1. This appeal by the Revenue arises out of the order dated 4-4-1988 of the learned Commissioner of Gift-tax (Appeals), Karnal, for the assessment year 1980-81.
On the facts and in the circumstances of the case the learned Commissioner of Gift-tax (Appeals) has erred in law and facts in quashing the order of the Gift-tax Officer assessing the goodwill amount of Rs. 4,54,000 ignoring the deeming provisions of the Gift-tax Act which are applicable in this case.
3. Brief facts of the case may first be noticed. A firm known and styled as M/s. Mahajan Overseas came into existence on 17-1-1974. Its business consisted of purchase and export of various handlooms goods e.g. pillow shams, napkins, cotton and woollen durries, table mats etc.
On 1-1-1977 the firm was reconstituted and four new partners including Smt. Raj Devi the assessee joined it and a minor (Miss Nishi Mahajan) was admitted to the benefits of the partnership. Immediately prior to the reconstitution, the firm consisted of 9 partners. Smt. Raj Devi had 12 per cent share. A new partnership deed was executed on 14-4-1977 when Nishi Mahajan attained majority. There was otherwise no change in the constitution of the firm. On 1-1-1978 the firm was reconstituted again. Out of the 14 partners 8 partners retired and the following partners continued the business of the firm :- On 18-9-1979 Smt. Raj Devi voluntarily retired from the firm. A deed of dissolution of the firm dated 18-9-1979 was executed. The remaining 5 partners took over all the assets and liabilities of the business of the firm as a going concern with effect from 19-9-1979. As a result of the retirement of Smt. Raj Devi, the shares of three of the remaining partners were modified and there was no change in the share of the other two partners. Thus, with effect from 19-9-1979 Smt. Kamal Saroj had 25 per cent share, Smt. Nirmal Kanta 15 per cent share and Shri Rakesh Mahajan 25 per cent share. In other words, their shares were increased by 5% each. There was no change in the shares of Shri Rajesh Mahajan and Km. Nishi Mahajan which remained at 20% and 15% respectively.
4. In the. partnership deed of 1-1-1976 there was no specific clause regarding goodwill of the firm. Clause 15 of the deed, however, stipulated as under:- That for all other purposes the relations of the parties shall be governed by the provisions of the Indian Partnership Act.
In the partnership deed of 1-1-1977, clause 9 was to the following effect:- That the firm shall not be dissolved by the retirement, expulsion, bankruptcy or disability of any of the partner, and on happening of any such event, the remaining partners shall be entitled to continue the business of the firm as usual subject to the determination of the share of the retiring, expelled, insolvent, disabled or deceased partner as provided hereinafter in this deed, but in so determining his share, the goodwill of the firm shall not be taken into consideration.
That the goodwill of the partnership firm M/s. Mahajan Overseas shall be the property of the firm.
Though a new partnership deed was drawn up on 14-4-1977, there was no change so far as the clauses with regard to goodwill were concerned.
Clauses No. 10 and 13 were the exact reproduction of clauses No. 9 and 13 respectively of the earlier partnership deed dated 1-1-1977.Though a copy of the partnership deed executed on 1-1-1978 was not filed before us, copy of the Tribunal's order dated 30-4-1985 in the assessee's Estate Duty case (E.D.A. ll/Chandi./1983) showed that clause 15 of the partnership deed dated 1-1-1978 provided as under:- The goodwill of the firm shall belong to all the parties in proportion to their shares fixed in this deed.
5. The Gift-tax Officer, A-Ward, Panipat, issued a notice under Section 16 of the Gift-tax Act, 1958 in the name of Shri G.D. Mahajan, legal heir of Smt. Raj Devi, on 22-10-1982. The gift-tax proceedings were initiated against the assessee on the ground that Smt. Raj Devi was having 15% share in the firm M/s. Mahajan Overseas, Panipat, and had surrendered her right in the goodwill in favour of the other partners.
