners and the transfer of the firm's assets to the Limited company constituted a deemed gift. The CGT(A) upheld this levy, relying on various judicial precedents, including CIT v. Jagatram Ahuja, CIT v. Chhotalal Mohanlal, M.K. Kuppuraj v. CGT, and CGT v. V. Premji Trikamji Jobanputra. The CGT(A) rejected the assessees' contention that the transaction was bona fide and not subject to gift tax.

The Tribunal, however, disagreed with the CGT(A)'s finding, noting that the retirement of the partners was for bona fide reasons, such as avoiding further erosion of capital and future liabilities due to continued losses. The Tribunal emphasized that the transaction was a natural incident of retirement and could not be viewed as a sham or ulterior motive. The Tribunal also highlighted that the settlement of accounts was governed by clause 12 of the Partnership Deed, which entitled the retiring partners only to the amounts standing to their credit in their capital or current accounts.

3. Applicability of Section 5(1)(xiv) of the Gift-tax Act:

The assessees argued that if the transaction was deemed a gift, it should be exempt under section 5(1)(xiv) of the Gift-tax Act, as it was in the course of carrying on business. The CGT(A) rejected this contention, stating that the assessees ceased to carry on the business after the gift was made, failing one of the conditions laid by the Madras High Court in CGT v. Smt. E.S.M.P. Rasiya Banu.

The Tribunal did not specifically address this issue in detail, as it found that there was no gift or deemed gift in the first place.

4. Valuation of the Firm's Property:

The GTO and the Valuation Cell determined the market value of the scheduled property at Rs. 23,20,000 as on 31-12-1982, while the property was sold for Rs. 27 lakhs on 15-9-1986. The assessees contended that the valuation was excessive and unrealistic. The CGT(A) saw no reason to interfere with the value determined by the Valuation Cell.

The Tribunal noted that only one of the firm's assets was revalued, not all assets and liabilities. It emphasized that unless all assets and liabilities are revalued, and a surplus is realized, the transaction cannot be brought within the purview of gift tax. The Tribunal also pointed out that the property was sold four years after the retirement, and using the sale value to determine the market value at the date of retirement was not permissible.

Conclusion:

The Tribunal allowed the appeals filed by the assessees, holding that there was no gift or deemed gift under sections 2(xii), 4(1)(a), or 4(1)(c) of the Gift-tax Act. It emphasized the bona fide nature of the transaction and the necessity of revaluing all assets and liabilities to determine any surplus. Consequently, the levy of gift tax was deleted.

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