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TMI Blog2010 (7) TMI 770X X X X Extracts X X X X X X X X Extracts X X X X ..... nly on dissolution or retirement, the actual share of a partner could be ascertained and the value of the property is unascertainable on the day they were brought into the partnership firm, the question of holding it as a deemed gift under section 4(1)(a) is impermissible. That is precisely what the Tribunal has held on considering the various judgments on the point. In that view of the matter, no merit in the contention of the Revenue - substantial question of law is answered against the Revenue and in favour of the assessee. - 3 of 2005 - - - Dated:- 20-7-2010 - KUMAR N., NAGARATHNA B. V. MRS., JJ. JUDGMENT N. Kumar J.- 1. As the same question of law is involved in all these three appeals, they are taken up for consideration together and disposed of by this common order. The Revenue has filed these appeals challenging the common order of the Tribunal. 2. The respondents in all these three appeals are assessees. They entered into a partnership with nine others in the name and style of M/s. Amalgamated Property Developers. The partnership came to be constituted on April 1, 1993. Each of the assessees contributed the land owned by them into the partnership firm a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have recorded a finding that the capital contribution of Rs. 11,59,375 by the assessee in favour of the partnership firm on April 1, 1993, and subsequent retirement on August 31, 1993, after four months by receiving a sum of Rs. 22,84,375 amounts to a device adopted by the assessee in order to avoid tax ? 3. Whether the Tribunal was correct in failing to record a finding that the entire transaction was bona fide not for inadequate consideration and consequently does not attract gift-tax liability without passing a speaking order ?" In G. T. A. No. 4 of 2005 "1. Whether the Tribunal was correct in holding that capital contribution of Rs. 28,26,250 by the assessee in favour of the partnership firm on April 1, 1993, and the subsequent retirement on August 31, 1993, after four months by receiving a sum of Rs. 69,59,250 the difference of Rs. 41,33,000 cannot be treated as deemed gift as per the provisions of the Gift-tax Act ? 2. Whether the Tribunal have recorded a finding that the capital contribution of Rs. 28,26,250 by the assessee in favour of the partnership firm on April 1, 1993, and subsequent retirement on August 31, 1993, after four months by receiving a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in property. (b) the grant or creation of any lease, mortgage, charge, easement licence, power, partnership or interest in property . . ." 8. The words "firm", "partner" and "partnership" are defined under section 2(xi) of the Act as under : "the expressions 'firm', 'partner' and 'partnership' shall have the meanings respectively assigned to them under section 2 of the Income-tax Act." 9. Section 3 is the charging section. It provides that subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1958 (but before the 1st day of April, 1987), a tax (hereinafter referred to as gift-tax) in respect of the gifts, if any, made by a person during the previous year (other than gifts made before the 1st day of April, 1957), at the rate or rates specified in Schedule I. Sub-section (2) provides that subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1987, gift-tax in respect of the gifts, if any, made by a person during the previous year, at the rate of thirty per cent. on the value of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC), that the distribution of the assets on dissolution does not amount to a transfer to the erstwhile partners. What the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. It is nothing strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner's retirement . . . The consideration for the transfer of the personal assets is the right which arises or accrues to the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partner retires. It evidences no debt due by the firm to the partner. Indeed, the capital represented by the notional entry to the credit of the partner's account may be completely wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital account is credited. Having regard to the nature and quality of the consideration which the partner may be said to acquire on introducing his personal asset into the partnership firm as his contribution to its capital, it cannot be said that any income or gain arises or accrues to the assessee in the true commercial sense which a businessman would understand as real income or gain." 12. Following this judgment, a Division Bench of this court in the case of N.Prasanna v. CGT [1997] 228 ITR 427 (Karn) held as under (page 438) : "It is no doubt true that 'consideration' for transfer, which is very relevant to determine capital gains, has normally no relevance to a gift, which in the generally accepted sense is a transfer without consideration. But, we are concerned here not with a 'gift' which is a transfer without consideration, but with a 'deemed gift' created by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the insertion of section 4(1)(a) some transfers with consideration also were deemed to be transfer amounting to deemed gift. Such deeming provisions were made applicable to transfers which were made otherwise than for adequate consideration and brought within the province of gift to be subjected to levy of gift-tax . . . bringing any asset as a contribution to the partnership capital by a partner amounts to reduction of his exclusive right to enjoy the asset during the subsistence of partnership and it becomes subservient to get his share in profits and losses so long as his status as a partner continues and upon dissolution of the firm or retirement from partnership to claim his share in partnership assets in accordance with the Partnership Act and agreement of partnership after satisfying the liabilities of the firm and as a part of taking accounts . . . This brings to the fore, the question : What is the interest transferred and what is the consideration for which the transferor (the partner who contributes the asset) has transferred the asset ? In the answer to it lies the key to whether adequacy or inadequacy of consideration is determinable in praesenti at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If at the time of constitution of partnership or at the time of his entry into the partnership, if a value is mentioned in the books of the partnership firm representing the interest he has brought into the partnership, it does not truly reflect the market value of the property which he has brought into the partnership firm. It is purely a notional value. The said notional value is only for the purpose of distributing the profits of the said partnership firm either at the time of dissolution or at the time of retirement. When a partner brings his property into the partnership firm, though the consideration is that he will acquire the status of a partner and he continues to have interest in the partnership assets, there is no monetary consideration for such transfer of the property and the book value mentioned is not the consideration for such transfer. Section 4(1)(a) is attracted only in a case where there is a monetary consideration for transfer and that monetary consideration is lesser than the market value of the property, the difference in the amount being treated as a deemed gift under section 4(1)(a). The share to which a partner is entitled to at the time of dissolution or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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