1978 (8) TMI 124 - AT - Income Tax

Summary

Issues:
1. Whether the addition of deemed gift by the assessee upon converting a proprietary concern into a partnership concern is justified.
2. Whether the conversion of the business into a partnership concern was without consideration, leading to a deemed gift.
3. Whether the sons and daughters contributed capital for the partnership firm, providing adequate consideration for the conversion.

Detailed Analysis:
1. The appeal was filed by the Department against the order of the AAC, Madurai, which deleted the addition of Rs. 59,279 as a deemed gift by the assessee when he converted his proprietary concern into a partnership concern with his children. The ITO treated the value of 65% share in the goodwill as a deemed gift due to the conversion. The AAC found that the conversion was for adequate consideration as the sons and daughters brought in proportionate share capitals and agreed to share profits and losses, leading to the deletion of the addition.

2. The main contention was whether the conversion without consideration constituted a gift. The partnership deed showed that the partners contributed share capital in proportion to their shares, with the deceased assessee being allotted 35% shares for a capital of Rs. 8,750. The sons and daughters also contributed capital as per their share percentages. The partnership deed also included a clause for the father's management remuneration, indicating consideration for the conversion. The Tribunal held that the conversion was not without consideration, as the children had contributed capital for the partnership firm.

3. The Departmental representative argued that the assessee relinquished his business without consideration, citing previous judgments. However, the Tribunal noted that the facts of the present case were similar to a decision of the Madras High Court where the conversion was found to be for consideration. The Tribunal confirmed the AAC's finding that there was adequate consideration for the conversion, dismissing the Department's appeal based on the contribution of capital by the sons and daughters for the partnership firm.