1. This is an appeal by an assessee from the order of the Appellate Assistant Commissioner of Income-tax, A.R.II, Ahmedabad (A.A.C.) dated June 18, 1987 upholding the gift-tax assessment as made by the Gift-tax Officer (GTO), Professional Circle-I, Ahmedabad under Section 15(3) of the Gift-tax Act, 1958 (the Act).
2. Briefly stated the relevant facts are that the assessee is a Solicitor enrolled in the High Court of Bombay and presently practising at Ahmedabad in the name and style of M.G. Doshit & Co. From May 1952 till the end of December 1972 the assessee was a partner of M/s Bhaishanker Kanga & Girdharlal, a firm of Solicitors at Bombay. On the formation of the State of Gujarat and establishment of a High Court at Ahmedabad, the said firm of M/s Bhaishanker Kanga & Girdharlal opened an office in Ahmedabad and from mid 1960 to mid 1963, the assessee was posted at Ahmedabad. In 1963, the assessee went back to the Bombay office and in or about July 1968 he was again posted in Ahmedabad office of the said firm where he retired on and with effect from January 1, 1973.
3. Under the provisions of several deeds of partnership of M/s Bhaishanker Kanga and Girdharlal as executed by and between the partners thereof from time to time, a former partner was entitled to receive a share in the profits of the said firm in respect of the work done during the time he was a partner. After his retirement from the said firm, the assessee, by a deed of settlement dated December 27, 1976, settled on trust his right to receive, recover and realise from the said firm his share according to the several deeds of partnership from the recoveries for the relevant period made after December 31, 1975. In the said deed of settlement the assessee valued the trust property at Rs. 40,000.
4. On June 29, 1977 the assessee filed a gift-tax return in respect of the property settled on trust by the abovementioned deed of settlement dated December 27, 1976. In the said return the assessee valued the property gifted at Rs. 40,000 and after deducting Rs. 5,000 exempt under Sub-section (2) of Section 5 of the Act valued the taxable gift at Rs. 35,000.
5. When the GTO took up the assessment of the assessee he called upon the assessee to file a statement regarding the valuation of the property settled on trust. Accordingly the assessee filed a statement which showed that the value of the property settled on trust came to Rs. 25,925 only. The assessee had computed the value of the property settled on trust in the manner as indicated in annexure A to this order.
6. The assessee requested the GTO to adopt the said figure of Rs. 25,925 in place of Rs. 40,000 and make the assessment accordingly. One of the items taken into account by the assessee in making computation of the valuation of his interest in the partnership firm was reasonable remuneration of the partners of the firm. According to the assessee the valuation had been made by him in accordance with the notification dated July 20, 1977, issued by the Central Board of Direct Taxes (CBDT) in exercise of the powers conferred upon it by Rule 10(4) of the Gift-tax Rules, 1958 (the Rules). In the course of the assessment proceedings the assessee appears to have stressed upon the GTO that in various partnership agreements of the said firm made from time to time some provisions had been made for payment of some remuneration to the junior partners of the firm and, therefore, reasonable remuneration paid to the partners of the firm was required to be taken into consideration while arriving at the computation of average annual income of the said firm for the purposes of valuation of the rights of the assessee to receive, recover and realise from the said firm his share from the recoveries for the relevant periods made after 31st December, 1975. The assessee further appears to have invited the attention of the GTO to the statements of accounts of the said firm and the assessment orders passed in the case of that firm.
7. The GTO, however, did not accept the working submitted by the assessee with regard to the reasonable remuneration of Rs. 3 lakhs. In the opinion of the GTO there was no mention in the partnership deed for such remuneration and in the assessment orders also there was no mention thereof while computing the total income of the firm. He was, therefore, of the opinion that an amount of Rs. 3 lakhs adopted by the assessee on account of reasonable remuneration and sought to be deducted from the assessed income of the firm for the last five years while computing the average income of the firm was not acceptable. He, therefore, worked out the value of assessee's right to receive, recover and realise from the said firm his share from the recoveries for the relevant period made after 31st December, 1975 in the manner as indicated in annexure B to this order.
8. The GTO thus valued the assessee's share at Rs. 1,25,925 and, treating the same as the property gifted, charged gift-tax thereupon accordingly.
9. The assessee had further claimed credit for the Stamp Duty of Rs. 1,600 paid on the deed of settlement but the GTO gave credit for Rs. 1,000 only.
10. Aggrieved against the assessment as made by the GTO, the assessee carried the matter in appeal before the A.A.C. The learned A.A.C.agreed with the GTO that the assessee had failed to furnish the necessary details of remuneration deducted by the assessee and also whether such type of remuneration was paid to the partners and any mention thereof was there in the partnership deeds. The AAC was, therefore, of the opinion that since the assessee could not produce any evidence to show that the partners in the firm had received any remuneration over and above the shares of profits received by them, the assessment as made by the GTO was not required to be disturbed.
