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TMI Blog2003 (8) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... siness has actually been conducted by the partners. (b) That the Ld. CGT(A)(C) has wrongly not considered that the turnover of the partnership concern increased from 5 crores to 7 crores. 4. That the Ld. CGT(A)(C) has wrongly rejected the assessee's case that while working out capital employed in the firm for allowing interest on that capital, the amount of goodwill and appreciation of assets, is to be considered as part of capital. 5. That the Ld. CGT(A)(C) while confirming the addition on account of goodwill has wrongly not allowed deduction in respect of : (a) Interest on partners capital at market rate. (b) Salary to all the partners at market rate and commensurate with their experience and expertise. 6. That the Ld. CGT(A)(C) while quantifying the amount of goodwill, has wrongly confirmed 3 years purchases. 7. That in any case, the quantum of gift held to be chargeable to tax, is highly excessive. 8. That the Ld. CGT(A)(C) has wrongly held that copy of account of Shri Om Parkash Munjal, one of the partners was not filed. Actually, it was filed under letter dated 12-3-1996. Similar grounds have been taken in all the other remaining appeals. The main issue raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the incoming partners was liable to gift tax. He further referred to the judgment of Supreme Court in the case of CGT v. Chhotalal Mohanlal [1987] 166 ITR 124, where the Supreme Court has held that goodwill is an asset of the firm and reduction in profit sharing ratio in favour of the minor sons of the partners admitted to the benefits of partnership amounts to gift by father to his two minor sons as per sub-section (xii) of section 2 of the Gift-tax Act. The Assessing Officer further examined the copies of accounts of new partners and found that they had not introduced any capital at the time of entry on 1-4-1992. However, subsequently in the months of July and August, these partners had introduced capital varying from Rs.2 lakhs to Rs.2.75 lakhs, out of which sufficient amounts were immediately withdrawn. He also observed that investment allowance reserve was distributed among the partners including the new partners. Besides, interest and share of profits were also credited. Considering the extent of share capital introduced, the Assessing Officer found that in the case of new partners, namely, Shri Om Parkash Munjal, interest of Rs.27,622, share of investment allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Assessing Officer determined the value of reduced share in the assets and goodwill of M/s. Munjal Sales Corporation at Rs.24,25,594 and Rs.31,18,625 respectively. This was also included in the taxable gift of these assessees. The Assessing Officer further observed that M/s. Thakurdevi Investments Pvt. Ltd. and M/s. Hero International Pvt. Ltd. were also partners in the firm of M/s. Munjal Steels. There was also a change in the constitution of the firm resulting in reduction in share of profit of 10% each in the cases of M/s.Thakurdevi Investments Pvt. Ltd. and M/s.Hero International Pvt. Ltd. The Assessing Officer worked out the value of taxable gift at Rs.4,32,352 each and included the same in the taxable gift in the hands of the respective assessees. 5. Apart from the above cases, the Assessing Officer also observed that M/s.Hero International Pvt. Ltd., M/s.Munjal Investments Pvt. Ltd., M/s.Om Parkash Sons (HUF) and Shri Sudhir Munjal were partners in the firm of M/s.Munjal Gases. There was also a change in the constitution of the firm introduced w.e.f. 1-4-1992 whereby share of profit of M/s.Hero International (P.) Ltd. was reduced from 20% to 10% and in the remaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of Rs.73,854. Her capital account was credited by investment allowance reserve, interest and share of profit aggregating to Rs.2,33,724 and the balance carried forward was Rs.3,55,229. Similarly, Smt. Sobhna Munjal brought in capital of Rs.2 lakhs on 11-8-1992 out of which she withdrew a sum of Rs.73,853 on 31-3-1993. Her capital a/c was credited by way of interest, development rebate reserve and share of profit from the firm aggregating to Rs.2,29,083. The balance carried forward was Rs. 3,55,229. By analyzing these details, the Ld. CGT(A) observed that the submissions of the assessees that new partners had brought in additional capital was without any merit. There was also no evidence that new partners had put in labour also. He also noticed that old partners whose share of profit was reduced did not get any additional benefit on admission of the new partners. In fact, the investment allowance reserve in the books of account was also distributed among all the partners including the new partners. He further observed that the reduced share of goodwill in the partnership firms also amounted to gift as the assessees had abandoned their rights and interest in respect of investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance in the account of M/s.Bahadur Chand Investments Pvt. Ltd. and M/s.Thakurdevi Investments Pvt. Ltd. as on 1-4-1992 was Rs.44.09 lakhs, Rs.39.92 lakhs respectively and the closing balance was at Rs.47.26 lakhs and Rs.37.52 lakhs respectively as on 31-3-1993. As against the same, opening debt balance in the account of Smt. Sudershan Kumari Munjal was Rs.1.81 lakhs and closing balance was Rs.5.56 lakhs as on 1-4-1992 and 31-3-1993 respectively and still she was given 16% share of profit in the firm. Similarly, M/s.Hero Investments Ltd., whose share was reduced in the firm, had also opening balance of Rs.33.80 lakhs and closing balance of Rs.49.80 lakhs respectively. Therefore, there was no justification for reducing her share of profit. He also observed that even in the account of other partners, the credit balance in their capital account was nominal and still they were given much higher share of profit in the firm. He, therefore, observed that reduction in the share of profit of the firm was not justified on this account and the incoming partners had not brought any substantial capital to justify share of profit allotted to them vis-a-vis old partners. Thus, CGT(A) upheld