S. Annamalai and ors. Vs. Assistant Commissioner of Gift Tax. - Court Judgment

Excerpt:
- constitution of india article 141; [a.p. shah, c.j., f.m. ibrahim kaliffulla &v. ramasubramanian, jj] reference to larger bench - precedent - full bench decision held, it is binding on the division bench. only if the full bench comes to conclusion that earlier full bench decision is incorrect, there is scope for making reference to larger bench. division bench doubting correctness of full bench decision cannot direct registry for placing papers before chief justice to make reference to larger bench. orderg. santhanam, a.m. :these appeals involve common issue and, therefore, a consolidated order is passed for the sake of convenience.2. the assessee are partners in m/s tenzing timber corporation along with m/s asia gule & chemicals (p) ltd. each one of the assessees had 8 per cent share in the profits and losses of the firm with 60 per cent share to the limited company as a partner. the partnership was as a result of a reconstitution made on 1st october, 1982. on 31st december, 1982, the entire business with its assets and liabilities were transferred to m/s asia glue & chemicals (p) ltd., one of the partners of the firm, with the other five partners retiring from the partnership. pursuant to the retirement of the assessees from the firm, an indenture of release deed was executed on 5th july, 1983. the relevant clauses of the deed of indenture are as follows :'(a) whereas according to mutual agreement between the releasors on the one part and the company on the other, the releasors have transferred to the company on 31st december, 1982 their shares in the firm w.e.f. 1st january, 1983 and accordingly ceased to be partners of the firm and the firm itself ceased to exist w.e.f. 1st january, 1983 and consequently the company has become the sole owner of all the assets of the firm from 1st january, 1983;whereas the releasors have agreed to formally release and relinquish in favour of the company all their rights and interests over the scheduled properties by getting the amounts standing to their credit to the tune of rs. 1,01,634.77 as detailed under :rs.sri k. a. a. arunachalam19,198.95sri s. annamalai19,100.51sri s. maheswaran24,057.23sri a. tenzing24,724.60sri s. ashok14,523.48'(b) now this indenture of release witnesseth that in pursuance of the said agreement, by getting the balance standing to their accounts, amounting in all to rs. 1,01,634.77 (rupees one lac, one thousand, six hundred & thirty-four and paise seventy-seven only) the releasors do hereby release and relinquish in favour of the company all their proportionate rights, liberties, interests, claims and titles in, to or upon the scheduled properties.(c) the releasors do hereby agree, declare and confirm as follows :1. the releasors have retired from the firm on 31st december, 1982 and ceased to be partners of the firm and the firm itself ceased to exist as and from 1st january, 1983.2. the releasors hereby acknowledge for having received the said amount of rs. 1,01,634.77 standing to their credit in their respective accounts as detailed under :rs.sri k. a. a. arunachalam19,198.95sri s. annamalai19,100.51sri s. maheswaran24,037.23sri a. tenzing24,774.50sri s. ashok14,523.483. the releasors have released all their rights, claims and interests in the firm in favour of the company w.e.f. 1st january, 1983.4. the company shall not be liable for any personal debts or liabilities of the releasors and such other debts or liabilities that might have been incurred by them presumably on behalf of the firm but not accounted to the firm and not taken into account in the balance sheet of the firm;(d) the scheduled properties were purchased as vacant land under a sale deed executed by madhavan pillai on 27th september, 1962 and registered as document no. 3667 of 1962 in book i vol. 274 on pp. 217 to 220 of the chenganacherry sub-registry.'3. the gto noticed that the market value of the scheduled property was higher than the value of the rights of the partners. it was also noticed that the scheduled property was sold for rs. 27 lakhs on 15th september, 1986. the valuation cell determined the value at rs. 23,20,000 as on 31st december, 1982. therefore, he concluded that the act of the assessees in reconstructing the firm on 1st october, 1982 by admitting the limited company as a partner with 60 per cent share to its credit amounted to a gift. therefore, he brought to tax the difference between 60 per cent of the market value of the scheduled property as on 1st october, 1982 and the sum total of the balance in the capital account of the 5 assessee partners. he further held that upon retirement as on 31st december, 1982, the assessees have relinquished their rights to the extent of 40 per cent of the market value of the property in favour of the limited company. this time, he computed the value of the gift at the difference between 40 per cent of the market value of the property and the amount to the credit of the retiring partners in their accounts in the books of the firm. thus, he brought to gift-tax the entire market value of the scheduled property as coming within the purview of gt act.4. on appeal, the cgt(a) held that at the time of reconstitution of the firm, though there was a transfer of the interest on the part of the old partners in favour of the incoming partners, yet the value of their interest while the firm is subsisting cannot be assigned and, therefore, no gift-tax is leviable in respect of reduction in profit-sharing ratio suffered by the existing partners. thus, he vacated the levy of gift-tax on the reconstitution of the firm on 1st october, 1982. the assessees have no grievance against this part of the order of the cgt(a).5. the first appellate authority, however, upheld the levy of the gift-tax on the assessees in respect of 40 per cent of their interest in the firm going in