B.T. Patil & Sons Vs. Commissioner of Gift Tax, Karnataka
EmailAppeal: Civil Appeal No. 15618 of 1996
Petitioner: B.T. Patil & Sons
Respondent: Commissioner of Gift Tax, Karnataka
Apeal: Civil Appeal No. 15618 of 1996
Judges: S.P. BHARUCHA, S.N. PHUKAN & Y.K. SABHARWAL, JJ.
Date of Judgment: Sep 20, 2000
Head Note:
GIFT
Gift Tax Act, 1958
Section 4(1)(a) – Deemed gift – Firm transferring certain items of machinery to its partners and written-down value of the ma-chinery debited to the accounts of the partners – Partners there-after floating another firm and transferring the machineries to the new firm – Second firm subsequently selling the machinery for a much higher consideration than the written-down value at which these were earlier transferred to the partners – Difference between the transfer consideration and sale consideration whether chargeable to gift tax as deemed gift. Held, the transfer of machinery made by the firm during its subsistence to its partners for a lesser value, amounted to deemed gift attracting Section 4(1)(a).
Gift Tax Act, 1958
Section 4(1)(a) – Deemed gift – Firm transferring certain items of machinery to its partners and written-down value of the ma-chinery debited to the accounts of the partners – Partners there-after floating another firm and transferring the machineries to the new firm – Second firm subsequently selling the machinery for a much higher consideration than the written-down value at which these were earlier transferred to the partners – Difference between the transfer consideration and sale consideration whether chargeable to gift tax as deemed gift. Held, the transfer of machinery made by the firm during its subsistence to its partners for a lesser value, amounted to deemed gift attracting Section 4(1)(a).
Held:
In our view, when there is a dissolution of partnership or a partner retires and obtains in lieu of his interest in the firm an asset of the firm, no transfer is involved for the reason set out in the passage quoted above. But the position is very differ-ent when, during the subsistence of a partnership, an asset of the partnership becomes the asset of only one of the partners thereof, there is, in such a case, a transfer of that asset by the partnership to the individual partner. Where such transfer is for less than the value of that asset, there is a deemed gift to the extent of the difference under the provisions of Section 4(1)(a) of the Gift Tax Act.
(Para 6)
(Para 6)
Cases Reffered:
1. Sunil Siddharthbhai v. Commissioner of Income Tax, Ahmedabad (156 ITR 509) (Para 5)
JUDGEMENT:
ORDER
1. The High Court answered the following question in the affirma-tive and against the assessee :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the distribution of the plant and machinery, belonging to the assessee-firm, by it to its partners constituted a transfer of the assets and, hence, it was a case of deemed gift, by way of sale of the assets at a consid-eration less than the market price thereof.”
The assessee is in appeal by special leave.
2. The assessee is a partnership firm. It was engaged in the activity of excavating tunnels. It had five partners. During the Assessment Year under consideration, namely, Assessment Year 1979-1980, it transferred certain items of machinery to each of its five partners and debited their accounts with the considera-tion charged therefor. The aggregate of such consideration came to Rs. 1,26,035/- .This, apparently, was the written-down value of the machinery in the assessee’s books. About three months later, the five partners floated another partnership and brought in the said machinery as their capital contribution thereto, of the value of Rs. 9,48,100/-. Then, the new partnership firm sold the machinery to another concern for the price of Rs. 10,76,220/-. On these facts, the Gift Tax Officer came to the conclusion that the assessee had made a gift of the machinery to its five partners and the consideration therefor, was much less than the market value as evidenced by the sale of the machinery to the third party for the sum of Rs. 10,76,220/-. On the basis that the assessee had made a gift of Rs. 9,50,185/-, the assessee was charged gift tax. The Commissioner (Appeals) upheld the assess-ment but took the value of the machinery at Rs. 9,48,100/-, which was taken to be the capital value thereof, when it was brought in by the partners of the new partnership, and gave relief accord-ingly. Both the Revenue and the assessee went to the Tribunal and the Tribunal upheld the order of the appellate authority.
3. Arising out of the order of the Tribunal, the question aforementioned was considered by the High Court. It had no doubt that the allotment or distribution of an asset, or some of the assets, of a firm by the firm to a partner or partners during its sub-sistence so as to enable such partner to hold the assets in his or their individual capacity, was a transfer of property and not an adjustment of capital. Accordingly, it upheld the Tribunal’s conclusion.
4. Learned Counsel for the assessee submitted to us that when there is already a subsisting shared interest in an asset, as in the case when a firm is continuing, the distribution of such asset to a partner would amount to replacing the shared interest with an exclusive interest in the asset and so there was no transfer. There was a transfer when an individual interest in an asset was converted to a shared interest, when the asset was brought into the partnership. But there was no transfer when the shared interest in an asset was converted to an individual inter-est as happened on dissolution, retirement or pursuant to the desire of partners to distribute.