the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sees are aggrieved with the orders of the CGT(A) and hence these appeals before us. 11. The Ld. Counsel for the assessees, Shri Subhash Aggarwal, submitted that the issue, which requires to be considered by this Bench, is whether there is any gift when there is a change in the profit sharing ratio among the partners. He submitted that the incoming partners had contributed capital and, therefore, change in the profit sharing ratio did not result in gift. He relied on the following judgments: (i) Sree Narayana Chandrika Trust v. CGT [2003] 261 ITR 279(SC); (ii) CGT v. D.C. Shah [2001] 249 ITR 518 (SC); (iii) CGT v. T.M. Louiz [2000] 245 ITR 831 (SC); (iv) CGT v. P.K. Somarajan Pillai [2003] 127 Taxman 632 (Ker.); (v) CGT v. Maneklal Hargovandas Patel [2002] 124 Taxman 55 (Guj.); (vi) CGT v. T. Abdul Wahid [2000] 242 ITR 665 (Mad.). Apart from the above, the Ld. Counsel has given a gist of various High Court judgments in support of his contention that mere change in the profit sharing ratio or retirement of a partner and induction of new partners does not result in gift. He also relied on the two decisions of ITAT, Chandigarh Bench in the cases of Shri Brij Mohan La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to in section 4, deemed to be a gift under that section." Sub-section (xxii) of section 2 of the Gift-tax Act defines "property" as under: "(xxii) 'property' includes any interest in property, movable or immovable." Sub-section (xxiv) of section 2 of the Gift-tax Act defines "transfer of property" as under: "(xxiv) '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 which intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly the value of his own property and to increase the value of the property of any other person. Thus, it is obvious that the expression "transfer of property" in the Gift-tax Act is very wide and comprehensive and covers all transactions of property and rights thereof in favour of any other person. Section 4 of the Gift-tax Act further includes certain situations, which provide for treating the gift as deemed in a case where the property is transferred otherwise than for adequate consideration and sub-section (c) of section 4(1) also covers transaction if 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 to the extent such discharge has not been considered to be bona fide by the Assessing Officer. Thus, the issue whether, there is a transfer of property or rights therein are to be decided with reference to the facts and circumstances of each case. This proposition finds support from the following judgments: (i) CGT v. C.S. Patil [1989] 180 ITR 97 (Kar.); (ii) CGT v. Smt. Kamla Devi Bhanot [1988] 171 ITR 398(MP); (iii) CGT v. Vinod Kumar Agarwal [1990] 185 ITR 507 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage profit of the last five years. Besides, all the firms owned movable and immovable assets in the form of shares, investment allowance reserve and other movable and immovable properties. The market value of these assets far exceeded the book value thereof. We have also noted that market value of these assets was taken as per value shown in the respective balance-sheets and as declared in the wealth tax returns for the assessment year 1992-93. The difference between the fair market value and book value of the assets owned by the firms and the goodwill is as under: --------------------------------------------------------------------- Firm Difference in Goodwill Market value and Book value of assets --------------------------------------------------------------------- M/s. Munjal Casting 72,47,968 1,24,15,048 M/s. Munjal Sales Corpn. 1,45,62,601 2,02,81,795 M/s. Munjal Gases 6,32,234 18,19,569 M/s. Munjal Steels 42,33,528 - -------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... useful to the firms. Moreover, these are the cases of investment companies and in cases where assessees have been carrying on business, the transactions are with sister concerns. Looking to these facts, the justification of extra labour needed by the firms also remain unsubstantiated. In fact, in the case of M/s.Munjal Gases, the assessees have made contradictory claims. In any case, such claim also remains unsubstantiated. (vii) Further, it is observed that profit sharing ratio among the partners has not been linked with their capital contribution. Even though in some cases capital contributed was much higher, share of profit allocated to them was comparatively lower vis-a-vis other partners. Thus share of profit given to them did not commensurate with their capital contribution. We find in the case of M/s.Bhagyoday Investments Pvt. Ltd. a partner in the firm of M/s.Munjal Castings, the opening balance in the capital account was Rs.41,75,263. After withdrawals during the accounting year under reference, the closing balance as on 31-3-1993 was Rs.52,88,086. Similarly, in the case of M/s.Bahadur Chand Investments Pvt. Ltd., the opening balance was Rs.34,28,239 and after taking int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a partner can claim to have a specific interest in its assets exclusively apart from his interest as a partner in the firm and such interest is restricted to the profit sharing ratio. When the assets of the firm belong to all the partners in their profit sharing ratio, each partner can be said to have interest in those assets to the extent of his share of profit. Any reduction in the profit sharing ratio results in reduction or alienation of his rights in the assets of the firm to the extent of his reduced profit sharing ratio. Therefore, the same would constitute a gift in favour of the incoming partners within the meaning of sub-sections (xxii) and (xxiv) of section 2 read with sections 4(1)(a) and 4(l)(c) of the Gift-tax Act, provided such transfer is without adequate consideration. The facts detailed above clearly show that the incoming partners have either not brought any capital or brought very nominal capital vis-a-vis the old partners. Thus, it could not be said that reduction in share of capital in favour of the incoming partners was for adequate consideration. In fact, in some of the cases where partners have not brought any capital i.e. in cases of minors and the reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e newly admitted partner i.e. the company, was given 18% share in the profit and loss of the firm. The new partner contributed a capital of Rs.1 lakh. On these facts, the authorities below including the Tribunal held that the relinquishment of a portion of rights held by the three partners in favour of the newly inducted partner to the extent of 18% share given to the newly inducted partner did not truly reflect the value of the firm's assets vis-a-vis the new partner's capital contribution and that there was a gift to the company. On a reference, the High Court held that even though there was a capital contribution by the newly inducted partner, the extent of contribution had been found to be not commensurate with the value of the benefit conferred on that newly inducted partner by reason of reduction in the shares of the continuing partners in their share of profits. Such reduction resulted in a gift. The facts of the present cases are similar to the facts of the case before the Madras High Court. In the present cases also, the incoming partners have either brought no capital or a very nominal capital which did not commensurate with the value of the benefits conferred on them. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ift-tax Act, 1958. 19. Our discussion on the issue would be incomplete without referring to the various judgments, which were specifically cited by the Ld. Counsel for the assessee. These are discussed hereunder: (i) Sree Narayana Chandrika Trust's case: The facts of the case before the Apex Court were that the assessee was a charitable institution having 45% share in the profits of the firm constituted on 1-4-1980. At the time of becoming a partner in the said firm in 1980, the assessee had contributed a sum of Rs.1,000 as share capital. There was a change in the constitution of the firm on 1-10-1982 whereby a new partner, who contributed Rs.25,000 towards her share of the capital of the firm, was inducted with a share of profit of 12%. As a result of induction of new partner, share of profit of the assessee was reduced from 45% to 30%. On the facts, the Tribunal had held that even though there was a transfer by the assessee in favour of the incoming partner and the existing partners, inasmuch as the consideration for the transfer, which was the right of the partner to get the value of his share could not be valued during the subsistence of the partnership, it was not possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into the firm on his contribution of capital in the firm of Rs.2.33 lakhs. Besides, he had been in the business for nearly four years and it was, therefore, reasonable to assume that the increase in the share of profit was on account of his experience and capacity to shoulder more responsibilities. Thus, this case is distinguishable on facts for the reason that incoming partner had brought sufficient capital of Rs.2.33 lakhs and besides he was in the same business for the last four years. The other facts about the worth of the firm and goodwill, if any, are not known. Therefore, the decision of Supreme Court in that case is applicable to its own facts and not to the facts of the present cases. (iii) T.M. Louiz's case: This is a case of a partnership firm where the assessee had retired by taking his share of capital standing to his credit in the firm. The revenue authorities brought to tax relinquished share of profit on the ground that the market value and the goodwill of the firm had not been taken into account at the time of his retirement. On these facts, the Hon'ble Supreme Court held that when a partner retires from a partnership, the partnership continues. The assets and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to remain the assets of the firm. As discussed above, this case is distinguishable inasmuch as in the present cases, it is not the case of the retirement of old partners. These are the cases of reduction of shares in favour of the incoming partners without adequate consideration. Therefore, this case is also not applicable to the facts of the present cases. (vi) Maneklal Hargovandas Patel's case: In this case, the assessee was 80 years old and totally blind and, therefore, physically unfit for continuing as a partner in the firm. Due to these reasons, his share of profit was reduced from 25% to 4%. Further, the assessee had already declared a gift of Rs.25,000 in the return. The issue before the Gujarat High Court was whether reduction of 21% share of profit of the assessee amounted to a gift. The High Court held that it did not amount to a gift because such reduction was for a valid reason. These are not the facts of the present cases. In none of the cases, the assessee has been able to lead evidence that reduction in share of profit was made because the partner was physically unfit to carry on the business of the firm. 20. The Ld. Counsel for the assessee has also relied on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to read the judgment of the court in isolation of the facts and questions raised before the court. Reliance in this regard is placed on the judgment of Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works P. Ltd. [1999] 198 ITR 297. Thus the judgments/decisions relied upon by the Ld. Counsel are of no help to the assessees. 23. Thus, in the light of detailed discussion on the facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that Ld. CGT(A) was justified in holding that reduction in the share of profit of the assessees in the assets and goodwill of the firm in favour of the incoming partners including the minors admitted constituted gifts liable to gift tax. Such finding would equally apply to cases where as a result of reconstitution of the firm, shares of profit of the partners were reduced in favour of the other partners i.e. in the case of Munjal Gases. We do not find any infirmity in the orders of the CGT(A). The same are upheld and the respective grounds of the assessees are dismissed. 24. Assessees have raised some grounds relating to computation of gift. However, no specific arguments were advanced duri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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