2001 (9) TMI 7 - HC - Income Tax

Gift Tax Act, 1958 - Whether, on the facts and in the circumstances of the case, the assessee was liable to gift-tax under the Gift-tax Act, 1958 ? There is no dispute about the fact that upon his retirement from the firm, the assessee withdrew the capital from the firm. Hence, it was not a case of the assessee making any gift of his capital in the firm in favour of his mother or brother. Hence assessee was not liable to gift-tax - Accordingly, our answer to the question is in the negative, i.e., in favour of the assessee and against the Revenue.

Summary

Issues:
Whether the assessee was liable to gift-tax under the Gift-tax Act, 1958?

Analysis:
The High Court of GUJARAT was tasked with determining whether the assessee was liable to gift-tax under the Gift-tax Act, 1958 for the assessment year 1975-76. The case revolved around the assessee's retirement from a partnership firm, Abadi and Co., and subsequent constitution of a new firm with different partners. The Gift-tax Officer alleged that the assessee had made a taxable gift to his mother and brother based on the value of the firm's goodwill. The Commissioner of Gift-tax (Appeals) accepted the assessee's contention, citing relevant legal precedents. The Tribunal dismissed the Revenue's appeal, leading to this reference to the High Court.

The Revenue contended that the Supreme Court's decision in CGT v. Chhotalal Mohanlal established that goodwill is property, and any change in partnership shares constitutes a taxable gift. On the other hand, the respondent-assessee argued that since he withdrew his capital upon retirement, no gift was made. The assessee's counsel relied on the Supreme Court's decision in CGT v. T. M. Louiz, emphasizing that upon retirement, the partnership assets and goodwill remain with the firm.

After considering the arguments, the High Court found merit in the assessee's submissions. It emphasized the definition of 'gift' under the Gift-tax Act, which requires a voluntary transfer of property without consideration. Referring to CGT v. T. M. Louiz, the Court highlighted that when a partner retires, the partnership and goodwill continue with the firm, and the retiring partner receives only the value of their share in the assets. The Court distinguished the facts of Chhotalal Mohanlal's case, where a continuing partner reduced their share in favor of minors, from the present case where the outgoing partner took back their capital share.

The Court also addressed the principle of following subsequent explanations of Supreme Court decisions, as outlined in Nizzamuddin Suleman v. New Shorrock Spg. and Mfg. Mills Co. Ltd. and Gujarat Housing Board v. Nagjibhai Laxmanbhai. It noted that the law laid down in T. M. Louiz clarified the earlier decision in Chhotalal Mohanlal, and therefore, the assessee was not liable to gift-tax under the Gift-tax Act, 1958. The Court ruled in favor of the assessee, concluding that no gift-tax was applicable in this case.

In conclusion, the High Court disposed of the reference, ruling in favor of the assessee and against the Revenue, with no order as to costs.