High Court Of Jharkhand
Commissioner Of Gift Tax vs. Sanjay Kapoor & Anr.
Section GT 4(1)(c)
M.Y. Eqbal & D.G.R. Patnaik, JJ.
Tax Case No. 2 of 1998
4th September, 2007
Counsel Appeared :
K.K. Jhunjhunwala, for the Revenue : Binod Poddar, Biren Poddar, Piyush Poddar, Ajay Poddar & Vikas Pandey, for the Assessee
JUDGMENT
By the Court :
By this reference under s. 256(1) of the IT Act, 1961, the following question has been referred to this Court : “Whether, on the facts and circumstances of the case, the Tribunal was justified in law to hold that the abandonment of Rs. 1,99,211 which is the share of the investment allowance reserve by the assessee in favour of the firm, i.e., M/s Kapoor Brothers is not a deemed gift under s. 4(1)(c) of the GT Act ?”
2. The facts of the case lie in a narrow compass. The assessee was a partner in the registered firm M/s Kapoor Brothers having a one-fifth share in the profit or loss of the said firm. The assessee retired from the partnership firm w.e.f. 1st April, 1986, and on the date of retirement, the credit balance in the capital account of the firm was Rs. 2,11,637 which was transferred to the unsecured loan account. The assessee received his share from the capital assets of the firm. However, he did not claim his share in the investment allowance reserve which amounts to Rs. 1,99,211. The case of the assessing authority was that the assessee relinquished his claim to the extent of Rs. 1,99,211 which was his share in the investment allowance reserve. The assessing authority, therefore, treated this amount as deemed gift under s. 4(1)(c) of the GT Act and held that the assessee was liable to pay tax on the said amount. Aggrieved by the said order, the assessee preferred an appeal before the CIT(A), Ranchi, [in short “the CIT(A)”]. After hearing the parties, the appellate authority took the view that the aforesaid sum of Rs. 1,99,211 shall not be treated as deemed gift. Consequently, the appeal was allowed and the order of the assessing authority was set aside. The Revenue authority preferred second appeal before the Tribunal. The Tribunal in its orders has observed that the Department has failed to convince as to how the investment allowance reserve was an asset or a property and how upon retirement by the appellant from the partnership firm, there has been relinquishment in such an asset. The Tribunal further held that the Revenue authority has failed to prove the presence of essential ingredients laid down under s. 4(1)(c) of the GT Act so as to make the assessee liable for payment of tax on the said amount.
3. We have heard Mr. Poddar, learned counsel appearing for the assessee, and Mr. Jhunjhunwala, learned counsel appearing for the appellant.
4. There is no dispute that after retirement from the partnership firm, the assessee received his share from the credit balance in the capital account. Mr. Jhunjhunwala, learned counsel appearing for the appellant, is unable to satisfy us that the investment allowance reserve is also an asset of the firm and in the event of retirement, the partner is entitled to receive his share from the investment allowance reserve also.
5. The question involve is as to whether such allowance other than the capital assets in the capital account, shall be treated as an asset of the firm and in the event of retirement, such investment allowance or goodwill shall be treated as deemed gift, no longer res integra. In the case of CGT vs. T.M. Louiz (2000) 163 CTR (SC) 359 : (2000) 245 ITR 831 (SC), the Supreme Court has considered the meaning and application of gift as defined in s. 4(1)(c) of the Act. In that case, after the partner retired from the partnership firm, he received the value of his share in the firm. However, he did not claim anything in respect of the goodwill of the firm. The assessing authority was of the view that the assessee received his share showing less than the market value thereof. Considering the provisions of the GT Act, the Court observed as follows :
“To recapitulate, when the assessee retired from the two firms, he received the value of his shares therein and the argument was that what he had received was less than the market value of his shares since the goodwill of the firms had not been taken into account. When a partner retires from a partnership, the partnership continues. The assets and the goodwill of the firm continue to remain the assets and the goodwill of the firm. All that the retiring partner gets is the value of his share in the partnership assets less its liabilities. It cannot, in such circumstances, be held, assuming that the retiring partner received less than what was his due, that the difference was something that he had transferred to the continuing partners within the meaning of ‘transfer of property’ for the purposes of the GT Act or that there was a gift liable to gift-tax.”
In the case of CIT vs. Smt. Asha Gulati (2005) 194 CTR (Del) 192 : (2006) 282 ITR 584 (Del), the assessee partner after retiring from the firm, received only the balance amount of outstanding in the capital account without receiving any amount towards goodwill and import entitlements of the firm. The assessing authority treated 50 per cent of the goodwill and the said price of import entitlements as gift. On appeal, the Tribunal held that there was no gift. Ultimately, the matter came to the Delhi High Court. The Delhi High Court following the ratio decided by the Supreme Court in T. M. Louiz (supra), held that there was no gift within the meaning of s. 4(1)(c) of the GT Act. Following the ratio decided by the Supreme Court in T. M. Louiz (supra), we have no option but to hold that merely because the assessee abandoned or did not claim any share in the investment allowance reserve, the same shall not be treated as a deemed gift within the meaning of s. 4(1)(c) of the GT Act. In the result, the question is answered accordingly in favour of the assessee.
[Citation : 299 ITR 360]