favour of the limited company upon their retirement and dissolution of the firm. he saw no reason to interfere with the value as estimated by the valuation cell. in coming to this conclusion, the cgt(a) relied upon the decision of the andhra pradesh high court in the case of cit vs . jagatram ahuja : [1988]172itr632(ap) , and also placed reliance on the decision of the apex court in the case of cit vs . chhotalal mohanlal : [1987]166itr124(sc) , m. h. kuppuraj vs . cgt 1 : [1985]153itr481(mad) and the bombay high court decision in the case of cgt vs. v. premji trikamji jobanpatra : [1982]133itr317(bom) . the assessees plea alternatively was that assuming that release of interest in favour of the limited company (which tookover all the assets and liabilities of the firm for an agreed consideration), is deemed to be a gift, then it would be entitled to exemption under s. 5(1) (xiv) of the gt act. this gift was in recourse of carrying on business and was in pursuance of the transfer of the business and, therefore, exemption would be available to the assessee. the first appellate authority rejected this contention holding that after the gift was made, the assessee ceased to carry on the business and one of the two conditions laid by the madras high court in the case of cgt vs. smt. esmp rasiya banu : [1984]146itr592(mad) , did not stand specified. the third contention of the assessee was that the value as determined by the valuation cell was excessive and the cgt(a) saw no reason to interfere with the value of the property. the assessees are in further appeal.6. shri devanathan, the learned counsel for the assessees submitted that in the case before the andhra pradesh high court, there was no contract between the partners as to the entitlement of the retiring partners unlike before the case before us and, thus, the facts are distinguishable. he further submitted that the cgt(a) erred in bringing the transaction under s. 4(1)(a) of the gt act, whereas the appropriate clause under which the transaction should be considered, if at all, is s. 4(1)(c) of the gt act and to invoke s. 4(1)(c), unless the transaction is proved to be not bona fide, no gift-tax is leviable. this is a case of retirement of partners. it is a normal incident in the life of a firm and the entire business with all its assets and liabilities have been made over to one of the partners under an agreement as a result of the five of the existing partners transferred their interest to the limited company and it is not the case of the revenue that such transfer of business with all its assets and liabilities to and in favour of one of the partners was a sham frame action or is not a genuine transaction. therefore, s. 4(1)(c) cannot be invoked. he further submitted that on the retirement of the partners, there can be no surrender of future benefits and there can be no gift involved because the partners were only exercising right to retire from the firm. a legal right to retire from the firm cannot be construed as gift because of the consequences flowing from it.7. shri devanathan vehemently contended that without valuing all the assets and liabilities of the firm, the department erred in picking up one of the assets viz., the scheduled property for purpose of gift-tax. in this connection, he relied upon the decision of the madras high court in the case of cgt vs. indo traders and agencies (madras) p. ltd. : [1981]131itr313(mad) . alternatively he submitted that if at all there is a gift, it was a gift in the course of the business and the same should be exempt under s. 5(1)(xiv) of the gt act. lastly he submitted that the value as estimated by the valuation cell based on the sale of the property in 1986 was very excessive and unrealistic. these two later submissions, he emphasised, were without prejudice to the main submission that there is no gift in the impugned transaction. the learned departmental representative relied on the orders of the cgt(a) and took us through the decision of the andhra pradesh high court reported in : [1988]172itr632(ap) (supra). he submitted that where there is reduction of share either on admission or on retirement, the same would be subject to levy of tax as has been held by supreme court in the case of cit vs. chota lal mohanlal (supra).8. we have, thus, heard the rival submissions and perused the records. the partnership firm consisted of 6 partners. on 31st december, 1982, five of the six partners retired from the firm, resulting in the dissolution of the firm. as mutually agreed upon, one of the six partners, a limited company, has taken over the business of the partnership firm with all its assets and liabilities by agreeing to pay the retiring partners, the amount standing to their credit in the books of the firm. one of the properties of the firm (property in the schedule) was also taken over at its book value in a sum of rs. 81,447. there was no revaluation of assets and liabilities upon retirement ending in dissolution. thus, the entire business was taken over by one of the partners at book values which was agreed upon among the partners. as one of the properties, (the property in the schedule) is an immovable property, pursuant to the understanding among the partners, the assessees executed a release deed in favour of the company which took over the business of the firm. thus, the release deed executed by 5 of the 6 partners was only pursuant to their retirement ending in dissolution as per the recitals in the release deed extracted in para 2 (a, b, c, and d) supra. it is stated before us and not controverted on materials on record that the firm has been suffering losses. as a result, a limited company was admitted as a partner and because of the continued losses, the other partners retired from the firm, resulting in the taking over of the entire business with all its assets and liabilities by the limited company which was the surviving