1994 (5) TMI 47 - AT - Income Tax

Summary

Issues Involved:

1. Adequacy of consideration received by retiring partners for transfer of special rights.
2. Adequacy of consideration received by continuing partners for giving up special rights.
3. Determination of deemed gift under Section 4(1) of the Gift Tax (GT) Act.
4. Methodology used by the Gift Tax Officer (GTO) to ascertain the value of assets and goodwill.
5. Year of assessment for the deemed gift.

Issue-wise Detailed Analysis:

1. Adequacy of Consideration Received by Retiring Partners for Transfer of Special Rights:

The GTO held that the consideration received by the four retiring partners from Kwality Biscuits Pvt. Ltd. was inadequate for the transfer of their special rights in goodwill and capital appreciation of the assets. The Tribunal found that at the time of retirement, there could be no transfer as held by several judicial decisions, including CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) and its approval by the Supreme Court in Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC). The Tribunal concluded that the transaction was an adjustment of rights among partners, not a transfer, thus no gift or deemed gift occurred.

2. Adequacy of Consideration Received by Continuing Partners for Giving Up Special Rights:

The GTO also deemed the consideration received by Shri Viswanath Gupta and Shri Umesh Gupta, two continuing partners, for giving up their special rights in the goodwill and capital appreciation of the assets of the firm as inadequate. The Tribunal noted that the partnership was subsisting among the partners, and the value of any partner's share could not be ascertained with certainty unless an account of all assets and liabilities was taken. Therefore, the Tribunal held that there was no gift or deemed gift in the case of continuing partners as well.

3. Determination of Deemed Gift under Section 4(1) of the GT Act:

The GTO evaluated the deemed gift based on the difference between the consideration received and the value of the rights in goodwill and capital appreciation of the firm. The Tribunal found that the GTO's method was erroneous, as it did not consider the value of assets as on the date of the transaction (16th Feb., 1979) and instead used values from the dissolution of the firm on 17th March, 1981. The Tribunal held that the inadequacy of consideration must be worked out with reference to the value of assets as on the transaction date.

4. Methodology Used by the GTO to Ascertain the Value of Assets and Goodwill:

The Tribunal criticized the GTO's methodology for valuing the assets and goodwill. The GTO had taken the revaluation done as on 17th March, 1981, and worked backward to estimate the value as on 16th Feb., 1979, which the Tribunal found unscientific and ad hoc. The Tribunal also noted that the GTO did not deduct the book value of the assets and had independently evaluated the goodwill in a manner not aligned with recognized principles. The Tribunal referenced "Advanced Accounts" by Mr. M.C. Shukla & T.S. Grewal to emphasize the correct approach for valuing goodwill.

5. Year of Assessment for the Deemed Gift:

The assessee contended that the deemed gift should be considered in the assessment year 1979-80, as they had chosen 31st March, 1979, as their previous year. The CIT(A) rejected this, stating that the GTO did not accept the change of the previous year from June to March. The Tribunal did not find merit in this contention and upheld the assessment year as 1980-81.

Conclusion:

The Tribunal concluded that the GTO's method for evaluating the assets and goodwill was flawed and that there was no gift or deemed gift involved in the transactions of both retiring and continuing partners. The Tribunal canceled the levy of gift-tax in each case and allowed the appeals.