Madhya Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that transfer by the assessee of 40 per cent of the value of the goodwill and of the development rebate reserve is for consideration and that there was no gift within the meaning of section 2(xii) r/w s. 4 (1)(c) of the GT Act ?

Counsel Appeared

Rawat, for the Petitioner : V.S. Malhotra, for the Respondent

D. OJHA, C.J.:

The Tribunal, Jabalpur Bench, Jabalpur, has referred the following question to this Court for its opinion under s. 26(1) of the GT Act, 1958 (hereinafter referred to as “the Act”) :

” Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that transfer by the assessee of 40 per cent of the value of the goodwill and of the development rebate reserve is for consideration and that there was no gift within the meaning of section 2(xii) r/w s. 4 (1)(c) of the GT Act ?”

2. The necessary facts which emerge from a perusal of the record are that the predecessor-ininterest of the present non-applicants, namely, Banarsidas Bhanot, who shall hereinafter be referred to as the assessee, was a partner in the firm, M/s Banarsidas Bhanot & Sons, Jabalpur, having 60 per cent share. The remaining 40 per cent share was held by Dharam Pal Sharma. It further appears that there was another partnership firm in the name of M/s Pandit Brothers in which three major sons of the assessee were partners. Subsequently, a new partnership in the same name of M/s Banarsidas Bhanot and Sons was constituted with effect from 1st April,1966. In the new partnership, the share of the assessee was reduced from 60 per cent to 20 per cent. The share of Dharam Pal Sharma was also reduced from 40 per cent to 17-1/2 per cent. The remainder of the share was allotted to the three major sons of the assessee who were partners in M/s Pandit Brothers and two of his minor sons all of whom were inducted as partners in the newly constituted firm. The three major sons of the assessee were given 17 1/2 per cent share each and the two minor sons were admitted to the benefits of the partnership to the extent of 5 per cent share each. The assessment proceedings for the relevant year were reopened and a question arose as to whether the surrender of his 40 per cent share by the assessee in favour of his sons amounted to a gift within the meaning of the Act, liable to tax. The case of the assessee was that the surrender of the said 40 per cent share was made for consideration and consequently it could not be treated as a gift. According to him, his three major sons who were carrying on business in the name of M/s Pandit Brothers had expertise also in the business which was being carried on by the firm, M/s Banarsidas Bhanot and Sons, and on reconstitution of the firm, the benefit of their expertise was available to the reconstituted firm and this constituted consideration for the surrender of the assessee’s 40 per cent share. His case further was that all his five sons had also made a contribution in the sum of Rs. 3,70,000 odd as capital investment in the newly constituted firm and that too formed a consideration for the surrender of his 40 per cent share. The plea raised by the assessee, however, did not find favour with the GTO and the CGT(A), with the result that the surrender of his 40 per cent share by the assessee was taken to be a gift for the purposes of the Act. On a second appeal being filed by the assessee, the Tribunal reversed the orders of the authorities below and held that the surrender of 40 per cent share by the assessee was for consideration. At the instance of the CGT, however, the Tribunal referred the aforesaid question to this Court for its opinion.

3. It has been urged by learned counsel for the Department that insofar as the contribution of expertise as consideration is concerned, obviously there could not be any contribution of such expertise by the two minor sons of the assessee inasmuch as they did not have any such expertise. On this basis, it was urged that at any rate, the surrender of the share of the assessee in favour of his minor sons was without any consideration and amounted to a gift. It was also urged by learned counsel for the Department that as has been found by the CGT (Appeals), the cash contribution made by the sons of the assessee in the newly constituted firm as capital investment had not been made at the time when the partnership was entered into or during the relevant assessment year, but was made after about 39 months. On this basis, it was urged that the same could not be treated as consideration for surrender of his 40 per cent share by the assessee. In this connection, reliance was placed by learned counsel for the Department on paragraph 10 of the deed of partnership which has been referred to in the order of the Tribunal. On this basis, it has been urged that even on a bare perusal of the said clause, it was clear that no consideration had passed for surrender of the 40 per cent share by the assessee in favour of his sons at the time of execution of the said agreement. It was pointed out that no consideration had, as found by the CGT, passed even during the relevant assessment year which in the instant case was 1967-68. On the other hand, the amount sought to be treated as the capital investment of the sons of the assessee was paid only on 1st July, 1969. According to him, in this view of the matter, even the payment of the amount of Rs. 3,70,000 odd could not be taken as consideration for the surrender of his 40 per cent share by the assessee.