As the assessee's share of goodwill had been determined at Rs. 4,54,000 in the order dated 18-6-1980 passed by the Assistant Controller of Estate Duty, Karnal, the Gift-tax Officer also adopted the value of the gift at Rs.4,54,000 and completed the gift-tax assessment on 23-3-1987 accordingly. The assessee preferred an appeal before the Commissioner of Gift-tax (Appeals) who vide his impugned order held that the value of assessee's share in the goodwill of the assessee firm was Rs. 40,000 as against Rs. 4,54,000 adopted by the Gift-tax Officer. He further held that no gift-tax liability was attracted on the facts of the case because according to him the relinquishment by Smt. Raj Devi of her share in the goodwill of the firm on 18-9-1979 did not constitute a gift at all.
6. Shri Puneet Gangal, learned Departmental Representative, strongly relied on the Gift-tax Officer's order.
7. Shri Hari Har Lal, learned counsel for the assessee, on the other hand, made submissions on the following lines. The Gift-tax Officer without applying his mind had adopted the value of assessee's share in the goodwill at Rs. 4,54,000 from the Estate Duty order dated 18-6-1980 passed by the Assistant Controller of Estate Duty. The aforesaid order of estate duty had been set aside as early as 30-4-1985 by the Tribunal in E.D.A. No. 11 (Chandi.) of 1983 and still the Gift-tax Officer while completing the gift-tax assessment on 23-3-1987 had adopted the same value at Rs. 4,54,000. This was a mere mechanical adoption of the value of the assessee's share of goodwill. When the assessee became a partner in the firm M/s. Mahajan Overseas on 1-1-1977 the firm was having a flourishing export business. The assessee did not bring any capital contribution nor did she contribute any skill or labour to the firm.
She was only a sleeping partner. On 1-1-1977 the goodwill of the firm was considerable and she could have been asked to pay a sum of Rs. 2.52 lakhs as her share towards the goodwill of the firm on joining the firm. On the other hand, when she left the firm on 18-9-1979 the business of the firm was on the wane and her capital account also showed a debit balance of Rs. 41,218. At the time of her retirement value of her share in the goodwill of the firm was insignificant and at the most could be put at Rs. 40,000. As she did not pay anything towards goodwill when she became a partner, she did not charge or claim anything for her share in the goodwill at the time of retirement.
Relinquishment or abandonment of her right to charge for her share in the goodwill of the firm could be treated as gift only under Section 4(l)(c) of the Gift-tax Act. Section4(l)(c) was not attracted if the transaction was bona fide. The present transaction was bona fide because it was made in good faith and there was no intention to deceive. Everything was done in a straightforward manner without subterfuge or concealment of any kind or in an attempt to make the transaction appear other than what it was in reality. She had not paid anything towards goodwill when she joined the firm and she retired from the firm when she was quite advanced in age and the export business had suffered a severe Jolt. The relinquishment or abandonment of her right or claim in the goodwill of the firm was equitable, fair, justified and bona fide and so Section 4(1 )(c) of the Gift-tax Act was not attracted in this case. At the highest her share in the goodwill could be valued at Rs. 40,000 on the date of her retirement and there was no question of valuing it at Rs. 4,54,000.
8. We have carefully considered the rival submissions and examined the facts on record. Gift is defined in Section 2(xii) of the Gift-tax Act as under:- '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 of any property deemed to be a gift under Section 4.
The learned counsel for the assessee does not challenge that goodwill of a firm is an asset The Punjab & Haryana High Court (Full Bench) decision in the case of State v. Prem Nath [1977] 106 ITR 446 has held that the goodwill of a firm is an asset of the firm. The Supreme Court in the case of Khushal Khemgar Shah v. Khorshed Banu Dadiba Boatwalla [1970] 3 SCR 689 has held that goodwill of afirm is an asset. Its transfer would, therefore, be a gift. In the case of CGT v. Chhotalal Mohanlal [1987] 166 ITR 124/31 Taxman 512 the Supreme Court held that goodwill is property and when minors are admitted to the benefits of a partnership in a firm the share of an existing partner is reduced thereby and the right to the money value of the goodwill stands transferred and the transaction constitutes a "gift" under the Gift-tax Act. On the basis of the ratio of the above decision it can be said that the assessee in the instant case was liable to gift-tax. When the assessee did not take any share in the value of the goodwill at the time of retirement though as per the partnership deed she was entitled to have it, it has to be held that there was abandonment or relinquishment of her right in favour of the existing partners and this amounted to a gift. We hold accordingly.