partner.9. as a matter of fact, the cit(a) has held that even if the taxable income is taken as the basis for computation of super profits, such computation has resulted only in negative income for the asst. yrs. 1979-80 to 1983-84 and this finding was based on the computation as given in the assessment order itself. we may further add that in the asst. yrs. 1981-82 to 1983-84, there was no even positive taxable income but only negative taxable income. in the circumstances, we hold that the admission of the company into the partnership as a partner was necessitated by bona fide, business exigencies.10. the cgt(a) held that as the incoming partner also had brought in capital for his share of the capital, there was absolutely no case for holding that there was any gift or deemed gift at the time of admission of the limited company into partnership. we up-hold his finding. however, we are unable to agree with his finding that when 5 of the 6 partners retired from the firm, there was a deemed gift. there is force in the contention of the assessee that as the assessees continued to suffer losses, it was in the interest of the old partners to have retired from the firm in order to avoid further erosion of capital and future liabilities and losses. in other words, what reasons prompted the five partners to reconstitute the firm by admitting the limited company into the partnership, remained good for them to retire from the firm. the transaction from both the ends is a bona fide, one. the retirement of the partners was for genuine reasons and the transaction which is a natural incident of retirement cannot be viewed as a sham transaction or a transaction with an ulterior motive, because of the reason that by retiring from the firm the partners get discharged from the liabilities and losses that might be fastened on them if they were to remain in the firm. thus, the entire transaction, admission and retirement was for bona fide, reasons and once the retirement is for bona fide, reason, the transaction resulting from such an event should also be considered to have been made bona fide.11. unless and until all the assets and all the liabilities are revalued and the surplus is realised in respect of the net assets of the firm and retiring partners (whose retirement led to the dissolution) took a share less than their entitlement, the transaction cannot be brought within the purview of gift either under s. 2(xii) or 4(1)(a) or 4(1)(c) of the gt act. in the instant case, only one of the assets was revalued, not any other asset or liability. secondly, this is not a case of distribution of assets upon dissolution and as per the terms of the partnership deed dt. 1st january, 1982, the retiring or outgoing partner was entitled only to the amount standing to the credit in his capital or current account as on the date of retirement. such a provision was not found in the case before the andhra pradesh high court in : [1988]172itr632(ap) (supra). on the other hand, in that case the settlement of accounts was under an agreement set out as follows :'(i) sri jagatram (assessee) is to retire before 31st december, 1971.(ii) steps are to be taken to finalise accounts relating to the partnership and determination of the amount due to sri jagatram on retirement.(iii) sri bishanlal agreed to pay a sum of rs. 1,50,000 to sri jagatram towards the value of 50 per cent share of the goodwill of the firm.(iv) the above sum of rs. 1,50,000 payable by sri bishanlal to sri jagatram shall be in addition to the sum due to sri jagatram from the partnership at the time of retirement.(v) if the total sum including 50 per cent share value of the goodwill i.e., rs. 1,50,000 payable to sri jagatram falls below rs. 3,00,000 the amount in excess of the balance actually due to sri jagatram at the time of retirement shall be treated as the sale value of 50 per cent share of the goodwill belonging to sri jagatram.(vi) sri jagatram shall execute proper conveyance in favour of sri bishanlal conveying 50 per cent share in the land and building in which the business of 3 aces is carried on.(vii) it is open to sri bishanlal to classify the sum payable to sri jagatram as between movable and immovable properties and get necessary documents executed by sri jagatram'.in pursuance of the agreement aforesaid, a deed of dissolution of the partnership was executed on 22nd november, 1971, dissolving the partnership with effect from that date. the important terms of the deed of dissolution, as set out in the order of assessment, are as follows :'(i) all the assets and liabilities of the partnership including the land and building are taken by sri bishanlal from 22nd november, 1971.(ii) sri jagatram renounced his interest, share and interest in the said assets and liabilities from 22nd november, 1971.(iii) in full settlement and satisfaction of the share, right and interest of sri jagatram in the partnership including land and buildings, profits and goodwill and the amounts standing to the credit of sri jagatram in the partnership accounts as on 21st november, 1971, sri jagatram has agreed to receive rs. 3,00,000.(iv) out of the said rs. 3,00,000, rs. 1,00,000 has already been paid. the balance of rs. 2,00,000 is payable by sri bishanlal against the sale consideration of the undivided 50 per cent share in the land and building known as mohsin-ul-mulk kothi.(v) sri jagatram should immediately execute a sale deed and register the same in favour of sri bishanlal conveying his 50 per cent share in the land and building for rs. 2,00,000.(vi) sri bishanlal is entitled to continue to carry on his separate business in the name and style of 3 aces.