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TMI Blog1972 (3) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... on the admission of the two partners did not amount to a gift by the assessee of a portion of his share in the goodwill of the firm ? 2. Whether, on the acts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the surrender or abandonment by the assessee of a share in the goodwill of the business in favour of his two children was bona fide and, therefore, did not amount to a gift within the meaning of section 4(c) of the Gift-tax Act ? " The assessee was carrying on a business in tobacco as sole proprietor. On June 9, 1954, he converted his business into a partnership business consisting of himself and his two daughters, Rookia Bibi and Rahma Bibi. He had a 60% share in the assets and the profit and loss and his two daughters had 20% share each in the partnership. This firm was recognised by this court as being genuine and entitled to registration under section 26A of the Indian Income-tax Act, 1922. Subsequently, on November 2, 1960, the assessee transferred a sum of Rs. 25,000 each to his daughter, Rabiath Bibi, and son, Noor Mohamed, from his share capital account. On November 3, 1960, a partnership deed was executed with Rabiath Bib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered the business with their contribution of capital, they were entitled to a share in the business and that though such share might be to the detriment of the single partner or of all the existing partners, there was no element of gift in such redistribution of shares on the admission of new partners. The Tribunal was of the view that even assuming that there was a surrender or abandonment of a portion of the assessee's share in the goodwill in favour of his two children, since the surrender or abandonment was bona fide it did not amount to a gift within the meaning of section 4(c) of the Act. In that view, the Tribunal held that the assessee was liable to pay gift-tax only on the sum of Rs. 50,000, which was returned by him. It is necessary to notice certain relevant clauses in the deed of partnership dated November 3, 1960, in order to answer the reference. After setting out in the preamble the gift of share capital of Rs. 25,000 each to his son and daughter, the deed further stated that the gross assets and liabilities of the predecessor-firm shall form the assets and liabilities of the partnership business newly constituted and that the value of the same to be as found in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition to the share capital of Rs. 50,000. Section 2(xii) of the Gift-tax Act defines " gift " as meaning " the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth ". Section 2(xxiv) defines " transfer of property " as " including the grant of partnership or interest in property ". In Commissioner of Gift-tax v. V. A. M. Ayya Nadar, a Division Bench of this court considered the scope and meaning of the phrase " grant of partnership or interest in property " in the definition of " transfer of property ". That was a case in which the assessee who had a 1/3rd share in the assets and a 1/3rd share in the profits and losses of the partnership business transferred a 2/9th share in the profits and losses alone to two of the partners without transferring any portion of his share in the assets of the partnership. In other words, the assessee's share capital remained as it was prior to the transfer and the transfer was in effect a redistribution of the profit sharing ratio among the parties. The Gift-tax Officer treated the distribution of the 2/9th share in the profits and losses as a gift and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business on the basis of this valuation was at Rs. 1,41,304 as against the market value of the total assets shown by the assessee at Rs. 1,10,500. The difference in valuation came in because the partners did not value the goodwill when the value of the assets were determined at Rs. 1,10,500. But, the department took the view that the donor had impliedly transferred the goodwill attached to the business also while transferring the 4/5th share in the business. Three questions were referred for decision under section 26(1) of the Gift-tax Act, of which two are relevant here and they are :- "(1) Whether a specific transfer of goodwill is necessary to invoke the provisions of the Gift-tax Act ? and (2) Whether by the transfer of the business, the father had impliedly transferred the goodwill that is attached to that business ? " These questions were answered in favour of the department holding that the gift also included the goodwill and was liable to tax. There could, therefore, be no doubt, in the instant case, that there was a transfer of interest in property when the assessee took his daughter and son into the partnership, assigned them a portion of the share capital and realign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court held that since the departmental authorities never treated all the assets and property of the assessee which were transferred to the partnership as the subject-matter of the gift, it was not open to the department to pick out only one of the assets of the assessee's proprietary business, namely, the goodwill, and regard that as the subject of the gift and that no gift-tax was payable on the goodwill of the assessee's business. Though, at first blush, the decision of the Supreme Court appeared to be in point, on further scrutiny it is quite clear that the decision is not applicable to the facts of the present case. In the present case, as already stated, the value of the net assets excluding the goodwill was determined by the parties at Rs. 1,25,000 on the basis of the value of the assets as found in the books of the predecessor firm ; whereas in the case before the Supreme Court the value of the goodwill was also included in the ascertainment of the total value of the capital at Rs. 4 lakhs. This is clear from the following passage in the said judgment : " Now it is quite clear that according to the deed of partnership and even otherwise on admitted facts goodwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to a share in the goodwill of the business. The learned counsel for the assessee then contended that the gift of the share capital was on November 2, 1960, and the partnership deed was executed on November 3, 1960, and that, therefore, the donees became entitled to a share in the goodwill not by virtue of the gift of the share capital but by virtue of the mutual agreement or contract entered into by the partners as evidenced by the partnership deed dated November 3, 1960. This argument which found favour with the Appellate Tribunal is really not understandable. The whole thing was one transaction amounting to admission of two new partners and reconstituting the old partnership. The gift of the share capital and the transfer of the assets and liabilities and also the whole arrangement were effected by necessary adjiistmens in the books of the business. In fact, such an argument was advanced in the case in Commissioner of Gift-tax v. V. A. M. Ayya Nadar also which was repelled by the Division Bench and it was held therein that distribution by way of realignment of the profit sharing ratio did involve transfer of property amounting to " gift " chargeable to tax. On the facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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