9911796707
TMI Blog1985 (9) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... not yielding) 5.50 acres Total 170.05 acres For the assessment year 1972-73 for which the valuation date was 31-3-1972 the WTO assessed the value of the coffee and cardamom estate at Rs. 4,96,650 and the value of the bungalow situated therein at Rs. 30,000. Thus, the total of the agricultural lands as well as the bungalow situated therein was valued at Rs. 5,26,650 for wealth-tax purposes both for the assessment years 1972-73 and 1973-74. For the assessment year 1973-74, the valuation date was 31-1-1973. The wealth-tax assessment orders dated 6-2-1979 for assessment years 1972-73 and 1973-74 were filed before us. The assessee did not dispute in any appeal the valuation of either the agricultural land (coffee and cardamom plantation estate) or the bungalow situated therein for the assessment years 1972-73 and 1973-74 for which he was assessed at Rs. 5,26,650 in each of the two assessment years. 3. On 19-7-1973, the assessee formed a partnership with his wife and six children under which for the first time a firm called Kamala Estate came into being. Among the six children the assessee had three minors and the rest of the three were majors. The assessee br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her 26 acres as her capital contribution which is mentioned in Schedule IV appended to the partnership deed. The value of the extents mentioned in Schedules II to IV was stated at Rs. 65,000 each. The unmarried major daughter of the assessee Miss Syamala Devi had brought 23.99 acres as her capital contribution and the description of her land is given in Schedule V and its value was shown at Rs. 55,000. The three minor daughters of the assessee had contributed 4 acres each valuing Rs. 55,000 and the extent, thus, contributed by the minors are shown in Schedule VI appended to the partnership deed. In clause 6 of the partnership deed it is specifically mentioned that from the commencement of the partnership deed it was declared that the properties mentioned in Schedules I to VI under the partnership deed should belong to the firm and the partners should deal with these properties in a similar way as the properties of the firm. So also it was declared that the major partners do not have any separate claim over the partnership properties and the individual partners shall have the same right over them as any other partner. Clause 8 states that the partnership is one at will and any partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m in the capital account of the assessee and the real market value of the total extent of the assets brought into as capital by the assessee as on the date of transfer, viz., 17-9-1973 constitutes gift made by the assessee in favour of the other partners of the firm. Thus, holding the GTO began computing the value of the gift under his orders dated 29-9-1983. The fair market value of the estate as on the date of transfer was held to be Rs. 8,26,300. After deducting Rs. 2,50,000 towards the share capital of the assessee the remaining amount of Rs. 5,76,300 was taken to be the value of gross gift made by the assessee to the other partners of the firm. As already stated there are 8 partners and the assessee's wife is one among them. The GTO felt that one-seventh share not exceeding Rs. 50,000 should be construed to be a gift made by the assessee to his wife and so exempt under section 5(1)(viii) of the Act. So also he granted basic exemption of Rs. 5,000 and computed the taxable gift at Rs. 4,28,570 as per his order dated 29-3-1983. It was later rectified as per the order of the GTO dated 12-6-1984 under which the value of the gift was determined at Rs. 5,13,670. This figure was subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion that the gift was not properly valued, the learned Commissioner (Appeals) held that the estate of the assessee was already valued by the WTO while making wealth-tax assessments and since the GTO adopted the same value as adopted for the purpose of relevant wealth-tax assessment the argument that the property had been valued at a very high figure for the purposes of gift-tax cannot be upheld. Thus, the learned CGT (Appeals) repelled all the three contentions raised by the assessee and dismissed the appeal. 6. As against the impugned order dated 25-2-1984 the assessee came up in second appeal before this Tribunal and, thus, the matter stands for our consideration. We have heard Shri C.B.M. Warrier, the learned counsel for the assessee and Shri K.P. Sudhaharan Pillai, learned departmental representative. Firstly, it is contended before us on behalf of the assessee that assuming without admitting there was a gift involved in the creation of partnership, the gross value of the gift should be computed as follows : Total value of the coffee cardamom plantation estate as determined for the purpose of wealth-tax for asst. yrs. 1972-73 and 1973-74 Rs. 5,26,650 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended that even if there is considered to be any gift as the gift is executed in the course of carrying on of the business such gift is exempt from tax under section 5(1)(xiv). It is sought to be further contended that the gift, if any, in this case, is for carrying on of business. 