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TMI Blog1996 (8) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... EAS according to mutual agreement between the Releasors on the one part and the company on the other, the Releasors have transferred to the company on 31st December, 1982, their shares in the firm with effect from 1st January, 1983 and accordingly ceased to be partners of the firm and the firm itself ceased to exist with effect from 1st January, 1983 and consequently the company has become the sole owner of all the assets of the firm from 1st January, 1983. WHEREAS the Releasors have agreed to formally release and relinquish in favour of the company all their rights and interests over the scheduled properties by getting the amounts standing to their credit to the tune of Rs. 1,01,634.77 as detailed under : Sri K.A.A. Arunachalam Rs. 19,198.95 Sri S. Annamalai Rs. 19,100.51 Sri S. Maheswaran Rs. 24,057.23 Sri A. Tenzing Rs. 24,724.60 Sri S. Ashok Rs. 14,523.48 " (b) NOW THIS INDENTURE OF RELEASE WITNESSETH THAT in pursuance of the said agreement, by getting the balance standing to their accounts, amounting in all to Rs. 1,01,634.77 (Rupees One lac one thousand six hundred thirty four and paise seventy seven only), the Releasors do hereby release and relinquish in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the retiring partners in their accounts in the books of the firm. Thus, he brought to Gift Tax, the entire market value of the scheduled property as coming within the purview of Gift-tax Act. 4. On appeal, the CGT(A) held that at the time of re-constitution of the firm, though there was a transfer of the interest on the part of the old partners in favour of the incoming partners, yet the value of their interest while the firm is subsisting cannot be assigned and, therefore, no gift tax is leviable in respect of reduction in profit-sharing ratio suffered by the existing partners. Thus, he vacated the levy of gift tax on the re-constitution of the firm on 1-10-1982. The assessees have no grievance against this part of the order of the CGT (Appeals). 5. The first appellate authority, however, upheld the levy of the gift tax on the assessees in respect of 40% of their interest in the firm going in favour of the Limited company upon their retirement and dissolution of the firm. He saw no reason to interfere with the value as estimated by the Valuation Cell. In coming to this conclusion, the CGT (Appeals) relied upon the decision of the Andhra Pradesh High Court in the case of CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the partners was a shamframe action or is not a genuine transaction. Therefore, section 4(1)(c) cannot be invoked. He further submitted that on the retirement of the partners, there can be no surrender of future benefits and there can be no gift involved because the partners were only exercising right to retire from the firm. A legal right to retire from the firm cannot be construed as gift because of the consequences flowing from it. 7. Shri Devanathan vehemently contended that without valuing all the assets and liabilities of the firm, the Department erred in picking up one of the assets, viz., the scheduled property for purpose of gift tax. In this connection, he relied upon the decision of the Madras High Court in the case of CGT v. Indo Traders Agencies (Madras) P. Ltd. [1981] 131 ITR 313. Alternatively he submitted that if at all there is a gift, it was a gift in the course of the business and the same should be exempt under section 5(1)(xiv) of the Gift-tax Act. Lastly, he submitted that the value as estimated by the Valuation Cell based on the sale of the property in 1986 was very excessive and unrealistic. These two later submissions, he emphasised, were withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order itself. We may further add that in the assessment years 1981-82 to 1983-84, there was not even positive taxable income but only negative taxable income. In the circumstances, we hold that the admission of the company into the partnership as a partner was necessitated by bona fide business exigencies. 10. The CGT (Appeals) held that as the incoming partner also had brought in capital for his share of the capital, there was absolutely no case for holding that there was any gift or deemed gift at the time of admission of the Limited company into partnership. We uphold his finding. However, we are unable to agree with his finding that when 5 of the 6 partners retired from the firm, there was a deemed gift. There is force in the contention of the assessee that as the assessees continued to suffer losses, it was in the interest of the old partners to have retired from the firm in order to avoid further erosion of capital and future liabilities and losses. In other words, what reasons prompted the five partners to reconstitute the firm by admitting the Limited company into the partnership, remained good for them to retire from the firm. The transaction from both the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be treated as the sale value of 50% share of the goodwill belonging to Sri Jagatram. (vi) Sri Jagatram shall execute proper conveyance in favour of Sri Bishanlal conveying 50% share in the land and building in which the business of 3 Aces is carried on. (vii) it is open to Sri Bishanlal to classify the sum payable to Sri Jagatram as between movable and immovable properties and get necessary documents executed by Sri Jagatram." In pursuance of the agreement aforesaid, a deed of dissolution of the partnership was executed on November 22, 1971, dissolving the partnership with effect from that date. The important terms of the deed of dissolution, as set out in the order of assessment, are as follows : " (i) All the assets and liabilities of the partnership including the land and building are taken by Sri Bishanlal from November 22, 1971. (ii) Sri Jagatram renounced his interest, share and interest in the said assets and liabilities from November 22, 1971. (iii) In full settlement and satisfaction of the share, right and interest of Sri Jagatram in the partnership including land and buildings, profits and goodwill and the amounts standing to the credit of Sri Jagatram in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assets, properties and the goodwill of the firm ; " 13. May be, the retirement of 5 partners resulted in the dissolution of the firm but the settlement of the rights with the erstwhile partners would be governed by only clause 12 which was a binding contract among the partners, unless the same is excepted in the Deed of Dissolution. Even though the settlement of accounts took place subsequent to dissolution, it was in conformity with their rights as at the moment of retirement as envisaged in clause 12 of the Partnership Deed and such settlement was not on any other basis. In other words, we hold that this is not a case of settlement of accounts by way of distribution of assets upon dissolution of the firm unlike in Jagatram Ahuja 's case. It is only a settlement of accounts upon retirement resulting in dissolution of the firm. The split second that proceeded the factual dissolution of the firm is very material because at that point of time clause 12 of the Partnership Deed comes into operation to determine the rights of the retiring partners. 14. We, therefore, hold that the decision of the Andhra Pradesh High Court is distinguishable on facts and in law from those in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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