(vii) sri jagatram shall not carry on any business under the above name and style.'on 10th march, 1972, a document styled as release deed was executed by sri jagatram and sri bishanlal. the important terms of this release deed, as set out in the assessment order, are as follows :'sri bishanlal agreed to release his half share in 3-aces including the land and building for rs. 3,00,000 out of rs. 3,00,000, rs. 1,00,000 has already been paid towards the release of movable assets. the balance of rs. 2,00,000 is to be paid towards half share and interest in the land and building. out of this amount, a sum of rs. 50,000 is paid at the time of registration of the deed and the balance of rs. 1.5 lakhs is to be paid in two instalments, rs. 75,000 before 1st december, 1972, and rs. 75,000 before 1st december, 1973.'12. it was on these facts that the high court held the issue against the assessee. the facts of the case before us are totally different as has been stated in the preceding paragraphs. there is always a split time interval between an event leading to the dissolution and the dissolution itself. when 5 out of 6 of the partners decided to retire from the partnership, their rights are governed by cl. 12 of the partnership deed which reads as follows :'this partnership shall be a partnership at will. differences of opinions, arising among the partners, if any, shall be settled only through negotiations among themselves. in case of retirement of any partner, the retiring or outgoing partner shall be entitled only to the amounts standing to the credit of his/its capital or current accounts as on the date of retirement. in any event, the outgoing or retiring partner shall not be entitled to claim any right over any of the assets, properties and the goodwill of the firm.'13. may be, the retirement of 5 partners resulted in the dissolution of the firm but the settlement of the rights with the erstwhile partners would be governed by only cl. 12 which was a binding contract among the partners, unless the same is excepted in the deed of dissolution. even though the settlement of accounts took place subsequent to dissolution, it was in conformity with their rights as at the moment of retirement as envisaged in cl. 12 of the partnership deed and such settlement was not on any other basis. in other words, we hold that this is not a case of settlement of accounts by way of distribution of assets upon dissolution of the firm unlike in the case reported in : [1988]172itr632(ap) (supra). it is only a settlement of accounts upon retirement resulting in dissolution of the firm. the split second that preceded the factual dissolution of the firm is very material because at that point of time cl. 12 of the partnership deed comes into operation to determine the rights of the retiring partners.14. we, therefore, hold that the decision of the andhra pradesh high court is distinguishable on facts and in law from those in the present case before us. it is worthwhile to recall that in the case before the andhra pradesh high court in the partnership deed, the provision as found in cl. 12 of the partnership deed in the case before us did not exist. for these reasons, we hold that there is no gift or deemed gift either under s. 2(xii) or 4(1) (a) or 4(1)(c) of the gt act.15. even in the case of transfer of business lock, stock and barrel by one entity (company) to another entity (firm), the madras high court has held in cgt vs. indo traders & agencies (madras) (p) ltd. (supra), that unless all assets and liabilities are valued, it cannot be inferred that there was goodwill exigible to gift-tax nor the difference between the realised value of stock-in-trade and the amount shown in balance sheet can be subjected to gift-tax. the case of the assessee stands on a strong footing. in this case, the impugned property was not immediately sold off netting much more than its book value. it was sold only in 1986 after a lapse of about 4 years. therefore, from a sale at such a distant point of time, it cannot be said that the market value of the property could be adequately determined as at the date of retirement - 4 years in the rear and then say that there was gift to the extent of the difference between estimated market value and its book value. such a course is not permissible vide cwt vs. (smt.) suguna mahendran & ors. : [1994]209itr684(mad) . in this context, it is worth recalling the lucid observations of the madras high court in the case reported in : [1981]131itr313(mad) (supra) :'learned standing counsel for the commissioner stressed that the adequacy of the price has to be judged only in the light of the market value of the property transferred and according to him, there is no other yardstick which could be applied to a situation like this. we are unable to agree. we may explain why we disagree with him by taking an example. supposing an old lady who owns a neighbouring property, wants to part with it to a medical practitioner, so that the medical practitioner would be of immediate assistance to her as and when she needs it and she parts with the property at what the parties conceive to be a reasonable price, could it be said that there was a gift of the property to the extent of the difference between what is later taken to be the market value and what was conceived to be the reasonable price for the property. it has also to be remembered that the computation of market value is in most cases a matter of estimate, which may also vary. such a variable concept would not have been made the yardstick.'16. in our considered opinion, even assuming that the market value of the impugned property was precisely estimated by the valuation cell, unless and until all other assets and liabilities are revalued and a surplus is shown to exist, it cannot be readily inferred that the assessee have made a gift or deemed gift in favour of the company.17. in this view of the matter, we do not go into the question whether the value of the impugned scheduled property as determined by the valuation cell was excessive or otherwise unreasonable. hence, we delete the levy of the gift-tax.18. in the result, the appeals filed by the assessee are allowed.

