1. These are two appeals by the revenue raising identical questions and, therefore, they are decided by this common order. We have heard the learned departmental representative and the learned counsel for the assessee and have perused the material placed before us. The facts are that there was a partnership firm consisting of Mahboob Mohd.
(Respondent) in GT Appeal No. 12 of 1980 and Nasir Mohammed (Respondent) in GT Appeal No. 11 of 1982, each of whom had a 50 per cent share. On 30-9-1971, Nasir Mohd. retired from the said partnership and from 1-10-1971 the firm was reconstituted and the newly constituted firm took over the assets and liabilities of the old firm. In the new firm the share of Mahboob Mohd. was reduced from 50 per cent to 25 per cent and two new partners were taken and they were Niwazi Miya and Smt.
Hajjan Sakuranbi, each having a share of 20 per cent and 10 per cent, respectively. Three minors were also admitted to the benefits of the partnership. They were Shakil Ahmed, Aqueel Ahmed and Suhel Ahmed each of whom was to have 15 per cent share in the profits of the partners.
The GTO took the view that the surrender of the entire share by Nasir Mohd. and the reduction in the share of Mahboob Mohd. from 50 per cent to 25 per cent resulted in a gift of their respective shares of goodwill in the firm to the new partners. The GTO, therefore, initiated proceedings against the two persons aforesaid, who filed returns declaring the gift at nil. The GTO determined the value of the goodwill at Rs. 1,25,727 and, therefore, in respect of Nasir Mohd. he determined the value of his share of the goodwill at Rs. 62,863 and the taxable gift at Rs. 57,860. Similarly, in the case of Mahboob Mohd. the taxable gift was determined at Rs. 30,357. Both the asseesses appealed to the AAC, who took the view that since all the partners had invested capital in the reconstituted firm, there was no gift. He also held that the firm did not have any goodwill. With these findings the learned AAC cancelled the assessement made on the firm.
2. The learned departmental representative relying on the orders passed by the GTO contended that since the firm had earned profits before its reconstitution, it could not be said that it did not have any goodwill and that the learned GTO had rightly calculated the value of the goodwill and determined the amount of the taxable gift. The learned counsel, on the other hand contended, that in the reconstituted firm all the incoming partners had invested capital and joined the firm for a consideration and, therefore, there was no element of gift.
3. Whether in circumstances like those in the case before us there is a deemed gift or not was discussed by the Hon'ble Madhya Pradesh High Court in Manaklal Motilal Agrawal v. CGT [1984] 147 ITR 670. After considering the opinions of the various High Courts, the Hon'ble High Court held that mere retirement of a partner and reconstitution by other partners will not amount to a gift chargeable to gift-tax unless further facts are enquired into. The Hon'ble High Court quoted with approval the observations of the Hon'ble Bombay High Court in CGT v.Premji Trikamji Jobanputra [1982] 133 ITR 317 in which it was observed that to ascertain whether there is a gift by the assessee of the goodwill and the assets of the firm or not will depend upon the determination of the two questions, viz., (i) whether the value of the assets of the earlier firm including the goodwill exceeds the total liability of the earlier firm, and (ii) whether the incoming partner or a minor, who has been admitted to the benefits of the firm has brought in capital. The Hon'ble Bombay High Court observed that unless such questions are determined, it would not be possible to lay down as a general principle that there has been a gift in respect of the goodwill whenever a firm is reconstituted as a result of which the minors are admitted to the benefits of the partnership and the shares in the goodwill of one of the partners is reduced and the same is pro rata given to the minors, who are so admitted to the benefits of the partnership.
4. A perusal of the assessment order made by the learned GTO would show that he has not proceeded on the lines indicated above. He has merely taken into account one of the alleged assets of the firms, namely, its goodwill. He has given no attention to the relevant facts, that is, what was the value of the total assets including goodwill, if, any of the firm taken over by the new firm, and what were its liabilities. He has also not taken into account what was the capital invested by the partners in the new firms and whether the benefit that the new partners got by admission into the partnership was more than what was invested.
Unless it was found as a fact that by admission to the partnership a particular partner became entitled to assets that were larger in value than the amount invested by him, there could be no gift at all. Only the difference between the share of assets and the capital invested could be deemed as a gift. The approach of the learned A AC that since each one of the new partners had invested capitals, there was no gift, is also not correct. A gift would be negatived only if investment of capital is equal to the value of assets that would fall to the share of a particular person, if the firm was dissolved. If the investment was less than that, there would always be a deemed gift.
5. Since the GTO did not proceed on the right line the assessment made by him was not sustainable. Since there is no material on record to show prima facie that there was any element of gift and since the proceedings relate to the assessment year 1973-74, we do not think it proper to restore the matter to the GTO for making fresh assessment.