1. All these appeals by the assessees arise out of orders passed in the wealth-tax assessments of different assessees for the assessment years 1980-81 to 1982-83 and assessment year 1980-81 under the Gift-tax Act, 1958. All these appeals were heard together and are being disposed of by a consolidated order for the sake of convenience.
2. The assessee, Shri Indur S. Gajra, was partner along with four others in a partnership business run under the name and style of M/s.
Elve Corporation. The aforesaid partnership was evidenced by a partnership deed dated 1st July 1967, which was amended on 16th November 1975 and on 24th October 1975. On 1-7-1978, the limited company by name Gajra Gears Pvt. Ltd., entered into this partnership.
The assessee and the other partners, other than the company, were directors of Gajra Gears Pvt. Ltd. The existing partners relinquished 10% of profit sharing ratio in favour of the limited company. The conditions were the losses and appreciation in the value of all the assets of the firm except goodwill should be shared in the same proportion in which the profits and losses of the firm were shared.
However, it was agreed that the new partner, M/s. Gajra Gears Pvt.
Ltd., shall have no claim in the value of the goodwill of the firm. By a deed dated 19-10-1978, the partners agreed to change the accounting year of the firm. Subsequently, by a deed dated 7th March 1980, although the profit and loss sharing ratios were maintained, there were certain amendments, which are contained in clauses 4 and 5 of the partnership deed, which may conveniently be extracted as under :- (4) The net profit and loss of the partnership business, after providing for all outgoings, interests, taxes and other revenue expenses, shall be shared in the following proportions :(1) Bhisham S. Gajra 10% All the capital profits or losses whether realised or not and all accretions, appreciation and depletion in the value of all assets of the Partnership firm including the snares and securities held by the Partnership firm in M/s. Gajra Bevel Gears Ltd., whether realised or not, whenever occasion arises to ascertain the value thereof whether on dissolution or otherwise, shall continue to belong and shall always be deemed at all times to belong to the party of the Sixth Part i.e., M/s. Gajra Gears (P.) Ltd. (5) The goodwill of the firm shall always belong to the party of the First to Fifth Parts excluding the party of the Sixth Part i.e., M/s. Gajra Gears Private Limited. M/s. Gajra Gears (P.) Ltd., shall have no claim of right to, interest and entitlements over the goodwill of the firm, at any time.
It was these amendments, which prompted the Assessing Officer to hold that the assessee had made a gift of his rights in assets in favour of the new partner, Gajra Gears Pvt. Ltd. The Assessing Officer first computed the gifts deemed to have been made by the firm in favour of the new partner, Gajra Gears Pvt. Ltd. and then quantified the assessee's share in such deemed gift. The assessee contended that the admission of Gajra Gears Pvt. Ltd., as partner was for full and valid consideration inasmuch as the new partner had contributed capital of Rs. 15 lakhs and it also exposed itself to all the liabilities of the firm by agreeing to share in the losses. It had also agreed to bind itself to the acts of the partners and agreed to deny itself in any rights in the goodwill. But this contention did not find favour with the revenue authorities. However, the Commissioner of Income-tax (Appeals) gave some relief in the matter relating to the valuation of the gift. The assessee is aggrieved and has taken the following ground before us :- II. Without prejudice, the concerned CIT(A) fail to appreciate appellant's basic submission that on admission of a partner in a firm and the resultant readjustment of shares of the partners, there is no 'transfer' within the meaning of Gift-tax Act, 1958 and consequently such a transaction not chargeable to gift-tax at all.
2.1 We have heard the assessee's learned counsel who vehemently argued that, in the facts and circumstances of the case, the admission of a partner in the firm and readjustment of the shares of the partners in the assets of the firm, do not involve 'transfer' within the meaning of Gift-tax Act, 1958 and consequently the transactions does not attract the Gift-tax Act, 1958. The assessee's learned counsel further submitted that the whole arrangement was for business consideration and does not attract any gift of assets. The assessee's learned counsel further argued that M/s. Gajra Gears Pvt. Ltd. will not only be entitled to appreciation, if any and shall also likewise suffer losses, if any, in respect of the assets of the business other than goodwill inasmuch as such assets having not been disposed of, there is no gift of any existing property since the new partner is exposed to the risk of fluctuation in value of assets, the quantification of gift was not fair or proper on the methods of valuation of the assets also. The assessee's learned counsel reiterated the contentions, which the assessee has taken before the tax authorities.