Judgment:
ORDER

G. SANTHANAM, A.M. :

These appeals involve common issue and, therefore, a consolidated order is passed for the sake of convenience.

2. The assessee are partners in M/s Tenzing Timber Corporation along with M/s Asia Gule & Chemicals (P) Ltd. Each one of the assessees had 8 per cent share in the profits and losses of the firm with 60 per cent share to the limited company as a partner. The partnership was as a result of a reconstitution made on 1st October, 1982. On 31st December, 1982, the entire business with its assets and liabilities were transferred to M/s Asia Glue & Chemicals (P) Ltd., one of the partners of the firm, with the other five partners retiring from the partnership. Pursuant to the retirement of the assessees from the firm, an indenture of Release Deed was executed on 5th July, 1983. The relevant clauses of the Deed of Indenture are as follows :

'(a) Whereas according to mutual agreement between the Releasors on the one part and the company on the other, the Releasors have transferred to the company on 31st December, 1982 their shares in the firm w.e.f. 1st January, 1983 and accordingly ceased to be partners of the firm and the firm itself ceased to exist w.e.f. 1st January, 1983 and consequently the company has become the sole owner of all the assets of the firm from 1st January, 1983;

Whereas the Releasors have agreed to formally release and relinquish in favour of the company all their rights and interests over the scheduled properties by getting the amounts standing to their credit to the tune of Rs. 1,01,634.77 as detailed under :

Rs.

Sri K. A. A. Arunachalam

19,198.95

Sri S. Annamalai

19,100.51

Sri S. Maheswaran

24,057.23

Sri A. Tenzing

24,724.60

Sri S. Ashok

14,523.48'

(b) Now this indenture of release witnesseth that in pursuance of the said agreement, by getting the balance standing to their accounts, amounting in all to Rs. 1,01,634.77 (Rupees one lac, one thousand, six hundred & thirty-four and paise seventy-seven only) the Releasors do hereby release and relinquish in favour of the company all their proportionate rights, liberties, interests, claims and titles in, to or upon the scheduled properties.

(c) The releasors do hereby agree, declare and confirm as follows :

1. The releasors have retired from the firm on 31st December, 1982 and ceased to be partners of the firm and the firm itself ceased to exist as and from 1st January, 1983.

2. The releasors hereby acknowledge for having received the said amount of Rs. 1,01,634.77 standing to their credit in their respective accounts as detailed under :

Rs.

Sri K. A. A. Arunachalam

19,198.95

Sri S. Annamalai

19,100.51

Sri S. Maheswaran

24,037.23

Sri A. Tenzing

24,774.50

Sri S. Ashok

14,523.48

3. The releasors have released all their rights, claims and interests in the firm in favour of the company w.e.f. 1st January, 1983.

4. The company shall not be liable for any personal debts or liabilities of the Releasors and such other debts or liabilities that might have been incurred by them presumably on behalf of the firm but not accounted to the firm and not taken into account in the balance sheet of the firm;

(d) The scheduled properties were purchased as vacant land under a Sale Deed executed by Madhavan Pillai on 27th September, 1962 and registered as document No. 3667 of 1962 in Book I Vol. 274 on pp. 217 to 220 of the Chenganacherry sub-Registry.'

3. The GTO noticed that the market value of the scheduled property was higher than the value of the rights of the partners. It was also noticed that the scheduled property was sold for Rs. 27 lakhs on 15th September, 1986. The Valuation Cell determined the value at Rs. 23,20,000 as on 31st December, 1982. Therefore, he concluded that the act of the assessees in reconstructing the firm on 1st October, 1982 by admitting the limited company as a partner with 60 per cent share to its credit amounted to a gift. Therefore, he brought to tax the difference between 60 per cent of the market value of the scheduled property as on 1st October, 1982 and the sum total of the balance in the capital account of the 5 assessee partners. He further held that upon retirement as on 31st December, 1982, the assessees have relinquished their rights to the extent of 40 per cent of the market value of the property in favour of the limited company. This time, he computed the value of the gift at the difference between 40 per cent of the market value of the property and the amount to the credit of the retiring partners in their accounts in the books of the firm. Thus, he brought to gift-tax the entire market value of the scheduled property as coming within the purview of GT Act.

4. On appeal, the CGT(A) held that at the time of reconstitution of the firm, though there was a transfer of the interest on the part of the old partners in favour of the incoming partners, yet the value of their interest while the firm is subsisting cannot be assigned and, therefore, no gift-tax is leviable in respect of reduction in profit-sharing ratio suffered by the existing partners. Thus, he vacated the levy of gift-tax on the reconstitution of the firm on 1st October, 1982. The assessees have no grievance against this part of the order of the CGT(A).