8. On the other hand, the learned departmental representative contended that each of the contentions raised on behalf of the assessee is untenable. The argument claiming exemption under section 5(1)(xiv) saying that the gift is made in the course of carrying on of business was never raised before the Commissioner of Income-tax (Appeals) and it was raised for the first time only before this Tribunal. The learned departmental representative contended that even with regard to the capital contribution of Rs. 2,50,000 we have to hold that there is transfer and such transfer results in capital gains in view of the Gujarat High Court decision in CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42 and the Kerala High Court (Full Bench) decision in the case of A. Abdul Rahim, Travancore Confectionery Works v. CIT [1977] 110 ITR 595. It is further contended that in view of the authoritative pronouncement of the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credited to the assessee's account towards his capital contribution to the firm has to be excluded. Further exemptions to which the assessee was entitled to was the basic exemption of Rs. 5,000 under section 5(2) and the exemption under section 5(1)(viii), i.e., value of gift said to have been made to the wife of the assessee. After having adjusted the exemptions claimed we hold that in any view of the matter the value of the gift should be determined only at Rs. 2,44,677, the break-up of which is given in the annexure to this order : ANNEXURE Total value of the properties contributed by Shri V. Madhava Menon Rs. 4,96,650 Value of bungalow 30,000 . 5,26,650 Less : Amount credited to capital account 2,50,000 . 2,76,650 Less : 5% assessee's share of profit 13,832 . 2,62,818 Less: 5% assessee's wife share of profit exempt under s. 5(i)(vii) 13,141 . 2,49,677 Basis exemption under s. 5(2) of GT Act 5,000 Total value of the taxable gift 2,44,677 10. Now, let us come to the contentions put forward before us by the assessee on mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Full Bench decision, it is noted as follows : " When the business in the manufacture and sale of confectionery owned by the assessee was converted into a partnership business of the assessee and his son and the firm took over the assets and liabilities of the said business, there was an extinguishment of the right of the assessee in the property which was exclusively his and which was brought in for the purpose of the business of the firm. This was sufficient to attract section 2(47) of the Income-tax Act, 1961. As there was a transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, attracting section 34(3)(b) and section 155(5) of the Act, the Appellate Tribunal was right in holding that the withdrawal under section 155(5) of the development rebate which had already been granted by the Income-tax Officer for the assessment years 1962-63 to 1965-66 and 1967-68 was justified. " The Full Bench decision of the Kerala High Court was followed by the Gujarat High Court in the case of Kartikey V. Sarabhai. There also it was held that by bringing in separate property of a partner towards his share capital in a partnership firm in which he was a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T V. M.A.J. Vasanaik [1979] 116 ITR 110. There also the Hon'ble Karnataka High Court considered the right of a partner over an asset of the firm which he himself introduced into the firm and stated as follows : " ... If the partners agreed to treat the property of any of them as partnership property, such property will become partnership property and section 14 of the Partnership Act becomes applicable. The said Act is not similar to the unilateral act on the part of a coparcener who throws his separate property into the family hotchpot. The legal results which flow from the individual's property being converted into partnership property are that the partner to whom the property belonged before becoming partnership property loses his exclusive titles to it and the right he thereupon acquires is only the right of a partner in the partnership assets, in accordance with the partnership agreement and the provisions of the Partnership Act. There is virtually a transfer of his right in the property to the partners of a firm including himself...." 12. In this case, what we have to decide is the character of the excess value of the coffee and cardamom plantation estate which the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of firm and (iii) the goodwill of the business. In the partnership deed, before us there is no clause which runs contrary to the effect of section 14. Section 48(b)(iii) of the Indian Partnership Act states in what way the assets of the firm should be distributed after dissolution of the firm and during the settlement of accounts of the firm. It states, the assets of the firm including any sums contributed by the partners to make up deficiencies of capital shall be applied firstly in paying the debts of the firm to third parties and secondly in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital and thirdly in paying to each partner rateably what is due to him on account of capital and the residue, if any, shall be divided among the partners in the same proportion in which the profits are to be divided among them. In our understanding when a property is introduced by an individual partner into the firm which is of more value than at which the owner partner introduces it into the firm, section 14 nonetheless considers the whole property as belonging to the firm. In Kartikey V. Sarabhai's case itself it was decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only by executing a registered document subject to other conditions being fulfilled. It is also held therein that the transaction would not be complete and a gift in the eye of law cannot be made by the donor to the donee prior to the registration of the document by which the gift was made. Therefore, the liability to pay tax on gift must be determined not with reference to the date of gift deed but with reference to the date on which it was