1. Under Section 23(1) of the Gift-tax Act, 1958, the assessee appealed this Tribunal to hold that no gift-tax is leviable in case of abatement in share of profit in the firm suffered by an assessee-partner where the reconstitution in profit-sharing ratio is made between the partners.
The assessee was having 36 per cent share in M/s. Chunnilal Cam-palal & Company as per the agreement dated 31-5-1971 which was reduced by 14 per cent as per the agreement dated 21-10-1979 w.e.f.
31-10-1979. This 14 per cent was given up in favour of the two other existing partners. The partners resorted to reconstitute the shares mutually. No other reason was delineated in the agreement.
Apparently, there was no intercalation or extrication of capital of the firm. Neither any new partners were introduced nor anybody retired.
3. It was contended before the Gift-tax Officer (GTO) that no gift-tax is payable in respect of readjustment. The GTO, however, repelled the contention, as according to him, the provisions of Section 4 of the Gift-tax Act, gift-tax is attracted as the assessee relinquished a part of his profit-sharing ratio. As the assessee's share of the firm had reduced by 14 per cent, the Gift-tax Officer computed the taxable gift on the basis of super-profit and determined the same at Rs. 16,800.
4. Before the learned Appellate Assistant Commissioner (AAC), the assessee relied on the Hon'ble High Court of Madhya [Pradesh's decision in Sharadkumar Shrikishan v. CGT (sic) and contended that the gift-tax is not payable in this case. The learned AAC, however, did not agree with the contention of the assessee, as according to him, the decision relied by the assessee is not applicable. In that case, he pointed out, a partner settled his accounts on retirement from the partnership firm without any stipulation in respect of the valuation of goodwill and it was considered not to have made a gift of share of goodwill in favour of incoming partner remaining partners of the firm. He confirmed the decision of the Gift-tax Officer. Hence these appeals before the Tribunal.
5. The first contention raised by the assessee's learned counsel was that in the case of bona fide transaction no gift-tax is attracted.
6. He further pleaded that in case of redistribution of shares in the firm of the partners no gift is contemplated. For that he relied on the decision of the Gujarat High Court in Ramniklal Chhotalal v. CGT [1977] 106 ITR 799 in which the assessee had given up 25 per cent share of his share of the firm in favour of his minor sons."; The Hon'ble Gujarat High Court, following its earlier decision in CGT v. Chhotalal Mohanlal [1974] 97 ITR 393, held that there was only a re constitution of the firm and the admission of the minor sons to the benefits of the partnership with the consent of the continuing partners could not amount to gift by the assessee in favour of his minor son.
7. He also relied on the decision in Chhotalal Mohanlal's case (supra).
As this case has been fully discussed in the earlier case, relied by him (supra), we do not find necessary to discuss the facts of this case. Other cases relied by him - D.C. Shah v. CGT [1982] 134 ITR 492 (Kar.) and CGT v. P. Gheevarghese, Travancore Timber & Products [1972] 83 ITR 403 (SC) will be discussed at the opportune time.
8. The learned counsel argued that it was for the Department to find out that the transaction amounted to gift and chargeable to Gift-tax.
9. The learned Departmental Representative (D.R.) at the out-set submitted that the decisions relied upon by the learned counsel of the Gujarat High Court are overruled by the Supreme Court in CGT v.Chhotalal Mohanlal [1987] 166 ITR 124. In that case it was held that goodwill is a property and when the minors are admitted to the benefits of the partnership in a firm and the share of any existing partner is reduced thereby, the right to money value of the goodwill stands transferred and the transaction constitutes a gift under the Gift-tax Act, 1958. The learned D.R., therefore, argued that the learned lower authorities were justified in their views that the gift-tax is leviable in the present case.