2.2 The departmental representative, on the other hand, strongly supported the order of the Gift-tax Officer and contended that, in the facts and circumstances of the case, there has been a gift in the form of right to share in the appreciation of assets in favour of Gajra Gears Pvt. Ltd. To the extent there is a lack of consideration, there is a deemed gift assessable under the provisions of Gift-tax Act, 1958.
It was vehemently argued that the orders of the Commissioner of Income-tax (Appeals) be confirmed.
2.3 We have carefully considered the rival submissions in the light of the materials produced before us and we are unable to agree that there is a gift assessable under Gift-tax Act, 1958 in the facts and circumstances of the case. The admission of a new partner into the firm may amount to gift if the same is without consideration. In the facts before us, the limited company, which had entered into partnership, has provided capital of Rs. 15 lakhs to the firm. It has also contributed the corporate image by being a partner in the firm. It has also agreed to share in liabilities and losses, which may fall on it in the course of business by being a partner in the firm whose liability is unlimited. The alleged gift, if any, in our view, is not of any existing asset. The realignment of interest in partnership assets accrues to the benefit of new partner only in the event of dissolution of the firm. It is difficult to envisage only appreciation in the values of all the business assets of the firm. The depreciation or a steep fall in the value of the assets of the partnership firm cannot be totally ruled out. The contribution of working experience by the company; agreeing to be exposed to the risks of partnership business for the actions of the other partners; they all constitute valuable considerations for the arrangement of the type, which the partners in the instant case have made between themselves. The gift charged to tax by computing the notional and hypothetical appreciation in the value of the assets of the firm, in our opinion, does not enure to the present benefit of the donee. For these reasons, we are unable to sustain the order levying the gift-tax.
3. In all these appeals, the different assessees have taken the following common grounds for all the assessment years : (2) On facts and circumstances of the case and in law the learned Commissioner of Wealth-tax (Appeals) erred in upholding that the appellant partner had a right appreciation in the value of assets of the firm of M/s. Elve Corporation.
(3) On facts and circumstances of the case and in law the learned Commissions of Wealth-tax (Appeals) erred in upholding the action of the Assessing Officer that addition (on protective basis) of Rs. 10,02,583 towards 10% share of the appellant forms a part of the appellant's net wealth under Section 2(m) of the Wealth-tax Act.
(4) It is respectfully submitted that on the valuation dates relevant to assessment years under appeal the appellant partner had no right in the appreciation in the value of capital assets of the firm M/s. Elve Corporation by virtue of Partnership Deed dated 7-3-1980 and accordingly no share of right in the appreciation of assets of the firm M/s. Elve Corporation existed in the hands of the appellant on the valuation dates.
In the course of income-tax proceedings for the assessment year 1980-81, in the case of the firm of Elve Corporation, it was found that by a deed of partnership dated 7-3-1980 the assessee have relinquished their right in the appreciation in the value of the assets of the firm in favour of M/s. Gajra Gears Pvt. Ltd. The assessees have contended that such appreciation in the value of the assets, if any, in accordance with the partnership deed as in force at the relevant valuation date, does not belong to them. The department took a stand that the assessees had objected the action of the Assessing Officer in bringing deemed gift to tax and, consequently, holding that the assessees are liable under the Wealth-tax Act in respect of the value of the assets as on the valuation date. The assessments framed for the other years are also on the same reasoning.
3.1 We have heard the parties to the dispute. In the gift-tax proceedings, we have taken a view that the amendment in the partnership deed was for adequate business consideration and does not involve any gift. As far as the levy of wealth-tax liability is concerned, we are unable to sustain the orders of the tax authorities. Under Section 3 of the Act, the assessee is liable to the tax in respect of the net wealth on the valuation date. The term 'net wealth' is defined in Section 2(m) of the Wealth-tax Act, according to which it means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets wherever located belonging to the assessee on the valuation date is in excess of the aggregate value of the debts owed by him on the valuation date. Under Section 4(1)(b) of the Wealth-tax Act, where the assessee is a partner in a firm or a member of an association of persons, the value of his interest in the firm or association shall be determined in the prescribed manner. Rule 2 of the Wealth-tax Rules, 1957, which provides for the computation of the value of interest of a partner in a firm, directs the determination of such value in accordance with the partnership deed. A reading of all these provisions together makes it clear that in the cases before us and in accordance with the partnership deed prevalent on the relevant valuation dates, the assessees could not be assessed to wealth-tax in respect of appreciation in the value of the assets, which are ceded in favour of Gajra Gears Pvt. Ltd.