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TMI Blog1976 (7) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... share of profits of the three partners was determined as 40 : 35 : 25. This firm was reconstituted under another partnership deed dated January 1, 1964, by which the first partner instead of taking 40% in the share of profits took only 25%, and the remaining 15% share of the profits was adjusted by increasing the shares of the other two partners from 35% to 40% and 25% to 35% respectively. The Gift-tax Officer took the view that the reduction of the first partner's, i.e., the assessee's share of profit from 40 to 25% and the consequential increase in the shares of the other two partners will constitute a "gift" liable to be taxed under the provisions of the Gift-tax Act to the extent of the said 15% of the profits and accordingly levied tax. An appeal filed by the assessee also failed. However, on second appeal preferred by the assessee to the Income-tax Appellate Tribunal, the Tribunal allowed the appeal and held, following its earlier decisions that when a partnership firm is reconstituted resulting in the reduction of share of profits of the partners, the consequent enhancement in the share of profits of the other partners could not result in a gift exigible to tax under the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest and correspondingly increasing the value or quantum of the shares earlier held by the other two partners. On that view, we think that the distribution by way of realignment of the one-third share of the assessee did involve transfer of property amounting to a gift chargeable to tax." The same is the view taken by this court in the two subsequent decisions in Commissioner of Gift-tax v. A. M. A. Abdul Rahman Rowther [1973] 89 ITR 219 (Mad) and the other in Commissioner of Gift-tax v. K. P. S. V. Doraiswamy Nadar [1973] 91 ITR 473 (Mad). In view of these decisions of this court, it must be held that the Tribunal was wrong in stating as a general proposition that when a partnership firm is reconstituted resulting in the reduction of share of profits of some of the partners, the consequent enhancement in the share of profits of the other partners could not result in a gift exigible to tax under the Gift-tax Act. In view of this, we answer the first question in the negative and against the assessee. That leaves the second question which is an independent question. Section 5(1)(xiv) of the Gift-tax Act so far as is relevant is as follows: " (1) Gift-tax shall not be charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of carrying on the business and it must be made for the purpose of the business. In that context, the Supreme Court observed that the expression "in the course of the carrying on of business, etc.," means that the gift should have some relationship with the carrying on of the business. Similarly, the Supreme Court pointed out that the object in making the gift or the design or intention behind it should be related to the business. Having so observed, on the facts of that case, the Supreme Court held that the requirements of section 5(1)(xiv) were not satisfied. The Supreme Court pointed out: " The real intention of the assessee apparently was to take his daughters into the firm with the object of conferring benefit on them for the natural reason that the father wanted to look to the advancement of his daughters. It was further provided in the deed that even the minor children would, in due course, be admitted to the partnership." In view of these facts, it was held that the gift with which the Supreme Court was concerned did not fall within the scope of section 5(1)(xiv) of the Gift-tax Act. As far as the present case is concerned, as we have pointed out already, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in the partnership firm were also brought about on an earlier occasion by a partnership deed dated January 1, 1962, we are convinced that the case falls within the ambit of the exemption under section 5(1)(xiv) of the Gift-tax Act and consequently not exigible to gift tax". Consequently, even the bona fides of the gift was not questioned before the Tribunal and, therefore, the Tribunal was fully justified in holding that the gift in question falls within the scope of section 5(1)(xiv). Mr. Jayaraman, the learned counsel for the department, contended that the reason for redistribution given in the partnership deed dated January 1, 1964, was also given in the partnership deed dated January 1, 1962, and, therefore, it could not be said to be a real reason and the gift cannot be said to be for the purpose of the business. We are unable to accept this argument. As a matter of fact, the recital contained in the partnership deed dated January 1, 1962, is different. The recitals in that deed are: "AND WHEREAS, as such the said Mekala Talkies is the personal business of the first partner, in the conduct of the affairs of which the First partner has to devote a large amount of attenti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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