1988 (8) TMI 149 - AT - Income Tax

Summary

Issues:
1. Whether gift-tax is leviable in case of abatement in share of profit in a firm due to reconstitution in profit-sharing ratio between partners.
2. Whether a redistribution of shares in a partnership firm constitutes a taxable gift under the Gift-tax Act, 1958.
3. Whether a bona fide transaction exempts the assessee from gift-tax liability.

Analysis:
Issue 1:
The assessee appealed to the Appellate Tribunal ITAT INDORE under section 23(1) of the Gift-tax Act, 1958, contending that no gift-tax should be levied in the case of a reduction in the share of profit in a firm due to reconstitution in the profit-sharing ratio among partners. The Gift-tax Officer assessed the taxable gift based on the reduction in the assessee's share of the firm's profit and determined it at Rs. 16,800. The Appellate Assistant Commissioner upheld this decision, leading to the appeal before the Tribunal.

Issue 2:
The assessee argued that no gift-tax should be applicable in the case of redistribution of shares in a partnership firm. The counsel relied on a Gujarat High Court decision where a similar redistribution was considered a reconstitution of the firm and not a taxable gift. However, the Departmental Representative contended that a Supreme Court decision overruled the Gujarat High Court decisions, establishing that reducing a partner's share in a firm and admitting minors as partners constitutes a taxable gift. The Tribunal found that the facts of the cases cited by the counsel were distinguishable from the present case, where no new capital was introduced, and there was no agreement for active participation in the business by incoming partners.

Issue 3:
The counsel argued that the transaction was bona fide and, therefore, not subject to gift-tax. He referred to a clause in the Gift-tax Act regarding the release or abandonment of an interest in property, claiming that the relinquishment of shares was made bona fide. However, the Tribunal rejected this argument, stating that the relinquishment of shares cannot be equated with the scenarios covered under the clause cited by the counsel. The Tribunal found no evidence of bona fide action in the partnership agreement and confirmed the gift-tax liability imposed by the Gift-tax Officer.

In conclusion, the Tribunal dismissed the appeal of the assessee and confirmed the decision of the Appellate Assistant Commissioner regarding the gift-tax liability on the reduction in the share of profit in the partnership firm due to reconstitution in the profit-sharing ratio among partners.