registered under section 47 of the Indian Registration Act, 1908. This argument of the assessee is fallacious. The learned departmental representative in order to counteract the argument of the learned counsel of the assessee cited before us the decision of the Allahabad High Court in K.D. Pandey's case where as per the head-note of the decision the following is held : " A partner can bring his immovable property to the stock or capital of the firm as his contribution thereto without a registered instrument. As soon as a partner intends that his separate properties should become partnership properties and they are treated as such, then by virtue of the provisions of the Contract Act and the partnership, the properties become the properties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is due to him from the firm for advances made by him as distinguished from capital and thirdly the assets should be applied in paying to each partner rateably what is due to him on account of capital and the residue shall be divided in the same ratio as profits of the firm are agreed to be divided. 16. There is a catena of decisions to show that on dissolution when an asset of the firm is transferred to an erstwhile partner it does not require any registered document. We have already extracted from Kartikey V. Sarabhai's case as to the extract right of a partner after he introduces his individual property into the assets of the firm. It is clearly held in that case that the person who introduced the property would not be able to claim or entitled to claim any exclusive right over any property which he had brought in or over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. It is also said in that very same case that a partner having one-half share in the partnership is not the one-half owner of the specific properties belonging to the firm. What he has is one-half share in the residu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26 lakhs it is difficult to understand how there can be consideration for the difference between Rs. 5.26 lakhs and Rs. 2.50 lakhs. Simply because the properties contributed by other partners to the assets of the firm also are of much more value than the amounts of capitals credited to their respective names it cannot be said that there is consideration for the gift made by the assessee. Utmost it can be said that those partners who had contributed their extents to the assets of the firm also made gifts. Under the circumstances we are unable to uphold the contention that the children of the assessee also made an excess contribution of Rs. 60,450 and that should either be deducted from the value of the gift computed in the hands of the assessee or that can be regarded as consideration for the gift made by the assessee. 18. Lastly, it is contended even if there is considered to be any gift in this transaction as the gift is executed in the course of carrying on of the business such gift is exempt from tax under section 5(1)(xiv). In support of the said contention, the assessee relied upon the decision of the Kerala High Court in the case of V.O. Markose v. CIT [1975] 98 ITR 504, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons cited on behalf of the assessee do not help his contention. 20. In P. Gheevarghese, Travancore Timbers Products' case the assessee is the sole proprietor under the name and style of Travancore Timbers and Products. He converted his proprietary business into a partnership firm under a deed dated 1-8-1963. The capital of the partnership was Rs. 4 lakhs of which the assessee contributed Rs. 3.50 lakhs and each of his two daughters contributed Rs. 25,000. The contribution of capital by the daughters was affected by the transfer of Rs. 25,000 from the assessee's account to the account of each of the daughters. All the assets of the erstwhile proprietary business of the assessee were transferred to the partnership business. It was agreed that profits and losses were to be divided in equal shares though the assessee is entitled to 7/8th share and his daughters 1/16th share each in the assets of the firm. It was the contention of the assessee in that case that the main intention was to ensure continuity of the business and to prevent its extinction on his death and such purpose amounted to business expediency and, therefore, all the conditions of section 5(1)(xiv) are satisfied. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42,500 4. Miss A. Santhadevi 16.98 acres valued at Rs. 42,500 5. Miss A. Devayani 20.96 acres valued at Rs. 52,500 Thus, it can be seen that the assessee had gifted 89.54 acres of coffee plantation out of his total extent of 170.05 acres in favour of his daughters. The taxable gift was computed at Rs. 10,951.20 by the GTO as per his orders dated 29-3-1983. 23. Against the GTO's order the matter is carried on to the Commissioner (Appeals), Calicut. He held that the transfer of the estate as a whole had been subjected to gift-tax for the assessment year 1974-75 and so the subsequent gifts made by the assessee cannot have any effect and cannot be considered as gifts made by him. A property can only be transferred once and as an absolute transfer of gift had already taken place in 1974-75 and, therefore, the subsequent gifts can have no legal effect or consequence and in that view no transfer took place in favour of the assessee's five daughters under the impugned gift deeds. He further opined the transfer, if any, is to be considered to have been effected only by the firm to which the properties legitimately belonged and not to the appellant. In view of that the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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