High Court Of Rajasthan
CIT vs. Marudhar Hotel (P) Ltd.
Sections GT 4(1)(a)
Rajesh Balia & D.N. Joshi, JJ.
IT Ref. No. 118 of 1998
17th February, 2003
Counsel Appeared
S. Bhandawat, for the Applicant : L.R. Mehta, for the Respondent
JUDGMENT
Rajesh Balia, J. :
Heard the learned counsel for the parties.
2. The following substantial question of law arising out of the order of Tribunal, Jaipur Bench has been referred to this Court in GTA No. 6/Jp/1986 under s. 26(3) of the GT Act in pursuance of the order made by this Court on 4th March, 1997, in DB GT Ref. No. 6/1994 : “Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that there could be no element of deemed gift whereby sustaining the order of the CGT(A) and dismissing the Departmental appeal?”
3. The facts giving rise to this reference are that the assessee-company-respondent entered into a partnership with Ex-ruler of Marwar H.H. Gaj Singh on 12th Nov., 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 contributing partner viz., the assessee-company on dissolution of the firm. The capital account of 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 AO invoked the provisions of s. 4(1)(a) of the GT Act, 1958 (hereinafter called the Act of 1958) for the purpose of subjecting difference in 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 in the firm, and accordingly the Department levied gift-tax on the said amount. On appeal by the assessee, the CGT(A) relying on the decision of the Supreme Court in Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC) held that when a partner brings in his capital assets as his contribution to the firm capital, there is no doubt a transfer, but the amount that is credited to his capital account cannot be considered as deemed consideration as on the date such asset was brought into the firm as partner’s contribution towards capital. Therefore, there cannot be any deemed gift in terms of s. 4(1)(a) of the Act of 1958. Consequently, the appeal was allowed by order, dt. 31st March, 1986. On further appeal, the Tribunal affirmed the view taken by the CGT(A). Learned counsel for the Revenue has urged that once it is held that bringing property as a capital contribution to the firm amounts to a transfer, the provisions of s. 4(1)(a) comes into operation and the difference between the apparent consideration for which the property has been transferred to the partnership firm and the estimated market value of the property on the date of transfer ought to be considered as a deemed gift made by such partner. Learned counsel for the respondent has urged, on the other hand, that in view of the clear decision of the Supreme Court in Sunil Siddharthbhai’s case (supra), the consideration as on the date the asset is brought into the firm as capital contribution, is incapable of valuation and, therefore, cl. (a) of sub-s. (1) of s. 4 cannot be invoked for want of necessary determination of requisite conditions for its operation. Sub-s. (1)(a) as it existed at the relevant time when the building in question was contributed by the respondent assessee-company as capital to the firm reads as under : “For the purposes of this Act, where the property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor to the transferee. Provided that nothing contained in this clause shall apply in any case where the property is transferred to the Government or where the value of the consideration is determined or approved by the Central Government or Reserve Bank of India.”
Apparently the present case does not attract the proviso to s. 4(1)(a) of the GT Act, 1958. Requirements of above portion for its operation are firstly, that there should be a transfer of property; secondly, the transfer should be for consideration; and thirdly, the consideration be not adequate. In such case market value of the property so transferred at the date of transfer must be in excess of consideration at which it has been purported to be transferred. In such event, 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 (supra) was rendered by the Supreme Court, the opinion was divided. However, this question has since been answered in affirmative by the Supreme Court. The term ‘transfer of property’ under s. 2(xxiv) of the GT 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 his own property and to increase the value of the property of any other person.
9. Definition of ‘Gift’ under s. 2(xii) of the Act provides that unless the context otherwise required, transfer by one person to any person to whom the property has been transferred voluntarily and without any consideration of money. Thus ordinarily no element of consideration is involved in the case of transfer inter vivos by way of gift. With the insertion of s. 4(1)(a) some transfers with consideration also were deemed to be transfer amounting to deemed gift. Such deeming provisions were made applicable to transfers which were made otherwise than for adequate consideration and brought within the province of gift to be subjected to levy of gift-tax.
10. In Sunil Siddharthbhai’s case (supra), the apex Court while considering whether contribution of an immovable property to capital of the firm by a partner amounts to a transfer under the IT Act and interpreting the expression ‘transfer’ under s. 2(47) of the IT Act, 1961 which was slightly different than definition of transfer under GT Act, but was also inclusive definition as under the GT Act, held as under : “In its general sense, the expression, ‘transfer of property’ connotes, the passing of rights in property from one person to another. In one case, there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which the exclusive interest is reduced to a shared interest, it would seem that there is a transfer of interest. Therefore, when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital….” Thus while interpreting inclusive definition of transfer the apex Court adopted broad sense of word in 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 other or to the extent restriction of right to the exclusive user, there is transfer of owner’s interest in the property. In coming to this decision, the Supreme Court relied on and reiterated its earlier view as to nature of right created in property in favour of other partners and also the right which he gets in consideration in the case of Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300, which is reproduced herein below 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 this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can be assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time 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 cl. (a) and subcls. (i), (ii) and (iii) of cl. (b) of s. 48.”
