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TMI Blog2017 (11) TMI 917X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in the firm came to be brought down from 19.5% to 11.25 % with simultaneous increase in the share of another partner by name Suman Vijoo, whose existing share of 3 % was enhanced to 11.25%. In other words, extent of shares held by the assessee was reduced by 8.25%, while that of the other partner by name Suman Vijoo got enhanced by 8.25%. This reallocation of shares was taken note of by the assessing authority, who issued a notice to the assessee pointing out that transaction was exigible to tax in terms of the Gift Tax Act and in turn, directing the assessee to file return accordingly. Return was filed by the assessee pointing out that the transaction would not attract tax liability under the Gift Tax Act. It was also pointed out that the 'additional share capital' was contributed by the other partner by name Suman Vijoo, and she had also undertaken to 'discharge various duties' for the firm, besides furnishing 'collateral securities' in respect of various financial transactions of the firm. The person by name Suman Vijoo had also offered 'personal guarantee' for various financial transactions and it was effected in the course of business, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of firm to Smt. Suman Vijoo and that such transfer was for inadequate consideration ?" 4. Heard the learned counsel appearing for the appellant and the learned counsel appearing for the assessee at length. 5. The first and foremost contention raised by the Revenue is that the decision rendered by the Apex Court in Sree Narayana Chandrika Trust's case [cited supra] virtually stands in favour of the Revenue. The relevant portion of the said verdict has been extracted in paragraphs 4 and 5 of the appeal, which are reproduced below : "4. The decision of the Tribunal.......................................................... It may be pointed out that the Supreme Court observed in Sree Narayana Chandrika Trust Vs. CIT (2003) 261 ITR 279 as under (page 285): "Although it may be possible to say in the appellant's case that relinquishment of the share of profit/loss by a partner in favour of the inducted parter may amount to a transfer, we are unable to accept the contention that it was for inadequate consideration so as to amount to a taxable gift within the meaning of section 4 (1) (a) of the Gift Tax Act." 5. In the case cited above,................................ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llocation of the shares, was totally an 'inadequate consideration' and hence it was nothing else, but a 'gift' to be mulcted with tax liability. 7. There is no much factual dispute as to the course and events. As mentioned already, it is also not a matter of dispute that both the assessee as well as partner by name Suman Vijoo were existing partners before and after the share allocation exercise. It also remains a fact that, apart from the additional capital contribution of Rs. 1,23,750/- and the undertaking of the partner by name Suman Vijoo, to sincerely and faithfully carry out the business of the firm, she had also provided 'collateral security' for various financial transactions/loans availed by the firm from different corners. That apart, the partner by name Suman Vijoo had also offered 'personal guarantee' for several financial transactions, which definitely was to have a bearing with regard to the running of the business of the firm. The observations as to the factual position in this regard by the Commissioner of Income Tax [Appeals] and the Tribunal in Annexures D/C orders is not rebutted by the Revenue anywhere in the appeal and as such, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d shares. The firm was carrying on the business of putting on circus shows. Even after surrender of 15% of his share of profit, the assessee continued to occupy a pivotal role in the onduct of the business. On these premises, the Appellate Tribunal held that this was a case where the assessee voluntarily relinquished 15% of his right to share of profits of the firm to his three sons and to that extent there was a gift. When a partnership firm reconstituted resulting in the reduction of the share of profits of some partners and the consequential increase in the share of profits of some partners and the consequential increase in the share of profits of others, it would result in a gift exigible to tax under the Gift Tax Act. It has been held so by the Madras High Court in CGT Vs. T.S. Shanmugham [1977] 110 ITR 237 [See also CGT Vs. Chhotalal Mohanlal [1987] 166 ITR 124 (SC)]. In view of the above decisions, we hold that there was gift exigible to gift-tax by the assessee in relinquishing 15% of his share in the profits of the firm." After holding that it was an instance exigible to tax, the Court proceeded further to consider whether the assessee was entitled to the exemption conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The High Court was right in holding, having regard to the recital of the deed of partnership, that it was not possible to make out any transfer of property as such by any particular individual in favour of another individual so as to result in a gift. To find out whethere there was a gift, the terms of the document were material as also any other evidence that might be brought on record and the burden of so doing was upon the Revenue. There being no material from which it could be inferred that there was a gift, the High Court concluded that the answer to the question must be in favour of the assessee and against the Revenue . The High Court noted that the son had brought into the firm a contribution of capital in the sum of Rs. 2.33 lakhs. He had been in the business for nearly four years and the High Court found it reasonable to assume that the increase in his share of profits was on account of his experience and capacity to shoulder more responsibilities. Merely because the share of the father had come to be reduced by five paise and there was a corresponding increase so far as the son was concerned did not lead to the inference that the five paise share of the father had bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since there was no dispute as to the usefulness of his service to the firm, there was no instance of any gift. The appeal however came to be dismissed, which made the assesee to pursue the matter before the Tribunal, where interference was made by the Tribunal holding the position against the Revenue and in favour of the assessee. This made the Revenue to obtain a reference under section 26 (1) of the Gift Tax Act raising following two questions : "1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that even though the reconstitution of the firm resulted in the reduction of the share of profit of the assessee-trust there was no gift exigible to tax in its hands ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that even though there was a transfer by the assessee in favour of the incoming partner and existing partners, the consideration for the transfer could not be evaluated during the subsistence of the partnership and so the question of adequacy or inadequacy of consideration could not be quantified and so there was no gift exigible to tax ?" The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as under the partnership deed dated October 1, 1982. We are of the view that even assuming that there was a transfer of 12 per cent of the share of profit/loss in favour of the incoming partner, M.U. Indira by the appellant assessee, it was not a situation of transfer for inadequate consideration so as to amount to a taxable gift within the meaning of Section 4 (1) (a) of the Gift- Tax Act, 1958." 12. From the above, it is quite clear that a mere instance of reduction in the shares of profit of a partner resulting in increase in the share of profit of another by itself will not constitute a 'gift' coming within the purview of section 4 (1) (a) of the Act. The Apex Court held that the contribution of Rs. 25,000/- made by the newly inducted partner in Sree Narayana Chandrika Trust's case [cited supra] and the undisputed usefulness of her service to the firm was considered as adequate consideration, to take it outside the purview of 'gift'. 13. Coming to the undisputed factual position in the present case, over and above the additional capital contribution of Rs. 1,23,750/- the partner Suman Vijoo, who got more shares pursuant to the reduction of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X
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