5. Our attention was drawn by learned Counsel for the assessee to the judgment of this Court in Sunil Siddharthbhai v. Commissioner of Income Tax, Ahmedabad (156 ITR 509), and, specifically, to a passage that stated that it had been held by it earlier “that when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contem-plated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realised by the receipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realisation of a pre-existing right. The position is different, it seems to us, when a partner brings his personal asset into the partnership firm as his contribution to its capital. An individual asset is the sole subject of consider-ation. An exclusive interest in it before it enters the partner-ship is reduced on such entry into a shared interest.
6. In our view, when there is a dissolution of partnership or a partner retires and obtains in lieu of his interest in the firm an asset of the firm, no transfer is involved for the reason set out in the passage quoted above. But the position is very differ-ent when, during the subsistence of a partnership, an asset of the partnership becomes the asset of only one of the partners thereof, there is, in such a case, a transfer of that asset by the partnership to the individual partner. Where such transfer is for less than the value of that asset, there is a deemed gift to the extent of the difference under the provisions of Section 4(1)(a) of the Gift Tax Act.
7. In the result, the civil appeal is dismissed.
8. No order as to costs.
1. The High Court answered the following question in the affirma-tive and against the assessee :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the distribution of the plant and machinery, belonging to the assessee-firm, by it to its partners constituted a transfer of the assets and, hence, it was a case of deemed gift, by way of sale of the assets at a consid-eration less than the market price thereof.”
The assessee is in appeal by special leave.
2. The assessee is a partnership firm. It was engaged in the activity of excavating tunnels. It had five partners. During the Assessment Year under consideration, namely, Assessment Year 1979-1980, it transferred certain items of machinery to each of its five partners and debited their accounts with the considera-tion charged therefor. The aggregate of such consideration came to Rs. 1,26,035/- .This, apparently, was the written-down value of the machinery in the assessee’s books. About three months later, the five partners floated another partnership and brought in the said machinery as their capital contribution thereto, of the value of Rs. 9,48,100/-. Then, the new partnership firm sold the machinery to another concern for the price of Rs. 10,76,220/-. On these facts, the Gift Tax Officer came to the conclusion that the assessee had made a gift of the machinery to its five partners and the consideration therefor, was much less than the market value as evidenced by the sale of the machinery to the third party for the sum of Rs. 10,76,220/-. On the basis that the assessee had made a gift of Rs. 9,50,185/-, the assessee was charged gift tax. The Commissioner (Appeals) upheld the assess-ment but took the value of the machinery at Rs. 9,48,100/-, which was taken to be the capital value thereof, when it was brought in by the partners of the new partnership, and gave relief accord-ingly. Both the Revenue and the assessee went to the Tribunal and the Tribunal upheld the order of the appellate authority.
3. Arising out of the order of the Tribunal, the question aforementioned was considered by the High Court. It had no doubt that the allotment or distribution of an asset, or some of the assets, of a firm by the firm to a partner or partners during its sub-sistence so as to enable such partner to hold the assets in his or their individual capacity, was a transfer of property and not an adjustment of capital. Accordingly, it upheld the Tribunal’s conclusion.
4. Learned Counsel for the assessee submitted to us that when there is already a subsisting shared interest in an asset, as in the case when a firm is continuing, the distribution of such asset to a partner would amount to replacing the shared interest with an exclusive interest in the asset and so there was no transfer. There was a transfer when an individual interest in an asset was converted to a shared interest, when the asset was brought into the partnership. But there was no transfer when the shared interest in an asset was converted to an individual inter-est as happened on dissolution, retirement or pursuant to the desire of partners to distribute.
5. Our attention was drawn by learned Counsel for the assessee to the judgment of this Court in Sunil Siddharthbhai v. Commissioner of Income Tax, Ahmedabad (156 ITR 509), and, specifically, to a passage that stated that it had been held by it earlier “that when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contem-plated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realised by the receipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realisation of a pre-existing right. The position is different, it seems to us, when a partner brings his personal asset into the partnership firm as his contribution to its capital. An individual asset is the sole subject of consider-ation. An exclusive interest in it before it enters the partner-ship is reduced on such entry into a shared interest.
6. In our view, when there is a dissolution of partnership or a partner retires and obtains in lieu of his interest in the firm an asset of the firm, no transfer is involved for the reason set out in the passage quoted above. But the position is very differ-ent when, during the subsistence of a partnership, an asset of the partnership becomes the asset of only one of the partners thereof, there is, in such a case, a transfer of that asset by the partnership to the individual partner. Where such transfer is for less than the value of that asset, there is a deemed gift to the extent of the difference under the provisions of Section 4(1)(a) of the Gift Tax Act.
7. In the result, the civil appeal is dismissed.
8. No order as to costs.