11. Dissatisfied with this order of the learned A.A.C. the assessee has come up in this appeal before us. Mr. Vijay L. Shah, the learned representative for the assessee-appellant took us through the written submissions, the deed of settlement dated 27-12-1976, the copy of gift-tax return, statement showing the valuation of property gifted prepared by the assessee, copy of notification dated 20th July, 1977, names of the partners of M/s Bhaishanker Kanga & Girdharlal and their standings, copy of gift-tax order dated 16-3-1982, copy of letter of assessee dated 19-1-1982, memo of appeal before the A.A.C. and the copy of partnership deed of M/s Bhaishanker Kanga & Girdharlal dated 17-10-72. Mr. Shah vehemently urged that this being the case of computation of the value of a partner's right to share the profits of the firm without the right to share the assets thereof such computation was required to be made in accordance with notification No. S.O.301, dated 20th July, 1977 issued by the CBDT in exercise of the powers conferred upon it by Rule 10(4) of the Rules, Mr. Shah submitted that the said notification clearly says that salaries and interest on capital paid to partner/proprietor shall, in the first instance, be added back to the income of the business and thereafter a deduction was required to be allowed for a sum, which, in the opinion of the GTO, is deemed reasonable remuneration for the working partner/proprietor.
Referring to various clauses in the partnership deed dated 17-10-1972 Mr. Shah submitted that remunerations to be paid to the junior partners by the firm were clearly mentioned in the said partnership deed and that the senior partners, of whom the assessee before the Tribunal was one, also received remunerations for the services rendered by them. In view of the specific provisions made in the partnership deed deduction on account of reasonable remuneration paid to the partners of the firm, and which came to Rs. 3 lakhs in each of the live preceding years must have been given in the computation of the average annual income of the said firm for the purposes of determining the value of the right of the assessee in the said firm. Mr. Shah thus submitted that the authorities below have erred in law in ignoring the principles laid down in the notification dated 20th July, 1977. Mr. Shah further submitted that the working of reasonable remuneration sought to be deducted in the computation of annual average income of the firm for the last five years, as submitted by the assessee, before the authorities below was quite justified and, therefore, the value of the right of the assessee to receive, recover and realise from the said firm his share from the recoveries for the relevant periods made after 31st December, 1975 and which came to Rs. 25,925 must have been accepted by the authorities below for the purposes of levy of gift-tax in the present matter.
12. Contrary to the above Mr. A.K. Hajela, the learned Departmental Representative, vehemently urged that despite repeated requests and demands made by the G.T.O. the assessee had failed to explain as to how he had arrived at the figure of Rs. 3 lakhs representing the reasonable remuneration paid to the partners by the firm of M/s Bhaishanker Kanga & Girdharlal. Mr. Hajela further submitted that in the absence of necessary details of the particulars of remuneration paid by the firm to the partners the G.T.O. was perfectly justified, in totally ignoring the item of reasonable remuneration from his computation of the value of assessee's right to receive, recover and realise from the said firm his share from the recoveries for the relevant period made after 31st December, 1975. According to Mr. Hajela, the Gift-tax Officer had worked out the value of the right of the assessee as per principles laid down in the notification dated 20th July, 1977.
13. From the trend of arguments as advanced before us it is no longer in dispute between the parties that notification No. S.O. 301, dated 20th July, 1977 issued by the CBDT in exercise of its powers conferred by Rule 10(4) of the Rules would in fact govern the issue presently before us. It would, therefore, be worth while to have a look at the contents of the said notification. The said notification published at page 14 of 112 ITR, statute part runs as under:-- In exercise of the powers conferred by Rule 10(4) of the Gift-tax Rules, 1958 (as amended by the Gift-tax (Second Amendment) Rules, 1976), the Central Board of Direct Taxes hereby directs that the value of a partner's right to share the profits of the firm without the right to share the assets shall be calculated in the manner specified in the annexure to this Circular.
2. This notification shall come into force with effect from 30th May, 1977, the date on which Circular No. 219 (F.No. 333/1/76-GI) was issued.
Valuation of right to share the profits of the firm without a right to share the assets. Step I: (a) The Gift-tax Officer shall, in the first instance, compute the average annual income of the business carried on by the firm/or the proprietary business which is converted into partnership. In the case of a business or profession which has been in existence for five years or more, such average annual income shall be the average of the income of the five accounting years immediately preceding the date to which the valuation relates. In other cases, it shall be the average of incomes of the accounting years immediately preceding such date.
