SMT.P.L. STELLA, V. THE COMMISSIONER OF GIFT TAX,

GTA/1/2001

AI Insights

The case involves a Gift Tax Appeal and an Income Tax Appeal concerning the transfer of property and shares during the conversion of a proprietorship into a partnership firm. The appellant, Smt. P.L. Stella, had two proprietary concerns which were converted into a partnership with her sons. The main legal issues revolved around whether the shares allotted to the sons constituted a gift under the Gift Tax Act, 1958, and whether the transfer of property to the partnership firm resulted in a taxable gift. The court examined the transactions and the applicable provisions of the Gift Tax Act, ultimately deciding that there was no taxable gift in the transactions.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 735865 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 26-11-2018
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. Jacobs (P) Ltd.
• Laws Referred To: Gift Tax Act, 1958
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: P K R MENON; JOSE JOSEPH
• Assessee Lawyers: E K NANDAKUMAR; PREETHA NAIR; P GOPINATH
• Keywords: Assessment; Book Value; Income tax appeal; Market value; Partnership firm; Proprietorship firm; Transfer of property; Gift Tax Appeal
• Section: 4(1)(a); 4(1)(c)

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 26TH DAY OF NOVEMBER 2018 / 5TH AGRAHAYANA, 1940 GTA.No. 1 of 2001 AGAINST THE ORDER/JUDGMENT IN GTA 31/COCH/1987 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 11-06-2001 APPELLANT/S:/ASSESSEE: SMT.P.L. STELLA, PULICKAL HOUSE, COCHIN. BY ADVS. SRI.E.K.NANDAKUMAR (SR.) SMT.PREETHA S.NAIR SRI.P.GOPINATH RESPONDENT/S:/REVENUE: THE COMMISSIONER OF GIFT TAX, COCHIN. BY ADV. SRI.PKR MENON, SR.COUNSEL, GOI (TAXES) SRI JOSE JOSEPH, SC FOR INCOME-TAX DEPARTMENT THIS GIFT TAX APPEAL HAVING BEEN FINALLY HEARD ON 26.11.2018, ALONG WITH ITA.109/2000, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: GTA1/01 & ITA 109/00 -2- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 26TH DAY OF NOVEMBER 2018 / 5TH AGRAHAYANA, 1940 ITA.No. 109 of 2000 AGAINST THE ORDER/JUDGMENT IN GTA 31/COCH/1987 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 20.1.2000 APPELLANT/S:/ASSESSEE: P.L. STELLA, PULICKAL HOUSE, COCHIN. BY ADVS. SRI.E.K.NANDAKUMAR (SR.) SMT.PREETHA S.NAIR SRI.P.GOPINATH RESPONDENT/S:/REVENUE: THE COMMISSIONER OF GIFT TAX, COCHIN. BY ADVS.SRI.PKR MENON, SR.COUNSEL, GOI (TAXES) SRI.JOSE JOSEPH, SC FOR INCOME-TAX DEPT. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 26.11.2018, ALONG WITH GTA.1/2001, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: GTA1/01 & ITA 109/00 -3- K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------- GTA No.1 of 2001 and ITA No.109 of 2000 ------------------------------------------- Dated this the 26th day of November, 2018 J U D G M E N T K.Vinod Chandran, J. The Gift Tax Appeal arises from the order of the Income Tax Appellate Tribunal, finding that there was a transfer of building from the assessee to the partnership firm. The Income Tax Appeal is against the very same order of the Tribunal, for the Tribunal having not decided the crucial issue whether the transaction resulted in a gift or not under the provisions of the Gift Tax Act, 1958 ('GT Act', for short). 2. We would first consider the Gift Tax Appeal. Questions of law arising from the order of the Tribunal are re-framed as follows:- (1) Whether on the proprietorship being converted into a partnership firm, the shares allotted to the sons of the appellant/assessee could be GTA1/01 & ITA 109/00 -4- treated as a gift assessable under the GT Act and the value of such shares, allotted to the children, assessed under Section 4(1)(c) of the GT Act? (2) Whether on the assessee bringing the land and property of a proprietorship firm into a partnership firm, there could be a gift found on the basis of the difference between the book value and the market value? 3. We have looked at the history of the litigation and also noticed the facts to arrive at the real question of law as available from the orders appealed against. The assessee had two proprietary concerns by name M/s.Cochin Tourist Home, Ernakulam and M/s.Pulickal Pharmaceutical Distributors, Ernakulam. On 1.7.1979, the assessee entered into a partnership with her two sons, P.V.Antony and P.V.Louis, and both the proprietorship firms were converted into one single partnership firm. The assessee confined her shares to 10% and surrendered 90% of the shares of the business by allotting 35% to Antony and 55% to Louis. We do not GTA1/01 & ITA 109/00 -5- have anything on record to show whether Antony and Louis had brought in anything to the partnership firm. Though a reference to the partnership deed is made by the AO, it is perfunctory and does not refer to the terms at all. However, that may not be relevant, looking at the statutory proceedings. 