1982 (12) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 81,915, being the value of the assessee's share of the goodwill, is liable to gift-tax in the assessment year 1967-68.

Comprehensive, Issue-wise Detailed Analysis:

Issue 1: Liability of the Assessee's Share of Goodwill to Gift-Tax

Facts and Background:
The assessee, an individual, was a partner in a firm, holding a 54/100ths share. On April 9, 1967, the assessee relinquished his entire share in the firm, allowing the other partner to take over the entire business. The Gift-tax Officer (GTO) considered this surrender of share of profits as a gift under section 4(a) and (c) of the Gift-Tax Act, 1958, and held it liable to gift-tax. The GTO noted that there was no consideration for the relinquishment, thereby deeming it not bona fide. The assessee argued that his retirement did not materially alter his financial position as he continued to receive interest on the balance standing to his credit in the new firm's books.

GTO's Stand:
The GTO held that the non-receipt of share of profits was a material alteration in the income of the assessee, thus attracting gift-tax. He valued the interest relinquished at the average of the profits of the five previous years.

Appellate Authority's Stand:
The Appellate Assistant Commissioner (AAC) interpreted the GTO's order as holding that the assessee's retirement resulted in a transfer of goodwill to the surviving partner, who derived an advantage from the goodwill gathered by the erstwhile firm. The AAC affirmed the GTO's order.

Tribunal's Stand:
On further appeal, the Appellate Tribunal, citing the Supreme Court decision in CGT v. P. Gheevarghese and the Gujarat High Court decision in CGT v. Chhotalal Mohanlal, held that no gift-tax was payable on the alleged relinquishment of a share in the goodwill of the firm. The Tribunal allowed the appeal.

High Court's Analysis:
The High Court analyzed the case on two footings: the surrender of future profits and the relinquishment of the assessee's share in the goodwill of the firm.

1. Surrender of Future Profits:
- The court held that future profits are not property since once a person ceases to be a partner, there is no question of receiving any profits thereafter.
- The court agreed with the Madras High Court's view in Addl. CGT v. P. Krishnamoorthy that a retiring partner has no right to future profits, and hence, there is no property to be relinquished.
- The court concluded that the surrender of future profits cannot be treated as a gift or transfer of property under section 2(xxiv) of the G.T. Act, nor does it attract section 4(1)(c).

2. Relinquishment of Share in Goodwill:
- Goodwill is an asset of a partnership firm. The court examined whether the relinquishment of a share in goodwill by a retiring partner constitutes a gift.
- The court referred to the Gujarat High Court decision in CGT v. Karnaji Lumbaji, which held that a partner cannot predicate a definite share in any particular asset of the firm, including goodwill.
- The Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa clarified that a partner's interest is in the partnership firm as a whole, not in specific assets.
- The court found support in CGT v. P. Gheevarghese, where the Supreme Court held that picking out goodwill as the subject-matter of gift was inappropriate.
- The court concluded that it is not permissible to treat the relinquishment of a share in goodwill as a gift for the purpose of gift-tax.

Conclusion:
The High Court held that whether treated as a surrender of future profits or a relinquishment of share in goodwill, the transaction does not attract gift-tax under the G.T. Act. The question referred was answered in the negative, in favor of the assessee and against the Department. No costs were awarded.