9911796707
TMI Blog1972 (3) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... in tobacco as sole proprietor. On June 9, 1954, he converted his business into a partnership business consisting of himself and his two daughters, Rookia Bibi and Rahma Bibi. He had a 60% share in the assets and the profit and loss and his two daughters had 20% share each in the partnership. This firm was recognised by this court as being genuine and entitled to registration under section 26A of the Indian Income-tax Act, 1922. Subsequently, on November 2, 1960, the assessee transferred a sum of Rs. 25,000 each to his daughter, Rabiath Bibi, and son, Noor Mohamed, from his share capital account. On November 3, 1960, a partnership deed was executed with Rabiath Bibi and Noor Mohamed as partners. The deed provided that the gross assets and liabilities of the predecessor-firm shall form the assets and liabilities of the partnership business, that the capital of the firm shall be Rs. 1,25,000 and it shall belong to the five partners (the assessee, his three daughters and a son) in equal shares and that the profits and losses of the partnership shall be divided between and borne by the parties in equal proportions. The assessee filed a gift-tax return for the assessment year 1961-62 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de it did not amount to a gift within the meaning of section 4(c) of the Act. In that view, the Tribunal held that the assessee was liable to pay gift-tax only on the sum of Rs. 50,000, which was returned by him. It is necessary to notice certain relevant clauses in the deed of partnership dated November 3, 1960, in order to answer the reference. After setting out in the preamble the gift of share capital of Rs. 25,000 each to his son and daughter, the deed further stated that the gross assets and liabilities of the predecessor-firm shall form the assets and liabilities of the partnership business newly constituted and that the value of the same to be as found in the books of the predecessor firm. The capital of the firm shall be Rs. 1,25,000 and it shall belong to the five partners of the partnership in equal shares ; the profits and losses of the partnership shall be divided between and borne by the partners in equal proportions ; any amount standing to the credit of any of the partners in excess of their share capital and any further advance made by the partners shall carry interest at 6 per cent. per annum. It is seen from these clauses of the parnership deed and the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership or interest in property " in the definition of " transfer of property ". That was a case in which the assessee who had a 1/3rd share in the assets and a 1/3rd share in the profits and losses of the partnership business transferred a 2/9th share in the profits and losses alone to two of the partners without transferring any portion of his share in the assets of the partnership. In other words, the assessee's share capital remained as it was prior to the transfer and the transfer was in effect a redistribution of the profit sharing ratio among the parties. The Gift-tax Officer treated the distribution of the 2/9th share in the profits and losses as a gift and value of the distribution of the 2/9th share as if it was a part of the goodwill. The Appellate Assistant Commissioner and the Tribunal held that the reallocation of shares in the profit and loss did not involve any transfer or surrender of the 2/9th share in favour of the other two partners on the ground that the redistribution of shares was the result of mutual consent and that the goodwill could be valued only at the dissolution of the partnership firm. The question for consideration in the High Court was whether, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Gift-tax Act, of which two are relevant here and they are :- "(1) Whether a specific transfer of goodwill is necessary to invoke the provisions of the Gift-tax Act ? and (2) Whether by the transfer of the business, the father had impliedly transferred the goodwill that is attached to that business ? " These questions were answered in favour of the department holding that the gift also included the goodwill and was liable to tax. There could, therefore, be no doubt, in the instant case, that there was a transfer of interest in property when the assessee took his daughter and son into the partnership, assigned them a portion of the share capital and realigned the shares in the partnership and the profit sharing ratio, which amounted to a gift chargeable to tax. The learned counsel for the assessee contended that since goodwill is an asset of the firm it is not open to the Gift-tax Officer to pick and choose one item of the assets of the partnership and treat it as a subject-matter of the gift and add it on to the sum of Rs. 50,000 which was returned by the assessee. He further contended that it might or might not be open to the Gift-tax Officer to value the entire assets o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint, on further scrutiny it is quite clear that the decision is not applicable to the facts of the present case. In the present case, as already stated, the value of the net assets excluding the goodwill was determined by the parties at Rs. 1,25,000 on the basis of the value of the assets as found in the books of the predecessor firm ; whereas in the case before the Supreme Court the value of the goodwill was also included in the ascertainment of the total value of the capital at Rs. 4 lakhs. This is clear from the following passage in the said judgment : " Now it is quite clear that according to the deed of partnership and even otherwise on admitted facts goodwill was a part of the properties and assets of the business which the assessee was running under the style of Travancore Timber and Products at Kottayam. All these were valued at Rs. 4,00,000. The entire property of the assessee's proprietary business was transferred to the new partnership. According to clause 7 in the schedule to the partnership deed the parties were to be entitled to the capital and property of the partnership in the following shares : Assessee 7/8th share Each daughter 1/16th share These shares were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late Tribunal is really not understandable. The whole thing was one transaction amounting to admission of two new partners and reconstituting the old partnership. The gift of the share capital and the transfer of the assets and liabilities and also the whole arrangement were effected by necessary adjiistmens in the books of the business. In fact, such an argument was advanced in the case in Commissioner of Gift-tax v. V. A. M. Ayya Nadar also which was repelled by the Division Bench and it was held therein that distribution by way of realignment of the profit sharing ratio did involve transfer of property amounting to " gift " chargeable to tax. On the facts and circumstances of this case, we are of the view that the redistribution of the profit sharing ratio on the admission of the two new partners did amount to a " gift " by the assessee of a portion of his share in the goodwill of the firm. In view of our finding that there was a gift of a share of the goodwill chargeable under the charging section itself, the consideration as to whether it will fall under section 4(c) of the Act as a " deemed gift " does not arise, and, therefore, we need not answer the second question. We an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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