TaxTMI 
TaxTMI 
2009 (9) TMI 644
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....facts in confirming the addition of Rs. 64,05,788 made by AO under s. 45(3) of the Act. Under the facts and circumstances of the case, learned CIT(A) ought to have deleted the said addition. 3. Learned CIT(A) has erred in law and on facts in holding that the conversion of the proprietorship concern into partnership, entries recorded in the partnership firm for transfer of assets as well as revaluation of the same have been done in the previous year relevant to the assessment year under consideration. However, as a matter of fact the proprietary concern got converted into partnership firm w.e.f. 1st April, 1994 while the revaluation of the assets was done on 31st March, 1995 and therefore both the transactions have been carried out in different assessment years. Learned CIT(A) further erred in making many other factual errors which has led him to reach to a perverse finding which is far from the facts on records. 4. Levy of interest under s. 234A/234B/234C of the Act is not justified. 5. Initiation of penalty proceedings under s. 271(1)(c) of the Act is not justified." GTA No. 2/Ahd/2005 for asst. yr. 1995-96: "1. The learned CIT(A) has erred in law and on facts in co....
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....fer' and the value at which it is credited to partners account will be treated as 'consideration' accruing for transfer of the assets. The AO observed that since the amount of Rs. 80,54,997 credited as per the revalued figures as mentioned above would be deemed as sale consideration received/accruing and the capital gain attributable thereon is liable to tax on. In this context, the AO issued notice under s. 148 on 14th May, 1997, in response to which, the assessee filed the return of income on 14th July, 1998 declaring total income of Rs. 43,180. In statement of income 25 per cent share of profit from the firm was shown. The assessee in response to summons issued under s. 131, dt. 16th June, 1998, submitted vide letter dt. 4th Aug., 1998 that the proprietary concern is converted into firm and return of income for asst. yr. 1995-96 of the firm has been filed on 20th Nov., 1995 and as such he is not liable to pay any tax on the income derived from that business. 5. The AO noted the facts about conversion and revaluation under para 13 of his order as under: "13. In the context of aforesaid arguments, it would be appropriate to recapitulate the facts and circumstances existent i....
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....sp; 5,81,336 22,91,025 --------- --------- 16,49,209 80,54,997 (i) Amount of revaluation portion transferred to your capital account 20,13,748 Less: Fixed assets of the proprietary business before revaluation 16,49,209 &nb....
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....AO when the assets were revalued. Since the appellant has transferred its assets to a partnership firm during the same year and hence according to the AO capital gain is chargeable to tax as the revaluation is also made in the same year. In the appellant's case, the entries recorded in the partnership firm for transfer of assets and revaluation made falls in the same year and accordingly the AO was justified in bringing the transactions in the purview of capital gain and I decline to interfere with the action of the AO. The addition made by the AO of Rs. 64,05,788 stands confirmed." 6. The learned Authorised Representative before us vehemently contended that the provisions of s. 45(3) are not applicable in the case of the assessee as the event of transfer of capital assets by the assessee to a firm in which the assessee has become a partner has taken place as on 1st April, 1994 while the revaluation of the assets was effected on 31st March, 1995. The capital accounts of all the partners not only of the assessee were credited when the revaluation was made. On the date of revaluation of the assets the assessee was already a partner in the firm. It is the partnership firm which hel....
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....he effect of the revaluation was given in the books of account of the firm by passing a journal entry as on 31st March, 1995 in the following manner: (Vr. No. 32) Land a/c Debit 15,20,905 Factory building a/c Debit 42,43,067 Revaluation reserve (capital) a/c Credit 80,54,997 [Being the amount of revaluation of assets as per various valuation reports as laid down by the Supreme Court in the case of CIT vs. Hind Construction Ltd. transfer to revaluation reserve account] Subsequently again on 31st March, 1995 the following entry was passed through J.V.-33: Revaluation reserve a/c Debit 80,54,997 D.B. Shah ....