4. The Assessing Officer, on the question of partnership, found that the assessee had surrendered 90% of the shares to the two new partners inducted. Hence, gift tax was assessed under Section 4(1)(c). The assessee also had in her name a land and building, in which M/s.Cochin Tourist Home was run. Such properties were brought into the partnership firm. The book value shown was found to be far less than the market value. The difference was assessed under the GT Act by virtue of Section 4(1)(a). The assessee went in appeal before the Commissioner, which appeal was allowed by Annexure-B. A further appeal was taken by the Revenue to the Tribunal, which stood rejected by Annexure-C. Reference by the Revenue was disposed of by this Court as per Annexure-D judgment. GTA1/01 & ITA 109/00 -6- 5. A reading of Annexure-D would indicate that the Department had, in the Reference, only canvassed the question whether there was a gift of the building being used by M/s.Cochin Tourist Home to run a hotel, when the assessee converted her proprietary concerns carrying on two businesses into a partnership firm. The Reference was also disposed of remitting the matter to the Appellate Tribunal for recording a clear finding, after taking into consideration the rival submissions. The issue remanded, hence, was merely whether the building in which the hotel was run became an asset of the firm, when the proprietary concern was converted into a partnership firm. Here we have to observe that though there was a reference taken from the question as to whether the shares conceded to the sons on the constitution of the partnership firm would be the subject of an assessment under Section 4(1)(c) of the GT Act, it was given up before this Court. Hence, the answer to the question as given by the Tribunal in Annexure-C order has achieved finality. The first question as raised in the reference, hence, is answered against the Revenue and in favour GTA1/01 & ITA 109/00 -7- of the assessee, since it does not at all arise from the order from which the present appeal has been filed. The present impugned order only could be with respect to whether there was any transfer of property from the proprietorship firm to the partnership firm; which was the limited remand directed by this Court. 6. The question, as we noticed, remitted back to the Tribunal was as to whether there was transfer of property. The Tribunal first passed Annexure-E order dated 20.1.2000 finding that the hotel building had been transferred by the assessee to the partnership firm. A Miscellaneous Application was filed by the assessee from Annexure-E order pointing out that a decision was not taken on the question as to whether there is a gift by the transfer of the property. Here, we have to pause, to note with despair the manner in which the Tribunal has dealt with the appeal itself, in a haphazard manner. 7. The Tribunal in Annexure-F order finds that there was a Miscellaneous Application filed by the GTA1/01 & ITA 109/00 -8- assessee against Annexure-E order, pointing out that the principal question as to whether there was any gift, even when the land with the building became the asset of the firm, was not answered. The Tribunal then observes that by order dated 28.12.2000, the earlier order of the Tribunal dated 06.04.1990 (Annexure-C) was recalled. However, immediately thereafter the operative portion of the order dated 28.12.2000 is extracted which speaks of recall of the order dated 20.01.2000, which is Annexure-E order. Annexure-C order could not have been recalled, since the reference to the High Court from that order was confined to the question as to whether there was any transfer of property. Then again, despite noticing the prayer in the M.A of the assessee, there was no consideration in Annexure-F order as to whether there was a gift as such in the transfer of property found to have been effected. More distressing is the fact that the Tribunal having found that there is a transfer; finds that the assessee fails and dismisses the appeal; which appeal is by the Revenue. We cannot but express our deep dissatisfaction and leave it at that, especially since the order is of GTA1/01 & ITA 109/00 -9- almost two decades back. We also notice Annexure-G, where the Tribunal corrects itself and says the Revenue succeeds. 8. The Tribunal in considering the Miscellaneous Application did not recall its earlier order dated 6.4.1990 (Annexure-C) by order dated 28.12.2000. It only recalled Annexure-E order dated 20.01.2000. We do not see how Annexure-C could have been recalled in its entirely, since the issue of gift tax assessment on the shares conceded to the sons though raised in the Reference before the High Court, was given up as seen from the order at Annexure-D. No finding was also recorded on the constitution of the firm and the shares amounting to 90% having been allotted to the children. The issue of transfer of property was considered and a finding entered that the building had become the property of the firm on the same being transferred to the partnership firm. Again the question whether there was a gift was not considered. GTA1/01 & ITA 109/00 -10- 9. The only question now arising is the second one i.e. as to whether there would be a gift and the difference between the market value and the book value could be assessed under Section 4(1)(a) of the GT Act. We find that the Tribunal has not answered the issue, but however, considering the fact that the appeals have been pending here for the last 17 years, we do not think that a remand would be appropriate, especially looking at the decision in Commissioner of Income Tax v. Jacobs (P) Ltd. rendered by a Division Bench of this Court reported in (1999) 237 ITR 433 (Kerala). 