9911796707
TMI Blog1988 (4) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on January 9, 1965, by two brothers, Jagatram Ahuja ("the assessee "herein) and Bishanlal Ahuja. The firm was carrying on the business of a restaurant in a building known as " Mohsin-ul-Mulk Kothi ", situated at Abid Road, Hyderabad. The building constituted the property of the firm. It comprised of 11,600 sq. yards of site on which it stood. On April 15, 1971, an agreement was entered into between the assessee and his brother, Bishanlal, whereunder the assessee decided and agreed to retire from the partnership. The terms of the agreement, as set out in the assessment order, are to the following effect: "(i) Sri Jagatram (assessee) is to retire before December 31, 1971. (ii) Steps are to be taken to finalise accounts relating to the partnership and determination of the amount due to Sri Jagatram on retirement. (iii) Sri Bishanlal agreed to pay a sum of Rs. 1,50,000 to Sri Jagatram towards the value of 50% share of the goodwill of the firm. (iv) The above sum of Rs. 1,50,000 payable by Sri Bishanlal to Sri Jagatram shall be in addition to the sum due to Sri Jagatram from the partnership at the time of retirement. (v) If the total sum including 50% share value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Rs. 3,00,000. Out of Rs. 3,00,000, Rs. 1,00,000 has already been paid towards the release of movable assets. The balance of Rs. 2,00,000 is to be paid towards half share and interest in the land and building. Out of this amount, a sum of Rs. 50,000 is paid at the time of registration of the deed and the balance of Rs. 1.5 lakhs is to be paid in two instalments, Rs. 75,000 before December 1, 1972, and Rs. 75,000 before December 1, 1973." In reassessment proceedings under section 16(1) of the Gift-tax Act, the Gift-tax Officer valued the share of the assessee (Sri Jagatram Ahuja) in the partnership assets at Rs. 12,67,015. From this, he deducted the amount of Rs. 3,00,000 paid by Sri Bishanlal to Sri jagatram and arrived at the figure of Rs. 9,67,015 as the value of the property gifted by the assessee to his brother, Sri Bishanlal. After granting exemption of Rs. 5,000, he determined the taxable value of the gift at Rs. 9,62,015 and levied tax thereon. (There were two more cash gifts made by the assessee to some other persons which were also taken into account, but with which aspect we are not concerned herein.) The reassessment order is dated November 14, 1977. On appeal, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " property " is defined by clause (xxii). It is an inclusive definition. It reads: "'property' includes any interest in property, movable or immovable." The expression " transfer of property " is defined by clause (xxiv) in the following terms: " 'transfer of property' means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes (a) the creation of a trust in property; (b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property; (c) the exercise of a power of appointment (whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made) of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power; and (d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person." Section 4 declares certain, transfers to be gifts for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solution), and March 10, 1972, (release deed). The partnership " 3-Aces " comprised of only two partners, namely, the assessee and his brother, Sri Bishanlal. It was formed in 1955 (sic) and had been running a very prosperous business. In 1971, an arrangement or an understanding was arrived at between the two partners, whereunder one (assessee) was to retire from the partnership leaving the entire business to the other (Bishanlal). In consideration of the assessee's leaving the business in its entirety to the other, the assessee was paid a sum of Rs. 3,00,000, whereas, properly valued, the assets of the partnership were worth Rs. 9,98,000, apart from, and in addition to, the value of the goodwill. The partners themselves had valued the goodwill at Rs. 3 lakhs and the assessee's share therein at Rs. 1,50,000. (As mentioned hereinbefore, the question of valuation of goodwill was proposed to be remitted by the Tribunal to the Gift-tax Officer but which it did not actually do because of its opinion on the question of law. But, for the sake of discussion, we may take the value of the goodwill at Rs. 3,00,000 as determined by the parties themselves in the agreement dated April 15, 1971). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplies to a partnership as well., Even if there is an unequal distribution of assets between the partners on the dissolution of a firm, it cannot be said that there is a transfer or that there is a gift to the extent the market value exceeds the consideration; and (iii) that the interest of a partner in a partnership is not " interest in property " or " property " as defined and dealt with in the Gift-tax Act. On the other hand, it is contended by Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, that as held by the Supreme Court in its several decisions, the interest of a partner in the assets of partnership is " property ", within the meaning of the Gift-tax Act and also as ordinarily understood, and that any and every transaction by which the value of the share of a person is reduced, and which results correspondingly in the increase in the value of the share of any other person or persons, necessarily amounts to a transfer and a gift for the purpose of the Gift-tax Act. Both counsel have referred to a good amount of case law on the subject in support of their respective contentions. In CGT v. Chhotalal Mohanlal [1987] 166 ITR 124, the Supreme Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Boatwalla, AIR 1970 SC 1147, that goodwill of a firm is an " asset ". It also approved a decision of the Calcutta High Court taking the same view. It then referred approvingly to the decision of the Madras High Court in M. K. Kuppuraj v. CGT [1985] 153 ITR 481, where, in similar circumstances, the High Court bad held that there was a gift. It also referred to two other decisions of the Rajasthan and Bombay High Courts taking the same view on similar facts and then observed as follows (p. 127 of 166 ITR): " Once goodwill is taken to be property and with the admission of two minors to the benefits of partnership in respect of a fixed share, the right to the money value of the goodwill stands transferred, the transaction does constitute a gift under the Act. " In other words, the Supreme Court upheld the view taken by the Gift-tax Officer in that case. In M. K. Kuppuraj v. CGT [1985] 153 ITR 481, the Madras High Court dealt with a case arising under the Gift-tax Act, the facts whereof are as follows: The assessee, Kuppuraj, had a 50% share in a partnership firm. During the accounting year relevant to the assessment year 1971-72, i.e., on April 14, 1970, there was a reconstituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f his share of profits from and out of the said 50%. It is only because the assessee has agreed to part with this 8% profit-sharing ratio, the other partners consented to the minors being admitted to the benefits of the partnership. This relinquishment of 8% profit-sharing ratio is admittedly without consideration. Therefore, there is a relinquishment of a right by the assessee in favour of the minors who have been admitted to the benefits of the partnership..." It also observed that the minors had no interest in the partnership before the reconstitution of the firm and that it is only by virtue of the terms of the deed of reconstitution that the assessee relinquished a portion of his right and the minors were admitted to benefits to that extent. The court referred to several earlier decisions of the same court holding in similar circumstances that there was a gift and held that in the case before it also, there was a " gift " within the meaning of section 2(xii) read with section 2(xxiv) of the Act. In CGT v. Premji Trikamji [1982] 133 ITR 317, the Bombay High.. Court held that the expression " transfer of property " as defined in section 2(xxiv) of the Gift-tax Act is wide en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding immovable properties of the partnership were allotted to one partner, R.L.S., absolutely. The said partner, R.L.S., was directed to pay a sum of Rs. 17,000 to the other partner, P.H., in lieu of his share. The question arose whether the award created rights in immovable properties worth more than Rs. 100 and, therefore, required registration. It was held that the award did purport, expressly, to create rights in immovable property of the firm worth more than Rs. 100 and, therefore, the award is compulsorily registrable. Since it was unregistered, it was held, it cannot be looked into for any purpose, and cannot even be made a rule of the court. The contention of learned standing counsel for the Revenue is that the facts of this case are substantially similar to the facts of the case before us. CIT v. Bharani Pictures [1981] 129 ITR 244 (Mad) was a case where the assessee-firm consisted of two partners, R and B. The assessee-firm owned certain properties. On February 9, 1968, a document of release was executed by both R and B, whereunder R released and relinquished all his rights in a particular property owned by the partnership and vested absolute ownership thereof in B. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Supreme Court in CIT v. Dewas Cine Corporation [1968] 68 ITR 240. In this case, it was observed that the property which is brought in at the inception of the partnership, or which is acquired during the course of the business, becomes partnership property, and that a partner, subject to a special agreement, is entitled upon dissolution to a share in the money representing the value of the property. The distribution of the surplus on the dissolution of a partnership, it was held, is for the purpose of adjustment of the rights of the partners in the assets of the partnership, and that it does not amount to transfer of assets. It was held that such allotment of property towards the share of each partner does not amount to sale or transfer. Applying the principle of the decision of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, it