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

ITA/109/2000HC KeralaKLHC01015190200026 November 2018Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON15 pages
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What did the High Court hold?

The High Court held that the first issue regarding gift tax assessment on shares allotted to the sons was not arising from the impugned order and had achieved finality against the Revenue in a previous High Court reference (Annexure-D), where this issue was given up. Therefore, this question was answered in favour of the assessee. Regarding the second issue, concerning the gift tax on the difference between the book and market value of the property transferred to the firm, the Court relied on the decision in Commissioner of Income Tax v. Jacobs (P) Ltd. (1999) 237 ITR 433 (Kerala). The Court held that when a partner contributes individual property to a partnership as capital, the consideration is unascertainable until the dissolution of the partnership. In the absence of an explicit provision stating otherwise, it is impermissible to treat the amount credited in the firm's books as the consideration for the transfer for the purposes of Section 4(1) of the GT Act. Therefore, no gift tax could be assessed on the differential value between the market value and book value. The Court found that although there was a transfer of property, it did not constitute a gift for the purpose of the GT Act. Consequently, the appeals were disposed of, with the finding that no gift tax was leviable.

What were the facts?

The assessee, Smt. P.L. Stella, converted her two proprietorship concerns, M/s. Cochin Tourist Home and M/s. Pulickal Pharmaceutical Distributors, into a single partnership firm with her two sons on July 1, 1979. The assessee retained a 10% share, while her sons received 35% and 55% respectively. The land and building of M/s. Cochin Tourist Home were brought into the partnership firm, with the book value significantly lower than the market value. The Assessing Officer (AO) assessed gift tax under Section 4(1)(c) for the shares surrendered to the sons and under Section 4(1)(a) for the difference between the book and market value of the land and building. The Commissioner allowed the assessee's appeal, but the Revenue appealed to the Income Tax Appellate Tribunal (Tribunal). The High Court had previously remanded the matter to the Tribunal for a clear finding on whether the building became an asset of the firm upon conversion. The Tribunal's subsequent orders were inconsistent and confusing, leading to the present appeals.

What were the issues?

1. Whether the shares allotted to the assessee's sons upon the conversion of her proprietorship into a partnership firm could be treated as a gift assessable under the Gift Tax Act, 1958, specifically under Section 4(1)(c)? 2. Whether, when the assessee brought land and property from her proprietorship into a partnership firm, a gift could be found based on the difference between the book value and the market value, assessable under Section 4(1)(a) of the Gift Tax Act, 1958? Assessee's Contentions: The assessee argued that the shares allotted to her sons were not a gift assessable under the GT Act. Regarding the property transfer, the assessee contended that no gift tax was leviable on the difference between book and market value when property is brought into a partnership, citing the principle that consideration for such transfers is unascertainable until dissolution. Revenue's Contentions: The Revenue contended that the transfer of shares to the sons constituted a gift. The Revenue also argued that the difference between the book value and market value of the land and building transferred to the firm was a gift assessable under the GT Act.

Which sections of the Income-tax Act were involved?

Section 4(1)(c),Section 4(1)(a)

AI-generated summary — verify with the full judgment below

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 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 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 RE

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