TMI Blog1991 (7) TMI 380X X X X Extracts X X X X X X X X Extracts X X X X ..... led by the assessee for the assessment year 1975-76 wherein the taxable gift shown was ₹ 5,000. Prior to January 1, 1974, the assessee's share in the partnership firm was 25 per cent. On January 1, 1974, the four minor sons of the assessee were admitted to the benefits of the partnership by a deed entered into on that day. According to this, the four minor sons were together allotted 20 per cent share in the profits of the firm while the assessee's share in the firm was reduced to 5 per cent. While completing the assessment, the Gift-tax Officer considered that the assessee had surrendered 20 per cent of his interest in the firm with effect from January 1, 1974, and such surrender amounted to a gift taxable under the Gift-tax Act, 1958. He worked out the goodwill of the firm at ₹ 2,13,972 and 20 per cent of the same, viz., ₹ 42,794, was treated as the proportionate value of the goodwill transferred by the assessee in favour of his four minor sons. Adding this to the cash gift of ₹ 10,000 and allowing the deduction under Section 5(2) of the Gift-tax Act, 1958, the taxable gift was fixed at ₹ 47,794. The assessee objected to the Gift-tax Officer& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, if any, for the transfer of the assessee's share or interest in the partnership. The assessee's contention that the contribution of ₹ 10,000 towards capital made by the four minors would amount to adequate consideration for purposes of gift-tax was not accepted by the Tribunal. They held that the extent of the contribution should be evaluated with reference to the value of the interest transferred by the assessee to determine the question whether there was adequacy of consideration. They considered the fact that the capital contribution of ₹ 10,000 made by the minors came as withdrawal from the capital account of the assessee in the firm and held that it is to be treated as consideration for the transfer and held that this amount should be adjusted against the value of the property transferred on admission of the minors to the benefits of the partnership. In that view of the matter, they directed the Gift-tax Officer to evaluate the interest of the assessee in the firm which has been forgone in favour of the minors and adjust the amount of contribution of capital made by them and thus determine the value of the taxable gift. The Revenue felt that the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e son brought in his own capital and rendered services to the firms which were adequate consideration. Since the reconstitution was in the regular course of business, it was contended that the assessee is entitled to get exemption under Section 5(1)(xiv) of the Gift-tax Act, 1958. The evaluation of the gift liable to be taxed was also questioned. It was contended that the assessee's son had brought in his own capital while joining the respective firms and the assessee's share of profit was decreased only from the rearrangement of the constitution of the firm and, therefore, it could not be termed as a gift within the meaning of Section 2(xii) of the Gift-tax Act, 1958. The contribution of capital by the incoming partner, rendering service to the respective firms and sharing future liabilities and losses, would constitute sufficient consideration. It was also submitted that the reconstitution of the firm is in the regular course of business and, therefore, exempted under Section 5(1)(xiv) of the Gift-tax Act, 1958. But the authorities rejected this contention. The Commissioner, in revision for the assessment years 1979-80 and 1980-81, held that the relinquishment of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n himself and any other person jointly without adequate consideration and such other person makes an appropriation from or out of the said property, the amount of the appropriation used for the benefit of the person making the appropriation or for the benefit of any other person shall be deemed to be a gift made in his favour by the person who causes or has caused the property to be so vested. In CGT v. Chhotalal Mohanlal [1987]166ITR124(SC), the Supreme Court held that on reconstitution of a firm with minor sons of a partner admitted to the benefits of partnership, there will be a gift of the goodwill. The Supreme Court held that (at page 127) : Once goodwill is taken to be property and with the admission of the two minors to the benefits of partnership in respect of a fixed share, the right to the money value of the goodwill stands transferred, the transaction does constitute a gift under the Act. Since there has been no dispute about valuation of the goodwill as made by the Gift-tax Officer, with the conclusion that there has been a gift in respect of a part of the goodwill, the answer to the question referred has to be in the affirmative, that is, it constitutes a gift unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goodwill of one of the partners is reduced as has been held in the decision referred to above : Manaklal Motilal Agrawal v. CGT [1984]147ITR670(MP) . 9. This court has already held in K. K. Achuthan v. CGT [1988]170ITR518(Ker) that, where, as a result of reconstitution, the assessee-partner relinquished a part of his share in favour of his sons who were existing partners in the firm, there is a gift. In doing so, this court followed the decision in CGT v. Chhotalal Mohanlal: [1987]166ITR124(SC). Here also, there was no capital contribution by the partner. The question whether the reconstitution of a firm by inducting one or more new partners in an existing firm would involve transfer or gift will depend upon the appreciation and interpretation of the terms of the document. In CGT v. V. M. Philip [1985]154ITR819(Ker), the assessee who owned a plantation as proprietary business decided to form a partnership with his son to run the business and transferred 50 per cent of his interest in the proprietary business to his son who contributed rupees one lakh as his share of the capital for the partnership business. The Gift-tax Officer assessed the value of the gift diminished by the ..... 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