5. The first appellate authority, however, upheld the levy of the gift-tax on the assessees in respect of 40 per cent of their interest in the firm going in favour of the limited company upon their retirement and dissolution of the firm. He saw no reason to interfere with the value as estimated by the Valuation Cell. In coming to this conclusion, the CGT(A) relied upon the decision of the Andhra Pradesh High Court in the case of CIT vs . Jagatram Ahuja : [1988]172ITR632(AP) , and also placed reliance on the decision of the apex Court in the case of CIT vs . Chhotalal Mohanlal : [1987]166ITR124(SC) , M. H. Kuppuraj vs . CGT 1 : [1985]153ITR481(Mad) and the Bombay High Court decision in the case of CGT vs. V. Premji Trikamji Jobanpatra : [1982]133ITR317(Bom) . The assessees plea alternatively was that assuming that release of interest in favour of the limited company (which tookover all the assets and liabilities of the firm for an agreed consideration), is deemed to be a gift, then it would be entitled to exemption under s. 5(1) (xiv) of the GT Act. This gift was in recourse of carrying on business and was in pursuance of the transfer of the business and, therefore, exemption would be available to the assessee. The first appellate authority rejected this contention holding that after the gift was made, the assessee ceased to carry on the business and one of the two conditions laid by the Madras High Court in the case of CGT vs. Smt. ESMP Rasiya Banu : [1984]146ITR592(Mad) , did not stand specified. The third contention of the assessee was that the value as determined by the Valuation Cell was excessive and the CGT(A) saw no reason to interfere with the value of the property. The assessees are in further appeal.

6. Shri Devanathan, the learned counsel for the assessees submitted that in the case before the Andhra Pradesh High Court, there was no contract between the partners as to the entitlement of the retiring partners unlike before the case before us and, thus, the facts are distinguishable. He further submitted that the CGT(A) erred in bringing the transaction under s. 4(1)(a) of the GT Act, whereas the appropriate clause under which the transaction should be considered, if at all, is s. 4(1)(c) of the GT Act and to invoke s. 4(1)(c), unless the transaction is proved to be not bona fide, no gift-tax is leviable. This is a case of retirement of partners. It is a normal incident in the life of a firm and the entire business with all its assets and liabilities have been made over to one of the partners under an agreement as a result of the five of the existing partners transferred their interest to the limited company and it is not the case of the Revenue that such transfer of business with all its assets and liabilities to and in favour of one of the partners was a sham frame action or is not a genuine transaction. Therefore, s. 4(1)(c) cannot be invoked. He further submitted that on the retirement of the partners, there can be no surrender of future benefits and there can be no gift involved because the partners were only exercising right to retire from the firm. A legal right to retire from the firm cannot be construed as gift because of the consequences flowing from it.

7. Shri Devanathan vehemently contended that without valuing all the assets and liabilities of the firm, the Department erred in picking up one of the assets viz., the scheduled property for purpose of gift-tax. In this connection, he relied upon the decision of the Madras High Court in the case of CGT vs. Indo Traders and Agencies (Madras) P. Ltd. : [1981]131ITR313(Mad) . Alternatively he submitted that if at all there is a gift, it was a gift in the course of the business and the same should be exempt under s. 5(1)(xiv) of the GT Act. Lastly he submitted that the value as estimated by the Valuation Cell based on the sale of the property in 1986 was very excessive and unrealistic. These two later submissions, he emphasised, were without prejudice to the main submission that there is no gift in the impugned transaction. The learned Departmental Representative relied on the orders of the CGT(A) and took us through the decision of the Andhra Pradesh High Court reported in : [1988]172ITR632(AP) (supra). He submitted that where there is reduction of share either on admission or on retirement, the same would be subject to levy of tax as has been held by Supreme Court in the case of CIT vs. Chota lal Mohanlal (supra).

8. We have, thus, heard the rival submissions and perused the records. The partnership firm consisted of 6 partners. On 31st December, 1982, five of the six partners retired from the firm, resulting in the dissolution of the firm. As mutually agreed upon, one of the six partners, a limited company, has taken over the business of the partnership firm with all its assets and liabilities by agreeing to pay the retiring partners, the amount standing to their credit in the books of the firm. One of the properties of the firm (property in the schedule) was also taken over at its book value in a sum of Rs. 81,447. There was no revaluation of assets and liabilities upon retirement ending in dissolution. Thus, the entire business was taken over by one of the partners at book values which was agreed upon among the partners. As one of the properties, (the property in the schedule) is an immovable property, pursuant to the understanding among the partners, the assessees executed a Release Deed in favour of the company which took over the business of the firm. Thus, the Release Deed executed by 5 of the 6 partners was only pursuant to their retirement ending in dissolution as per the recitals in the Release Deed extracted in para 2 (a, b, c, and d) supra. It is stated before us and not controverted on materials on record that the firm has been suffering losses. As a result, a limited company was admitted as a partner and because of the continued losses, the other partners retired from the firm, resulting in the taking over of the entire business with all its assets and liabilities by the limited company which was the surviving partner.

