1997 (3) TMI 72 - HC - Income Tax

Partner's asset contribution to firm not taxable under Gift-tax Act

The court held that the contribution of an individual asset by a partner to a firm is a 'transfer of property' under the Gift-tax Act but not a gift. As a ... Bona Fide, Carrying On Business, Deemed Gift, Gift Tax Issues Involved:1. Whether the contribution of the site by the assessee to the firm constitutes a gift under section 4(1)(a) of the Gift-tax Act.2. If it constitutes a gift, whether it is taxable under the Gift-tax Act.3. Whether the exemption under section 5(1)(xiv) of the Gift-tax Act is applicable.Issue-wise Detailed Analysis:Issue 1: Whether the contribution of the site by the assessee to the firm constitutes a gift under section 4(1)(a) of the Gift-tax Act.The petitioner contributed two sites valued at Rs. 1,35,000 to a partnership firm, which the Gift-tax Officer assessed at Rs. 6,00,000, treating the difference as a gift. The Tribunal upheld this view, but the petitioner argued that the contribution was not a gift as it was not a transfer without consideration under section 2(xii). The court referred to the Supreme Court's decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, which held that the consideration for such transfers is unascertainable in monetary terms, making the question of inadequacy of consideration irrelevant. Consequently, the court concluded that the contribution of the individual asset of a partner towards the capital of the firm is a 'transfer of property' but not a deemed gift under section 4(1)(a) of the Gift-tax Act.Issue 2: If it constitutes a gift, whether it is taxable under the Gift-tax Act.Since the court answered the first issue in the negative, stating that the contribution is not a deemed gift, the second issue of taxability under the Gift-tax Act does not survive for consideration. The court noted that the definition of 'person' under section 2(xviii) of the Gift-tax Act does not include partnerships, but this point was moot given the resolution of the first issue.Issue 3: Whether the exemption under section 5(1)(xiv) of the Gift-tax Act is applicable.The petitioner claimed exemption under section 5(1)(xiv), which exempts gifts made in the course of carrying on a business. The court clarified that for this exemption to apply, the gift must be made by a person in the course of carrying on their business, and it must be for the purpose of that business. The court found that the petitioner was not carrying on business before the transfer and that the gift was not for the purpose of the petitioner's business. Therefore, the exemption under section 5(1)(xiv) was not available.Conclusion:1. Contribution of the individual asset of the partner towards the capital of the firm is a 'transfer of property' under the Gift-tax Act but is neither a gift nor a deemed gift under section 4(1)(a) of the Gift-tax Act.2. As the first question is answered in the negative, the second question does not survive for consideration.3. The exemption under section 5(1)(xiv) of the Gift-tax Act was not available in respect of a contribution of the personal asset of a partner to the capital of the firm at the time of the constitution of the firm. The question is answered in the affirmative and against the assessee.As the first question is answered in favor of the assessee, the contribution of the gift by the petitioner to the firm is not taxable under the Gift-tax Act.