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TMI Blog1986 (11) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to continue the business in partnership and as per clause 7 of the very same deed they also decided not to close the firm's accounts on the date of death of Kantilal Raychand Mehta, but they wanted to determine the profit of the firm on time basis, in proportion to the number of days he was a partner in the year to the total number of days in the year and to allocate the profits up to the date of demise of the deceased partner. There was reconstitution of the firm and the said reconstituted firm came into force from 24-12-1977 as per the partnership deed of even date. Admittedly, the assessee is one of the partners both in the original as well as in the reconstituted firm and as per the reconstitution she was having 30 per cent share both in profits and losses. There was change in the said firm again as per the deed dated 1-4-1978. Under this new partnership apart from the four partners under the reconstituted deed dated 24-12-1977, one Mrs, Surajben K. Mehta, wife of late Kantilal Raychand Mehta joined the partnership in her capacity as the trustee of Mehta Trust. This reconstituted firm took over the business of the old firm with all the assets and liabilities as on 31-3- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovide any financial personal benefit to the incoming partner. He further held that the incoming partner brought a capital of ₹ 10,000 as a consideration for the allotment of a share to the trust. Taking into consideration that the share transferred by the assessee is only 5 per cent, the AAC held that there is no justification to sustain the gift-tax imposed and hence, he cancelled the assessment. 4. As against the said order of the AAC the present appeal is filed by the revenue and the matter stands for our consideration. It was contended by the learned departmental representative that the AAC erred in holding that the capital contributed by the incoming partner was adequate consideration for her admission into the partnership. The alleged consideration did not pass to the assessee and, therefore, the capital contribution cannot he taken to be consideration for the reduction of share of the assessee in the firm. The learned departmental representative invited our attention to the Madras High Court decision in M.K. Kuppuraj v. CGT [1985] 153 ITR 481, in which on a consideration of the case-law, the Madras High Court held that where a partner relinquishes a port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uently the erstwhile proprietor sought to convert his business into a partnership business and he sought to give 50 per cent of his interest to his son. The son who was introduced into the partnership contributed ₹ 1 lakh. The Tribunal found that the sum of ₹ 1 lakh paid by the son was towards consideration for the assets transferred and the Tribunal having accepted that the amount of ₹ 1 lakh should be taken as consideration for the assets transferred, held that there was no gift and set aside the order of the Commissioner. In that case, approving the Tribunal the Hon'ble High Court held that consideration in a slim of ₹ 1 lakh passed from the son to the father for the benefits conferred on the son by being admitted into the partnership. They further held that the balance amount of ₹ 44,787 can only be considered as the amount on which tax was payable. Firstly, in our opinion, the case decided by the Kerala High Court is not on all fours with the case before us. In that case, the proprietary business was, for the first time, converted into a partnership business. In those circumstances, their Lordships held that the amount of ₹ 1 lakh brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of any asset involved by reducing the assessee's share by 5 per cent. 3. In a partnership, when new partners are introduced in an existing firm such new partners not only have share in the profits of the firm but subject to the contract to the contrary may be liable to share the losses of the firm. They may have to contribute capital or they may be taken as working partners. When they contribute capital or when they are taken as working partners there is adequate consideration. So the question of transfer of the right to share future profits by the existing partners in favour of the new partners does not arise. Merely because the share in the profits and losses allotted to one or other person is reduced, compared to the position obtaining earlier, in the reconstitution of the firm because of the allotment made to the new partners, it cannot be assumed that the allotment of shares to the new partners is by the reduction effected in the shares of the existing partners. During the subsistence of a partnership no partner can deal with any portion of the property as his own. Nor can he assign his interest in any specific item of the partnership property to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2] 134 ITR 492, the Karnataka High Court held that contribution of capital by the new partners would be sufficient or adequate consideration for being inducted as partners and there was no taxable gift as a result of the reallocation of shares. In CGT v. Chalasani Subbayya [1983] 144 ITR 295, the Andhra Pradesh High Court held that on the retirement of a partner there is no gift of any property. It was