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TMI Blog2003 (2) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... al was justified in holding that there could be no element of deemed gift whereby sustaining the order of the Commissioner of Gift-tax (Appeals) and dismissing the departmental appeal?" The facts giving rise to this reference are that the assessee-company-respondent entered into a partnership with the ex-Ruler of Marwar H. H. Gaj Singh on November 12, 1974, for the purposes of running a hotel titled as Umaid Bhawan Palace. By means of the agreement, the assessee company was to bring in its capital asset, namely, the building known as the "Umaid Bhawan Palace" as its contribution to the partnership capital, with a condition that it will revert back to the contributing partner viz., the assessee-company, on dissolution of the firm. The capital account of the assessee in the firm was credited with Rs. 50,70,000 which was the book value of the asset on the date of its contribution. The Assessing Officer invoked the provisions of section 4(1)(a) of the Gift-tax Act, 1958 (hereinafter called the Act of 1958) for the purpose of subjecting the difference between the book value of the building and its market value estimated to be Rs. 80,30,000 as deemed gift in favour of Maharaj Gaj Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is determined or approved by the Central Government or the Reserve Bank of India." Apparently the present case does not attract the proviso to section 4(1)(a) of the Gift-tax Act, 1958. The requirements of the above portion for its operation are firstly, that there should be a transfer of property; secondly, the transfer should be for consideration; and thirdly, the consideration be not adequate. In such case the market value of the property so transferred at the date of the transfer must be in excess of consideration at which it has been purported to be transferred. In such event, the difference is to be considered as deemed gift by the transferor to the transferee. Firstly, whether contribution of any immovable asset to partnership capital amounts to a transfer? Until the decision in Sunil Siddharthbhai's case [1985]156 ITR 509 was rendered by the Supreme Court, the opinion was divided. However, this question has since been answered in the affirmative by the Supreme Court. The term "transfer of property" under section 2(xxiv) of the Gift-tax Act, 1958, is defined, to mean any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partnership firm as his contribution to its capita], he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital." Thus while interpreting the inclusive definition of transfer the apex court adopted a broad sense of the word in a general sense; holding that when property held exclusively is subjected to joint enjoyment, restricting the owner's exclusive enjoyment to the extent created in favour of others or to the extent of restriction of the right to exclusive user, there is a transfer of the owner's interest in the property. In coming to this decision, the Supreme Court relied on and reiterated its c earlier view as to the nature of the right created in the property in favour of other partners and also the right which he gets in consideration in the case of Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, which is reproduced hereinbelow as under: "... whatever may be the character of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of contribution. When an asset is brought as a contribution to the partnership capital in the firm, whether it is a transfer of full right in the property upon such transfer to be enjoyed by other partners or it is the right lesser than the full right in the asset? Upon transfer of interest in such property, right to be enjoyed jointly comes into existence, but it cannot be equated with the transfer of whole property in absolute inasmuch the contributor retains right to enjoy the property at best jointly as much as other partners also retain right to share partnership property including the one brought in by him on dissolution of the firm or on his retirement. The aforesaid principle clearly indicates that bringing in of assets by a partner as his capital contribution to the firm is not a transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tensibly transaction is evidenced by the amount credited to the capital account of the partner who brings in such asset. Can the amount so credited in the partner's account as his capital contribution be treated as the consideration received by the transferor from the firm or other partners, with reference to which its distance from the market value of the transferred asset can be gauged? In other words, the crucial question is whether what the assessee gets by way of consideration is less than the market price of the asset as on the date of transfer. If this question can be answered in the positive, one can say that a deemed gift has taken place within the meaning of section 4(1)(a). To this extent, the answer is clearly provided by two decisions of the Supreme Court in the negative that as such market value of a right acquired by the contributor in consideration cannot be valued and determined as on the date the asset is so transferred. The question has arisen in Sunil Siddharthbhai's case [1985] 156 ITR 509 (SC) in the context of sections 45 and 48 of the Income-tax Act, 1961, which deals with levy of tax on capital gain arising from the transfer of a capital asset. Fair s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the partnership firm and reduction/diminishing of personal interest in property expressly fall within the purview of transfer of property as defined in sub-clauses (b) and (d) of section 2(xxiv) of the Gift-tax Act. The next and core question which was considered by the Supreme Court in Sunil Siddharthbhai's case [1985] 156 ITR 509 was as to what is the consideration for such transfer and what is the full value of consideration received for such transfer received or accrued to such contributing partner. It is only with reference to determination of the value of consideration that capital gains could be computed. The court held, as discussed above relying on Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, that what a partner who contributes capital to a firm gets as consideration is the right to obtain such profit from time to time as fall to his share and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48 of the Partnership Act. With the aforesaid conclusion, the court opined that the value of such considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken into account at the time of determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate before hand what will be the position in terms of monetary value of a partner's share on that date. At the time when a partner transfers his personal asset to the partnership firm, there 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 the date of dissolution or retirement can be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet." With the aforesaid conclusion that notwithstanding that bringing assets/ property into capital of the firm was a transfer of interest, the court held that the present value of consideration of such transfer cannot be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on cannot exist. Hence the contingency to invoke section 4(1)(a) also cannot arise. It is only where a transfer of property is for "inadequate consideration", that the question of finding the market price can arise. As noticed above when an asset is brought into partnership the contributor partner acquires in consideration the right to obtain his share in the profits from time to time and also the right to share in the net assets of the firm on its dissolution or on his retirement in accordance with the provisions of the Partnership Act and the terms of the partnership agreement. All these rights fructify in future. The credit to his capital account is only a notional value and not the value of consideration as the same is incapable of determination. In the present case the building known as "Umaid Bhawan Palace" has been brought in by the assessee as his share of capital contribution. It was with the condition that on dissolution of the firm the building shall revert back to the assessee-company. In other words, the right to share the asset on dissolution of firm was not transferred. The fact that it is to be used as a business apparatus of hotel business to be carried on by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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