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....as passed. otherwise the assessee would have passed the entry for the difference in the revalued figure of land, factory building, plant and machinery and their respective value as has been recorded in the books of the firm as on 1st April, 1994, i.e., only for Rs. 64,05,788. This fact is also clear from the second voucher by which the capital accounts of the partners were credited. The capital accounts of the partners have also been credited by revalued figure of Rs. 80,54,997, not by the difference arising due to the revaluation, i.e., only by Rs. 64,05,788. Had the partners' accounts been credited earlier as on 1st April, 1994, the assessee's capital account would have not been credited by Rs. 20,13,748 but only by the proportionate difference due to revaluation. Only on this ground itself, in our opinion, the assessee is not entitled for any relief as the provisions of s. 45(3) will clearly be applicable as the assessee has recorded the assets as on 31st March, 1995 when the capital accounts were credited. The amount recorded in the books of account of the assessee is Rs. 80.54.997 in respect of the capital assets transferred. The section clearly speaks of that for the purpose ....
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....ks to provide for charging to tax of the profits or gains arising from transfer of a capital asset by a partner to a firm or by a member to an AOP or BOI or vice versa. In view of the practical difficulties in evaluating the consideration for transfer in such cases, the bill seeks to provide certain deeming provisions as well. Thus, in a case if transfer of a capital asset by a partner to a firm or by a member to AOP or BOI, the amount recorded in the books of accounts of firm, association or body as the value of the capital asset, shall be deemed to be the full value of consideration as a result of such transfer. By way of distribution of capital asset by a firm, AOP or BOI, the fair market value of the assets as on the date of transfer shall be deemed to be the full value of consideration as a result of such transfer consequential amendment to ss. 47 and 49 have also been proposed." The scope and effect of introduction of s. 45(3) was explained by the CBDT vide Circular No. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] under para 24.2 which reads as under: "With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987 has inserted new su....
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....evious year in which the transfer takes place; (f) For the computation of capital gain under s. 48, the amount recorded in the books of account of the firm as the value of the capital asset shall be deemed to be the full value of consideration received or accrued as a result of transfer of the capital assets. This section does not state that the amount recorded in the books of account of the firm on the date or at the time when the person brought in the capital assets will be deemed to be the full value of the consideration. If during the previous year the amount has been recorded as the value of the capital assets, the same shall be treated to be the full value of the consideration received or accrued. The amount arising due to revaluation has been recorded during the previous year as the previous year in this case ends on 31st March, 1995. During the previous year in which the transfer has taken place the firm has recorded the capital assets at a revalued figure i.e., at Rs. 80,54,997. Accordingly the said value will be taken to be the full value of the consideration. This section defines full value of the consideration for the purpose of s. 48 but does not restrict the con....
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.... 427 (Kar); (e) CIT vs. Marudhar Hotel (P) Ltd. (2003) 184 CTR (Raj) 372 : (2004) 269 ITR 310 (Raj). By relying upon the aforesaid decisions it was vehemently contended that there will not be any gift-tax leviable on the amount of Rs. 64,05,788 and the case of the assessee is duly covered by the aforesaid decisions. 16. The learned Departmental Representative, on the other hand, contended that the gift-tax is clearly leviable as the consideration stated was not adequate and the assessee himself has transferred the assets to the firm at Rs. 80,54,997 while the WDV of the assets in the books of the proprietary concern of the assessee were only Rs. 16,49,209. 17. We have carefully considered the rival submissions and, perused the material on record along with the order of the tax authorities below. We have also gone through various case laws as relied from both the sides. The decision of the Hon'ble Kerala High Court in the case of CCT vs. A.C. Raghava Menon as relied upon by the learned Authorised Representative, in our opinion, is not applicable because in that case the partnership deed clearly provides that in case of dissolution of the firm or retirement of the partner....
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....sfer. If this question can be answered positively, one can say that a deemed gift has taken place within the meaning of s. 4(1)(a). To this extent, the answer is clearly provided by two decisions of the Supreme Court in the negative that 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 Court clarified that the notional amount credited to the account of capital of the firm as contribution by a partner as a value of assets brought into the firm account does not represent the correct and true value of consideration because on that date, it is impossible to determine the value of consideration, which lies in the womb of the future. This value can only be computed in future when the partnership is dissolved or the partner retires and the assets of the firm are distributed to the partners on a future date. While creation of a shared interest in an asset by diminishing his own right to exclusive interest amounts to a "transfer of property", the value of consideration at which such person can be said to have transferred his property being incapable of valuation in praesenti, the essenti....