9. As a matter of fact, the CIT(A) has held that even if the taxable income is taken as the basis for computation of super profits, such computation has resulted only in negative income for the asst. yrs. 1979-80 to 1983-84 and this finding was based on the computation as given in the assessment order itself. We may further add that in the asst. yrs. 1981-82 to 1983-84, there was no even positive taxable income but only negative taxable income. In the circumstances, we hold that the admission of the company into the partnership as a partner was necessitated by bona fide, business exigencies.

10. The CGT(A) held that as the incoming partner also had brought in capital for his share of the capital, there was absolutely no case for holding that there was any gift or deemed gift at the time of admission of the limited company into partnership. We up-hold his finding. However, we are unable to agree with his finding that when 5 of the 6 partners retired from the firm, there was a deemed gift. There is force in the contention of the assessee that as the assessees continued to suffer losses, it was in the interest of the old partners to have retired from the firm in order to avoid further erosion of capital and future liabilities and losses. In other words, what reasons prompted the five partners to reconstitute the firm by admitting the limited company into the partnership, remained good for them to retire from the firm. The transaction from both the ends is a bona fide, one. The retirement of the partners was for genuine reasons and the transaction which is a natural incident of retirement cannot be viewed as a sham transaction or a transaction with an ulterior motive, because of the reason that by retiring from the firm the partners get discharged from the liabilities and losses that might be fastened on them if they were to remain in the firm. Thus, the entire transaction, admission and retirement was for bona fide, reasons and once the retirement is for bona fide, reason, the transaction resulting from such an event should also be considered to have been made bona fide.

11. Unless and until all the assets and all the liabilities are revalued and the surplus is realised in respect of the net assets of the firm and retiring partners (whose retirement led to the dissolution) took a share less than their entitlement, the transaction cannot be brought within the purview of gift either under s. 2(xii) or 4(1)(a) or 4(1)(c) of the GT Act. In the instant case, only one of the assets was revalued, not any other asset or liability. Secondly, this is not a case of distribution of assets upon dissolution and as per the terms of the partnership deed dt. 1st January, 1982, the retiring or outgoing partner was entitled only to the amount standing to the credit in his capital or current account as on the date of retirement. Such a provision was not found in the case before the Andhra Pradesh High Court in : [1988]172ITR632(AP) (supra). On the other hand, in that case the settlement of accounts was under an agreement set out as follows :

'(i) Sri Jagatram (assessee) is to retire before 31st December, 1971.

(ii) Steps are to be taken to finalise accounts relating to the partnership and determination of the amount due to Sri Jagatram on retirement.

(iii) Sri Bishanlal agreed to pay a sum of Rs. 1,50,000 to Sri Jagatram towards the value of 50 per cent share of the goodwill of the firm.

(iv) The above sum of Rs. 1,50,000 payable by Sri Bishanlal to Sri Jagatram shall be in addition to the sum due to Sri Jagatram from the partnership at the time of retirement.

(v) If the total sum including 50 per cent share value of the goodwill i.e., Rs. 1,50,000 payable to Sri Jagatram falls below Rs. 3,00,000 the amount in excess of the balance actually due to Sri Jagatram at the time of retirement shall be treated as the sale value of 50 per cent share of the goodwill belonging to Sri Jagatram.

(vi) Sri Jagatram shall execute proper conveyance in favour of Sri Bishanlal conveying 50 per cent share in the land and building in which the business of 3 Aces is carried on.

(vii) It is open to Sri Bishanlal to classify the sum payable to Sri Jagatram as between movable and immovable properties and get necessary documents executed by Sri Jagatram'.

In pursuance of the agreement aforesaid, a deed of dissolution of the partnership was executed on 22nd November, 1971, dissolving the partnership with effect from that date. The important terms of the deed of dissolution, as set out in the order of assessment, are as follows :

'(i) All the assets and liabilities of the partnership including the land and building are taken by Sri Bishanlal from 22nd November, 1971.

(ii) Sri Jagatram renounced his interest, share and interest in the said assets and liabilities from 22nd November, 1971.

(iii) In full settlement and satisfaction of the share, right and interest of Sri Jagatram in the partnership including land and buildings, profits and goodwill and the amounts standing to the credit of Sri Jagatram in the partnership accounts as on 21st November, 1971, Sri Jagatram has agreed to receive Rs. 3,00,000.

(iv) Out of the said Rs. 3,00,000, Rs. 1,00,000 has already been paid. The balance of Rs. 2,00,000 is payable by Sri Bishanlal against the sale consideration of the undivided 50 per cent share in the land and building known as Mohsin-ul-Mulk Kothi.

(v) Sri Jagatram should immediately execute a sale deed and register the same in favour of Sri Bishanlal conveying his 50 per cent share in the land and building for Rs. 2,00,000.

(vi) Sri Bishanlal is entitled to continue to carry on his separate business in the name and style of 3 Aces.

(vii) Sri Jagatram shall not carry on any business under the above name and style.'