10. We have considered the rival submissions, facts and materials on record and also perused the written submissions filed by the learned counsel for the assessee. The decisions of the Hon'ble High Court of Gujarat reported in 106 and 97 ITRs (supra) relied by the learned counsel for the assessee have become ineffective in view of the decision of the Supreme Court relied by the learned Departmental Representative. The next case was relied by the learned counsel in case of D.C. Shah (supra). The facts were, in that case, the firm was consisted of 11 partners. On January 1, 1964, a son of one of the partners joined the firm as a partner. A fresh deed of partnership was adopted on that date and the new partner was allotted the share and the share of his father was reduced. In 1968, there was a further reconstitution of the firm as four new partners and four minors were admitted to the benefits of the partnership. A fresh deed of partnership was again drawn up and the shares were reallocated. The shares of some of the erstwhile partners were reduced in favour of the new partners. New partners in 1964 and the partners and the persons admitted to the benefits of partnership in 1968 contributed capitals in the firm and the new partners agreed to work for the firm. On the question whether the reallocation of shares in 1964 and 1968 amounted to gifts, the Hon'ble High Court held that there were contributions of capital by new partners and the partners admitted to the benefits of the partnership. Moreover, the clauses in the deed of partnership made it obligatory on the new partners to participate in the business and work of the firm which is adequate consideration and, therefore, there was no taxable gift as a result of reallocations of shares in 1964 and 1968. The facts of that case and the case before us are distinguishable. Firstly, there were introduction of fresh capitals by the incoming partners and secondly there was agreement of active participation of business by incoming partners. In this case, these had not happened. There was neither introduction of new capital or the fresh blood came in participating in business. In P. Gheevarghese Travancore Timber & Products' case (supra), case relied by the learned counsel for the assessee, we find the facts are dissimilar. In that case, though according to the deed of partnership, goodwill was made a part of the partnership and the assets of the business which the assessee had transferred to the partnership, the departmental authorities never treated all the assets and the properties of the assessee which were transferred to the partnership as a subject-matter of gift instead it picked up only one of the assets of the assessee's property to its business viz., the goodwill and that is the subject-matter of gift. The Supreme Court looking into the various clauses of the partnership found as under: Under Clause 10 the assessee was to be the managing partner of the firm. He alone had the power to sign the cheques on account of the partnership in the name of the firm. He had the power to borrow from banks and other private parties for the purpose of the business and to execute bonds, documents, agreements and other activities as might be necessary. There were other provisions also which showed that it was the assessee who retained substantially the control of the running of the business in his own hands. Clause 17 provided that whenever any of the partners died during the continuance of the partnership then the partnership would not be dissolved between the surviving partners and fairly elaborate provisions were made with regard to what would pass to the representatives of such deceased partner from out of the properties and assets of the partnership as also its profits. The partnership deed also contained what were called special provisions as to the share of the first partner.
Clause 18 provided that the assessee who was the first partner could nominate neither one or all of his minor children to be a partner or partners on their attaining majority. Such nomination or appointment could be made "by a will or codicil.
11. After considering the above facts it held that when the Department never treated all the assets and the properties of the assessee which were transferred to the partnership, pertaining to his proprietary business as a gift but the only picking one of the assets as a subject-matter of gift was incomprehensible. In other words, in absence of any plea that all assets of proprietary business converted to the partnership business tanta-mounted to gift, inducting daughters as partners at the time of such conversion, could not be treated as gift of goodwill. There are dissimilarity in clauses and facts between the case before the Supreme Court and the appeal before us. Moreover, in our opinion, the facts of the Supreme Court's case in Chhotalal Mohanlal (supra), are more akin to the facts of the appeal before us.
Therefore, we prefer to follow the latter decision.
12. With regard to the contention of the learned counsel that the bona fide transaction does not attract gift-tax, we may say, does not appeal to us. For his proposition the learned counsel drew our attention to Clause (c) of Section 4(1) of the gift-tax Act which runs as under: Where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any other person, the value of the release, discharge, surrender, forfeiture or abandonment, to the extent to which it has not been found to the satisfaction of the GTO to have been bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment.
13. He argued that relinquishment in this case was made bona fide, therefore, the exemption is available to the assessee under Clause (c) referred to above. However, his submission cannot be accepted. Firstly, because it cannot be accepted that the Supreme Court was oblivious of this clause and held the relinctuishment of shares as taxable gift in Chhotalal Mohanlal's case (supra), secondly, if the submission of the learned counsel is accepted, then Section 2(xii), (xxiv) and Clause (d) becomes otiose. Clause (d) and Subsections (xii) and (xxiv) of Section 2 read as under: (xii) 'Gift' means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth and includes the transfer or conversion of any property referred to in Section 4, deemed to be a gift under that section.
(xxiv) 'Property' includes any interest in property, movable or immovable.
(d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person.
14. In our view, Section 4(1)(c) of the Act contemplates action where the debt, actionable claim, contract, interest in any property, is available to an assessee, against other, and, it is given up. This cannot be equated with relinquishment of any part of the shares in a firm by an assessee. Further we fail to notice any bona fide action on the part of the assessee anywhere in the agreement of the partnership in this case. Except mutuality, nothing has been mentioned in the partnership agreement and no new partner had come in.
15. In view of the above, we confirm the decision of the AAC of Gift-tax confirming the gift-tax levied by the GTO.