was observed that a partner may, in an action for dissolution, insist that the assets of the partnership be realised by sale of its property ; but where, in satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale, property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal. Under these circumstances, it is not necessary for us to consider what would be the position in law if there was first a division of status in a Hindu undivided family and the same was followed up by division by metes and bounds in which division one of the coparceners takes properties less than what he is entitled to under law..." The learned judge observed further that in a Hindu joint family, all coparceners are joint owners of the properties of the family, that so long as the family remains joint, no coparcener can predicate what his share in the joint family is, and that only when there is a division of status, or a division by metes and bounds, does his share get determined. In our opinion, the reservation made in the above extract makes all the difference and makes it clear that the case of a Hindu undivided family where there is no prior division of status, stands on a footing different from that of a partnership. In a partnership, the share of each partner is definite, though it is true that even in the case of partnership properties, no partner can predicate at a given point of time that a particular property belongs to him. He is entitled only to such assets as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven point of time. Moreover, this decision has to be read and understood in the light of the subsequent decision of the Supreme Court in CED v. Kantilal Trikamlal [1976] 105 ITR 92, which is, no doubt, a case arising under the Estate Duty Act. Section 2(l 5) of the Estate Duty Act defines " property " in the following terms: "'Property' includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale and also includes any property converted from one species into another by any method. Explanation 1.-xx (omitted as unnecessary). Explanation 2.-The extinguishment at the expense of the deceased of a debt or other right shall be deemed to have been a disposition made by the deceased in favour of the person for whose benefit the debt or right was extinguished, and in relation to such a disposition the expression 'property' shall include the benefit conferred by the extinguishment of the debt or right. " It would be seen that the definition of " property " is in pari materia with the definition of the said expression in section 2(xxii) of the Gift-tax Act, and Explanation 2 to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,000. The shares of the two partners are equal. But one partner takes Rs. 95,000 and the other partner takes a mere Rs. 5,000. Would it be realistic to say that no gift is involved to the extent of Rs. 45,000 from the partner (taking a mere Rs. 5,000) to the other partner who is given cash/assets of value of Rs. 45,000 in excess of what he is entitled to according to his share ? In such a case, it would be unrealistic to say that it is a mere distribution of assets. Distribution of assets it is, no doubt, but where such distribution does not correspond or approximate to the respective shares of the partners and the transaction is one whereby one partner is diminishing the value of his share, correspondingly increasing the share of the other partner or partners, it amounts to a " transaction " within the meaning of sub-clause (d) of clause (xxiv) of section 2 of the Gift-tax Act. In other words, to the extent of the property allocated corresponding or approximate to the share of a partner, it is a mere distribution of assets not involving a transfer; but, to the extent of the excess assets allocated to one partner at the expense of the other, it must be treated as a transaction " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is necessary for that purpose. It was held that it cannot be treated as transfer. This decision has, no doubt, to be read subject to the recent decision of the Supreme Court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. Be that as it may, it is unnecessary to pursue the said aspect in the facts of this case. Another decision cited is in CIT v. R. M. Amin [1977] 106 ITR 368 (SC). But, that is a case of an incorporated company going into liquidation and the liquidator paving a larger amount to the shareholders than the face value of the shares. The question was whether the excess amount constitutes a capital gain. We do not see the relevance of the principle of the said decision herein. The above discussion yields the following principles: (i) On dissolution of a partnership firm, the allocation of surplus (cash or assets) amongst the partners corresponding or approximate to their shares does not amount to a transfer of property, whether in ordinary law or for the purpose of the Gift-tax Act. (ii) Where, however, the distribution of assets between the partners is unequal and it appears from the relevant facts that one partner has received cash/assets of value less than ..... 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