On 10th March, 1972, a document styled as Release Deed was executed by Sri Jagatram and Sri Bishanlal. The important terms of this release deed, as set out in the assessment order, are as follows :

'Sri Bishanlal agreed to release his half share in 3-Aces including the land and building for Rs. 3,00,000 out of Rs. 3,00,000, Rs. 1,00,000 has already been paid towards the release of movable assets. The balance of Rs. 2,00,000 is to be paid towards half share and interest in the land and building. Out of this amount, a sum of Rs. 50,000 is paid at the time of registration of the deed and the balance of Rs. 1.5 lakhs is to be paid in two instalments, Rs. 75,000 before 1st December, 1972, and Rs. 75,000 before 1st December, 1973.'

12. It was on these facts that the High Court held the issue against the assessee. The facts of the case before us are totally different as has been stated in the preceding paragraphs. There is always a split time interval between an event leading to the dissolution and the dissolution itself. When 5 out of 6 of the partners decided to retire from the partnership, their rights are governed by cl. 12 of the partnership deed which reads as follows :

'This partnership shall be a Partnership at will. Differences of opinions, arising among the partners, if any, shall be settled only through negotiations among themselves. In case of retirement of any partner, the retiring or outgoing partner shall be entitled only to the amounts standing to the credit of his/its capital or current accounts as on the date of retirement. In any event, the outgoing or retiring partner shall not be entitled to claim any right over any of the assets, properties and the goodwill of the firm.'

13. May be, the retirement of 5 partners resulted in the dissolution of the firm but the settlement of the rights with the erstwhile partners would be governed by only cl. 12 which was a binding contract among the partners, unless the same is excepted in the deed of dissolution. Even though the settlement of accounts took place subsequent to dissolution, it was in conformity with their rights as at the moment of retirement as envisaged in cl. 12 of the partnership deed and such settlement was not on any other basis. In other words, we hold that this is not a case of settlement of accounts by way of distribution of assets upon dissolution of the firm unlike in the case reported in : [1988]172ITR632(AP) (supra). It is only a settlement of accounts upon retirement resulting in dissolution of the firm. The split second that preceded the factual dissolution of the firm is very material because at that point of time cl. 12 of the partnership deed comes into operation to determine the rights of the retiring partners.

14. We, therefore, hold that the decision of the Andhra Pradesh High Court is distinguishable on facts and in law from those in the present case before us. It is worthwhile to recall that in the case before the Andhra Pradesh High Court in the partnership deed, the provision as found in cl. 12 of the partnership deed in the case before us did not exist. For these reasons, we hold that there is no gift or deemed gift either under s. 2(xii) or 4(1) (a) or 4(1)(c) of the GT Act.

15. Even in the case of transfer of business lock, stock and barrel by one entity (company) to another entity (firm), the Madras High Court has held in CGT vs. Indo Traders & Agencies (Madras) (P) Ltd. (supra), that unless all assets and liabilities are valued, it cannot be inferred that there was goodwill exigible to gift-tax nor the difference between the realised value of stock-in-trade and the amount shown in balance sheet can be subjected to gift-tax. The case of the assessee stands on a strong footing. In this case, the impugned property was not immediately sold off netting much more than its book value. It was sold only in 1986 after a lapse of about 4 years. Therefore, from a sale at such a distant point of time, it cannot be said that the market value of the property could be adequately determined as at the date of retirement - 4 years in the rear and then say that there was gift to the extent of the difference between estimated market value and its book value. Such a course is not permissible vide CWT vs. (Smt.) Suguna Mahendran & Ors. : [1994]209ITR684(Mad) . In this context, it is worth recalling the lucid observations of the Madras High Court in the case reported in : [1981]131ITR313(Mad) (supra) :

'Learned standing counsel for the Commissioner stressed that the adequacy of the price has to be judged only in the light of the market value of the property transferred and according to him, there is no other yardstick which could be applied to a situation like this. We are unable to agree. We may explain why we disagree with him by taking an example. Supposing an old lady who owns a neighbouring property, wants to part with it to a medical practitioner, so that the medical practitioner would be of immediate assistance to her as and when she needs it and she parts with the property at what the parties conceive to be a reasonable price, could it be said that there was a gift of the property to the extent of the difference between what is later taken to be the market value and what was conceived to be the reasonable price for the property. It has also to be remembered that the computation of market value is in most cases a matter of estimate, which may also vary. Such a variable concept would not have been made the yardstick.'

16. In our considered opinion, even assuming that the market value of the impugned property was precisely estimated by the Valuation Cell, unless and until all other assets and liabilities are revalued and a surplus is shown to exist, it cannot be readily inferred that the assessee have made a gift or deemed gift in favour of the company.

17. In this view of the matter, we do not go into the question whether the value of the impugned scheduled property as determined by the Valuation Cell was excessive or otherwise unreasonable. Hence, we delete the levy of the gift-tax.

18. In the result, the appeals filed by the assessee are allowed.