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TMI Blog1978 (8) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... to Jeejeebhoy (assessee) alone and Shiamak, the other partner, would be entitled to the amount, if any, actually invested or other moneys brought in by him and standing to his credit as appearing from the books of account of the partnership and he would be entitled to his share of profits remaining to be paid at the date of the termination of the partnership and the amount standing to the credit of his capital account. On February 1, 1959, new partners were admitted into both the firms. The reconstituted firms consisted of the following partners having shares mentioned against their individual names : Engineering Department Rs. 1. Shiamak J. Marshall 0-4-0 2. Jeejeebhoy N. Marshall 0-3-0 3. Maneckji N. Marshall 0-3-0 4. Shehernaz Hoshang Dalal 0-3-0 5. Maharookh Darius Forbes 0-3-0 --------- 1-0-0 -------- Spirax and Steel Department Rs. 1. Shiamak J. Marshall 0-4-0 2. Jeejeebhoy N. Marshall 0-4-0 3. Maneckji N. Marshall 0-2-0 4. Shehernaz Hoshang Dalal 0-3-0 5. Maharookh Darius Forbes 0-3-0 --------- 1-0-0 --------- Both the deeds of partnership as regards the goodwill contain the following provision : " The goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of any assessment under the Act on the footing that the new partners received a portion of the existing goodwill of the business as gift. The Tribunal, inter alia, pointed out that there was no permissible rule to pick out one of the conditions of the contract and regard it as bringing into effect a unilateral act of bounty by one of the contracting parties. The Tribunal also relied upon the decision of the Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300. According to the Tribunal, in this decision, the Supreme Court pointed out the whole concept of partnership. Ordinarily, the right of a partner during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon amongst the partners and after the dissolution of the partnership or upon retirement of a partner from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. The Tribunal took the view that there was no immediate gift of goodwill to the three partners so as to attract liability to gift-tax. The Tribunal, accordingly, held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was an overall arrangement and the onus is upon the revenue to show that there was no consideration in the present case. He submitted that if regard be had to the provisions of the deed of partnership and the normal incidents of partnership as contemplated by the Partnership Act, there was adequate and valuable consideration. He urged that if it is the contention of the revenue to show that there was no consideration, the burden is entirely upon the revenue which, in the present case, has not been discharged at all. He relied upon a large number of cases to support his submissions. Prior to January 1, 1956, the assessee was carrying on the business as merchant, contractor and of buying and selling or importing machinery, electrical and other equipments and all other items usually utilised in this branch of business and as consulting engineer in the name and style of J. N. Marshall Co. in its Spirax and Steel Department as a sole proprietor thereof. With effect from January 1, 1956, the assessee took his son, Shiamak, as a partner upon the terms and conditions which are contained in the deed of partnership which was executed on June 27, 1956. Under cl. 4 of the partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re partners, viz., Manekji N. Marshall, Shehernaz Hoshang Dalal and Maharookh Darius Forbes, as partners with effect from February 1, 1959. The duration of this partnership was to be at will. The capital of the partnership business was to be contributed by the partners as and when required. Clauses 5 and 6 of this partnership deed are as under : " 5. The shares of the parties hereto in the profits and losses of the partnership business shall be as follows : Rs. 1 . Shiamak J. Marshall 0-4-0 2. Jeejeeboy N. Marshall 0-4-0 3. Maneckji N. Marshall 0-2-0 4. Shehernaz Hoshang Dalal 0-3-0 5. Maharookh Darius Forbes 0-3-0 --------- 1-0-0 --------- 6. The goodwill of the firm shall belong to : 1. Shiamak J. Marshall 2. Shehernaz H. Dalal 3. Maharookh D. Forbes. " It is apparent from the earlier deed of partnership and the new deed of partnership that the provision under the earlier deed of partnership was that on termination of the firm the stock-in-trade, goodwill and assets of the partnership business were to belong exclusively to the assessee while so far as the assets of the reconstituted firm are concerned, in the absence of any specific pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see to his son and daughters without any consideration whatsoever, the GTO was perfectly justified in holding that a gift has been made by the assessee. So far as the valuation was concerned, he altered the valuation as we have pointed out while narrating the facts. In second appeal before the Tribunal, objections were raised not only to the valuation but also as regards the liability to pay gift-tax because it was one of the primary contentions on behalf of the assessee that there was no gift within the meaning of the Act. The Tribunal