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....hich is as under: 2. The brief facts regarding conversion of proprietorship business of the assessee are narrated by learned Brother in the proposed order. The firm Oswal Machinery Equipment Co. carried on the business for full year and later decided to revalue the assets of the firm on 31st March, 1995 i.e., asst. yr. 1995-96. The AO while framing the income-tax assessment for the asst. yr. 1995-96 brought the transaction in the purview of capital gain. The learned CIT(A) upheld the action of AO and on second appeal, the appeal of the assessee is dismissed in ITA No. 1229/Ahd/2003 in the proposed order of my learned Brother. 3. Under the GT Act, the AO framed the assessment under s. 15(3) r/w s. 16 of the GT Act, 1958 for the asst. yr. 1995-96 wherein he invoked the provisions contained in s. 4(1)(a) of the GT Act, 1958 and brought to tax revaluation so made and then credited to other partner's capital account to the extent of Rs. 60,41,249. It is pertinent to note that revaluation is based on valuation reports submitted by the assessee himself during the course of assessment proceedings. The valuer has valued all these properties as on 25th Dec., 1994. The assessee has tran....
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....; 16,49,209 3,64,539 --------- (ii) Amount transferred to the capital accounts of partners in their profit sharing ratio 60,41,249 --------- Capital gain treated as taxable In the hands of the appellant 64,05,788 ....
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...., goodwill remained exclusively property of the assessee. In the case before Hon'ble Rajasthan High Court also building known as Umed Bhawan Palace was brought by the assessee as his share capital contribution and one of the conditions was that on dissolution of the firm building shall revert back to the assessee company. In other words, in both the cases, the right to share the assets on dissolution of the firm was not transferred. Therefore, in my opinion, like judgment of Hon'ble Kerala High Court in the case of A.C. Raghava Menon, the judgment of Hon'ble Rajasthan High Court in case of Marudhar Hotel (P) Ltd. is not applicable to the facts of assessee's case. 6. Hon'ble Rajasthan High Court in the case of Marudhar Hotel (P) Ltd. clearly noted that the building known as "Umed Bhavan Palace" was brought by the assessee as its share 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 assets on the dissolution of the firm was not transferred, meaning thereby building "Umed Bhavan Palace" will not become the property of the firm within the meaning of s. 14 of....
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....ssets mentioned hereinabove were contributed by assessee as capital to the firm reads as under: "For the purpose of this Act, where property is transferred otherwise than for adequate consideration, the amount by which the *(value of the property as on the date of the transfer and determined in the manner laid down in Sch. II) exceeds the value of the consideration shall be deemed to be a gift made by the transferor." * substituted for "market value of property at the date of transfer" by Finance (No. 2) Act, 1991, w.e.f. 1st April, 1992. The requirements of the above clause for its operation are firstly, that there should be a transfer of property; secondly, the transfer should be for consideration; thirdly the consideration be not adequate. In such case, the value of property so transferred determined in the manner laid down in Sch. II at the date of 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 a deemed gift by the transferor to the transferee. In the instant case, valuation report as on 25th Dec., 1994 of machinery and equipment for fabrication of machine, crane, crusher, ....
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....e authorities below made an attempt to find out the value of three properties transferred by the assessee on the date of gift i.e., conversion of proprietorship concern into partnership firm on 1st April, 1994, as per Sch. II of the GT Act, 1958. As per provision contained in s. 6(1) of the GT Act, 1958 value as on the date of gift was required to be determined in the manner laid down in Sch. II of the GT Act, 1958. In this view of the matter, for limited purpose the matter is sent to the file of GTO who will recompute the taxable gift in the manner laid down in Sch. II to the GT Act, 1958 after affording reasonable opportunity of hearing to the assessee. 8. In the result, the appeal of the assessee, i.e., GTA No. 2/Ahd/2005 is partly allowed for statistical purposes, whereas ITA No. 1229/Ahd/2003 is dismissed. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 5th March, 2009 Since there is a difference of opinion between the learned JM and the learned AM on the ground of appeal raised by the assessee, we he....
