1980 (6) TMI 58 - AT - Income Tax

Summary

Issues:
1. Whether the diminishing of the assessee's share in a partnership due to the introduction of a new partner constitutes a gift for the purposes of Gift-tax assessment.
2. Whether the exemption under section 5(1)(xiv) of the Gift-tax Act applies to the alleged gift in this case.

Detailed Analysis:

Issue 1:
The Revenue appealed against the order of the AAC of Gift-tax, Ambala, which canceled the order of the GTO for the assessment year 1975-76. The GTO contended that the introduction of a new partner, reducing the assessee's share in the firm, constituted a gift to the new partner. The GTO relied on a decision of the Madras High Court to support this view. However, the AAC, following the Gujarat High Court decision in Karnaji Lumbaji, held that no gift occurred upon the introduction of a partner, even if the existing partner's share was reduced. The AAC also cited Supreme Court and Bombay High Court decisions to support the exemption of the alleged gift under section 5(1)(xiv) of the Gift-tax Act. Consequently, the AAC canceled the GTO's order.

Issue 2:
During the appeal before the ITAT, the Departmental Representative argued that the reduction in the assessee's share constituted a gift, referencing the Madras High Court decision. However, the assessee's counsel, supported by the AAC's decision and various judgments, contended that no gift occurred as the new partner was introduced due to the failing health of the assessee, who needed assistance in managing the business. The ITAT analyzed the facts and legal precedents, including the Bombay and Gujarat High Court decisions, and concluded that no gift was involved. The ITAT emphasized that the introduction of the new partner was based on the consideration of services to be rendered, especially due to the ill health of the assessee, and therefore did not amount to a taxable gift. Additionally, the ITAT accepted the alternative submission that even if there was a gift, it would be exempt under section 5(1)(xiv) of the Act, as it was made in the course of carrying on the business and for business purposes. Consequently, the ITAT dismissed the Revenue's appeal, affirming the cancellation of the GTO's order.