9911796707
TMI Blog1982 (12) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... re held by the other partner to 100% and is accordingly liable to be treated as a gift within the meaning of s. 4(a) and (c) of the G.T. Act 1958. He observed that there was no consideration for the relinquishment by the petitioner and that, therefore, it was not bona fide. When the assessee was called upon to explain why the relinquishment of " his share of interest in the firm " should not be treated as a gift, the assessee submitted an explanation denying the exigibility of the transaction to gift-tax under the Act. He submitted that his retirement from the firm did not result in any material alteration in his financial position since he continued to receive interest on the balance standing to his credit in the new firm's books, i. e., the firm which was constituted later by the surviving partner with another person. The GTO did not agree with this explanation and held that the share of profits, which was hitherto derived by the assessee stopped the moment he retired from the partnership and that the non-receipt of share of profits was itself a material alteration in the income of the assessee. He accordingly completed the assessment holding that the assessee's retirement from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... linquishment of share of profits in the firm. The GTO also observed in his order that the retirement of the assessee from the firm did not result in any material alteration in his financial position since he continued to receive interest on the balance standing to his credit in the new firm's books (indeed, a similar observation is also to be found in the order of the Tribunal). What appears to have happened is that the share of the assessee in the firm was valued and that amount was treated as his investment in the new firm (constituted by the surviving partner with another person after the assessee's retirement) and the assessee was being paid interest thereon. Probably, it is for this reason that the entire share relinquished by the petitioner was not valued by GTO for the purpose of gift-tax. In appeal, however, the basis of exigibility to tax came to be understood differently. The appellate order proceeds on the assumption that gift-tax was levied on the relinquishment of the assessee's share in the goodwill of the firm. The appellate authority held that since the goodwill enables the surviving partner, either by himself or in partnership with others, to earn income, the relin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other person. " Another provision which must be noticed is s. 4. It says that for the purpose of this Act certain transactions shall be treated as gifts. Clause (c) of s. 4(1) is relevant for the present purpose. It reads : " Where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment, to the extent to which it has not been found to the satisfaction of the Gift-tax Officer to have been bonafide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment." The question is whether the surrender or relinquishment of future profits can be treated as a gift, i. e., as a transfer of movable or immovable property from one person to another within the meaning of s. 2 (xxiv) ? Or, can it be treated as transfer of property whereby, as a result of the transaction, the value of one's property is diminished directly or indirectly and there is an increase in the value of the property or another person, as contemplated by cl. (xxiv) ? It has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and one of his sons were reduced to 6 np and 13 np respectively, while the two new partners were given each 12 np share. The GTO held that there was a gift of 19 np share of the assessee in the goodwill of the firm to the newly inducted partners and that the assessee was liable to pay gift-tax thereon. The Appellate Tribunal held that the assessee did not have any specific interest in the goodwill of the firm and that there was no existing movable or immovable property which could be transferred by the assessee to his two newly inducted sons/partners. The Appellate Tribunal held further that even if there was a transfer of 19 np share in the goodwill of the firm to the newly inducted sons, it was not without consideration in money or money's worth and that even if it were assumed that the assessee discharged or surrendered or released his 19 np share, such release, discharge or surrender was not shown to be wanting in bona fides and could not, therefore, be deemed to be a gift within the meaning of s. 4(1)(c). When the matter came up before the High Court, Bhagwati C.J., speaking for the court, held that no partner can predicate during the continuance of the partnership that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular asset or assets of the partnership firm. The learned counsel further contends that it is impossible and unrealistic to separate one of the assets of the partnership, namely, the goodwill, and to say that a retiring partner has relinquished his share in that particular asset as such. We find sufficient force in this contention which appears to be supported not only by the aforesaid two decisions but also by another decision of the Supreme Court in CGT v. P. Gheevarghese [1972] 83 ITR 403. In this case, the assessee who was the sole proprietor of a business converted it into a partnership by a deed dated August 1, 1963. The partnership was to consist of the assessee and his two daughters. The capital of the partnership was Rs. 4 lakhs of which the assessee's contribution was Rs. 3,50,000 and the contribution of each of the two daughters was Rs. 25,000. All the assets of the proprietary business were transferred to the partnership and in these assets the assessee and his daughters were entitled to shares in proportion to their share capital. The profits and losses of the partnership were, however, to be divided in equal shares between all the three partners. For the relevant as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se circumstances, the authorities sought to treat the two-ninths share as gift from the assessee to the newly inducted partners and it was upheld by the Madras High Court. We are unable to see how this decision is of any assistance to the Department in this case. We are, accordingly, of the opinion that it is not open to the Department to pick out one of the assets of the firm, namely, the goodwill, and say that the assessee has relinquished his share in the goodwill and levy gift-tax thereon. Such a course is not permissible, as pointed out by the Supreme Court in CGT v. P. Gheevarghese [1972] 83 ITR 403 (SC). In the case of a transfer of the partner's interest, what is transferred is his interest in the partnership firm as elucidated in Narayanappa's case, AIR 1966 SC 1300 and not any particular share in any particular asset of the partnership firm. We hold that even treating the subject-matter of gift as the relinquishment of the assessee's share in the goodwill of the firm, it is not exigible to tax under the G.T. Act. For the above reasons, the question referred to us is answered in the negative, i.e., in favour of the assessee and against the Department. No costs. - - ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
