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TMI Blog2017 (8) TMI 1385X X X X Extracts X X X X X X X X Extracts X X X X ..... s, Paulose C. Abraham and Raja Kannan, Advocates, for the appellant. Anil D. Nair, P. K. R. Menon, Senior Counsel, Government of India (Taxes) and George K. George, Standing Counsel, for Income-tax Department, for the respondent. JUDGMENT P. R. Ramachandra Menon Would the transfer of shares effected by some partners of the firm in favour of a newly inducted partner, virtually suffering a reduction in the share of profit ; simultaneously facilitating extension/increase of profits to the incoming partner by itself will result in exigibility to tax under section 4 of the Gift-tax Act, 1958 ? If the additional contribution pumped in by the newly inducted partner, coupled with the liability undertaken to discharge the liabilities to financial institutions and other creditors and also the undertaking to work for the common good of the firm, besides offering personal guarantee in respect of various financial transactions could be taken as sufficient consideration for the purpose of the exemption under section 5(1)(xiv) of the Act ? These are the main points to be answered by this court in the reference made by the Tribunal, at the instance of the assessees. 2. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessees the version of the Revenue was accepted and it was accordingly, that annexures A, B and C orders were passed by the assessing authority. This made the assessees to prefer statutory appeal before the Commissioner of Income-tax (Appeals), who interdicted the assessment orders and held that no instance of tax was established and accordingly, the appeals were allowed. The orders passed by the appellate authority were subjected to challenge from the part of the Revenue by filing further appeal before the Tribunal. After considering the submissions made from both the sides the orders of the appellate authority were set aside and the assessment was sustained, upholding the exigibility to tax ; however, ordering that 50 per cent. of the capital contribution made by the assessees alone would stand deducted for the purpose of calculation. The common order passed by the Tribunal in this regard is produced as annexure E . 5. On passing the above order, 3 of the assessees submitted reference applications as R. A. No. 9(Coch)/1999, R. A. No. 10(Coch)/1999 and R. A. No. 11(Coch)/1999 in Gift Tax Appeal Nos. GTA. No. 26 (Coch)93, GTA. No. 27(Coch)93 GTA. No. 28(Coch)93, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainable, the Tribunal has not given any cogent reasoning with regard to the course pursued. Similarly, the verdicts sought to be relied on from the part of the assessees have not been correctly analysed or appreciated by the Tribunal and hence the challenge, by way of reference, to have it considered and answered by this court. It is also pointed out that, exactly similar issue had come up for consideration before the apex court and was answered in favour of the assessee, as per the decision reported in CGT v. D. C. Shah [2001] 249 ITR 518 (SC) ; which was followed by the subsequent ruling in Sree Narayana Chandrika Trust v. CGT [2003] 261 ITR 279 (SC) as well. Both the above decisions were referred to and relied on by a Division Bench of this court in the ruling rendered and reported in K. Govindan v. CGT [2004] 272 ITR 220 (Ker) ; [2004] 2 KLT 834 (Ker). 8. The learned standing counsel for the Revenue submits that, adequacy of consideration is a question of fact and that the same has been considered by the Tribunal which is the ultimate authority as per the statute and as such, nothing actually survives to be considered by this court, treating it as a question of law to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the business of the firm is also one of the main factors. The Bench held that the gift of a portion of one partner's share to another partner has to be established by evidence and that the onus in this regard lay only on the shoulders of the Revenue ; which was held as not satisfied/discharged in the said case. Accordingly, the appeal preferred at the instance of the Revenue was dismissed. 10. The apex court had occasion to consider the scope of the provision in a subsequent ruling as well, in Sree Narayana Chandrika Trust v. CGT [2003] 261 ITR 279 (SC). That was a case which originated from this court. The matter was taken up before the Supreme Court at the instance of the assessee, a charitable institution, who was a partner of the firm having 45 per cent. of shares. The reconstitution made a new partner to have entry with an additional capital contribution of ₹ 25,000 towards her share capital, which led to fixation of profit in favour of the new partner of the firm, resulting in reduction of share of the assessee to 30 per cent. The reduction of the said extent from 45 per cent. to 30 per cent. was taken as gift to the newly inducted partner, at the hands of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance was there since it was only a case of minor who had not effected any additional contribu tion of the capital ; was not of much significance, in view of the relevant facts and figures borne out by the record. It was held that, adequacy of consideration was an aspect to be proved by the Revenue and that the Revenue had not proved any fact to show that there was a gift . Accord ingly, the challenge was upheld, answering question No. 1 in the nega tive and against the Department. Similarly, question No. 2 was also answered in the negative and against the Department, virtually disposing of the ITRs as aforesaid. 12. Coming to the law declared by the three member Bench of the Supreme Court in CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 (SC) it is true that there is a finding to the effect that the transfer of share effected by the father, in favour of the minor son, was part of the goodwill and was exigible to tax in terms of the relevant provisions of the statute. But in that case, the father retired from the partnership and all the shares were distributed among the minor sons who were inducted as partners. It was under such circumstances, that the Bench held that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by name Vijoo Zacharia taking it to a total extent of 3.5 lakhs, while that of the other partner Thara Thomas was for a total of ₹ 3.15 lakhs. That apart there is no dispute to the fact that the newly inducted partners had offered personal guarantee in connection with the financial borrowings made on behalf of the firm and had also undertaken to share the losses by discharging the liabilities to the banks/financial institutions/other creditors. It is also an admitted fact that the newly inducted partners had also undertaken to devote much of their time by working for the firm. It was accordingly, that new branches were opened at Bangalore and Hyderabad ; in turn, developing the business. The specific case of the assessees was that the induction of the new partners was in the course of the business, to develop the business of the firm as aforesaid ; which however was simply given a go-bye , while passing annexure E verdict by the Tribunal. We find that the stand taken by the Tribunal in annexure E order is not correct or sustainable either on facts or in law, more so in view of the law declared by the apex court as mentioned above. In the said circumstances, we answer th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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