took the view that the relevant provisions under the partnership deed pertaining to the goodwill did not operate as an immediate gift of goodwill to the three partners so as to attract the liability to gift-tax. The charging provision is contained in s. 3 of the Act. It provides that, subject to the other provisions contained in the Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1958, a tax (hereinafter referred to as gift-tax) in respect of the gifts, if any, made by a person during the previous year (other than gifts made before the 1st day of April, 1957) at the rate or rates specified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider in the present case is that having regard to the provisions of the earlier partnership deed and the later partnership deed and the provisions of the Partnership Act, can it be said that when under the later partnership deed the goodwill of the firm was to belong to the son and the two daughters, there was transfer without consideration in money or money's worth ? It is quite clear that under the earlier partnership deed executed on June 27, 1956, between the assessee and the son, it is expressly provided that on termination of the partnership, the goodwill, inter alia, was to belong exclusively to the assessee. However, when three new persons were introduced as partners in this firm by the execution of the partnership deed dated April 15, 1959, which came into force with effect from February 1, 1959, the goodwill of the firm was to belong only to three persons, viz., Shiamak, Shehernaz and Maharookh. If regard be had to the provisions of the later deed of partnership, it is quite clear that no cash amount has been paid by any of these partners for getting the goodwill. What we have to consider in the present case is whether there was consideration in money's worth. If the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Thus, it is quite apparent that whenever a new partner or partners are introduced in an existing firm, such newly added partners not only have a 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. They may have to look after the business of the firm. It cannot, therefore, be said that when a new partner is added and given a share in the profits and losses of the firm, there is a gift as such. It was, however, urged by Mr.Joshi on behalf of the revenue that so far as the present partnership is concerned, the profits and losses of the firm are to be divided amongst the five partners in accordance with their respective shares mentioned in cl. 5 of the partnership deed ; but so far as the goodwill was concerned, it is the property of only three persons, viz., the son and the two daughters of the assessee. He, therefore, submitted that so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g regard to the definition of the word " gift ", even consideration in money's worth is permissible and if such consideration exists, then one of the essential elements to constitute a gift will be absent. It should not be overlooked that the burden of proving that a particular transfer is a gift is upon the revenue and it was for the revenue to show that the transfer was without consideration. Such onus has not been discharged by the revenue. Not a word is to be found in the order of the GTO or the AAC to indicate that rights qua goodwill were conferred upon the son and the two daughters without consideration. The factors we have indicated earlier, viz., the obligations on the newly added partners to work in the business, their liability to share the losses that may be suffered by the business, the reduction of the share in the profits of the son, and similar other factors, clearly go to show that there is consideration in money's worth when under the new deed of partnership the rights qua goodwill, which prior to the execution of the deed belonged to the assessee, are now vested in the son and the two daughters. Such evidence by itself is sufficient to indicate that for transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration or not will have to be dealt with as a whole and not considering each item separately by itself. The Division Bench pointed out that where a portion of the goodwill of a business is deemed to be a transfer by reason of the formation of the partnership, the question which will arise for determination first is whether there was consideration for the entire transaction, viz., the formation of the partnership and not whether there was consideration for the transfer or transmission of interest in the goodwill. It was pointed out that a partnership is a contract, i.e., an agreement enforceable at law which must be supported by consideration. Reference was made by the Division Bench upon a passage in Lindley on Partnership, 13th edn., at page 113, wherein it is stated : " Agreements to enter into partnership, like all other agreements, require to be founded on some consideration in order to be binding. Any contribution in the shape of capital or labour, or any act which may result in liability to third parties, is a sufficient consideration to support such an agreement. A bona fide contract of partnership is not invalidated by an unequal value of the contributions of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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