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....partners took 10 per cent each therein. Under cl. 9 all the partners had to take part in the business activities by mutual understanding and for the common aim of the firm. On 31st March, 1995 there was a revaluation of the assets of the partnership such as land, factory, building and plant and machinery. These were revalued at Rs. 80,54,997 and the amount was transferred to the capital accounts of the partners in their profit sharing ratio through journal entries by debiting the assets with the revalued figure and crediting the capital accounts. 3. In the income-tax proceedings of the assessee for the asst. yr. 1995-96, the AO invoked the s. 45(3) of the IT Act and held that the assessee was liable to capital gains tax on the footing that the amount of Rs. 80,54,997 represented the sale consideration. The amount of capital gain was calculated at Rs. 64,05,788. The assessee challenged the action and the matter ultimately reached the Tribunal in ITA No. 1229/Ahd/2003. The Tribunal affirmed the assessment to capital gains. Simultaneously with the income-tax proceedings, the AO also took proceedings under s. 4(1)(a) of the GT Act holding that the properties of the assessee were tra....
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....equacy or otherwise thereof cannot also be determined. He accordingly confirmed the assessment to gift-tax. However, for the purposes of finding out the proper valuation, he remitted the matter to the file of the GTO with directions that the taxable gift shall be computed in the manner laid down in Sch. II of the GT Act, after affording the assessee a reasonable opportunity of being heard. This is how the point of difference has arisen. 5. I have carefully considered the matter in the light of the rival contentions. The contentions advanced before me on behalf of the assessee is two-fold. It is first contended on the basis of judgment of the Supreme Court in the case of Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC) that the consideration is incapable of being determined at the point when a proprietary concern is converted into a partnership firm and if that is the position, no question can arise as to whether the consideration is adequate or not. The second contention is that in any case when all the incoming partners bring in capital, take part in the business of the firm and also share the losses of the firm, the consideration is present and ther....
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....at the order of the learned JM has to be upheld. 7. In my opinion, the contentions advanced on behalf of the assessee should prevail. In the case of Sunil Siddharthbhai it was held by the Supreme Court that when a partner introduces his assets into the partnership firm as his capital contribution, his exclusive interest in the assets becomes a shared interest and to this extent there was a transfer. It was however held that at that point of time, considering the features of a partnership and the position of the partners, it was not possible to conceive of any consideration for the transfer of the assets and therefore it was not possible to charge capital gain on the partner. Relying on this principle, the contention advanced on behalf of the assessee is that if the consideration itself is incapable of being determined, there is no question of ascertaining whether it is adequate or inadequate and therefore there can be no deemed gift under s. 4(1)(a) of the GT Act. I am inclined to accept the contention as correct and sound. The provisions of s. 45(3) of the IT Act were brought in by the Finance Act, 1987 to get over the effect of the judgment of the Supreme Court cited above and....
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....rstanding and in furtherance of the common aim of the firm. All these constitute adequate consideration. In the case of Karnaji Lumbaji the Hon'ble Gujarat High Court has held that where the incoming partners are required to take part and attend the business of the firm without any remuneration paid to them and where they share not only the profits but also the losses of the firm there was a consideration for inducting them as partners and there would be no gift under the GT Act. At p. 352 of the report it was observed that the obligations which the incoming partners undertaken form the consideration for the rights which each one has under the contract of the partnership. In the present case, as in the case before the Hon'ble Gujarat High Court, the incoming partners have brought in capital, have undertaken to take part in the business activities of the firm and have also undertaken to share the losses. These obligations constitute consideration for the transfer of the proprietary business into a partnership business. 9. For the above reasons, I agree with the decision of the learned AM that there is no deemed gift within the meaning of s. 4(1)(a) of the GT Act. I accordingly an....