High Court Of Gujarat
Commissioner Of Gift Tax vs. Ramniklal M. Bambhania
Sections GT 4(1)(a)
Asst. Year 1981-82
M.S. Shah & A.M. Kapadia, JJ.
GT Ref. Nos. 1 to 5 of 1997
21st January, 2004
Counsel Appeared
Manish R. Bhatt, for the Applicant : None, for the Respondent
JUDGMENT
M.S. Shah, J. :
In these five references, the following common questions of law have been referred for our opinion in respect of asst. yr. 1981-82 :
“1. Whether the Tribunal is right in law and on facts in holding that there was no deemed gift when the assessee relinquished his share in the partnership firm in favour of the new incumbent partner?
2. Whether the Tribunal has correctly appreciated the decision of the Hon’ble Supreme Court in the case of CGT vs. Chhotalal Mohanlal (1987) 61 CTR (SC) 263 : (1987) 166 ITR 124 (SC)?”
2. The facts giving rise to these references are as under :
2.1 All the five assessees were partners in the firm M/s Accurate Engineering Co., having 20 per cent share each. During the previous year relevant to asst. yr. 1981-82, there was a change in the constitution of the firm inasmuch Mr. G.V. Modha, trustee of the Accurate Trust was admitted as a partner with 50 per cent share and, therefore, reducing the share of all the five assessees by 10% each. Subsequently, there was another change in the constitution of the said firm whereby the assessee-partners of the firm retired and the business of the firm was taken over by Mr. G.V. Modha, trustee of the Accurate Trust as its sole proprietor. The GTO held that all the five assessees are liable to gift-tax on deemed gift arising out of relinquishment of their respective share of 20 per cent in the said partnership firm in favour of Mr. G.V. Modha, trustee of Accurate Trust without adequate consideration of money or money’s worth. He accordingly computed the value of deemed gift by taking average of income for five years from asst. yrs. 1977-78 to 1981-82 after allowing deduction in respect of interest on partners’ capital at the rate of 12 per cent by computing the average amount of capital for one year on the basis of interest rates of partners’ capital for the aforesaid five years and by allowing a further deduction at 20 per cent of profit by way of salary.
2.2 The Dy. CGT(A) held that the Accurate Trust has brought in capital of Rs. 8,12,602 while the existing five partners (i.e., the assessees) have withdrawn their capital to the extent of Rs. 8,73,954. The capital of the new partner M/s Accurate Trust was Rs. 8,52,854. Hence, the question of deemed gift for relinquishment of their respective shares did not arise. He came to the conclusion that the capital contributed by the new partner constituted adequate consideration and there was no deemed gift involved. He, therefore, cancelled the gift-tax assessment orders passed by the GTO in all these cases and allowed the appeals of all these assessees.
2.3 Hence, the GTO carried the matter in appeal before the Tribunal. Before the Tribunal, the Revenue contended that the goodwill of the business has been held to be an asset by the Hon’ble Supreme Court in CGT vs. Chhotalal Mohanlal (1987) 61 CTR (SC) 263 : (1987) 166 ITR 124 (SC) and that, therefore, the capital contributed by M/s Accurate Trust in the capital account cannot be treated as consideration for transfer of goodwill by these five partners in favour of M/s Accurate Trust. The Revenue accordingly contended that transfer of goodwill by the five outgoing partners in favour of M/s Accurate Trust was without any consideration and, therefore, liable to gift-tax. The gift was accordingly valued on the principles relating to valuation of goodwill. The Tribunal upheld the finding given by the Dy. CGT(A) for the following reasons : (i) The trustees of M/s Accurate Trust had undertaken to actively look after the business of the firm and they were also liable for losses; (ii) The contribution of a substantial amount of capital by M/s Accurate Trust will expose the trust to the risk of losses; (iii) The contribution of capital cannot be regarded as confined to capital account only and not towards goodwill because unless a business has goodwill, no person would like to join that business as a partner and contribute because the goodwill of the firm will attract new capital. Therefore, the capital contribution by the new partners constituted adequate consideration not only in respect of the right to get future profits, but also in respect of the property in the goodwill.
2.4 Since the Tribunal dismissed the appeal of the Revenue, the Revenue has come in reference.
3. We have heard Mr. M.R. Bhatt, learned standing counsel for the Revenue, in all these five references. Though served, none appears for the respondent-assessees.
4. In CGT vs. Punjabhai Kalabhai (2000) 160 CTR (Guj) 14 : (2000) 243 ITR 223 (Guj), this Court has held that goodwill is an asset of a firm and like any other asset of the firm is capable of being transferred, but at the same time, retirement of a person from a firm and taking accounts at that time does not involve any transfer of property as such. Retirement of a partner and continued existence of the firm carrying on the same business by the remaining partners postulates that the firm carries on the business with the goodwill. It is ultimately a question of contract between the parties as to the settlement of accounts whether the goodwill is to be taken into account or not. For the purpose of inviting operation of gift-tax, the first condition is that there must be a transfer from one person to another. As no transfer takes place between the partners or from the firm to the partners or vice versa as a result of dissolution or on retirement of the partner, the taxability of the event is rightly not founded on the basis of transfer of share in the goodwill from the firm to the remaining partners. When the new incumbent has been inducted in the firm for consideration, there is no transfer of future right to share without consideration. Hence, there is no liability to pay gift-tax.
5. In the facts of the present case also, both the Dy. CGT as well as the Tribunal have held that M/s Accurate Trust had brought in capital to the tune of Rs. 8,52,854 and the outgoing five partners had withdrawn their capital to the extent of Rs. 8,73,954. It is thus clear that the new partner had given adequate consideration for being inducted as a partner and the outgoing partners had also received considerations for retiring from the partnership firm. In view of these facts, the Tribunal was right in holding that there was no deemed gift when the five assessees relinquished their shares in the partnership firm in favour of the new partner. Since the five assessees received their capital to the aforesaid extent, it cannot be said that the assessees had relinquished their shares in the partnership firm in favour of the new partner without any consideration.
6. As far as the decision in the case of Chhotalal Mohanlal (supra) is concerned, that was a case where the existing partner brought in his minor sons to the partnership firm without any contribution of capital by the minor sons and, therefore, the apex Court held it to be a case of gift. In the present case, the incoming partner having brought in his own capital, the ratio in Chhotalal Mohanlal’s case (supra) can never apply. Accordingly, we answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Revenue. In view of the above discussion, our answer to question No. 2 is also in the affirmative, i.e., in favour of the assessee and against the Revenue. All these references accordingly stand disposed of.
[Citation : 269 ITR 438]
