AI Drafter 
TaxTMI 
TaxTMI 
2003 (2) TMI 7
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.... 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 Singh the other partner between the firm and accordingly the department levied gift-tax on the said amount. On appeal by the assessee, the Commissioner of Income-tax (Appeals) relying on the decisions of the Supreme Court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, held that when a partner brings in his capital assets....
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....e 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 property and, without limiting the generality of the foregoing, includes-amongst others, the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property; and any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of ....
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....he 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 property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of th....
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....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 of asset in wholesome value, but such transfer brings into existence a right which arises or accrues to the contributory partner, namely, during the subsistence of the partnership to get his share in profit or loss of the firm from time to time and after dissolution of the partnership or with his retire....
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....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 shorn of all embellishment generally speaking when on transfer of a capital asset any consideration is received in excess of actual cost of acquisition of transferred asset, such excess consideration is treated as capital gains arising from the transfer of a capital asset and is liable to tax ....
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....rt 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 consideration cannot be determined immediately and, therefore, it cannot be brought to tax. The court said: "It is apparent, therefore, that when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the enti....
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....ement. 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 and that the notional amount credited to the partner's account as his contribution cannot be considered as consideration for such transfer. The court clarified that the notional amount credited to the account of capital of the firm as contribution by the partner as a value of asset....