further held that it is not open to the department to pick out one of the assets of the firm, namely, the goodwill, and say that a retiring partner had relinquished his share in the goodwill and levy gift-tax thereon. This Bench of the Tribunal by its orders in GT Appeal No. 11 (Coch.) of 1983 dated 28-6-1983 and GT Appeal No. 33 (Coch.) of 1983 dated 7-8-1985 held that contribution of capital by the new partner is adequate consideration and no gift is involved. The order of the Tribunal, Madras Bench 'B' in C.V. Jacob's case (supra) is distinguishable. Firstly in that case the contribution of capital of ₹ 6,000 was found to be inadequate for giving share of 20 per cent. The Tribunal directed the GTO to take the value of gift at 10 per cent instead of 20 per cent ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D. Mehta and Shri Narotham M. Shanghvi agreed to share the profits and losses of the business in the ratio of 30: 30: 30: 10. Thereafter, there was a change in the constitution of this firm. By a partnership deed dated 1-4-1978, Mrs. Surajben K. Mehta, widow of late Shri Kantilal R. Mehta, joined the firm as a partner in her capacity as the trustee of Mehta Trust, by contributing ₹ 10,000 as her capital. The partners agreed to share the profits and losses of the business as follows: 1. Mrs. Saralaben S. Mehta 25 per cent 2. Mrs. Madhuben M. Mehta 25 per cent 3. Mrs. Geetaben D. Mehta 25 per cent 4. Shri Narotham M. Shanghvi 10 per cent 5. Mrs. Surajben K. Mehta 15 per cent Under clause 8 of the partnership deed dated 1-4-1978, all the partners agreed to conduct and manage the business of the firm jointly and severally. 3. The GTO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t did not tantamount to a gift without adequate consideration. According to him, therefore, the provisions of section 4(1) did not apply to the case. In support of his view, the learned Accountant Member referred to the decisions of the Supreme Court in the cases of Addanki Narayanappa (supra) and P. Gheevarghese Travancore Timbers Products (supra ). He also relied upon the decisions of various High Courts in V.M. Philip's case (supra), J.N. Marshall's case (supra), D.C. Shah's case (supra ) and Chalasani Subbayya's case (supra). He also referred to the decisions of the Cochin Bench of the Tribunal in GT Appeal No. 11 (Coch.) of 1983 and GT Appeal No. 33 (Coch.) of 1983. 7. It is against this background that the case has been referred to me for resolving the point of difference between the two Members of the Cochin Bench. 8. Before me, the representative of the department reiterated the arguments advanced by the learned Judicial Member and strongly relied upon the decisions of the Madras High Court in CGT v. V.A.M. Ayya Nadar [1969] 73 ITR 761, CGT v. K.P.S.V. Duraiswamy Nadar [1973] 91 ITR 473 , CGT v. A.M. Abdul Ragman Rowther [1973 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the High Courts are in favour of the assessee. In J.N. Marshall's case (supra) the Bombay High Court has held that when a new partner is added and given a share in the profits and losses of the firm, there is no gift as such. It is so because, whenever a new partner is introduced in an existing firm, his share in the firm would extend to such of the assets as are specified under the partnership agreement but he would also equally share in the liabilities that may be incurred by the firm. He would be subject to all the obligations, contractual as well as statutory, which attach to a partner of a firm. To the same effect is the view taken by the Gujarat High Court in Chhotalal Mohanlal's case (supra). In the case of Karnaji Lumbaji (supra) ex-employees were taken as partners who agreed to work for the partnership without any remuneration and to share in the assets and liabilities of the firm and also future losses. On these facts t was held by the Gujarat High Court that there was no gift in the transaction. Similar view has - been taken by the Karnataka High Court in D.C. Shah's case (supra). In that case, the partnership was enlarged by admission of new partners, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm. The new partners were to introduce capital in the firm and were to attend to the business of the firm. It was held by the Madras High Court that contribution of capital, rendering of service and sharing of liabilities and losses would all constitute consideration for the admission of new partners into the firm and hence, there was no question of any gift liable to tax. To the same effect is the view taken by the Madras High Court in the case of A.A. Annamalai Nadar (supra). Evidently the Madras High Court is divided on the point at issue. In such a situation, it would be only desirable to follow the view taken by the majority of the High Courts. 13. In view of the above discussion, I conclude that the consensus of opinion on the point at issue is in favour of the assessee. I would, therefore, hold that since Mrs. Surajben K. Mehta contributed a capital of ₹ 10,000 for becoming a partner in the firm and since she agreed to share the losses of the business and to render services to the firm, the consequent reduction of the assessee's share in the firm from 30 per cent to 25 per cent would not tantamount to a gift within the meaning of section 4(1)(a). ..... X X X X Extracts X X X X X X X X Extracts X X X X
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