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TMI Blog1990 (6) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-1973 was not filed before us, but the partnership deed dated 6-9-1976 under which there was a reconstitution of the firm was filed before us. Clauses 5, 7, 13 and 14 of the Partnership Deed dated 6-9-1976 under which the reconstitution took place are important and they are as follows :-- "5. The capital of the firm shall be Rs. 1,00,000 (Rupees one lakh only) which shall be contributed by the partners as under :-- Asoka Betelnut Co. Pvt. Ltd. Rs. 18,000 Sri M.K. Kuppuraj Rs. 32,000 Sri M.K. Chandrakanth Rs. 25,000 Sri M.K. Anantha Kumar Rs. 25,000 ------------------------- Rs. 1,00,000 ------------------------- If at any time hereafter any further capital shall be required, such further capital shall also be contributed in the proportion of their original capital contribution unless otherwise agreed to between them. The capital contributed by the partners shall carry simple interest @ 6% per annum and the interest shall be a charge in computing the net profit or loss of the firm. 7. The profit or loss of the business shall be divided or borne by the partners as follows : Asoka Betelnut Company Pvt. Ltd. 18% Sri M.K. Kuppuraj 32% Sri M.K. Chandrakanth 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestments Rs. 500 Stock-in-trade Rs. 7,00,000 Sundry debtors Rs. 46,800 Advances Rs. 2,09,910 Bank balances Rs. 32,818 Cash on hand Rs. 37,950 ------------------------- Rs. 24,18,892 ------------------------- The total of the liabilities of the firm is stated to be at Rs. 29,02,729 for which the break-up is as follows :-- Loan liabilities Rs. 28,79,528 Sundry creditors Rs. 23,201 -------------------------- Rs. 29,02,729 -------------------------- In the statement of affairs of the firm as on 1-4-1977 it is stated that it was prepared without taking into consideration the partners' current account and advance tax. It is stated that the total of the partners debit balances remained at Rs. 5,40,426 and the advance tax paid by the firm will be equal to its tax liabilities. The statement of affairs of the firm as on 6-9-1976 or 5-9-1976 was not filed before us. When we have ascertained from the learned counsel for the assessee he merely stated that it was not prepared. As there was a change in the profit sharing ratio of the existing partners, the Gift-tax Officer was of the opinion that there was an element of gift in favour of the incoming partners from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essees went in appeal before the Appellate Assistant Commissioner, Coimbatore. The following contentions were raised before him : (1) It was only at the time of dissolution the company was entitled to 25% share in the firm's immovable properties provided they remained the firm's properties as excess of its assets over liabilities. (2) It is well settled that during the course of carrying on a firm's business no partner can claim his share in any assets of the firm. The Gift-tax Officer is therefore not correct in fixing a notional gift relating to the valuation of the firm's property at Rs. 1,26,416 at the time of admission of the company as a partner. (3) It is specifically agreed to by the partners that the company was entitled to equal share (as against 18% share of profits or losses) in immovable properties of the firm at the time of dissolution and that even at that time it was not entitled to any share of goodwill and trademark rights of the firm. Subjected to the above demarcated rights only the company was admitted as a new partner from 6-9-1976. Therefore no gift element arises relating to immovable properties of the firm when a new partner is admitted. (4) During the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 13-4-1976 was prepared and from out of the balance sheet the assets and liabilities were furnished to us. The book value of Asoka Building itself was only Rs. 8,57,000, whereas its market value as estimated by the departmental valuer was Rs. 15,17,000. So the difference between the book value and market value of one asset of the firm itself was Rs. 6,60,000. Admittedly the firm has got other assets also and there is every likelihood that there would be vast difference between their book value and the market value. Having regard to this difference between the book value and the market value of the various assets held by the firm as on 13-4-1976 it cannot be said that the assets would not exceed the liabilities. Even according to the book values when we take the debit balance in the personal accounts of the partners of the firm of Rs. 5,89,661 as credit due to the firm then there would be excess of assets over liabilities. That means the assets of the firm would be the total of Rs. 37,30,631 (Rs. 31,40,970 plus Rs. 5,89,661). The excess of assets over liabilities would work out to Rs. 90,815, i.e., Rs. 37,30,631 minus Rs. 36,39,816. This excess of assets over liabilities is withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to was 18%, it was agreed that at the time of dissolution the company should get an equal share in the assets of the firm. Firstly we should see whether a stipulation as to how the distribution of the assets of the firm if they would remain as part of the excess of assets over liabilities after dissolution of the firm can be agreed upon and can be incorporated validly in a partnership deed is first to be looked into. However, as per law enunciated by Lindley on the Law of Partnership, 15th Edn. at page 512 the law on the subject is found as follows : "Where a change occurs in a firm by the retirement of one or more of its members, it is usual for the partners who continue the business to take the property of the old firm and pay its debts, either pursuant to an express agreement made at the time of such retirement or (as is more usual with modern professionally drawn partnerships) pursuant to express vesting provisions built into the original partnership. Sometimes, however, the partnership property or some part of it may be divided between the continuing partners and the outgoing partners in specie so that they can each pursue their independent business, in which case what was fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n principles as can be seen from the judgment at page 650 as under : "The above discussion yields the following principles: (i) On dissolution of a partnership firm, the allocation of surplus (cash or assets) amongst the partners corresponding or approximate to their shares does not amount to a transfer of property, whether in ordinary law or for the purpose of the Gift-tax Act. (ii) Where, however, the distribution of assets between the partners is unequal and it appears from the relevant facts that one partner has received cash/assets of value less than the value of assets to which he was entitled, and correspondingly the other partner or partners have received cash/assets of value more than the value to which they were entitled according to their share/shares, it must be held that it is a 'transaction' within the meaning of sub-clause (d) of clause (xxiv) of section 2 ; it amounts to a 'gift' for the purpose of the Gift-tax Act. (iii) An unequal distribution of coparcenary property between the members of a Hindu undivided family, where there is no prior division of status, stands on a footing different from the case of an unequal distribution of assets amongst the partners upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the firm belongs to him or his claim that he got a definite share in it, are all arguments dealt with and repelled by the Andhra Pradesh High Court in the decision quoted above. The Andhra Pradesh High Court cited the decision of the Hon'ble Supreme Court in CED v. Mrudula Nareshchandra [1986] 160 ITR 342/26 Taxman 348, for the proposition that a partner has a marketable interest in all the assets of the firm, including the goodwill, even during the subsistence of the partnership and that this interest is 'property' within the meaning of section 2(15) of the Estate Duty Act, 1953. With regard to the Supreme Court decision in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 and in CGT v. N.S. Getti Chettiar [1971] 82 ITR 599, their Lordships of the Andhra Pradesh High Court in the abovementioned case held as follows at page 646 : "In a partnership, the share of each partner is definite, though it is true that even in the case of partnership properties, no partner can predicate at a given point of time that a particular property belongs to him. He is entitled only to such assets as are allotted to him on dissolution after discharging all the liabilities and after takin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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