1968 (9) TMI 45 - HC - Income Tax

Summary

Issues Involved
1. Whether the reduction in the assessee's share in the partnership firm and the corresponding increase in the shares of Mohanlal Karnaji and Govindlal Karnaji constituted a "gift" under the Gift-tax Act.
2. Whether the transfer of the assessee's share in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji was without consideration.
3. Applicability of clauses (b) and (d) of section 2(xxiv) and section 4(c) of the Gift-tax Act.

Detailed Analysis

Issue 1: Whether the reduction in the assessee's share in the partnership firm and the corresponding increase in the shares of Mohanlal Karnaji and Govindlal Karnaji constituted a "gift" under the Gift-tax Act.

The Tribunal held that the assessee did not have any specific interest in the goodwill of the firm which could be transferred to Mohanlal Karnaji and Govindlal Karnaji. It was argued that neither during the continuance of a firm nor after its dissolution can a partner be said to have a specific interest in any particular asset of the firm. Hence, the assessee did not transfer any specific interest in the goodwill of the firm. The Tribunal also noted that even if the transaction could be construed as a transfer, there was nothing to show that it was made without consideration. Therefore, it could not be regarded as a gift liable to gift-tax under the Act.

Issue 2: Whether the transfer of the assessee's share in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji was without consideration.

The Tribunal observed that the interest of a partner in a firm is existing intangible property which can be transferred. However, the Tribunal found that the transfer was not without consideration. The admission of Mohanlal Karnaji and Govindlal Karnaji as partners was not gratuitous; it was in consideration of their experience and the benefit they would bring to the firm. They would also share in the liabilities and future losses of the firm. Therefore, the transfer was not without consideration in money or money's worth, and there was no gift by the assessee to Mohanlal Karnaji and Govindlal Karnaji.

Issue 3: Applicability of clauses (b) and (d) of section 2(xxiv) and section 4(c) of the Gift-tax Act.

The Tribunal considered whether the case could be brought within clauses (b) and (d) of section 2(xxiv). Clause (b) includes the creation of any interest in property, and clause (d) includes any transaction entered into with the intent to diminish the value of one's own property and increase the value of another's property. The Tribunal held that neither of these clauses applied to the facts of the present case. Even if clause (b) or (d) applied, the element of consideration was not absent, and it could not be regarded as a gift. The Tribunal also considered the applicability of section 4(c) and concluded that it had no application, as the release, discharge, or surrender of the assessee's share in the goodwill was bona fide.

Conclusion

The judgment concluded that the reduction in the assessee's share and the corresponding increase in the shares of Mohanlal Karnaji and Govindlal Karnaji did not constitute a gift under the Gift-tax Act. The transfer was not without consideration, and therefore, there was no liability to gift-tax. The Tribunal's decision was upheld, and the revenue's contentions were rejected. The Commissioner was directed to pay the costs of the reference to the assessee.