10. In Jacobs (P) Ltd., the assessee was a Company in which the public were not substantially interested and was engaged in the business of liquor distribution. The assessee-Company was admitted to a partnership and in accordance with the deed, the assessee's contribution towards capital was fixed at Rs.5,00,000/-. The contribution by the remaining partners were determined as Rs.25,000/- each. The question arose as to whether the credit entry in the GTA1/01 & ITA 109/00 -11- capital account of the firm could be deemed as the notional consideration for the properties of the Company and gift tax assessed on the differential, taking the market value of the said properties. In the aforesaid decision, the Division Bench of this Court found as follows:- “When the question relates to the extent or adequacy of consideration for the transfer arising from a transaction where a partner contributes his individual property to the partnership, the decision in Sunil Siddharthbhai's case [1985] 156 ITR 509 (SC), which holds that the consideration for such a transfer is unascertainable until the dissolution of the partnership, becomes relevant and applicable. The principles laid down relating to consideration in the said decision with reference to transfer of an asset by a partner to the firm, as a capital contribution apply with equal force to the case at hand as well. In the absence of any explicit provision providing that the amount recorded in the books of account of the firm, as the value of the capital asset contributed by the partner to the firm, shall be the consideration received or accrued as a result GTA1/01 & ITA 109/00 -12- of the transfer of the capital asset, it is impermissible to treat the amount credited in the capital asset in the books of account of the firm, as the consideration for the transfer for the purposes of section 4(1) of the Act.” 11. In such circumstances, the question raised as (2) above would be answered in favour of the assessee. Though there was a transfer of the asset in favour of the firm, there cannot be any gift tax assessed on the differential value between the market value and book value. The value shown in the capital account of the firm is only the notional value and as long as the firm holds the property, there cannot be said to be any surrender of rights in the property by the assessee, in favour of the firm, since as a partner, she holds the properties along with the others. As long as the partnership subsists, there cannot be any claim raised by either of the partners as to separate right in the property in accordance with their respective shares. During the subsistence of the GTA1/01 & ITA 109/00 -13- firm, the right of the partners is only to claim their share of the profits, in accordance with their respective shares and nothing more. We, having found that there is no gift, though there is a transfer of property, do not see any necessity to set aside the order of the Tribunal which only finds that there is a transfer of property in the name of the firm, which we have found to be not capable of being assessed under the GT Act. The Income Tax Appeal also would stand disposed of, since we have already found that there can be no gift found in the transaction. Both the Appeals are disposed of as above. No costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON JUDGE GTA1/01 & ITA 109/00 -14- APPENDIX OF GTA 1/2001 PETITIONER'S/S EXHIBITS: ANNEXURE-A TRUE COPY OF THE ASSESSMENT ORDER DATED 23/09/1986 FOR THE YEAR 1980-81. ANNEXURE-B TRUE COPY OF THE APPELLATE ORDER DATED 31/03/1987 FOR THE YEAR 1980-81. ANNEXURE-C TRUE COPY OF THE TRIBUNAL ORDER DATED 06/04/1990 IN GTA NO.31/COCH/87 PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH. ANNEXURE-D TRUE COPY OF THE JUDGMENT DATED 16/01/1998 IN ITR NO.157/95 PASSED BY THE HON'BLE HIGH COURT OF KERALA. ANNEXURE-E TRUE COPY OF THE TRIBUNAL ORDER DATED 20/01/2000 IN GTA NO.31/COCH/87 PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH. ANNEXURE-F TRUE COPY OF TRIBUNAL ORDER DATED 11/06/2001 IN GTA NO.31/COCH/87 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH. ANNEXURE-G TRUE COPY OF RECTIFICATION ORDER DATED 25/06/2001 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH. [True Copy] jg GTA1/01 & ITA 109/00 -15- APPENDIX OF ITA 109/2000 PETITIONER'S/S EXHIBITS: ANNEXURE-A TRUE COPY OF THE ASSESSMENT ORDER DATED 23/09/1986 FOR THE YEAR 1980-81. ANNEXURE-B TRUE COPY OF THE APPELLATE ORDER DATED 31/03/1987 FOR THE YEAR 1980-81. ANNEXURE-C TRUE COPY OF THE TRIBUNAL ORDER DATED 06/04/1990 IN GTA NO.31/COCH/1987 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH. ANNEXURE-D TRUE COPY OF THE JUDGMENT DATED 16/01/1998 IN ITR NO.157/95 PASSED BY THE HON'BLE HIGH COURT OF KERALA. ANNEXURE-E TRUE COPY OF THE TRIBUNAL ORDER DATED 20/01/2000 IN GTA NO.31/COCH/87 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH. [True Copy] jg "