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TMI Blog1989 (1) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... n the constitution, one more son of the deceased-assessee was admitted as a partner in the firm. Therefore, with effect from March 31, 1976 the constitution of the firm was as follows :-- 1. Mahasukhlal Bhailal 15% 2. Narendrakumar Mahasukhlal 25% 3. Jitendrakumar Mahasukhlal 25% 4. Ashwinkumar Mahasukhlal 35%. 4. The deceased-assessee filed a return of gift on 19.2.1979 declaring a gift of Rs. 10,000, other than the gift in question. However, the Gift-tax Officer (GTO) noted that in effecting the change in the constitution of the firm in the course of the year under consideration the share of the deceased-assessee was reduced from 40% to 15% and, therefore, there had been a gift of 25% of his share in the firm by the deceased-assessee in favour of his son, partner Ashwinkumar Mahasukhlal. The GTO was of the opinion that the reduction in the share of the deceased-assessee was without consideration and, therefore, it had amounted to a gift which he determined at Rs. 13,190. He, therefore, charged gift-tax accordingly after giving the statutory exemption of Rs. 5,000. 5. The assessee carried the matter in appeal to the AAC. Before the AAC it was urged on behalf of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a gift flowing from reduction of the share of an existing partner. Mr. Kaushik summed up by stressing that in the instant case it was an internal arrangement between the various members of a family headed by the deceased-assessee as karta thereof and it was simply a case of tax evasion through tax planning and so hit by the Supreme Court decision in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148. 7. As against the above arguments advanced on behalf of the revenue, Mr. T. P. Amin, the learned representative for the assessee-respondent advanced almost the same arguments which were advanced before the learned AAC. Mr. Amin particularly emphasised that in the instant case a major son had been admitted to the partnership and the said major son had contributed a capital of Rs. 70,000. Mr. Amin further pointed out that the assessee was in bad health and was not able to work and, therefore, the necessity of admitting a new partner, who had already been helping the business of the firm, arose. It was submitted that the new partner would devote his time in the business of the firm and was also liable to share the possible losses of the firm in future. Therefore, the services to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 512 that goodwill of a firm is a property and such property can be the subject matter of a valid gift. The reduction in the share of the deceased-assessee from 40% to 15% in favour of the new partner had certainly resulted in the transfer of deceased-assessee's rights and interest in the goodwill of the firm to the extent of 25%. Obviously the deceased-assessee or any other person on his behalf had received nothing, either directly or indirectly, by way of consideration of his releasing, discharging or surrendering a substantial part of his share in the goodwill of the firm. The question, however, is whether the obligation of the incoming partner to share the possible future losses of the firm, to render services to it and also to contribute capital in the firm could be said to be forming good consideration for the transaction in question in the instant case. The answer to this question, may we think, be best given on a study of the various terms and conditions as incorporated in the partnership deed executed between the partners of the firm at the time of admission of the new partner Shri Ashwinkumar Mahasukhlal to the firm. 11. As stated above the partnership deed was execute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the new partner Shri Ashwinkumar Mahasukhlal is stated to have been made a partner for the purpose of rendering services to the firm. Rendering of special or specialised services to a firm may no doubt constitute good consideration for the agreement for admission of the new partner to the firm as in that case the firm would be saved of the remuneration otherwise being paid by it to the incoming partner who might have been serving the firm before or to any other person in his place. But in the instant case clause 11 of the partnership deed specifically lays down that salary to working partner would be paid. In the presence of clause 11 it cannot be claimed that the services intended to be rendered to the firm by the new partner Shri Ashwinkumar Mahasukhlal could be regarded as sufficient consideration for the transaction culminating in his admission as a partner in the firm. Again, no doubt the copy of the capital account placed before us indicates that in S.Y. 2032 the opening balance in the capital account of the new partner was Rs. 70,196 and the closing balance was Rs. 64,009. But that position itself would not suggest that Ashwinkumar had been admitted in the partnership as a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm. It was on these facts that the Gujarat High Court observed that since the two sons were already the paid employees of the firm and as such were sufficiently experienced in the business of the firm and from their admission the firm was to be saved of the remuneration which was otherwise being paid to them as employees and the firm would be benefited by their experience, it was not possible to say that their admission as partners in the firm was gratuitous and without any consideration. That position is not obtaining in the present case. Herein there is no evidence to the effect that the new partner was an employee of the firm before or was having any special experience in the line of business carried on by the firm. Moreover by clause 11 it had been specifically provided that the working partner would be paid salary. In our opinion, therefore, the ratio in this decision does not help the case of the assessee. 15. In the case of CGT v. P. Gheevarghese Travancore Timbers Products [1972] 83 ITR 403 (SC) the assessee was the sole proprietor of a business which he converted into a partnership by taking two of his daughters as partners. The daughters' contribution to capital was m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efits of the partnership. The sons had contributed capitals to the firm. It was on these facts that, following the ratio in the decisions of the Gujarat High Court in Karnaji Lumbaji and of the Supreme Court in P. Gheevarghese, Travancore Timbers Products' case their Lordships of the Madras High Court held that in view of the capital contribution by the three sons and rendering of services and agreement to share the losses by the major son there was adequate consideration for the conversion of the proprietary business into a partnership business and hence there was no question of any gift of goodwill to the major son while as far as the minor sons were concerned there was no transfer of any assets as such to them so that there could be no gift of any goodwill in their favour. It may be noted that in rendering this decision their Lordships of the Madras High Court had followed the ratio laid down in the decisions of the Gujarat High Court and the Supreme Court which we have already discussed. We have found the said decisions had been decided on their own merits and not only that the facts of those cases materially differed from the facts of the case on hand but also that the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application of section 4(1)(c) would be whether such a gift was bona fide or not. In the instant case, the G.T.O. does not at all appear to have addressed himself to this pertinent question. In fact his order on this point is totally silent. It need not be restated that the G.T.O. had sought to tax an amount of Rs. 13,190 as a result of his reading a deemed gift in the transaction in question. The gift had resulted from reduction of the assessee's share in the firm. Obviously, therefore, the G.T.O. was required to consider as to whether such a gift had been made without any necessity or business expediency or was wanting in bona fides in any way. The G.T.O. did not approach the case from that angle. In fact he made no mention of the fact that he intended to tax the amount of Rs. 13,190 by application of the provisions of section 4(1)(c) of the Act. And, when we come to the order of the learned A.A.C. we find that he has accepted the contention of the assessee that the gift had been made out of business expediency inasmuch as the father-assessee had become old and the business of the firm required the services of another man, particularly one who had been working in and for the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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