2000 (10) TMI 48 - SC - Income Tax

Whether the release by the assessee, who was one of the partners in the firm of 3-Aces, of his rights in the assets of the firm for a consideration of ₹ 3,00,000 when the market value of the assets of the firm in proportion to his share was in excess thereof, did not amount to a gift within the meaning of the Gift-tax Act ? Held that - The High Court having rightly stated that the decision of Getti Chettiar (1971 (9) TMI 61 - SUPREME Court) which supported the case of the appellant and even the observations made were binding on it, wrongly did not apply the ratio of the said decision to the facts of the case in hand. Further, the High Court committed an error in stating that the said decision had no application to the distribution of the assets as between the partners whose shares inter se are specific and determined at any given point of time and that the said decision had to be read and understood in the light of the subsequent decision of this court in Kantilal Trikamlal's case 1976 (7) TMI 61 - SUPREME Court . As in the case of the Hindu joint family, the coparceners do not have exclusive rights in any specific property of the family, the property allotted to their shares become specified only on partition ; the same is the position in the case of a partner of a firm. No partner of a firm can claim exclusive or specific right in any specific asset of the property of a firm. Coparceners also have definite share in the Hindu undivided family. So also the partners have definite share in the partnership. In favour of assessee.

Issues Involved:
1. Whether the release of rights in the assets of a partnership firm for a consideration less than the market value amounts to a gift under the Gift-tax Act, 1958.
2. Applicability of the definition of "gift" and "transfer of property" under the Gift-tax Act, 1958.
3. Relevance of previous judicial decisions on similar matters.

Detailed Analysis:

1. Whether the release of rights in the assets of a partnership firm for a consideration less than the market value amounts to a gift under the Gift-tax Act, 1958:

The Tribunal had referred the question of whether the release by the assessee of his rights in the assets of the firm for Rs. 3,00,000, when the market value was higher, amounted to a gift under the Gift-tax Act. The High Court answered this in the negative, against the assessee. The Supreme Court examined the facts and the relevant agreements between the appellant and his brother, which included the retirement of the appellant from the partnership and the settlement of his share. The Tribunal had held that the distribution of assets on the dissolution of the firm did not constitute a "transfer of property" and thus did not amount to a gift.

2. Applicability of the definition of "gift" and "transfer of property" under the Gift-tax Act, 1958:

The Supreme Court referred to the definitions of "gift" and "transfer of property" under section 2 of the Gift-tax Act, 1958. The court reiterated that a "gift" involves a transfer made voluntarily and without consideration, while "transfer of property" includes various forms of disposition and alienation. The court cited its previous decision in CGT v. N. S. Getti Chettiar, which held that a partition in a Hindu joint family, where a greater share is allotted to other members, does not constitute a gift. The court extended this principle to partnerships, stating that the distribution of assets upon dissolution is a mutual adjustment of rights and not a transfer.

3. Relevance of previous judicial decisions on similar matters:

The court reviewed several precedents, including CGT v. Chhotalal Mohanlal, M. K. Kuppuraj v. CGT, and CGT v. Premji Trikamji Jobanputra, which were distinguished based on their specific facts, particularly involving minors' admission to partnerships. The court emphasized that these cases did not apply to the present case, which involved the dissolution of a firm and the adjustment of assets. The court reaffirmed the principles from Getti Chettiar and other cases like Malabar Fisheries Co. v. CIT and CIT v. Dewas Cine Corporation, which supported the view that such adjustments do not amount to a transfer or gift.

Conclusion:

The Supreme Court concluded that the High Court erred in its judgment. The distribution of assets between partners upon the dissolution of a firm does not constitute a transfer of property or a gift under the Gift-tax Act. The court set aside the High Court's judgment and upheld the Tribunal's order, answering the referred question in the affirmative, in favor of the assessee. The appeal was allowed, and no costs were imposed.

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