(b) Subject to the adjustments mentioned in (c) and (d) below, the income of any accounting year shall be the income as assessed under the Income-tax Act, 1961, and, if no income-tax assessment has been made as on the valuation date for any accounting year, it shall be the income as per books of accounts of the firm/ proprietary concern, after making such adjustments as are contemplated in Section 143(1)(b) of the Income-tax Act, 1961.
(c) Salaries and interest on capital paid to partners/proprietor shall, in the first instance, be added back to the income of the business. A deduction shall, thereafter, be allowed for a sum which, in the opinion of the Gift-tax Officer, is reasonable remuneration for the working partner/proprietor. A further deduction for a sum calculated at 12 per cent per annum shall be allowed on the capital as standing to the credit of the partner/proprietor as on the last date of the accounting year.
(d) Non-recurring items (both debits and credits) and capital items will be excluded from computation of the income of any particular accounting year.
The figure arrived at in Step I shall be multiplied by 2 in case of a mainly professional firm and by 3 in the case of any firm.
To arrive at the value of a partner's interest, the proportion of his share in the profits of the firm should be applied to the figure arrived at in Step II.From the above notification it may be noted that as per directions contained in Clause (c) of Step No. I salaries and interest on capital paid to partner/proprietor are, in the first instance, required to be added back to the income of the business. A deduction would thereafter be allowed for a sum, which, in the opinion of the GTO, is considered reasonable remuneration for the working partner/proprietor. A further deduction for a sum calculated at 12% per annum is also required to be allowed on the capital as standing to the credit of the partner/proprietor as on the last date of the accounting year. Since deduction of capital standing to the credit of the partners of M/s.
Bhaishanker Kanga & Girdharlal had been duly allowed by the GTO, the same is not in dispute before us. We are, therefore, required to consider whether the first part of Clause (c) of Step No. I was applicable to the facts of the instant case.
14. Clause (c) of Step No. I speaks of "deduction to be allowed for a sum which, in the opinion of the GTO is deemed reasonable remuneration for the working partner/ proprietor". The question arises as to what is meant by "reasonable remuneration", in this case.
15. The term "remuneration" connotes that if a man gives his services, whatever consideration he gets for giving his services, is remuneration for them. If a person is in receipt of payment, or in receipt of a percentage, or any kind of payment which would not be actual money payment, the amount he would receive in respect of that would be remuneration (vide Accountant General v. N. Bakshi AIR 1962 SC 505). In the case of Central Bank of India v. Their Workmen AIR 1960 SC 12, it was observed with reference to Section 10 of the Banking Act that prior to the amendment of 1956 in that Act Section 10 of the Act prohibited the grant of industrial bonus to bank employees inasmuch as such bonus was remuneration which took the form of a share in the profits of the banking company. That suggest that the term 'remuneration' is of wide amplitude and is not required to be construed narrowly. Whatever consideration a person may get for the services rendered by him may reasonably be called remuneration to him for such services. Again, the receipt of remuneration may be in the form of percentage, or share in the profits of a business or profession. It need not necessarily be payable at specified periods of time. It may be received periodically or annually even.
16. The expression "reasonable" means rational, according to the dictates of reason and not excessive or immoderate. An act is reasonable when it is conformably agreeable to reason, having regard to the facts of a particular controversy. The expression 'reasonable' therefore, suggests that the thing which this term qualifies should appeal to the reasons of a normal human being and should not be excessive or immoderate in quantity or measure. When this term is used as qualifying the other term 'remuneration' it would mean that the remuneration paid or claimed should be according to the dictates of reason and be not excessive or immoderate in the facts and circumstances of a given case.
17. Now coming to the merits of the controversy before us we may point out that the partnership deed dated 17th October, 1972 governed the assessee's relationship with the said partnership. When the said partnership deed was executed on 17th October, 1972 two of the old partners, namely, Ramdas Maneklal Gandhi and Punamchand Somchand Shah, had retired and in their place two new partners - Kirit Navnitlal Damania and Gordhandas Girdharlal Mehta were admitted in the partnership firm. The constitution of the partnership at the relevant time was as follows: Name Share of profit and loss in units10. Mr. Jagdish Maneklal Mehta 7----------------------------------------------------------------------- 150 Out of the above 10 partners, Shri Indravan Manilal Desai at sl.No. 2 was not to get any share in the profits or losses of the firm. Instead he was to receive Rs. 1,000 p.m. by way of remuneration. A study of various clauses of the above partnership deed discloses that as per clause 9 first five partners were to be treated as senior partners while the rest as junior partners. The partners were to receive the shares of profits as enumerated in Clause 2 and as mentioned above.
