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TMI Blog1998 (12) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... Manavadar, having a share of nine per cent. therein. He retired from the firm on October 26, 1973, at the close of previous year ending samvat year 2029. The firm inducted six new partners with effect from October 27, 1973, which included three sons of the assessee. The Income-tax Officer was of the view that the assessee retired from the firm without taking his share of goodwill from the above firm which amounted to relinquishing his right in the goodwill of the firm in favour of incoming partners. By holding that the right to share the profits of a firm is a valuable right which is capable of transfer, unless the transfer is made for full consideration in money or money's worth, the transfer would be liable to gift-tax on the value of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed for determining the sum payable to the outgoing partner is a matter of settlement between them and a question of fact. Section 55 of the Partnership Act envisages that in settling the accounts of a firm after dissolution, the goodwill may, subject to contract between the partners, be included in the assets and it may be sold either separately or along with other property of the firm. This provision envisages that the dealing with the goodwill at the time of dissolution of a firm can be the subject-matter of a contract. It may be valued and accounts may be taken on that basis. It may be valued and sold separately or along with other property of the firm and accounts may be taken or it may be that some of the partners be allowed to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goodwill in favour of the incoming partners, unless it can be shown that the retirement of A was conditional on induction of new partners nominated by him. Ordinarily after the retirement of partner A, induction of new persons as partners by the remaining partners is a matter of agreement between them. If the remaining partners induct new partners without consideration by way of contribution in capital or contribution in working of the partnership business it may amount to diminishing of the then existing partners' share in favour of the incoming partners. But in no circumstance, can it result in the transfer of share of the retiring partner to the incoming partners without consideration. In that event, the enquiry must necessarily be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etirement of the partner, the taxability of the event was rightly not founded on the basis of the transfer of share in the goodwill from the assessee to the remaining partners who in turn decide to have a larger firm by inducting new persons on contribution of capital from each one of the new partners with different percentage of profit sharing. The new incumbents have been inducted in the firm for consideration that is apparent from the deed of partnership which has been made part of the statement of case. So far as the new partners are concerned none of them has acquired any interest in the profits of the firm gratis. The only possible alternative which commended the Revenue to bring the amount to tax was to consider it a transfer of futu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be 'property' as contemplated by the statute. The moment a partner retires from a firm, he will have no right to receive any future profits in the said firm and hence there is no question of his giving up any such right." Viewed in this light, the question of relinquishing the right to share future profit resulting in a gift in favour of the incoming partners does not arise. As far as the question of settling accounts at the time of retirement is concerned, the law is fairly well-settled that taking of accounts on retirement or distribution of assets on dissolution of a firm does not entail any transfer. In CGT v. K G. Raghu [1994] 210 ITR 979, a Bench of the Kerala High Court held : "We are of the view that the Appellate Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not retired. It was a case in which there were three partners, namely, C, G and P. C had seven annas share, G four annas and P five annas. P had retired and three new partners were inducted by the remaining partners C and G which included two sons of C, K and D, at 12 per cent. and 13 per cent. share, respectively. P retired and R was brought at 25 per cent. share. G's 25 per cent. share remained unchanged and C's share diminished to 25 per cent. A finding was also there that the status on the capital account of the firm remained the same, that is to say, the minor sons K and D who had been inducted to the firm to the benefits of partnership had not contributed anything of their own to the share capital. They being minors, their participat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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