9. We now come to the argument of the learned counsel for the assessee that under Section 4(1 )(c) of the Gift-tax Act, Gift-tax liability is attracted only if the abandonment of any interest in property is not found to have been bona fide. Section 4(l)(c) of the Gift-tax Act, reads as under (c) 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 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 (Assessing Officer) 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; It has been held by the Allahabad High Court in the case of Sir Padampat Singhania v. CGT [1988] 172 ITR 292/37 Taxman 1 that "bona fide" means good faith implying the absence of fraud, unfair dealing or acting, whether it consists in simulation or dissimulation. In order that the transaction is bona fide, it must be shown that everything was done in an open and straightforward manner without subterfuge or concealment of any kind or in an attempt to make the transaction appear other than what it was in reality. The language of Section 4(l)(c) of the Gift-tax Act has been so cast as to throw the onus on the assessee for establishing that the transaction in question was bona fide. When the assessee became a partner in the firm on 1-1-1977, she could have been asked to pay towards her share in the goodwill of the firm. A specific clause was, however, added in the partnership deed of 1-1-1977 according to which the retiring, expelled, insolvent, disabled or deceased partner was not to have any interest in the goodwill of the firm. All the partners of the firm were family members and close relatives and the existing partners may have decided not to charge anything from the in-coming partners towards goodwill. Perhaps they were satisfied that by excluding the retiring partners, etc. from the partnership firm their purpose was achieved and the goodwill continued to be that of the firm. But when partnership deed of 1-1-1978 was drawn up it was specifically mentioned that the goodwill of the firm shall belong to all the parties in proportion to the shares fixed in the deed. Thus the assessee at the time of her retirement had undoubtedly 15 per cent share in the goodwill of the firm. If the intention was not to claim her share of the goodwill at the time of retirement, the partnership deeds would have been worded differently. This was, however, not done. On the contrary, clause 15 of the partnership deed dated 1-1-1978 was made more specific which entitled the assessee to receive her share of 15 per cent in the goodwill. The mere fact that on 1 -1 -1977 she had not paid anything towards her share in the goodwill would not mean that her not claiming the share in goodwill at the time of her retirement was bona fide. That would, in fact, be a far-fetched proposition to canvass. This is not borne out by the record either.
Whatever may have been the position on 1-1-1977 when she joined the firm, she was definitely entitled to 15 per cent share in the goodwill of the firm at the time of her retirement. We, therefore, hold that the abandonment or relinquishment of her right in the goodwill of the firm amounted to a gift on the date of retirement i.e. 18-9-1979 under Section 4(l)(c) of the Gift-tax Act 10. This leaves us with the question of computation of the value of the goodwill and assessee's share therein. The Gift-tax Officer computed the value of assessee's share in the goodwill at Rs. 4,54,000. This was done on the basis of the order dated 18-6-1980 passed by the Assistant Controller of Estate Duty. That order had, however, been set aside by the Tribunal as early as 30-4-1985 and the Assistant Controller of Estate Duty had been directed to recompute the value of the goodwill by taking into consideration certain claims put in by the accountable person. We were informed that the Assistant Controller of Estate Duty had not passed any fresh order till date. The Commissioner of Gift-tax (Appeals) in his impugned order has gone into the merits of the assessee's claim and come to the conclusion that the value of the assessee's share in the goodwill of the firm on 18-9-1979 was Rs. 40,000. The Revenue has not taken any specific objection to the value of the assessee's share in the goodwill being taken at Rs. 40,000. The learned Departmental Representative has also not addressed us on the subject nor has he pointed out any errors or infirmities in the computation given by the assessee and dealt with by the Commissioner of Gift-tax (Appeals). We have also looked into the computation of good will made by the assessee according to which the value of her share has been computed at Rs. 40,000. We find that this is proper and reasonable. We, therefore, hold that the value of the assessee's share in the goodwill was Rs. 40,000. We accordingly hold that there was a gift of Rs. 40,000 by the assessee on 18-9-1979 relevant to assessment year 1980-81. The Gift-tax Officer is directed to compute the Gift-tax liability accordingly.
11. In the result, the Revenue's appeal succeeds, to the extent indicated above.