Clause 4 allowed withdrawals by the partners and also additional withdrawals as was to be determined by senior partners. The restriction was that the aggregate was not to exceed 90% of the share of partners in the profits and excess, if any, was to be adjusted in future withdrawals. Clause 5 says that partners at sl. Nos. 6 to 10 were to get additional remuneration every month, as specified in that clause and such remuneration was to be charged on revenue account. Clause 6 made provisions for special payments also under certain circumstances and Clause 7 required Shri Indravadan Manilal Desai, partner at sl. No.2, to bring Rs. 50,000 as capital contribution and each of the rest of the partners to bring Rs. 2,000 per unit and such capital was to be kept in a "blocked account" which carried interest at the rate of 12%.
Another account under the head "operative account" was also to be maintained and that dealt with the payments made to the partners from time to time. Clause 24 speaks of the remuneration to be received by the senior partners. Clauses 28 & 29 say that the firm name and goodwill would be the property of Jayandralal Tribhovanrai Desai to the extent of half share and of Indravadan Manilal Desai and Madhukant Manjulal Thakore to the extent of remaining half and others i.e.
partners at sl. Nos. 4 to 10 would have no interest in the firm name and goodwill thereof. Clause 30 deals with the taking of assets of the old partnership by the new partnership. Clauses 33 and 34 deal with the situation arising in the event of any partner dying or otherwise ceasing to be the partner in the firm. Again, clause 35 deals with another allowance called "Ahmedabad allowance" to be paid to certain partners posted at Ahmedabad. Clauses 36 and 37 deal with provisions of free motor cars, entertainment and rent reimbursement to be made by the firm to the concerned partners.
18. We have hurriedly gone through the various clauses of the partnership deed in order to show that the case of the assessee that the partners were paid remuneration by the firm was not to be dismissed summarily by the authorities below. In fact various clauses in this partnership deed clearly suggest that the partners, whether they were junior partners or senior partners, were in fact getting remuneration for the services rendered by them to the firm and such remuneration was required to be taken into account by the GTO while computing the average annual income of the firm for the purposes of working out the value of the property gifted by the assessee. That could have been done by looking into the accounts and assessment orders of the firm for the last 5 years, as required by the notification dated 20th July, 1977. It is no doubt true that the assessee does not appear to have furnished the detailed particulars of the 'remuneration' paid by the firm to its partners during the last 5 years but for that reason alone his case for deduction of reasonable remuneration in the computation of average annual income of the firm during the past 5 years could not be brushed aside. We, however, do not wish to say that the figure of Rs. 3 lakhs, as suggested by the assessee for the purpose of deduction on account of remuneration paid by the firm to the partners was required to be taken at its face value. In fact it was not explained as to what was the basis of the assessee to adopt that figure for the purpose of deduction on account of reasonable remuneration: Reasonable remuneration, as explained by us above, shall have to be arrived at by the GTO after taking into account the remuneration paid by the firm to the partners from time to time in the past 5 years. In arriving at the figure of reasonable remuneration in each of the year concerned, the GTO is required to go into the accounts of the firm as also the assessed income in the relevant years. After that exercise only he could be in a position to say as to what amount, for the purpose of application of Clause (c) of step No. I of notification No. S.O. 301 dated 20th July, 1977 could be 'reasonable remuneration' for the working partners, the deduction whereof was required to be made in the computation of the average annual income of the firm for the purpose of finding out the value of the share of the assessee, which has been gifted away.
19. The above discussion leads us to hold that the authorities below have not worked out the value of the right of the assessee to receive, recover and realise from the said firm his share according to several deeds of partnership from the recoveries for the relevant period made after 31st December, 1975. The matter, therefore, requires to be sent back to the GTO to work out the value of the property settled by the assessee on trust in the light of the discussion made hereinabove, keeping in view the principles laid in Notification No. S.O. 301 dated 20th July, 1977.
20. The assessee has also raised an additional ground seeking proper direction under Section 18(a) of the Act in respect of stamp duty of Rs. 1,600 paid on the deed of settlement dated 27th December, 1976.
After hearing the parties, we have felt satisfied that the additional ground is required to be taken up before us. It is not disputed that the actual stamp duty paid by the assessee on the deed of settlement dated 27th December, 1977 was Rs. 1,600. In the computation sheet, the GTO has given credit for Rs. 1,000 only in that behalf. In our opinion, the figure 1,000 simply represents a typographical mistake which requires to be corrected as in fact and in reality the assessee has undisputedly paid stamp duty of Rs. 1,600 on the deed of settlement dated 27th December, 1976. We, therefore, allow the additional ground of appeal and direct the GTO to give credit of Rs. 1,600 instead of Rs. 1,000, as has been given by him in his assessment order, to the assessee towards stamp duty paid by him on the deed of settlement dated 27th December, 1976.
21. In the result this appeal succeeds and is allowed for statistical purposes in the manner indicated hereinabove. The matter shall go back to the GTO to work out the value of the property gifted in this case in the light of discussions made hereinabove and notification dated 20th July, 1977.