TMI Blog1979 (7) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... Company. After the retirement of these two partners, Goolamally Mohamadally and Ali Hussain Mulla were the two partners that were left to carry on the business at Linghi Chetty Street. Goolamally Mohamadally took his son as a partner in this firm and similarly, Ali Hussain Mulla also took his son into the firm. As a result of the reconstitution of the firm and the admission of the two new partners, the share of Goolamally Mohamadally came to be reduced to l/4th and similarly the share of Ali Hussain Mulla came to be reduced to 1/4th. Before the advent of these two partners, they would have had one-half each in the partnership business Taiyaballi and Company at Linghi Chetty Street. Goolamally Mohamadally filed a return admitting a sum of ₹ 11,520 as the value of the gift in respect of the transfer of part of his share in the firm to his son. Similarly, Ali Hussain Mulla filed a gift-tax return showing a sum of ₹ 11,520 as the gift representing the value of the interest transferred to his son. Later both of them disputed the liability to gift-tax, and contended that the reconstitution of the firm by admission of their respective sons into the partnership had not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount accumulates to ₹ 20,000, and it should be treated as capital brought by the appellant's son. It, therefore, follows that the appellant's son has contributed his share of the capital. As per the provisions in the partnership deed, the appellant's son has to attend to the business of the partnership firm with a liability to share, the future losses of the firm, if any. It is, therefore, clear that the admission of the appellant's son as a partner in the firm was not gratuitous. We, therefore, hold that even though there was a transfer by the appellant of his 50% share in the partnership firm to his son, the transfer was for consideration and there was no gift by the appellant to his son attracting the liability to gift-tax under the Act. In the order dated 16th January, 1975, the same conclusions were adopted. The result was that in both the cases, the levy of gift-tax with respect to the transactions under consideration was cancelled. There is one aspect of the Tribunal's order which requires to be considered before we proceed further. In the abstract given above from para. 8 of the order of the Tribunal dated December 31, 1971, it is st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the assessee's share from 25 paise to 6 paise, there was a gift of 19 paise share of the assessee in the goodwill of the firm to the two sons and that the assessee was liable to gift-tax. The Appellate Tribunal held that the assessee did not have any specific interest in the goodwill and that there was no existing movable or immovable property which could be transferred by the assessee to his two sons. It was also held that the admission of the two sons was not without consideration in money or money's worth. The Gujarat High Court, speaking through Bhagwati C.J., (as he then was) pointed out at p. 352 as follows: Now, obviously when the partners in an existing firm admit a new partner, they would do so for one of two reasons-either because he is going to bring finance or because he is going to attend to the business of the firm. Here in the present case, Mohanlal Karnaji and Govindlal Karnaji were paid employees of the firm and they were sufficiently experienced in the business of the firm. The result of admitting them as partners obviously was that the firm would be saved the remuneration which would otherwise be payable to them as employees. Moreover, as poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Another case also raised a similar problem and that case is CGT v. N. Palaniappa Mudaliar [1978] 113 ITR 440 (Mad.). Two persons were partners in a firm. This firm was reconstituted by taking the four sons of the one, and the brother and two sons of the other, as partners. The share of each of the two original partners was correspondingly reduced. The GTO considered that the reduction in the share in the hands of the original partners was liable to gift-tax. On appeal, the AAC did not agree with the GTO. He held that the admission of the two new partners was to effectively supervise and control the business of the firm which had a number of branches in various places and considering the expansion of the business, the introduction of the new partners could be said to be solely for the business. The department appealed to the Tribunal and the Tribunal held that there was no element of gift involved in the reduction of the original partners' share as a result of the admission of the other persons, as the transfer in each of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd so long as they fulfilled this expectation, their admission would not result in any liability to gift-tax. The questions referred to us in the two cases are as follows: T.C. No. 29/76 : Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was not liable to pay gift-tax in respect of that part of his right to share in the profits of the firm as a partner which he had surrendered in favour of his son? T.C. No. 533/75 : Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was not liable to pay gift-tax in respect of that part of his right to share in the profits of the firm as a partner which he had surrendered in favour of his son?. In both these questions, there is an assumption that there was a surrender in favour of the particular son by the respective partners. But actually there is no such surrender. At the time, when the other two partners left the firm taking the two branches for themselves, the two remaining partners took their respective sons into the firm. Therefore, there is no question of surrender as such in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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