The Court has emphasized that a person who brings his asset into partnership, shall not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. The Court further explained that a right of the partner who brings asset into partnership capital to form a partnership agreement, is to get his share of profits from time to time as may be agreed upon among the partners during the subsistence of the partnership and after dissolution of the partnership or with his retirement from partnership, the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. These two principles stated above makes two fields clearly visible. Firstly, that bringing any asset as a contribution to the partnership capital by a partner amounts to reduction of his exclusive right to enjoy the asset during the subsistence of partnership and it becomes subservient to get his share in profits and losses so long as his status as a partner continues and upon dissolution of the firm or retirement from partnership to claim his share in partnership assets in accordance with the Partnership Act and agreement of partnership after satisfying the liabilities of the firm and as a part of taking accounts. This brings to the fore, the question : What is the interest transferred and what is the consideration for which the transferor (the partner who contributes the asset) has transferred the asset. In answer to, it lies to key whether 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 joint 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 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 retirement from the partnership, to get the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges as per law relating thereto. That is the right that a partner gets in consideration. This is a continuous process and exact benefit or loss arising from admittance to partnership, and its present value on the date of admittance to firm is not determinable.
13. We have already noticed, three ingredients are required to be necessary, before provisions of s. 4(1)(a) could be invoked. The first ingredient, by bringing capital asset as a contribution towards partnership firm amounts to a transfer of property is satisfied in the present case.
14. This being not a transfer without consideration, the question arises for evaluating the market value of interest in assets transferred and consideration for such transfer of such interest in the asset. What is the consideration for creation of such rights in other partners and whether such consideration is inadequate vis-a-vis market value of the interest in asset transferred as on the date of such contribution, what is its value as on the date of transfer is made ? Undoubtedly, the property is brought as a capital contribution to the partnership firm that is contribution made by the contributing partner to the capital of the firm. In lieu of such contribution he becomes a partner which entitles him to share profits and losses of firm. The property transferred is the right or interest that is created as outstanding the rights of the contributor. The consideration which the transferor of such interest in the asset (the contributor-partner) gets is the right to share the profits and looses of the business of the firm of which he becomes partner from time to time at periodical intervals, and the share in net assets of the firm on its dissolution or on his retirement. The value of these two becomes the two ends to find whether the transfer is to be considered as ‘otherwise then for adequate consideration’. Ostensibly transaction is evidenced by the amount credited to the capital account of the partner who brings in such asset.
15. Does the amount so credited in partner’s account as his capital contribution can be treated as the consideration received by the transferor from the firm or other partners, with reference to which its distance from market value of 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 positive, 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 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 of the asset is so transferred.
16. The question has arisen in the Sunil Siddharthbhai’s case (supra) in the context of ss. 45 and 48 of the IT Act, 1961 which deals with levy of tax on capital gain arising from 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 transfer of a capital asset and is liable to tax under s. 45 of the IT Act, 1961. Sec. 48 deals with mode of computation of capital gains. It provides that income chargeable to capital gains is to be computed by deducting from the full value of consideration received or accruing as a result of transfer of capital asset. Sec. 52 of the Act of 1961 deals with computation of capital gains where there is understatement of consideration. The provision is somewhat akin to s. 4(1)(a) of GT Act. Where ITO has reason to believe that transfer is with the object of avoiding liability under s. 45 by understating the consideration of transfer, it may adopt fair market value of the assets transferred, if it exceeds more than 15 per cent of the disclosed consideration, the fair market price so determined is to be deemed full value of consideration for which transfer of the capital asset has been affected.
In the case of Sunil Siddharthbhai (supra), the ITO sought to determine the market value of asset brought in partnership firm as capital contribution, vis-a-vis the amount credited in the books of firm to the partner’s account, was treated to represent the disclosed consideration and computed capital gains on such consideration. First contention that no transfer takes place by a partner by bringing in his personal asset into partnership as his capital contribution was rejected and the Court held that where a partner of a firm makes over capital asset which is held by him to a firm as his contribution towards capital, there is a transfer of capital asset, within the meaning of s. 45 of the IT Act because an exclusive interest of the partner in personal assets is reduced on their entry into firm into a shared interest. We may notice that this conclusion was reached on adopting general expression of ‘transfer of property’ keeping in view the inclusive definition adopted under s. 2(47) of the IT Act. In the case of GT Act, these ingredients of transfer of an asset to partnership firm and reduction/diminishing of personal interest in property expressly fall within the purview of transfer of property as defined in sub-cls. (b) and (d) of s. 2(xxiv) of the GT Act.
