1982 (4) TMI 124 - AT - Income Tax

Summary

Issues Involved:
1. Determination of whether the retirement of partners from the firm amounted to a gift of goodwill.
2. Assessment of the value of the alleged gift of goodwill.
3. Validity of cross objections filed by the assessees.
4. Consideration of the arguments presented by the revenue and the assessees.

Detailed Analysis:

1. Determination of whether the retirement of partners from the firm amounted to a gift of goodwill:

The core issue was whether the retirement of Shri Om Parkash and Shri Hira Nand from the firm M/s. Laxmi Chand Chuni Lal, without receiving any consideration for relinquishing their rights in the firm's goodwill, constituted a gift subject to gift tax. The GTO presumed that the retirement and subsequent surrendering of rights by these partners amounted to a gift to the continuing and new partners. The GTO based this on the firm's prior profits and calculated the goodwill value accordingly.

However, the AAC disagreed, noting that the goodwill in a cloth business is tied to individuals, and the retiring partners had started a competitive business, indicating no transfer of goodwill. The AAC emphasized that the differences among partners led to the dissolution and formation of a new firm, negating the idea of a gift.

2. Assessment of the value of the alleged gift of goodwill:

The GTO calculated the goodwill value based on the average profits of the firm over five years, determining the value of the goodwill to be Rs. 2,71,350. The GTO then assigned portions of this value to the retiring partners based on their previous shares in the firm, resulting in assessed gifts of Rs. 65,124 for Om Parkash and Rs. 70,530 for Hira Nand.

The AAC, however, found that the GTO failed to establish the existence of goodwill as defined by the Supreme Court in CIT vs. B.C. Srinivasa Setty. The AAC noted that the firm's profits alone did not prove the existence of goodwill, especially given the internal conflicts and the competitive business started by the retiring partners.

3. Validity of cross objections filed by the assessees:

The cross objections filed by the assessees were dismissed as they were submitted late-by 20 days in the case of Hira Nand and 16 days in the case of Om Parkash. The assessees failed to show reasonable cause for the delay, leading to the dismissal of their cross objections as time-barred.

4. Consideration of the arguments presented by the revenue and the assessees:

The revenue argued that the AAC's relief was unwarranted, asserting that goodwill does not vanish due to partner differences and citing the Supreme Court judgment in CIT vs. B.C. Srinivasa Setty to justify the gift tax. The revenue emphasized that the firm's progressive profits indicated the presence of goodwill.

Conversely, the assessees contended that the GTO did not prove the existence of goodwill or that the transfer was without consideration. They argued that the firm's dissolution was due to partner differences and that the outgoing partners did not voluntarily relinquish any rights. They also highlighted that the outgoing partners left liabilities behind, which the continuing partners assumed, suggesting any surrender was not without consideration.

Conclusion:

The tribunal, after considering the submissions, upheld the AAC's decision. It concluded that the GTO did not establish the existence of goodwill as required by the Supreme Court's guidelines. The tribunal noted that the firm's dissolution and the competitive business started by the retiring partners negated the idea of a gift. Consequently, the appeals by the revenue were dismissed, and the cross objections by the assessees were dismissed as time-barred.

Final Decision:

Appeals and cross objections are dismissed.