1987 (4) TMI 73 - SC - Income Tax

Whether on the facts and in the circumstances of the case the benefits of partnership given to minors Kiritkumar Chhotalal and Deepak Kumar Chhotalal was a gift under the Gift-tax Act 1958 ? Held that - Once goodwill is taken to be property and with the admission of the two minors to the benefits of partnership in respect of a fixed share the right to the money value of the goodwill stands transferred the transaction does constitute a gift under the Act. Since there has been no dispute about valuation of the goodwill as made by the Gift-tax Officer with the conclusion that there has been a gift in respect of a part of the goodwill the answer to the question referred has to be in the affirmative that is it constitutes a gift under the Act. The appeal is allowed and the conclusion of the High Court is reversed.

Summary

Issues:
1. Whether the benefits of partnership given to minors constitute a gift under the Gift-tax Act, 1958?

Analysis:
The case involved a partnership firm, where a change in the constitution occurred, resulting in the assessee reducing his share and admitting his two minor sons to the benefits of the firm. The Gift-tax Officer concluded that the assessee had gifted away a share of the goodwill to his sons, treating it as a taxable gift. However, the Appellate Assistant Commissioner took a different stance, valuing the right to future profits instead of goodwill and enhancing the quantum. The Tribunal held that there was no gift of goodwill, and the right to receive future profits could not be a subject of a gift. The High Court upheld the Tribunal's view, ruling against the Revenue's claim that the benefits given to the minors constituted a gift under the Gift-tax Act.

The definition of "gift" under section 2(xii) of the Act was crucial in determining whether the arrangement in the partnership firm constituted a taxable event. The court referred to various decisions, emphasizing that goodwill of a firm is considered an asset and can be subject to transfer. Citing precedents, the court highlighted that the transfer of a partner's interest, including goodwill, to another party can be deemed a gift for the purpose of taxation. The court also referenced cases where minors admitted to partnership benefits resulted in a gift by the transferring partner, supporting the Revenue's argument.

The court ultimately held that with the admission of the two minors to the partnership benefits in exchange for a fixed share, the right to the money value of the goodwill had been transferred, constituting a gift under the Gift-tax Act. Since there was no dispute over the valuation of the goodwill, the court concluded that a gift had indeed occurred. As a result, the appeal was allowed, the High Court's decision was reversed, and no costs were awarded due to the respondent's absence during the proceedings.