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TMI Blog1990 (8) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... standing in its name. Thus, the total investment of the appellant assessee in the firm by way of capital contribution and the amount of loan came to Rs. 6,12,844 which represented the written down value of land and buildings belonging to the appellant-company. The learned GTO felt that there was an element of gift in the transaction and, therefore, issued notice under s. 16 of the GT Act. The assessee filed a gift-tax return at nil value. The GTO referred the valuation of the property to the Valuation Cell of the Department and the Valuation Officer determined the value of the property in question at Rs. 10,18,000. After hearing the assessee, the GTO taxed the difference between the value as determined by the Valuation Officer and the value at which the assets were brought into the firm i.e., Rs. 10,18,000 minus Rs. 6,12,844. This was treated as deemed gift under s. 4(1)(a) of the GT Act. 2. On first appeal, the assessee contended as follows: (a) When a person brings in certain properties whether movable or immovable into the stock of the partnership firm, there was no transfer. As such, there could not be any assessment to gift-tax. (b) The assessee was in a fix as the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court in Sunil Siddharthbhai, he could not now canvass the proposition that there was no transfer when a partner brought his separate properties into the partnership. However, he would still rely on the same decision of the Supreme Court for the proposition that the consideration for which the property was transferred cannot be determined at the time when the property is brought into a firm by a person on his admission as a partner. In fact, that is the reason why the Supreme Court while upholding the decision of the Gujarat High Court in Sunil Siddharthbhai's case in so far as the element of transfer is concerned did not approve the Gujarat High Court's view that the transaction gave rise to capital gains. On a parity of reasoning, he submitted that inasmuch as the amount credited to the capital account and the loan account were only token amounts or nominal amounts inasmuch as the consideration for which the properties were brought into the firm was nebulous or fluid or indeterminate, the transaction does not result in a gift. Elucidating further, Shri Srinivasan submitted that in order to ascertain the value of gift two things are to be determined. One is the mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the appellant company. Thus the company was able to reduce its tax liabilities and the whole arrangement is a device or a ruse with a view to evade tax. In the circumstances of the case, the levy of gift-tax was justified. 6. Shri Srinivasan, the learned counsel for the assessee vehemently objected to the doctrine of ruse or device invoked by the learned departmental representative for the reason that neither the GTO nor CGT(A) ever made an allegation against the assessee that the whole arrangement was a device with ulterior motives. There is not even whisper of such an allegation in the orders of the authorities. The Department is not on appeal against the order of the CGT(A). Therefore, it does not behove the learned departmental representative to make a totally new case for the first time before the Tribunal. On merits, he submitted that the allegations levelled by the departmental representative on his own are unwarranted, unjustified and without any basis whatsoever. The appellant company used to have bonded were house licence with the help of which it used to lift the stock from the godown where McDowell and Co. Ltd. held their stocks without having to pay cash across ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as its contribution towards capital. 8. As for the allegation that the assessee was only charging interest against the credit balance lying with the firm to the extent of the deficiency of interest which it had to pay to McDowell and Co. Ltd., Shri Srinivasan submitted that the non-charging of the interest would only result in higher income for the firm and the Department cannot have grievance against such an arrangement. Moreover, the appellant as a partner had an interest in the firm and if the partnership is burdened with large amount of interest payment, the business of the firm itself would suffer and as a partner he may have to share the sufferings. Thus, for business consideration only the appellant chose to draw interest from the firm to the extent to which it was absolutely necessary to cover the payment of interest to McDowell and Co. Ltd. on its balances. Thus from any angle it cannot be held that the arrangement was a device or ruse. 9. Having regard to rival submissions and the materials on record, we set aside the order of the learned CGT(A). Sec. 4(1)(a) of the GT Act is as follows: "Gifts to include certain transfers. 4. (1) For the purposes of this Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of s. 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in s. 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether." Though this decision was rendered in the context of s. 45 read with s. 48 of the IT Act, we hold that the principles of the Partnership Act which have been approvingly drafted into the judgement of the Supreme Court in the context of that case is equally valid in the sphere of ascertainment of the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h there was transfer of asset, the same cannot be brought within the purview of s. 4(1)(a) of the GT Act. 13. Shri Menon strenuously argued that the entire transaction was a device or a ruse to which Shri Srinivasan, the learned Chartered Accountant, takes exception not only on preliminary grounds but also on merits. We have gone through the gift-tax assessment order and also the order of the first appellate authority. There is not even a whisper of the allegation that the entire transaction was a device or a ruse. The assessee in its letters dt. 28th Dec., 1981, and dt. 18th Sept., 1986 had explained in the course of income-tax proceedings for the asst. yr. 1980-81 the difficulties it experienced upon the withdrawal of the bonded warehouse licence and the stiff attitude of McDowell and Co. Ltd. towards it, the huge liabilities it had to discharge and the advantages it gained in partnership and thus set out the background for entering into partnership. Even then there is no suggestion in the order of the GTO or the first appellate authority that the transaction was sham or bogus or a make-believe arrangement or an arrangement with ulterior motives. Besides, the Department is not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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