1995 (7) TMI 52 - HC - Income Tax

Summary

Issues Involved:
1. Whether the transfer in question resulted in a gift assessable to gift-tax.
2. Whether the capital brought in by the incoming partners can be considered as consideration for the transfer of the assessee's interest in the business.
3. Interpretation of "consideration" under the Gift-tax Act and the Indian Contract Act.
4. Applicability of previous conflicting judgments on similar issues.

Detailed Analysis:

1. Assessability of the Transfer as a Gift:
The primary issue was whether the transfer of 65% of the assessee's interest in the business to the incoming partners constituted a gift assessable to gift-tax. The Tribunal found that the transfer did not result in any gift assessable to gift-tax, as the capital introduced by the incoming partners was more than the value of the interest transferred by the assessee.

2. Consideration for Transfer:
The court needed to determine if the capital brought in by the incoming partners could be taken as consideration for the transfer of the assessee's interest. The Tribunal noted that the incoming partners had invested Rs. 30,000 as capital, which was more than the value of the interest transferred by the assessee. Therefore, it was concluded that the transfer was supported by adequate consideration, negating the existence of a gift.

3. Interpretation of "Consideration":
The term "consideration" is not defined in the Gift-tax Act but is defined in Section 2(d) of the Indian Contract Act, 1872. According to this provision, consideration can be an act, abstinence, or promise done at the desire of the promisor. The court agreed with the Tribunal that the capital introduced by the incoming partners constituted consideration for the transfer of the assessee's interest. The court emphasized that consideration need not directly benefit the promisor but could benefit a third party, such as a partnership firm where the promisor is a partner.

4. Applicability of Previous Judgments:
The court examined two conflicting Division Bench decisions: CGT v. Ganapathy Moothan and CGT v. K. A. Abdul Razack. In Ganapathy Moothan's case, the goodwill was not specifically transferred, whereas in Abdul Razack's case, the goodwill was transferred and the capital contributed by the incoming partners was treated as consideration. The court found no apparent conflict between these decisions, as they were based on different factual situations.

The court also referenced the Supreme Court's decision in CGT v. P. Gheevarghese, which criticized the practice of picking up only one asset (goodwill) as the subject of the gift. The court clarified that the transfer of goodwill as part of the business's assets is taxable, but it must be considered as part of the entire transaction.

Conclusion:
The court concluded that the transfer of the assessee's interest in the business, supported by the capital introduced by the incoming partners, did not constitute a gift assessable to gift-tax. The capital introduced was deemed adequate consideration, and thus, the essential ingredients constituting a gift were not present.

The court answered the referred question in the affirmative and in favor of the assessee, stating that the transfer did not result in any gift assessable to gift-tax.

Final Order:
A copy of the judgment was ordered to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.