4. Having heard learned counsel for the parties, we find it difficult to agree with the submission made by learned counsel for the Department. It is true that insofar as the benefit of expertise of the sons of the assessee is concerned, his two minor sons were not in a position to give any benefit of their expertise to the newly constituted firm. However, the three major sons were no doubt in a position to do so. That apart, the finding of the Tribunal in regard to the capital investment by the five sons of the assessee reads as under : “Thus, it cannot be said that the assessee was a loser when he admitted his sons into the new firm. Besides the above, we have noted that the assessee by surrendering 40 per cent of his share in the profits of the old firm acquired the services of experienced persons and not only that but as per cl. 10 of the partnership deed, the new partners agreed to contribute their major portion of the capital in the new firm which is evident from a perusal of page 6 of the paper book, wherein as on 31st March, 1969, the balance in the account of the five sons was Rs. 3,44,647.49 and as on 31st March,
1970, it was Rs. 8,56,757.41. Thus, it could be safely stated that Shri Banarsidas surrendered his share of profit with a substantial consideration and it is not correct to say that it was without consideration.”

5. With regard to the finding of the CGT that the contribution of the capital asset was made by the sons of the assessee after 39 months and that they appeared to have been carrying on their business in the name of M/s Pandit Brothers, the Tribunal has recorded a finding that the observation of the CGT(A) no doubt indicates that the sons were continuing their old business but as a matter of fact it is not true. In fact, these sons were carrying on the contract business only technically as, for a contractor, it is difficult to abruptly close down his business as he has to clear his unfinished work and has to receive back the securities deposited with the Government and it is not denied by the Revenue that they did not take up any new contract during these three years. According to the Tribunal, that being the position, the authorities below could not be said to be justified in holding that the surrender of 40 per cent share in favour of the incoming partners was without consideration. It is apparent that the contribution which was made by the sons of the assessee as capital investment was made not only by his three major sons but also by his two minor sons. That being so, the surrender of 40 per cent share by the assessee in favour of his five sons was, as held by the Tribunal, for consideration and could not be treated as a gift.

As regards the submission made by learned counsel for the Department that consideration did not pass either at the time when the deed of partnership was executed or during the relevant assessment year, suffice it to say that s. 4(1)(b) of the Act contemplates that where property is transferred for a consideration which, having regard to the circumstances of the case, has not passed or is not intended to pass either in full or in part from the transferee to the transferor, the amount of the consideration which has not passed or is not intended to pass shall be deemed to be a gift made by the transferor. In the instant case, paragraph 10 of the partnership deed indicates that consideration was intended to pass. Not only that, as is the finding of the Tribunal, that consideration did actually pass, even though not during the relevant assessment year. It was urged by learned counsel for the Department that in paragraph 10 of the deed of partnership, no time-limit was specified within which the consideration was to pass. So far as this submission is concerned, suffice it to say that this circumstance may have been relevant if consideration had not at all passed till the date of the order of assessment. On the facts and in the circumstances of the instant case, we do not consider it necessary to go into the question as to what would be the effect of an agreement where even though it is stated that consideration is intended to pass but no time limit is prescribed for payment of consideration inasmuch as in the instant case, even the order of the GTO is dt. 25th Jan., 1978, i.e., long after 1st July, 1969, which was the date when the consideration had passed.

Learned counsel for the Department further urged that the question which has been referred to us is with reference to s. 4(1)(c) of the Act and not with reference to s. 4(1)(b) of the Act. In so far as this submission is concerned, it may be pointed out that s. 4(1)(c), inter alia, contemplates release, discharge, surrender, forfeiture or abandonment of any interest in property, which in the opinion of the GTO is not bona fide. The word “property” has been defined in s. 2(xxii) of the Act and according to this definition, “property” includes any interest in property, movable or immovable. Consequently, when cl. (c) of s. 4(1) of the Act uses the words “release”, “discharge”, “surrender”, “forfeiture” or “abandonment of interest in property”, it apparently includes a case of transfer of property also. If there is a transfer of property for consideration, it will obviously be a bona fide transfer. In this connection, it may be seen that cl. (c) does not use the term “consideration” anywhere which term has been used in the question referred to us. We are accordingly of the opinion that even though the question referred to us refers to s. 4(1)(c) of the Act, circumstances contemplated by cl. (b) thereof which are relevant for finding as to whether the transfer was for consideration or not have, on the facts of the instant case, to be taken into account.

10. In view of the foregoing discussion, our answer to the question referred to us is that, on the facts and in the circumstances of the case, the Tribunal was right in holding that transfer by the assessee of 40 per cent of the value of the goodwill and of the development rebate reserve is for consideration and that there was no gift within the meaning of s. 2(xii) r/w s. 4(1)(c) of the GT Act. In other words. the answer to the aforesaid question is in the affirmative, in favour of the assessee and against the Department. In the circumstances of the case, there shall, however, be no order as to costs.

[Citation : 171 ITR 398]