17. The next and core question which was considered by the Supreme Court in Sunil Sidharthbhai’s case (supra) 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 value of consideration that capital gains could be computed. The Court held as discussed above relying on Addanki Narayanappa’s case (supra) that what a partner who contributes capital to firm gets as consideration is 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 cl. (a) and sub-cls. (i), (ii) and (ii) of cl. (b) of s. 48 of the Partnership Act. With aforesaid conclusion, the Court opined that 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 entire ownership of the partner becomes now subject to the rights of other partners in it. It is not an interest which can be evaluated immediately, it is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner’s interest takes place only when there is a dissolution of the firm or upon his retirement from it. It has sometimes been said, and we think erroneously, that the right of a partner to a share in the assets of the partnership firm arises upon dissolution of the firm or upon the partner retiring from the firm. We think it necessary to state that what is envisaged here is merely the right to realise the interest and receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement. It is because that interest exists already before dissolution ….” The Court, therefore, concluded that what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital is transformed into an interest shared with the other partners in that asset. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner’s interest in the totality of the partnership assets, and in regard to the latter, the value will be represented by his share in the assets on the dissolution of the firm or upon the partner’s retirement. Answering the second question, considering whether amount credited to partner’s capital account as a result of contributing the asset the Court said : “… The credit entry made in the partner’s capital account in the books of the partnership firm does not represent the true value of the consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner’s share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate beforehand 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 bringing asset/property into capital of the firm was a transfer of interest, the Court held that 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 partner as a value of asset 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 future. This value can only be computed in future when the partnership is dissolved or the partner retires and the asset of the firm are distributed to the partners on a future date. In Sunil Siddharthbhai’s case (supra) the incoming partner had brought shares of company to partnership account as his capital.
18. The same view was reiterated by the Supreme Court in CIT vs. H. Rajan & H. Kannan (1999) 153 CTR (SC) 11 : (1999) 9 SCC 203. It was a case in which the sole proprietary business was converted into a firm, the owner of the business has admitted his nephews to firm as partner by giving specific shares without receiving any consideration from his nephews. The Revenue sought to tax the difference between the cost of acquiring the assets so transferred and its market value. As in the case of Sunil Siddharthbhai (supra), the Department sought to assess the cost of acquisition and market value of share allotted to nephews admitted to partnership firm, and difference was sought to be taxed as capital gains being the excess consideration received over the cost of acquisition on the date when partnership was constituted. The contention of revenue was again negatived as in the Sunil Siddharthbhai’s case (supra) because as on the date when partnership was constituted value of consideration for transfer of asset was incapable of determination.
19. The aforesaid principles govern the case of contribution of capital asset by a person to firm as his capital contribution as a partner. 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 essential requirement of finding adequacy or inadequacy of consideration cannot exist. Hence contingency to invoke s. 4(1)(a) also cannot arise. It is only where a transfer of property is for ‘inadequate consideration’, then only the question of finding market price can arise. As noticed above, when an asset is brought in partnership the contributor partner acquires in consideration right to obtain his share in profits from time to time and also right to share in the net assets of the firm on its dissolution or on his retirement in accordance with the provisions of Partnership Act and terms of partnership agreement. All these rights fructify in future. The credit to his capital account is only notional value and not the value of consideration as the same is incapable of determination.
20. In the present case the building known as “Umaid Bhawan Palace” has been brought in by the assessee as his share of capital contribution. It was with the condition that on dissolution of the firm the building shall revert back to assessee-company. In other words, the right to share the asset on dissolution of firm was not transferred. The fact that it is to be used as business apparatus of hotel business to be carried on by the firm leads to reasonable inference that what has been transferred is right to joint use of the building as business apparatus in lieu of right to share profits of business from time to time in future and right to share in partnership assets other than building on dissolution. Apparently, building as such in its entirety with full interest is not the property transferred, but lesser rights have been transferred. Market value of building in absolute also, therefore, cannot be yardstick to find out adequacy or inadequacy of consideration; nor the consideration for such transfer is determinable immediately on the date of transfer, but it lies in the womb of future. In the absence of any determinate value of the consideration, no deemed gift can come into being.
21. For the reasons aforesaid we answer the question referred to us in affirmative, that is to say in favour of the assessee and against the Revenue. There shall be orders as to costs.
[Citation : 269 ITR 310]
