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TMI Blog2005 (1) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... t the time of their retirement from the said firms. The questions of law for our consideration, as framed in the memorandum of appeal by the appellant, are as under: "(1) Whether the Appellate Tribunal is right in holding that when the credit balance in the capital account of a retiring partner is settled by transferring to him certain immovable properties belonging to the firm, there is a transfer attracting the provisions of the Gift-tax Act, 1958? (2) Whether the Tribunal is justified in its view that the difference between the alleged market value as assessed by the Departmental Valuation Officer and the book value of the asset at the time of retirement of minor partner to whom the asset was transferred, could be assessed as a deemed gift under section 4(1)(a) of the Gift-tax Act, even in a situation where the property transferred to the retiring partner is only to the extent of his share in the firm?" The facts giving rise to the aforesaid questions, briefly stated, are as under. The assessee-firms were having certain minor partners admitted to the benefits of the partnership. During the relevant year in question, the minor partners withdrew from the said firms. At that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not adequate to meet the book value of those properties transferred to them, then the balance would be recoverable, the learned Commissioner (CGT) held: "...This narration in the dissolution deed clearly negatives the contention of the learned Authorised Representative that the properties had been transferred in consideration of minors' proportionate right over the property of the firm and therefore, the consideration was adequate." The respective assessees, being aggrieved, carried the matter in appeal to the Income-tax Appellate Tribunal. The learned Income-tax Appellate Tribunal found no merit in the contention of the assessee that there was no transfer involved since there was mere settlement of capital account of the retiring partners by adjustment of the asset account. The learned Income-tax Appellate Tribunal upheld the conclusions as also the reasons given in support thereof by the learned Commissioner (CGT). In addition, the learned Income-tax Appellate Tribunal referred to the definition in clause (xxiv) of section 2 of the Gift-tax Act and in particular, sub-clause (d) thereof which reads as under. "any transaction entered into by any person with intent ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position in law is the same in the context of the Gift-tax Act, whether it be a case of retirement of a partner or dissolution of the firm. It is so held in the judgments to which, we shall presently refer. In CCT v. T. M. Louiz [2000] 245 ITR 831, a three-judge Bench of the Supreme Court held as under: "When a partner retires from a partnership, the partnership continues. The assets and the goodwill of the firm continue to remain the assets and the goodwill of the firm. All that the retiring partner gets is the value of his share in the partnership assets less its liabilities. It cannot, in such circumstances, be held assuming that the retiring partner received less than what was his due, that the difference was something that he had transferred to the continuing partners within the meaning of 'transfer of property' for the purposes of the Gift-tax Act, 1958, or that there was a gift liable to gift-tax." In Jagatram Ahuja v. CGT [2000] 246 ITR 609 also, a judgment of a three-judge Bench of the Supreme Court, arising out of the Gift-tax Act, the question for consideration was whether release by one of the partners of the firm of his rights in the assets of the firm for a cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the reason set out in the passage quoted above. But the position is very different, when, during the subsistence of a partnership, an asset of the partnership becomes the asset of only one of the partners thereof; there is, in such a case, a transfer of that asset by the partnership to the individual partner. Where such transfer is for less than the value of that asset, there is a deemed gift to the extent of the difference under the provisions of section 4(1)(a) of the Gift-tax Act, 1958. Reliance was placed by learned counsel for the Revenue upon the statements in the latter part of the above passage on the ground that the partnership in the case on hand is subsisting. This argument is made overlooking the underlined portion of the statements, perhaps, in tune with the contention of the Revenue authorities that a minor is not a partner but is only entitled to the benefits of partnership. B. T. Patil and Sons v. CGT [2001] 247 ITR 588 (SC) was a case where certain items of machinery were allotted to the partners and their accounts were debited with the consideration charged therefor. The partners thereafter floated another partnership and brought in the said machinery as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the court shall proceed with the suit as one for dissolution and for settling accounts between the partners, and the amount of the share of the minor shall be determined along with the shares of the partners." It is clear from section 30(1) that though the minor: cannot be a partner, he can be admitted to the benefits of partnership; the existence of a partnership is postulated under section 30 of the Partnership Act. Sub-sections (2) and (3) thereof describe the rights and liabilities of a minor admitted to the benefits of partnership. By virtue of sub-section (2) of section 30, a minor has been conferred a right to "such share of the property and if the profits of the firm as may be agreed upon". Under sub-section (3), such share of the minor can be made liable for losses though the minor cannot be held personally liable for the losses. Sub-section (4) enables a minor to sever his connection with the firm and if he does so, the amount of his share has to be determined by a valuation made, as far as possible, in accordance with the rules contained in section 48. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has no share in the assets of the firm. It is settled position in law that the assets of the firm would include the property which is brought into the partnership by the partners when it is formed, or which may be acquired in the course of business, becomes the property of the partnership and a partner is, subject to any special agreement between the partners, entitled, upon retirement or dissolution, to a share in the money representing the value of the property. In other words, when a property of the firm is allotted to a minor in lieu of the minor's proportionate rights over the property of the firm, the same would be in satisfaction of the claim of the minor to his share in the value of the residue determined in terms of section 48. Thus, on settlement of accounts, capital and profit due to a minor on his severance, if a property of the firm is allotted to the minor in lieu of his share and profits of the firm, the same would be but a mutual adjustment of his rights in the firm's property and no question of extinguishment of the rights in the partnership assets amounting to a transfer of assets would arise. In our view, the principles stated in Getti Chettiar's case [1971] 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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