High Court Of Madras
Commissioner Of Gift Tax vs. S. Ashok & Ors.
Sections GT 2(xii), GT 4(1)(a)
R. Jayasimha Babu & S.R. Singharavelu, JJ.
Tax Case Nos. 357 to 360 of 1999
3rd November, 2003
Counsel Appeared
K. Subramaniam, for the Revenue : P.P.S. Janardhana Raja, for the Assessee
JUDGMENT
R. Jayasimha Babu, J. :
This reference is under the GT Act which has since been repealed. A partnership firm, which originally consisted of five partners, was reconstituted on 1st Oct., 1982, by admitting the company as a partner and allotting to it a 60 per cent share in the profits and losses after it brought in fresh capital of Rs. 30,000. The shares of the original five partners were at the time of reconstitution reduced from 20 per cent to 8 per cent each. Subsequently, on 31st Dec., 1982, the original five partners retired, and received at the time of retirement their capital as shown in the books of account of the firm. The genuineness of the firm was not questioned by the Revenue.
Four years later, in the year 1986, one of the properties which belonged to the firm the property being an immovable property in the State of Kerala was sold by the company which had become the owner of all the assets of the erstwhile firm, for a sum of Rs. 27 lakhs. The AO taking note of that fact proceeded to make assessments under the GT Act against the five original partners by treating the difference between 60 per cent of the market value of the property as on 1st Oct., 1982, and the amount of capital brought in by the company as constituting a gift in favour of the company. He also brought to gift-tax the difference between 40 per cent of the market value of that property as on 31st Dec., 1982, and the amounts received by the erstwhile partners as constituting a gift to the company.
On appeal, the CGT(A) held, and held rightly, that where the reduction in the value of the share of a partner is accompanied by the newly admitted partner to whom a share corresponding to the reduction had been allotted, bringing in fresh capital equal to the amount by which the capital of other partners was reduced, there was no gift. The CGT(A) recorded a finding that the company which was admitted as a partner on 1st Oct., 1982, had brought in capital to the extent of Rs. 30,000, the exact amount by which the capital contribution of the original five partners was reduced after the admission of the company as a partner. He held, therefore, that the admission of the company as a partner was for a consideration and there was no gift or deemed gift as on 1st Oct., 1982.
The CGT(A), however, upheld the order of the AO who had sought to levy gift-tax on the difference between 40 per cent of the market value and the amount paid to the retiring partners/releasors after they had released their rights in the firm’s properties. While concluding his order, he erroneously stated that the appeal was dismissed, while in fact, the appeal should have been allowed in part.
On further appeal by the assessee to the Tribunal, the Tribunal held that no gift-tax was payable either on account of the admission of the company as a partner or on account of the subsequent retirement of the original partners. The Tribunal took note of the fact that what was sold in the year 1986 was only one of the assets that had belonged to the firm, that no effort had been made to ascertain the net value of the assets of the firm as on the date the erstwhile partners retired, and more important that the firm had suffered losses continuously from the years 1979-80 to 1983-84 and, that the reason for admitting the company as a partner was to reduce the exposure of the original partners to the liabilities of the firm which continued to incur losses and that was also the reason why on a subsequent date they released their rights in the firm and allowed the company to take over all the assets and liabilities of the firm. It was held that the admission of the company as a partner, as also the subsequent release by the original partners were bona fide transactions.
The Tribunal has also pointed out that in terms of the agreement constituting the firm, if a partner wished to retire, he would only be entitled to his capital contribution. In accordance with that clause, the retiring partners were paid only their capital contribution and they had executed the release deed subsequently, only because one of the properties which was owned by the firm was an immovable property. The Tribunal further noticed the fact that the amount paid to the retiring partners was not an amount which was ascertained after taking note of all the assets and liabilities of the firm and, there was no material at all to hold that what was paid to the retiring partners was an amount which was less than the amount they would have been entitled to, on taking into account all the assets and liabilities of the firm on the date of their retirement. When a partnership is constituted, it is open to the partners to agree among themselves the terms subject to which they will carry on business as a firm. It is also open to them to agree on the terms on which they will agree to relinquish their interest in case any one of them decides to do so. So long as the terms of the agreement are not incompatible with any statutory requirement, the terms agreed among the partners are the terms that bind them. It was open to the partners in this case to agree that in the event of a partner wanting to retire, he would only be paid the amount standing to his capital amount in the books of the firm.
In case of dissolution of a firm, when all the assets and liabilities are valued and the entitlement of each of the partners determined in proportion to his share in the firm and any of those partners relinquish a part of their entitlement under the partnership deed, and agree to receive less, it can be said that there is a gift to the extent of that difference. But for coming to such a conclusion, it is first necessary that all the assets and liabilities of the firm should have been determined and the entitlement of each partner ascertained. It is not permissible to take the value of one property which had been sold and on that basis proceed to hold that there was a gift of the difference in the market value of the property and the amount that had been received by the individual partner at the time of retirement. As noticed by the Tribunal, in this case, the firm had suffered losses continuously and the reason for admitting the company as a partner was to reduce the exposure of the original partners to further losses and further liabilities. It is also that very reason that prompted them subsequently to release their rights in the firm and accept only the amount to their credit in the capital of the firm.
The Supreme Court in the case of CGT vs. T.M. Louiz (2000) 163 CTR (SC) 359 : (2000) 245 ITR 831 (SC) considered a case where a partner had retired from two firms. He was sought to be taxed under the GT Act on the ground that the amounts taken by him from the firms for his share was less than the market value thereof, as the goodwill of the firm had not been taken into account. The Court held that when a partner retires, all that he gets is the value of his share in the firm’s assets less its liabilities and that, in such circumstances, it cannot be held, assuming that the retiring partner received less than what was due to him, 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. Though in this case the firm did not continue, as all the partners except the one in whose favour the rights were relinquished had retired, the principle laid down in that decision governs the case on hand as well as there has been no ascertainment of the net value of the firm after taking note of all the assets and liabilities. Merely taking note of the value of one property that had been owned by the firm and which was sold four years after the assessee had relinquished his rights in the firm does not make the assessee liable for gift-tax, when as found by the Tribunal the reason for relinquishment of the rights of the assessee in the firm was the fact that the firm continued to suffer losses and, on that account, the assessee did not wish to continue in the firm any longer.
The two questions referred to us, viz., (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and had enough materials to hold that there was no gift or deemed gift involved in the transactions of admission of the company into the partnership and retirement of the partners resulting in dissolution of the firm ?; and (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that cl. 12 of the partnership deed came into operation to determine the rights of the retiring partners ? are answered in favour of the assessee, and against the Revenue. The assessee is entitled to costs in the sum of Rs. 2,500.
[Citation : 270 ITR 240]
