N PRASANNA Vs. COMMISSIONER OF GIFT TAX

JUDGEMENT

(1.) THIS reference under s. 256 (1) of the GT Act, 1958 ('act' for short) is made by the Tribunal at the instance of the assessee. The facts leading to the reference are given below briefly. 1. 1. The petitioner was the owner of two sites bearing Nos. 20 and 27, I, Main Road, Kumara park West, Bangalore, which were valued at Rs. 4,50,000 by an approved valuer on 16th April, 1979 in connection with his WT assessment for the asst. yr. 1979-80. He entered into a partnership with his mother w. e. f. 1st July, 1979 and contributed the said two sites as his capital at a value of Rs. 1,35,000. Subsequently, the firm was reconstituted on 14th March, 1980 by inducting the petitioner's father as a partner, resulting in a change in the profit-sharing ratio of the partners. The GTO issued a notice to the petitioner calling upon him to file his return. The petitioner filed a nil Return on 27th February, 1987. Thereafter, the GTO passed an Order on 31st March, 1987 assessing the gift-tax for the asst. yr. 1980-81 under s. 15 (3) of the Act, the valuation date being 31st March, 1980. 1. 2. The GTO held that the contribution of the sites towards the capital of the firm amounted to a transfer and determined the value of the sites as Rs. 6,00,000. As petitioner had contributed the sites to the firm valuing them at Rs. 1,35,000 he treated the difference in value, namely, Rs. 4,65,000 as a gift by the petitioner to the firm and made an assessment subjecting the same to gift tax. 1. 3. Feeling aggrieved, the petitioner filed an appeal before the CIT (A), Bangalore. The appellate authority by Order dt. 28th September, 1987, allowed the appeal holding that no gift tax was leviable. He held that there was nothing to prove that the fair market value was Rs. 6,00,000 and at best, the value can be taken as Rs. 4,50,000 as per the valuation adopted for wealth-tax purposes; that the other partners had also contributed Rs. 2,95,950 as against the contribution by the petitioner of the value of Rs. 4,50,000 and the petitioner's capital was subsequently increased to Rs. 3,65,000; that there was a liability of Rs. 13. 43 lakhs to KSFC and unsecured loans to an extent of Rs. 10. 91 lakhs and the other partners had considerable assets that could be proceeded against by the creditors in the event of non-payment by the firm; that these factors could not be evaluated strictly in terms of monetary value, in order to judge the adequacy of consideration; and therefore, the finding by the GTO that there was inadequacy of consideration was not based on proper evidence. He also held that even if the difference is to be construed as a deemed gift, as petitioner had contributed the same in the course of his business in partnership, it was exempted under s. 5 (1) (xiv) of the Act and therefore, no gift tax was payable. Consequently, he directed the GTO not to subject the petitioner to any tax under s. 4 (1) of the act. 1. 4. The GTO filed an appeal against the said decision before the Tribunal. The Tribunal by order dt. 6th September, 1990 held that the transfer of the property by the assessee to the firm was without any consideration and therefore s. 2 (xii) and s. 3 of the Act applied and transaction was not exempted under s. 5 (1) (xiv ). The Tribunal further held that for the purpose of computation of gift tax the value of the properties should be taken as Rs. 4,50,000 and the value of the deemed gift as Rs. 4,50,000 less Rs. 1,35,000; and as the petitioner was entitled to a specific share in the firm, his share had to be excluded while quantifying the value of the gift and only the balance will have to be taken into account for computing the value of the gift. Hence the tribunal reversed the order of the first appellate authority and restored the Order of the GTO with a direction to re-compute the taxable gift as indicated. Thus, though the Tribunal did not refer to s. 4 (1) (a), having regard to the computation adopted, it has impliedly held that the matter fell under s. 4 (1) (a ).

(2.) FEELING aggrieved, the petitioner has sought a reference of several questions; in pursuance of it, the Tribunal has formulated and referred the following questions of law for decision of this court : " (i) Whether, on the facts and in the circumstances of the case, there was a gift within the meaning of s. 4 (1) (a) of the GT Act by giving of the site worth Rs. 4,50,000 as assessee's contribution to the firm constituted on 1st July, 1979 ? (ii) If 'yes', whether it was taxable under the provisions of the GT Act ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the exemption under s. 5 (1) (xiv) of the GT Act was not available ?" re : Question (i)

(3.) THE learned counsel for the petitioner submitted that contribution of a personal property of a partner towards the capital of the partnership cannot be considered as a gift as it was not a transfer without consideration as defined in s. 2 (xii ). He also contended that though the transfer was for consideration, having regard to the nature of such transfer, the consideration for such transfer is incapable of ascertainment in monetary terms; and where the consideration is indeterminate, the question of inadequacy of consideration will not arise and consequently such a transaction cannot be treated as a deemed gift under s. 4 (1) (a) of the Act; and that the transaction did not also fall under cls. (b), (c), (d) or (e) of s. 4 (1); and therefore, the transaction can neither be treated as a gift nor as a deemed gift, which can be charged to gift tax under the Act. Strong reliance is placed on the decision of the Supreme Court in Sunil Siddharthbhai vs. CIT AIR1986 SC 368 , [1985 ]156 ITR509 (SC ), 1985 (2 )SCALE755 , (1985 )4 SCC519 , [1985 ]supp3 SCR102 to contend that the consideration for contribution of the asset of a partner to the firm cannot be ascertained. Reliance is also placed on the decision in cit vs. B. C. Srinivasa Setty AIR1981 SC 972b , [1981 ]128 ITR294 (SC ), 1981 (1 )SCALE384 , (1981 )2 SCC460 , [1981 ]2 SCR938 , wherein the Supreme Court observed that the charging section and computation provisions under such head of income constituted an integrated code and if the computation provision cannot apply to a particular case, such a case was not intended to fall within the charging section. Petitioner contends that if s. 4 (1) (a) is inapplicable as consideration could not be ascertained, s. 3 will not apply.