1989 (1) TMI 145 - AT - Income Tax

Summary

Issues Involved:

1. Whether there has been a gift from the deceased-assessee to his third son.
2. Whether the provisions of section 4(1)(c) of the Gift-tax Act, 1958 are applicable to the case.
3. Whether the gift, if any, was bona fide.

Issue-wise Detailed Analysis:

1. Whether there has been a gift from the deceased-assessee to his third son:

The deceased-assessee, along with his two sons, was a partner in the firm M/s. Mahasukhlal Bhailal. The firm underwent a change in its constitution effective from March 31, 1976, whereby the deceased-assessee's share was reduced from 40% to 15%, and his third son was admitted as a partner with a 35% share. The Gift-tax Officer (GTO) determined that this reduction in share constituted a gift of 25% of the deceased-assessee's share to his third son, Ashwinkumar Mahasukhlal, valued at Rs. 13,190 after statutory exemption.

The Appellate Assistant Commissioner (AAC) found that the new partner's admission was on account of commercial expediency, including capital contribution and participation in the business, and thus cancelled the levy of gift-tax.

However, the Tribunal concluded that the reduction in the deceased-assessee's share resulted in a deemed gift of 25% of his share in the firm. The Tribunal emphasized that the transaction was without consideration in money or money's worth and thus constituted a gift of the deceased-assessee's share in the goodwill of the firm.

2. Whether the provisions of section 4(1)(c) of the Gift-tax Act, 1958 are applicable to the case:

The Tribunal analyzed whether the obligation of the incoming partner to share future losses, render services, and contribute capital could be considered good consideration for the transaction. The partnership deed clauses indicated that the capital would carry interest, and salaries would be paid to working partners. The Tribunal found that the new partner's contribution of capital with a right to receive interest and the obligation to share future losses did not constitute adequate consideration for the reduction in the deceased-assessee's share.

The Tribunal distinguished the present case from previous cases where partners were admitted based on their experience or capital contribution without remuneration or interest. The Tribunal concluded that the transaction was without consideration and thus fell under the definition of a gift as per section 2(xii) read with section 2(xxiv) of the Act.

3. Whether the gift, if any, was bona fide:

The Tribunal noted that the GTO did not address whether the gift was bona fide. The AAC found that the gift was made out of business expediency due to the deceased-assessee's old age and the need for another partner's services. The Tribunal upheld this finding, stating that the revenue failed to prove that the gift was not bona fide. The Tribunal concluded that although the reduction in the share resulted in a gift, it was bona fide and thus not subject to gift-tax under section 4(1)(c) of the Act.

Conclusion:

The Tribunal dismissed the appeal, agreeing that the reduction in the deceased-assessee's share constituted a gift but was bona fide and thus not taxable under section 4(1)(c) of the Gift-tax Act, 1958.